ex4-1.htm


    Exhibit 4.1

     

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

    


    Original
Issue Date: August 8,
2008

    Original
Conversion Price (subject to adjustment herein): $1.55

    


    $____________

    


    


    10%
SUBORDINATED SECURED CONVERTIBLE DEBENTURE

    DUE
AUGUST 8, 2013

    


    THIS 10%
SUBORDINATED SECURED CONVERTIBLE DEBENTURE is one of a series of duly authorized
and validly issued 10% Subordinated Secured Convertible Debentures of IR
Biosciences Holdings, Inc., a Delaware corporation, (the “Company”), having its
principal place of business at _____________________________, designated as its
10% Subordinated Secured Convertible Debenture due August 8, 2013 (this
debenture, the “Debenture” and,
collectively with the other debentures of such series, the “Debentures”).

    


    FOR VALUE
RECEIVED, the Company promises to pay to ________________________ or its
registered assigns (the “Holder”), or shall
have paid pursuant to the terms hereunder, the principal sum of $_____________
on August 8, 2013 (the “Maturity Date”) or
such earlier date as this Debenture is required or permitted to be repaid as
provided hereunder, and to pay interest to the Holder on the aggregate
unconverted and then outstanding principal amount of this Debenture in
accordance with the provisions hereof.  This Debenture is subject to
the following additional provisions:

    


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

    


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

    


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

    


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

    


    “Beneficial Ownership
Limitation” shall have the meaning set forth in Section
4(c).

    


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

    


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

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    “Change of Control
Transaction” means the occurrence after the date hereof of any of (a) an
acquisition after the date hereof by an individual or legal entity or “group”
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
effective control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 40% of the
voting securities of the Company (other than by means of conversion or exercise
of the Debentures and the Securities issued together with the Debentures), (b)
the Company merges into or consolidates with any other Person, or any Person
merges into or consolidates with the Company and, after giving effect to such
transaction, the stockholders of the Company immediately prior to such
transaction own less than 60% of the aggregate voting power of the Company or
the successor entity of such transaction, or (c) the Company sells or transfers
all or substantially all of its assets to another Person and the stockholders of
the Company immediately prior to such transaction own less than 60% of the
aggregate voting power of the acquiring entity immediately after the
transaction, (d) a replacement at one time or within a three year period of more
than one-half of the members of the Board of Directors which is not approved by
a majority of those individuals who are members of the Board of Directors on the
date hereof (or by those individuals who are serving as members of the Board of
Directors on any date whose nomination to the Board of Directors was approved by
a majority of the members of the Board of Directors who are members on the date
hereof), or (e) the execution by the Company of an agreement to which the
Company  is a party or by which it is bound, providing for any of the
events set forth in clauses (a) through (d) above.

    


    “Conversion” shall
have the meaning ascribed to such term in Section 4.

    


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

    


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

    


    “Conversion Schedule”
means the Conversion Schedule in the form of Schedule 1 attached
hereto.

    


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

    


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

    


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

    


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

    


    “Equity Conditions”
means, during the period in question, (a) the Company shall have duly honored
all conversions and redemptions scheduled to occur or occurring by virtue of one
or more Notices of Conversion of the Holder, if any, (b) the Company shall have
paid all liquidated damages and other amounts owing to the Holder in respect of
this Debenture, (c)(i) there is an effective Registration Statement
pursuant to which the Holder is permitted to utilize the prospectus thereunder
to resell all of the shares of Common Stock issuable pursuant to the Transaction
Documents (and the Company believes, in good faith, that such effectiveness will
continue uninterrupted for the foreseeable future) or (ii) all of the Conversion
Shares issuable pursuant to the Transaction Documents (and any shares issued in
lieu of cash payments of interest hereunder) may be resold pursuant to Rule 144,
(d) the Common Stock is trading on a Trading Market and all of the shares
issuable pursuant to the Transaction Documents are listed or quoted for trading
on such Trading Market (and the Company believes, in good faith, that trading of
the Common Stock on a Trading Market will continue uninterrupted for the
foreseeable future), (e) there is a sufficient number of authorized but unissued
and otherwise unreserved shares of Common Stock for the issuance of all of the
shares issuable pursuant to the Transaction Documents, (f) there is no existing
Event of Default or no existing event which, with the passage of time or the
giving of notice, would constitute an Event of Default, (g) the issuance of the
shares in question (or, in the case of an Optional Redemption, the shares
issuable upon conversion in full of the Optional Redemption Amount) to the
Holder would not violate the limitations set forth in Section 4(c) herein, (h)
there has been no public announcement of a pending or proposed Fundamental
Transaction or Change of Control Transaction that has not been consummated, (i)
the Holder is not in possession of any information provided by the Company that
constitutes, or may constitute, material non-public information and (j) for
purposes of Section 6(c), the dollar value of the issuance of the shares in
question (based on the number of shares multiplied by then-effective Conversion
Price) is less than 25% of the total dollar trading volume of the Common Stock
during the 30 consecutive Trading Days prior to the applicable date in
question.

