Exhibit
4.2


 


 


[FORM OF
SUBORDINATED CONVERTIBLE DEBENTURE]


 


 


NEITHER THE
ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS.  THE SECURITIES MAY ONLY BE
OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED PURSUANT TO (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, (B) AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE
COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (C) RULE 144(K)
UNDER SAID ACT AND, IN EACH CASE, IN COMPLIANCE WITH APPLICABLE STATE
SECURITIES LAWS OR BLUE SKY LAWS. 
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. 
ANY TRANSFEREE OF THIS DEBENTURE SHOULD CAREFULLY REVIEW THE TERMS OF
THIS DEBENTURE, INCLUDING SECTIONS 3(c)(iii) AND 19(a) HEREOF.  THE PRINCIPAL AMOUNT REPRESENTED BY THIS
DEBENTURE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY
BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION
3(c)(iii) OF THIS NOTE.


 


 


Subordinated Convertible Debenture


 


 


	
  Issuance Date: September
  26, 2003

  	
  Principal:
  U.S. $15,000,000

  



 


FOR VALUE RECEIVED, 24/7 REAL MEDIA, INC., a Delaware corporation (the “Company”), hereby promises to pay to the
order of THE RIVERVIEW GROUP, LLC or registered assigns (“Holder”) the amount set out above as the
Principal (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), acceleration,
redemption or otherwise (in each case in accordance with the terms hereof) and
to pay interest (“Interest”) on
any outstanding Principal at the rate of 2.00% per annum, subject to periodic
adjustment pursuant to Section 2 (the “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), the Maturity
Date, acceleration, conversion, redemption or otherwise (in each case in
accordance with the terms hereof).  This
Subordinated Convertible Debenture (including all Subordinated Convertible
Debentures issued in exchange, transfer or replacement hereof, this “Debenture”) is one of an issue of
Subordinated Convertible Debentures (collectively, the


 

















 


“Debentures” and such other Subordinated Convertible
Debentures, the “Other Debentures”)
issued on the Issuance Date pursuant to the Securities Purchase Agreement (as
defined below).  Certain capitalized
terms are defined in Section 29.


 


(1)     MATURITY.  On the Maturity Date, the Holder shall
surrender this Debenture to the Company and the Company shall pay to the Holder
an amount in cash or, at the option of the Company (subject to the satisfaction
of the conditions set forth in this Section 1), in shares of Common Stock (“Repayment Shares”), or a combination of
cash and Repayment Shares, representing all outstanding Principal, accrued and
unpaid Interest and accrued and unpaid Late Charges, if any; provided that the
Principal, accrued and unpaid Interest and accrued and unpaid Late Charges, if
any payable on the Maturity Date shall be payable in Repayment Shares only if
the Company delivers written notice of such election (“Maturity Date Payment Election Notice”) to
each holder of the Debentures at least 15 Trading Days prior to the Maturity
Date (a “Maturity Payment Election Date”).  The “Original
Maturity Date” shall be September 26, 2006, as may be extended in
accordance with Section 8 hereof or as extended at the option of the Holder (i)
in the event that, and for so long as, an Event of Default (as defined in
Section 4(a)) shall have occurred and be continuing or any event shall have
occurred and be continuing which with the passage of time and the failure to
cure would result in an Event of Default and (ii) through the date that is ten
days after the consummation of a Change of Control (as defined in Section 5(a))
in the event that a Change of Control is publicly announced or a Change of
Control Notice (as defined in Section 5(a)) is delivered prior to the Maturity
Date (as may be extended, the “Maturity Date”).  Payments to be made on the Maturity Date in
Repayment Shares shall be paid in a number of fully paid and nonassessable
shares (rounded to the nearest whole share in accordance with Section 3(a)) of
Common Stock equal to the quotient of (a) the Principal, accrued and unpaid
Interest and accrued and unpaid Late Charges, if any, payable and (b) the
Maturity Date Conversion Price on the Maturity Date.  If any Repayment Shares are to be paid on the Maturity Date, then
the Company shall (X) provided that the Company’s transfer agent (the “Transfer Agent”) is participating in the
Depository Trust Company (“DTC”)
Fast Automated Securities Transfer Program, credit such aggregate number of
Repayment Shares 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 on the Maturity
Date, to such address as specified at least two Business Days prior to the
Maturity Date by the Holder in writing to the Company, a certificate,
registered in the name of the Holder or its designee, for the number of
Repayment Shares to which the Holder shall be entitled.  Notwithstanding the foregoing, the Company
shall not be entitled to make any payment due on the Maturity Date in Repayment
Shares and shall be required to make all such payment in cash on the Maturity
Date if, unless consented to in
writing by the Holder, (x) any event constituting an Event of Default or an
event that with the passage of time and assuming it were not cured would
constitute an Event of Default has occurred and is continuing on the applicable
Maturity Payment Election Date or the Maturity Date, or (y) (i) the
Registration Statement (as defined in the Registration Rights Agreement)
covering the Repayment Shares is not effective and available for the resale of
all of the Registrable Securities (as defined in the


 


2

















 


Registration Rights Agreement) relating to this Debenture on the
Maturity Payment Election Date or on the Maturity Date and (ii) the Holder is
not able to sell all of the Registrable Securities held by them pursuant to
Rule 144(k).  The Company shall pay any
and all taxes (other than income taxes which shall be payable by the Holder)
that may be payable with respect to the issuance and delivery of Repayment
Shares.  If the Company elects to pay
the amounts due on the Maturity Date by a combination of cash and Repayment
Shares, then any conversions made by the holder prior to the Maturity Date
shall be applied first to the amount of Repayment Shares which the Company has
elected to pay and then against the amount to be paid by cash under the
Maturity Date Payment Election Notice.


 


(2)     INTEREST; INTEREST RATE.  Interest on this Debenture shall commence
accruing on the Issuance Date and shall be computed on the basis of a 365-day
year and actual days elapsed and shall be payable in arrears on the first day
of each Semi-Annual Period during the period beginning on the Issuance Date and
ending on, and including, the Maturity Date (each, an “Interest Date”) with the first Interest
Date being January 1, 2004.  Interest
shall be payable on each Interest Date, at the option of the Company, (i) in
cash, (ii) by way of inclusion in the Conversion Amount in accordance with
Section 3(b)(i), or (iii) subject to the satisfaction of the conditions set
forth in this Section 2, in shares of Common Stock (“Interest Shares”); provided, that the Interest which
accrued during any period shall be payable in Interest Shares only if the
Company delivers written notice of such election (“Interest Election Notice”) to each holder of the Debentures at
least ten (10) Trading Days prior to the Interest Date (an “Interest Election Date”).  Interest to be paid on an Interest Date in
Interest Shares shall be paid in a number of fully paid and nonassessable
shares (rounded to the nearest whole share in accordance with Section 3(a)) of
Common Stock equal to the quotient of (a) the Interest payable and (b) the
Interest Conversion Price on the applicable Interest Date.  If any Interest Shares are to be paid on an
Interest Date, then the Company shall (X) provided that the Transfer Agent is
participating in the DTC Fast Automated Securities Transfer Program, credit
such aggregate number of Interest Shares 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 on the applicable Interest Date, to such address as specified at least
two Business Days prior to the applicable Interest Date by the Holder in
writing to the Company, a certificate, registered in the name of the Holder or
its designee, for the number of Interest Shares to which the Holder shall be
entitled.  Notwithstanding the
foregoing, the Company shall not be entitled to pay Interest in Interest Shares
and shall be required to pay such Interest in cash on the applicable Interest
Date if, unless consented to in writing by the Holder, (x) any event
constituting an Event of Default or an event that with the passage of time and
assuming it were not cured would constitute an Event of Default has occurred
and is continuing on the applicable Interest Election Date or the Interest
Date, or (y) (i) the Registration Statement (as defined in the Registration
Rights Agreement) covering the Interest Shares is not effective and available
for the resale of all of the Registrable Securities (as defined in the
Registration Rights Agreement) relating to this Debenture on the Interest Election
Date or on the Interest Date and (ii) the Holder is not able to sell all of the
Registrable Securities held by them pursuant to


 


3

















 


Rule 144(k).  Prior to the
payment of Interest on an Interest Date, Interest on this Debenture shall
accrue at the Interest Rate and be payable by way of inclusion of the Interest
in the Conversion Amount in accordance with Section 3(b)(i).  From and after the occurrence of an Event of
Default, the Interest Rate shall be increased to 12%.  In the event that such Event of Default is subsequently cured,
the adjustment referred to in the preceding sentence shall cease to be
effective as of the date of such cure; provided that the Interest as calculated
at such increased rate during the continuance of such Event of Default shall
continue to apply to the extent relating to the days after the occurrence of
such Event of Default through and including the date of cure of such Event of
Default.  The Company shall pay any and
all taxes (other than income taxes which shall be payable by the Holder) that
may be payable with respect to the issuance and delivery of Interest Shares.


