Document:

pacificnet_8k-ex1002.htm

    Exhibit
10.2

     

     

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

     

    Original
Issue Date:  March
13, 2006

     

    FORM
OF SECOND AMENDED AND RESTATED

    VARIABLE
RATE SECURED CONVERTIBLE DEBENTURE

    DUE
JULY 2009

     

    THIS
SECOND AMENDED AND RESTATED VARIABLE RATE SECURED CONVERTIBLE DEBENTURE is one
of a series of duly authorized and validly issued Secured Convertible Debentures
of PacificNet Inc., a Delaware corporation, having its principal place of
business at 23/F, Tower A, Timecourt, No.6 Shuguang Xili, Chaoyang District,
Beijing, China 100028 (the “Company”), designated
as its Second Amended and Restated Variable Rate Secured Convertible Debenture,
due July 2009 (this debenture, the “Debenture” and
collectively with the other such series of debentures, the “Debentures”).

     

    The
obligations under this Debenture are secured by that certain Security Agreement,
dated as of August 29, 2008, between the Company and __________________________,
as agent (as the same may be amended from time to time, the “Security
Agreement”).  To secure the prompt and complete payment and
performance in full of all of the obligations of the Company under this
Debenture, the Company hereby grants, assigns, conveys, mortgages, pledges,
hypothecates and transfers to the Holder a lien and continuing security interest
in and upon all of its right, title and interest in, to and under all of the
Collateral (as defined in the Security Agreement).  Additional rights
of the Holder are set forth in the Security Agreement.

     

    FOR VALUE
RECEIVED, the Company promises to pay to ___________________. or its registered assigns
(the “Holder”),
or shall have paid pursuant to the terms hereunder, the principal sum of $____________ by July 15,
2009, or such earlier date as this Debenture is required or permitted to be
repaid as provided hereunder (the “Maturity Date”), and
to pay interest to the Holder on the aggregate unconverted and then outstanding
principal amount of this Debenture in accordance with the provisions
hereof.  This Debenture is subject to the following additional
provisions:

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

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

     

    “2008 Settlement
Agreement” means the Settlement and Release Agreement, dated as of August
29, 2008, by and among the Company and each of Iroquois Master Fund, Ltd., C.E.
Unterberg, Towbin Capital Partners I (n/k/a Collins Stewart), Alpha Capital AG,
Whalehaven Capital Fund Ltd., DKR Soundshore Oasis Holding Fund, Ltd., Basso
Fund Ltd., Basso Multi-Strategy Holding Fund Ltd., and Basso Private
Opportunities Holding Fund Ltd.

     

    “2008 Settlement
Documents” shall have the meaning set forth in the 2008 Settlement
Agreement.

     

    “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, other than the involuntary
bankruptcy petition pending in the United States Bankruptcy Court for the
District of Delaware Case No. 08-10528; (c) the Company or any Significant
Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief
or other order approving any such case or proceeding is entered; (d) the
Company or any Significant Subsidiary thereof suffers any appointment of any
custodian or the like for it or any substantial part of its property that is not
discharged or stayed within 60 calendar days after such appointment;
(e) the Company or any Significant Subsidiary thereof makes a general
assignment for the benefit of creditors; (f) the Company or any Significant
Subsidiary thereof calls a meeting of its creditors with a view to arranging a
composition, adjustment or restructuring of its debts; or (g) the Company
or any Significant Subsidiary thereof, by any act or failure to act, expressly
indicates its consent to, approval of or acquiescence in any of the foregoing or
takes any corporate or other action for the purpose of effecting any of the
foregoing.

     

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

     

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

     

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

    
      
         

      

