Unassociated Document


     

    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: March 10, 2006

    


    $25,000.00

    


    


    7%
      CONVERTIBLE DEBENTURE

    DUE
      MARCH 10, 2008

    


    THIS
      7%
      CONVERTIBLE DEBENTURE is one of a series of duly authorized and issued 7%
      Convertible Debentures of Aprecia Inc., a Delaware corporation, having a
      principal place of business at c/o 1065
      Avenue of Americas, New York, NY 10018, Fax:
      (212) 930-9725 (the “Company”),
      designated as its 7% Convertible Debenture, due March 10, 2008 (the
“Debenture(s)”).

    


    FOR
      VALUE
      RECEIVED, the Company promises to pay to CMS
      CAPITAL,
      or its
      registered assigns (the “Holder”),
      or
      shall have paid pursuant to the terms hereunder, the principal sum of $25,000.00
      by March 10, 2008, or such earlier date as the Debentures are required or
      permitted to be repaid as provided hereunder (the “Maturity
      Date”),
      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.
      All
      payments shall be made by certified check to the address of the Holder as
      provided in Section 9(a) or by wire transfer of immediately available funds
      pursuant to instructions as may be provided from time to time by Holder. 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 have the meanings given
      to
      such terms 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(d).

    


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

    


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

    


    “Change
      of Control Transaction”
means
      the occurrence after the date hereof of any of (i) an acquisition after the
      date
      hereof by an individual or legal entity or “group” (as described in Rule
      13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether
      through legal or beneficial ownership of capital stock of the Company, by
      contract or otherwise) of in excess of 40% of the voting securities of the
      Company, or (ii) the Company merges into or consolidates with any other Person,
      or any Person merges into or consolidates with the Company and, after giving
      effect to such transaction, the stockholders of the Company immediately prior
      to
      such transaction own less than 40% of the aggregate voting power of the Company
      or the successor entity of such transaction, or (iii) the Company sells or
      transfers its assets, as an entirety or substantially as an entirety, to another
      Person and the stockholders of the Company immediately prior to such transaction
      own less than 40% of the aggregate voting power of the acquiring entity
      immediately after the transaction, (iv) a replacement at one time or within
      a
      three year period of more than one-half of the members of the Company’s 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 (v) the
      execution by the Company of an agreement to which the Company is a party or
      by
      which it is bound, providing for any of the events set forth above in (i) or
      (iv).

    


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

    


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

    


    “Conversion
      Shares”
means
      the shares of Common Stock issuable upon conversion of Debentures, sometimes
      referred to as the Underlying Shares, as defined in the Purchase
      Agreement.

    


    “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”
shall
      mean, during the period in question, (i)
      the
      Company shall have duly honored all conversions and redemptions scheduled to
      occur or occurring by virtue of one or more Notice of Conversions of the Holder,
      if any, (ii) all liquidated damages and other amounts owing to the Holder in
      respect of the Debentures shall have been paid; (iii)
      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, (iv) there is then existing no Event of Default
      or
      event which, with the passage of time or the giving of notice, would constitute
      an Event of Default, (v) if after the date hereof the Company becomes subject
      to
      the reporting requirements of the Exchange Act, the issuance of the shares
      in
      question (or, in the case of a redemption, the shares issuable upon conversion
      in full of the redemption amount) to the Holder would not violate the
      limitations set forth in Section 4(c) and (vi) no public announcement of a
      pending or proposed Fundamental Transaction, Change of Control Transaction
      or
      acquisition transaction has occurred, which transaction has not been
      consummated, excluding transaction which have been publicly announced and
      subsequently abandoned.

     

    
      
        
        

      

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

    


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

     

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

    


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

    


    “Mandatory
      Prepayment Amount”
for
      any
      Debentures shall equal the sum of (i) the greater of: (A) 120% of the principal
      amount of Debentures to be prepaid, plus all accrued and unpaid interest
      thereon, or (B) the principal amount of Debentures to be prepaid, plus all
      other
      accrued and unpaid interest hereon, divided by the Conversion Price on (x)
      the
      date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the
      date the Mandatory Prepayment Amount is paid in full, whichever is less,
      multiplied by the VWAP on (x) the date the Mandatory Prepayment Amount is
      demanded or otherwise due or (y) the date the Mandatory Prepayment Amount is
      paid in full, whichever is greater, and (ii) all other amounts, costs, expenses
      and liquidated damages due in respect of such Debentures.

