exv10w2






Exhibit 10.2




EXHIBIT A



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: December 30, 2008

Original Conversion Price (subject to adjustment herein): $1.65




$__________




10% SECURED CONVERTIBLE DEBENTURE

DUE DECEMBER 30, 2009




     THIS 10% SECURED CONVERTIBLE DEBENTURE is one of a series of duly authorized and validly
issued 10% Secured Convertible Debentures of T3 Motion, Inc., a Delaware corporation, (the
“Company”), having its principal place of business at 2990 Airway Avenue, Costa Mesa,
California, 92626, designated as its 10% Secured Convertible Debenture due December 30, 2009 (this
debenture, the “Debenture” and, collectively with the other debentures of such series, the
“Debentures”).



     FOR VALUE RECEIVED, the Company promises to pay to                                          or its registered
assigns (the “Holder”), or shall have paid pursuant to the terms hereunder, the principal
sum of $                     on December 30, 2009 (the “Maturity Date”) or such earlier date as this
Debenture is required or permitted to be repaid as provided hereunder, and to pay interest to the
Holder on the aggregate unconverted and then outstanding principal amount of this Debenture in
accordance with the provisions hereof. This Debenture is subject to the following additional
provisions:



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



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




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




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




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




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




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




     “Change of Control Transaction” means the occurrence after the date hereof of
any of (a) an acquisition after the date hereof by an individual or legal entity or “group”
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control
(whether through legal or beneficial ownership of capital stock of the Company, by contract
or otherwise) of in excess of 40% of the voting securities of the Company (other than by
means of conversion or exercise of the Debentures and the Securities issued together with
the Debentures), (b) the Company merges into or consolidates with any other Person, or any
Person merges into or consolidates with the Company and, after giving effect to such
transaction, the stockholders of the Company immediately prior to such transaction own less
than 60% of the aggregate voting power of the Company or the successor entity of such
transaction, or (c) the Company sells or transfers all or substantially all of its assets to
another Person and the stockholders of the Company



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immediately prior to such transaction own less than 60% of the aggregate voting power
of the acquiring entity immediately after the transaction, (d) a replacement at one time or
within a three year period of more than one-half of the members of the Board of Directors
which is not approved by a majority of those individuals who are members of the Board of
Directors on the date hereof (or by those individuals who are serving as members of the
Board of Directors on any date whose nomination to the Board of Directors was approved by a
majority of the members of the Board of Directors who are members on the date hereof), or
(e) the execution by the Company of an agreement to which the Company is a party or by
which it is bound, providing for any of the events set forth in clauses (a) through (d)
above.





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




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




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




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




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




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




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




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




     “Effective Date” means the earlier of (a) the effective date of a Registration
Statement and (b) the date that all of Conversion Shares are eligible for sale under Rule
144, without (i) the requirement for the Company to be in compliance with the current public
information required under Rule 144 and (ii) volume or manner-of-sale restrictions.




     “Equity Conditions” means, during the period in question, (a) the Company shall
have duly honored all conversions and redemptions scheduled to occur or occurring by virtue
of one or more Notices of Conversion of the Holder, if any, (b) the Company shall have paid
all liquidated damages and other amounts owing to the Holder in respect of this Debenture,
(c)(i) there is an effective Registration Statement pursuant to which the Holder is
permitted to utilize the prospectus thereunder to resell all of the shares of Common Stock
issuable pursuant to the Transaction Documents (and the Company believes, in good faith,
that such effectiveness will continue uninterrupted for the foreseeable future) or (ii) all
of the Conversion Shares issuable pursuant to the Transaction Documents (and shares issued
and issuable in lieu of cash payments of interest) may be resold pursuant to Rule 144
without volume or manner-of-sale



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restrictions or current public information requirements as determined by the counsel to
the Company pursuant to a written opinion letter to such effect, addressed and acceptable to
the Transfer Agent and the Holder, (d) the Common Stock is trading on a Trading Market and
all of the shares issuable pursuant to the Transaction Documents are listed or quoted for
trading on such Trading Market (and the Company believes, in good faith, that trading of the
Common Stock on a Trading Market will continue uninterrupted for the foreseeable future),
(e) there is a sufficient number of authorized but unissued and otherwise unreserved shares
of Common Stock for the issuance of all of the shares issuable pursuant to the Transaction
Documents, (f) there is no existing Event of Default or no existing event which, with the
passage of time or the giving of notice, would constitute an Event of Default, (g) the
issuance of the shares in question to the Holder would not violate the limitations set forth
in Section 4(c) herein, (h) there has been no public announcement of a pending or proposed
Fundamental Transaction or Change of Control Transaction that has not been consummated, (i)
the Holder is not in possession of any information provided by the Company that constitutes,
or may constitute, material non-public information and (j) for each Trading Day in a period
of 10 consecutive Trading Days prior to the applicable date in question, the average daily
dollar trading volume for the Common Stock on the principal Trading Market exceeds $50,000
per Trading Day.