 


(3)     CONVERSION OF DEBENTURES.  This Debenture shall be
convertible into shares of the Company’s common stock, par value $0.01 per
share (the “Common Stock”), on the
terms and conditions set forth in this Section 3.


 


(a)           Conversion Right. 
Subject to the provisions of Section 3(d), 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 3(c), at
the Conversion Rate (as defined below). 
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 taxes that may be payable with respect to the issuance and delivery of
Common Stock upon conversion of any Conversion Amount.


 


(b)           Conversion Rate.  The
number of shares of Common Stock issuable upon conversion of any Conversion
Amount pursuant to Section 3(a) shall be determined by dividing (x) such
Conversion Amount by (y) the Conversion Price (as defined below) (the “Conversion Rate”).


 


(i)            “Conversion Amount” means the sum of (A) the portion of the
Principal to be converted, redeemed or otherwise with respect to which this
determination is being made, (B) accrued and unpaid Interest with respect to
such Principal and (C) accrued and unpaid Late Charges with respect to such
Principal and Interest.


 


(ii)           “Conversion Price” means, as of any Conversion Date (as defined
below) or other date of determination, and subject to adjustment as provided
herein, $1.75


 


(c)           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


 


4

















 


facsimile (or otherwise
deliver), for receipt on or prior to 9:30 a.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 3(c)(iii), surrender this Debenture
to a common carrier for delivery to the Company as soon as practicable on or
following such date (or an indemnification undertaking with respect to this
Debenture in the case of its loss, theft or destruction).  On or before the first Business Day
following the date of receipt of a Conversion Notice, the Company shall transmit
by facsimile a confirmation of receipt of such Conversion Notice to the Holder
and the Transfer Agent (a “Confirmation
Receipt”).  On or before the
third Business Day following the date of receipt of a Conversion Notice (the “Share Delivery Date”), the Company shall
(X) 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 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.  If this Debenture is physically surrendered
for conversion as required by Section 3(c)(iii) 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 three Business Days after receipt of this Debenture and at its
own expense, issue and deliver to the holder a new Debenture (in accordance
with Section 19(d)) 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 on the Conversion Date. 
All Conversion Amounts converted by the Holder after the Mandatory
Conversion Notice Date shall reduce the Conversion Amount of this Debenture
required to be converted on the Mandatory Conversion Date.


 


(ii)           Company’s Failure to Timely Convert. 
Subject to Section 3(d), if the Company shall fail to issue 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
conversion of any Conversion Amount on or prior to the date which is five
Business Days after the Conversion Date, provided, that if the Company
shall not have timely delivered a Confirmation Receipt, the Buyer shall have
retransmitted by facsimile its Conversion Notice on or prior to the date which
is three Business Days after the Conversion Date (a “Conversion Failure”), then (A) the Company shall pay damages
to the Holder for each date of such Conversion Failure in an amount equal to
1.0%  of the product of (I) the sum
of the number of shares of Common Stock not issued to the Holder on or prior to
the Share Delivery Date and to which the Holder is entitled, and (II) the
Weighted Average Price of the Common Stock on the Share Delivery Date and (B)
the Holder, upon written notice to the Company, may void its Conversion Notice
with respect to, and retain or have returned, as the case may be, any portion
of this Debenture


 


5

















 


that has not been converted
pursuant to such Conversion Notice; provided that the voiding of a Conversion
Notice shall not affect the Company’s obligations to make any payments which
have accrued prior to the date of such notice pursuant to this Section 3(c)(ii)
or otherwise.


 


(iii)          Book-Entry. Notwithstanding anything to the contrary set forth herein, upon
conversion, redemption or repayment 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 physical surrender and reissue of
this Debenture.  The Holder and the Company
shall maintain records showing the Principal, Interest and Late Charges
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.


 


(iv)          Pro Rata Conversion; Disputes.  In
the event that the Company receives a Conversion Notice from more than one
holder of Debentures for the same Conversion Date and the Company can convert
some, but not all, of such portions of the Debentures submitted for conversion,
the Company, subject to Section 3(d), shall convert from each holder of
Debentures electing to have Debentures converted on such date a pro rata amount
of such holder’s portion of its Debentures submitted for conversion based on
the principal amount of Debentures submitted for conversion on such date by
such holder relative to the aggregate principal amount of all Debentures
submitted for conversion on such date. 
In the event of a dispute as to the number of shares of Common Stock
issuable to the Holder in connection with a conversion of this Debenture, the
Company shall issue to the Holder the number of shares of Common Stock not in
dispute and resolve such dispute in accordance with Section 24.


 


(d)           Limitations on Conversions.


 


(i)            Beneficial Ownership.  The
Company shall not effect any conversion of this Debenture, and the Holder of
this Debenture shall neither solicit the conversion nor have the right to
convert any portion of this Debenture pursuant to Section 3(a), to the extent
that after giving effect to such conversion, the Holder (together with the
Holder’s affiliates) would beneficially own in excess of 9.99% of the number of
shares of Common Stock outstanding immediately after giving effect to such
conversion.  For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned by
the Holder and its affiliates shall include the number of shares of Common
Stock issuable upon conversion of this Debenture with respect to which the
determination of such sentence is being made, but shall exclude the number of
shares of Common Stock which would be issuable upon (A) conversion of the
remaining, nonconverted portion of this Debenture beneficially owned by the
Holder or any of its affiliates and (B) exercise


 


6

















 


or conversion of the
unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any Other Debentures or warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its affiliates.  Except as set forth in the preceding
sentence, for purposes of this Section 3(d)(i), beneficial ownership shall be
calculated in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended.  For purposes of this
Section 3(d)(i), in determining the number of outstanding shares of Common
Stock, the Holder may rely on the number of outstanding shares of Common Stock
as reflected in (x) the Company’s most recent Form 10-Q or Form 10-K, (y) a
more recent public announcement by the Company or (z) any other notice by the
Company or the Transfer Agent setting forth the number of shares of Common
Stock outstanding.  For any reason at
any time, upon the written or oral request of the Holder, the Company shall
within two Business Days confirm orally and in writing to the Holder the number
of shares of Common Stock then outstanding. 
In any case, the number of outstanding shares of Common Stock shall be
determined after giving effect to the conversion or exercise of securities of
the Company, including this Debenture, by the Holder or its affiliates since
the date as of which such number of outstanding shares of Common Stock was
reported.  Any Conversion Notice
requesting a conversion that, after giving effect to such conversion, would
result in a violation of this Section 3(d)(i) shall be null and void as to the
portion of such Conversion Notice that would be in violation of this Section
3(d)(i) as if never delivered to the Company.


 


(ii)           Principal Market Regulation.  The
Company shall not be obligated to issue any shares of Common Stock upon
conversion of all outstanding Debentures and exercise of all outstanding
Warrants (including, the Warrant to purchase 428,571 shares of Common Stock
issued to the Company’s placement agent (the “Placement
Agent Warrants”) if the issuance of such shares of Common Stock
would exceed that number of shares of Common Stock which the Company may issue
upon conversion of the Debentures without breaching the Company’s obligations
under the rules or regulations of the Principal Market (the “Exchange
Cap”).  No purchaser of the
Debentures and Warrants pursuant to the Securities Purchase Agreement (the “Purchasers”) shall be issued, upon
conversion of the Debentures or exercise of the Warrants, shares of Common
Stock in an amount greater than the product of the Exchange Cap multiplied by a
fraction, the numerator of which is the sum of the number of Conversion Shares
and Warrant Shares underlying the Debentures and the Warrants issued to such
Purchaser pursuant to the Securities Purchase Agreement on the Issuance Date
and the denominator of which is the sum of the number of Conversion Shares and
Warrant Shares underlying the Debentures and the Warrants issued to all the
Purchasers pursuant to the Securities Purchase Agreement on the Issuance Date
and the number of shares of Common Stock issuable pursuant to the Placement
Agent Warrants issued on the Issuance Date (with respect to each Purchaser, the
“Exchange Cap Allocation”).  In the event that any Purchaser shall sell
or otherwise transfer any of such Purchaser’s Debentures, the transferee shall
be allocated a pro rata portion of such Purchaser’s Exchange Cap Allocation,
and the


 


7

















 


restrictions of the prior
sentence shall apply to such transferee with respect to the portion of the
Exchange Cap Allocation allocated to such transferee.  In the event that any holder of Debentures shall convert all of
such holder’s Debentures into a number of shares of Common Stock which, in the
aggregate, is less than such holder’s Exchange Cap Allocation, then the
difference between such holder’s Exchange Cap Allocation and the number of
shares of Common Stock actually issued to such holder shall be allocated to the
respective Exchange Cap Allocations of the remaining holders of Debentures on a
pro rata basis in proportion to the aggregate principal amount of the
Debentures then held by each such holder. 
Any Conversion Notice requesting a conversion that, after giving effect
to such conversion, would result in a violation of this Section 3(d)(ii) shall
be null and void as to the portion of such Conversion Notice that would be in
violation of this Section 3(d)(ii) as if never delivered to the Company.


