EX 10.5


    NEITHER
      THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE 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. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OF THESE
      SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
      OTHER
      LOAN SECURED BY SUCH SECURITIES.

    


    THIS
      INSTRUMENT AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE
      IN
      THE MANNER AND TO THE EXTENT SET FORTH IN THAT CERTAIN INTERCREDITOR AGREEMENT
      (AS THE SAME MAY BE AMENDED OR OTHERWISE MODIFIED FROM TIME TO TIME PURSUANT
      TO
      THE TERMS THEREOF, THE “INTERCREDITOR AGREEMENT”), DATED AS OF SEPTEMBER 28,
      2007, AMONG HERCULES TECHNOLOGY GROWTH CAPITAL, INC. (THE “LENDER”) AND EACH OF
      IROQUOIS CAPITAL LP, CRANSHIRE CAPITAL, L.P., PORTSIDE GROWTH AND OPPORTUNITY
      FUND AND ROCKMORE INVESTMENT MASTER FUND LTD (THE “SUBORDINATED CREDITORS”).
      EACH HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF, IRREVOCABLY AGREES
      TO
      BE BOUND BY THE PROVISIONS OF THE INTERCREDITOR AGREEMENT APPLICABLE TO A
“SUBORDINATED CREDITOR” (AS SUCH TERM IS DEFINED IN THE INTERCREDITOR
      AGREEMENT), AS IF SUCH HOLDER WERE AN ORIGINAL SIGNATORY THERETO AS A
      SUBORDINATED CREDITOR FOR ALL PURPOSES OF THE INTERCREDITOR
      AGREEMENT.

    


    Original
      Issue Date: October 25, 2004

    Original
      Conversion Price (subject to adjustment herein): $2.29
      [Note:
      Conversion Price reduced to $1.15 per antidilution provisions as a result of
      the
      September 30, 2006 Preferred Stock financing.]

    As
      Amended and Restated: $0.70

    


    $_______________

    


    AMENDED
      AND RESTATED VARIABLE RATE 

    SECURED
      SUBORDINATED CONVERTIBLE DEBENTURE

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    


    THIS
      AMENDED AND RESTATED VARIABLE RATE SECURED SUBORDINATED CONVERTIBLE DEBENTURE
      (this “Debenture”)
      is one
      of a series of duly authorized and issued Amended and Restated Variable Rate
      Secured Subordinated Convertible Debentures of Diomed Holdings, Inc., a Delaware
      corporation, having a principal place of business at One Dundee Park, Andover,
      MA 01810 (the “Company”),
      which
      amend, supplement, modify and completely restate and supersede the Variable
      Rate
      Convertible Debentures, due October 25, 2008 (collectively, the “Original
      Debentures”)
      initially issued on October 25, 2004.

    


    FOR
      VALUE
      RECEIVED, the Company promises to pay to ________________________ or its
      registered assigns (the “Holder”),
      the
      principal sum of $_______________ on October 25, 2008 or such earlier date
      as
      the Debentures are required or permitted to be repaid as provided hereunder
      (the
“Maturity
      Date”),
      in
      cash or in Common Stock, subject to the terms and conditions herein, 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 that are used herein and defined in the UCC shall have
      the
      meanings given to them in the UCC, (b) capitalized terms not otherwise defined
      herein have the meanings given to such terms in the Purchase Agreement and
      (c)
      the following terms shall have the following meanings:

    


    “2007
      Loan Agreement”
means
      the Loan and Security Agreement, dated as of September 28, 2007, by and among
      the Company, Diomed, Inc., a Delaware corporation and each of their respective
      subsidiaries that is or becomes a “Borrower” thereunder, and Hercules Technology
      Growth Capital, Inc., a Maryland corporation.

    


    “2007
      Loan Documents”
shall
      have the meaning given to the term “Loan Documents” in the 2007 Loan
      Agreement.

    


    “777
      Patent Litigation”
means
      litigation relating to the Borrowers’ patent infringement case against
      AngioDynamics, Inc, and Vascular Solutions, Inc. relating to ‘777 patent, Civil
      Action No. 04-10019-NMG (consolidated) filed in the United States District
      Court
      for the District of Massachusetts.

    


    “Alternate
      Consideration”
shall
      have the meaning set forth in Section 6(e)(ii).

    


    “Borrowers”
shall
      mean the Company and Diomed, Inc., a Delaware corporation, a wholly-owned
      subsidiary of the Company. 

    


    “Business
      Day”
means
      any day except Saturday, Sunday and any day which shall be 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.

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    


    “Change
      of Control Transaction”
means
      the occurrence after the date hereof of any of (i) an acquisition after the
      date
      hereof by an individual or legal entity or “group” (as described in Rule
      13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether
      through legal or beneficial ownership of capital stock of the Company, by
      contract or otherwise) of in excess of 33% of the voting securities of the
      Company, or (ii) a replacement at one time or within a three year period of
      more
      than one-half of the members of the Company’s board of directors which is not
      approved by a majority of those individuals who are members of the board of
      directors on the date hereof (or by those individuals who are serving as members
      of the board of directors on any date whose nomination to the board of directors
      was approved by a majority of the members of the board of directors who are
      members on the date hereof), or (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 of the events set forth above in (i) or (ii).

    


    “Closing
      Price”
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 closing bid 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 as reported by Bloomberg Financial L.P. (based on a Trading Day from
      9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b)  if the Common Stock
      is not then listed or quoted on a Trading Market and if prices for the Common
      Stock are then quoted on the OTC Bulletin Board, the closing bid 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 listed or quoted on 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 or agency succeeding to its functions of reporting prices), the
      most recent bid price per share of the Common Stock so reported; or (d) in
      all other cases, the fair market value of a share of Common Stock as determined
      by an independent appraiser selected in good faith by the Purchasers and
      reasonably acceptable to the Company.

     

    “Collateral”
has
      the
      meaning specified therefor in the Pledge and Security Agreement.

     

    “Commission”
means
      the Securities and Exchange Commission.

     

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

    


    “Conversion
      Date”
shall
      have the meaning set forth in Section 5(a) hereof.

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

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

     

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

    


    “Copyrights”
has
      the
      meaning specified therefor in the Pledge and Security Agreement. 

    


    “Copyright
      License”
has
      the
      meaning specified therefor in the Pledge and Security Agreement.

    


    “Dilutive
      Issuance”
shall
      have the meaning set forth in Section 6(b) hereof.

    


      “Effectiveness
      Period”
shall
      have the meaning given to such term in the Registration Rights
      Agreement.

