Document:

EXHIBIT 4.1

 

NEITHER THIS SECURITY NOR
THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN REGISTERED
WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH
SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. 
THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN SECURED BY SUCH SECURITIES.

 

Original
Issue Date: September     , 2009

Original
Conversion Price (subject to adjustment herein): $0.50

 

$                                

 

10% SENIOR SECURED CONVERTIBLE DEBENTURE

DUE SEPTEMBER       ,
2011

 

THIS 10% SENIOR SECURED CONVERTIBLE DEBENTURE is one of a series of duly authorized and validly issued 10% Senior Secured Convertible Debentures of Etelos, Inc., a Delaware corporation, (the “Company”), having its principal place of business at 26828 Maple Valley Highway-#297, Maple Valley, WA 98038, designated as its 10% Senior Secured Convertible Debenture due September     , 2011 (this debenture, the “Debenture” and, collectively with the other debentures of such series, the “Debentures”).
 

FOR VALUE RECEIVED, the Company promises to pay to
                                                
or its registered assigns (the “Holder”), or shall have paid pursuant to
the terms hereunder, the principal sum of
$                              
on September     ,
2011 (the “Maturity Date”) or such earlier date as this Debenture is required or permitted to be
repaid as provided hereunder, and to pay interest to the Holder on the
aggregate unconverted and then outstanding principal amount of this Debenture
in accordance with the provisions hereof. 
This Debenture is subject to the following additional provisions:

 

Section 1.               Definitions.  For the purposes hereof, in addition to the
terms defined elsewhere in this Debenture, (a) capitalized terms not
otherwise defined herein shall have the

 

1

 

meanings
set forth in the Purchase Agreement and (b) the following terms shall have
the following meanings:

 

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

 

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

 

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

 

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

 

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

 

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

 

2

 

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

 

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

 

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

 

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

 

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

 

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

 

“Debenture Register” means the records of the Company regarding
registration and transfers of this Debenture.

 

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

 

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

 

“Equity Conditions” means, during the period in question, (a) the
Company shall have duly honored all conversions and redemptions scheduled to
occur or occurring by virtue of one or more Notices of Conversion of the
Holder, if any, (b) the Company shall have paid all liquidated damages and
other amounts owing to the Holder in respect of this Debenture, (c) there
is an effective Registration Statement pursuant to which the Holder is
permitted to utilize the prospectus thereunder to resell all of the shares of
Common Stock issuable pursuant to the Transaction Documents (and the Company
believes, in good faith, that such effectiveness will continue uninterrupted
for the foreseeable future), (d) the Common Stock is trading on a Trading
Market and all of the shares issuable pursuant to the Transaction Documents are
listed or quoted for trading on such Trading Market (and the Company believes,
in good faith, that trading of the Common Stock on a Trading Market will
continue uninterrupted for the foreseeable future), (e) there is a
sufficient number of authorized but unissued and otherwise unreserved shares of
Common Stock for the issuance of all of the shares then issuable pursuant to
the Transaction Documents, (f) there is no existing Event of Default and
no existing event

 

3

 

which, with the passage of time or the giving of notice, would
constitute an Event of Default, (g) the issuance of the shares in question
to the Holder would not violate the limitations set forth in Section 4(d) herein,
(h) there has been no public announcement of a pending or proposed
Fundamental Transaction or Change of Control Transaction that has not been
consummated, (i) the applicable Holder is not in possession of any
information provided by the Company that constitutes, or may constitute,
material non-public information and (j) for each Trading Day in a period
of 20 consecutive Trading Days prior to the applicable date in question, the
daily dollar trading volume for the Common Stock on the principal Trading
Market exceeds $250,000 per Trading Day.

 

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

 

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

 

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

 

“Make-Whole Interest
Amount” shall have the meaning set forth in Section 2(a).

 

“Mandatory Default Amount” 
means the sum of (a) the greater of (i) the outstanding
principal amount of this Debenture, plus all accrued and unpaid interest
hereon, divided by the Conversion Price on the date the Mandatory Default
Amount is either (A) demanded (if demand or notice is required to create
an Event of Default) or otherwise due or (B) paid in full, whichever has a
lower Conversion Price, multiplied by the VWAP on the date the Mandatory
Default Amount is either (x) demanded or otherwise due or (y) paid in
full, whichever has a higher VWAP, or (ii) 120% of the outstanding
principal amount of this Debenture, plus 100% of accrued and unpaid interest
hereon and all interest that would have accrued if the outstanding principal
amount had remained outstanding through the Maturity Date and (b) all
other amounts, costs, expenses and liquidated damages due in respect of this
Debenture.

 

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

 

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

 

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

 

“Optional Redemption Amount” means the sum of (a) 100% of
the then outstanding principal amount of the Debenture, (b) accrued but
unpaid interest and (c) all liquidated damages and other amounts due in
respect of the Debenture.

 

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

 

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

 

4

 

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

 

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

 

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

 

“Permitted Indebtedness” means (a) the indebtedness
evidenced by the Debentures, (b) the Indebtedness existing on the Original
Issue Date and set forth on Schedule 3.1(aa) attached to the Purchase
Agreement and (c) indebtedness that (i) is expressly subordinate to
the Debentures pursuant to a written subordination agreement with the Purchasers
that is acceptable to each Purchaser in its sole and absolute discretion, and
delivered prior to the incurrence of such indebtedness and (ii) matures at
a date later than the 91st day following the Maturity Date.

 

“Permitted Lien” means the individual and collective reference
to the following: (a) Liens for taxes, assessments and other governmental
charges or levies not yet due or Liens for taxes, assessments and other
governmental charges or levies being contested in good faith and by appropriate
proceedings for which adequate reserves (in the good faith judgment of the
management of the Company) have been established in accordance with GAAP, (b) Liens
imposed by law which were incurred in the ordinary course of the Company’s
business, such as carriers’, warehousemen’s and mechanics’ Liens, statutory
landlords’ Liens, and other similar Liens arising in the ordinary course of the
Company’s business, and which (x) do not individually or in the aggregate
materially detract from the value of such property or assets or materially
impair the use thereof in the operation of the business of the Company and its
consolidated Subsidiaries or (y) are being contested in good faith by
appropriate proceedings, which proceedings have the effect of preventing for
the foreseeable future the forfeiture or sale of the property or asset subject
to such Lien, (c) Liens incurred in connection with Permitted
Indebtedness.

 

“Purchase Agreement” means the Securities Purchase Agreement,
dated as of September 29,
2009 among the Company and the original Holders, as amended, modified or
supplemented from time to time in accordance with its terms.

 

“Registration Statement” means a registration statement filed,
registering the resale, by the Purchasers, of the Underlying Shares.

 

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

 

“Successor Entity” shall have the meaning set forth in Section 5(e).

 

5

 

Section 2.              Interest.

 

a)            Payment of
Interest in Cash. The Company shall pay interest to the Holder on
the aggregate unconverted and then outstanding principal amount of this
Debenture at the rate of 10 % per annum, payable quarterly on January 1, April 1,
July 1 and October 1, beginning on January 1, 2010, on each Conversion
Date (as to that principal amount then being converted) and on the Maturity
Date (each such date, an “Interest Payment Date”) (if any Interest
Payment Date is not a Business Day, then the applicable payment shall be due on
the next succeeding Business Day), in cash. In addition to the payment of
interest described above, on each Conversion Date and in connection with the
payment of a Mandatory Default Amount or Optional Redemption Amount, the
Company shall pay the Holder via a bank check or wire transfer in the amount
equal to all interest that would have accrued if the principal amount subject
to such Notice of Conversion or payment, as applicable, had remained
outstanding through the stated Maturity Date (such amount, the “Make-Whole
Interest Amount”).

 

b)            Interest
Calculations. Interest shall be calculated on the basis of a
360-day year, consisting of twelve 30 calendar day periods, and shall accrue
daily commencing on the Original Issue Date until payment in full of the
outstanding principal, together with all accrued and unpaid interest,
liquidated damages and other amounts which may become due hereunder, has been
made.

 

c)            Late Fee.  All overdue accrued and unpaid interest to be
paid hereunder shall entail a late fee at an interest rate equal to the lesser
of 18% per annum or the maximum rate permitted by applicable law (the “Late
Fees”) which shall accrue daily from the date such interest is due
hereunder through and including the date of actual payment in full.

 

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

 

Section 3.              Registration of Transfers
and Exchanges.

 

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

 

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

 

6

 

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

 

Section 4.              Conversion.

 

a)            Voluntary Conversion. At any time
after the Original Issue Date until this Debenture is no longer outstanding,
this Debenture shall be convertible, in whole or in part, into shares of Common
Stock at the option of the Holder, at any time and from time to time (subject
to the conversion limitations set forth in Section 4(d) hereof).  The Holder shall effect conversions by
delivering to the Company a Notice of Conversion, the form of which is attached
hereto as Annex A (each, a “Notice of Conversion”), specifying
therein the principal amount of this Debenture to be converted and the date on
which such conversion shall be effected (such date, the “Conversion Date”).  If no Conversion Date is specified in a
Notice of Conversion, the Conversion Date shall be the date that such Notice of
Conversion is deemed delivered hereunder. 
To effect conversions hereunder, the Holder shall not be required to
physically surrender this Debenture to the Company unless the entire principal
amount of this Debenture, plus all accrued and unpaid interest thereon, has
been so converted and paid. Conversions hereunder shall have the effect of
lowering the outstanding principal amount of this Debenture in an amount equal
to the applicable conversion.  The Holder
and the Company shall maintain records showing the principal amount(s) converted
and the date of such conversion(s).  The
Company may deliver an objection to any Notice of Conversion within one (1) Business
Day of delivery of such Notice of Conversion. 
In the event of any dispute or discrepancy, the records of the Holder
shall be controlling and determinative in the absence of manifest error. The Holder, and any assignee by acceptance of this Debenture,
acknowledge and agree that, by reason of the provisions of this paragraph,
following conversion of a portion of this Debenture, the unpaid and unconverted
principal amount of this Debenture may be less than the amount stated on the
face hereof.