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




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




     “Interest Conversion Rate” means the lesser of (a) the Conversion Price or (b)
85% of the lesser of (i) the average of the VWAPs for the 10 consecutive Trading Days ending
on the Trading Day that is immediately prior to the applicable Interest Payment Date or (ii)
the average of the VWAPs for the 10 consecutive Trading Days ending on the Trading Day that
is immediately prior to the date the applicable Interest Conversion Shares are issued and
delivered if such delivery is after the Interest Payment Date.




     “Interest 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).




     “Mandatory Default Amount” means the sum of (a) 120% of the outstanding
principal amount of this Debenture, plus 100% of accrued and unpaid interest hereon, and (b)
all other amounts, costs, expenses and liquidated damages due in respect of this Debenture.



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




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




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




     “Optional Redemption Amount” means the sum of (a) 120% of the then outstanding
principal amount of the Debenture, (b) accrued but unpaid interest and (c) all liquidated
damages and other amounts due in respect of the Debenture.




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




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




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




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




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




     “Permitted Indebtedness” means (a) the indebtedness evidenced by the
Debentures, (b) the Indebtedness existing on the Original Issue Date and set forth on
Schedule 3.1(aa) attached to the Purchase Agreement, (c) indebtedness that is
expressly subordinate in right of payment to the indebtedness evidenced by this Debenture
pursuant to a written subordination agreement with the Holder that is acceptable to each
Holder in its sole and absolute discretion, (d) indebtedness evidenced by the Other
Debentures, (e) indebtedness secured by Permitted Liens, (f) indebtedness for trade payables
incurred in the ordinary course of business, and (g) extensions, re-financings, and renewals
of any Permitted Indebtedness so long as such extensions, re-financings and renewals are on
more favorable terms to the Company.




     “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



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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
clauses (a) and (b) thereunder.




     “Purchase Agreement” means the Securities Purchase Agreement, dated as of
December 30, 2008 among the Company and the original Holders, as amended, modified or
supplemented from time to time in accordance with its terms.




     “Qualified Financing” shall have the meaning set forth in Section 5(h).




     “Registration Statement” means a registration statement that registers the
resale of all Conversion Shares and Interest Conversion Shares of the Holder, names the
Holder as a “selling stockholder” therein.




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




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




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




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




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




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




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




     “VWAP” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market,
the daily volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the Trading Market on which the Common Stock is then listed or quoted for
trading as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City
time) to 4:02 p.m. (New York City time)); (b) if the OTC Bulletin Board is not a Trading
Market, the volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then quoted for
trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in
the “Pink Sheets” published by Pink OTC Markets, Inc. (or a similar organization or agency
succeeding to its functions of



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reporting prices), the most recent bid price per share of the Common Stock so reported;
or (d) in all other cases, the fair market value of a share of Common Stock as determined by
an independent appraiser selected in good faith by the Holder and reasonably acceptable to
the Company.




Section 2. Interest.




          a) Payment of Interest in Cash or Kind. The Company shall pay interest to the
Holder on the aggregate unconverted and then outstanding principal amount of this Debenture
at the rate of 10% per annum, payable quarterly on January 1, April 1, July 1 and October 1,
beginning on the first such date after the Original Issue Date, on each Conversion Date (as
to that principal amount then being converted), on each Optional Redemption Date (as to that
principal amount then being redeemed) and on the Maturity Date (each such date, an
“Interest Payment Date”) (if any Interest Payment Date is not a Business Day, then
the applicable payment shall be due on the next succeeding Business Day), in cash or, at the
Company’s option, in duly authorized, validly issued, fully paid and non-assessable shares
of Common Stock at the Interest Conversion Rate (the dollar amount to be paid in shares, the
“Interest Share Amount”) or a combination thereof; provided,
however, that payment in shares of Common Stock may only occur if (i) all of the
Equity Conditions have been met (unless waived by the Holder in writing) during the 20
Trading Days immediately prior to the applicable Interest Payment Date (the “Interest
Notice Period”) and through and including the date such shares of Common Stock are
actually issued to the Holder, (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 seven (7) 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 lesser of the (i) then Conversion Price and (ii)
the Interest Conversion Rate assuming for such purposes that the Interest Payment Date is
the Trading Day immediately prior to the commencement of the Interest Notice Period (the
“Interest Conversion Shares”). 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.




