Form of Variable Rate Convertible Debenture due March 2009


    EXHIBIT
      4.6

    


    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
      __, 2006

    Original
      Conversion Price (subject to adjustment herein): $10.00

    


    $_______________

    


    


    VARIABLE
      RATE CONVERTIBLE DEBENTURE

    DUE
      MARCH 2009

    


    THIS
      VARIABLE RATE CONVERTIBLE DEBENTURE is one of a series of duly authorized and
      validly issued Convertible Debentures of PacificNet, Inc., a Delaware
      corporation, having its principal place of business at 601 New Bright Building,
      11 Sheung Yuet Road, Kowloon Bay, Kowloon, Hong Kong (the “Company”),
      designated as its Variable Rate Convertible Debenture, due March 2009 (this
      debenture, the “Debenture”
and
      collectively with the other such series of debentures, 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
      $_______________ by March ___, 2009, or such earlier date as this Debenture
      is
      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.
      This Debenture is subject to the following additional provisions:

    


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

    



    
      
        
        

      

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

    


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

    


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

    


    “Business
      Day”
means
      any day except Saturday, 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 the following: (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 33% of the voting securities of the
      Company (other than by means of conversion or exercise of the Debentures and
      the
      Securities issued together with the Debentures), or (ii) the Company merges
      into
      or consolidates with any other Person, or any Person merges into or consolidates
      with the Company and, after giving effect to such transaction, the stockholders
      of the Company immediately prior to such transaction own less than 66% of the
      aggregate voting power of the Company or the successor entity of such
      transaction, or (iii) the Company sells or transfers all or substantially all
      of
      its assets to another Person and the stockholders of the Company immediately
      prior to such transaction own less than 66% of the aggregate voting power of
      the
      acquiring entity immediately after the transaction, or (iv) a replacement at
      one
      time or within a two 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 in clauses
      (i) through (iv) above.

    



    
      
        
        

      

      
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    “Closing
      Price”
means
      on any particular date (a) the last reported closing bid price per share of
      Common Stock on such date on the Trading Market (as reported by Bloomberg L.P.
      at 4:15 PM (New York time)), or (b) if there is no such price on such date,
      then
      the closing bid price on the Trading Market on the date nearest preceding such
      date (as reported by Bloomberg L.P. at 4:15 PM (New York time)), or (c)  if
      the Common Stock is not then listed or quoted on the Trading Market and if
      prices for the Common Stock are then listed or quoted on the OTC Bulletin Board
      or reported in the “pink sheets” published by Pink Sheets LLC (or a similar
      organization or agency succeeding to its functions of reporting prices), the
      most recent bid price per share of the Common Stock so reported, or (d) if
      the shares of Common Stock are not then publicly traded the fair market value
      of
      a share of Common Stock as determined by an appraiser selected in good faith
      by
      the Purchasers of a majority in interest of the Debentures then
      outstanding.

    


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

    


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

    


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

    


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

    


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

    


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

    


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

    


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

    


    “Equity
      Conditions”
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 Notices of Conversion of the Holder,
      if any, (ii) the Company shall have paid all liquidated damages and other
      amounts owing to the Holder in respect of this Debenture, (iii)
      there is an effective Registration Statement pursuant to which the Holder is
      permitted to utilize the prospectus thereunder to resell all of the shares
      issuable pursuant to the Transaction Documents (and the Company believes, in
      good faith, that such effectiveness will continue uninterrupted for the
      foreseeable future), (iv) the Common Stock is trading on a Trading Market and
      all of the shares issuable pursuant to the Transaction Documents are listed
      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), 

     

     

    
      
         

      

      
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    (v)
      there
      is a sufficient number of authorized but unissued and otherwise unreserved
      shares of Common Stock for the issuance of all of the shares issuable pursuant
      to the Transaction Documents, (vi) there is no existing Event of Default or
      no
      existing event which, with the passage of time or the giving of notice, would
      constitute an Event of Default, (vii) after the issuance of the shares in
      question (or, in the case of a Monthly Redemption, the shares issuable upon
      conversion in full of the Monthly Redemption Amount)), the issuance of all
      Conversion Shares under the Debentures and all Warrant Shares under the Warrants
      upon conversion or exercise in full would not violate the limitations set forth
      in Section 4(c)(i) and Section 4(c)(ii) herein, (viii)
      there has been no public announcement of a pending or proposed Fundamental
      Transaction or Change of Control Transaction that has not been consummated
      and
      (ix) the Holder is not in possession of any information that is, or might
      constitute, material nonpublic information.