    


    “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 Amount”
shall
      mean the sum of (i) 100% of the principal amount of the Debenture then
      outstanding, (ii) accrued but unpaid interest and (iii) all liquidated damages
      and other amounts due in respect of the Debenture.

    


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

    


    “Permitted
      Debt”
means
      trade payables and indebtedness consisting of capitalized lease obligations
      and
      purchase money indebtedness incurred in connection with acquisition of capital
      assets and obligations under sale-leaseback arrangements with respect to newly
      acquired or leased assets.

     

    
      
        
        

      

      
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    “Permitted
      Lien”
mean
      (a) Liens with respect to the payment of taxes or governmental charges in all
      cases which are not yet due or which are subject to a good faith contest; (b)
      any Liens incurred in connection with Permitted Debt provided that such liens
      are not secured by assets of the Company or its Subsidiaries other than the
      assets so acquired or leased; and (c) statutory Liens of landlords or equipment
      lessors against any property of the Company or its Subsidiaries existing as
      of
      the date of the Purchase Agreement in favor of suppliers, mechanics, carriers,
      materialmen, warehousemen or workmen.

     

    “Purchase
      Agreement”
means
      the Securities Purchase Agreement, dated at or about March ___, 2006, to which
      the Company and the original Holder are parties, as amended, modified or
      supplemented from time to time in accordance with its terms.

    


    “Trading
      Market”
means,
      as applicable, 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 New York Stock Exchange, the Nasdaq National Market, the Nasdaq
      SmallCap Market or the OTC Bulletin Board.

     

    Section
      2. Interest.

     

    a)  Payment
      of Interest.
      The
      Company shall pay interest to the Holder on the aggregate unconverted and then
      outstanding principal amount of this Debenture at the rate of 7% per annum,
      payable semi-annually on June 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 being redeemed) and on the Maturity Date (except that,
      if
      any such date is not a Business Day, then such payment shall be due on the
      next
      succeeding Business Day) (each such date, an “Interest
      Payment Date”),
      in
      cash.

     

    b)  Interest
      Calculations.
      Interest shall be calculated on the basis of a 360-day year and shall accrue
      daily commencing on the Original Issue Date until payment in full of the
      principal sum, together with all accrued and unpaid interest and other amounts
      which may become due hereunder, has been made. Interest shall cease to accrue
      with respect to any principal amount converted, provided that the Company in
      fact delivers the Conversion Shares within the time period required by Section
      4(d)(ii). 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 Debentures (the “Debenture
      Register”).
      

     

    c)  Late
      Fee.
      All
      overdue accrued and unpaid principal and interest to be paid hereunder shall
      entail a late fee at the rate of 18% per annum (or such lower maximum amount
      of
      interest permitted to be charged under applicable law) (“Late
      Fees”)
      which
      will accrue daily, from the date such principal and interest are due hereunder
      through and including the date of payment. 

     

    
      
        
        

      

      
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    d)  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 made 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 to the Company for transfer 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 into shares of Common Stock
      at
      the option of the Holder, in whole or in part at any time and from time to
      time
      (subject to the limitations on conversion set forth in Section 4(c)
      hereof). The Holder shall effect conversions by delivering to the Company the
      form of Notice of Conversion attached hereto as Annex
      A
      (a
“Notice
      of Conversion”),
      specifying therein the principal amount of Debentures to be converted and the
      date on which such conversion is to be effected (a “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 provided hereunder. To
      effect conversions hereunder, the Holder shall not be required to physically
      surrender Debentures 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 converted and the date of such conversions. The Company shall
      deliver any objection to any Notice of Conversion within 2 Business Days of
      receipt of such notice. 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.

     

    
      
        
        

      

      
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    b)  Conversion
      Price.
      The
      conversion price (the “Conversion
      Price”)
      in
      effect on any Conversion Date shall be equal to $0.12, as same may be adjusted
      as described in the Transaction Documents.