 

b)            Conversion
Price.  The conversion price in effect
on any Conversion Date shall be equal to $0.50, subject to adjustment herein (the
“Conversion Price”).

 

c)             Mechanics of
Conversion.

 

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

 

7

 

ii.             Delivery of Certificate Upon Conversion. Not later
than three (3) Trading Days after each Conversion Date (the “Share
Delivery Date”), the Company shall deliver, or cause to be delivered, to
the Holder (A) a certificate or certificates representing the Conversion
Shares which, on or after the earlier of (i) the six month anniversary of
the Original Issue Date or (ii) the Effective Date, shall be free of
restrictive legends and trading restrictions (other than those which may then
be required by the Purchase Agreement) representing the number of Conversion
Shares being acquired upon the conversion of this Debenture and (B) a bank
check in the amount of accrued and unpaid interest (plus any Make-Whole
Interest Amount(s)). On or after the earlier of (i) the six month
anniversary of the Original Issue Date or (ii) the Effective Date, the
Company shall use its best efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section 4(c) electronically
through the Depository Trust Company or another established clearing
corporation performing similar functions.

 

iii.            Failure to
Deliver Certificates.  If, in the
case of any Notice of Conversion, such certificate or certificates are not
delivered to or as directed by the applicable Holder by the Share Delivery
Date, the Holder shall be entitled to elect by written notice to the Company at
any time on or before its receipt of such certificate or certificates, to
rescind such Conversion, in which event the Company shall promptly return to
the Holder any original Debenture delivered to the Company and the Holder shall
promptly return to the Company the Common Stock certificates issued to such
Holder pursuant to the rescinded Conversion Notice.

 

iv.            Obligation
Absolute; Partial Liquidated Damages.  The Company’s obligations to issue and
deliver the Conversion Shares upon conversion of this Debenture in accordance
with the terms hereof are absolute and unconditional, irrespective of any
action or inaction by the Holder to enforce the same, any waiver or consent
with respect to any provision hereof, the recovery of any judgment against any
Person or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder or any other Person of any obligation to the Company or any violation or
alleged violation of law by the Holder or any other Person, and irrespective of
any other circumstance which might otherwise limit such obligation of the
Company to the Holder in connection with the issuance of such Conversion
Shares; provided, however, that such delivery shall not operate
as a waiver by the Company of any such action the Company may have against the
Holder.  In the event the Holder of this
Debenture shall elect to convert any or all of the outstanding principal amount
hereof, the Company may not refuse conversion based on any claim that the
Holder or anyone associated or affiliated with the Holder has been engaged in
any violation of law, agreement or for any

 

8

 

other reason, unless an injunction from a court, on notice to Holder,
restraining and or enjoining conversion of all or part of this Debenture shall
have been sought and obtained, and the Company posts a surety bond for the
benefit of the Holder in the amount of 150% of the outstanding principal amount
of this Debenture, which is subject to the injunction, which bond shall remain
in effect until the completion of arbitration/litigation of the underlying
dispute and the proceeds of which shall be payable to the Holder to the extent
it obtains judgment.  In the absence of
such injunction, the Company shall issue Conversion Shares or, if applicable,
cash, upon a properly noticed conversion. 
If the Company fails for any reason to deliver to the Holder such
certificate or certificates pursuant to Section 4(c)(ii) by the Share
Delivery Date, the Company shall pay to the Holder, in cash, as liquidated
damages and not as a penalty, for each $1,000 of principal amount being
converted, $10 per Trading Day (increasing to $20 per Trading Day on the fifth
(5th) Trading Day
after such liquidated damages begin to accrue) for each Trading Day after such
Share Delivery Date until such certificates are delivered or Holder rescinds
such conversion.    Nothing herein shall
limit a Holder’s right to pursue actual damages or declare an Event of Default
pursuant to Section 8 hereof for the Company’s failure to deliver
Conversion Shares within the period specified herein and the Holder shall have
the right to pursue all remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief.  The exercise of any
such rights shall not prohibit the Holder from seeking to enforce damages
pursuant to any other Section hereof or under applicable law.

 

v.             Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon Conversion. In addition
to any other rights available to the Holder, if the Company fails for any
reason to deliver to the Holder such certificate or certificates by the Share
Delivery Date pursuant to Section 4(c)(ii), and if after such Share
Delivery Date the Holder is required by its brokerage firm to purchase (in an
open market transaction or otherwise), or the Holder’s brokerage firm otherwise
purchases, shares of Common Stock to deliver in satisfaction of a sale by the
Holder of the Conversion Shares which the Holder was entitled to receive upon
the conversion relating to such Share Delivery Date (a “Buy-In”), then
the Company shall (A) pay in cash to the Holder (in addition to any other
remedies available to or elected by the Holder) the amount, if any, by which (x) the
Holder’s total purchase price (including any brokerage commissions) for the
Common Stock so purchased exceeds (y) the product of (1) the
aggregate number of shares of Common Stock that the Holder was entitled to
receive from the conversion at issue multiplied by (2) the actual sale
price at which the sell order giving rise to such purchase obligation was
executed (including any brokerage commissions) and (B) at the option of
the Holder, either reissue (if surrendered) this Debenture in a principal
amount equal to the principal amount of the attempted conversion (in which case
such conversion shall be deemed rescinded) or deliver to the Holder the number
of shares of Common Stock that would have

 

9

 

been issued if the Company had timely complied with its delivery
requirements under Section 4(c)(ii). 
For example, if the Holder purchases Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an attempted
conversion of this Debenture with respect to which the actual sale price of the
Conversion Shares (including any brokerage commissions) giving rise to such
purchase obligation was a total of $10,000 under clause (A) of the
immediately preceding sentence, the Company shall be required to pay the Holder
$1,000.  The Holder shall provide the
Company written notice indicating the amounts payable to the Holder in respect
of the Buy-In and, upon request of the Company, evidence of the amount of such
loss.  Nothing herein shall limit a
Holder’s right to pursue any other remedies available to it hereunder, at law
or in equity including, without limitation, a decree of specific performance
and/or injunctive relief with respect to the Company’s failure to timely
deliver certificates representing shares of Common Stock upon conversion of
this Debenture as required pursuant to the terms hereof.

 

vi.            Reservation of
Shares Issuable Upon Conversion. The Company covenants that
it will at all times reserve and keep available out of its authorized and
unissued shares of Common Stock for the sole purpose of issuance upon conversion
of this Debenture as herein provided, free from preemptive rights or any other
actual contingent purchase rights of Persons other than the Holder (and the
other holders of the Debentures), not less than such aggregate number of shares
of the Common Stock as shall (subject to the terms and conditions set forth in
the Purchase Agreement) be issuable (taking into account the adjustments and
restrictions of Section 5) upon the conversion of the then outstanding
principal amount of this Debenture.  The
Company covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly authorized, validly issued, fully paid and
nonassessable and, if a Registration Statement is then effective under the
Securities Act, shall be registered for public resale in accordance with such
Registration Statement.

 

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

 

viii.          Transfer Taxes.  The issuance of certificates for shares of
the Common Stock on conversion of this Debenture shall be made without charge
to the Holder hereof for any documentary stamp or similar taxes that may be
payable in respect of the issue or delivery of such certificates, provided
that, the Company shall not be required to pay any tax that may be payable in
respect of any transfer involved in the issuance and delivery of any such
certificate upon conversion in a

 

10

 

name other than that of the Holder of this Debenture so converted and
the Company shall not be required to issue or deliver such certificates unless
or until the Person or Persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.

 

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

 

11

 

transfer agent setting forth the number of shares of Common Stock
outstanding.  Upon the written or oral request of a Holder, the Company
shall within two Trading Days confirm orally and in writing to the Holder the
number of shares of Common Stock then outstanding.  In any case, the
number of outstanding shares of Common Stock shall be determined after giving
effect to the conversion or exercise of securities of the Company, including
this Debenture, by the Holder or its Affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. The “Beneficial
Ownership Limitation” shall be 4.99% of the number of shares of the Common
Stock outstanding immediately after giving effect to the issuance of shares of
Common Stock issuable upon conversion of this Debenture held by the
Holder.  The Holder, upon not less than
61 days’ prior notice to the Company, may increase or decrease the Beneficial
Ownership Limitation provisions of this Section 4(d), provided that the
Beneficial Ownership Limitation in no event exceeds 9.99% of the number of
shares of the Common Stock outstanding immediately after giving effect to the
issuance of shares of Common Stock upon conversion of this Debenture held by
the Holder and the Beneficial Ownership Limitation provisions of this Section 4(d) shall
continue to apply.  Any such increase or
decrease will not be effective until the 61st day after
such notice is delivered to the Company. 
The Beneficial Ownership Limitation provisions of this paragraph shall
be construed and implemented in a manner otherwise than in strict conformity
with the terms of this Section 4(d) to correct this paragraph (or any
portion hereof) which may be defective or inconsistent with the intended
Beneficial Ownership Limitation contained herein or to make changes or
supplements necessary or desirable to properly give effect to such limitation.
The limitations contained in this paragraph shall apply to a successor holder
of this Debenture.

