**Exhibit 10.3**

 

**NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THESECURITIES 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 OFFEREDOR 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 WITHAPPLICABLE 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. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESESECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.**

 

Date of Issuance: March 28, 2003

 

$500,000 

 

**7% CONVERTIBLE DEBENTURE**

**DUEMarch 27, 2005**

 

THIS DEBENTURE is one of a series of duly authorized and issued Debentures of Path 1 Network Technologies, Inc., a Delawarecorporation, having a principal place of business at 6215 Ferris Square, Suite 140, San Diego, California 92121 (the “Company”), designated as its 7% Convertible Debenture due 24 months from their date of issuance (the“Debentures”). 

 

FOR VALUERECEIVED, the Company promises to pay to Palisades Master Fund L.P. or its registered assigns (the“Holder”), the principal sum of $500,000 onMarch 27, 2005 or such earlier date as the Debentures are required or permitted to be repaid asprovided hereunder (the “Maturity Date”) and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Debenture at the rate of 7% per annum, payable semi-annually on June 1, andDecember 1, beginning on the first such date after the Original Issue Date and on each Conversion Date (as to that principal amount then being converted), on each Monthly Redemption Date (as to that principal amount then being redeemed) and on theMaturity 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 shares of Common Stock at the InterestConversion Rate, or a combination thereof; provided, however, payment in shares of Common Stock may only occur if: (i) there is an effective Underlying Shares Registration Statement pursuant to which the Holder is permitted to utilizethe prospectus thereunder to resell all of the shares of 

Common Stock to be issued in lieu of cash (and the Company believes, in good faith, that such effectiveness will continue uninterrupted forthe foreseeable future), (ii) the Common Stock is listed for trading on a Principal Market (and the Company believes, in good faith, that trading of the Common Stock on a Principal Market will continue uninterrupted for the foreseeable future),(iii) there is a sufficient number of authorized but unissued and otherwise unreserved shares of Common Stock for the issuance of all of the share issuable pursuant to the Transaction Documents, including the shares to be issued for interest in lieuof cash and (iv) such issuance would be permitted in full without violating the limitations set forth in Section 4(a)(ii). Subject to the terms and conditions herein, the decision whether to pay interest hereunder in shares of Common Stock or cashshall be at the discretion of the Company. Not less than 20 Trading Days prior to each Interest Payment Date, the Company shall provide the Holder with irrevocable written notice of its election to pay interest hereunder either in cash or shares ofCommon Stock (the Company may indicate in such notice that the election contained in such notice shall continue for later periods until revised upon 20 days’ prior written notice). Subject to the aforementioned conditions, failure to timelyprovide such written notice shall be deemed an election by the Company to pay the interest on such Interest Payment Date in cash. Interest shall be calculated on the basis of a 360-day year and shall accrue daily commencing on the Original IssueDate until payment in full of the principal sum, together with all accrued and unpaid interest and other amounts which may become due hereunder, has been made. Payment of interest in shares of Common Stock shall otherwise occur pursuant to Section4(b) and for purposes of the payment of interest in shares only, 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 in fact deliversthe Underlying Shares within the time period required by Section 4(b)(i). Interest hereunder will be paid to the Person in whose name this Debenture is registered on the records of the Company regarding registration and transfers of Debentures (the“Debenture Register”). Except as otherwise provided herein, if at anytime the Company pays interest partially in cash and partially in shares of Common Stock, then such payment shall be distributed ratably among the Holders basedupon the principal amount of Debentures held by each Holder. All overdue accrued and unpaid interest to be paid hereunder shall entail a late fee at the rate of 18% per annum (or such lower maximum amount of interest permitted to be charged underapplicable law) (“Late Fee”) which will accrue daily, from the date such interest is due hereunder through and including the date of payment. **The Company may not prepay any portion of the principal amount on this Debenturewithout the prior written consent of the Holder.**

 

This Debenture is subject to the following additional provisions: 

 

Section 1. This Debenture is exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holder surrendering the same. Noservice charge will be made for such registration of transfer or exchange. 

 

Section 2. 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 incompliance with the Purchase Agreement and applicable federal and state securities laws and 

 

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regulations. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat thePerson 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 theCompany nor any such agent shall be affected by notice to the contrary. 

 

Section 3. Events of Default. 