          b) Company’s Election to Pay Interest in Cash or Shares of Common Stock.
Subject to the terms and conditions herein, the decision whether to pay interest hereunder
in cash, shares of Common Stock or a combination thereof shall be at the sole discretion of
the Company. Prior to the commencement of any Interest Notice Period, the Company shall
deliver to the Holder a written notice of its election to pay interest hereunder on the
applicable Interest Payment Date either in cash, shares of Common Stock 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



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an Interest Payment Date or continuous) shall be irrevocable as to such Interest
Payment Date. Subject to the aforementioned conditions, failure to timely deliver such
written notice to the Holder shall be deemed an election by the Company to pay the interest
on such Interest Payment Date in cash. At any time the Company delivers a notice to the
Holder of its election to pay the interest in shares of Common Stock, the Company shall
timely file a prospectus supplement pursuant to Rule 424 disclosing such election. 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.




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




          d) Late Fee. All overdue accrued and unpaid interest to be paid hereunder
shall entail a late fee at an interest rate equal to the lesser of 15% per annum or the
maximum rate permitted by applicable law (the “Late Fees”) which shall accrue daily
from the date such interest is due hereunder through and including the date of actual
payment in full. Notwithstanding anything to the contrary contained herein, if, on any
Interest Payment Date the Company has elected to pay accrued interest in the form of Common
Stock but the Company is not permitted to pay accrued interest in Common Stock because it
fails to satisfy the conditions for payment in Common Stock set forth in Section 2(a) herein
(other than as a result of subsection (j) of the definition of “Equity Conditions”), then,
at the option of the Holder, the Company, in lieu of delivering either shares of Common
Stock pursuant to this Section 2 or paying the regularly scheduled interest payment in cash,
shall deliver, within three (3) Trading Days of each applicable Interest Payment Date, an
amount in cash equal to the product of (x) the number of shares of Common Stock otherwise
deliverable to the Holder in connection with the payment of interest due on such Interest
Payment Date multiplied by (y) the highest VWAP during the period commencing on the Interest
Payment Date and ending on the Trading Day prior to the date such payment is actually made.



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




Section 3. Registration of Transfers and Exchanges.




          a) Different Denominations. This Debenture is exchangeable for an equal
aggregate principal amount of Debentures of different authorized denominations, as
reasonably 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 and so long as the
transferee agrees to the terms of the Purchase Agreement as a Purchaser.




          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 90th calendar day
following the Original Issue Date until this Debenture is no longer outstanding, this
Debenture shall be convertible, in whole or in part, into shares of Common Stock at the
option of the Holder, at any time and from time to time (subject to the conversion
limitations set forth in Section 4(c) hereof). The Holder shall effect conversions by
delivering to the Company a Notice of Conversion, the form of which is attached hereto as
Annex A (each, a “Notice of Conversion”), specifying therein the principal
amount of this Debenture to be converted and the date on which such conversion shall be
effected (such date, the “Conversion Date”). If no Conversion Date is specified in
a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion
is deemed delivered hereunder. To effect conversions hereunder, the Holder shall not be
required to physically surrender this Debenture to the Company unless the entire principal
amount of this Debenture, plus all accrued and unpaid interest thereon, has been so
converted. Conversions hereunder shall have the effect of lowering the outstanding principal
amount of this Debenture in an amount equal to the applicable conversion. The Holder and
the Company shall maintain records showing the principal amount(s) converted and the date of
such conversion(s). The Company may deliver an objection to any Notice of Conversion within
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



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controlling and determinative in the absence of manifest error. The Holder, and any
assignee by acceptance of this Debenture, acknowledge and agree that, by reason of the
provisions of this paragraph, following conversion of a portion of this Debenture, the
unpaid and unconverted principal amount of this Debenture may be less than the amount stated
on the face hereof.




          b) Conversion Price. The conversion price in effect on any Conversion Date
shall be equal to $1.65, subject to adjustment herein (the “Conversion Price”).