    


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

    


    “Exchange
      Act”
means
      the Securities Exchange Act of 1934, as amended, and the rules and regulations
      promulgated thereunder.

     

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

    


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

    


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

    


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

    


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

     

    “Interest
      Conversion Rate”
means
      the
      lesser of (a) the Conversion Price or (b) the
      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 after the
      Interest Payment Date.

    


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

    


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

     

    “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).

    



    
      
        
        

      

      
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    “Mandatory
      Default Amount”
means
      the sum of (i) the greater of (A) 130% of the outstanding principal amount
      of
      this Debenture, plus all accrued and unpaid interest hereon, or (B) the
      outstanding principal amount of this Debenture, plus all accrued and unpaid
      interest hereon, divided by the Conversion Price on the date the Mandatory
      Default Amount is either (a) demanded (if demand or notice is required to create
      an Event of Default) or otherwise due or (b) paid in full, whichever has a
      lower
      Conversion Price, multiplied by the VWAP on the date the Mandatory Default
      Amount is either (x) demanded or otherwise due or (y) paid in full, whichever
      has a higher VWAP, and (ii) all other amounts, costs, expenses and liquidated
      damages due in respect of this Debenture.

    


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

     

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

     

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

     

    “Monthly
      Redemption Amount”
means,
      as to a Monthly Redemption, $320,000.

    


    “Monthly
      Redemption Date”
means
      January 1, 2007 and the 1st of each month thereafter and terminating upon the
      full redemption of this Debenture. 

    


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

     

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

     

    “Monthly
      Redemption Share Amount”
shall
      have the meaning set forth in Section 6(a) hereof. 

    


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

    


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

    


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

    


    “Optional
      Redemption Amount”
means
      the sum of (i) 120% 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.

    


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

    


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

    



    
      
        
        

      

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

     

    “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 existing on the Original Issue Date and set forth on Schedule
      3.1(ff)
      attached
      to the Purchase Agreement, (b) lease obligations and purchase money indebtedness
      of up to $20,000,000, in the aggregate, incurred in connection with the
      acquisition of capital assets and lease obligations with respect to newly
      acquired or leased assets and (c) up to $50,000,000 of additional Indebtedness
      incurred by the Company in connection with raising capital for the acquisition
      of another entity (by merger, consolidation, the acquisition of all or
      substantially of the assets of such entity or similar transaction), provided
      that in the case of (b) and (c) above, such Indebtedness does not mature or
      require payments of principal prior to the Maturity Date and is made expressly
      subordinate in right of payment to the Indebtedness evidenced by this Debenture,
      as reflected in a written agreement reasonably acceptable to, and approved
      by,
      the Holder in writing.

    


    “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; and (c) Liens incurred in connection with Permitted
      Indebtedness under clause (b) thereunder, provided that such Liens are not
      secured by assets of the Company or its Subsidiaries other than the assets
      so
      acquired or leased.

     

    “Person”
means
      an individual or corporation, partnership, trust, incorporated or unincorporated
      association, joint venture, limited liability company, joint stock company,
      government (or an agency or subdivision thereof) or other entity of any
      kind.

    


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

    


    “Purchase
      Agreement”
means
      the Securities Purchase Agreement among the Company and the original Holders,
      dated as of February 28, 2006, as amended, modified or supplemented from time
      to
      time in accordance with its terms.

    



    
      
        
        

      

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

    


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

    


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

    


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

    


    “Shareholder
      Approval”
shall
      have the meaning set forth in Section 4(c)(i).

    


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

    


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

    


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

    


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

    


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

    


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


    
      
        
        

      

      
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    Section
      2. Interest.

     