 


For the avoidance of doubt,
in no event shall the Company be required to seek stockholder approval with
respect to any of the transactions contemplated by the Transaction Documents.


 


(4)           RIGHTS UPON EVENT OF DEFAULT.


 


(a)           Event of Default. 
Each of the following events shall constitute an “Event of Default”:


 


(i)            the failure of the applicable Registration
Statement required to be filed pursuant to the Registration Rights Agreement to
be declared effective by the SEC on or prior to the date that is 60 days after
the applicable Effectiveness Deadline (as defined in the Registration Rights
Agreement), or, while the applicable Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of the applicable Registration Statement lapses
for any reason (including, without limitation, the issuance of a stop order) or
is unavailable to any holder of the Debentures for sale of all of such holder’s
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such lapse
or unavailability continues for a period of more than an aggregate of 20
Trading Days in any 365-day period (other than days during an Allowable Grace
Period (as defined in the Registration Rights Agreement));


 


(ii)           the suspension from trading or failure of the Common Stock to be listed
on the Principal Market, the Nasdaq National Market or The New York Stock
Exchange, Inc. for a period of 10 consecutive Trading Days or for more than an
aggregate of 20 Trading Days in any 365-day period;


 


(iii)          the Company’s (A) failure to cure a Conversion Failure by delivery of
the required number of shares of Common Stock within ten (10) Business Days
after the applicable Conversion Date or (B) written notice to any holder of the
Debentures, including by way


 


8

















 


of public announcement or
through any of its agents, at any time, of its express 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;


 


(iv)          at any time following the 20th consecutive Business Day that
the Holder’s Authorized Share Allocation is less than the number of shares of
Common Stock that the Holder would be entitled to receive upon a conversion of
the full Conversion Amount of this Debenture (without regard to any limitations
on conversion set forth in Section 3(d)(i) or otherwise);


 


(v)           the Company’s failure to pay to the Holder any amount of Principal,
Interest, Late Charges or other amounts when and as due under this Debenture,
the Securities Purchase Agreement, the Registration Rights Agreement, the
Warrants or any other agreement, document, certificate or other instrument
delivered in connection with the transactions contemplated hereby and thereby
to which the Holder is a party, except, in the case of a failure to pay
Interest and Late Charges when and as due, in which case only if such failure
continues for a period of at least seven Business Days after the Company has
received notice of such failure to pay from the Holder;


 


(vi)          any redemption of or acceleration prior to maturity of any material
Indebtedness (as defined in Section 3(s) of the Securities Purchase Agreement)
of the Company or any of its Subsidiaries (as defined in Section 3(a) of the
Securities Purchase Agreement) other than with respect to any Other Debentures;


 


(vii)         the Company or any of its Subsidiaries, pursuant to or within the
meaning of Title 11, U.S. Code, or any similar Federal or state law for the
relief of debtors (collectively, “Bankruptcy
Law”), (A) commences a voluntary case, (B) consents to the entry of
an order for relief against it in an involuntary case, (C) consents to the
appointment of a receiver, trustee, assignee, liquidator or similar official (a
“Custodian”),  (D) makes a general assignment for the
benefit of its creditors or (E) admits in writing that it is generally unable
to pay its debts as they become due;


 


(viii)        a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that (A) is for relief against the Company or any of its
Subsidiaries in an involuntary case, (B) appoints a Custodian of the Company or
any of its Subsidiaries or (C) orders the liquidation of the Company or any of
its Subsidiaries;


 


(ix)           a final non-appealable judgment or judgments for the payment of money
aggregating in excess of $1,500,000 are rendered against the Company or any of
its Subsidiaries and which judgments are not, within 60 days after the entry
thereof, bonded, discharged or stayed pending appeal, or are not discharged
within 60 days after the expiration of such stay; provided, however, that any
judgment which is covered by insurance or an indemnity from a credit worthy
party shall not be included in calculating


 


9

















 


the $1,500,000 amount set
forth above so long as the Company provides the Holder a written statement from
such insurer or indemnity provider (which written statement shall be reasonably
satisfactory to the Holder) to the effect that such judgment is covered by
insurance or an indemnity and the Company will receive the proceeds of such
insurance or indemnity within 30 days of the issuance of such judgment;


 


(x)            the Company breaches, in any material
respect, any representation, warranty, covenant or other term or condition of
the Securities Purchase Agreement, the Registration Rights Agreement, the
Warrants, this Debenture, the Other Debentures, or any other agreement,
document, certificate or other instrument delivered in connection with the
transactions contemplated thereby and hereby to which the Holder is a party,
except, in the case of a breach of covenant which is curable, only if such
breach continues for a period of at least ten (10) consecutive Business Days of
the Company’s receipt of notice of same; or


 


(xi)           any breach or failure in any respect to comply with Section 15 of this
Debenture.


 


(b)           Redemption Right. 
Promptly after the Company becomes aware of the occurrence of an Event
of Default with respect to this Debenture or any Other Debenture, the Company
shall deliver written notice thereof via facsimile and overnight courier (an “Event of Default Notice”) to the
Holder.  At any time after the earlier
of the Holder’s receipt of an Event of Default Notice and the Holder becoming
aware of an Event of Default, the Holder may require the Company to redeem all
or any portion of this Debenture by delivering written notice thereof (the “Event of Default Redemption Notice”) to
the Company, which Event of Default Redemption Notice shall indicate the facts
constituting the Event of Default and the portion of this Debenture the Holder is
electing to redeem.  Each portion of
this Debenture subject to redemption by the Company pursuant to this Section
4(b) shall be redeemed by the Company at a price equal to the greater of (i)
the product of (x) the Conversion Amount to be redeemed and (y) the Redemption
Premium and (ii) the product of (A) the Conversion Rate with respect to such
Conversion Amount in effect at such time as the Holder delivers an Event of
Default Redemption Notice and (B) the Weighted Average Price of the Common
Stock on the date immediately preceding such Event of Default (the “Event of Default Redemption Price”).  Redemptions required by this Section 4(b)
shall be made in accordance with the provisions of Section 12.


 


(5)           RIGHTS UPON CHANGE OF CONTROL.


 


(a)           Change of Control. 
Each of the following events shall constitute a “Change of Control”:


 


(i)            the consolidation, merger or other business
combination (including, without limitation, a reorganization or
recapitalization) of the Company with or into another Person (other than (A) a
consolidation, merger or other business combination (including,


 


10

















 


without limitation,
reorganization or recapitalization) in which holders of the Company’s voting
power immediately prior to the transaction continue after the transaction to
hold, directly or indirectly, the voting power of the surviving entity or
entities necessary to elect a majority of the members of the board of directors
(or their equivalent if other than a corporation) of such entity or entities,
or (B) pursuant to a migratory merger effected solely for the purpose of
changing the jurisdiction of incorporation of the Company);


 


(ii)           the sale or transfer of all or substantially all of the Company’s
assets; or


 


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


 


No sooner than 15 days nor later than 10 days
prior to the consummation of a Change of Control, but in any event not prior to
the public announcement of such Change of Control, the Company shall deliver
written notice thereof via facsimile and overnight courier to the Holder (a “Change of Control Notice”).


 


(b)           Assumption.  Prior to the consummation of
any Change of Control, the Company will secure from any Person purchasing the
Company’s assets or Common Stock or any successor resulting from such Change of
Control (in each case, an “Acquiring Entity”)
a written agreement (in form and substance satisfactory to the holders of
Debentures representing at least a majority of the aggregate principal amount
of the Debentures then outstanding) to deliver to each holder of Debentures in
exchange for such Debentures, a security of the Acquiring Entity evidenced by a
written instrument substantially similar in form and substance to the
Debentures, including, without limitation, having a principal amount and
interest rate equal to the principal amounts and the interest rates of the
Debentures then held by such holder, and reasonably satisfactory to the holders
of Debentures representing at least a majority of the principal amount of the
Debentures then outstanding.  In the
event that an Acquiring Entity is directly or indirectly controlled by a
company or entity whose common stock or similar equity interest is listed,
designated or quoted on a securities exchange or trading market, the holders of
Debentures representing at least a majority of the aggregate principal amount
of the Debentures then outstanding may elect to treat such Person as the Acquiring
Entity for purposes of this Section 5(b).