          c) Conversion Limitations. The Company shall not effect any conversion of
this Debenture, and a Holder shall not have the right to convert any portion of this
Debenture, to the extent that after giving effect to the conversion set forth on the
applicable Notice of Conversion, the Holder (together with the Holder’s Affiliates, and any
other person or entity acting as a group together with the Holder or any of the Holder’s
Affiliates) would beneficially own in excess of the Beneficial Ownership Limitation (as
defined below). For purposes of the foregoing sentence, the number of shares of Common
Stock beneficially owned by the Holder and its Affiliates shall include the number of shares
of Common Stock issuable upon conversion of this Debenture with respect to which such
determination is being made, but shall exclude the number of shares of Common Stock which
are issuable upon (A) conversion of the remaining, unconverted principal amount of this
Debenture beneficially owned by the Holder or any of its Affiliates and (B) exercise or
conversion of the unexercised or unconverted portion of any other securities of the Company
subject to a limitation on conversion or exercise analogous to the limitation contained
herein (including, without limitation, any other Debentures or the Warrants) beneficially
owned by the Holder or any of its Affiliates. Except as set forth in the preceding
sentence, for purposes of this Section 4(c), beneficial ownership shall be calculated in
accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder. To the extent that the limitation contained in this Section 4(c) applies, the
determination of whether this Debenture is convertible (in relation to other securities
owned by the Holder together with any Affiliates) and of which principal amount of this
Debenture is convertible shall be in the reasonable discretion of the Holder, and the
submission of a Notice of Conversion shall be deemed to be the Holder’s determination of
whether this Debenture may be converted (in relation to other securities owned by the Holder
together with any Affiliates) and which principal amount of this Debenture is convertible,
in each case subject to the Beneficial Ownership Limitation. To ensure compliance with this
restriction, the Holder will be deemed to represent to the Company each time it delivers a
Notice of Conversion that such Notice of Conversion has not violated the restrictions set
forth in this paragraph and the Company shall have no obligation to verify or confirm the
accuracy of such determination. In addition, a determination as to any group status as
contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act
and the rules and regulations promulgated thereunder. For purposes of this Section 4(c),
in determining the number of outstanding shares of Common Stock, the Holder may rely on the
number of outstanding shares of Common Stock as stated in the most recent of the following:
(A) the Company’s most recent periodic or annual report, as the case may be; (B) a more
recent public announcement by the Company; or (C) a more recent notice by



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the Company or the Company’s transfer agent setting forth the number of shares of
Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall
within two Trading Days confirm orally and in writing to the Holder the number of shares of
Common Stock then outstanding. In any case, the number of outstanding shares of Common
Stock shall be determined after giving effect to the conversion or exercise of securities of
the Company, including this Debenture, by the Holder or its Affiliates since the date as of
which such number of outstanding shares of Common Stock was reported. The “Beneficial
Ownership Limitation” shall be 9.99% 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 Holder, upon not less
than 61 days’ prior notice to the Company (unless there are less than 61 days remaining
until the Maturity Date, in which case such notice period shall be one day less than the
number of days remaining until the Maturity Date), may waive the Beneficial Ownership
Limitation provisions of this Section 4(c). Any such waiver will not be effective until the
61st day after such notice is delivered to the Company (or such shorter period
described in the previous sentence if there are less than 61 days remaining until the
Maturity Date). The Beneficial Ownership Limitation provisions of this paragraph shall be
construed and implemented in a manner otherwise than in strict conformity with the terms of
this Section 4(c) to correct this paragraph (or any portion hereof) which may be defective
or inconsistent with the intended Beneficial Ownership Limitation contained herein or to
make changes or supplements necessary or desirable to properly give effect to such
limitation. The limitations contained in this paragraph shall apply to a successor holder of
this Debenture.




d) Mechanics of Conversion.




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




          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 earlier of
(i) the six month anniversary of the Original Issue Date or (ii) the Effective Date,
shall be free of restrictive legends and trading restrictions (other than those
which may then be required by the Purchase Agreement) representing the number of
Conversion Shares being acquired upon the conversion of this Debenture (including,
if the Company has given continuous notice pursuant to Section 2(b) for payment of
interest in shares of Common Stock at least 20 Trading Days prior to the date on
which the Notice of Conversion is delivered to the Company, shares of Common Stock
representing the payment of accrued interest otherwise determined pursuant to
Section 2(a) but assuming that the Interest Notice Period is the 20 Trading Days period immediately prior to the date on which the Notice



11









 






of Conversion 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). On or after the
earlier of (i) the six month anniversary of the Original Issue Date or (ii) the
Effective Date, the Company shall use its best efforts to deliver any certificate or
certificates required to be delivered by the Company under this Section 4(d)
electronically through the Depository Trust Company or another established clearing
corporation performing similar functions.