    


    “Equity
      Conditions”
shall
      mean, during the period in question, (i)
      the
      Company shall have duly honored all conversions and redemptions scheduled to
      occur or occurring by virtue of one or more Conversion Notices, if any, (ii)
      all
      liquidated damages and other amounts owing in respect of the Debentures shall
      have been paid; (iii)
      there is an effective Registration Statement pursuant to which the Holder is
      permitted to utilize the prospectus thereunder to resell all of the shares
      issuable pursuant to the Transaction Documents (and the Company believes, in
      good faith, that such effectiveness will continue uninterrupted for the
      foreseeable future), (iv) the Common Stock is trading on the Trading Market
      and
      all of the shares issuable pursuant to the Transaction Documents are listed
      for
      trading on a 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), (v) there is a sufficient number of authorized but
      unissued and otherwise unreserved shares of Common Stock for the issuance of
      all
      of the shares issuable pursuant to the Transaction Documents, (vi) there is
      then
      existing no Event of Default or event which, with the passage of time or the
      giving of notice, would constitute an Event of Default and (vii) all of the
      shares issued or issuable pursuant to the transaction documents in full,
      ignoring for such purposes any conversion or exercise limitation therein, would
      not violate the limitations set forth in Section 5(c)(ii) and (ix)
      no
      public announcement of a pending or proposed Fundamental Transaction, Change
      of
      Control Transaction or acquisition transaction has occurred that has not been
      consummated.

    


    “Event
      of Default”
shall
      have the meaning set forth in Section 9.

    


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

    


    “Fundamental
      Transaction”
shall
      have the meaning set forth in Section 6(e)(iii) hereof.

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    “Forced
      Conversion”
shall
      have the meaning set forth in Section 7(d).

     

    “Forced
      Conversion Notice”
shall
      have the meaning set forth in Section 7(d).

    


    “Force
      Conversion Notice Date”
shall
      have the meaning set forth in Section 7(d).

    


    “Subsidiary
      Guaranty”
means
      the Guaranty, dated as of September 28, 2007, made by Diomed, Inc., in favor
      of
      the Secured Parties.

    


    “Intercreditor
      Agreement”
means
      the Intercreditor Agreement, dated as of September 28, 2007, by and among the
      Company, Diomed, Inc., the Lender and each holder of Debentures as of September
      28, 2007 and their respective successors and assigns.

    


    “Interest
      Conversion Rate”
means
      90% of the least of (a) the average of the 5 Closing Prices immediately prior
      to
      the applicable Interest Payment Date (b) the average of the 4 Closing Prices
      immediately prior to the applicable Interest Payment Date, (c) the average
      of
      the 3 Closing Prices immediately prior to the applicable Interest Payment Date,
      (d) the average of the 2 Closing Prices immediately prior to the applicable
      Interest Payment Date and (e) the Closing Price immediately prior to the
      applicable Interest Payment Date.

     

    “Judgment”
means
      any judgment of the United States District Court for the District of
      Massachusetts or any successor court in respect of the 777 Patent
      Litigation.

    


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

    


    “Lender”
means
      Hercules Growth Capital, Inc., its successors and assigns, as the Lender under
      the 2007 Loan Documents.

    


    “Lien”
means
      any mortgage, deed of trust, pledge, hypothecation, assignment for security,
      security interest, encumbrance, lien or charge of any kind, whether voluntarily
      incurred or arising by operation of law or otherwise, against any property,
      any
      conditional sale or other title retention agreement, and any lease in the nature
      of a security interest.

    


    “Mandatory
      Prepayment Amount”
for
      any
      Debentures shall equal the sum of (i) the greater of: (A) 130% of the principal
      amount of Debentures to be prepaid, plus all accrued and unpaid interest
      thereon, or (B) the principal amount of Debentures to be prepaid, plus all
      other
      accrued and unpaid interest hereon, divided by the Conversion Price on (x)
      the
      date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the
      date the Mandatory Prepayment Amount is paid in full, whichever is less,
      multiplied by the Closing Price on (x) the date the Mandatory Prepayment Amount
      is demanded
      or otherwise due or (y) the date the Mandatory Prepayment Amount is paid in
      full, whichever is greater, and (ii) all other amounts, costs, expenses and
      liquidated damages due in respect of such Debentures.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    “Market
      Price”
shall
      mean $1.91, subject to adjustment for reverse and forward stock splits, stock
      dividends, stock combinations and other similar transactions of the Common
      Stock
      that occur after the date of the Purchase Agreement.

    


    “Maturity
      Conversion”
shall
      have the meaning set forth in Section 7(c)(iii).

    


    “Maturity
      Conversion Notice”
shall
      have the meaning set forth in Section 7(c)(iii).

    


    “Maturity
      Conversion Notice Date”
shall
      have the meaning set forth in Section 7(c)(iii).

    


    “Maturity
      Conversion Price”
shall
      have the meaning set forth in Section 7(c)(iii).

    


    “Optional
      Redemption”
shall
      have the meaning set forth in Section 7(a).

    


    “Optional
      Redemption Amount”
shall
      mean the sum of (i) 110% of the principal amount of the Debenture then
      outstanding, (ii) accrued but unpaid interest and (iii) all liquidated damages
      and other amounts due in respect of the Debenture.

    


    “Optional
      Redemption Notice”
shall
      have the meaning set forth in Section 7(a).

    


    “Optional
      Redemption Notice Date”
shall
      have the meaning set forth in Section 7(a).

    


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

    


    “Patent
      License”
has
      the
      meaning specified therefor in the Pledge and Security Agreement. 

    


    “Patents”
has
      the
      meaning specified therefor in the Pledge and Security Agreement.

    


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

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    


    “Pledge
      and Security Agreement”
means
      a
      Pledge and Security Agreement made by a the Company in favor of the Holders,
      in
      form annexed hereto as Exhibit
      A,
      securing the obligations of the Company under the Debentures and any other
      Transaction Document and delivered to the Holders.

    


    “Purchase
      Agreement”
means
      the Securities Purchase Agreement, dated as of September 28, 2004, 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
      Rights Agreement”
means
      the Registration Rights Agreement, dated as of the date of the Purchase
      Agreement, 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
      Statement”
means
      a
      registration statement meeting the requirements set forth in the Registration
      Rights Agreement, covering among other things the resale of the Conversion
      Shares and naming the Holder as a “selling stockholder” thereunder.

    


    “Secured
      Obligations”
shall
      have the meaning set forth in Section 2(a).

    


    “Secured
      Parties”
means
      the Holder and the other holders of Debentures, together with their respective
      successors and assigns.

    


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

    


    “Subsidiary”
shall
      have the meaning given to such term in the Purchase Agreement.

    


    “Threshold
      Period”
shall
      have the meaning given to such term in Section 7(d).

    


    “Trading
      Day”
means
      a
      day on which the Common Stock is traded on a Trading Market.

     

    “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 Nasdaq SmallCap Market, the American
      Stock Exchange, the New York Stock Exchange or the Nasdaq National
      Market.

     

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

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

    “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 as reported by Bloomberg Financial L.P. (based on a Trading
      Day
      from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b)  if the Common
      Stock is not then listed or quoted on a Trading Market and if prices for the
      Common Stock are then quoted on the OTC Bulletin Board, 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 listed or quoted
      on 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 or agency 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 an independent appraiser selected in good faith by the Holders
      and
      reasonably acceptable to the Company.