 


(c)           Redemption Right.  At
any time during the period beginning after the Holder’s receipt of a Change of
Control Notice and ending on the date of the consummation of such Change of
Control (or, in the event a Change of Control Notice is not delivered at least
10 days prior to a Change of Control, at any time on or after the date which is
10 days prior to a Change of Control and ending 10 days after the consummation
of such Change of Control), the Holder may require the Company to redeem all or
any portion of this Debenture by delivering written notice thereof (“Change of Control Redemption Notice”) to
the Company, which Change of Control Redemption Notice shall indicate the
Conversion Amount the Holder is electing to redeem.  The portion of this Debenture subject to redemption pursuant to
this Section


 


11

















 


5(c) shall be redeemed by the Company at a
price equal to the greater of (i) the product of (x) the Conversion
Amount being redeemed and (y) the quotient determined by dividing (A) the Weighted Average Price of the Common
Stock for the full Trading Day immediately following the public announcement of
such proposed Change of Control by (B) the Conversion Price and (ii) 125% of
the Conversion Amount being redeemed
(the “Change of Control Redemption Price”).  If at any time the Weighted Average Price of
the Common Stock exceeds 175% of the Conversion Price as of the Issuance Date (subject
to adjustments pursuant to the terms and conditions of this Debenture) on the date of the occurrence of a Change of
Control, then the Company shall have the right to redeem all or a portion of
this Debenture by providing notice to the Holder at any time on or after the
date of such Change of Control and two days after such Change of Control by
delivering written notice thereof to the Holder, indicating the Conversion
Amount and the Change of Control Redemption Price.  Redemptions required by this Section 5(c) shall be made in accordance
with the provisions of Section 12 and shall have priority to payments to
stockholders in connection with a Change of Control.


 


(6)           RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND
OTHER CORPORATE EVENTS.


 


(a)           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.


 


(b)           Other Corporate Events. Prior to the consummation of any
recapitalization, reorganization, consolidation, merger, spin-off or other
business combination (other than a Change of Control) pursuant to which holders
of Common Stock are entitled to receive securities or other assets with respect
to or in exchange for 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, (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 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 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


 


12

















 


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 holders of Debentures representing at least a
majority of the aggregate principal amount of the Debentures then outstanding.


 


(7)           RIGHTS UPON ISSUANCE OF OTHER SECURITIES.


 


(a)           Adjustment of Conversion Price upon Issuance of
Common Stock.  If and whenever on or after the Issuance
Date, the Company issues or sells, or in accordance with this Section 7(a) is
deemed to have issued or sold, any shares of Common Stock (including the
issuance or sale of shares of Common Stock owned or held by or for the account
of the Company, but excluding shares of Common Stock issued or deemed to have
been issued or sold by the Company in connection with any Excluded Security)
for a consideration per share (the “New
Securities Issuance Price”) less than a price (the “Applicable Price”) equal to the Conversion
Price in effect immediately prior to such issue or sale (the foregoing a “Dilutive Issuance”), then
immediately after such Dilutive Issuance, the Conversion Price then in effect
shall be reduced to an amount equal to the greater of (x) the New Securities
Issuance Price and (y) the quotient obtained by dividing (A) the sum of (i) the
aggregate principal face amount of Debentures then outstanding and (ii) the
product of the aggregate number of Warrant Shares (as defined in the Warrant)
issuable pursuant to all of the Warrants then outstanding multiplied by the
Exercise Price (as defined in the Warrant) then in effect by (B) 16,999,811
minus the aggregate number of shares issued pursuant to the Debentures and the
Warrants on or prior to the date of the Dilutive Issuance (such quotient, the “Price Floor”).  For purposes of
determining the adjusted Conversion Price under this Section 7(a), the
following shall be applicable:


 


(i)            Issuance of Options.  If
the Company in any manner grants or sells any Options, other than 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, solely for purposes of this Section 7,
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 7(a)(i), 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 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.


 


13

















 


(ii)           Issuance of Convertible Securities.  If
the Company in any manner issues or sells any Convertible Securities, other
than 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, solely for purposes of this Section 7,
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 of sale of such Convertible
Securities for such price per share. 
For the purposes of this Section 7(a)(ii), the “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 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 7(a), 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, the additional consideration,
if any, payable upon the issue, conversion, 
exchange or exercise of any Convertible Securities, or the rate at which
any Convertible Securities are convertible into or exchangeable or exercisable
for Common Stock changes at any time, the Conversion Price in effect at the
time of such change shall be adjusted 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 7(a)(iii), 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 to a Conversion Price greater
than the Conversion Price in effect on the Issuance Date (subject to
appropriate adjustments for stock splits, stock dividends, stock combinations
and other similar transactions after the Issuance Date).


 


(iv)          Calculation of Consideration Received.  In
case any Option is issued in connection with the issue or sale of other
securities of the Company, together comprising one integrated transaction in
which no specific consideration is allocated to such Options by the parties
thereto, the Options will be deemed to have been issued for a consideration of $.01.  If any Common Stock, Options or Convertible
Securities are issued or sold or


 


14

















 


deemed to have been issued
or sold for cash, the consideration received therefor will be deemed to be the
gross amount received by the Company therefor. 
If any Common Stock, Options or Convertible Securities are issued or
sold for a consideration other than cash, 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 Weighted Average
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, the amount of consideration therefor
will be deemed to be the fair value of such portion of the net assets and
business of the non-surviving entity as is attributable to such 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
holders of Debentures representing at least a majority of the principal amounts
of the Debentures, unless the Board of Directors of the Company shall have
obtained a fairness opinion from an independent financial advisor in which case
the fair value shall be as stated in such fairness opinion.  If, in the absence of a fairness opinion,
such parties are unable to reach agreement within ten days after the occurrence
of an event requiring valuation (the “Valuation
Event”), the fair value of such consideration will be determined in
accordance with Section 24 hereof.


 


(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 shares of 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
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of Common Stock into a greater
number of shares, the Conversion Price in effect immediately prior to such
subdivision will be proportionately reduced. 
If the Company at any time combines (by combination, reverse stock split
or otherwise) one or more classes of its outstanding shares of Common Stock
into a smaller number of shares, the Conversion Price in effect immediately
prior to such combination will be proportionately increased.


 


(c)           Other Events.  If
any event occurs of the type contemplated by the provisions of this Section 7
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, in
their reasonable discretion, will make


 


15

















 


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 7.


 


(8)           EXTENSION OF MATURITY DATE.


 


(a)           Holder Maturity Date Extension Option.  The
Holder shall have the right, in its sole discretion, to require that the
Original Maturity Date as to this Debenture (but not any other Debenture) be
extended for a period not to exceed, in the aggregate, three years from the Original
Maturity Date, without the action of any other Person, by delivering written
notice thereof (a “Holder Maturity Date
Extension Notice”) to the Company at any time or from time to time
prior to the Original Maturity Date, as extended, which Holder Maturity Date
Extension Notice shall indicate the Maturity Date, as so extended, of this
Debenture.  Within one Business Day of
receipt of a Holder Maturity Date Extension Notice, the Company shall inform
all other holders of Debentures that such a notice has been received by the
Company.


 


(b)           Automatic Maturity Date Extension.  If
at any time during the 180 day period immediately preceding, but not including,
the Original Maturity Date (the “Maturity
Extension Measuring Period”), the arithmetic average of the Weighted
Average Price of the Common Stock exceeds 175% of the Conversion Price as of
the Issuance Date (subject to appropriate adjustments for stock splits, stock
dividends, stock combinations and other similar transactions after the Issuance
Date) for each of any 30 consecutive Trading Days during the Maturity Extension
Measuring Period, and the Conditions to Automatic Maturity Extension (as
defined below) are satisfied or waived in writing by all holders of Debentures,
the Maturity Date as to this Debenture and all Other Debentures shall be
extended automatically, without further action on the part of any Person, to
September 26, 2009.  For purposes of
this Section 8(b), “Conditions to Automatic
Maturity Extension” means  the
following conditions: (i) during the
period beginning on the Issuance Date and ending on and including the Original
Maturity Date, subject to the terms and conditions of Section 3(d), the Company
shall have delivered shares of Common Stock upon any conversion of Conversion
Amounts on a timely basis as set forth in Section 3(c)(i) and delivered shares
of Common Stock upon exercise of any Warrants on a timely basis as set forth in
Section 1(a) of the Warrants; (ii) on each day during the period beginning on
the first Trading Day of the Maturity Extension Measuring Period and ending on and including the Original
Maturity Date, the Common Stock shall be listed on the Principal Market, the
Nasdaq National Market or The New York Stock Exchange, Inc. and delisting or
suspension by such market or exchange shall not have been threatened either (A)
in writing by such market or exchange or (B) by failing to satisfy the minimum
listing maintenance requirements of such market or exchange; (iii) during the
period beginning on the Issuance Date and ending on and including the Original
Maturity Date, there shall not have occurred (x) the public announcement of a
pending, proposed or intended Change of Control which has not been abandoned,
terminated or consummated, (y) an Event of Default or (z) an event that with
the passage of time or giving of notice, and assuming it were not cured, would
constitute an Event of


 


16

















 


Default; (iv) on each day of the period
beginning on the first Trading Day of the Maturity Extension Measuring
Period and ending on and
including the Original Maturity Date either (x) the Registration Statement or
Registration Statements required pursuant to the Registration Rights Agreement
shall be effective and available for the sale for all of the Registrable
Securities in accordance with the terms of the Registration Rights Agreement or
(y) all shares of Common Stock issuable upon conversion of the Debentures and
shares of Common Stock issuable upon exercise of the Warrants shall be eligible
for sale without restriction and without the need for registration under any
applicable federal or state securities laws; and (v) the Company otherwise
shall have been in material compliance with and shall not have breached, in any
material respect, any provision, covenant, representation or warranty of the
Securities Purchase Agreement, the Registration Rights Agreement, the Warrants
or any of the Debentures.