    a) Payment
      of Interest in Cash or Kind.
      At the
      Closing, the Company prepaid the Holder the first year’s interest by means of an
      original issue discount. The Company shall pay interest to the Holder on the
      aggregate unconverted and then outstanding principal amount of this Debenture
      at
      the rate of 6% per annum beginning on the first anniversary of the Original
      Issue Date until the day immediately prior to the second anniversary of the
      Original Issue Date, increasing to 7% per annum from the second anniversary
      of
      the Original Issue Date, payable on a monthly basis on the first day of each
      month, beginning on the first day of the 13th
      month
      after the Original Issue Date, on each Conversion Date (as to that principal
      amount then being converted) 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 or duly authorized, validly issued, fully paid and non-assessable shares
      of
      Common Stock at the Interest Conversion Rate (the amount to be paid in shares,
      the “Interest
      Share Amount”),
      or a
      combination thereof; provided,
      however,
      that
      (i) payment in shares of Common Stock may only occur if 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 issued to the
      Holder all of the Equity Conditions have been met (unless waived by the Holder
      in writing), (ii) the Company shall have given the Holder notice in accordance
      with the notice requirements set forth below and (iii) as to such Interest
      Payment Date, prior to such Interest Notice Period (but not more than 5 Trading
      Days prior to the commencement of such Interest Notice Period), the Company
      shall have delivered to the Holder’s account with The Depository Trust Company a
      number of shares of Common Stock to be applied against such Interest Share
      Amount equal to the quotient of (x) the applicable Interest Share Amount divided
      by (y) the then Conversion Price (the “Interest
      Conversion Shares”).
      

     

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

    



    
      
        
        

      

      
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    c) Interest
      Calculations.
      Interest shall be calculated on the basis of a 365-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, liquidated damages
      and other amounts which may become due hereunder, has been made. Payment of
      interest in shares of Common Stock (other than the Interest Conversion Shares
      issued prior to an Interest Notice Period) shall otherwise occur pursuant to
      Section 4(d)(ii) herein and, solely for purposes of the payment of interest
      in
      shares, the Interest Payment Date shall be deemed the Conversion 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). 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 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 (“Late Fees”) which shall
      accrue daily from the date such interest is due hereunder through and including
      the date of 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 able to pay accrued
      interest in Common Stock because it fails to satisfy the conditions for payment
      in Common Stock set forth above, then, at the option of the Holder, the Company,
      in lieu of delivering either shares of Common Stock pursuant to this Section
      2
      or paying the regularly scheduled interest payment in cash, shall deliver,
      within three Trading Days of each applicable Interest Payment Date, an amount
      in
      cash equal to the product of (x) the number of shares of Common Stock otherwise
      deliverable to the Holder in connection with the payment of interest due on
      such
      Interest Payment Date multiplied by (y) the highest VWAP during the period
      commencing on the Interest Payment Date and ending on the Trading Day prior
      to
      the date such payment is made. If any Interest Conversion Shares are issued
      to
      the Holder in connection with an Interest Payment Date and are not applied
      against an Interest Share Amount, then the Holder shall promptly return such
      excess shares to the Company.

     

    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. 

    



    
      
        
        

      

      
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    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
      (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 (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 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) and shall
      make appropriate notations on the Conversion Schedule attached hereto as
Schedule
      1.
      The
      Company may deliver an objection to any Notice of Conversion within 1 Business
      Day of delivery of such Notice of Conversion. In the event of any dispute or
      discrepancy, the records of the Holder shall be controlling and determinative
      in
      the absence of manifest error. The
      Holder, and any assignee by acceptance of this Debenture, acknowledge and agree
      that, by reason of the provisions of this paragraph, following conversion of
      a
      portion of this Debenture, the unpaid and unconverted principal amount of this
      Debenture may be less than the amount stated on the face
      hereof.

     


    
      
        
        

      

      
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    b) Conversion
      Price.
      The
      conversion price in effect on any Conversion Date shall be equal to $10.00
      (subject
      to adjustment herein) (the “Conversion
      Price”).

    


    c) Conversion
      Limitations.
      

    