    


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

    


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

    


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

    


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

    


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

    


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

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    “Interest Conversion
Rate” means the lesser of (a) the Conversion Price or (b) 80% of the
lesser of (i) the average of the VWAPs for the 10 consecutive Trading Days
ending on the Trading Day that is immediately prior to the applicable Interest
Payment Date or (ii) the average of the VWAPs for the 10 consecutive Trading
Days ending on the Trading Day that is immediately prior to the date the
applicable Interest Conversion Shares are issued and delivered if such delivery
is after the Interest Payment Date.

    


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

    


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

    


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

    


    “Mandatory Default
Amount”  means the sum of (a) the greater of (i) the
outstanding principal amount of this Debenture, plus all accrued and unpaid
interest hereon, divided by the Conversion Price on the date the Mandatory
Default Amount is either (A) demanded (if demand or notice is required to create
an Event of Default) or otherwise due or (B) paid in full, whichever has a lower
Conversion Price, multiplied by 175% of the highest VWAP during the period
commencing on the Trading Day immediately prior to the applicable Event of
Default and ending on the date the Mandatory Default Amount is paid in full, or
(ii) 125% of the outstanding principal amount of this Debenture, plus 100% of
accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses
and liquidated damages due in respect of this Debenture.

    


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

    


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

    


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

    


    “Optional Redemption
Amount” means the sum of (a) (i) as to Optional Redemption Dates
occurring prior to the one year anniversary of the Original Issue Date, 120% of
the then outstanding principal amount of the Debenture and (ii) as to Optional
Redemption Dates occurring on or after the one year anniversary of the Original
Issue Date, 130% of the then outstanding principal amount of the Debenture, (b)
accrued but unpaid interest and (c) all liquidated damages and other amounts due
in respect of the Debenture.

    


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

    


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

    


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

    


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

    


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

    


    “Permitted
Indebtedness” means (a) the indebtedness evidenced by the Debentures and,
(b) the Indebtedness existing on the Original Issue Date and set forth on Schedule 3.1(aa)
attached to the Purchase Agreement.

    


    “Permitted Lien” means
the individual and collective reference to the following: (a) Liens for taxes,
assessments and other governmental charges or levies not yet due or Liens for
taxes, assessments and other governmental charges or levies being contested in
good faith and by appropriate proceedings for which adequate reserves (in the
good faith judgment of the management of the Company) have been established in
accordance with GAAP; (b) Liens imposed by law which were incurred in the
ordinary course of the Company’s business, such as carriers’, warehousemen’s and
mechanics’ Liens, statutory landlords’ Liens, and other similar Liens arising in
the ordinary course of the Company’s business, and which (x) do not individually
or in the aggregate materially detract from the value of such property or assets
or materially impair the use thereof in the operation of the business of the
Company and its consolidated Subsidiaries or (y) are being contested in good
faith by appropriate proceedings, which proceedings have the effect of
preventing for the foreseeable future the forfeiture or sale of the property or
asset subject to such Lien; (c) Liens incurred in connection with Permitted
Indebtedness under clauses (a) and (b).

     

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

    


    “Purchase Agreement”
means the Securities Purchase Agreement, dated as of August 8, 2008 among the
Company and the original Holders, as amended, modified or supplemented from time
to time in accordance with its terms.

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

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

    


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

    


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

    


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

    


    “Trading Day” means a
day on which the New York Stock Exchange is open for business.

    


    “Trading Market” means
the following markets or exchanges on which the Common Stock is listed or quoted
for trading on the date in question: the American Stock Exchange, the Nasdaq
Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the
New York Stock Exchange or the OTC Bulletin Board.

    


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

    


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

    


    Section
2.               Interest.

    


    a) Payment of Interest in Cash,
Kind or Interest Debenture. The Company shall pay interest to the Holder
on the aggregate unconverted and then outstanding principal amount of this
Debenture at the rate of 10% per annum, payable quarterly on March 31, June 30,
September 30 and December 31, beginning on the first such date after the
Original Issue Date, on each Conversion Date (as to that principal amount then
being converted), on each Optional Redemption Date (as to that principal amount
then being redeemed) and on the Maturity Date, or sooner as provided herein
(each such date, an “Interest Payment
Date”) (if any Interest Payment Date is not a Business Day, then the
applicable payment shall be due on the next succeeding Business Day), either (A)
in cash or, (B) at the Company’s option, in duly authorized, validly issued,
fully paid and non-assessable shares of Common Stock at the Interest Conversion
Rate (the dollar amount to be paid in shares, the “Interest Share
Amount”) or (C) at the Company’s option, an Interest Debenture in the
aggregate principal amount equal to such interest amount, or (D) a combination
thereof of (A), (B) and (C); provided, however, that
payment, pursuant to subsection (B), in shares of Common Stock may only occur if
(i) all of the Equity Conditions have been met (unless waived by the Holder in
writing) during the 20 Trading Days immediately prior to the applicable Interest
Payment Date  (the “Interest Notice
Period”) and through and including the date such shares of Common Stock
are actually issued to the Holder, and (ii) the Company shall have given the
Holder notice in accordance with the notice requirements set forth below; provided, further, however, if the
Company shall determine to pay interest in the form of an Interest Debenture,
attached hereto as Exhibit X, or in the
form of shares of Common Stock, the Company shall deliver such Interest
Debenture, registered in the name of such Holder and in the aggregate principal
amount equal to such interest payment, or such shares of Common Stock, no later
than three (3) Trading Days following such Interest Payment
Date.  Notwithstanding anything herein to the contrary, on the Closing
Date, the Company shall prepay interest in lieu of making interest payments
October 1, 2008 and July 1, 2013, in amount equal to all interest that would
have accrued during the periods from (x) the Closing Date through September 30,
2008 (the “First
Quarter Interest Payment Amount”) and (y) from April 1, 2013 through June
30, 2013 (assuming the principal amount outstanding on the Closing Date had
remained outstanding through October 1, 2008, and the Maturity Date) (the “Last Quarter Interest
Payment Amount”).