    


    Section
      2. Security.
      The
      Company grants to the Secured Parties a security interest, in accordance with
      the terms of the Pledge and Security Agreement, which shall be delivered
      simultaneously with this Debenture, in, all of its right, title and interest
      in
      and to the Collateral as security for the prompt payment in full of all
      obligations of the Company under the Debentures, whether for principal,
      interest, costs, fees, expenses or otherwise and whether now or hereafter
      existing (all of such obligations being the “Secured
      Obligations”).
      

    


    a) Borrowers
      Remain Liable.
      Anything
      herein to the contrary notwithstanding: 

    


    (i) each
      Borrower shall remain liable under the contracts and agreements to which it
      is a
      party included in the Collateral to the extent set forth therein, and shall
      perform all of its respective duties and obligations under such contracts and
      agreements to the same extent as if the security interest granted herein had
      not
      been made, and the Secured Parties shall not have any obligation or liability
      under any contracts or agreements included in the Collateral by reason of the
      security interest granted herein, nor shall any Secured Party be obligated
      to
      perform any of the obligations or duties of any Borrower thereunder or to take
      any action to collect or enforce any claim for payment assigned
      hereunder;

     

    (ii) each
      Borrower shall comply in all material respects with all laws relating to the
      ownership and operation of the Collateral, including all registration
      requirements under applicable laws, and shall pay when due all taxes, fees
      and
      assessments imposed on or with respect to the Collateral, except to the extent
      the validity thereof is being contested in good faith by appropriate proceedings
      for which adequate reserves in accordance with GAAP have been set aside by
      the
      Company; and

     

    (iii) the
      exercise by the Secured Parties of any of their rights hereunder shall not
      release the Borrowers from any of their duties or obligations under any such
      contracts or agreements included in the Collateral.
      

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    


    b) Authorization
      to Perfect Security Interests.
      Each
      Borrower hereby irrevocably authorizes the Secured
      Parties
      at any
      time and from time to time to file in any filing office in any UCC jurisdiction
      any initial financing statements and amendments thereto that (a) indicate the
      Collateral (i) as all assets of such Borrower or words of similar effect,
      regardless of whether any particular asset comprised in the Collateral falls
      within the scope of Article 9 of the UCC, or (ii) as being of an equal or lesser
      scope or with greater detail, and (b) provide any other information required
      by
      part 5 of Article 9 of the UCC for the sufficiency or filing office acceptance
      of any financing statement or amendment. Each Borrower agrees to furnish any
      such information to the Secured
      Parties
      promptly
      upon request. Each Borrower also ratifies its authorization for the Secured
      Parties
      to have
      filed in any UCC jurisdiction any like initial financing statements or
      amendments thereto if filed prior to the date hereof.

     

    Section
      3. 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 equal to the greater
      of (i) ten percent (10%) per annum and (ii) 500 basis points plus the most
      recent 6-month LIBOR (London Interbank Offered Rate), payable quarterly on
      March
      31, June 30, September 30 and December 31, 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 Forced Conversion Date (as to that
      principal amount then being converted), on each Optional Redemption Date and
      on
      the Maturity Date (except that, if any such date is not a Business Day, then
      such payment shall be due on the next succeeding Business Day) (each such date,
      an “Interest
      Payment Date”),
      in
      cash or shares of Common Stock, or a combination of cash and shares of Common
      Stock, at the Interest Conversion Rate, or a combination thereof; provided,
      however,
      payment
      in shares of Common Stock may only occur if during the 20 Trading Days
      immediately prior to the applicable Interest Payment Date all of the Equity
      Conditions have been met. 

     

    b) Company’s
      Election to Pay Interest in Kind.
      Subject
      to the terms and conditions herein, the decision whether to pay interest
      hereunder in shares of Common Stock or cash shall be at the discretion of the
      Company. Not less than 20 Trading Days prior to each Interest Payment Date
      (the
“Interest
      Payment Notice Date”),
      the
      Company shall provide the Holder with written notice of its election to pay
      interest hereunder either in cash or shares of Common Stock (the Company may
      indicate in such notice that the election contained in such notice shall
      continue for later periods until revised) and the exact combination thereof.
      Within 20 Trading Days prior to an Interest Payment Date, the Company’s election
      (whether specific to an Interest Payment Date or continuous) shall be
      irrevocable as to such Interest Payment Date. Subject to the aforementioned
      conditions, failure to timely provide such written notice shall be deemed an
      election by the Company to pay the interest on such Interest Payment Date in
      cash. The Company’s determination
      of whether to pay interest in cash or shares shall be applied ratably to the
      Holders. 

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    c) Interest
      Calculations.
      Interest shall be calculated on the basis of a 360-day year and shall accrue
      daily commencing on the Original Issue Date until payment in full of the
      principal sum, together with all accrued and unpaid interest and other amounts
      which may become due hereunder, has been made. Payment of interest in shares
      of
      Common Stock shall otherwise occur pursuant to Section 5(d)(ii) and only 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 in fact delivers
      the
      Conversion Shares within the time period required by Section 5(d)(ii). Interest
      hereunder will be paid to the Person in whose name this Debenture is registered
      on the records of the Company regarding registration and transfers of Debentures
      (the “Debenture
      Register”).
      Except as otherwise provided herein, if at any time the Company pays interest
      partially in cash and partially in shares of Common Stock, then such payment
      shall be distributed ratably among the Holders based upon the principal amount
      of Debentures held by each Holder. 

    


    d) Late
      Fee.
      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 under applicable law) (“Late
      Fee”)
      which
      will accrue daily, from the date such interest is due hereunder through and
      including the date of payment. Notwithstanding anything to the contrary
      contained herein, if on any Interest Payment Date the Company has elected to
      pay
      interest in Common Stock and is not able to pay accrued interest in the form
      of
      Common Stock because it does not then satisfy the conditions for payment in
      the
      form of Common Stock set forth above, then, at
      the
      option of the Holder, the
      Company, in lieu of delivering either
      shares
      of
      Common Stock pursuant to this Section 3 or
      paying
      the regularly scheduled cash interest payment, shall deliver, within three
      Trading Days of each applicable Interest Payment 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 the payment of interest due on such Interest
      Payment Date and the highest Closing Price during the period commencing on
      the
      Interest Payment Date and ending on the Trading Day prior to the date such
      payment is made.

    


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

    


    Section
      4. Registration
      of Transfers and Exchanges.
      

     

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

     

    
      
        
        

      

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

    


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

    


    Section
      5. Conversion.