    i. Nasdaq
      National Market Limitations.
      Notwithstanding anything herein to the contrary, if the Company has not obtained
      Shareholder Approval (as defined below), then the Company may not issue, upon
      conversion of this Debenture, a number of shares of Common Stock which, when
      aggregated with any shares of Common Stock issued on or after the Original
      Issue
      Date and prior to such Conversion Date (A) in connection with any Debentures
      issued pursuant to the Purchase Agreement, (B) in connection with any Warrants
      issued pursuant to the Purchase Agreement and (C) in connection with any
      warrants issued to any registered broker-dealer as a fee in connection with
      the
      issuance of the Securities pursuant to the Purchase Agreement, would exceed
      19.999% of the number of shares of Common Stock outstanding on the Trading
      Day
      immediately preceding the Original Issue Date (such number of shares, the
“Issuable
      Maximum”).
      Each
      Holder shall be entitled to a portion of the Issuable Maximum equal to the
      quotient obtained by dividing (x) the aggregate principal amount of the
      Debenture(s) issued and sold to such Holder on the Original Issue Date by (y)
      the aggregate principal amount of all Debentures issued and sold by the Company
      on the Original Issue Date. If any Holder shall no longer hold the Debenture(s),
      then such Holder’s remaining portion of the Issuable Maximum, if any, shall be
      allocated pro-rata among the remaining Holders. If, on any Conversion Date,
      (1)
      the applicable Conversion Price is such that the shares issuable under this
      Debenture on such Conversion Date, together with the aggregate number of shares
      of Common Stock that would then be issuable upon conversion in full of all
      then
      outstanding Debentures, would exceed the Issuable Maximum and (2) the Company
      shall not have previously obtained Shareholder Approval, then the Company shall
      issue to the Holder requesting a conversion a number of shares of Common Stock
      equal to such Holder’s pro-rata portion (which shall be calculated pursuant to
      the terms hereof) of the Issuable Maximum and, with respect to the remainder
      of
      the aggregate principal amount of the Debentures (including any accrued
      interest) then held by such Holder for which a conversion in accordance with
      the
      applicable Conversion Price would result in an issuance of shares of Common
      Stock in excess of such Holder’s pro-rata portion (which shall be calculated
      pursuant to the terms hereof) of the Issuable Maximum (the “Excess
      Principal”),
      the
      Company shall be prohibited from converting such Excess Principal and shall
      promptly notify the Holder of the reason therefor. This Debenture shall
      thereafter be unconvertible to such extent until and unless Shareholder Approval
      is subsequently obtained, but this Debenture shall otherwise remain in full
      force and effect. The Holder acknowledges and agrees that shares of Common
      Stock
      issuable upon conversion hereof or exercise of the Warrants are not eligible
      to
      vote in connection with the Shareholder Approval.

     

     

    
      
         

      

      
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    ii.
Holder’s
      Restriction on Conversion.
      The
      Company shall not effect any conversion of this Debenture, and a Holder shall
      not have the right to convert any portion of this Debenture, to the extent
      that
      after giving effect to the conversion set forth on the applicable Notice of
      Conversion, such Holder (together with such Holder’s Affiliates, and any other
      person or entity acting as a group together with such Holder or any of such
      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 such 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 such 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 such
      Holder or any of its Affiliates.  Except as set forth in the preceding
      sentence, for purposes of this Section 4(c)(ii), beneficial ownership shall
      be
      calculated in accordance with Section 13(d) of the Exchange Act and the rules
      and regulations promulgated thereunder. To the extent that the limitation
      contained in this Section 4(c)(ii) applies, the determination of whether this
      Debenture is convertible (in relation to other securities owned by such Holder
      together with any Affiliates) and of which principal amount of this Debenture
      is
      convertible shall be in the sole discretion of such Holder, and the submission
      of a Notice of Conversion shall be deemed to be such Holder’s determination of
      whether this Debenture may be converted (in relation to other securities owned
      by such Holder together with any Affiliates) and which principal amount of
      this
      Debenture is convertible, in each case subject to such aggregate percentage
      limitations. To ensure compliance with this restriction, each Holder will be
      deemed to represent to the Company each time it delivers a Notice of Conversion
      that such Notice of Conversion has not violated the restrictions set forth
      in
      this paragraph and the Company shall have no obligation to verify or confirm
      the
      accuracy of such determination. In
      addition, a determination as to any group status as contemplated above shall
      be
      determined in accordance with Section 13(d) of the Exchange Act and
      the
      rules and regulations promulgated thereunder. For
      purposes of this Section 4(c)(ii), in determining the number of outstanding
      shares of Common Stock, a 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 Form 10-QSB (or Form 10-Q) or Form 10-KSB (or Form 10-K), 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 such Holder the number of shares of Common Stock then
      outstanding.

     


    
      
        
        

      