          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 second Trading Day after the Share Delivery Date, the
Holder shall be entitled to elect by written notice to the Company at any time on or
before its receipt of such certificate or certificates, to rescind such Conversion,
in which event the Company shall promptly return to the Holder any original
Debenture delivered to the Company and the Holder shall promptly return to the
Company the Common Stock certificates representing the principal amount of this
Debenture unsuccessfully tendered for conversion to the Company.




          iv. Obligation Absolute; Partial Liquidated Damages. The Company’s
obligations to issue and deliver the Conversion Shares upon conversion of this
Debenture in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the same, any waiver
or consent with respect to any provision hereof, the recovery of any judgment
against any Person or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the Holder
or any other Person of any obligation to the Company or any violation or alleged
violation of law by the Holder or any other Person, and irrespective of any other
circumstance which might otherwise limit such obligation of the Company to the
Holder in connection with the issuance of such Conversion Shares; provided,
however, that such delivery shall not operate as a waiver by the Company of
any such action the Company may have against the Holder. In the event the Holder of
this Debenture shall elect to convert any or all of the outstanding principal amount
hereof, the Company may not refuse conversion based on any claim that the Holder or
anyone associated or affiliated with the Holder has been engaged in any violation of
law, agreement or for any other reason, unless an injunction from a court, on notice
to Holder, restraining and or enjoining conversion of all or part of this Debenture
shall have been sought and obtained, and the Company posts a surety bond for the
benefit of the Holder in the amount of 150% of the outstanding principal amount of
this Debenture, which is subject to the injunction, which bond shall remain in
effect until the completion of arbitration/litigation of the underlying dispute and
the proceeds of which shall be payable to the Holder to the extent it obtains
judgment. In the
absence of such injunction, the Company shall issue Conversion Shares or, if



12









 






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 second Trading Day after the Share Delivery Date, the Company shall
pay to the Holder, in cash, as liquidated damages and not as a penalty, for each
$1,000 of principal amount being converted, $10 per Trading Day for each Trading Day
after such second (2nd) Trading Day after the Share Delivery Date until
such certificates are delivered. Nothing herein shall limit a Holder’s right to
pursue actual damages or declare an Event of Default pursuant to Section 8 hereof
for the Company’s failure to deliver Conversion Shares within the period specified
herein and the Holder shall have the right to pursue all remedies available to it
hereunder, at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief. The exercise of any such rights shall not
prohibit the Holder from seeking to enforce damages pursuant to any other Section
hereof or under applicable law.




          v. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon
Conversion. In addition to any other rights available to the Holder, if the
Company fails for any reason to deliver to the Holder such certificate or
certificates by the Share Delivery Date pursuant to Section 4(d)(ii), and if after
such Share Delivery Date the Holder is required by its brokerage firm to purchase
(in an open market transaction or otherwise), or the Holder’s brokerage firm
otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by
the Holder of the Conversion Shares which the Holder was entitled to receive upon
the conversion relating to such Share Delivery Date (a “Buy-In”), then the
Company shall (A) pay in cash to the Holder (in addition to any other remedies
available to or elected by the Holder) the amount by which (x) the Holder’s total
purchase price (including any brokerage commissions) for the Common Stock so
purchased exceeds (y) the product of (1) the aggregate number of shares of Common
Stock that the Holder was entitled to receive from the conversion at issue
multiplied by (2) the actual sale price at which the sell order giving rise to such
purchase obligation was executed (including any brokerage commissions) and (B) at
the option of the Holder, either reissue (if surrendered) this Debenture in a
principal amount equal to the principal amount of the attempted conversion or
deliver to the Holder the number of shares of Common Stock that would have been
issued if the Company had timely complied with its delivery requirements under
Section 4(d)(ii). For example, if the Holder purchases Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion
of this Debenture with respect to which the actual sale price of the Conversion
Shares (including any brokerage commissions) giving rise to such purchase obligation
was a total of $10,000 under clause (A) of the immediately preceding sentence, the
Company shall be required to pay the Holder $1,000. The Holder shall provide the
Company written notice indicating the amounts payable to the Holder in respect of
the Buy-In and, upon request of the Company, evidence of the amount of such loss.
Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in



13









 






equity including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Company’s failure to timely deliver
certificates representing shares of Common Stock upon conversion of this Debenture
as required pursuant to the terms hereof.




          vi. Reservation of Shares Issuable Upon Conversion. The Company
covenants that it will at all times reserve and keep available out of its authorized
and unissued shares of Common Stock for the sole purpose of issuance upon conversion
of this Debenture and payment of interest on this Debenture, each as herein
provided, free from preemptive rights or any other actual contingent purchase rights
of Persons other than the Holder (and the other holders of the Debentures), not less
than the greater of the Required Minimum and 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 a Registration Statement is then
effective under the Securities Act, shall be registered for public sale in
accordance with such Registration Statement.