     

    a) Voluntary
      Conversion.
      At any
      time after the Original Issue Date until this Debenture is no longer
      outstanding, this Debenture shall be convertible into shares of Common Stock
      at
      the option of the Holder, in whole or in part at any time and from time to
      time
      (subject to the limitations on conversion set forth in Section 5(c)
      hereof). The Holder shall effect conversions by delivering to the Company the
      form of Notice of Conversion attached hereto as Annex
      A
      (a
“Notice
      of Conversion”),
      specifying therein the principal amount of Debentures to be converted and the
      date on which such conversion is to be effected (a “Conversion
      Date”).
      If no
      Conversion Date is specified in a Notice of Conversion, the Conversion Date
      shall be the date that such Notice of Conversion is received by the Company
      pursuant to Section 10(a) hereunder. To effect conversions hereunder, the Holder
      shall not be required to physically surrender Debentures to the Company unless
      the entire principal amount of this Debenture plus all accrued and unpaid
      interest thereon has been so converted. Conversions hereunder shall have the
      effect of lowering the outstanding principal amount of this Debenture in an
      amount equal to the applicable conversion. The Holder and the Company shall
      maintain records showing the principal amount converted and the date of such
      conversions. The Company shall deliver any objection to any Notice of Conversion
      within 2 Business Days of receipt of such notice. 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
      $0.70, subject
      to adjustment herein (the “Conversion
      Price”).

     

    
      
        
        

      

      
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    c) Holder’s
      Restriction on Conversion.
      


    a. The
      Holder shall not have the right to convert any portion of this Debenture,
      pursuant to Section 5(a) or otherwise, to the extent that after giving effect
      to
      such conversion, the Holder (together with the Holder’s affiliates), as set
      forth on the applicable Notice of Conversion, would beneficially own in excess
      of 4.99% of the number of shares of the Common Stock outstanding immediately
      after giving effect to such conversion.  For purposes of the foregoing
      sentence, the number of shares of Common Stock beneficially owned by the Holder
      and its affiliates shall include the number of shares of Common Stock issuable
      upon conversion of this Debenture with respect to which the determination of
      such sentence is being made, but shall exclude the number of shares of Common
      Stock which would be issuable upon (A) conversion of the remaining, nonconverted
      portion of this Debenture beneficially owned by the Holder or any of its
      affiliates and (B) exercise or conversion of the unexercised or nonconverted
      portion of any other securities of the Company (including, without limitation,
      any other Debentures or the Warrants) subject to a limitation on conversion
      or
      exercise analogous to the limitation contained herein beneficially owned by
      the
      Holder or any of its affiliates.  Except as set forth in the preceding
      sentence, for purposes of this Section 5(c), beneficial ownership shall be
      calculated in accordance with Section 13(d) of the Exchange Act. To the extent
      that the limitation contained in this section applies, the determination of
      whether this Debenture is convertible (in relation to other securities owned
      by
      the Holder) and of which a portion of this Debenture is convertible shall be
      in
      the sole discretion of such Holder. To ensure compliance with this restriction,
      the Holder will be deemed to represent to the Company each time it delivers
      a
      Notice of Conversion that such Notice of Conversion has not violated the
      restrictions set forth in this paragraph and the Company shall have no
      obligation to verify or confirm the accuracy of such determination. For purposes
      of this Section 5(c), in determining the number of outstanding shares of Common
      Stock, the Holder may rely on the number of outstanding shares of Common Stock
      as reflected in (x) the Company’s most recent Form 10-QSB or Form 10-KSB, as the
      case may be, (y) a more recent public announcement by the Company or (z) any
      other notice by the Company or the Company’s Transfer Agent setting forth the
      number of shares of Common Stock outstanding.  Upon the written or oral
      request of the Holder, the Company shall within two 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.

     

    
      
        
        

      

      
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    b. The
      Company shall not effect any conversion of this Debenture pursuant to Section
      5(a) or otherwise, to the extent that after giving effect to such conversion,
      the Holder (together with the Holder’s affiliates), as set forth on the
      applicable Notice of Conversion, would beneficially own in excess of 9.99%
      of
      the number of shares of the Common Stock outstanding immediately after giving
      effect to such conversion.  For purposes of the foregoing sentence, the
      number of shares of Common Stock beneficially owned by the Holder and its
      affiliates shall include the number of shares of Common Stock issuable upon
      conversion of this Debenture with respect to which the determination of such
      sentence is being made, but shall exclude the number of shares of Common Stock
      which would be issuable
      upon (A) conversion of the remaining, nonconverted portion of this Debenture
      beneficially owned by the Holder or any of its affiliates and (B) exercise
      or
      conversion of the unexercised or nonconverted portion of any other securities
      of
      the Company (including, without limitation, any other Debentures or the
      Warrants) subject to a limitation on conversion or exercise analogous to the
      limitation contained herein beneficially owned by the Holder or any of its
      affiliates.  Except as set forth in the preceding sentence, for purposes of
      this Section 5(c), beneficial ownership shall be calculated in accordance with
      Section 13(d) of the Exchange Act. To the extent that the limitation contained
      in this section applies, the determination of whether this Debenture is
      convertible (in relation to other securities owned by the Holder) and of which
      a
      portion of this Debenture is convertible shall be in the sole discretion of
      such
      Holder. To ensure compliance with this restriction, the Holder will be deemed
      to
      represent to the Company each time it delivers a Notice of Conversion that
      such
      Notice of Conversion has not violated the restrictions set forth in this
      paragraph and the Company shall have no obligation to verify or confirm the
      accuracy of such determination. For purposes of this Section 5(c), in
      determining the number of outstanding shares of Common Stock, the Holder may
      rely on the number of outstanding shares of Common Stock as reflected in (x)
      the
      Company’s most recent Form 10-QSB or Form 10-KSB, as the case may be, (y) a more
      recent public announcement by the Company or (z) any other notice by the Company
      or the Company’s Transfer Agent setting forth the number of shares of Common
      Stock outstanding.  Upon the written or oral request of the Holder, the
      Company shall within two 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.

     

    d) Mechanics
      of Conversion.

     

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

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    


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

     

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

     

    iv. Partial
      Liquidated Damages.
      If the
      Company fails for any reason to deliver to the Holder such certificate or
      certificates pursuant to Section 5(d)(ii) by the third Trading Day after the
      Conversion Date, the Company shall pay to such Holder, in cash upon demand
      of
      such Holder, as liquidated damages and not as a penalty, for each $1000 of
      principal amount being converted, $10 per Trading Day (increasing to $20 per
      Trading Day after 10 Trading Days after such damages begin to accrue) for each
      Trading Day after such third Trading Day until such certificates are delivered.
      The Company’s obligations to issue and deliver the Conversion Shares upon
      conversion of this Debenture in accordance with the terms hereof are absolute
      and unconditional, irrespective of any action or inaction by the Holder to
      enforce the same, any waiver or consent with respect to any provision hereof,
      the recovery of any judgment against any Person or any action to enforce the
      same, or any setoff, counterclaim, recoupment, limitation or termination, or
      any
      breach or alleged breach by the Holder or any other Person of any obligation
      to
      the Company or any violation or alleged violation of law by the Holder or any
      other person, and irrespective of any other circumstance which might otherwise
      limit such obligation of the Company to the Holder in connection with the
      issuance of such Conversion Shares; provided,
      however,
      such
      delivery shall not operate as a waiver by the Company of any such action the
      Company may have against the Holder. In the event a Holder of this Debenture
      shall elect to convert any or all of the outstanding principal amount hereof,
      the Company may not refuse conversion based on any claim that the Holder or
      any
      one associated or affiliated with the Holder of has been engaged in any
      violation of law, agreement or for any other reason, unless, an injunction
      from
      a court, on notice, restraining and or enjoining conversion of all or part
      of
      this Debenture shall have been sought and obtained and the Company posts a
      surety bond for the benefit
      of the Holder in the amount of 150% of the principal amount of this Debenture
      outstanding, which is subject to the injunction, which bond shall remain in
      effect until the completion of arbitration/litigation of the dispute and the
      proceeds of which shall be payable to such Holder to the extent it obtains
      judgment. In the absence of an injunction precluding the same, the Company
      shall
      issue Conversion Shares or, if applicable, cash, upon a properly noticed
      conversion. Nothing herein shall limit a Holder’s right to pursue actual damages
      or declare an Event of Default pursuant to Section 9 herein for the Company’s
      failure to deliver Conversion Shares within the period specified herein and
      such
      Holder shall have the right to pursue all remedies available to it at law or
      in
      equity including, without limitation, a decree of specific performance and/or
      injunctive relief. The exercise of any such rights shall not prohibit the
      Holders from seeking to enforce damages pursuant to any other Section hereof
      or
      under applicable law.