 

(a) “Event of Default”, wherever used herein, means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation oflaw 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 the principal of, interest on or liquidated damages in respect of, any Debentures, freeof any claim of subordination, 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 is not cured, if possible to cure, within 3 days of notice of suchdefault sent by the Holder; 

 

(ii) the Company shall fail to observe or perform any other covenant, agreement or warranty contained in, or otherwise commit any breach of any of the Transaction Documents (other than a breach by the Company of its obligations todeliver shares of Common Stock to the Holder upon conversion or interest payment which breach is addressed in clause (x) below) which is not cured, if possible to cure, within 5 days of notice of such default sent by the Holder (except with respectto breaches pursuant to Sections 4.1, 4.8 and 4.9 of the Purchase Agreement and Section 3(a) of the Warrant); 

 

(iii) the Company or any of its subsidiaries shall commence, or there shall be commenced against the Company or any suchsubsidiary a case under any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or the Company commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors,dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or any subsidiary thereof or there is commenced against the Company or any subsidiary thereof any such bankruptcy,insolvency or other proceeding which remains undismissed for a period of 60 days; or the Company or any subsidiary thereof is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered;or the Company or any subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of 60 days; or the Company or any subsidiary thereofmakes a general 

 

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assignment for the benefit of creditors; or the Company shall fail to pay, or shall state that it is unable to pay, or shall be unable topay, its debts generally as they become due; or the Company or any subsidiary thereof shall call a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or the Company or any subsidiary thereofshall by any act or failure to act expressly indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the Company or any subsidiary thereof for the purpose of effecting any of theforegoing; 

 

(iv) the Companyshall default in any of its obligations under any other Debenture or any mortgage, credit agreement or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured orevidenced any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement of the Company in an amount exceeding $150,000, whether such indebtedness now exists or shall hereafter be created and such default shallresult in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable; 

 

(v) the Common Stock shall not be eligible for quotation on or quoted for trading on the OTC Bulletin Board, the NasdaqSmallCap Market, the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market (each, a “Principal Market”) and shall not again be eligible for and quoted or listed for trading thereon within five TradingDays; 

 

(vi) the Company shallagree to sell or dispose of all or in excess of 33% of its assets in one or more transactions (whether or not such sale would constitute a Change of Control Transaction) or shall redeem or repurchase more than a de minimis number of its outstandingshares of Common Stock or other equity securities of the Company (other than redemptions of Underlying Shares); 

 

(vii) an Underlying Shares Registration Statement shall not have been declared effective by the Commission on or prior tothe 180th calendar day after the Original Issue Date; 

 

(viii) if, during the Effectiveness Period (as defined in the Registration Rights Agreement), the effectiveness of the Underlying Shares Registration Statement lapses for any reason or the Holder shall not be permitted toresell Registrable Securities (as defined in the Registration Rights Agreement) under the Underlying Shares Registration Statement, in either case, for more than 10 consecutive Trading Days or 20 non-consecutive Trading Days during any 12 monthperiod; 

 

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(ix) an Event (as defined in the Registration Rights Agreement) shall not have been cured to the satisfaction of the Holder prior to the expiration of thirty days from the Event Date (as defined in the Registration Rights Agreement)relating thereto (other than an Event resulting from a failure of an Underlying Shares Registration Statement to be declared effective by the Commission on or prior to the Effectiveness Date (as defined in the Registration Rights Agreement), whichshall be covered by Section 3(a)(vii)); 

 

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

 

(xi) the Company shall fail for any reason to deliver the payment in cash pursuant to aBuy-In (as defined herein) within five days after notice thereof is delivered hereunder. 

 

(b) If any Event of Default occurs and is continuing, the full principal amount of this Debenture (and, at theHolder’s option, all other Debentures then held by such Holder), together with interest and other amounts owing in respect thereof, to the date of acceleration shall become at the Holder’s election, immediately due and payable in cash. Theaggregate amount payable upon an Event of Default shall be equal to the Mandatory Prepayment Amount. Interest shall accrue on the Mandatory Prepayment Amount hereunder from the 5th day after such amount is due (being the date of an Event of Default) through the date of prepayment in full thereof in an amount equal to the Late Fee, toaccrue daily from the date such payment is due hereunder through and including the date of payment. All Debentures for which the full prepayment price hereunder shall have been paid in accordance herewith shall promptly be surrendered to or asdirected by the Company. The Holder need not provide and the Company hereby waives any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of itsrights and remedies hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder at any time prior to payment hereunder and the Holder shall have all rights as a Debenture holderuntil such time, if any, as the full payment under this Section shall have been received by it. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon. 