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




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




Section 5. Certain Adjustments.



     a) Stock Dividends and Stock Splits. If the Company, at any time while this
Debenture is outstanding: (i) pays a stock dividend or otherwise makes a distribution or



14









 






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




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



15









 






after the date of such Dilutive Issuance, regardless of whether the Holder accurately refers
to the Base Conversion Price in the Notice of Conversion.




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




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




     e) Fundamental Transaction. If, at any time while this Debenture is
outstanding, (i) the Company effects any merger or consolidation of the Company with or into
another Person and shareholders of the Company hold less than 60% of voting equity
securities of the Person, (ii) the Company effects any sale of all or substantially all of
its assets in one transaction or a series of related transactions, (iii) any tender offer or
exchange offer (whether by the Company or another Person) is completed pursuant to which
holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (iv) the Company effects any reclassification of
the



16









 






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




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




     g) Notice to the Holder.




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




          ii. Notice to Allow Conversion by Holder. If (A) the Company shall
declare a dividend (or any other distribution in whatever form) on the Common Stock,
(B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting



17









 






to all holders of the Common Stock of rights or warrants to subscribe for or purchase
any shares of capital stock of any class or of any rights, (D) the approval of any
stockholders of the Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of the assets
of the Company, of any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property or (E) the Company shall authorize
the voluntary or involuntary dissolution, liquidation or winding up of the affairs
of the Company, then, in each case, the Company shall cause to be filed at each
office or agency maintained for the purpose of conversion of this Debenture, and
shall cause to be delivered to the Holder at its last address as it shall appear
upon the Debenture Register, at least twenty (20) calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x) the
date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken, the
date as of which the holders of the Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be determined or (y)
the date on which such reclassification, consolidation, merger, sale, transfer or
share exchange is expected to become effective or close, and the date as of which it
is expected that holders of the Common Stock of record shall be entitled to exchange
their shares of the Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer or share exchange,
provided that the failure to deliver such notice or any defect therein or in the
delivery thereof shall not affect the validity of the corporate action required to
be specified in such notice. In the event that the proposed action set forth in
this Section 5(g)(ii) is material and if the proposed action has not yet been
publicly disclosed by the Company, the Holder hereby agrees to maintain the
confidentiality of such disclosure and the Company shall use best efforts to
publicly disclose all such material information as soon as possible. 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.




     h) Other Adjustment. In the event that the Company fails to consummate a
“Qualified Financing” (as defined below) on or before March 30, 2009, the Conversion Price
hereunder shall be reduced to equal the lesser of (i) the then effective Conversion Price
and (ii) $1.54 (subject to adjustment for forward and reverse stock splits, stock dividends,
recapitalizations and the like that occur after the date of the Purchase Agreement). For
clarity, the Conversion Price can only be adjusted downward pursuant to this Section 5(h).
As used herein, “Qualified Financing” means an issuance by the Company of Common
Stock and/or Common Stock Equivalents in an equity financing transaction that occurs after
the date of this Debenture and before March 30, 2009 with net cash proceeds to the Company
of at least $6,000,000.




Section 6. Redemption.



18









 






     a) Optional Redemption at Election of Company. Subject to the provisions of
this Section 6(a), at any time after 6-month anniversary of the Original Issue Date, the
Company may deliver a notice to the Holder (an “Optional Redemption Notice” and the
date such notice is deemed delivered hereunder, the “Optional Redemption Notice
Date”) of its irrevocable election to redeem some or all of the then outstanding
principal amount of this Debenture for cash in an amount equal to the Optional Redemption
Amount on the 20th Trading Day following the Optional Redemption Notice Date
(such date, the “Optional Redemption Date”, such 20 Trading Day period, the
“Optional Redemption Period” and such redemption, the “Optional
Redemption”). The Optional Redemption Amount is payable in full on the Optional
Redemption Date. The Company covenants and agrees that it will honor all Notices of
Conversion tendered from the time of delivery of the Optional Redemption Notice through the
date all amounts owing thereon are due and paid in full. The Company’s determination to pay
an Optional Redemption in cash shall be applied ratably to all of the holders of the then
outstanding Debentures based on their (or their predecessor’s) initial purchases of
Debentures pursuant to the Purchase Agreement.




     b) Redemption Procedure. The payment of cash pursuant to an Optional
Redemption shall be payable on the Optional Redemption Date. If any portion of the payment
pursuant to an Optional Redemption shall not be paid by the Company by the applicable due
date, interest shall accrue thereon at an interest rate equal to the lesser of 15% per annum
or the maximum rate permitted by applicable law until such amount is paid in full.
Notwithstanding anything herein contained to the contrary, if any portion of the Optional
Redemption Amount remains unpaid after such date, the Holder may elect, by written notice to
the Company given at any time thereafter, to invalidate such Optional Redemption
initio, and, with respect to the Company’s failure to honor the Optional Redemption,
the Company shall have no further right to exercise such Optional Redemption.
Notwithstanding anything to the contrary in this Section 6, the Company’s determination to
redeem in cash under Section 6(a) 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.