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    v. 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 pursuant
      to
      Section 5(d)(ii) by the third Trading Day after the Conversion Date, and if
      after such third Trading Day the Holder is required by its brokerage firm to
      purchase (in an open market transaction or otherwise) Common Stock to deliver
      in
      satisfaction of a sale by such Holder of the Conversion Shares which the Holder
      anticipated receiving upon such conversion (a “Buy-In”),
      then
      the Company shall (A) pay in cash to the Holder (in addition to any remedies
      available to or elected by the Holder) the amount by which (x) the Holder’s
      total purchase price (including brokerage commissions, if any) for the Common
      Stock so purchased exceeds (y) the product of (1) the aggregate number of shares
      of Common Stock that such Holder anticipated receiving from the conversion
      at
      issue multiplied by (2) the actual sale price of the Common Stock at the time
      of
      the sale (including brokerage commissions, if any) giving rise to such purchase
      obligation and (B) at the option of the Holder, either reissue Debentures in
      principal amount equal to the principal amount of the attempted conversion
      or
      deliver to the Holder the number of shares of Common Stock that would have
      been
      issued had the Company timely complied with its delivery requirements under
      Section 5(d)(ii). For example, if the Holder purchases Common Stock having
      a
      total purchase price of $11,000 to cover a Buy-In with respect to an attempted
      conversion of Debentures with respect to which the actual sale price of the
      Conversion Shares at the time of the sale (including brokerage commissions,
      if
      any) giving rise to such purchase obligation was a total of $10,000 under clause
      (A) of the immediately preceding sentence, the Company shall be required to
      pay
      the Holder $1,000. The Holder shall provide the Company written notice
      indicating the amounts payable to the Holder in respect of the Buy-In.
      Notwithstanding anything contained herein to the contrary, if a Holder requires
      the Company to make payment in respect of a Buy-In for the failure to timely
      deliver certificates hereunder and the Company timely pays in full such payment,
      the Company shall not be required to pay such Holder liquidated
      damages under Section 5(d)(iv) in respect of the certificates resulting in
      such
      Buy-In.

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    vi. Reservation
      of Shares Issuable Upon Conversion.
      The
      Company covenants that it will at all times reserve and keep available out
      of
      its authorized and unissued shares of Common Stock solely for the purpose of
      issuance upon conversion of the Debentures and payment of interest on the
      Debenture, 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 any
      additional requirements of the Company as to reservation of such shares set
      forth in the Purchase Agreement) be issuable (taking into account the
      adjustments and restrictions of Section 6) upon the conversion of 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 Registration Statement is then effective under
      the Securities Act, registered for public sale in accordance with such
      Registration Statement.

    


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

    


    viii. Transfer
      Taxes.
      The
      issuance of certificates for shares of the Common Stock on conversion of the
      Debentures 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 tax that may be payable in respect of any transfer involved in the
      issuance and delivery of any such certificate upon conversion in a name other
      than that of the Holder of such Debentures so converted and the Company shall
      not be required to issue or deliver such certificates unless or until the person
      or persons requesting the issuance thereof shall have paid to the Company the
      amount of such tax or shall have established to the satisfaction of the Company
      that such tax has been paid.

     

    
      
        
        

      

      
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    Section
      6. Certain
      Adjustments.

     

    a) Stock
      Dividends and Stock Splits.
      If the
      Company, 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 Common Stock (which, for avoidance of doubt,
      shall not include any shares of Common Stock issued by the Company pursuant
      to
      this Debenture, including as interest thereon), (B) 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 Conversion Price shall be
      multiplied by a fraction of which the numerator shall be the number of shares
      of
      Common Stock (excluding treasury shares, if any) outstanding before such event
      and of which the denominator shall be the number of shares of Common Stock
      outstanding after such event. Any adjustment made pursuant to this Section
      shall
      become effective immediately after the record date for the determination of
      stockholders entitled to receive such dividend or distribution and shall become
      effective immediately after the effective date in the case of a subdivision,
      combination or re-classification.

     

    b) Subsequent
      Equity Sales.
      If the
      Company or any Subsidiary thereof, as applicable, at any time while Debentures
      are outstanding, shall 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 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 less than
      the
      then Conversion Price (“Dilutive
      Issuance”),
      as
      adjusted hereunder (if the holder of the Common Stock or Common Stock
      Equivalents so issued shall at any time, whether by operation of purchase price
      adjustments, reset provisions, floating conversion, exercise or exchange prices
      or otherwise, or due to warrants, options or rights per share which is issued
      in
      connection with such issuance, be entitled to receive shares of Common Stock
      at
      an effective price per share which is less than the Conversion Price, such
      issuance shall be deemed to have occurred for less than the Conversion Price),
      then the Conversion 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. Such adjustment shall be
      made
      whenever such Common Stock or Common Stock Equivalents are issued and this
      provision is invoked. The Company shall notify the Holder in writing, no later
      than three business days following the issuance of any Common Stock or Common
      Stock Equivalents subject to this section, indicating therein the applicable
      issuance price, or of applicable reset price, exchange price, conversion price
      and other pricing terms.

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

     

    c) Pro
      Rata Distributions.
      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 to subscribe for or purchase any security, then
      in
      each such case the Conversion Price shall be determined 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 Closing Price determined as
      of
      the record date mentioned above,
      and of which the numerator shall be such Closing Price on such record date
      less
      the then fair market value at such record date of the portion of such assets
      or
      evidence of indebtedness so distributed applicable to one outstanding share
      of
      the Common Stock as determined by the Board of Directors in good faith and
      considering the value to be received by the Company for the proceeds, if any,
      of
      the exercise of the rights or issuance of the indebtedness giving rise to the
      adjustment of the Conversion Price hereunder. In either case the adjustments
      shall be described in a statement provided to the Holders of the portion of
      assets or evidences of indebtedness so distributed or such subscription rights
      applicable to one share of Common Stock. Such adjustment shall be made whenever
      any such distribution is made and shall become effective immediately after
      the
      record date mentioned above.