 

Section 4. Conversion. 

 

(a) (i) At any time after the Closing Date, this Debentureshall be convertible into shares of Common Stock at the option of the Holder, in whole or in part at any time 

 

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and from time to time (subject to the limitations on conversion set forth in Section 4(a)(ii) hereof). The Holder shall effect conversions bydelivering to the Company the form of conversion notice attached hereto as Annex A (a “Conversion Notice”), specifying therein the principal amount of Debentures to be converted and the date on which such conversion is to beeffected (a “Conversion Date”) and shall contain a completed schedule in the form of Schedule 1 to the Conversion Notice (as amended on each Conversion Date, the “Conversion Schedule”) reflecting theremaining principal amount of this Debenture and all accrued and unpaid interest thereon subsequent to the conversion at issue. If no Conversion Date is specified in a Conversion Notice, the Conversion Date shall be the date that such ConversionNotice is provided hereunder. To effect conversions hereunder, the Holder shall not be required to physically surrender Debentures to the Company unless the entire principal amount of this Debenture has been so converted. Conversions hereunder shallhave the effect of lowering the outstanding principal amount of this Debenture plus all accrued and unpaid interest thereon in an amount equal to the applicable conversion, which shall be evidenced by entries set forth in the Conversion Schedule.The Holder and the Company shall maintain records showing the principal amount converted and the date of such conversions. The Company shall deliver any objection to the figures represented in the Conversion Schedules within 1 Business Day ofreceipt of such notice. In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error. The Holder and any assignee, by acceptance of this Debenture, acknowledge andagree 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. In the event aHolder of this Debenture shall elect to convert any or all of the outstanding principal amount hereof, the Company may not refuse conversion based on any claim that the Holder or any one associated or affiliated with the Holder of has been engagedin any violation of law, agreement or for any other reason, unless, an injunction from a court, on notice, restraining and or enjoining conversion of all or part of this Debenture shall have been sought and obtained and the Company posts a suretybond for the benefit of the Holder in the amount of 150% of the principal amount of this Debenture outstanding, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the dispute andthe proceeds of which shall be payable to such Holder to the extent it obtains judgment. In the absence of an injunction precluding the same, the Company shall issue Conversion Shares or, if applicable, cash, upon a properly noticed conversion.Nothing herein shall limit a Holder’s right to pursue actual damages or declare an Event of Default pursuant to Section 3 herein for the Company’s failure to deliver Conversion Shares within the period specified herein and such Holdershall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall 

 

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not prohibit the Holders from seeking to enforce damages pursuant to any other Section hereof or under applicable law. 

 

(ii) Certain Conversion Restrictions.A Holder may not convert Debentures or receive shares of Common Stock as payment of interest hereunder to the extent such conversion or receipt of such interest payment would result in the Holder, together with its Affiliates, beneficially owning(as determined in accordance with Section 13(d) of the Exchange Act and the rules promulgated thereunder) in excess of 4.999% of the then issued and outstanding shares of Common Stock, including shares issuable upon conversion of, and payment ofinterest on, the Debentures held by such Holder after application of this Section. The Holder shall be entitled to rely on the Company’s public filing with respect to the number of shares of Common Stock which are then issued and outstanding,and the Holder may inquire of the Company’s Chief Financial Officer to obtain a more current number, which shall be provided within 2 Business Days of written request therefor. To ensure compliance with this restriction, the Holder will bedeemed to represent to the Company each time it delivers a Conversion Notice that such Conversion Notice has not violated the restrictions set forth in this paragraph. If the Holder has delivered a Conversion Notice for a principal amount ofDebentures that, without regard to any other shares that the Holder or its affiliates may beneficially own, would result in the issuance in excess of the permitted amount hereunder, the Company shall notify the Holder of this fact and shall honorthe conversion for the maximum principal amount permitted to be converted on such Conversion Date in accordance with the periods described in Section 4(b) and, at the option of the Holder, either retain any principal amount tendered for conversionin excess of the permitted amount hereunder for future conversions or return such excess principal amount to the Holder. In the event of a merger or consolidation of the Company with or into another Person, this paragraph shall not apply withrespect to a determination of the number of shares of common stock issuable upon conversion in full of the Debentures if such determination is necessary to establish the Securities or other assets which the holder of Common Stock shall be entitledto receive upon the effectiveness of such merger or consolidation. The provisions of this Section 4(a)(ii) may be waived by the Holder at the election of the Holder upon not less than 61 days’ prior notice to the Company, and the provisions ofthis Section 4(a)(ii) shall continue to apply until such 61st day (or such later date, as determined by the Holder,as may be specified in such notice of waiver). No conversion of this Debenture in violation of this Section 4(a)(ii) but otherwise in accordance with this Debenture shall affect the status of the Underlying Shares as validly issued, fully-paid andnonassessable. 