 


(9)           COMPANY’S RIGHT OF MANDATORY CONVERSION AND
PREPAYMENT; HOLDER’S RIGHT TO REQUIRE REPAYMENT.


 


(a)           (i)    Mandatory Conversion.  If at any time from and after the
Issuance Date, the arithmetic average of the Weighted Average Price of the
Common Stock exceeds 175% of the Conversion Price as of the Issuance Date
(subject to adjustments pursuant to the terms and conditions of this Debenture)
for each of any 30 consecutive Trading Days (the “Mandatory Conversion Measuring Period”) and the Conditions to
Mandatory Conversion (as set forth in Section 9(c)) are satisfied or waived in
writing by the Holder, the Company shall have the right to require the Holder
to convert all or any such portion of the Conversion Amount of this Debenture
designated in the Mandatory Conversion Notice into fully paid, validly issued
and nonassessable shares of Common Stock in accordance with Section 3(c)
hereof at the Conversion Rate as of the Mandatory Conversion Date (as defined
below) (a “Mandatory Conversion”).  The Company may exercise its right to
require conversion under this Section 9(a) by delivering within not more than
ten Trading Days following the end of such Mandatory Conversion Measuring
Period a written notice thereof by facsimile and overnight courier to all, but
not less than all, of the holders of Debentures and the Transfer Agent (the “Mandatory Conversion Notice” and the date
all of the holders received such notice is referred to as the “Mandatory Conversion Notice Date”).  The Mandatory Conversion Notice shall be
irrevocable.


 


(ii)           Prepayment.  Notwithstanding
anything to the contrary contained in this Agreement and as long as the
conditions set forth in Section 9(c) are satisfied or waived in writing
by the Holder, the Company shall have the right to prepay all or any such portion of the outstanding Principal (the “Prepayment
Portion”) for an amount in cash equal to 150% of the sum of the
Prepayment Portion plus all accrued and unpaid Interest and accrued and unpaid
Late Charges thereon, if any (such amount, the “Prepayment Premium Amount”). 
The Company may exercise its rights to prepay the Debenture as set forth
hereunder by delivering written notice to the Holder at least twenty (20)
Trading Days and no more than sixty (60) Trading Days prior to the
effectiveness of such election indicating the date of effectiveness of 


 


17

















 


delivery of a written notice election, the
Prepayment Portion, and the Prepayment Premium Amount.  The Company shall deliver payment of the
Prepayment Premium Amount by wire transfer of immediately available funds or by
delivery of a certified check. A prepayment election hereunder shall be
irrevocable unless waived by the Holder.


 


(b)           Pro Rata Conversion Requirement.  If
the Company elects to cause a conversion of all or any portion of the
Conversion Amount of this Debenture pursuant to Section 9(a)(i) or to prepay
this Debenture in accordance with Section 9(a)(ii), then it must simultaneously
take the same action with respect to the Other Debentures.  If the Company elects to cause the
conversion of this Debenture pursuant to Section 9(a) (or similar provisions
under the Other Debentures) with respect to less than all of the Conversion
Amounts of the Debentures then outstanding, then the Company shall require
conversion of a Conversion Amount from each of the holders of the Debentures equal
to the product of (I) the aggregate Conversion Amount of Debentures which the
Company has elected to cause to be converted pursuant to Section 9(a),
multiplied by (II) the fraction, the numerator of which is the sum of the
aggregate principal amount of the Debentures purchased by such holder pursuant
to the Securities Purchase Agreement and the denominator of which is the sum of
the aggregate principal amount of the Debentures then outstanding and purchased
by all holders pursuant to the Securities Purchase Agreement (such fraction
with respect to each holder is referred to as its “Allocation Percentage,” and such amount with respect to each
holder is referred to as its “Pro Rata
Conversion Amount”).  In the
event that the initial holder of any Debentures shall sell or otherwise
transfer any of such holder’s Debentures, the transferee shall be allocated a
pro rata portion of such holder’s Allocation Percentage.  The Mandatory Conversion Notice shall state
(i) the Trading Day selected for the Mandatory Conversion in accordance
with Section 9(a), which Trading Day shall be at least 10 Business Days but not
more than 60 Business Days following the Mandatory Conversion Notice Date (the
“Mandatory Conversion Date”), (ii) the aggregate Conversion Amount of the
Debentures which the Company has elected to be subject to mandatory conversion
from all of the holders of the Debentures pursuant to this Section 9 (and
analogous provisions under the Other Debentures), (iii) each holder’s Pro Rata
Conversion Amount of the Conversion Amount of the Debentures the Company has
elected to cause to be converted pursuant to this Section 9 (and analogous
provisions under the Other Debentures) and (iv) the number of shares of
Common Stock to be issued to such Holder as of the Mandatory Conversion Date.  All
Conversion Amounts converted by the Holder after the Mandatory Conversion
Notice Date shall reduce the Conversion Amount of this Debenture required to be
converted on the Mandatory Conversion Date. 
If the Company has elected a Mandatory Conversion, the mechanics
of conversion set forth in Section 3(c) shall apply, to the extent applicable,
as if the Company and the Transfer Agent had received from the Holder on the
Mandatory Conversion Date a Conversion Notice with respect to the Conversion
Amount being converted pursuant to the Mandatory Conversion.


 


(c)           Conditions
to Mandatory Conversion.  For
purposes of this Section 9, “Conditions to
Mandatory Conversion” means  the
following conditions: (i) during the
Mandatory Conversion Measuring Period, the Company shall have delivered shares
of Common


 


18

















 


Stock upon any conversion of Conversion
Amounts on a timely basis as set forth in Section 3(c)(i) and delivered shares
of Common Stock upon exercise of any Warrants or on a timely basis as set forth
in Section 1(a) of the Warrants; (ii) on each day during the period beginning
on the first Trading Day of the Mandatory Conversion Measuring Period and
ending on and including the Mandatory Conversion Date, the Common Stock shall
be listed on the Principal Market, the Nasdaq National Market or The New York
Stock Exchange, Inc. and delisting or suspension by such market or exchange
shall not have been threatened either (A) in writing by such market or exchange
or (B) by falling below the minimum listing maintenance requirements of such
market or exchange; (iii) during the Mandatory Conversion Measuring Period,
there shall not have occurred (x) the public announcement of a pending,
proposed or intended Change of Control which has not been abandoned, terminated
or consummated, or (y) an Event of Default; (iv) on each day of the period
beginning on the date of delivery of the Mandatory Conversion Notice and ending
on the Mandatory Conversion Date either (x) the Registration Statement or
Registration Statements required pursuant to the Registration Rights Agreement
shall be effective and available for the sale for all of the Registrable
Securities in accordance with the terms of the Registration Rights Agreement or
(y) all shares of Common Stock issuable upon conversion of the Debentures and
shares of Common Stock issuable upon exercise of the Warrants shall be eligible
for sale without restriction and without the need for registration under any
applicable federal or state securities laws; (v) on each day of the period
beginning on the Mandatory Conversion Date and ending thirty Trading Days
thereafter either (x) the Registration Statements required pursuant to the
Registration Rights Agreement shall be expected to be effective and available
for the sale of at least all of the Registrable Securities in accordance with
the terms of the Registration Rights Agreement or (y) all shares of Common
Stock issuable upon conversion of the Debentures and shares of Common Stock
issuable upon exercise of the Warrants shall be eligible for sale without
restriction and without the need for registration under any applicable federal
or state securities laws; and (vi) the Company otherwise shall have been in
material compliance with and shall not have breached, in any material respect,
any provision, covenant, representation or warranty of the Securities Purchase
Agreement, the Registration Rights Agreement, the Warrants or any of the
Debentures.