    


    c)  Conversion
      Limitations;
      Holder’s
      Restriction on Conversion.
      At any
      time after the Common Stock is registered under Section 12 of the Exchange
      Act,
      the Company shall not effect any conversion of this Debenture, and the Holder
      shall not have the right to convert any portion of this Debenture, pursuant
      to
      Section 4(a) or otherwise, to the extent that after giving effect to such
      conversion, the Holder (together with the Holder’s affiliates), as set forth on
      the applicable Notice of Conversion, would beneficially own in excess of 4.99%
      of the number of shares of the 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 or conversion of the unexercised or nonconverted
      portion of any other securities of the Company (including, without limitation,
      any other Debentures or the 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 4(c), beneficial ownership shall be
      calculated in accordance with Section 13(d) of the Exchange Act. To the extent
      that the limitation contained in this section applies, the determination of
      whether this Debenture is convertible (in relation to other securities owned
      by
      the Holder) and of which a portion of this Debenture is convertible shall be
      in
      the sole discretion of such Holder. 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. 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 reflected in (x) Schedule
      3.1(g)
      to the
      Purchase Agreement, (y) a more recent public announcement by the Company or
      (z)
      any other 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 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. The provisions of this Section 4(c) may be waived
      by
      the Holder, at the election of the Holder, upon not less than 61 days’ prior
      notice to the Company, and the provisions of this Section 4(c) shall continue
      to
      apply until such 61st day (or such later date, as determined by the Holder,
      as
      may be specified in such notice of waiver).

     

    
      
        
        

      

      
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      d) 
        Mechanics of Conversion

       

    

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

      

    ii.  Delivery
      of Certificate Upon Conversion.
      Not
      later than three Business Days after any Conversion Date, the Company will
      deliver or cause to be delivered to the Holder (A) a certificate or certificates
      representing the Conversion Shares which shall be free of restrictive legends
      and trading restrictions (other than those required by the Purchase Agreement)
      representing the number of shares of Common Stock being acquired upon the
      conversion of Debentures and (B) a bank check in the amount of accrued and
      unpaid interest. The Company shall, if available and if allowed under applicable
      securities laws, use its best efforts to deliver any certificate or certificates
      required to be delivered by the Company under this Section electronically
      through the Depository Trust Corporation or another established clearing
      corporation performing similar functions. 

     

    iii.  Failure
      to Deliver Certificates.
      If in
      the case of any Notice of Conversion such certificate or certificates are not
      delivered to or as directed by the applicable Holder by the third Business
      Day
      after a Conversion Date, the Holder shall be entitled by written notice to
      the
      Company at any time on or before its receipt of such certificate or certificates
      thereafter, to rescind such conversion, in which event the Company shall
      immediately return the certificates representing the principal amount of
      Debentures tendered for conversion. 

     

    iv.  Obligation
      Absolute; Partial Liquidated Damages.
      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 Business Day after the
      Conversion Date, the Company shall pay to such Holder, in cash, as liquidated
      damages and not as a penalty, for each $1000 of principal amount being
      converted, $10 per Business Day (increasing to $20 per Business Day after 10
      Business Days after such damages begin to accrue) for each Business Day after
      such fifth Business Day until such certificates are delivered. 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,
      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 a 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
      any
      one 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, 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 principal amount
      of this Debenture outstanding, which is subject to the injunction, which bond
      shall remain in effect until the completion of arbitration/litigation of the
      dispute and the proceeds of which shall be payable to such Holder to the extent
      it obtains judgment. In the absence of an injunction precluding the same, the
      Company shall issue Conversion Shares or, if applicable, cash, upon a properly
      noticed conversion. Nothing herein shall limit a Holder’s right to pursue actual
      damages or declare an Event of Default pursuant to Section 8 herein for the
      Company’s failure to deliver Conversion Shares within the period specified
      herein and such Holder shall have the right to pursue all remedies available
      to
      it 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.