 

(iii)Underlying Shares Issuable Upon Conversion and Pursuant to Interest. 

 

(A) Conversion of Principal Amount. The number of shares of Common Stock issuable upon a conversion shall be determined by the 

 

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quotient obtained by dividing (x) the outstanding principal amount of this Debenture to be converted and (y) the Set Price, and 

 

(B) Payment of Interest in UnderlyingShares. The number of shares of Common Stock issuable upon payment of interest under this Debenture shall be the number determined by (x) the product of (I) the outstanding principal amount of this Debenture to be converted and (II) the productof (aa) the quotient obtained by dividing 7% by 360 and (bb) the number of days for which such principal amount was outstanding, divided by (y) the applicable Interest Conversion Rate, provided, that if the Company shall have elected to paythe interest due on an Interest Payment Date in cash pursuant to the terms hereof, this subsection (B) shall not be used in the calculation of the number of shares of Common Stock issuable upon a conversion hereunder. 

 

(C) Notwithstanding anything to the contrarycontained herein, if on any Conversion Date: 

 

(1) the number of shares of Common Stock at the time authorized, unissued and unreserved for all purposes, or held as treasury stock, is insufficient to honor such conversion; 

 

(2) the Common Stock shall fail to be listedor quoted for trading on a Principal Market; or 

 

(3) the Company has failed to timely satisfy its conversion obligations hereunder. 

 

then, at the option of the Holder, the Company, in lieu of delivering shares of Common Stock pursuant to this Section 4,shall deliver, within three Trading Days of each applicable Conversion Date, an amount in cash equal to the product of the number of shares of Common Stock otherwise deliverable to the Holder in connection with such Conversion Date and the highestVWAP during the period commencing on the Conversion Date and ending on the Trading Day prior to the date such payment is made. 

 

(b) (i) Not later than three Trading Days after any Conversion Date, the Company will deliver to the Holder (A) a certificate orcertificates for the Shares of Common Stock which shall be free of restrictive legends and trading restrictions (other than those required by the Purchase Agreement) representing the number of shares of Common Stock being acquired upon theconversion of Debentures and (B) a bank check in the amount of accrued and unpaid interest (if the Company has 

 

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timely elected or is required to pay accrued interest in cash). The Company shall, upon request of the Holder, if available and if allowedunder applicable securities laws, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section electronically through the Depository Trust Corporation or another established clearingcorporation performing similar functions. If in the case of any Conversion Notice such certificate or certificates are not delivered to or as directed by the applicable Holder by the fifth Trading Day after a Conversion Date, the Holder shall beentitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the certificates representing theprincipal amount of Debentures tendered for conversion. 

 

(ii) If the Company fails for any reason to deliver to the Holder such certificate or certificates pursuant to Section 4(b)(i) by the third Trading Day after the Conversion Date, the Company shall pay to such Holder, in cash, asliquidated damages and not as a penalty, for each $5,000 of principal amount being converted, $50 per Trading Day (increasing to $100 per Trading Day after 3 Trading Days and increasing to $200 per Trading Day 6 Trading Days after such damages beginto accrue) for each Trading Day after such third Trading Day until such certificates are delivered. Nothing herein shall limit a Holder’s right to pursue actual damages or declare an Event of Default pursuant to Section 3 herein for theCompany’s failure to deliver certificates representing shares of Common Stock upon conversion within the period specified herein and such Holder shall have the right to pursue all remedies available to it at law or in equity including, withoutlimitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holders from seeking to enforce damages pursuant to any other Section hereof or under applicable law. 