 


(d)           Holder’s
Right to Require Redemption.  If at
any time on or after the second anniversary of the Initial Issuance Date, the
Weighted Average Price of the Common Stock is less than the Conversion Price on
any five Trading Days after such second anniversary, the Holder shall have the
right, in its sole discretion, to require that the Company redeem up to
$7,500,000 principal amount of this Note (a “Holder
Optional Redemption”) by delivering written notice thereof (a “Holder Optional Redemption Notice”) to the
Company, which Holder Redemption Notice shall indicate the Conversion Amount
the Holder is electing to redeem.  The
portion of this Note subject to redemption pursuant to this Section 9(d) shall
be redeemed by the Company at a price equal to the Conversion Amount being
redeemed (the “Holder Optional Redemption
Price”).  Redemptions
required by this Section 9(d) shall be made in accordance with the provisions
of Section 12.


 


(10)         NONCIRCUMVENTION.  The
Company hereby covenants and agrees


 


19

















 


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


 


(11)         RESERVATION OF AUTHORIZED SHARES.


 


(a)           Reservation.  The Company shall initially
reserve out of its authorized and unissued Common Stock a number of shares of
Common Stock for each of the Debentures equal to 130% of the Conversion Rate
with respect to the Conversion Amount of each such Debenture as of the Issuance
Date.  Thereafter, the Company, so long
as any of the Debentures are outstanding, shall take all action necessary to
reserve and keep available out of its authorized and unissued Common Stock,
solely for the purpose of effecting the conversion of the Debentures, 110% of
the number of shares of Common Stock as shall from time to time be necessary to
effect the conversion of all of the Debentures then outstanding; provided that
at no time shall the number of shares of Common Stock so reserved be less than
the number of shares required to be reserved by the previous sentence (the “Required Reserve Amount”).  The initial number of shares of Common Stock
reserved for conversions of the Debentures and each increase in the number of
shares so reserved shall be allocated pro rata among the holders of the
Debentures based on the principal amount of the Debentures held by each holder
at the time of Issuance Date or increase in the number of reserved shares, as
the case may be (the “Authorized Share
Allocation”).  In the event
that a holder shall sell or otherwise transfer any of such holder’s Debentures,
each transferee shall be allocated a pro rata portion of such holder’s
Authorized Share Allocation.  Any shares
of Common Stock reserved and allocated to any Person which ceases to hold any
Debentures shall be allocated to the remaining holders of Debentures, pro rata
based on the principal amount of the Debentures then held by such holders.


 


(b)           Insufficient Authorized Shares.  If
at any time while any of the Debentures remain outstanding the Company does not
have a sufficient number of authorized and unreserved shares of Common Stock to
satisfy its obligation to reserve for issuance upon conversion of the
Debentures at least a number of shares of Common Stock equal to the Required
Reserve Amount (an “Authorized Share Failure”),
then the Company shall immediately take all action necessary to increase the
Company’s authorized shares of Common Stock to an amount sufficient to allow
the Company to reserve the Required Reserve Amount for the Debentures then
outstanding.  Without limiting the
generality of the foregoing sentence, as soon as reasonably practicable after the
date of the occurrence of an Authorized Share Failure, but in no event later
than 90 days after the occurrence of such Authorized Share Failure, the Company
shall hold a meeting of its stockholders for the approval of an increase in the
number of authorized shares of Common Stock. 
In connection with such meeting, the Company shall provide each
stockholder with a proxy statement and shall use its best efforts to solicit
its stockholders’ approval of such increase in authorized shares of Common
Stock and to cause its


 


20

















 


board of directors to recommend to the
stockholders that they approve such proposal.


 


(12)         HOLDER’S REDEMPTIONS.


 


(a)           Mechanics.  In the event that the Holder
has sent a Redemption Notice to the Company pursuant to Section 4(b) or Section
5(c), the Holder shall promptly submit this Debenture to the Company.  The Company shall deliver the applicable
Event of Default Redemption Price to the Holder within 10 Business Days after
the Company’s receipt of the Holder’s Event of Default Redemption Notice.  If the Holder has submitted a Change of
Control Redemption Notice in accordance with Section 5(c), the Company shall
deliver the applicable Change of Control Redemption Price to the Holder concurrently
with the consummation of such Change of Control if such notice is received
prior to the consummation of such Change of Control and within five Business
Days after the Company’s receipt of such notice otherwise.  In the event that the Holder has sent
a Holder Optional Redemption Notice pursuant to Section 9(d), the Company shall
deliver the Holder Optional Redemption Price within 45 days after the Company’s
receipt of the Holder Optional Redemption Notice and upon receipt of such
payment, the Holder shall promptly deliver this Debenture to the Company.  In
the event of a redemption of less than all of the Conversion Amount of this
Debenture, the Company shall promptly cause to be issued and delivered to the
Holder a new Debenture (in accordance with Section 19(d)) representing the
outstanding Principal which has not been redeemed.  In the event that the Company does not pay the Redemption Price
or Holder Optional Redemption to the Holder (or deliver any Common Stock to be
issued pursuant to a Company Redemption Share Notice) within the time period
required, at any time thereafter and until the Company pays such unpaid
Redemption Price (and issues any Common Stock required pursuant to a Company
Redemption Share Notice) in full, the Holder shall have the option, in lieu of
redemption, to require the Company to promptly return to the Holder all or any
portion of this Debenture representing the Conversion Amount that was submitted
for redemption and for which the applicable Redemption Price (or any Common
Stock required to be issued pursuant to a Company Redemption Share Notice)
(together with any Late Charges thereon) has not been paid.  Upon the Company’s receipt of such notice,
(x) the Redemption Notice shall be null and void with respect to such
Conversion Amount, (y) the Company shall immediately return this Debenture, or
issue a new Debenture (in accordance with Section 19(d)) to the Holder
representing such Conversion Amount and (z) the Conversion Price of this
Debenture or such new Debentures shall be adjusted to the lesser of (A) the
Conversion Price as in effect on the date on which the Redemption Notice is
voided and (B) the greater of (I) the Price Floor and (II) the Weighted Average
Price, on the date on which the Redemption Notice is voided.  The Holder’s delivery of a notice voiding a
Redemption Notice and exercise of its rights following such notice shall not
affect the Company’s obligations to make any payments of Late Charges which
have accrued prior to the date of such notice with respect to the Conversion
Amount subject to such notice.


 


(b)           Redemption by Other Holders. 
Upon the Company’s receipt of notice from any of the holders of the
Other Debentures for redemption or repayment as a result of an event or
occurrence substantially similar to the events or occurrences described in Section


 


21

















 


4(b) (each, an “Other Redemption Notice”), the Company shall immediately
forward to the Holder by facsimile a copy of such notice.  The Holder shall have five Business Days
from receipt of such facsimile copy of such Other Redemption Notice to deliver
a Redemption Notice.  If the Company
receives a Redemption Notice and one or more Other Redemption Notices during
such five Business Day period and the Company is unable to redeem all
principal, interest and other amounts designated in such Redemption Notice and
such Other Redemption Notices, then the Company shall redeem a pro rata amount
from each holder of the Debentures (including the Holder) based on the
principal amount of the Debentures submitted for redemption pursuant to such
Redemption Notice and such Other Redemption Notices received by the Company
during such five Business Day period.


 


(13)         RESTRICTION ON REDEMPTION AND CASH DIVIDENDS. 
Until all of the Debentures have been converted, redeemed or otherwise
satisfied in accordance with their terms, the Company shall not, directly or
indirectly, redeem, repurchase or declare or pay any cash dividend or
distribution on its capital stock, other than the repurchase of restricted
stock from terminated employees or the redemption of any shares of preferred
stock or payment of dividends or redemptions required to be paid pursuant to
the terms of any securities existing on the date hereof, without the prior
express written consent of the holders of Debentures representing at least a
majority of the aggregate principal amount of the Debentures then outstanding.


 


(14)         VOTING RIGHTS.  The
Holder shall have no voting rights as the holder of this Debenture, except as
required by law, including but not limited to the Delaware General Corporation
Law, and as expressly provided in this Debenture.


 


(15)         RANK; ADDITIONAL INDEBTEDNESS; LIENS.


 


(a)           Rank.      All payments due under this
Debenture (a) shall rank pari passu
with all Other Debentures and (b) shall be senior to all other Indebtedness of
the Company and its Subsidiaries, other than Permitted Senior and Pari Passu
Indebtedness (as defined below).