     Section 7. Negative Covenants. As long as any portion of this Debenture
remains outstanding, unless the holders of at least 51% in principal amount of the then outstanding
Debentures shall have otherwise given prior written consent, the Company shall not, and shall not
permit any of its subsidiaries (whether or not a Subsidiary on the Original Issue Date) to,
directly or indirectly:




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



19









 






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




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




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




     e) repay, repurchase or offer to repay, repurchase or otherwise acquire any
Indebtedness, other than the Debentures if on a pro-rata basis;




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




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




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



     Section 8. Events of Default.




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




          i. any default in the payment of (A) the principal amount of any Debenture or
(B) interest, liquidated damages and other amounts owing to a Holder on any
Debenture, as and when the same shall become due and payable (whether on a
Conversion Date or the Maturity Date or by acceleration or otherwise) which default,
solely in the case of an interest payment or other default under clause (B) above,
is not cured within 5 Trading Days;



20









 






          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 (x) below) which failure is not cured, if possible to
cure, within the earlier to occur of (A) 5 Trading Days after notice of such failure
sent by the Holder or by any other Holder to the Company and (B) 10 Trading Days
after the Company has become 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 of no less than 5
Trading Days) 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) and to which the
amount in controversy exceeds $350,000;




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




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




          vi. the Company or any Subsidiary shall default on any of its obligations under
any mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued, or by which there may
be secured or evidenced, any indebtedness for borrowed money or money due under any
long term leasing or factoring arrangement that (a) involves an obligation greater
than $350,000, 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. after the Common Stock has been initially qualified for listing on a
Trading Market, the Common Stock subsequently 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);



21









 






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




          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 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;




          xi. any Person shall breach any agreement delivered to the initial Holders
pursuant to Section 2.2 of the Purchase Agreement;




          xii. the Company shall fail to initiate a public market for the Common Stock on
a Trading Market before by April 15, 2009; and




          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 $100,000, 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 15% per annum or the maximum rate
permitted under applicable law. Upon the payment in full of the Mandatory Default Amount,
the Holder shall promptly surrender this Debenture to or as directed by the Company. In
connection with such acceleration described herein, the Holder need not provide, and the
Company hereby waives, any presentment, demand, protest or other notice of any kind, and the
Holder may immediately and without expiration of any grace period enforce any and all of its
rights and remedies hereunder and all other remedies available to it under applicable law.
Such acceleration may be rescinded and annulled by Holder at any time prior to payment
hereunder and the Holder shall have all rights as a holder of the Debenture until such time,
if any, as the Holder receives full payment pursuant to this Section 8(b). No such
rescission or annulment shall affect any subsequent Event of Default or impair any right
consequent thereon.



     Section 9. Miscellaneous.




     a) Notices. Any and all notices or other communications or deliveries to be
provided by the Holder hereunder, including, without limitation, any Notice of



22









 






Conversion,
shall be in writing and delivered personally, by facsimile, or sent by a nationally
recognized overnight courier service, addressed to the Company, at the address set forth
above, or such other facsimile number or address as the Company may specify for such purpose
by notice to the Holder delivered in accordance with this Section 9(a). Any and all notices
or other communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile, or sent by a nationally recognized overnight
courier service addressed to each Holder at the facsimile number or address of the Holder
appearing on the books of the Company, or if no such facsimile number or address appears, at
the principal place of business of the Holder as set forth in the Purchase Agreement. Any
notice or other communication or deliveries hereunder shall be deemed given and effective on
the earliest of (i) the date of transmission, if such notice or communication is delivered
via facsimile at the facsimile number specified on the signature page prior to 5:30 p.m.
(Los Angeles time), (ii) the date immediately following the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number specified on the
signature page between 5:30 p.m. (Los Angeles time) and 11:59 p.m. (Los Angeles 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 a lost debenture affidavit
and agree to customary indemnification thereof and evidence of such loss, theft or
destruction of such Debenture, and of the ownership hereof, reasonably satisfactory to the
Company.