     

    
      
        
        

      

      
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    v.  Compensation
      for Buy-In on Failure to Timely Deliver Certificates Upon
      Conversion.
      In
      addition to any other rights available to the Holder and only if after the
      Original Issue Date the Company becomes subject to the reporting requirements
      of
      the Exchange Act, 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
      Business Day after the Conversion Date, and if after such third Business Day
      the
      Holder is required by its brokerage firm to purchase (in an open market
      transaction or otherwise) Common Stock to deliver in satisfaction of a sale
      by
      such Holder of the Conversion Shares which the Holder anticipated receiving
      upon
      such conversion (a “Buy-In”),
      then
      the Company shall (A) pay in cash to the Holder (in addition to any remedies
      available to or elected by the Holder) the amount by which (x) the Holder’s
      total purchase price (including brokerage commissions, if any) for the Common
      Stock so purchased exceeds (y) the product of (1) the aggregate number of shares
      of Common Stock that such Holder anticipated receiving from the conversion
      at
      issue multiplied by (2) the actual sale price of the Common Stock at the time
      of
      the sale (including brokerage commissions, if any) giving rise to such purchase
      obligation and (B) at the option of the Holder, either reissue Debentures in
      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 had the Company 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 Debentures with respect to which the actual sale price of the
      Conversion Shares at the time of the sale (including brokerage commissions,
      if
      any) 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.
      Notwithstanding anything contained herein to the contrary, if a Holder requires
      the Company to make payment in respect of a Buy-In for the failure to timely
      deliver certificates hereunder and the Company timely pays in full such payment,
      the Company shall not be required to pay such Holder liquidated damages under
      Section 4(d)(iv) in respect of the certificates resulting in such
      Buy-In.

     

    
      
        
        

      

      
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    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 solely for the purpose of
      issuance upon conversion of the Debentures, 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 number of shares of the Common Stock as shall (subject to any additional
      requirements of the Company as to reservation of such shares set forth in the
      Purchase Agreement) be issuable (taking into account the adjustments and
      restrictions of Section 5) upon the conversion of the outstanding principal
      amount of the Debentures. The Company covenants that all shares of Common Stock
      that shall be so issuable shall, upon issue, be duly and validly authorized,
      issued and fully paid, nonassessable and, if the Registration Statement is
      then
      effective under the Securities Act, registered for public sale in accordance
      with such Registration Statement.

    


    vii.  Fractional
      Shares.
      Upon a
      conversion hereunder the Company shall not be required to issue stock
      certificates representing fractions of shares of the Common Stock, but may
      if
      otherwise permitted, make a cash payment in respect of any final fraction of
      a
      share based on the VWAP at such time. If the Company elects not, or is unable,
      to make such a cash payment, the Holder shall be entitled to receive, in lieu
      of
      the final fraction of a share, one whole share of Common Stock.

    


    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 certificate, 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 such Debentures 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.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    Section
      5. Certain
      Adjustments.

    


    a)  Stock
      Dividends And Stock Splits.
      If the
      Company, at any time while this Debenture is outstanding: (A) pays a stock
      dividend or otherwise makes a distribution or distributions on shares of its
      Common Stock or any other equity or equity equivalent securities payable in
      shares of Common Stock (which, for avoidance of doubt, shall not include any
      shares of Common Stock issued by the Company pursuant to this Debenture,
      including as interest thereon), (B) subdivides outstanding shares of Common
      Stock into a larger number of shares, (C) combines (including by way of reverse
      stock split) outstanding shares of Common Stock into a smaller number of shares,
      or (D) issues by reclassification of shares of the Common Stock any shares
      of
      capital stock of the Company, then the Conversion Price shall be multiplied
      by a
      fraction of which the numerator shall be the number of shares of Common Stock
      (excluding treasury shares, if any) outstanding 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 the
      Company or any Subsidiary thereof, as applicable, at any time while this
      Debenture is outstanding, shall sell, grant any option to purchase or offer,
      sell or grant any right to reprice its securities, or otherwise dispose of
      or
      issue any Common Stock or Common Stock Equivalents entitling any Person to
      acquire shares of Common Stock, at an effective price per share less than the
      then Conversion Price (such lower price, the "BASE CONVERSION PRICE" and such
      issuances collectively, a "DILUTIVE ISSUANCE"), as adjusted hereunder (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 is issued in connection with such
      issuance, be entitled to receive shares of Common Stock at an effective price
      per share which is less 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. The Company shall notify the Holder in writing, no later than the
      Business Day following the issuance of any Common Stock or Common Stock
      Equivalents subject to this section, indicating therein the applicable issuance
      price, or of 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,
      after the date of such Dilutive Issuance the Holder is entitled to receive
      a
      number of Conversion Shares based upon the Base Conversion Price regardless
      of
      whether the Holder accurately refers to the Base Conversion Price in the Notice
      of Conversion.