 

Section 5.               Certain Adjustments.

 

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

 

12

 

b)            Subsequent
Equity Sales.  If, at any
time while this Debenture is outstanding, the Company or any Subsidiary, as
applicable, sells or grants any option to purchase or sells or grants any right
to reprice, or otherwise disposes of or issues (or announces any sale, grant or
any option to purchase or other disposition), any Common Stock or Common Stock
Equivalents entitling any Person to acquire shares of Common Stock at an
effective price per share that is lower than the then Conversion Price (such
lower price, the “Base Conversion Price” and such issuances,
collectively, a “Dilutive Issuance”) (if the holder of the Common Stock
or Common Stock Equivalents so issued shall at any time, whether by operation
of purchase price adjustments, reset provisions, floating conversion, exercise
or exchange prices or otherwise, or due to warrants, options or rights per
share which are issued in connection with such issuance, be entitled to receive
shares of Common Stock at an effective price per share that is lower than the
Conversion Price, such issuance shall be deemed to have occurred for less than
the Conversion Price on such date of the Dilutive Issuance), then the
Conversion Price shall be reduced to equal the Base Conversion Price.  Such adjustment shall be made whenever such
Common Stock or Common Stock Equivalents are issued.  Notwithstanding the foregoing, no adjustment
will be made under this Section 5(b) in respect of an Exempt
Issuance.  If the Company enters into a
Variable Rate Transaction, despite the prohibition set forth in the Purchase
Agreement, the Company shall be deemed to have issued Common Stock or Common
Stock Equivalents at the lowest possible conversion price at which such
securities may be converted or exercised. The Company shall notify the Holder
in writing, no later than the Trading Day following the issuance of any Common
Stock or Common Stock Equivalents subject to this Section 5(b), indicating
therein the applicable issuance price, or applicable reset price, exchange
price, conversion price and other pricing terms (such notice, the “Dilutive
Issuance Notice”).  For purposes of
clarification, whether or not the Company provides a Dilutive Issuance Notice
pursuant to this Section 5(b), upon the occurrence of any Dilutive
Issuance, the Holder is entitled to receive a number of Conversion Shares based
upon the Base Conversion Price on or after the date of such Dilutive Issuance,
regardless of whether the Holder accurately refers to the Base Conversion Price
in the Notice of Conversion. Notwithstanding anything to the contrary in this Section 5(b),
in no event shall then Conversion Price be reduced to less than $0.10 (subject
to adjustment pursuant to Section 5(a)) as a result of any adjustment to
the Conversion Price pursuant to this Section 5(b).

 

c)             Subsequent
Rights Offerings.  If the
Company, at any time while the Debenture is outstanding, shall issue rights,
options or warrants to all holders of Common Stock (and not to the Holders)
entitling them to subscribe for or purchase shares of Common Stock at a price
per share that is lower than the VWAP on the record date referenced below, then
the Conversion Price shall be multiplied by a fraction of which the denominator
shall be the number of shares of the Common Stock outstanding on the date of
issuance of

 

13

 

such rights, options or warrants plus the number of additional shares
of Common Stock offered for subscription or purchase, and of which the
numerator shall be the number of shares of the Common Stock outstanding on the
date of issuance of such rights, options or warrants plus the number of shares
which the aggregate offering price of the total number of shares so offered
(assuming delivery to the Company in full of all consideration payable upon
exercise of such rights, options or warrants) would purchase at such VWAP.  Such adjustment shall be made whenever such
rights, options or warrants are issued, and shall become effective immediately
after the record date for the determination of stockholders entitled to receive
such rights, options or warrants.

 

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

 

e)             Fundamental
Transaction. If, at any time while this Debenture is
outstanding, (i) the Company,
directly or indirectly, in one or more related transactions effects any
merger or consolidation of the Company with or into another Person, (ii) the
Company, directly or indirectly, effects any
sale, lease, license, assignment,
transfer, conveyance or other disposition of all or substantially all
of its assets in one or a series of related transactions, (iii) any,
direct or indirect, purchase offer, tender offer or exchange offer (whether by
the Company or another Person) is completed pursuant to which holders of Common
Stock are permitted to sell, tender or exchange their shares for other
securities, cash or property and has been accepted by the holders of 50% or
more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any
reclassification, reorganization or recapitalization 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, (v) the
Company, directly or indirectly, in one or
more related transactions  consummates
a stock or share purchase agreement or other business
combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with another
Person whereby such other Person acquires more than 50% of the
outstanding shares of Common Stock
(not including any shares of Common Stock held by the other Person or other
Persons making or party to, or associated or affiliated with the other Persons

 

14

 

making or party to, such stock or
share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent conversion of this
Debenture, the Holder shall have the
right to receive, for each Conversion Share that would have been issuable upon
such conversion immediately prior to the occurrence of such Fundamental
Transaction (without regard to any limitation in Section 4(d)), the number of shares of Common Stock of the successor
or acquiring corporation or of the Company, if it is the surviving corporation,
and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction
by a holder of the number of shares of Common Stock for which this Debenture is
convertible immediately prior to such Fundamental Transaction (without
regard to any limitation in Section 4(d) on the conversion of this
Debenture). 
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 (1) share of Common Stock in such Fundamental Transaction,
and the Company shall apportion the Conversion Price among the Alternate
Consideration in a reasonable manner reflecting the relative value of any
different components of the Alternate Consideration.  If holders of Common Stock are given any
choice as to the securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any conversion of this Debenture following such
Fundamental Transaction.  The Company
shall cause any successor entity in a Fundamental Transaction in which the
Company is not the survivor (the “Successor Entity”) to assume in
writing all of the obligations of the Company under this Debenture and the
other Transaction Documents (as defined in the Purchase Agreement) in
accordance with the provisions of this Section 5(e) pursuant to
written agreements in form and substance reasonably satisfactory to the Holder
and approved by the Holder (without unreasonable delay) prior to such
Fundamental Transaction and shall, at the option of the holder of this
Debenture, deliver to the Holder in exchange for this Debenture a security of
the Successor Entity evidenced by a written instrument substantially similar in
form and substance to this Debenture which is convertible for a corresponding
number of shares of capital stock of such Successor Entity (or its parent
entity) equivalent to the shares of Common Stock acquirable and receivable upon
conversion of this Debenture (without regard to any limitations on the
conversion of this Debenture) prior to such Fundamental Transaction, and with a
conversion price which applies the conversion price hereunder to such shares of
capital stock (but taking into account the relative value of the shares of
Common Stock pursuant to such Fundamental Transaction and the value of such
shares of capital stock, such number of shares of capital stock and such
conversion price being for the purpose of protecting the economic value of this
Debenture immediately prior to the consummation of such Fundamental
Transaction), and which is reasonably satisfactory in form and substance to the
Holder. Upon the occurrence of any such Fundamental Transaction, the Successor
Entity shall succeed to, and be substituted for (so that from and after the
date of such Fundamental Transaction, the provisions of this Debenture and the
other Transaction Documents referring to the “Company” shall refer instead to
the Successor Entity), and may exercise every right and power of the Company
and shall assume all of

 

15

 

the obligations of the Company under this Debenture and the other
Transaction Documents with the same effect as if such Successor Entity had been
named as the Company herein.

 

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

 

g)            Notice to the
Holder.

 

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

 

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

 

16

 

share exchange is expected to become effective or close, and the date
as of which it is expected that holders of the Common Stock of record shall be
entitled to exchange their shares of the Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange, provided that the failure to deliver such
notice or any defect therein or in the delivery thereof shall not affect the
validity of the corporate action required to be specified in such notice.  To the extent that any notice provided
hereunder constitutes, or contains, material, non-public information regarding
the Company or any of the Subsidiaries, the Company shall simultaneously file
such notice with the Commission pursuant to a Current Report on Form 8-K.  The Holder shall remain entitled to convert
this Debenture during the 20-day period commencing on the date of such notice
through the effective date of the event triggering such notice except as may
otherwise be expressly set forth herein.

 

Section 6.