 

(iii) In addition to any other rights available to theHolder, if the Company fails for any reason to deliver to the Holder such certificate or certificates pursuant to Section 4(b)(i) by the third Trading Day after the Conversion Date, and if after such third Trading Day the Holder is required by itsbrokerage firm to purchase (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by such Holder of the Underlying Shares which the Holder anticipated receiving upon such conversion (a“Buy-In”), then the Company shall (A) pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) the amount by which (x) the Holder’s total purchase price (including brokerage commissions, ifany) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that such Holder anticipated receiving from the conversion at issue multiplied by (2) the actual sale price of the Common Stock atthe time of the sale (including brokerage commissions, if any) giving rise to such purchase obligation and (B) at the option of the Holder, either reissue Debentures in 

 

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principal amount equal to the principal amount of the attempted conversion or deliver to the Holder the number of shares of Common Stock thatwould have been issued had the Company timely complied with its delivery requirements under Section 4(b)(i). 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 attemptedconversion of Debentures with respect to which the actual sale price of the Underlying Shares at the time of the sale (including brokerage commissions, if any) giving rise to such purchase obligation was a total of $10,000 under clause (A) of theimmediately preceding sentence, the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In. Notwithstanding anything containedherein to the contrary, if a Holder requires the Company to make payment in respect of a Buy-In for the failure to timely deliver certificates hereunder and the Company timely pays in full such payment, the Company shall not be required to pay suchHolder liquidated damages under Section 4(b)(ii) in respect of the certificates resulting in such Buy-In. 

 

(c) (i) The conversion price in effect on any Conversion Date shall be equal to **$0.65**(subject to adjustment herein)(the“Set Price”). 

 

(ii) If theCompany, at any time while the Debentures are outstanding: (A) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of CommonStock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company pursuant to this Debenture, including interest thereon), (B) subdivide outstanding shares of Common Stock into a larger number of shares, (C)combine (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (D) issue by reclassification of shares of the Common Stock any shares of capital stock of the Company, then the Set Price shallbe multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstandingafter 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 immediatelyafter the effective date in the case of a subdivision, combination or re-classification. 

 

(iii) If the Company, at any time while Debentures are outstanding, shall issue rights, options or warrants to all holders of Common Stock (and not to Holders) entitling them to subscribe for orpurchase shares of Common Stock or Common Stock Equivalents at a price per share less than the VWAP at the record date 

 

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mentioned below, then the Set Price shall be adjusted by multiplying the Set Price ineffect immediately prior to such record date by a fraction, of which the denominator shall be the number of shares of the Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the numberof 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 (excluding treasury shares, if any) outstanding on the date of issuance of such rights orwarrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at the VWAP on the record date. Such adjustment shall be made whenever such rights or warrants are issued, and shall becomeeffective immediately after the record date for the determination of stockholders entitled to receive such rights, options or warrants. 

 

(iv) If the Company or any subsidiary thereof, as applicable, at any time while Debentures are outstanding, shall convert, exercise,adjust or reset any Laurus Securities into Common Stock or offer, sell, grant any option to purchase or offer, sell or grant any right to reprice its securities, or otherwise dispose of or issue (or announce any offer, sale, grant or any option topurchase or other disposition) any Common Stock or any equity or equity equivalent securities (including any equity, debt or other instrument that is at any time over the life thereof convertible into or exchangeable for Common Stock) (collectively,“Common Stock Equivalents”) entitling any Person to acquire shares of Common Stock, at an effective price per share less than the then Set Price (“Dilutive Issuance”), as adjusted hereunder (if the holder of theCommon Stock or Common Stock Equivalent 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 sharewhich is issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share which is less than the Set Price, such issuance shall be deemed to have occurred for less than the Set Price and shall besubject to adjustment hereunder), then the Set Price shall be reduced to equal the effective conversion, exchange or purchase price for such Common Stock or Common Stock Equivalents (including any reset provisions thereof) at issue; provided,however, with respect to the Laurus Securities only, any adjustment hereunder shall be on a one for one basis, that is, if the holder thereof converts, exercises or is granted an adjustment or reset with respect to any portion of the LaurusSecurities, the adjustment to the Set Price hereunder shall be only with respect to an equivalent principal amount of this Debenture (the Holder, in its sole discretion, shall determine which principal amount is adjusted). Such adjustment shall bemade whenever such Common Stock or Common Stock Equivalents are issued, adjusted or reset. The Company shall notify the Holder in writing, no later than the Business Day following the issuance of any Common Stock or Common Stock Equivalent 

 

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subject to this section, indicating therein the applicable issuance price, or ofapplicable reset price, exchange price, conversion price and other pricing terms. 