 


(b)           Incurrence
of Indebtedness.  So long as this Debenture is outstanding, the
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness, other than (i) the Indebtedness evidenced by this Debenture and
the Other Debentures and (ii) Permitted Indebtedness.  As used herein, “Permitted
Indebtedness” means (A) any Indebtedness of a third party assumed by
the Company in connection with (and not arising out of) an arms-length
transaction in which the Company acquires such third party, whether by merger,
combination, stock or asset purchase or otherwise (“Permitted Acquisition Indebtedness”); (B) an aggregate amount
of Indebtedness that is senior or pari passu
in right of payment to the Debentures (collectively, “Permitted Senior and Pari Passu Indebtedness”)
not to exceed at any one time $15,000,000; and (C) Permitted Subordinated
Indebtedness.  “Permitted Subordinated Indebtedness” means
Indebtedness that (x) is made expressly subordinate in right of payment to


 


22

















 


the Indebtedness evidenced by this Debenture and the Other Debentures
on terms reasonably satisfactory to the holders of Debentures representing not
less than a majority of the aggregate principal amount of the then outstanding
Debentures and (y) does not provide at any time for the payment, prepayment,
repayment, repurchase or defeasance, directly or indirectly, of any principal
or premium, if any, thereon until at least 91 days after the Maturity Date.


 


(c)           Existence
of Liens.  So long as this Debenture is outstanding, the Company shall not,
and the Company shall not permit any of its Subsidiaries to, directly or
indirectly, allow or suffer to exist any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by the
Company or any of its Subsidiaries (collectively, “Liens”) other than Permitted Liens.  As used herein, “Permitted
Liens” means (i) Liens incurred to secure Permitted Acquisition
Indebtedness and Permitted Senior and Pari Passu Indebtedness, (ii) statutory
Liens for current taxes not yet due, (iii) purchase money Liens on equipment or
other property acquired or held by the Company or any of its Subsidiaries in
the ordinary course of its business to secure the purchase price of such
equipment or Indebtedness incurred solely for the purpose of financing the
acquisition of such equipment or Liens existing on such equipment at the time
of its acquisition; provided, however, that no such Lien shall
extend to or cover any other property of the Company or any of its
Subsidiaries; and (iv) other Liens imposed by law (such a materialmen’s,
mechanics’, carriers’, worker’s and repairman’s Liens).


 


(d)           Restricted Payments.  The
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, redeem, defease, repurchase, repay or make any payments
in respect of, by the payment of cash or cash equivalents (in whole or in part,
whether by way of open market purchases, tender offers, private transactions or
otherwise), all or any portion of any Permitted Subordinated Indebtedness or
Permitted Senior and Pari Passu Indebtedness that is not expressly made senior
in right of payment of the Debentures, the Other Debentures, whether by way of
payment in respect of principal of (or premium, if any) or interest on, such
Indebtedness if at the time such payment is due or is otherwise made or, after
giving effect to such payment, an event constituting, or that with the passage
of time and without being cured would constitute, an Event of Default has
occurred and is continuing.


 


(16)         PARTICIPATION.  The
Holder, as the holder of this Debenture, shall be entitled to such dividends
paid and distributions made to the holders of Common Stock to the same extent
as if the Holder had converted this Debenture into Common Stock (without regard
to any limitations on conversion herein or elsewhere) and had held such shares
of Common Stock on the record date for such dividends and distributions.  Payments under the preceding sentence shall
be made concurrently with the dividend or distribution to the holders of Common
Stock.


 


(17)         VOTE TO ISSUE, OR CHANGE THE TERMS OF,
DEBENTURES.  The affirmative vote at a meeting duly
called for such purpose or the written consent without a meeting, of the
holders of Debentures representing not less than a majority of the aggregate


 


23

















 


principal amount of the then outstanding Debentures, shall be required
for any change or amendment to this Debenture or the Other Debentures.  Any election by the holders of Debentures
representing at least a majority of the aggregate principal amount of the
Debentures then outstanding shall bind the holders of all Debentures then
outstanding.


 


(18)         TRANSFER.  This Debenture may be
offered, sold, assigned or transferred by the Holder without the consent of the
Company, subject only to the provisions of Section 2(f) of the Securities
Purchase Agreement.


 


(19)         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 forthwith issue and deliver upon the order of the
Holder a new Debenture (in accordance with Section 19(d)), registered as the Holder
may request, 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 19(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 3(c)(iii)
and this Section 19(a), 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 19(d))
representing the outstanding Principal.


 


(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 19(d) and in principal
amounts of at least $100,000) 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 19(a) or Section 19(c), the
Principal designated by the Holder which, when added to the principal
represented by the other new Debentures issued in connection with such


 


24

















 


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
but unpaid Interest and Late Charges on the Principal and Interest of this
Debenture, from the Issuance Date.


 


(20)         REMEDIES, CHARACTERIZATIONS, OTHER
OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this
Debenture shall be cumulative and in addition to all other remedies available
under this Debenture, the Securities Purchase Agreement, the Warrants and the
Registration Rights Agreement, at law or in equity (including a decree of
specific performance and/or other injunctive relief), and nothing herein shall
limit the parties’ right to pursue actual and consequential damages for any
failure by the other party hereto to comply with the terms of this Debenture;
provided, however, that in no event shall any party recover more than once for
the same losses or damages.  Amounts set
forth or provided for herein with respect to payments, conversion and the like
(and the computation thereof) shall be the amounts to be received by the Holder
and shall not, except as expressly provided herein, be subject to any other
obligation of the Company (or the performance thereof).  The Company acknowledges that a breach by it
of its obligations hereunder will cause irreparable harm to the Holder and that
the remedy at law for any such breach may be inadequate.  The Company therefore agrees that, in the
event of any such breach or threatened breach, the Holder shall be entitled to
seek, in addition to all other available remedies, an injunction restraining
any breach without the necessity of showing economic loss and without any bond
or other security being required.


 


(21)         PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER
COSTS.  If (a) this Debenture is placed in the hands
of an attorney for collection or enforcement or is collected or enforced
through any legal proceeding or the Holder otherwise takes action to collect
amounts due under this Debenture or to enforce the provisions of this Debenture
or (b) there occurs any bankruptcy, reorganization, receivership of the Company
or other proceedings affecting Company creditors’ rights and involving a claim
under this Debenture, then the Company shall pay the costs incurred by the
Holder for such collection, enforcement or action or in connection with such
bankruptcy, reorganization, receivership or other proceeding, including, but
not limited to, attorneys’ fees and disbursements.


 


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


 


(23)         FAILURE OR INDULGENCE NOT WAIVER.  No
failure or delay on the part of the Company or the Holder in the exercise of
any power, right or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or
privilege.


 


25

















 


(24)         DISPUTE RESOLUTION.  In
the case of a dispute as to the determination of the Redemption Price or the
arithmetic calculation of the Conversion Rate or the Redemption Price, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile within one Business Day of receipt of the Conversion Notice or
Redemption Notice or other event giving rise to such dispute, as the case may
be, to the Holder.  If the Holder and
the Company are unable to agree upon such determination or calculation within
one Business Day of such disputed determination or arithmetic calculation being
submitted to the Holder, then the Company shall, within one Business Day submit
via facsimile (a) the disputed determination of the Weighted Average Price to
an independent, reputable investment bank selected by the Company and approved
by the Holder or (b) the disputed arithmetic calculation of the Conversion Rate
or the Redemption Price to the Company’s independent, outside accountant.  The Company, at the Company’s expense, shall
cause the investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the Holder of the
results no later than five Business Days from the time it receives the disputed
determinations or calculations.  Such
investment bank’s or accountant’s determination or calculation, as the case may
be, shall be binding upon all parties absent demonstrable error.


 


(25)         NOTICES; PAYMENTS.


 


(a)           Notices.  Whenever notice is required
to be given under this Debenture, unless otherwise provided herein, such notice
shall be given in accordance with Section 9(f) of the Securities Purchase
Agreement.  The Company shall provide
the Holder with prompt written notice of all actions taken pursuant to this
Debenture, including in reasonable detail a description of such action and the
reason therefore.  Without limiting the
generality of the foregoing, the Company will give written notice to the Holder
(i) within three Business Days upon any adjustment of the Conversion Price,
setting forth in reasonable detail, and certifying, the calculation of such
adjustment and (ii) at least the same number of days prior to the date
on which the Company provides notice to any other Person who has the right to
receive notice of such an event (A)
with respect to any dividend or distribution upon the Common Stock, (B) with
respect to any pro rata subscription offer to holders of Common Stock or (C)
for determining rights to vote with respect to any Change of Control,
dissolution or liquidation, provided in each case that such information shall
be made known to the public prior to or in conjunction with such notice being
provided to the Holder.  Notwithstanding
the foregoing, Section 4(i) of the Securities Purchase Agreement shall apply to
all notices given pursuant to this Debenture.