 

a)             Optional Redemption at
Election of Company.  Subject to
the provisions of this Section 6(a), at any time after Effective Date, the
Company may deliver a notice to the Holder (an “Optional Redemption Notice”
and the date such notice is deemed delivered hereunder, the “Optional
Redemption Notice Date”) of its irrevocable election to redeem all of the
then outstanding principal amount of this Debenture for cash in an amount equal
to the Optional Redemption Amount on the 20th Trading Day
following the Optional Redemption Notice Date (such date, the “Optional
Redemption Date”, such 20 Trading Day period, the “Optional Redemption
Period” and such redemption, the “Optional Redemption”).  The Optional Redemption Amount is payable in
full on the Optional Redemption Date. 
The Company may only effect an Optional Redemption if each of the Equity
Conditions shall have been met (unless waived in writing by the Holder) on each
Trading Day during the period commencing on the Optional Redemption Notice Date
through to the Optional Redemption Date and through and including the date
payment of the Optional Redemption Amount is actually made in full.  If any of the Equity Conditions shall cease
to be satisfied at any time during the Optional Redemption Period, then the
Holder may elect to nullify the Optional Redemption Notice by notice to the
Company within 3 Trading Days after the first day on which any such Equity
Condition has not been met (provided that if, by a provision of the Transaction
Documents, the Company is obligated to notify the Holder of the non-existence
of an Equity Condition, such notice period shall be extended to the third
Trading Day after proper notice from the Company) in which case the Optional
Redemption Notice shall be null and void, ab  initio.  The Company covenants and agrees that it will
honor all Notices of Conversion tendered from the time of delivery of the
Optional Redemption Notice through the date all amounts owing thereon are due
and paid in full. The Company’s
determination to pay an Optional Redemption in cash shall be applied ratably to
all of the holders of the then outstanding Debentures based on their (or their
predecessor’s) initial purchases of Debentures pursuant to the Purchase
Agreement.

 

b)            Redemption Procedure.  The payment of cash pursuant to an Optional
Redemption shall be payable on the Optional Redemption Date.  If any portion of the payment pursuant to an
Optional Redemption shall not be paid by the Company by the

 

17

 

applicable due date, interest shall accrue thereon
at an interest rate equal to the lesser of 18% per annum or the maximum rate
permitted by applicable law until such amount is paid in full.  Notwithstanding anything herein contained to
the contrary, if any portion of the Optional Redemption Amount remains unpaid
after such date, the Holder may elect, by written notice to the Company given
at any time thereafter, to invalidate such Optional Redemption, ab initio, and,
with respect to the Company’s failure to honor the Optional Redemption, the
Company shall have no further right to exercise such Optional Redemption.  The Holder may elect to convert the
outstanding principal amount of the Debenture pursuant to Section 4 prior
to actual payment in cash for any redemption under this Section 6 by the
delivery of a Notice of Conversion to the Company.

 

Section 7.               Negative Covenants. As long as
any portion of this Debenture remains outstanding, unless the holders of at
least 75% in principal amount of the then outstanding Debentures shall have
otherwise given prior written consent, the Company shall not, and shall not
permit any of the Subsidiaries to, directly or indirectly:

 

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

 

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

 

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

 

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

 

e)             repay,
repurchase or offer to repay, repurchase or otherwise acquire any Indebtedness,
other than (x) the Debentures if on a pro-rata basis or (y) subject
to the terms of the Subordination Agreements, regularly scheduled principal and
interest payments as such terms are in effect as of the Original Issue Date;

 

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

 

18

 

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

 

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

 

Section 8.              Events of Default.

 

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

 

i.                any default in the payment
of (A) the principal amount of any Debenture or (B) interest,
liquidated damages and other amounts owing to a Holder on any Debenture, as and
when the same shall become due and payable (whether on a Conversion Date or the
Maturity Date or by acceleration or otherwise) which default, solely in the
case of an interest payment or other default under clause (B) above, is
not cured within 3 Trading Days;

 

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

 

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

 

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

 

19

 

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

 

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

 

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

 

viii.           the Company shall be a party
to any Change of Control Transaction or Fundamental Transaction or shall agree
to sell or dispose of all or in excess of 40% of its assets in one transaction
or a series of related transactions (whether or not such sale would constitute
a Change of Control Transaction);

 

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

 

x.               the Company does not meet
the current public information requirements under Rule 144; or

 

xi.              any monetary judgment, writ
or similar final process shall be entered or filed against the Company, any
subsidiary or any of their respective property or other assets for more than
$150,000, and such judgment, writ or similar final process shall remain
unvacated, unbonded or unstayed for a period of 45 calendar days.

 

b)            Remedies Upon
Event of Default. If any Event of Default occurs, the outstanding
principal amount of this Debenture, plus accrued but unpaid interest,
liquidated damages and other amounts owing in respect thereof through the date
of acceleration, shall become, at the Holder’s election, immediately due and
payable in cash at the Mandatory Default Amount.  Commencing 5 days after the occurrence of any

 

20

 

Event of Default that results in the eventual acceleration of this
Debenture, the interest rate on this Debenture shall accrue at an interest rate
equal to the lesser of 18% per annum or the maximum rate permitted under
applicable law.  Upon the payment in full
of the Mandatory Default Amount, the Holder shall promptly surrender this
Debenture to or as directed by the Company. 
In connection with such acceleration described herein, the Holder need
not provide, and the Company hereby waives, any presentment, demand, protest or
other notice of any kind, and the Holder may immediately and without expiration
of any grace period enforce any and all of its rights and remedies hereunder
and all other remedies available to it under applicable law.  Such acceleration may be rescinded and
annulled by Holder at any time prior to payment hereunder and the Holder shall
have all rights as a holder of the Debenture until such time, if any, as the
Holder receives full payment pursuant to this Section 8(b).  No such rescission or annulment shall affect
any subsequent Event of Default or impair any right consequent thereon.

 

Section 9.               Miscellaneous.

 

a)             Notices.  Any and all notices or other communications
or deliveries to be provided by the Holder hereunder, including, without
limitation, any Notice of Conversion, shall be in writing and delivered
personally, by facsimile, or sent by a nationally recognized overnight courier
service, addressed to the Company, at the address set forth above, or such
other facsimile number or address as the Company may specify for such purposes
by notice to the Holder delivered in accordance with this Section 9(a).  Any and all notices or other communications
or deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, or sent by a nationally recognized
overnight courier service addressed to each Holder at the facsimile number or
address of the Holder appearing on the books of the Company, or if no such
facsimile number or address appears on the books of the Company, at the
principal place of business of such Holder, as set forth in the Purchase
Agreement.  Any notice or other
communication or deliveries hereunder shall be deemed given and effective on
the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number set forth on
the signature pages attached hereto prior to 5:30 p.m. (New York City
time) on any date, (ii) the next Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number set forth on the signature pages attached hereto on a day
that is not a Trading Day or later than 5:30 p.m. (New York City time) on
any Trading Day, (iii) the second Trading Day following the date of
mailing, if sent by U.S. nationally recognized overnight courier service or (iv) upon
actual receipt by the party to whom such notice is required to be given.

 

b)            Absolute
Obligation. Except as expressly provided herein, no provision
of this Debenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, liquidated damages and
accrued interest, as applicable, on this Debenture at the time, place, and
rate, and in the coin or currency, herein prescribed.  This Debenture is a direct debt obligation of
the Company.  This

 

21

 

Debenture ranks pari  passu with all other Debentures now
or hereafter issued under the terms set forth herein.

 

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

 

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

 

e)             Waiver.  Any waiver by the Company or the Holder of a
breach of any provision of this Debenture shall not operate as or be construed
to be a waiver of any other breach of such provision or of any breach of any
other provision of this Debenture.  The
failure of the Company or the Holder to insist upon strict adherence to any
term of

 

22

 

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 on any other occasion.  Any waiver by the Company or the Holder must
be in writing.

 

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

 

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

 

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

 

i)             Secured Obligation.  The obligations of the Company under this
Debenture are secured by all assets of the Company and each Subsidiary pursuant
to the Security Agreement, dated as of September     ,
2009 between the Company, the Subsidiaries of the Company and the Secured
Parties (as defined therein).

 

j)             Amendments.  This Debenture may be modified or amended or
the provisions hereof waived with the prior written consent of the Company and
Holders holding Debentures at least equal to 75% of the aggregate principal
amount then outstanding under all Debentures.

 

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

 

23

 

(Signature
Pages Follow)

 

24

 

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.

 

 

	
   

  	
  ETELOS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:  Daniel
  J.A. Kolke

  
	
   

  	
   

  	
  Title:  Chief
  Executive Officer

  
	
   

  	
  Facsimile
  No. for delivery of Notices: 425.458.4511

  

 

25

 

ANNEX A

 

NOTICE OF CONVERSION

 

The undersigned hereby
elects to convert principal under the 10%
Senior Secured Convertible Debenture due September     ,
2011 of Etelos, Inc., a
Delaware corporation (the “Company”), into shares of common stock (the “Common
Stock”), of the Company according to the conditions hereof, as of the date
written below.  If shares of Common Stock
are to be issued in the name of a person other than the undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith.  No
fee will be charged to the holder for any conversion, except for such transfer
taxes, if any.

 

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

 

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

 

	
  Conversion calculations:

  	
   

  
	
   

  	
  Date to Effect Conversion:

  
	
   

  	
   

  
	
   

  	
  Principal Amount of Debenture to be Converted:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Number of shares of Common Stock to be issued:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Signature:

  
	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
   

  
	
   

  	
  Address for Delivery of Common Stock Certificates:

  
	
   

  	
   

  
	
   

  	
  Or

  
	
   

  	
   

  
	
   

  	
  DWAC Instructions:

  
	
   

  	
   

  
	
   

  	
  Broker No:

  
	
   

  	
  Account No:

  

 

26

 

Schedule 1

 

CONVERSION SCHEDULE

 

The 10%
Senior Secured Convertible Debentures due on September     ,
2011 in the aggregate principal amount of
$                        
are issued by Etelos, Inc., a
Delaware corporation.  This
Conversion Schedule reflects conversions made under Section 4 of the above
referenced Debenture.