 

(v) If the Company, at any time while Debentures are outstanding, shall distribute to all holders of Common Stock (and not to Holders) evidences of its indebtedness or assets or rights or warrants tosubscribe for or purchase any security, then in each such case the Set Price shall be determined by multiplying such price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distributionby 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 suchassets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith. In either case the adjustments shall be described in a statement provided to the Holdersof the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediatelyafter the record date mentioned above. 

 

(vi)[RESERVED] 

 

(vii) All calculations under thisSection 4 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 4, the number of shares of Common Stock deemed to be outstanding as of a given date shall be the sum of the number ofshares of Common Stock (excluding treasury shares, if any) outstanding. 

 

(viii) Whenever the Set Price is adjusted pursuant to any of Section 4(c)(ii) - (v), the Company shall promptly mail to each Holder a notice setting forth the Set Price after such adjustment and setting forth a briefstatement of the facts requiring such adjustment. 

 

(ix) If (A) the Company shall declare a dividend (or any other distribution) on the Common Stock; (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock; (C) the Company shallauthorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; (D) the approval of any stockholders of the Company shall be required in connectionwith 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 isconverted into other securities, cash or property; (E) the Company shall authorize the 

 

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voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then, in each case, the Company shall cause tobe filed at each office or agency maintained for the purpose of conversion of the Debentures, and shall cause to be mailed to the Holders at their last addresses as they shall appear upon the stock books of the Company, at least 20 calendar daysprior 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, transferor 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 propertydeliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporateaction required to be specified in such notice. Holders are entitled to convert Debentures during the 20-day period commencing the date of such notice to the effective date of the event triggering such notice. 

 

(x) Fundamental Transaction/Change of Control. If, atany time while this Debenture is outstanding, (A) the Company effects any merger or consolidation of the Company with or into another Person, (B) the Company effects any sale of all or substantially all of its assets in one or a series of relatedtransactions, (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 Underlying Share that would have been issuable upon such conversion absent such FundamentalTransaction, 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 oneshare of Common Stock (the “Alternate Consideration”). For purposes of any such conversion, the determination of the Set Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of AlternateConsideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Set Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any differentcomponents of the Alternate Consideration. If 

 

13 

holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then theHolder 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 theCompany 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 termsof 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 paragraph (c) and insuring that this Debenture (or any suchreplacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. If a Change of Control Transaction occurs, including a Fundamental Transaction that constitutes a Change of Control Transaction,then at the request of the Holder delivered before the 90th day after such Fundamental Transaction, the Company (or any such successor or surviving entity) will purchase the Debenture from the Holder for a purchase price, payable in cash within fiveTrading Days after such request (or, if later, on the effective date of the Fundamental Transaction), equal to the 100% of the remaining unconverted principal amount of this Debenture on the date of such request, plus all accrued and unpaid interestthereon, plus all other accrued and unpaid amounts due hereunder. 

 

(xi) Notwithstanding the foregoing, no adjustment will be made under this paragraph (c) in respect of (A) the granting of options to employees, officers and directors of the Company pursuant to any stock option plan dulyadopted by a majority of the non-employee members of the Board of Directors of the Company or a majority of the members of a committee of non-employee directors established for such purpose, (B) upon the exercise of this Debenture or any otherDebenture of this series or of any other series or security issued by the Company in connection with the offer and sale of this Company’s securities pursuant to the Purchase Agreement, or (C) other than the SLD Debentures, upon the exercise ofor conversion of any convertible securities, options or warrants issued and outstanding on the Closing Date, provided such securities have not been amended since the date of the Purchase Agreement, or (D) acquisitions or strategic investments, theprimary purpose of which is not to raise capital. 

 

(d) The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock solely for the purpose of issuance upon conversion of the Debentures and payment ofinterest on the Debentures, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders, not less than such number of shares of the Common Stock as shall (subject to anyadditional requirements of the Company as to reservation of such shares 

 

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set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 4(b)) upon the conversionof the outstanding principal amount of the Debentures and payment of interest hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid,nonassessable and, if the Underlying Shares Registration Statement has been declared effective under the Securities Act, registered for public sale in accordance with such Underlying Shares Registration Statement. 