      
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    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 such Holder or its Affiliates since
      the date as of which such number of outstanding shares of Common Stock was
      reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of
      shares of the Common Stock outstanding immediately after giving effect to the
      issuance of shares of Common Stock issuable upon conversion of this Debenture
      held by the Holder. The Beneficial Ownership Limitation provisions of this
      Section 4(c)(ii) may be waived by such Holder, at the election of such Holder,
      upon not less than 61 days’ prior notice to the Company, to change the
      Beneficial Ownership Limitation to 9.99% of the number of shares of the Common
      Stock outstanding immediately after giving effect to the issuance of shares
      of
      Common Stock upon conversion of this Debenture held by the Holder and the
      provisions of this Section 4(c)(ii) shall continue to apply. Upon such a change
      by a Holder of the Beneficial Ownership Limitation from such 4.99% limitation
      to
      such 9.99% limitation, the Beneficial Ownership Limitation may not be further
      waived by such Holder. The provisions of this paragraph shall be construed
      and
      implemented in a manner otherwise than in strict conformity with the terms
      of
      this Section 4(c)(ii) to correct this paragraph (or any portion hereof) which
      may be defective or inconsistent with the intended Beneficial Ownership
      Limitation herein contained or to make changes or supplements necessary or
      desirable to properly give effect to such limitation.
      The
      limitations contained in this paragraph shall apply to a successor holder of
      this
      Debenture.

    
d) Mechanics
      of Conversion.

     

    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 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 shares of Common Stock being acquired upon the
      conversion of this Debenture (including, if the Company has given continuous
      notice pursuant to Section 2(b) for payment of interest in shares of Common
      Stock at least 20 Trading Days prior to the date on which the Conversion Notice
      is delivered to the Company, shares of Common Stock representing the payment
      of
      accrued interest otherwise determined pursuant to Section 2(a) but assuming
      that
      the Interest Notice Period is the 20 Trading Days period immediately prior
      to
      the date on which the Conversion Notice is delivered to the Company and
      excluding for such issuance the condition that the Company deliver Interest
      Conversion Shares as to such interest payment) and (B) a bank check in the
      amount of accrued and unpaid interest (if the Company has elected or is required
      to pay accrued interest in cash). 


    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    


    On
      or
      after the Effective Date, the Company shall use its best efforts to deliver
      any
      certificate or certificates required to be delivered by the Company under this
      Section 4 electronically through the Depository Trust Company or another
      established clearing corporation performing similar functions. 

     

    iii. Failure
      to Deliver Certificates.
      If in
      the case of any Notice of Conversion such certificate or certificates are not
      delivered to or as directed by the applicable Holder by the third Trading Day
      after the Conversion Date, the Holder shall be entitled to elect by written
      notice to the Company at any time after such third Trading Day, but 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 the
      Common Stock certificates representing the principal amount of this Debenture
      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 such 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 such Holder, in cash, as liquidated damages and not as a penalty, for
      each $1000 of principal amount being converted, $10 per Trading Day (increasing
      to $20 per Trading Day on the fifth Trading Day after such liquidated damages
      begin to accrue) for each Trading Day after such third Trading Day until such
      certificates are delivered; provided, however that if the Holder rescinds or
      withdraws such conversion notice such liquidated damages shall cease to continue
      to accrue after such date. 


    
      
        
        

      

      
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    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 such 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) shares of Common Stock to deliver in
      satisfaction of a sale by such 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 such 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.

     


    
      
        
        

      

      
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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 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.
      Upon a
      conversion hereunder the Company shall not be required to issue stock
      certificates representing fractions of shares of 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, 1 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 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.

    



    
      
        
        

      

      
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    Section
      5. Certain
      Adjustments.

     

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

     

    b) Subsequent
      Equity Sales.
      If the
      Company or any Subsidiary thereof, as applicable, at any time while this
      Debenture is outstanding, sells or grants any option to purchase or sells or
      grants any right to reprice its securities, 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.
      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 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.

     


    
      
        
        

      

      
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    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, (A) the Company effects any merger
      or consolidation of the Company with or into another Person, (B) the Company
      effects any sale of all or substantially all of its assets in one transaction
      or
      a series of related transactions, (C) any tender offer or exchange offer
      (whether by the Company or another Person) is completed pursuant to which
      holders of Common Stock are permitted to tender or exchange their shares for
      other securities, cash or property, or (D) the Company effects any
      reclassification of the Common Stock or any compulsory share exchange pursuant
      to which the Common Stock is effectively converted into or exchanged for other
      securities, cash or property (in any such case, a “Fundamental
      Transaction”),
      then,
      upon any subsequent conversion of this Debenture, the Holder shall have the
      right to receive, for each Conversion Share that would have been issuable upon
      such conversion immediately prior to the occurrence of such Fundamental
      Transaction, the same kind and amount of securities, cash or property as it
      would have been entitled to receive upon the occurrence of such Fundamental
      Transaction if it had been, immediately prior to such Fundamental Transaction,
      the holder of 1 share of Common Stock (the “Alternate
      Consideration”).
      


    
      
        
        

      

      
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    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 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).