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    c) Pro
      Rata Distributions.
      If the
      Company, at any time while this Debenture is outstanding, shall distribute
      to
      all holders of Common Stock (and not to the holders of the Debenture) evidences
      of its indebtedness or assets (including cash and cash dividends) or rights
      or
      warrants to subscribe for or purchase any security, 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 one outstanding share of the Common
      Stock as determined by the Board of Directors in good faith. In either case
      the
      adjustments shall be described in a statement provided to the Holder of the
      portion of assets or evidences of indebtedness so distributed or such
      subscription rights applicable to one 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.

    


    d) Fundamental
      Transaction.
      If, at
      any time while this Debenture is outstanding, (A) the Company effects any merger
      or consolidation of the Company with or into another Person, (B) the Company
      effects any sale of all or substantially all of its assets in one or a series
      of
      related transactions, (C) any tender offer or exchange offer (whether by the
      Company or another Person) is completed pursuant to which holders of Common
      Stock are permitted to tender or exchange their shares for other securities,
      cash or property, or (D) the Company effects any reclassification of the Common
      Stock or any compulsory share exchange pursuant to which the Common Stock is
      effectively converted into or exchanged for other securities, cash or property
      (in any such case, a "FUNDAMENTAL TRANSACTION"), then upon any subsequent
      conversion of this Debenture, the Holder shall have the right to receive, for
      each Conversion Share that would have been issuable upon such conversion
      immediately prior to the occurrence of such Fundamental Transaction, the same
      kind and amount of securities, cash or property as it would have been entitled
      to receive upon the occurrence of such Fundamental Transaction if it had been,
      immediately prior to such Fundamental Transaction, the holder of one 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 one 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 he foregoing provisions, any successor to the Company or surviving
      entity in such Fundamental Transaction shall (i) assume in writing all of the
      obligations of the Company under thisDebenture 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) prior
      to
      such Fundamental Transaction and (ii) to 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 amounts and the
      interest rates of the Debentures held by the Holder and having similar ranking
      to the Debenture, and satisfactory to the Holder (any such approval not to
      be
      unreasonably withheld or delayed). The provisions of this Section shall apply
      similarly and equally to successive Fundamental Transactions and shall be
      applied without regard to any limitations on the conversion or redemption of
      this Debenture. 

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    e) 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
      treasury shares, if any) issued and outstanding.

    


    Section
      6. Notice
      To The Holder.

    


    i.     
      Adjustment
      To Conversion Price.
      Whenever the Conversion Price is adjusted pursuant to Section 5, the Company
      shall promptly mail 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. If the Company issues a variable rate security, despite the
      prohibition thereon in the Purchase Agreement, the Company shall be deemed
      to
      have issued Common Stock or Common Stock Equivalents at the lowest possible
      conversion or exercise price at which such securities may be converted or
      exercised in the case of a Variable Rate Transaction (as defined in the Purchase
      Agreement).

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    ii. Notice
      To Allow Conversion By Holder.
      If (A)
      the Company shall declare a dividend (or any other distribution) 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 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; (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 mailed to the Holder at its last addresses
      as
      it shall appear upon the stock books of the Company, at least 10 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 mail such notice or any defect therein or in the mailing 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
      10-day period commencing the date of such notice to the effective date of the
      event triggering such notice.