     

    d) Calculations.
      All
      calculations under this Section 6 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
      6,
      the number of shares of Common Stock outstanding as of a given date shall be
      the
      sum of the number of shares of Common Stock (excluding treasury shares, if
      any)
      outstanding.

    


    e) Notice
      to Holders.

    


    i. Adjustment
      to Conversion Price.
      Whenever the Conversion Price is adjusted pursuant to any of this Section 6,
      the
      Company shall promptly mail to each Holder a notice setting forth the Conversion
      Price after such adjustment and setting forth a brief statement of the facts
      requiring such adjustment. If the Company issues a variable rate security,
      despite the prohibition thereon in the Purchase Agreement, the Company shall
      be
      deemed to have issued Common Stock or Common Stock Equivalents at the lowest
      possible conversion or exercise price at which such securities may be converted
      or exercised in the case of a Variable Rate Transaction (as defined in the
      Purchase Agreement), or the lowest possible adjustment price in the case of
      an
      MFN Transaction (as defined in the Purchase Agreement).

     

    
      
        
        

      

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

     

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

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    iv. Exempt
      Issuance.
      Notwithstanding
      the foregoing, no adjustment will be made under this Section 6 in respect of
      an
      Exempt Issuance.

    


    Section
      7. Redemption
      and Forced Conversion.

    


    a) Optional
      Redemption at Election of Company.
      Subject
      to the provisions of this Section 7, if at any time after the 1 year anniversary
      of the Effective Date each of the Closing Prices during any 20 consecutive
      Trading Day period is less than the then Conversion Price (such
      period commencing only after such anniversary date, such period the
“Redemption
      Threshold Period”),
      the
      Company may, within 1 Trading Day of any Redemption Threshold Period, deliver
      a
      notice to the Holders (an “Optional
      Redemption Notice”
and
      the
      date such notice is deemed delivered hereunder, the “Optional
      Redemption Notice Date”)
      of its
      irrevocable election to redeem on the 20th
      Trading
      Day following the Optional Redemption Notice Date (such date, the “Optional
      Redemption Date”
and
      such redemption, the “Optional
      Redemption”)
      all of
      the then outstanding Debentures, for an amount, in cash, equal to the Optional
      Redemption Amount. The Optional Redemption Amount is due in full on the Optional
      Redemption Date. The Company may only effect an optional redemption if during
      the Redemption Threshold Period through to the Optional Redemption Date, each
      of
      the Equity Conditions shall have been met. If any of the Equity Conditions
      shall
      cease to be satisfied at any time during the required period, then the Holder
      may elect to nullify the Optional Redemption Notice by notice to the Company
      within 3 Trading Days after the first day on which any such Equity Condition
      has
      not been met (provided that if, by a provision of the Transaction Documents
      the
      Company is obligated to notify the Holder of the non-existence of an Equity
      Condition, such notice period shall be extended to the third Trading Day after
      proper notice from the Company) in which case the Optional Redemption Notice
      shall be null and void, ab initio.
      Any
      election by the Company under this Section 7(a) shall require the redemption
      of
      all Debentures.

     

    
      
        
        

      

      
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    b) Redemption
      Procedure.
      The
      payment of cash pursuant to an Optional Redemption shall be made on the Optional
      Redemption Date. If any portion of the cash payment
      for an Optional Redemption shall not be paid by the Company by the respective
      due date, interest shall accrue thereon at the rate of 18% per annum (or the
      maximum rate permitted by applicable law, whichever is less) until the Optional
      Redemption Amount, plus all amounts owing thereon is paid in full.
      Alternatively, if any portion of the Optional Redemption Amount remains unpaid
      after such date, the Holders may elect, by written notice to the Company given
      at any time thereafter, to invalidate ab initio
      such
      redemption, notwithstanding anything herein contained to the contrary, and,
      with
      respect the failure to honor the Optional Redemption, the Company shall have
      no
      further right to exercise such Optional Redemption. The
      Holder may elect to convert the outstanding principal amount of the Debenture
      pursuant to Section 5 prior to actual payment in cash for any redemption under
      this Section 7 by fax delivery of a Notice of Conversion to the Company. The
      Company covenants and agrees that it will honor all Conversion Notices tendered
      from the time of delivery of the Optional Redemption Notice through the date
      all
      amounts owing thereon are due and paid in full.

     

    c) Forced
      Conversion.
      

    


    i. Notwithstanding
      anything herein to the contrary, if after the 1 year anniversary of the
      Effective Date each of the Closing Prices for any 20 consecutive Trading Days
      (such period commencing only after such anniversary date, such period the
“Conversion
      Threshold Period”))
      equals or exceeds 175% of the then Conversion Price, the Company may, within
      1
      Trading Day of the end of any Conversion Threshold Period, deliver a notice
      to
      the Holder (a “Forced
      Conversion Notice”
and
      the
      date such notice is received by the Holder, the “Forced
      Conversion Notice Date”)
      to
      cause the Holder to immediately convert all or part of the then outstanding
      principal amount of Debentures pursuant to Sections 5(a) and 5(b). The Company
      may only effect a Forced Conversion Notice if all of the Equity Conditions
      are
      met through the Conversion Threshold Period until the date of the applicable
      Forced Conversion. Any Forced Conversion shall be applied ratably to all Holders
      based on their initial purchases of Debentures pursuant to the Purchase
      Agreement.

     

    
      
        
        

      

      
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    ii. Notwithstanding
      anything herein to the contrary, if during the period beginning on the
      80th
      Trading
      Day prior to the Maturity Date until the 60th
      Trading
      Day prior to the Maturity Date the average daily trading volume of the Common
      Stock equals or exceeds 65,000 (subject
      to adjustment for reverse and forward stock splits, stock dividends, stock
      combinations and other similar transactions of the Common Stock that occur
      after
      the date of this Agreement) (such period the “Maturity
      Threshold Period”),
      the
      Company may, within 1 Trading Day of the end of such Threshold Period, deliver
      a
      notice to the Holder (a “Maturity
      Conversion Notice”
and
      the
      date such notice is received by the Holder, the “Maturity
      Conversion Notice Date”)
      to
      cause the Holder to immediately convert all of the then outstanding principal
      amount of Debentures pursuant to Section 5(a) (the “Maturity
      Conversion”);
      provided,
      however,
      the
      conversion price
      for
      such Maturity Conversion shall be equal to the lesser of (x) the then Conversion
      Price and (y) 90% of the average of the VWAPs for the 20 Trading Days
      immediately prior to the Maturity Date (the “Maturity
      Conversion Price”).
      The
      Company may only effect a Maturity Conversion Notice if all of the Equity
      Conditions are met through the Threshold Period until the date of the applicable
      Maturity Conversion. Any Maturity Conversion shall be applied ratably to all
      Holders based on their initial purchases of Debentures pursuant to the Purchase
      Agreement.