     


    
      
        
        

      

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

     

    Section
      6. Redemption
      and Forced Conversion.

    


    a) Monthly
      Redemption.
      On each
      Monthly Redemption Date, the Company shall redeem the Monthly Redemption Amount
      plus accrued but unpaid interest, liquidated damages and any other amounts
      then
      owing to such Holder in respect of this Debenture (the “Monthly
      Redemption”).
      The
      Monthly Redemption Amount payable on each Monthly Redemption Date shall be
      paid
      in cash; provided,
      however,
      as to
      any Monthly Redemption and upon 20 Trading Days’ prior written irrevocable
      notice (the “Monthly
      Redemption Notice”
and
      the
      20 Trading Day period immediately following the Monthly Redemption Notice,
      the
“Monthly
      Redemption Period”),
      in
      lieu of a cash redemption payment the Company may elect to pay all or part
      of a
      Monthly Redemption Amount in Conversion Shares (such dollar amount to be paid
      on
      a Monthly Redemption Date in Conversion Shares, the “Monthly
      Redemption Share Amount”)
      based
      on a conversion price equal to the lesser of (i) the then Conversion Price
      and



    
      
        
        

      

      
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    (ii)
      88%
      of the average of the VWAPs for the 10 consecutive Trading Days ending on the
      Trading Day that is immediately prior to the applicable Monthly Redemption
      Date
      (subject to adjustment for any stock dividend, stock split, stock combination
      or
      other similar event affecting the Common Stock during such 10 Trading Day
      period) (the price calculated during the 10 Trading Day period immediately
      prior
      to the Monthly Redemption Date, the “Monthly
      Conversion Price”
and
      such 10 Trading Day period, the “Monthly
      Conversion Period”);
      provided,
      further,
      that
      the Company may not pay the Monthly Redemption Amount in Conversion Shares
      unless (y) from the date the Holder receives the duly delivered Monthly
      Redemption Notice through and until the date such Monthly Redemption is paid
      in
      full, the Equity Conditions have been satisfied, unless waived in writing by
      the
      Holder, and (z) as to such Monthly Redemption, prior to such Monthly Redemption
      Period (but not more than 5 Trading Days prior to the commencement of the
      Monthly Redemption Period), the Company shall have delivered to the Holder’s
      account with The Depository Trust Company a number of shares of Common Stock
      to
      be applied against such Monthly Redemption Share Amount equal to the quotient
      of
      (x) the applicable Monthly Redemption Share Amount divided by (y) the then
      Conversion Price (the “Pre-Redemption
      Conversion Shares”).
      The
      Holder may convert, pursuant to Section 4(a), any principal amount of this
      Debenture subject to a Monthly Redemption at any time prior to the date that
      the
      Monthly Redemption Amount, plus accrued but unpaid interest, liquidated damages
      and any other amounts then owing to the Holder are due and paid in full. Unless
      otherwise indicated by the Holder in the applicable Notice of Conversion, any
      principal amount of this Debenture converted during the applicable Monthly
      Redemption Period until the date the Monthly Redemption Amount is paid in full
      shall be first applied to the principal amount subject to the Monthly Redemption
      Amount payable in cash and then to the Monthly Redemption Share Amount. Any
      principal amount of this Debenture converted during the applicable Monthly
      Redemption Period in excess of the Monthly Redemption Amount shall be applied
      against the last principal amount of this Debenture scheduled to be redeemed
      hereunder, in reverse time order from the Maturity Date; provided,
      however,
      if any
      such conversion is applied against such Monthly Redemption Amount, the
      Pre-Redemption Conversion Shares, if any were issued in connection with such
      Monthly Redemption or were not already applied to such conversions, shall be
      first applied against such conversion. The Company covenants and agrees that
      it
      will honor all Notice of Conversions tendered up until such amounts are paid
      in
      full. The Company’s determination to pay a Monthly Redemption in cash, shares of
      Common Stock or a combination thereof shall be applied ratably to all of the
      holders of the then outstanding Debentures based on their (or their
      predecessor’s) initial purchases of Debentures pursuant to the Purchase
      Agreement. At any time the Company delivers a notice to the Holder of its
      election to pay the Monthly Redemption Amount in shares of Common Stock, the
      Company shall file a prospectus supplement pursuant to Rule 424 disclosing
      such
      election.