    


    Section
      7. Negative
      Covenants.
      So long
      as any portion of this Debenture is outstanding, the Company will not and will
      not permit any of its Subsidiaries to directly or indirectly:

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    a)  except
      with the prior written consent of the Holder, 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 that is senior to, or pari passu
      with, in
      any respect, the Company’s obligations hereunder;

     

    b)  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, other than Permitted
      Liens;

    


    c)  amend
      its
      certificate of incorporation, bylaws or other charter documents so as to
      adversely affect any rights of the Holder;

    


    d)  repay,
      repurchase or offer to repay, repurchase or otherwise acquire more than a
de
      minimis
      number
      of shares of its Common Stock or Common Stock Equivalents other than as to
      the
      Conversion Shares to the extent permitted or required under the Transaction
      Documents or as otherwise permitted by the Transaction Documents; 

    


    e)  enter
      into any agreement with respect to any of the foregoing;
      or

    


    f)  pay
      cash
      dividends on any equity securities of the Company.

     

    Section
      8. Events
      of Default.
      

    


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

    


    i.  any
      default in the payment of (A) the principal amount of any Debenture, or (B)
      interest (including Late Fees) on, or liquidated damages in respect of, 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 Business Days;

     

    ii.  the
      Company shall fail to observe or perform any other covenant or agreement
      contained in this Debenture (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 (viii) below) which failure is not cured,
      if
      possible to cure, within the earlier to occur of (A) 10 Business Days after
      notice of such default sent by the Holder or by any other Holder and (B)15
      Business Days after the Company shall become or should have become aware of
      such
      failure;

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    iii.  a
      default
      or event of default (subject to any grace or cure period provided for in the
      applicable agreement, document or instrument) shall occur under (A) any of
      the
      Transaction Documents other than the Debentures, or (B) any other material
      agreement, lease, document or instrument to which the Company or any Subsidiary
      is bound;

    


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

    


    v.  (i)
      the
      Company or any of its Subsidiaries shall commence, or there shall be commenced
      against the Company or any such Subsidiary, a case under any applicable
      bankruptcy or insolvency laws as now or hereafter in effect or any successor
      thereto, or the Company or any Subsidiary commences any other proceeding under
      any reorganization, arrangement, adjustment of debt, relief of debtors,
      dissolution, insolvency or liquidation or similar law of any jurisdiction
      whether now or hereafter in effect relating to the Company or any Subsidiary
      thereof or (ii) there is commenced against the Company or any Subsidiary thereof
      any such bankruptcy, insolvency or other proceeding which remains undismissed
      for a period of 45 days; or (iii) the Company or any Subsidiary thereof is
      adjudicated by a court of competent jurisdiction insolvent or bankrupt; or
      any
      order of relief or other order approving any such case or proceeding is entered;
      or (iv) the Company or any Subsidiary thereof suffers any appointment of any
      custodian or the like for it or any substantial part of its property which
      continues undischarged or unstayed for a period of 45 days; or (v) the Company
      or any Subsidiary thereof makes a general assignment for the benefit of
      creditors; or (vi) the Company shall fail to pay, or shall state that it is
      unable to pay, or shall be unable to pay, its debts generally as they become
      due; or (vii) the Company or any Subsidiary thereof shall call a meeting of
      its
      creditors with a view to arranging a composition, adjustment or restructuring
      of
      its debts; or (viii) the Company or any Subsidiary thereof shall by any act
      or
      failure to act expressly indicate its consent to, approval of or acquiescence
      in
      any of the foregoing; or (ix) any corporate or other action is taken by the
      Company or any Subsidiary thereof for the purpose of effecting any of the
      foregoing;

     

    vi.  the
      Company or any Subsidiary shall default in 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 of the Company in an amount
      exceeding $50,000, whether such indebtedness now exists or shall hereafter
      be
      created and such default shall result in such indebtedness becoming or being
      declared due and payable prior to the date on which it would otherwise become
      due and payable; 