 

Dated:

 

	
  Date of Conversion

  (or for first entry,

  Original Issue Date)

  	
   

  	
  Amount of

  Conversion

  	
   

  	
  Aggregate

  Principal

  Amount

  Remaining

  Subsequent to

  Conversion

  (or original

  Principal

  Amount)

  	
   

  	
  Company Attest

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

27EXHIBIT 4.2

 

NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH
THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO,
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO
THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY.  THIS SECURITY
AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED
IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH
SECURITIES.

 

SERIES I COMMON STOCK PURCHASE WARRANT

 

ETELOS, INC.

 

	
  Warrant Shares:

  	
  Initial Exercise Date:
  September        , 2009

  

 

THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”)
certifies that, for value received,                     
(the “Holder”) is entitled, upon the terms and subject to the
limitations on exercise and the conditions hereinafter set forth, at any time
on or after the date hereof (the “Initial Exercise Date”) and on or
prior to the close of business on the five year anniversary of the Initial
Exercise Date (the “Termination Date”) but not thereafter, to subscribe
for and purchase from Etelos, Inc., a Delaware corporation (the “Company”),
up to               
shares (the “Warrant Shares”) of Common Stock.  The purchase price of one share of Common
Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).

 

Section 1.                                            Definitions.  Capitalized terms used and not otherwise
defined herein shall have the meanings set forth in that certain Securities
Purchase Agreement (the “Purchase Agreement”), dated September 29,
2009, among the Company and the purchasers signatory thereto.

 

Section 2.                                            Exercise.

 

a)                                      Exercise of Warrant. 
Exercise of the purchase rights represented by this Warrant may be made,
in whole or in part, at any time or times on or after the Initial Exercise Date
and on or before the Termination Date by delivery to the Company (or such other
office or agency of the Company as it may designate by notice in writing to 

 

1

 

the registered Holder at
the address of the Holder appearing on the books of the Company) of a duly
executed facsimile copy of the Notice of Exercise Form annexed hereto;
and, within three (3) Trading Days of the date said Notice of Exercise is
delivered to the Company, the Company shall have received payment of the aggregate
Exercise Price of the shares thereby purchased by wire transfer or cashier’s
check drawn on a United States bank or, if available, pursuant to the cashless
exercise procedure specified in Section 2(c) below.  Notwithstanding anything herein to the
contrary, the Holder shall not be required to physically surrender this Warrant
to the Company until the Holder has purchased all of the Warrant Shares
available hereunder and the Warrant has been exercised in full, in which case,
the Holder shall surrender this Warrant to the Company for cancellation within
three (3) Trading Days of the date the final Notice of Exercise is
delivered to the Company.  Partial
exercises of this Warrant resulting in purchases of a portion of the total
number of Warrant Shares available hereunder shall have the effect of lowering
the outstanding number of Warrant Shares purchasable hereunder in an amount
equal to the applicable number of Warrant Shares purchased.  The Holder and the Company shall maintain
records showing the number of Warrant Shares purchased and the date of such
purchases.  The Company shall deliver any
objection to any Notice of Exercise Form within 1 Business Day of receipt
of such notice.  In the event of any
dispute or discrepancy, the records of the Holder shall be controlling and
determinative in the absence of manifest error. The Holder
and any assignee, by acceptance of this Warrant, acknowledge and agree that, by
reason of the provisions of this paragraph, following the purchase of a portion
of the Warrant Shares hereunder, the number of Warrant Shares available for
purchase hereunder at any given time may be less than the amount stated on the
face hereof.

 

b)                                     Exercise Price. 
The exercise price per share of the Common Stock under this Warrant
shall be $0.60, subject to adjustment hereunder
(the “Exercise Price”).

 

c)                                      Cashless Exercise. 
If at any time after six month anniversary of the Initial Exercise Date,
there is no effective Registration Statement registering, or no current
prospectus available for, the resale of the Warrant Shares by the Holder, then
this Warrant may also be exercised, in whole or in part, at such time by means
of a “cashless exercise” in which the Holder shall be entitled to receive a
certificate for the number of Warrant Shares equal to the quotient obtained by
dividing [(A-B) (X)] by (A), where:

 

(A) = the VWAP on the Trading Day immediately
preceding the date on which Holder elects to exercise this Warrant by means of
a “cashless exercise,” as set forth in the applicable Notice of Exercise;

 

(B) = the Exercise Price of this Warrant, as
adjusted hereunder; and

 

(X) = the number of Warrant Shares that would be
issuable upon exercise of this Warrant in accordance with the terms of this
Warrant if such exercise were by means of a cash exercise rather than a
cashless exercise.

 

Notwithstanding anything herein to the contrary, on
the Termination Date, this Warrant shall be automatically exercised via
cashless exercise pursuant to this Section 

 

2

 

2(c); provided, however, unless waived in accordance with the
provisions of Section 2(e), such automatic exercise shall not occur and
the Company shall not effect any such exercise of this Warrant, and a Holder
shall not have the right to such exercise, to the extent that after giving
effect to the issuance of shares of Common Stock upon such automatic exercise
the Holder (together with the Holder’s Affiliates, and any other Persons acting
as a group together with the Holder or any of the Holder’s Affiliates), would
beneficially own (calculated in accordance with Rule 13(d)-3 of the
Exchange Act) in excess of the Beneficial Ownership Limitation (as defined
below) in effect as of the Termination Date.

 

d)                                     Mechanics of Exercise.

 

i.                  Delivery of Certificates Upon Exercise. 
Certificates for shares purchased hereunder shall be transmitted by the
Transfer Agent to the Holder by crediting the account of the Holder’s prime
broker with the Depository Trust Company through its Deposit Withdrawal Agent
Commission (“DWAC”) system if the Company is then a participant in such
system and either (A) there is an effective Registration Statement
permitting the issuance of the Warrant Shares to or resale of the Warrant
Shares by the Holder or (B) the shares are eligible for resale by the
Holder without volume or manner-of-sale limitations pursuant to Rule 144,
and otherwise by physical delivery to the address specified by the Holder in
the Notice of Exercise by the date that is three (3) Trading Days after
the latest of (A) the delivery to the Company of the Notice of Exercise
Form, (B) surrender of this Warrant (if required), and (C) payment of
the aggregate Exercise Price as set forth above (including by cashless
exercise, if permitted) (such date, the “Warrant Share Delivery Date”).  This Warrant shall be deemed to have been
exercised on the first date on which all of the foregoing have been delivered
to the Company.  The Warrant Shares shall
be deemed to have been issued, and Holder or any other person so designated to
be named therein shall be deemed to have become a holder of record of such
shares for all purposes, as of the date the Warrant has been exercised, with
payment to the Company of the Exercise Price (or by cashless exercise, if
permitted) and all taxes required to be paid by the Holder, if any, pursuant to
Section 2(d)(vi) prior to the issuance of such shares, having been
paid.  If the Company fails for any
reason to deliver to the Holder certificates evidencing the Warrant Shares
subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company
shall pay to the Holder, in cash, as liquidated damages and not as a penalty,
for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP
of the Common Stock on the date of the applicable Notice of Exercise), $10 per
Trading Day (increasing to $20 per Trading Day on the fifth Trading Day after
such liquidated damages begin to accrue) for each Trading Day after such
Warrant Share Delivery Date until such certificates are delivered or Holder
rescinds such exercise.

 

3

 

ii.                                 Delivery of New Warrants Upon Exercise. 
If this Warrant shall have been exercised in part, the Company shall, at
the request of a Holder and upon surrender of this Warrant certificate, at the
time of delivery of the certificate or certificates representing Warrant
Shares, deliver to Holder a new Warrant evidencing the rights of Holder to
purchase the unpurchased Warrant Shares called for by this Warrant, which new
Warrant shall in all other respects be identical with this Warrant.

 

iii.                        Rescission Rights. 
If the Company fails to cause the Transfer Agent to transmit to the
Holder a certificate or the certificates representing the Warrant Shares
pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then,
the Holder will have the right to rescind such exercise.

 

iv.                       Compensation for Buy-In on Failure to
Timely Deliver Certificates Upon Exercise.  In addition
to any other rights available to the Holder, if the Company fails to cause the
Transfer Agent to transmit to the Holder a certificate or the certificates
representing the Warrant Shares pursuant to an exercise on or before the
Warrant Share Delivery Date, and if after such date the Holder is required by
its broker to purchase (in an open market transaction or otherwise) or the
Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver
in satisfaction of a sale by the Holder of the Warrant Shares which the Holder
anticipated receiving upon such exercise (a “Buy-In”), then the Company
shall (A) pay in cash to the Holder the amount, if any, by which (x) the
Holder’s total purchase price (including brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (y) the amount obtained by
multiplying (1) the number of Warrant Shares that the Company was required
to deliver to the Holder in connection with the exercise at issue times (2) the
price at which the sell order giving rise to such purchase obligation was
executed, and (B) at the option of the Holder, either reinstate the
portion of the Warrant and equivalent number of Warrant Shares for which such
exercise was not honored (in which case such exercise shall be deemed
rescinded) or deliver to the Holder the number of shares of Common Stock that
would have been issued had the Company timely complied with its exercise and
delivery obligations hereunder.  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 exercise of shares of
Common Stock with an aggregate sale price giving rise to such purchase
obligation of $10,000, under clause (A) of the immediately preceding
sentence the Company shall be required to pay the Holder $1,000. The Holder
shall provide the Company written notice indicating the amounts payable to the
Holder in respect of the Buy-In and, upon request of the Company, evidence of
the amount of such loss.  Nothing herein
shall limit a Holder’s right to pursue any other remedies available to it 

 

4

 

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

 

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

 

vi.                       Charges, Taxes and Expenses. 
Issuance of certificates for Warrant Shares shall be made without charge
to the Holder for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the Holder or in such name or names as may be directed by the Holder; provided,
however, that in the event certificates for Warrant Shares are to be
issued in a name other than the name of the Holder, this Warrant when
surrendered for exercise shall be accompanied by the Assignment Form attached
hereto duly executed by the Holder and the Company may require, as a condition
thereto, the payment of a sum sufficient to reimburse it for any transfer tax
incidental thereto.