    


    b) Company’s Election to Pay
Interest in Cash, Shares of Common Stock or Interest
Debenture.  Subject to the terms and conditions herein, the
decision whether to pay interest hereunder in cash, shares of Common Stock, or
in the form of an Interest Debenture, or a combination thereof shall be at the
sole discretion of the Company.  Prior to the commencement of any
Interest Notice Period, the Company shall deliver to the Holder a written notice
of its election to pay interest hereunder on the applicable Interest Payment
Date either in cash, shares of Common Stock, an Interest Payment Debenture or a
combination thereof, provided that the Company may indicate in such notice that
the election contained in such notice shall apply to future Interest Payment
Dates until revised by a subsequent notice.  During any Interest
Notice Period, the Company’s election (whether specific to an Interest Payment
Date or continuous) shall be irrevocable as to such Interest Payment
Date.  Subject to the aforementioned conditions, failure to timely
deliver such written notice to the Holder shall be deemed an election by the
Company to pay the interest on such Interest Payment Date in cash.  At
any time the Company delivers a notice to the Holder of its election to pay the
interest in shares of Common Stock, the Company shall timely file a prospectus
supplement pursuant to Rule 424 disclosing such election, unless Company Counsel
is willing to provide the Transfer Agent with a Rule 144 opinion as to such
shares.  Within 5 business days of the Maturity Date, if no principal
amount of this Debenture remains outstanding during the quarter from April 1,
2013 to June 30, 2013, the Holder agrees to repay to the Company an amount equal
to the Last Quarter Interest Payment Amount less the amount of interest actually
payable by the Company on any principal outstanding during such
quarter.

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    c) Interest
Calculations. Interest shall be calculated on the basis of a 360-day
year, consisting of twelve 30 calendar day periods, and shall accrue daily
commencing on the Original Issue Date until payment in full of the outstanding
principal, together with all accrued and unpaid interest, liquidated damages and
other amounts which may become due hereunder, has been made.  Payment
of interest in shares of Common Stock shall otherwise occur pursuant to Section
4(d)(ii) herein and, solely for purposes of the payment of interest in shares,
the Interest Payment Date shall be deemed the Conversion
Date.  Interest shall cease to accrue with respect to any principal
amount converted, provided that, the Company actually delivers the Conversion
Shares within the time period required by Section 4(d)(ii)
herein.  Interest hereunder will be paid to the Person in whose name
this Debenture is registered on the records of the Company regarding
registration and transfers of this Debenture (the “Debenture Register”).
Except as otherwise provided herein, if at any time the Company pays interest
partially in cash and partially in shares of Common Stock to the holders of the
Debentures, then such payment of cash shall be distributed ratably among the
holders of the then-outstanding Debentures based on their (or their
predecessor’s) initial purchases of Debentures pursuant to the Purchase
Agreement.

    


    d) Late
Fee.  All overdue accrued and unpaid interest to be paid
hereunder shall entail a late fee at an interest rate equal to the lesser of 18%
per annum or the maximum rate permitted by applicable law (the “Late Fees”) which
shall accrue daily from the date such interest is due hereunder through and
including the date of actual payment in full. Notwithstanding anything to the
contrary contained herein, if, on any Interest Payment Date the Company has
elected to pay accrued interest in the form of Common Stock but the Company is
not permitted to pay accrued interest in Common Stock because it fails to
satisfy the conditions for payment in Common Stock set forth in Section 2(a)
herein, then, at the option of the Holder, the Company, in lieu of delivering
either shares of Common Stock pursuant to this Section 2 or paying the regularly
scheduled interest payment in cash, shall deliver, within three (3) Trading Days
of each applicable Interest Payment Date, an amount in cash equal to the product
of (x) the number of shares of Common Stock otherwise deliverable to the Holder
in connection with the payment of interest due on such Interest Payment Date
multiplied by (y) the highest VWAP during the period commencing on the Interest
Payment Date and ending on the Trading Day prior to the date such payment is
actually made.

    


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

    


    Section
3.               Registration of Transfers
and Exchanges.

    


    a) Different
Denominations. This Debenture is exchangeable for an equal aggregate
principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same.  No service charge will
be payable for such registration of transfer or exchange.

    


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

    


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

    


    Section
4.              
Conversion.