 


(b)           Payments.  Whenever any payment of cash
is to be made by the Company to any Person pursuant to this Debenture, such
payment shall be made in lawful money of the United States of America by a
check drawn on the account of the Company and sent via overnight courier
service to such Person at such address as previously provided to the Company in
writing (which address, in the case of each of the Purchasers, shall initially
be as set forth on the Schedule of Buyers attached to the Securities Purchase
Agreement); provided that the Holder may elect to receive a payment of cash via
wire transfer of immediately available funds by


 


26

















 


providing the Company with written notice at least two Business Days
prior to the due date of such payment setting out such request and the Holder’s
wire transfer instructions.  Whenever
any amount expressed to be due by the terms of this Debenture is due on any day
which is not a Business Day, the same shall instead be due on the next
succeeding day which is a Business Day and, in the case of any Interest Date
which is not the date on which this Debenture is paid in full, the extension of
the due date thereof shall not be taken into account for purposes of
determining the amount of Interest due on such date.  Any amount of Principal or other amounts required to be paid
under the Transaction Documents (as defined in the Securities Purchase
Agreement) other than Interest which is not paid when due shall result in a
late charge being incurred and payable by the Company in an amount equal to
interest on such amount at the rate of 12% per annum from the date such amount
was due until the same is paid in full (“Late
Charge”).


 


(26)         CANCELLATION. 
After all Principal, accrued Interest and other amounts at any time owed
on this Debenture has been paid in full, this Debenture shall automatically be
deemed canceled, shall be surrendered to the Company for cancellation and shall
not be reissued.


 


(27)         WAIVER OF NOTICE.  To
the extent permitted by law, the Company hereby waives demand, notice, protest
and all other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Debenture.


 


(28)         GOVERNING LAW. 
This Debenture shall be construed and enforced in accor­dance with, and
all questions concerning the construction, validity, interpretation and
performance of this Debenture shall be governed by, the internal laws of the
State of New York, without giving effect to any choice of law or conflict of
law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York.


 


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


 


(a)           “Approved Stock Plan” means any employee benefit plan which has
been approved by the Board of Directors of the Company, pursuant to which the
Company’s securities may be issued to any employee, officer, director or other
service provider to the Company for services provided to the Company.


 


(b)           “Bloomberg” means
Bloomberg Financial Markets.


 


(c)           “Business Day” means any day other than Saturday, Sunday or
other day on which commercial banks in The City of New York are authorized or
required by law to remain closed.


 


(d)           “Convertible Securities”
means any stock or securities (other than


 


27

















 


Options) directly or indirectly convertible into or exercisable or
exchangeable for Common Stock.


 


(e)           “Excluded Securities”
shall have the meaning given to it in the Securities Purchase Agreement.


 


(f)            “Interest Conversion Price” means, with respect to any Interest Date,
that price which shall be computed as 90% of the arithmetic average of the
Weighted Average Price of the Common Stock on each of the five consecutive
Trading Days immediately preceding such Interest Date.  All such determinations to be appropriately
adjusted for any stock split, stock dividend, stock combination or other
similar transaction during such period.


 


(g)           “Maturity Date Conversion
Price” means that price
which shall be computed as 90% of the arithmetic average of the Weighted
Average Price of the Common Stock on each of the 15 consecutive Trading Days
immediately preceding the Maturity Date. 
All such determinations to be appropriately adjusted for any stock
split, stock dividend, stock combination or other similar transaction during
such period.


 


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


 


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


 


(j)            “Principal
Market” means The Nasdaq SmallCap Market.


 


(k)           “Redemption Premium” means
(i) in the case of the Events of Default described in Section 4(a)(i) - (vii)
and (x) - (xiv), 120% or (ii) in the case of the Events of Default described in
Section 4(a)(viii) - (ix), 100%.


 


(l)            “Registration
Rights Agreement” means that certain registration rights agreement
between the Company and the initial holders of the Debentures relating to the
registration of the resale of the shares of Common Stock issuable upon conversion
of the Debentures.


 


(m)          “SEC” means the United
States Securities and Exchange Commission.


 


(n)           “Securities Purchase Agreement”
means that certain securities purchase agreement between the Company and the
initial holders of the Debentures pursuant to which the Company issued the
Debentures.


 


(o)           “Semi-Annual Period” means
each of: the period beginning on


 


28

















 


and including January 1 and ending on and including June 30; and the
period beginning on and including July 1 and ending on and including December
31.


 


(p)           “Trading Day” means any
day on which the Common Stock is traded on the Principal Market, or, if the
Principal Market is not the principal trading market for the Common Stock, then
on the principal securities exchange or securities market on which the Common
Stock is then traded; provided that “Trading Day” shall not include any day on
which the Common Stock is scheduled to trade on such exchange or market for
less than 4.5 hours or any day that the Common Stock is suspended from trading
during the final hour of trading on such exchange or market (or if such
exchange or market does not designate in advance the closing time of trading on
such exchange or market, then during the hour ending at 4:00:00 p.m., New York
Time).


 


(q)           “Warrants” has the meaning ascribed to such term in the
Securities Purchase Agreement, and shall include all warrants issued in
exchange therefor or replacement thereof.


 


(r)            “Weighted Average Price” means, for any security as of any date, the
dollar volume-weighted average price for such security on the Principal Market
during the period beginning at 9:30:01 a.m., New York Time (or such other time
as the Principal Market publicly announces is the official open of trading), and
ending at 4:00:00 p.m., New York Time (or such other time as the Principal
Market publicly announces is the official close of trading) as reported by
Bloomberg through its “Volume at Price” functions, or, if the foregoing does
not apply, the dollar volume-weighted average price of such security in the
over-the-counter market on the electronic bulletin board for such security
during the period beginning at 9:30:01 a.m., New York Time (or such other time
as such market publicly announces is the official open of trading), and ending
at 4:00:00 p.m., New York Time (or such other time as such market publicly
announces is the official close of trading) as reported by Bloomberg, or, if no
dollar volume-weighted average price is reported for such security by Bloomberg
for such hours, 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 (formerly the National Quotation Bureau,
Inc.).  If the Weighted Average Price
cannot be calculated for a security on a particular date on any of the
foregoing bases, the Weighted Average Price of such security on such date shall
be the fair market value as mutually determined by the Company and the Holder.  If the Company and the Holder are unable to
agree upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 24.  All
such determinations to be appropriately adjusted for any stock dividend, stock
split, stock combination or other similar transaction during the applicable
calculation period.


 


[Signature Page Follows]


 


29

















 


IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed as of the
Issuance Date set out above.


 


	
   

  	
  24/7 REAL
  MEDIA, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  David J. Moore

  
	
   

  	
   

  	
  Chief Executive Officer

  



 

















 


EXHIBIT I


 


24/7 REAL MEDIA, INC.


CONVERSION NOTICE


 


Reference is made to the Convertible
Debenture (the “Debenture”) issued
to the undersigned by 24/7 Real Media, Inc. (the “Company”).  In
accordance with and pursuant to the Debenture, the undersigned hereby elects to
convert the Conversion Amount (as defined in the Debenture) of the Debenture
indicated below into shares of Common Stock, par value $0.01 per share (the “Common Stock”), of the Company as of the
date specified below.


 


After giving effect to the conversion of the
Aggregate Conversion Amount of Debentures requested to be converted pursuant
hereto, the undersigned will not be the beneficial owner of 10% or more of the
outstanding Common Stock (determined as set forth in Section 3(d)(i) of the
Debenture).


 


	
   

  	
  Date of Conversion:

  
	
   

  	
   

  
	
   

  	
  Aggregate Conversion
  Amount to be converted:

  
	
   

  	
   

  
	
  Please confirm the
  following information:

  
	
   

  	
   

  
	
   

  	
  Conversion Price:

  
	
   

  	
   

  
	
   

  	
  Number of shares of Common
  Stock to be issued:

  
	
   

  	
   

  
	
  Please issue the Common
  Stock into which the Debenture is being converted in the following name and
  to the following address:

  
	
   

  	
   

  
	
   

  	
  Issue to:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Facsimile Number:

  
	
   

  	
   

  
	
   

  	
  Authorization:

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Dated:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Account Number:

  
	
   

  	
    (if electronic book entry transfer)

  
	
   

  	
   

  
	
   

  	
  Transaction Code Number:

  
	
   

  	
    (if electronic book entry transfer)

  
							



 

















 


ACKNOWLEDGMENT


 


The Company hereby
acknowledges this Conversion Notice and hereby directs The Bank of New York to
issue the above indicated number of shares of Common Stock in accordance with
the Transfer Agent Instructions dated September 26, 2003 from the Company and
acknowledged and agreed to by The Bank of New York.


 


	
   

  	
  24/7 REAL
  MEDIA, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  David J. Moore

  
	
   

  	
   

  	
  Chief Executive Officer