 

vii.                    Closing of Books. 
The Company will not close its stockholder books or records in any
manner which prevents the timely exercise of this Warrant, pursuant to the
terms hereof.

 

e)                                      Holder’s Exercise Limitations. 
The Company shall not effect any exercise of this Warrant, and a Holder
shall not have the right to exercise any portion of this Warrant, pursuant to Section 2
or otherwise, to the extent that after giving effect to such issuance after
exercise as set forth on the applicable Notice of Exercise, the Holder
(together with the Holder’s Affiliates, and any other Persons acting as a group
together with the Holder or any of the Holder’s Affiliates), would beneficially
own in excess of the Beneficial Ownership Limitation (as defined below). 
For purposes of the foregoing sentence, the number of shares of Common Stock
beneficially owned by the Holder and its Affiliates shall include the number of
shares of Common Stock issuable upon exercise of this Warrant with respect to
which such determination is being made, but shall exclude the number of shares
of Common Stock which would be issuable upon (i) exercise of the
remaining, nonexercised portion of this Warrant beneficially owned by the
Holder or any of its Affiliates and (ii) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any other Common Stock 

 

5

 

Equivalents) 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 2(e), beneficial ownership shall be
calculated in accordance with Section 13(d) of the Exchange Act and
the rules and regulations promulgated thereunder, it being acknowledged by
the Holder that the Company is not representing to the Holder that such
calculation is in compliance with Section 13(d) of the Exchange Act
and the Holder is solely responsible for any schedules required to be filed in
accordance therewith.  To the extent that
the limitation contained in this Section 2(e) applies, the
determination of whether this Warrant is exercisable (in relation to other
securities owned by the Holder together with any Affiliates) and of which
portion of this Warrant is exercisable shall be in the sole discretion of the
Holder, and the submission of a Notice of Exercise shall be deemed to be the
Holder’s determination of whether this Warrant is exercisable (in relation to
other securities owned by the Holder together with any Affiliates) and of which
portion of this Warrant is exercisable, in each case subject to the Beneficial
Ownership Limitation, and the Company shall have no obligation to verify or
confirm the accuracy of such determination. 
In addition, a determination as to any group status as contemplated
above shall be determined in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder.  For purposes of this Section 2(e), in
determining the number of outstanding shares of Common Stock, a Holder may rely
on the number of outstanding shares of Common Stock as reflected in (A) the
Company’s most recent periodic or annual report filed with the Commission, as
the case may be, (B) a more recent public announcement by the Company or (C) a
more recent written notice by the Company or the Transfer Agent setting forth
the number of shares of Common Stock outstanding.  Upon the written or
oral request of a Holder, the Company shall within two Trading Days confirm
orally and in writing to the Holder the number of shares of Common Stock then
outstanding.  In any case, the number of outstanding shares of Common
Stock shall be determined after giving effect to the conversion or exercise of
securities of the Company, including this Warrant, by the Holder or its
Affiliates since the date as of which such number of outstanding shares of
Common Stock was reported.  The “Beneficial
Ownership Limitation” shall be 4.99% of the number of shares of the Common
Stock outstanding immediately after giving effect to the issuance of shares of
Common Stock issuable upon exercise of this Warrant.  The Holder, upon not less than 61 days’ prior
notice to the Company, may increase or decrease the Beneficial Ownership
Limitation provisions of this Section 2(e), provided that the Beneficial
Ownership Limitation in no event exceeds 9.99% of the number of shares of the
Common Stock outstanding immediately after giving effect to the issuance of
shares of Common Stock upon exercise of this Warrant held by the Holder and the
provisions of this Section 2(e) shall continue to apply.  Any such increase or decrease will not be effective until the 61st day after such notice is delivered to the
Company.  The provisions of this paragraph shall be
construed and implemented in a manner otherwise than in strict conformity with
the terms of this Section 2(e) to correct this paragraph (or any
portion hereof) which may be defective or 

 

6

 

inconsistent with the intended Beneficial Ownership
Limitation herein contained or to make changes or supplements necessary or
desirable to properly give effect to such limitation. The limitations contained
in this paragraph shall apply to a successor holder of this Warrant.

 

Section 3.                                            Certain Adjustments.

 

a)                                      Stock Dividends and Splits. If the Company, at any time while this
Warrant is outstanding: (i) pays a stock dividend or otherwise makes a
distribution or distributions on shares of its Common Stock or any other equity
or equity equivalent securities payable in shares of Common Stock (which, for
avoidance of doubt, shall not include any shares of Common Stock issued by the
Company upon exercise of this Warrant), (ii) subdivides outstanding shares
of Common Stock into a larger number of shares, (iii) combines (including
by way of reverse stock split) outstanding shares of Common Stock into a
smaller number of shares or (iv) issues by reclassification of shares of
the Common Stock any shares of capital stock of the Company, then in each case
the Exercise Price shall be multiplied by a fraction of which the numerator
shall be the number of shares of Common Stock (excluding treasury shares, if
any) outstanding immediately before such event and of which the denominator
shall be the number of shares of Common Stock outstanding immediately after
such event, and the number of shares issuable upon exercise of this Warrant
shall be proportionately adjusted such that the aggregate Exercise Price of
this Warrant shall remain unchanged.  Any
adjustment made pursuant to this Section 3(a) shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision, combination
or re-classification.

 

b)                                     Subsequent Equity Sales. If the Company or any Subsidiary
thereof, as applicable, at any time while this Warrant is outstanding, shall
sell or grant any option to purchase, or sell or grant any right to reprice, 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 Exercise Price (such lower price, the “Base
Share Price” and such issuances collectively, a “Dilutive Issuance”)
(if the holder of the Common Stock or Common Stock Equivalents so issued shall
at any time, whether by operation of purchase price adjustments, reset
provisions, floating conversion, exercise or exchange prices or otherwise, or
due to warrants, options or rights per share which are issued in connection
with such issuance, be entitled to receive shares of Common Stock at an
effective price per share that is less than the Exercise Price, such issuance
shall be deemed to have occurred for less than the Exercise Price on such date
of the Dilutive Issuance), then, the Exercise Price shall be reduced and only
reduced to equal the Base Share Price; provided, however, the
Exercise Price shall not be adjusted pursuant to this Section 3(b) to
be less than $0.10 per share, subject to adjustment pursuant to Section 3(a).  Such adjustment shall be made whenever such
Common Stock or Common Stock Equivalents are issued.  Notwithstanding the foregoing, no adjustments
shall be made, paid or issued under this Section 3(b) in respect of
an Exempt Issuance.  The Company shall
notify the Holder, in writing, no later than 

 

7

 

the Trading Day following
the issuance of any Common Stock or Common Stock Equivalents subject to this Section 3(b),
indicating therein the applicable issuance price, or applicable reset price,
exchange price, conversion price and other pricing terms (such notice, the “Dilutive
Issuance Notice”).  For purposes of
clarification, whether or not the Company provides a Dilutive Issuance Notice
pursuant to this Section 3(b), upon the occurrence of any Dilutive
Issuance, after the date of such Dilutive Issuance the Holder is entitled to
receive a number of Warrant Shares based upon the Base Share Price regardless
of whether the Holder accurately refers to the Base Share Price in the Notice
of Exercise.

 

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

 

d)                                     Pro Rata Distributions. 
If the Company, at any time while this Warrant is outstanding, shall
distribute to all holders of Common Stock (and not to the Holders) evidences of
its indebtedness or assets (including cash and cash dividends) or rights or
warrants to subscribe for or purchase any security other than the Common Stock
(which shall be subject to Section 3(b)), then in each such case the
Exercise Price shall be adjusted by multiplying the Exercise Price in effect
immediately prior to the record date fixed for determination of stockholders
entitled to receive such distribution by a fraction of which the denominator
shall be the VWAP determined as of the record date mentioned above, and of
which the numerator shall be such VWAP on such record date less the then per
share fair market value at such record date of the portion of such assets or
evidence of indebtedness or rights or warrants so distributed applicable to one
outstanding share of the Common Stock as determined by the Board of Directors
in good faith.  In either case the
adjustments shall be described in a statement provided to the Holder of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock.  Such adjustment shall be made whenever any
such distribution is made and shall become effective immediately after the
record date mentioned above.