     d) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and construed and
enforced in accordance with the internal laws of the State of New York, without regard to
the principles of conflict of laws thereof. Each party agrees that all legal proceedings
concerning the interpretation, enforcement and defense of the transactions contemplated by
any of the Transaction Documents (whether brought against a party hereto or its
respective Affiliates, directors, officers, shareholders, employees or agents) shall be
commenced in the state and federal courts sitting in the City of New York, Borough of



23









 






Manhattan (the “New York Courts”). Each party hereto hereby irrevocably submits to
the exclusive jurisdiction of the New York Courts for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of any of the Transaction Documents), and
hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any
claim that it is not personally subject to the jurisdiction of such New York Courts, or such
New York Courts are improper or inconvenient venue for such proceeding. Each party hereby
irrevocably waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof via registered or certified mail
or overnight delivery (with evidence of delivery) to such party at the address in effect for
notices to it under this Debenture and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any other manner permitted by applicable
law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal proceeding arising out of or
relating to this Debenture or the transactions contemplated hereby. If either party shall
commence an action or proceeding to enforce any provisions of this Debenture, then the
prevailing party in such action or proceeding shall be reimbursed by the other party for its
attorneys fees and other costs and expenses incurred in the investigation, preparation and
prosecution of such action or proceeding.




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




     f) Severability. If any provision of this Debenture is invalid, illegal or
unenforceable, the balance of this Debenture shall remain in effect, and if any provision is
inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all
other Persons and circumstances. If it shall be found that any interest or other amount
deemed interest due hereunder violates the applicable law governing usury, the applicable
rate of interest due hereunder shall automatically be lowered to equal the maximum rate of
interest permitted under applicable law. The Company covenants (to the extent that it may
lawfully do so) that it shall not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or
other law which would prohibit or forgive the Company from paying all or any portion of the
principal of or interest on this Debenture as contemplated herein, wherever enacted, now or
at any time hereafter in force, or which may affect the covenants or the performance of this
indenture, and the Company (to the extent it may lawfully do so) hereby expressly waives all
benefits or advantage of any such law, and covenants that it
will not, by resort to any such law, hinder, delay or impede the execution of any power



24









 






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 due and made on the next
succeeding Business Day.




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




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




     j) Secured Obligation. The obligations of the Company under this Debenture are
secured by all assets of the Company and each Subsidiary pursuant to the Security Agreement,
dated as of December 30, 2008 between the Company, the Subsidiaries of the Company and the
Secured Parties (as defined therein).



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




(Signature Pages Follow)




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     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.



	 	 	 	 	 
	 	T3 MOTION, INC.

 	 
	 	By:  	
 	 
	 	 	Name:  	 	 
	 	 	Title:  		 
	 	 	Facsimile No. for delivery of Notices:                      	  	 



26









 






	 	 	 	 	 



ANNEX A




NOTICE OF CONVERSION





     The undersigned hereby elects to convert principal under the 10% Secured Convertible Debenture
due December 30, 2009 of T3 Motion, Inc., a Delaware corporation (the “Company”), into
shares of common stock (the “Common Stock”), of the Company according to the conditions
hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably requested by the
Company in accordance therewith. No fee will be charged to the holder for any conversion, except
for such transfer taxes, if any.



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



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



	 	 	 
	Conversion calculations:
	 	 
	
	 	Date to Effect Conversion: 
	 
	 

	 	Principal Amount of Debenture to be Converted:
	 
	 	 
	 

	 	Payment of Interest in Common Stock
___ yes ___ no

(as determined by the Company)
	 
	 	 
	 

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

	 	Number of shares of Common Stock to be issued:
	 
	 	 
	 

	 	Signature:
	 
	 	 
	 

	 	Name:
	 
	 	 
	 

	 	Address for Delivery of Common Stock Certificates:
	 
	 	 
	 

	 	Or
	 
	 

	 	DWAC Instructions:
	 
	 	 
	 

	 	Broker No:                     
	 

	 	Account No:                     






27









 






Schedule 1




CONVERSION SCHEDULE



The 10% Secured Convertible Debenture due on December 30, 2009 in the original principal amount of
$______ is issued by T3 Motion, Inc., a Delaware corporation. This Conversion Schedule reflects
conversions made under Section 4 of the above referenced Debenture.




Dated:




	 	 	 	 	 	 	 
	 
	 	 	 	Aggregate Principal	 	 
	 
	 	 	 	Amount Remaining	 	 
	Date of Conversion
	 	 	 	Subsequent to	 	 
	(or for first
	 	 	 	Conversion	 	 
	entry, Original
	 	 	 	(or original	 	 
	Issue Date)
	 	Amount of Conversion
	 	Principal Amount)
	 	Company Attest
	 
	 	 
	 	 
	 	 






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