    


    a) Voluntary Conversion.
At any time after the Original Issue Date until this Debenture is no longer
outstanding, this Debenture shall be convertible, in whole or in part, into
shares of Common Stock at the option of the Holder, at any time and from time to
time (subject to the conversion limitations set forth in Section 4(c)
hereof).  The Holder shall effect conversions by delivering to the
Company a Notice of Conversion, the form of which is attached hereto as Annex A (each, a
“Notice of
Conversion”), specifying therein the principal amount of this Debenture
to be converted and the date on which such conversion shall be effected (such
date, the “Conversion
Date”).  If no Conversion Date is specified in a Notice of
Conversion, the Conversion Date shall be the date that such Notice of Conversion
is deemed delivered hereunder.  To effect conversions hereunder, the
Holder shall not be required to physically surrender this Debenture to the
Company unless the entire principal amount of this Debenture, plus all accrued
and unpaid interest thereon, has been so converted. Conversions hereunder shall
have the effect of lowering the outstanding principal amount of this Debenture
in an amount equal to the applicable conversion.  The Holder and the
Company shall maintain records showing the principal amount(s) converted and the
date of such conversion(s).  The Company may deliver an objection to
any Notice of Conversion within 2 Business Days of delivery of such Notice of
Conversion.  In the event of any dispute or discrepancy, the records
of the Holder shall be controlling and determinative in the absence of manifest
error. The Holder, and any
assignee by acceptance of this Debenture, acknowledge and agree that, by reason
of the provisions of this paragraph, following conversion of a portion of this
Debenture, the unpaid and unconverted principal amount of this Debenture may be
less than the amount stated on the face hereof.

    


    b) Conversion
Price.  The conversion price in effect on any Conversion Date
shall be equal to $1.55,
subject to adjustment herein (the “Conversion
Price”).

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    c) Conversion
Limitations.  The Company shall not effect any conversion of
this Debenture, and a Holder shall not have the right to convert any portion of
this Debenture, to the extent that after giving effect to the conversion set
forth on the applicable Notice of Conversion, the Holder (together with the
Holder’s Affiliates, and any other person or entity acting as a group together
with the Holder or any of the Holder’s Affiliates) would beneficially own in
excess of the Beneficial Ownership Limitation (as defined below).  For
purposes of the foregoing sentence, the number of shares of Common Stock
beneficially owned by the Holder and its Affiliates shall include the number of
shares of Common Stock issuable upon conversion of this Debenture with respect
to which such determination is being made, but shall exclude the number of
shares of Common Stock which are issuable upon (A) conversion of the remaining,
unconverted principal amount of this Debenture beneficially owned by the Holder
or any of its Affiliates and (B) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company  subject to
a limitation on conversion or exercise analogous to the limitation contained
herein (including, without limitation, any other Debentures or the Warrants)
beneficially owned by the Holder or any of its Affiliates.  Except as set
forth in the preceding sentence, for purposes of this Section 4(c), beneficial
ownership shall be calculated in accordance with Section 13(d) of the Exchange
Act and the rules and regulations promulgated thereunder.  To the
extent that the limitation contained in this Section 4(c) applies, the
determination of whether this Debenture is convertible (in relation to other
securities owned by the Holder together with any Affiliates) and of which
principal amount of this Debenture is convertible shall be in the sole
discretion of the Holder, and the submission of a Notice of Conversion shall be
deemed to be the Holder’s determination of whether this Debenture may be
converted (in relation to other securities owned by the Holder together with any
Affiliates) and which principal amount of this Debenture is convertible, in each
case subject to the Beneficial Ownership Limitation. To ensure compliance with
this restriction, the Holder will be deemed to represent to the Company each
time it delivers a Notice of Conversion that such Notice of Conversion has not
violated the restrictions set forth in this paragraph and the Company shall have
no obligation to verify or confirm the accuracy of such
determination.  In addition, a determination as to any group status as
contemplated above shall be determined in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated
thereunder.   For purposes of this Section 4(c), in determining
the number of outstanding shares of Common Stock, the Holder may rely on the
number of outstanding shares of Common Stock as stated in the most recent of the
following: (A) the Company’s most recent periodic or annual report, as the case
may be; (B) a more recent public announcement by the Company; or (C) a more
recent notice by the Company or the Company’s transfer agent setting forth the
number of shares of Common Stock outstanding.  Upon the written or oral
request of a Holder, the Company shall within two Trading Days confirm orally
and in writing to the Holder the number of shares of Common Stock then
outstanding.  In any case, the number of outstanding shares of Common Stock
shall be determined after giving effect to the conversion or exercise of
securities of the Company, including this Debenture, by the Holder or its
Affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. The “Beneficial Ownership
Limitation” shall be 9.98% of the number of shares of the Common Stock
outstanding immediately after giving effect to the issuance of shares of Common
Stock issuable upon conversion of this Debenture held by the
Holder.  The Beneficial Ownership Limitation provisions of this
paragraph shall be construed and implemented in a manner otherwise than in
strict conformity with the terms of this Section 4(c) to correct this paragraph
(or any portion hereof) which may be defective or inconsistent with the intended
Beneficial Ownership Limitation contained herein or to make changes or
supplements necessary or desirable to properly give effect to such limitation.
The limitations contained in this paragraph shall apply to a successor holder of
this Debenture.