 

e)                                      Fundamental Transaction. If, at any time while this Warrant is
outstanding, (i) the Company,
directly or indirectly, in one or more related transactions effects any merger or consolidation of
the Company with or into another Person, (ii) the 

 

8

 

Company, directly or indirectly, effects any sale, lease,
license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets
in one or a series of related transactions, (iii) any, direct or indirect,
purchase offer, tender offer or exchange offer (whether by the Company or
another Person) is completed pursuant to which holders of Common Stock are
permitted to sell, tender or exchange their shares for other securities, cash or
property and has been accepted by the holders of 50% or more of the outstanding
Common Stock, (iv) the Company,
directly or indirectly, in one or more related transactions effects any reclassification,
reorganization or recapitalization 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, (v) the Company, directly or indirectly, in one or more related transactions  consummates
a stock or share purchase agreement or other business
combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with another
Person whereby such other Person acquires more than 50% of the
outstanding shares of Common Stock
(not including any shares of Common Stock held by the other Person or other
Persons making or party to, or associated or affiliated with the other Persons
making or party to, such stock or share purchase agreement or other
business combination) (each a “Fundamental Transaction”),
then, upon any subsequent exercise of
this Warrant, the Holder shall have the
right to receive, for each Warrant Share that would have been issuable upon
such exercise immediately prior to the occurrence of such Fundamental
Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on
the exercise of this Warrant), the number of
shares of Common Stock of the successor or acquiring corporation or of the
Company, if it is the surviving corporation, and any additional consideration (the
“Alternate Consideration”) receivable as
a result of such Fundamental Transaction by a holder of the number of shares of
Common Stock for which this Warrant is exercisable immediately prior to such
Fundamental Transaction (without regard to any limitation in Section 2(e) on
the exercise of this Warrant).  For purposes of any such exercise, the
determination of the Exercise 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 Exercise 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 exercise of this Warrant following such
Fundamental Transaction.  Notwithstanding
anything to the contrary, in the event of a Fundamental Transaction that is (1) an
all cash transaction, (2) a “Rule 13e-3 transaction” as defined in Rule 13e-3
under the Exchange Act, or (3) a Fundamental Transaction (other than a
third-party tender offer) involving a person or entity not traded on a national
securities exchange, the Company or any Successor Entity (as defined below) shall,
at the Holder’s option, exercisable at any time concurrently with, or within 30
days after, the consummation of the Fundamental Transaction, purchase this
Warrant from the Holder by paying to the Holder an amount of cash equal to the
Black Scholes Value of the remaining unexercised portion of this Warrant on the
date of the consummation of such Fundamental Transaction.  “Black
Scholes Value” means the value of this Warrant based 

 

9

 

on the Black and Scholes
Option Pricing Model obtained from the “OV” function on Bloomberg, L.P. (“Bloomberg”)
determined as of the day of consummation of the applicable Fundamental
Transaction for pricing purposes and reflecting (A) a risk-free interest
rate corresponding to the U.S. Treasury rate for a period equal to the time
between the date of the public announcement of the applicable Fundamental
Transaction and the Termination Date, (B) an expected volatility equal to
the greater of 100% and the 100 day volatility obtained from the HVT function
on Bloomberg as of the Trading Day immediately following the public
announcement of the applicable Fundamental Transaction, (C) the underlying
price per share used in such calculation shall be the sum of the price per
share being offered in cash, if any, plus the value of any non-cash
consideration, if any, being offered in such Fundamental Transaction and (D) a
remaining option time equal to the time between the date of the public
announcement of the applicable Fundamental Transaction and the Termination
Date.  The Company shall cause any
successor entity in a Fundamental Transaction in which the Company is not the
survivor (the “Successor Entity”) to assume in writing all of the
obligations of the Company under this Warrant and the other Transaction
Documents in accordance with the provisions of this Section 3(e) pursuant
to written agreements in form and substance reasonably satisfactory to the
Holder and approved by the Holder (without unreasonable delay) prior to such
Fundamental Transaction and shall, at the option of the holder of this Warrant,
deliver to the Holder in exchange for this Warrant a security of the Successor
Entity evidenced by a written instrument substantially similar in form and
substance to this Warrant which is exercisable for a corresponding number of
shares of capital stock of such Successor Entity (or its parent entity)
equivalent to the shares of Common Stock acquirable and receivable upon
exercise of this Warrant (without regard to any limitations on the exercise of
this Warrant) prior to such Fundamental Transaction, and with an exercise price
which applies the exercise price hereunder to such shares of capital stock (but
taking into account the relative value of the shares of Common Stock pursuant
to such Fundamental Transaction and the value of such shares of capital stock,
such number of shares of capital stock and such exercise price being for the
purpose of protecting the economic value of this Warrant immediately prior to
the consummation of such Fundamental Transaction), and which is reasonably
satisfactory in form and substance to the Holder. Upon the occurrence of any
such Fundamental Transaction, the Successor Entity shall succeed to, and be
substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Warrant and the other Transaction Documents
referring to the “Company” shall refer instead to the Successor Entity), and
may exercise every right and power of the Company and shall assume all of the
obligations of the Company under this Warrant and the other Transaction
Documents with the same effect as if such Successor Entity had been named as
the Company herein.

 

f)                                        Calculations. All calculations under this Section 3
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 3, the number of shares of
Common Stock deemed to be issued and outstanding as of a given date shall be
the sum of the number of shares of Common Stock (excluding treasury shares, if
any) issued and outstanding.

 

10

 

g)                                     Notice to Holder.

 

i.                  Adjustment to Exercise Price. Whenever the Exercise Price is adjusted
pursuant to any provision of this Section 3, the Company shall promptly
mail to the Holder a notice setting forth the Exercise Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment. If the Company enters into a Variable Rate Transaction, 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.

 

ii.               Notice to Allow Exercise by Holder. If (A) the Company shall declare a
dividend (or any other distribution in whatever form) on the Common Stock, (B) the
Company shall declare a special nonrecurring cash dividend on or a redemption
of the Common Stock, (C) the Company shall authorize the granting to all
holders of the Common Stock 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, or any compulsory share exchange whereby the Common
Stock is converted into other securities, cash or property, or (E) the
Company shall authorize the voluntary or involuntary dissolution, liquidation
or winding up of the affairs of the Company, then, in each case, the Company
shall cause to be mailed to the Holder at its last address as it shall appear
upon the Warrant Register 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.  To the
extent that any notice provided hereunder constitutes, or contains, material,
non-public information regarding the Company or any of the Subsidiaries, the
Company shall simultaneously file such notice with the Commission pursuant to a
Current Report on Form 8-K.  The
Holder shall remain entitled to exercise this Warrant during the period
commencing on the date of such notice to the effective date of the event
triggering such notice except as may otherwise be expressly set forth herein.

 

11

 

Section 4.                                            Transfer of
Warrant.

 

a)                                      Transferability. 
Subject to compliance with any applicable securities laws and the
conditions set forth in Section 4(d) hereof and to the provisions of Section 4.1
of the Purchase Agreement, this Warrant and all rights hereunder (including,
without limitation, any registration rights) are transferable, in whole or in
part, upon surrender of this Warrant at the principal office of the Company or
its designated agent, together with a written assignment of this Warrant substantially
in the form attached hereto duly executed by the Holder or its agent or
attorney and funds sufficient to pay any transfer taxes payable upon the making
of such transfer.  Upon such surrender
and, if required, such payment, the Company shall execute and deliver a new
Warrant or Warrants in the name of the assignee or assignees, as applicable,
and in the denomination or denominations specified in such instrument of
assignment, and shall issue to the assignor a new Warrant evidencing the
portion of this Warrant not so assigned, and this Warrant shall promptly be
cancelled.  This Warrant, if properly
assigned in accordance herewith, may be exercised by a new holder for the
purchase of Warrant Shares without having a new Warrant issued.

 

b)                                     New Warrants. This Warrant may be divided or combined
with other Warrants upon presentation hereof at the aforesaid office of the
Company, together with a written notice specifying the names and denominations
in which new Warrants are to be issued, signed by the Holder or its agent or
attorney.  Subject to compliance with Section 4(a),
as to any transfer which may be involved in such division or combination, the
Company shall execute and deliver a new Warrant or Warrants in exchange for the
Warrant or Warrants to be divided or combined in accordance with such notice.
All Warrants issued on transfers or exchanges shall be dated the original Issue
Date and shall be identical with this Warrant except as to the number of
Warrant Shares issuable pursuant thereto.

 

c)                                      Warrant Register. The Company shall register this
Warrant, upon records to be maintained by the Company for that purpose (the “Warrant
Register”), in the name of the record Holder hereof from time to time.  The Company may deem and treat the registered
Holder of this Warrant as the absolute owner hereof for the purpose of any
exercise hereof or any distribution to the Holder, and for all other purposes,
absent actual notice to the contrary.

 

d)                                     Transfer Restrictions. If, at the time of the surrender of
this Warrant in connection with any transfer of this Warrant, the transfer of
this Warrant shall not be either (i) registered pursuant to an effective
registration statement under the Securities Act and qualified or registered (or
exempt from qualification or registration) under applicable state securities or
blue sky laws or (ii) eligible for resale without volume or manner-of-sale
restrictions or current public information requirements pursuant to Rule 144,
the Company may require, as a condition of allowing such transfer, that the
Holder or transferee of this Warrant, as the case may be, agree in writing to
be bound, with respect to the Warrant, with the provisions of Section 5.7
of the Purchase Agreement.