 

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

 

(d) The issuance of certificates for shares of the Common Stock on conversion of theDebentures shall be made without charge to the Holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any taxthat may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such Debentures so converted and the Company shall not be required to issue ordeliver 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.

 

(e) Any and all notices orother communications or deliveries to be provided by the Holders hereunder, including, without limitation, any Conversion Notice, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier serviceor sent by certified or registered mail, postage prepaid, addressed to the Company, at the address set forth above, **facsimile number (858) 450-4203, Attn: John Zavoli**or such other address or facsimile number as the Company may specify forsuch purposes by notice to the Holders delivered in accordance with this Section. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, sent by anationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to each Holder at the facsimile telephone number or address of such Holder appearing on the books of the Company, or if no suchfacsimile telephone number or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if suchnotice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:30 p.m. (New York City time), (ii) the date after the date 

 

15 

of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section laterthan 5:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) four days after deposit in the United States mail, (iv) the Business Day following the date of mailing, if sent by nationallyrecognized overnight courier service, or (v) upon actual receipt by the party to whom such notice is required to be given. 

 

Section 5. [RESERVED] 

 

Section 6. Definitions. For the purposes hereof, in addition to the terms defined elsewhere in this Debenture: (a)capitalized terms not otherwise defined herein have the meanings given to such terms in the Purchase Agreement, and (b) the following terms shall have the following meanings: 

 

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

 

“Change of Control Transaction” means the occurrence after the date hereofof any of (i) an acquisition after the date hereof by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership ofcapital stock of the Company, by contract or otherwise) of in excess of 33% of the voting securities of the Company, or (ii) a replacement at one time or within a one year period of more than one-half of the members of the Company’s board ofdirectors 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 boardof directors was approved by a majority of the members of the board of directors who are members on the date hereof), or (iii) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any ofthe events set forth above in (i) or (ii). 

 

“Commission” means the Securities and Exchange Commission. 

 

“Common Stock” means the common stock, $0.001 par value per share, of the Company and stock of any otherclass into which such shares may hereafter have been reclassified or changed. 

 

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

 

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

 

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“Interest Conversion Rate” means 90% of the lesser of (i) the average of the 20 VWAPs immediately prior to the applicable Interest Payment Date or (ii) the average of the 20 VWAPs immediately prior to the date theapplicable interest payment shares are issued and delivered if after the Interest Payment Date. 

 

“Late Fees” shall have the meaning set forth in the second paragraph to this Debenture. 

 

“Laurus Securities” shallmean any securities of the Company issued to Laurus Master Fund, Ltd., or any of its Affiliates, in the past, present or future. 

 

“Mandatory Prepayment Amount” for any Debentures shall equal the sum of (i) the greater of: (A) 150% ofthe principal amount of Debentures to be prepaid, plus all accrued and unpaid interest thereon, plus all other accrued and unpaid amounts due hereunder, or (B) the principal amount of Debentures to be prepaid, plus all accrued and unpaid interestthereon, plus all other accrued and unpaid amounts due hereunder, divided by the Set Price on (x) the date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the date the Mandatory Prepayment Amount is paid in full, whichever isless, multiplied by the VWAP on (x) the date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the date the Mandatory Prepayment Amount is paid in full, whichever is greater, and (ii) all other amounts, costs, expenses andliquidated damages due in respect of such Debentures. 

 

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

 

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

 

“Purchase Agreement” meansthe Securities Purchase Agreement, dated as of March 28, 2003, to which the Company and the original Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms. 

 

“Registration RightsAgreement” means the Registration Rights Agreement, dated as of the Original Issue Date, to which the Company and the original Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms.

 

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

 

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

 

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“Trading Day” means (a) a day on which the shares of Common Stock are traded on the Principal Market on which the shares of Common Stock are then listed or quoted, or (b) if the shares of Common Stock are not quotedon a Principal Market, a day on which the shares of Common Stock are quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reportingprices); provided, that in the event that the shares of Common Stock are not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day shall mean a Business Day. 

 

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

 

“UnderlyingShares” means the shares of Common Stock issuable upon conversion of Debentures or as payment of interest in accordance with the terms hereof. 