    


    
      	
              d)  

            	
              Mechanics of
      Conversion.

            


    

    


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

    i. 

    


    ii. Delivery of Certificate Upon
Conversion. Not later than three Trading Days after each Conversion Date
(the “Share Delivery
Date”), the Company shall deliver, or cause to be delivered, to the
Holder (A) a certificate or certificates representing the Conversion Shares
which, on or after the Effective Date, shall be free of restrictive legends and
trading restrictions (other than those which may then be required by the
Purchase Agreement) representing the number of Conversion Shares being acquired
upon the conversion of this Debenture (including, if the Company has given
continuous notice pursuant to Section 2(b) for payment of interest in shares of
Common Stock at least 20 Trading Days prior to the date on which the Notice of
Conversion is delivered to the Company, shares of Common Stock representing the
payment of accrued interest otherwise determined pursuant to Section 2(a) but
assuming that the Interest Notice Period is the 20 Trading Days period
immediately prior to the date on which the Notice of Conversion is delivered to
the Company) and (B) a bank check in the amount of accrued and unpaid interest
(if the Company has elected or is required to pay accrued interest in cash). On
or after the Effective Date, the Company shall use its best efforts to deliver
any certificate or certificates required to be delivered by the Company under
this Section 4(d) electronically through the Depository Trust Company or another
established clearing corporation performing similar functions. If the Conversion
Shares are not covered by an effective registration statement and are not
eligible for resale under Rule 144, the Company shall deliver a certificate to
the Holder within 3 Trading Days after the Conversion Date that contains a
legend pursuant to Section 4.1(b) of the Purchase Agreement.

    


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

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    iv. Obligation Absolute; Partial
Liquidated Damages.  The Company’s obligations to issue and
deliver the Conversion Shares upon conversion of this Debenture in accordance
with the terms hereof are absolute and unconditional, irrespective of any action
or inaction by the Holder to enforce the same, any waiver or consent with
respect to any provision hereof, the recovery of any judgment against any Person
or any action to enforce the same, or any setoff, counterclaim, recoupment,
limitation or termination, or any breach or alleged breach by the Holder or any
other Person of any obligation to the Company or any violation or alleged
violation of law by the Holder or any other Person, and irrespective of any
other circumstance which might otherwise limit such obligation of the Company to
the Holder in connection with the issuance of such Conversion Shares; provided, however, that such
delivery shall not operate as a waiver by the Company of any such action the
Company may have against the Holder.  In the event the Holder of this
Debenture shall elect to convert any or all of the outstanding principal amount
hereof, the Company may not refuse conversion based on any claim that the Holder
or anyone associated or affiliated with the Holder has been engaged in any
violation of law, agreement or for any other reason, unless an injunction from a
court, on notice to Holder, restraining and or enjoining conversion of all or
part of this Debenture shall have been sought and obtained, and the Company
posts a surety bond for the benefit of the Holder in the amount of 150% of the
outstanding principal amount of this Debenture, which is subject to the
injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the underlying dispute and the proceeds of which shall
be payable to the Holder to the extent it obtains judgment.  In the
absence of such injunction, the Company shall issue Conversion Shares or, if
applicable, cash, upon a properly noticed conversion.  If the Company
fails for any reason to deliver to the Holder such certificate or certificates
pursuant to Section 4(d)(ii) by the third Trading Day after the Conversion Date,
the Company shall pay to the Holder, in cash, as liquidated damages and not as a
penalty, for each $1,000 of principal amount being converted, $10 per Trading
Day (increasing to $20 per Trading Day on the fifth (5th)
Trading Day after such liquidated damages begin to accrue) for each Trading Day
after such third (3rd)
Trading Day until such certificates are
delivered.    Nothing herein shall limit a Holder’s right to
pursue actual damages or declare an Event of Default pursuant to Section 8
hereof for the Company’s failure to deliver Conversion Shares within the period
specified herein and the Holder shall have the right to pursue all remedies
available to it hereunder, at law or in equity including, without limitation, a
decree of specific performance and/or injunctive relief.  The exercise
of any such rights shall not prohibit the Holder from seeking to enforce damages
pursuant to any other Section hereof or under applicable law.

    


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

    


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

    


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

    


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

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Section
5.               Certain
Adjustments.