 

12

 

e)                                      Representation by the Holder. 
The Holder, by the acceptance hereof, represents and warrants that it is
acquiring this Warrant and, upon any exercise hereof, will acquire the Warrant
Shares issuable upon such exercise, for its own account and not with a view to
or for distributing or reselling such Warrant Shares or any part thereof in
violation of the Securities Act or any applicable state securities law, except
pursuant to sales registered or exempted under the Securities Act.

 

Section 5.                                            Miscellaneous.

 

a)                                      No Rights as Stockholder Until Exercise. 
This Warrant does not entitle the Holder to any voting rights, dividends
or other rights as a stockholder of the Company prior to the exercise hereof as
set forth in Section 2(d)(i).

 

b)                                     Loss, Theft, Destruction or Mutilation of
Warrant. The
Company covenants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant or any stock certificate relating to the Warrant Shares, and in case of
loss, theft or destruction, of indemnity or security reasonably satisfactory to
it (which, in the case of the Warrant, shall not include the posting of any
bond), and upon surrender and cancellation of such Warrant or stock
certificate, if mutilated, the Company will make and deliver a new Warrant or
stock certificate of like tenor and dated as of such cancellation, in lieu of
such Warrant or stock certificate.

 

c)                                      Saturdays, Sundays, Holidays, etc. 
If the last or appointed day for the taking of any action or the
expiration of any right required or granted herein shall not be a Business Day,
then, such action may be taken or such right may be exercised on the next
succeeding Business Day.

 

d)                                     Authorized Shares.

 

The Company covenants that, during the period the Warrant is
outstanding, it will reserve from its authorized and unissued Common Stock a
sufficient number of shares to provide for the issuance of the Warrant Shares
upon the exercise of any purchase rights under this Warrant.  The Company further covenants that its
issuance of this Warrant shall constitute full authority to its officers who
are charged with the duty of executing stock certificates to execute and issue
the necessary certificates for the Warrant Shares upon the exercise of the purchase
rights under this Warrant.  The Company
will take all such reasonable action as may be necessary to assure that such
Warrant Shares may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of the Trading Market upon
which the Common Stock may be listed. 
The Company covenants that all Warrant Shares which may be issued upon
the exercise of the purchase rights represented by this Warrant will, upon
exercise of the purchase rights represented by this Warrant and payment for
such Warrant Shares in accordance herewith, be duly authorized, validly issued,
fully paid and nonassessable and free from all taxes, liens and 

 

13

 

charges created by the Company in respect of the issue
thereof (other than taxes in respect of any transfer occurring
contemporaneously with such issue).

 

Except and to the extent as waived or consented to by
the Holder, the Company shall not by any action, including, without limitation,
amending its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of
all such actions as may be necessary or appropriate to protect the rights of
Holder as set forth in this Warrant against impairment.  Without limiting the generality of the
foregoing, the Company will (i) not increase the par value of any Warrant
Shares above the amount payable therefor upon such exercise immediately prior
to such increase in par value, (ii) take all such action as may be
necessary or appropriate in order that the Company may validly and legally
issue fully paid and nonassessable Warrant Shares upon the exercise of this
Warrant and (iii) use commercially reasonable efforts to obtain all such
authorizations, exemptions or consents from any public regulatory body having
jurisdiction thereof, as may be, necessary to enable the Company to perform its
obligations under this Warrant.

 

Before taking any action which would result in an
adjustment in the number of Warrant Shares for which this Warrant is
exercisable or in the Exercise Price, the Company shall obtain all such
authorizations or exemptions thereof, or consents thereto, as may be necessary
from any public regulatory body or bodies having jurisdiction thereof.

 

e)                                      Jurisdiction. All questions concerning the
construction, validity, enforcement and interpretation of this Warrant shall be
determined in accordance with the provisions of the Purchase Agreement.

 

f)                                        Restrictions. 
The Holder acknowledges that the Warrant Shares acquired upon the
exercise of this Warrant, if not registered and the Holder does not utilize
cashless exercise, will have restrictions upon resale imposed by state and
federal securities laws.

 

g)                                     Nonwaiver and Expenses. 
No course of dealing or any delay or failure to exercise any right
hereunder on the part of Holder shall operate as a waiver of such right or
otherwise prejudice Holder’s rights, powers or remedies, notwithstanding the
fact that all rights hereunder terminate on the Termination Date.  If the Company willfully and knowingly fails
to comply with any provision of this Warrant, which results in any material
damages to the Holder, the Company shall pay to Holder such amounts as shall be
sufficient to cover any costs and expenses including, but not limited to,
reasonable attorneys’ fees, including those of appellate proceedings, incurred
by Holder in collecting any amounts due pursuant hereto or in otherwise
enforcing any of its rights, powers or remedies hereunder.

 

14

 

h)                                     Notices.  Any notice,
request or other document required or permitted to be given or delivered to the
Holder by the Company shall be delivered in accordance with the notice
provisions of the Purchase Agreement.

 

i)                                         Limitation of Liability. 
No provision hereof, in the absence of any affirmative action by Holder
to exercise this Warrant to purchase Warrant Shares, and no enumeration herein
of the rights or privileges of Holder, shall give rise to any liability of
Holder for the purchase price of any Common Stock or as a stockholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.

 

j)                                         Remedies.  The Holder,
in addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under this Warrant.  The Company agrees
that monetary damages would not be adequate compensation for any loss incurred
by reason of a breach by it of the provisions of this Warrant and hereby agrees
to waive and not to assert the defense in any action for specific performance
that a remedy at law would be adequate.

 

k)                                      Successors and Assigns. 
Subject to applicable securities laws, this Warrant and the rights and
obligations evidenced hereby shall inure to the benefit of and be binding upon
the successors and permitted assigns of the Company and the successors and
permitted assigns of Holder.  The
provisions of this Warrant are intended to be for the benefit of any Holder
from time to time of this Warrant and shall be enforceable by the Holder or
holder of Warrant Shares.

 

l)                                         Amendment.  This Warrant
may be modified or amended or the provisions hereof waived with the written
consent of the Company and Holders holding Warrants at least equal to 75% of
the Warrant Shares issuable upon exercise of all then outstanding Warrants.

 

m)                                   Severability. 
Wherever possible, each provision of this Warrant shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Warrant shall be prohibited by or invalid under applicable
law, such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provisions or the
remaining provisions of this Warrant.

 

n)                                     Headings.  The headings
used in this Warrant are for the convenience of reference only and shall not,
for any purpose, be deemed a part of this Warrant.

 

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

 

(Signature Pages Follow)

 

15

 

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

 

 

	
   

  	
  ETELOS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name: Daniel
  J.A. Kolke

  
	
   

  	
   

  	
  Title: Chief
  Executive Officer

  

 

16

 

NOTICE OF EXERCISE

 

TO:                            ETELOS, INC.

 

(1)          The undersigned hereby elects to purchase                    
Warrant Shares of the Company pursuant to the terms of the attached Warrant
(only if exercised in full), and tenders herewith payment of the exercise price
in full, together with all applicable transfer taxes, if any.

 

(2)          Payment shall take the form of (check applicable box):

 

o   in lawful money of the
United States; or

 

o   [if permitted] the
cancellation of such number of Warrant Shares as is necessary, in accordance
with the formula set forth in subsection 2(c), to exercise this Warrant with
respect to the maximum number of Warrant Shares purchasable pursuant to the
cashless exercise procedure set forth in subsection 2(c).

 

(3)          Please issue a certificate or certificates
representing said Warrant Shares in the name of the undersigned or in such
other name as is specified below:

 

                                                      

 

The Warrant Shares shall be delivered to the following DWAC Account
Number or by physical delivery of a certificate to:

 

                                                                        

 

                                                                        

 

                                                                        

 

(4)  Accredited Investor.  The undersigned is an “accredited investor”
as defined in Regulation D promulgated under the Securities Act of 1933, as
amended.

 

[SIGNATURE OF
HOLDER]

 

	
  Name of
  Investing Entity: 

  	
   

  	
   

  	
   

  
	
  Signature
  of Authorized Signatory of Investing Entity: 

  	
   

  
	
  Name of
  Authorized Signatory: 

  	
   

  	
   

  
	
  Title of
  Authorized Signatory: 

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  	
   

  
						

 

17

 

ASSIGNMENT FORM

 

(To assign the foregoing warrant, execute

this form and supply required information. 

Do not use this form to exercise the warrant.)

 

FOR VALUE RECEIVED, [            ]
all of or [           ]
shares of the foregoing Warrant and all rights evidenced thereby are hereby
assigned to

 

	
   

  	
  whose address is

  
	
   

  	
   

  
	
   

  	
   

  	
  .

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Dated:

  	
                

  	
  ,

  	
   

  	
   

  
						

 

	
  Holder’s
  Signature: 

  	
   

  
	
   

  	
   

  
	
  Holder’s
  Address: 

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Signature
  Guaranteed:  

  	
   

  	
   

  	
   

  
				

 

NOTE:  The signature to this
Assignment Form must correspond with the name as it appears on the face of
the Warrant, without alteration or enlargement or any change whatsoever, and
must be guaranteed by a bank or trust company. 
Officers of corporations and those acting in a fiduciary or other
representative capacity should file proper evidence of authority to assign the
foregoing Warrant.

 

18

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