    



    
      
        
        

      

      
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    b) Optional
      Redemption at Election of Company.
      Subject
      to the provisions of this Section 6, at any time after the 12-month anniversary
      of the Effective 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 Debentures for cash in an amount
      equal to the Optional Redemption Amount on the 20th
      Trading
      Day following the Optional Redemption Notice Date (such date, the “Optional
      Redemption Date” and such redemption, the “Optional Redemption”). The Optional
      Redemption Amount is payable in full on the Optional Redemption Date. The
      Company may only effect an Optional Redemption if 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,
      each of
      the Equity Conditions shall have been met. If any of the Equity Conditions
      shall
      cease to be satisfied at any time during the 20 Trading Day period, then the
      Holder may elect to nullify the Optional Redemption Notice by notice to the
      Company within 3 Trading Days after the first day on which any such Equity
      Condition has not been met (provided that if, by a provision of the Transaction
      Documents, the Company is obligated to notify the Holder of the non-existence
      of
      an Equity Condition, such notice period shall be extended to the third Trading
      Day after proper notice from the Company) in which case the Optional Redemption
      Notice shall be null and void, ab initio. The Company covenants and agrees
      that
      it will honor all Notices of Conversion tendered from the time of delivery
      of
      the Optional Redemption Notice through the date all amounts owing thereon are
      due and paid in full.


    c) Redemption
      Procedure.
      The
      payment of cash or issuance of Common Stock, as applicable, pursuant to an
      Optional Redemption or Monthly Redemption shall be made on the Optional
      Redemption Date or Monthly Redemption Date, as applicable. If any portion of
      the
      payment pursuant to an Optional Redemption or Monthly Redemption shall not
      be
      paid by the Company by the applicable due date, interest shall accrue thereon
      until such amount is paid in full at an interest rate equal to the lesser of
      18%
      per annum or the maximum rate permitted by applicable law. Notwithstanding
      anything herein contained to the contrary, if any portion of the Optional
      Redemption Amount or Monthly Redemption Amount, as applicable remains unpaid
      after such date, the Holder may elect, by written notice to the Company given
      at
      any time thereafter, to invalidate ab initio
      such
      redemption, 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.

     


    
      
        
        

      

      
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    d) Forced
      Conversion.
      Notwithstanding anything herein to the contrary, if after the six month
      anniversary of the Effective Date, the Closing Price for each Trading Day during
      any consecutive 20 calendar days, which period shall have commenced only after
      the six month anniversary of the Effective Date, such period the “Threshold
      Period”))
      exceeds $15.00 (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) and the average daily volume
      for
      such Threshold Period exceeds 100,000 shares of Common Stock per Trading Day
      (subject to adjustment for forward and reverse stock splits, recapitalizations,
      stock dividends and the like 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 up to 50% of the then outstanding principal amount
      of Debentures plus, if so specified in the Forced Conversion Notice, accrued
      but
      unpaid interest, 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 all of the Equity
      Conditions are met 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. Notwithstanding anything herein to the contrary,
      the Company may only deliver an additional Forced Conversion Notice provided
      that such second Forced Conversion Notice Date is at least 13 months following
      the Original Issue Date and each Forced Conversion Notice is dependent on a
      separate Threshold Period from a prior Forced Conversion Notice. 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 such 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 20% of the aggregate principal amount of all Debentures issued on the
      Original Issue Date remain outstanding, the Company shall not, and shall not
      permit any of its Subsidiaries to, directly or indirectly, without the prior
      written consent of the holders of all Debentures then outstanding (provided,
      however, that if the principal amount of a holder’s Debenture is less $50,000,
      such holder’s consent shall not be required):

    


    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;

     


    
      
        
        

      

      
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    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, the certificate of
      incorporation and bylaws, in any manner that materially and adversely affects
      any rights of the Holder;

    


    d) repay,
      repurchase or offer to repay, repurchase or otherwise acquire more than a
de minimis
      number
      of shares of its Common Stock or Common Stock Equivalents other than as to
      (a)
      the Conversion Shares or Warrant Shares as permitted or required under the
      Transaction Documents, (b) repurchases of Common Stock or Common Stock
      Equivalents of departing officers and directors of the Company, provided that
      such repurchases shall not exceed an aggregate of $100,000 for all officers
      and
      directors during the term of this Debenture), (c)
      repurchases of Common Stock pursuant to the Company’s Corporate Stock Repurchase
      Program; and (d) repurchases of up to 200,000 shares of Common Stock that are
      subject to Rule 144, from former controlling shareholders of entities acquired
      by the Company that are not Affiliates of the Company or any of its
      Subsidiaries, provided that (i) the per share purchase price of such shares
      shall not exceed $6.50 and (ii) such repurchased shares are retired to
      treasury. 