    


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

    


    b) Subsequent Equity
Sales.  If, at any time while this Debenture is
outstanding,  the Company or any Subsidiary, as applicable, sells or
grants any option to purchase or sells or grants any right to reprice, or
otherwise disposes of or issues (or announces any sale, grant or any option to
purchase or other disposition), any Common Stock or Common Stock Equivalents
entitling any Person to acquire shares of Common Stock at an effective price per
share that is lower than the then Conversion Price (such lower price, the “Base Conversion
Price” and such issuances, collectively, a “Dilutive Issuance”)
(if the holder of the Common Stock or Common Stock Equivalents so issued shall
at any time, whether by operation of purchase price adjustments, reset
provisions, floating conversion, exercise or exchange prices or otherwise, or
due to warrants, options or rights per share which are issued in connection with
such issuance, be entitled to receive shares of Common Stock at an effective
price per share that is lower than the Conversion Price, such issuance shall be
deemed to have occurred for less than the Conversion Price on such date of the
Dilutive Issuance), then the Conversion Price shall be reduced to equal the Base
Conversion Price.  Such adjustment shall be made whenever such Common
Stock or Common Stock Equivalents are issued.  Notwithstanding the
foregoing, no adjustment will be made under this Section 5(b) in respect of an
Exempt Issuance.  If the Company enters into a Variable Rate
Transaction, despite the prohibition set forth in the Purchase Agreement, the
Company shall be deemed to have issued Common Stock or Common Stock Equivalents
at the lowest possible conversion price at which such securities may be
converted or exercised. The Company shall notify the Holder in writing, no later
than 1 Business Day following the issuance of any Common Stock or Common Stock
Equivalents subject to this Section 5(b), indicating therein the applicable
issuance price, or applicable reset price, exchange price, conversion price and
other pricing terms (such notice, the “Dilutive Issuance
Notice”).  For purposes of clarification, whether or not the
Company provides a Dilutive Issuance Notice pursuant to this Section 5(b), upon
the occurrence of any Dilutive Issuance, the Holder is entitled to receive a
number of Conversion Shares based upon the Base Conversion Price on or after the
date of such Dilutive Issuance, regardless of whether the Holder accurately
refers to the Base Conversion Price in the Notice of Conversion.

     

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

    


    d) Pro Rata
Distributions. If the Company, at any time while this Debenture is
outstanding, distributes to all holders of Common Stock (and not to the Holders)
evidences of its indebtedness or assets (including cash and cash dividends) or
rights or warrants to subscribe for or purchase any security (other than the
Common Stock, which shall be subject to Section 5(b)), then in each such case
the Conversion Price shall be adjusted by multiplying such Conversion Price in
effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the VWAP determined as of the record date mentioned above,
and of which the numerator shall be such VWAP on such record date less the then
fair market value at such record date of the portion of such assets or evidence
of indebtedness so distributed applicable to 1 outstanding share of the Common
Stock as determined by the Board of Directors of the Company in good
faith.  In either case the adjustments shall be described in a
statement delivered to the Holder describing the portion of assets or evidences
of indebtedness so distributed or such subscription rights applicable to 1 share
of Common Stock.  Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date mentioned above.

    


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

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

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

    


    g) Notice to the
Holder.

    


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

    


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

    


    


    Section
6.                Redemption and Forced
Conversion.

    


    a) Optional Redemption at
Election of Company.  Subject to the provisions of this Section
6(a), at any time after six-month anniversary of the Original Issue Date, the
Company may deliver a notice to the Holder (an “Optional Redemption
Notice” and the date such notice is deemed delivered hereunder, the
“Optional Redemption
Notice Date”) of its irrevocable election to redeem some or all of the
then outstanding principal amount of this Debenture for cash in an amount equal
to the Optional Redemption Amount on the 15th Trading
Day following the Optional Redemption Notice Date (such date, the “Optional Redemption
Date”, such 15 Trading Day period, the “Optional Redemption
Period” and such redemption, the “Optional
Redemption”).  The Optional Redemption Amount is payable in
full on the Optional Redemption Date.  The Company may only effect an
Optional Redemption if (x) each of the Equity Conditions shall have been met
(unless waived in writing by the Holder) on each Trading Day during the period
commencing on the Optional Redemption Notice Date through to the Optional
Redemption Date and through and including the date payment of the Optional
Redemption Amount is actually made in full, (y) the VWAP is less than the then
effective Conversion Price for each Trading Day during the Optional Redemption
Period through and including the date the Optional Redemption Amount is paid in
full and (z) such Optional Redemption Notice includes a representation from the
Company that there are no pending or proposed financings, Fundamental
Transactions or Change of Control Transactions of any nature under consideration
or discussion.  If any of the Equity Conditions shall cease to be
satisfied at any time during the Optional Redemption Period, then the Holder may
elect to nullify the Optional Redemption Notice by notice to the Company within
3 Trading Days after the first day on which any such Equity Condition has not
been met (provided that if, by a provision of the Transaction Documents, the
Company is obligated to notify the Holder of the non-existence of an Equity
Condition, such notice period shall be extended to the third Trading Day after
proper notice from the Company) in which case the Optional Redemption Notice
shall be null and void, ab initio.  The
Company covenants and agrees that it will honor all Notices of Conversion
tendered from the time of delivery of the Optional Redemption Notice through the
date all amounts owing thereon are due and paid in full. The Company’s
determination to pay an Optional Redemption in cash shall be applied ratably to
all of the holders of the then outstanding Debentures based on their (or their
predecessor’s) initial purchases of Debentures pursuant to the Purchase
Agreement.