    


    Section
      8. Negative
      Covenants.
      So long
      as 10% of the principal amount of this Debenture is outstanding, the Company
      will not and will not permit any of its Subsidiaries to directly or
      indirectly:

     

    a) enter
      into, create, incur, assume or suffer to exist any indebtedness or 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 that
is
      senior
      to, or pari passu
      with, in
      any respect, the Company’s obligations under the Debentures,
       excluding
      purchase money security interests granted to suppliers to the Company and any
      of
      the foregoing that are made in the ordinary course of business of the Company
      and its Subsidiaries;

     

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

    


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

    


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

     

    Section
      9. Events
      of Default.
      

    


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

    


    i. any
      default in the payment of (A) the principal of amount of any Debenture, or
      (B)
      interest (including Late Fees) on, or liquidated damages in respect of, any
      Debenture, in each case free of 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, solely in the case of an
      interest payment or other default under clause (B) above, is not cured, within
      3
      Trading Days;

     

    
      
        
        

      

      
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    ii. the
      Company shall fail to observe or perform any other covenant or agreement
      contained in this Debenture, the Pledge and Security Agreement or any of the
      other Transaction Documents (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 (xii) below) which failure is not cured,
      if
      possible to cure, within the earlier to occur
      of
(A)
      5
Trading
      Days after notice of such default sent by the Holder or by any other
      Holder
      and
      (B)10 Trading Days after the Company shall become or should have, with the
      exercise of reasonable care, become aware of such failure;

    


    iii. a
      default
      or event of default shall occur under (A) any of the Transaction Documents
      other
      than the Debentures, (B) any 2007 Loan Document (including the 2007 Loan
      Agreement) or (C) any other material agreement, lease, document or instrument
      to
      which the Company or any Subsidiary is bound and which is not covered during
      the
      applicable cure period;

    


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

    


    v. (i)
      the
      Company or any of its Subsidiaries shall commence, or there shall be commenced
      against the Company or any such Subsidiary, a case under any applicable
      bankruptcy or insolvency laws as now or hereafter in effect or any successor
      thereto, or the Company or any Subsidiary commences any other proceeding under
      any reorganization, arrangement, adjustment of debt, relief of debtors,
      dissolution, insolvency or liquidation or similar law of any jurisdiction
      whether now or hereafter in effect relating to the Company or any Subsidiary
      thereof or (ii) there is commenced against the Company or any Subsidiary thereof
      any such bankruptcy, insolvency or other proceeding which remains undismissed
      for a period of 60 days; or (iii) the Company or any Subsidiary thereof is
      adjudicated by a court of competent jurisdiction insolvent or bankrupt; or
      any
      order of relief or other order approving any such case or proceeding is entered;
      or (iv) the Company or any Subsidiary thereof suffers any appointment of any
      custodian or the like for it or any substantial part of its property which
      continues undischarged or unstayed for a period of 60 days; or (v) the Company
      or any Subsidiary thereof makes a general assignment for the benefit of
      creditors; or (vi) the Company shall fail to pay, or shall state that it is
      unable to pay, or shall be unable to pay, its debts generally as they become
      due; or (vii) the Company or any Subsidiary thereof shall call a meeting of
      its
      creditors with a view to arranging a composition, adjustment or restructuring
      of
      its debts; or (viii) the Company or any Subsidiary
      thereof shall by any act or failure to act expressly indicate its consent to,
      approval of or acquiescence in any of the foregoing; or (ix) any corporate
      or
      other action is taken by the Company or any Subsidiary thereof for the purpose
      of effecting any of the foregoing;

     

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

     

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

    


    vii. the
      Common Stock shall not be eligible for quotation on or quoted for trading on
      a
      Trading Market and shall not again be eligible for and quoted or listed for
      trading thereon within five Trading Days;

    


    viii. the
      Company shall be a party to any Change of Control Transaction or Fundamental
      Transaction, shall agree to sell or dispose of all or in excess of 40% of its
      assets in one or more transactions (whether or not such sale would constitute
      a
      Change of Control Transaction) or shall redeem or repurchase more than a de
      minimis number of its outstanding shares of Common Stock or other equity
      securities of the Company (other than redemptions of Conversion Shares and
      repurchases of shares of Common Stock or other equity securities of departing
      officers and directors of the Company; provided such repurchases shall not
      exceed $100,000, in the aggregate, for all officers and directors during the
      term of this Debenture) or the Company or any of its Subsidiaries shall sell,
      pledge, dispose of or otherwise encumber any of its respective Intellectual
      Property Rights; provided,
      however,
      that
      nothing contained in this subsection 9(a)(viii) shall be deemed to limit the
      Company’s ability to license its Intellectual Property or abandon or discontinue
      prosecution of any of its Intellectual Property in the ordinary course of its
      business;

    


    ix. a
      Registration Statement shall not have been declared effective by the Commission
      on or prior to the 180th calendar
      day after the Closing Date or any other or any other Event (as defined in the
      Registration Rights Agreement);

     

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

     

    x. if,
      during the Effectiveness Period (as defined in the Registration Rights
      Agreement), the effectiveness of the Registration Statement lapses for any
      reason or the Holder shall not be permitted to resell Registrable Securities
      (as
      defined in the Registration Rights Agreement) under the Registration Statement,
      in either case, for more than 30 consecutive Trading Days or 60 non-consecutive
      Trading
      Days during any 12 month period; provided,
      however,
      that in
      the event that the Company
      is negotiating a merger, consolidation, acquisition or sale of all or
      substantially all of its assets or a similar transaction and in the written
      opinion of counsel to the Company, the Registration Statement, would be required
      to be amended to include information concerning such transactions or the parties
      thereto that is not available or may not be publicly disclosed at the time,
      the
      Company shall be permitted an additional 30 consecutive Trading Days one-time
      during any 12 month period relating to such an event;

    


    xi. 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 Registration Statement
      to be
      declared effective by the Commission on or prior to the Effectiveness Date
      (as
      defined in the Registration Rights Agreement), which shall be covered by Section
      9(a)(ix); 

    


    xii. 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 5(d) or the Company shall provide notice to the Holder, including by
      way
      of public announcement, at any time, of its intention not to comply with
      requests for conversions of any Debentures in accordance with the terms
      hereof;

    


    xiii. the
      Company shall fail for any reason to pay in full the amount of cash due pursuant
      to a Buy-In within 7 Trading Days after notice therefor is delivered hereunder
      or shall fail to pay all amounts owed on account of an Event of Default within
      five days of the date due; 

    


    xiv. the
      Company shall fail to have available a sufficient number of authorized and
      unreserved shares of Common Stock to issue to such Holder upon a conversion
      hereunder; or

    


    xv. the
      Pledge and Security Agreement or any other security document shall for any
      reason fail or cease to create a valid and perfected and, except to the extent
      permitted by the terms hereof or thereof, first priority Lien in favor of the
      Secured Parties on any Collateral purported to be covered thereby.