    


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

    


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

    


    At
      such
      time that less than 20% of the aggregate principal amount of all Debentures
      issued on the Original Issue Date remain outstanding, the Company shall no
      longer be subject to the negative covenants set forth in this Section 8 above
      or
      be required to obtain prior written consent of the holders of the Debentures
      to
      take the foregoing actions.

     

    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;

     


    
      
        
        

      

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

     

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

     

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

     

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

     

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

    


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

    


    viii. the
      Company shall be a party to any Change of Control Transaction or Fundamental
      Transaction or shall agree to sell or dispose of all or in excess of 33% 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. a
      Registration Statement shall not have been declared effective by the Commission
      on or prior to the 180th calendar
      day after the Closing Date;

    
 

    
      
        
        

      

      
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    x. if,
      during the Effectiveness Period (as defined in the Registration Rights
      Agreement), either (a) the effectiveness of the Registration Statement lapses
      for any reason or (b) the Holder shall not be permitted to resell Registrable
      Securities (as defined in the Registration Rights Agreement) under the
      Registration Statement for a period of more than 20 consecutive Trading Days
      or
      60 non-consecutive Trading Days during any 12 month period; provided,
      however,
      that if
      the Company
      is negotiating a merger, consolidation, acquisition or sale of all or
      substantially all of its assets or a similar transaction and, in the written
      opinion of counsel to the Company, the Registration Statement would be required
      to be amended to include information concerning such pending transaction(s)
      or
      the parties thereto which information is not available or may not be publicly
      disclosed at the time, the Company shall be permitted an additional 10
      consecutive Trading Days during any 12 month period pursuant to this Section
      8(a)(x);

    


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

    


    xii. any
      Person shall breach any voting agreement or lock up agreement delivered to
      the
      initial Holders pursuant to Section 2.2(a) of the Purchase Agreement;
      or

    


    xiii. 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 $50,000, and such judgment, writ or similar final process
      shall remain unvacated, unbonded or unstayed for a period of 45 calendar
      days.

     

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

    



    
      
        
        

      

      
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    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, facsimile number 011-852-279-30689,
      Attn: Victor Tong, President with
      a
      copy to Loeb & Loeb LP, Attn: Mitchell S. Nussbaum, Esq., facsimile number
      212-407-4990 or
      such
      other facsimile number or address as the Company may specify for such purpose
      by
      notice to the Holder delivered in accordance with this Section 9. Any and all
      notices or other communications or deliveries to be provided by the Company
      hereunder shall be in writing and delivered personally, by facsimile, or sent
      by
      a nationally recognized overnight courier service addressed to each Holder
      at
      the facsimile number or address of such Holder appearing on the books of the
      Company, or if no such facsimile number or address appears, at the principal
      place of business of the Holder. Any notice or other communication or deliveries
      hereunder shall be deemed given and effective on the earliest of (i) the date
      of
      transmission, if such notice or communication is delivered via facsimile at
      the
      facsimile number specified in this Section 9 prior to 5:30 p.m. (New York City
      time), (ii) the date immediately following the date of transmission, if such
      notice or communication is delivered via facsimile at the facsimile number
      specified in this Section 9 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.

    



    
      
        
        

      

      
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    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.
      


    
      
        
        

      

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

     

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

    


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

    


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

    


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


    
      
        
        

      

      
        29

        
          

        

      

      
        
        

      

    



    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.

    


    


    
      	
              PACIFICNET,
                INC.

               

            
	
              By:__________________________________________

              Name:

              Title:

            


    

    



    
      
        
        

      

      
        30

        
          

        

      

      
        
        

      

    


    ANNEX
      A

    


    NOTICE
      OF CONVERSION

     

    


    The
      undersigned hereby elects to convert principal under the Variable Rate
      Convertible Debenture of Pacificnet, Inc., a Delaware corporation (the
“Company”),
      due
      on February ___, 2009, into shares of common stock, par value $.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 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:

    



    
      
        
        

      

      
        31

        
          

        

      

      
        
        

      

    


    


    Schedule
      1

    


    CONVERSION
      SCHEDULE

    


    The
      Variable Rate Convertible Debentures due on February ___, 2009, in the aggregate
      principal amount of $____________ issued by Pacificnet, Inc. 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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