    


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

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    c) Forced Conversion.
Notwithstanding anything herein to the contrary, if after the Effective Date,
the VWAP for each of 20 out of 30 consecutive Trading Days, which period shall
have commenced only after the Effective Date (such period the “Threshold Period”),
exceeds $2.25 (subject to adjustment for reverse and forward stock splits, stock
dividends, stock combinations and other similar transactions of the Common Stock
that occur after the Original Issue Date), the Company may, within 1 Trading Day
after the end of any such Threshold Period, deliver a written notice to the
Holder (a “Forced
Conversion Notice” and the date such notice is delivered to the Holder,
the “Forced Conversion
Notice Date”) to cause the Holder to convert all or part of up to 50% of
the then outstanding principal amount of this Debenture (increasing to 100% of
the outstanding principal amount of this Debentures if the VWAP for 20 out of
the 30 Trading Days during a Threshold Period exceeds $2.625 (subject to
adjustment for reverse and forward stock splits, stock dividends, stock
combinations and other similar transactions of the Common Stock that occur after
the Original Issue Date) plus, if so specified in the Forced Conversion Notice,
accrued but unpaid interest, liquidated damages and other amounts owing to the
Holder under this Debenture, it being agreed that the “Conversion Date” for
purposes of Section 4 shall be deemed to occur on the third Trading Day
following the Forced Conversion Notice Date (such third Trading Day, the “Forced Conversion
Date”).  The Company may not deliver a Forced Conversion
Notice, and any Forced Conversion Notice delivered by the Company shall not be
effective, unless (x) all of the Equity Conditions are met (unless waived in
writing by the Holder) on each Trading Day occurring during the applicable
Threshold Period through and including the later of the Forced Conversion Date
and the Trading Day after the date such Conversion Shares pursuant to such
conversion are delivered to the Holder and (y) such Forced Conversion Notice
includes a representation from the Company that there are no pending or proposed
financings, Fundamental Transactions or Change of Control Transactions of any
nature under consideration or discussion.  The Company can only effect
one Forced Conversion during any 40-Trading Day period.  Any Forced
Conversion shall be applied ratably to all Holders based on their initial
purchases of Debentures pursuant to the Purchase Agreement, provided that any
voluntary conversions by a Holder shall be applied against the Holder’s pro rata
allocation, thereby decreasing the aggregate amount forcibly converted hereunder
if only a portion of this Debenture is forcibly converted.  For
purposes of clarification, a Forced Conversion shall be subject to all of the
provisions of Section 4, including, without limitation, the provision requiring
payment of liquidated damages and limitations on conversions.

    


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

    


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

    


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

    


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

    


    d) repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of
shares of its Common Stock or Common Stock Equivalents (other than Permitted
Indebtedness) other than as to (i) the Conversion Shares or Warrant Shares as
permitted or required under the Transaction Documents and (ii) repurchases of
Common Stock or Common Stock Equivalents of departing officers and directors of
the Company, provided that such repurchases shall not exceed an aggregate of
$100,000 for all officers and directors during the term of this
Debenture;

    


    e) repay,
repurchase or offer to repay, repurchase or otherwise acquire any Indebtedness
other than Permitted Indebtedness, other than the Debentures if on a pro-rata
basis, other than regularly scheduled principal and interest payments as such
terms are in effect as of the Original Issue Date, provided that such payments
shall not be permitted if, at such time, or after giving effect to such payment,
any Event of Default exist or occur (other than to the convertible debentures
issued to YA Global Investors, L.P.);

    


    f) pay cash
dividends or distributions on any equity securities of the Company;

    


    g) enter
into any transaction with any Affiliate of the Company which would be required
to be disclosed in any public filing with the Commission, unless such
transaction is made on an arm’s-length basis and expressly approved by a
majority of the disinterested directors of the Company (even if less than a
quorum otherwise required for board approval); or

    


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

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Section
8.                Events of
Default.

    


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

    


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

    


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

    


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

    


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

    


    v. the
Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w)
of Regulation S-X)  shall be subject to a Bankruptcy
Event;

    


    vi. the
Company or any Subsidiary shall default on any of its obligations under any
mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued, or by which there
may be secured or evidenced, any indebtedness for borrowed money or money due
under any long term leasing or factoring arrangement that (a) involves an
obligation greater than $250,000, whether such indebtedness now exists or shall
hereafter be created, and (b) results in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise become
due and payable;

    


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

    


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

    


    ix. Not
Used;

    


    x. the
Company does not meet the current public information requirements under Rule 144
in respect of the Underlying Shares;

    


    xi. the
Company shall fail for any reason to deliver certificates to a Holder prior to
the fifth Trading Day after a Conversion Date pursuant to Section 4(d) or any
Forced Conversion Date pursuant to Section 6(c) or the Company shall provide at
any time notice to the Holder, including by way of public announcement, of the
Company’s intention to not honor requests for conversions of any Debentures in
accordance with the terms hereof; or

    


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

    


    b) Remedies Upon Event of
Default. If any Event of Default occurs, the outstanding principal amount
of this Debenture, plus accrued but unpaid interest, liquidated damages and
other amounts owing in respect thereof through the date of acceleration, shall
become, at the Holder’s election, immediately due and payable in cash at the
Mandatory Default Amount.  Commencing 5 days after the occurrence of
any Event of Default, the interest rate on this Debenture shall accrue at an
interest rate equal to the lesser of 15% per annum or the maximum rate permitted
under applicable law.  Upon the payment in full of the Mandatory
Default Amount, the Holder shall promptly surrender this Debenture to or as
directed by the Company.  In connection with such acceleration
described herein, the Holder need not provide, and the Company hereby waives,
any presentment, demand, protest or other notice of any kind, and the Holder may
immediately and without expiration of any grace period enforce any and all of
its rights and remedies hereunder and all other remedies available to it under
applicable law.  Such acceleration may be rescinded and annulled by
Holder at any time prior to payment hereunder and the Holder shall have all
rights as a holder of the Debenture until such time, if any, as the Holder
receives full payment pursuant to this Section 8(b).  No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon.