 

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

 

“VWAP” means, for any date, the price determined by the first of thefollowing clauses that applies: (a) if the Common Stock is then listed or quoted on a Principal Market or the OTC Bulletin Board, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on thePrincipal Market (or OTC Bulletin Board) on which the Common Stock is then listed or quoted as reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m. ET to 4:02 p.m. Eastern Time) using the VAP function; (b) if the Common Stockis not then listed or quoted on a Principal Market or the OTC Bulletin Board and if prices for the Common Stock are then reported in the “pink sheets” published by the National Quotation Bureau Incorporated (or a similar organization oragency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (c) in all other cases, the fair market value of a share of Common Stock as determined by a nationally recognizedindependent appraiser selected in good faith by Purchasers holding a majority of the outstanding principal amount of Debentures. 

 

Section 7. Except as expressly provided herein, no provision of this Debenture shall alter or impair the obligation of the Company,which is absolute and unconditional, to pay the principal of, interest and liquidated damages (if any) on, this Debenture at the time, place, and rate, and in the coin or currency, herein prescribed. This Debenture is a direct debt obligation of theCompany. This Debenture ranks paripassu with all other Debentures now or hereafter issued under the terms set forth herein. As long as there are Debentures outstanding, the Company shall not and shall cause it subsidiaries not to,without the consent of the Holders, (a) amend its certificate of incorporation, 

 

18 

bylaws or other charter documents so as to adversely affect any rights of the Holders; (b) repay, repurchase or offer to repay, repurchase orotherwise acquire shares of its Common Stock or other equity securities other than as to the Underlying Shares to the extent permitted or required under the Transaction Documents; (c) enter into any agreement with respect to any of the foregoing; or(d) issue any variable priced equity securities or variable priced equity linked securities. 

 

Section 8. 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 mutilatedDebenture, 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 ordestruction of such Debenture, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Company. 

 

Section 9. The Company will not and will not permit any of its subsidiaries to, directly or indirectly, enter into, create, incur,assume or suffer to exist any indebtedness 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 that is senior in any respect to theCompany’s obligations under the Debentures. 

 

Section 10. All questions concerning the construction, validity, enforcement and interpretation of this Debenture shall be governed by and construed and enforced in accordance with the internal laws of the State of New York,without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether broughtagainst 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 YorkCourts”). 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 discussedherein (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 anysuch court, or such New York Courts are improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing acopy 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 serviceof process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law,any and all right to trial by jury in any legal proceeding arising out of or relating to this Debenture or the transactions contemplated hereby. If either party shall commence an action or proceeding to enforce any provisions of this Debenture, thenthe prevailing party in such action or proceeding shall be reimbursed by the other 

 

19 

party for its attorneys fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action orproceeding. 

 

Section 11. Any waiver by theCompany 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 orthe 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 thisDebenture. Any waiver must be in writing. 

 

Section 12. 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 shallnevertheless remain applicable to all other persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates applicable laws governing usury, the applicable rate of interest due hereunder shallautomatically be lowered to equal the maximum permitted rate of interest. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit oradvantage 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 the Debentures as contemplated herein, wherever enacted, now or at any timehereafter 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, byresort 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. 

 

Section 13. Whenever any payment or other obligationhereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day. 

 

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

 

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

 

PATH 1 NETWORK TECHNOLOGIES, INC.

By: /s/ John R. Zavoli
 
 

**Name:**John R. Zavoli

**Title:**Chief Financial Officer
  

**ANNEX A**

 

**NOTICE OF CONVERSION**

 

The undersigned hereby elects to convert principal and, if specified, interest under the 7% Convertible Debenture of Path 1Network Technologies, Inc., (the “Company”) due on                             ,2005, into shares of common stock, $0.001 par value 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 theundersigned, 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 forany conversion, except for such transfer taxes, if any. 

 

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

 

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

 

Conversion calculations: 

 

Date to Effect Conversion:

Principal Amount of Debentures to be Converted

Payment of Interest in Common Stock   ̈ Yes             ̈ No

If yes, $              of InterestAccrued on Account of Conversion at Issue

Number of shares of Common Stock to be Issued:

Applicable Set Price:

Signature:

Name:

Address:

**Schedule 1**

 

**CONVERSION SCHEDULE**

 

7% Convertible Debentures due on                         , 2005, in the aggregate principal amount of$                     issued by Path 1 Network Technologies, Inc. This Conversion Schedule reflects conversions made under Section 4 of theabove referenced Debenture. 

 

Dated: 

 

**Date of Conversion**