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    vii.  the
      Company shall be a party to any Change of Control Transaction or Fundamental
      Transaction, shall agree to sell or dispose of all or in excess of 45% of its
      assets in one or more transactions (whether or not such sale would constitute
      a
      Change of Control Transaction) or shall redeem or repurchase more than a de
      minimis number of its outstanding shares of Common Stock or other equity
      securities of the Company (other than redemptions of Conversion Shares and
      repurchases of shares of Common Stock or other equity securities of departing
      officers and directors of the Company; provided such repurchases shall not
      exceed $50,000, in the aggregate, for all officers and directors during the
      term
      of this Debenture); or

    


    viii.  the
      Company shall fail for any reason to deliver certificates to a Holder prior
      to
      the 7th
      Business
      Day after a Conversion Date pursuant to and in accordance with Section 4(d)
      or
      the Company shall provide notice to the Holder, including by way of public
      announcement, at any time, of its intention not to comply with requests for
      conversions of any Debentures in accordance with the terms hereof.

     

    b)  Remedies
      Upon Event of Default.
      If any
      Event of Default occurs, the full principal amount of this Debenture, together
      with interest and other amounts owing in respect thereof, to the date of
      acceleration shall become, at the Holder’s election, immediately due and payable
      in cash. The aggregate amount payable upon an Event of Default shall be equal
      to
      the Mandatory Prepayment Amount. Commencing 15 days after the occurrence of
      any
      Event of Default that results in the eventual acceleration of this Debenture,
      the interest rate on this Debenture shall accrue at the rate of 18% per annum,
      or such lower maximum amount of interest permitted to be charged under
      applicable law. All Debentures for which the full Mandatory Prepayment Amount
      hereunder shall have been paid in accordance herewith shall promptly be
      surrendered to or as directed by the Company. 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 declaration may be rescinded
      and annulled by Holder at any time prior to payment hereunder and the Holder
      shall have all rights as a Debenture holder until such time, if any, as the
      full
      payment under this Section shall have been received by it. No such rescission
      or
      annulment shall affect any subsequent Event of Default or impair any right
      consequent thereon.


     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

     

    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, sent by a nationally recognized
      overnight courier service, addressed to the Company, at the address set forth
      above, facsimile number: (212) 930-9725,
      Attn:
      Marc Ross, Esq., or such other address or facsimile number as the Company may
      specify for such purposes by notice to the Holders delivered in accordance
      with
      this Section. 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, sent by a nationally recognized overnight courier service
      addressed to each Holder at the facsimile telephone number or address of such
      Holder appearing on the books of the Company, or if no such facsimile telephone
      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 telephone number
      specified in this Section prior to 5:30 p.m. (New York City time), (ii) the
      date
      after the date of transmission, if such notice or communication is delivered
      via
      facsimile at the facsimile telephone number specified in this Section later
      than
      5:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New
      York
      City time) on such 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, interest and liquidated damages (if any) 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,
      and indemnity, if requested, all 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 conflicts of law thereof. Each party agrees that all legal
      proceedings concerning the interpretations, 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
      any such court, 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 manner permitted by 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 with the investigation,
      preparation and prosecution of such action or proceeding.

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

     

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

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

     

    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.

    


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

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    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.

    


    


    
      	
               

            	
              APRECIA INC.

               

            
	
            	By: 	/s/Isidore
              Sobkowski
              Name:
                Isidore Sobkowski

              Title:
                Pres and CEO

            


    

    


    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    


    ANNEX
      A

    


    NOTICE
      OF CONVERSION


    The
      undersigned hereby elects to convert principal under the 7% Convertible
      Debenture of Aprecia Inc., a Delaware corporation (the “Company”),
      due
      on March ___, 2008, into shares of common stock, par value $0.0001 per share
      (the “Common
      Stock”),
      of
      the Company according to the conditions hereof, as of the date written below.
      If
      shares 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
      determined in accordance with Section 13(d) of the Exchange Act, specified
      under
      Section 4 of this Debenture.

    


    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 Debentures 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:

    


    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

     

    Schedule
      1

    


    CONVERSION
      SCHEDULE

    


    The
      7%
      Convertible Debentures due on March ___, 2008, in the aggregate principal amount
      of $____________ issued by Aprecia Inc., a __________ corporation. 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

            
	 	 	 	 
	 	 	 	 
	
               

            	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 


    

    


    
      
        
        

      

      
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