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Section
9.               Miscellaneous.

    


    a) Notices.  Any
and all notices or other communications or deliveries to be provided by the
Holder hereunder, including, without limitation, any Notice of Conversion, shall
be in writing and delivered personally, by facsimile, or sent by a nationally
recognized overnight courier service, addressed to the Company, at the address
set forth above, or such other facsimile number or address as the Company may
specify for such purpose by notice to the Holder delivered in accordance with
this Section 9(a).  Any and all notices or other communications or
deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, or sent by a nationally recognized overnight
courier service addressed to each Holder at the facsimile number or address of
the Holder appearing on the books of the Company, or if no such facsimile number
or address appears, at the principal place of business of the
Holder.  Any notice or other communication or deliveries hereunder
shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified on the signature page prior to 5:30 p.m. (New York
City time), (ii) the date immediately following the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
specified on the signature page between 5:30 p.m. (New York City time) and 11:59
p.m. (New York City time) on any date, (iii) the second Business Day following
the date of mailing, if sent by nationally recognized overnight courier service
or (iv) upon actual receipt by the party to whom such notice is required to be
given.

    


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

    


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

    


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

    


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

    


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

    


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

    


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

    


    i) Assumption.  Any
successor to the Company or any surviving entity in a Fundamental Transaction
shall (i) assume, prior to such Fundamental Transaction, all of the obligations
of the Company under this Debenture and the other Transaction Documents pursuant
to written agreements in form and substance satisfactory to the Holder (such
approval not to be unreasonably withheld or delayed) and (ii) issue to the
Holder a new debenture of such successor entity evidenced by a written
instrument substantially similar in form and substance to this Debenture,
including, without limitation, having a principal amount and interest rate equal
to the principal amount and the interest rate of this Debenture and having
similar ranking to this Debenture, which shall be satisfactory to the Holder
(any such approval not to be unreasonably withheld or delayed).  The
provisions of this Section 9(i) shall apply similarly and equally to successive
Fundamental Transactions and shall be applied without regard to any limitations
of this Debenture.

    


    j) Secured
Obligation.  The obligations of the Company under this
Debenture are secured by all assets of the Company and each Subsidiary pursuant
to the Security Agreement, dated as of August 8, 2008 between the Company, the
Subsidiaries of the Company and the Secured Parties (as defined
therein).

    


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

     

    (Signature
Pages Follow)

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

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

    


    


    
      	
              IR
      BIOSCIENCES HOLDINGS, INC.

               

               

            
	
              By:
      /s/ Michael
      Wilhelm                   
      

              Name:  Michael
      Wilhelm

              Title:  CEO

              Facsimile
      No. for delivery of Notices:
_______________

            


    

     

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    ANNEX
A

     

    NOTICE
OF CONVERSION

    


    


    The
undersigned hereby elects to convert principal under the 10% Subordinated
Secured Convertible Debenture due August 8, 2013 of IR Biosciences Holdings,
Inc., a Delaware corporation (the “Company”), into
shares of common stock (the “Common Stock”), of
the Company according to the conditions hereof, as of the date written
below.  If shares of Common Stock are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates and
opinions as reasonably requested by the Company in accordance
therewith.  No fee will be charged to the holder for any conversion,
except for such transfer taxes, if any.

    


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

    


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

    


    Conversion
calculations:

    Date to
Effect Conversion:

    


    Principal
Amount of Debenture to be Converted:

    


    Payment
of Interest in Common Stock __ yes  __ no

     

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

    


    Number of
shares of Common Stock to be issued:

    


    


    Signature:_________________________________

    


    Name:____________________________________

    


    Address
for Delivery of Common Stock Certificates:

    


    Or

    


    DWAC Instructions:

    


    Broker
No: _________________________________                                                     

     

    Account
No:________________________________

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Schedule
1

     

    CONVERSION
SCHEDULE

    


    This 10%
Subordinated Secured Convertible Debentures due on August 8, 2013 in the
original principal amount of $____________ is issued by IR Biosciences Holdings,
Inc., a Delaware.  This Conversion Schedule reflects conversions made
under Section 4 of the above referenced Debenture.

    


    Dated:

    


    


    
      	
               

              Date
      of Conversion

              (or
      for first entry, Original Issue Date)

            	
               

              Amount
      of Conversion

            	
               

              Aggregate
      Principal Amount Remaining Subsequent to Conversion

              (or
      original Principal Amount)

            	
               

              Company
      Attest