     

    
      
        
        

      

      
        25

        
          

        

      

      
        
        

      

    


    b) Remedies
      Upon Event of Default.
      If any
      Event of Default occurs, the full principal amount of this Debenture, together
      with interest and other amounts owing in respect thereof, to the date of
      acceleration shall become, at the Holder’s election, immediately due and payable
      in cash. The aggregate amount payable upon an Event of Default shall be equal
      to
      the Mandatory Prepayment Amount. Commencing 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 the rate
      of
      18% per annum, or such lower maximum amount of interest permitted to be charged
      under applicable law. All Debentures for which the full Mandatory Prepayment
      Amount hereunder shall have been paid in accordance herewith shall promptly
      be
      surrendered to or as directed by the Company. The Holder need not provide and
      the Company hereby waives any presentment, demand, protest or other notice
      of
      any kind, and the Holder may immediately and without expiration of any grace
      period enforce any and all of its rights and remedies hereunder and all other
      remedies available to it under applicable law. Such declaration may be rescinded
      and annulled by the Holder at any time prior to payment hereunder and the Holder
      shall have all rights as a Debenture holder until such time, if any, as the
      full
      payment under this Section shall have been received by it. No such rescission
      or
      annulment shall affect any subsequent Event of Default or impair any right
      consequent thereon. In addition, upon and during the continuance of any one
      or
      more Events of Default, the Holder may exercise all rights and remedies with
      respect to the Collateral under the Loan Documents or otherwise available to
      it
      under the UCC and other applicable law, including the right to release, hold,
      sell, lease, liquidate, collect, realize upon, or otherwise dispose of all
      or
      any part of the Collateral and the right to occupy, utilize, process and
      commingle the Collateral. The Holder’s rights and remedies under this Section
      shall be cumulative and not exclusive.

     

    c)
       Collection;
      Foreclosure.
      Upon
      the occurrence and during the continuance of any Event of Default, the Holder
      may, at any time or from time to time, apply, collect, liquidate, sell in one
      or
      more sales, lease or otherwise dispose of, any or all of the Collateral, in
      its
      then condition or following any commercially reasonable preparation or
      processing, in such order as the Holder may elect. Any such sale may be made
      either at public or private sale at its place of business or elsewhere. Each
      Borrower agrees that any such public or private sale may occur upon ten (10)
      calendar days’ prior written notice to the Company. The Holder may require any
      Borrower to assemble the Collateral and make it available to the Holder at
      a
      place designated by the Holder that is reasonably convenient to the Holder
      and
      such Borrower. The proceeds of any sale, disposition or other realization upon
      all or any part of the Collateral shall be applied by the Holder in the
      following order of priorities:

    


    First,
      to the
      Holder in an amount equal to the then unpaid amount of the Secured Obligations,
      in such order and priority as the Holder may choose in its sole discretion;
      and

     

    
      
        
        

      

      
        26

        
          

        

      

      
        
        

      

    

     

    Second,
      after
      the full, final, and indefeasible payment in Cash of all of the Secured
      Obligations, to the Company or as a court of competent jurisdiction may
      direct.

     

    The
      Holder shall be deemed to have acted reasonably in the custody, preservation
      and
      disposition of any of the Collateral if it complies with the obligations of
      a
      secured party under the
      UCC.

     

    Section
      10. Miscellaneous.
      


    a) Notices.
      Any and
      all notices or other communications or deliveries to be provided by the Holders
      or by the Company hereunder, including, without limitation, any Notice of
      Conversion, shall be made in accordance with Section 6.4 of the Purchase
      Agreement.

     

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

     

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

    


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

     

    
      
        
        

      

      
        27

        
          

        

      

      
        
        

      

    

     

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

     

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

     

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

     

    
      
        
        

      

      
        28

        
          

        

      

      
        
        

      

    

     

    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.

    


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

    


    [SIGNATURE
      PAGE FOLLOWS]

     

    
      
        
        

      

      
        29

        
          

        

      

      
        
        

      

    


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

    


    


    
      	
              DIOMED
                HOLDINGS, INC.  

            
	 	 
	
              By:

            	 
	 	
              Name:
                David B. Swank

            
	 	
              Title:
                Chief Financial Officer

            


    

    


    


    


    [Signature
      Page to Amended and Restated Variable Rate 

    Secured
      Subordinated Convertible Debenture]

     

    
      
        
        

      

      
        30

        
          

        

      

      
        
        

      

    


    ANNEX
      A

    


    NOTICE
      OF CONVERSION

    


    The
      undersigned hereby elects to convert principal under the Variable Rate
      Convertible Debenture of Diomed Holdings, Inc.., a Delaware corporation (the
      “Company”),
      due
      on October 25, 2008, into shares of common stock, par value $0.001 per share
      (the “Common
      Stock”),
      of
      the Company according to the conditions hereof, as of the date written below.
      If
      shares are to be issued in the name of a person other than the undersigned,
      the
      undersigned will pay all transfer taxes payable with respect thereto and is
      delivering herewith such certificates and opinions as reasonably requested
      by
      the Company in accordance therewith. No fee will be charged to the holder for
      any conversion, except for such transfer taxes, if any.

    


    By
      the
      delivery of this Notice of Conversion the undersigned represents and warrants
      to
      the Company that its ownership of the Company’s Common Stock does not exceed the
      amounts determined in accordance with Section 13(d) of the Exchange Act, as
      further specified under Section 5(c) of this Debenture.

    


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

    


    Conversion
      calculations:   

    


    
      	
              Date
                to Effect Conversion:

            
	 
	
              Principal
                Amount of Debentures to be Converted:

            
	 
	
              Payment
                of Interest in Common Stock __ yes __ no 
If
                yes, $_____ of Interest Accrued on Account of 
Conversion at
                Issue.

            
	 
	
              Number
                of shares of Common Stock to be issued:

            
	 
	
              Signature:

            
	 
	
              Name:

            
	 
	
              Address:

            


    

     

    
      
        
        

      

      
        31

        
          

        

      

      
        
        

      

    

    


    Schedule
      1

    


    CONVERSION
      SCHEDULE

    


    The
      Variable Rate Secured Subordinated Convertible Debentures due on October 25,
      2008, in the aggregate principal amount of $____________ issued by Diomed
      Holdings, Inc. This Conversion Schedule reflects conversions made under Section
      5 of the above referenced Debenture.

    


    Dated:
      

    


    
      	 	 	 	 
	
              Date
                of Conversion

              (or
                for first entry, 

              Original
                Issue Date)

            	
              Amount
                of 

              Conversion

            	
              Aggregate
                

              Principal
                

              Amount
                

              Remaining
                

              Subsequent
                to 

              Conversion

              (or
                original 

              Principal
                

              Amount)

            	
              Company
                Attest

            
	 	 	 	 
	 	 	 	 
	
               

            	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 


    

     

    
      
        
        

      

      
        32

        
          

        

      

      
        
        

      

    

     

    Exhibit
      A 

    


    Form
      of Pledge and Security Agreement

     

    
      
        
        

      

      
        33