      
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    “Change of Control
Transaction” means the occurrence after the date hereof of any of the
following: (i) an acquisition after the date hereof by an individual or
legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the
Exchange Act) of effective control (whether through legal or beneficial
ownership of capital stock of the Company, by contract or otherwise) of in
excess of 33% of the voting securities of the Company (other than by means of
conversion or exercise of the Debentures and the Securities issued together with
the Debentures), or (ii) the Company merges into or consolidates with any
other Person, or any Person merges into or consolidates with the Company and,
after giving effect to such transaction, the stockholders of the Company
immediately prior to such transaction own less than 66% of the aggregate voting
power of the Company or the successor entity of such transaction, or
(iii) the Company sells or transfers all or substantially all of its assets
to another Person and the stockholders of the Company immediately prior to such
transaction own less than 66% of the aggregate voting power of the acquiring
entity immediately after the transaction, or (iv) a replacement at one time
or within a two year period of more than one-half of the members of the
Company’s board of directors which is not approved by a majority of those
individuals who are members of the board of directors on the date hereof (or by
those individuals who are serving as members of the board of directors on any
date whose nomination to the board of directors was approved by a majority of
the members of the board of directors who are members on the date hereof), or
(v) the execution by the Company of an agreement to which the
Company  is a party or by which it is bound, providing for any of the
events set forth in clauses (i) through (iv) above.

     

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

     

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

     

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

     

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

     

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

     

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

     

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

    
      
         

      

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

     

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

     

    “Equity Conditions”
shall mean, during the period in question, (i) the Company shall have duly
honored all conversions and redemptions scheduled to occur or occurring by
virtue of one or more Notices of Conversion of the Holder, if any, (ii) the
Company shall have paid all liquidated damages and other amounts owing to the
Holder in respect of this Debenture, (iii) the Company shall have filed,
during the 12 months preceding the date of such notice, all reports required to
be filed by it under Section 13 or Section 15(d) of the Exchange Act, (iv) upon
issuance, the shares in question will be freely tradeable without restriction
under the Securities Act and applicable state securities laws and will not be
subject to any restrictive legends, (v) the Common Stock is trading on a
Trading Market and all of the shares issuable pursuant to the 2008 Settlement
Documents are listed or otherwise eligible 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),
(vi) there is a sufficient number of authorized but unissued and otherwise
unreserved shares of Common Stock for the issuance of all of the shares issuable
pursuant to the 2008 Settlement Documents, (vii) there is no existing Event
of Default or no existing event which, with the passage of time or the giving of
notice, would constitute an Event of Default, (viii) after the issuance of
the shares in question (or, in the case of a Monthly Redemption, the shares
issuable upon conversion in full of the Monthly Redemption Amount), the issuance
of all Conversion Shares under the Debentures and all Warrant Shares under the
Warrants upon conversion or exercise in full would not violate the limitations
set forth in Section 4(c)(i) and Section 4(c)(ii) herein, (ix) there has
been no public announcement of a pending or proposed Fundamental Transaction or
Change of Control Transaction that has not been consummated and (x) the
Holder is not in possession of any information that is, or might constitute,
material nonpublic information.

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

    “Interest Conversion
Rate” means the lesser of (a) the Conversion Price or (b) the
80% of the lesser of (i) the average of the VWAPs for the 20 consecutive
Trading Days ending on the Trading Day that is immediately prior to the
applicable Interest Payment Date or (ii) the average of the VWAPs for the
20 consecutive Trading Days ending on the Trading Day that is immediately prior
to the date the applicable Interest Conversion Shares are issued and delivered
if after the Interest Payment Date (in each case, subject to adjustment for any
stock dividend, stock split, stock combination or other similar event affecting
the Common Stock during such 20 Trading Day period).

    
      
         

      

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

    “Monthly Redemption
Amount” means, as to a Monthly Redemption, $191,219.63.

     

    “Monthly Redemption
Date” means October 15, 2008 and the 15th of each month thereafter and
terminating upon the full redemption of this Debenture.

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

    
      
         

      

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

     

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

     

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

     

    “Permitted
Indebtedness” means (a) the Indebtedness existing on the Original
Issue Date and set forth on Schedule 3.1(ff)
attached to the Purchase Agreement, (b) lease obligations and purchase
money indebtedness of up to $20,000,000, in the aggregate, incurred in
connection with the acquisition of capital assets and lease obligations with
respect to newly acquired or leased assets, provided that such Indebtedness does
not mature or require payments of principal prior to the Maturity Date and is
made expressly subordinate in right of payment to the Indebtedness evidenced by
this Debenture, as reflected in a written agreement reasonably acceptable to,
and approved by, the Holder in writing, and (c) up to $50,000,000 of
additional Indebtedness incurred by the Company in connection with raising
capital, provided that, if such Indebtedness is convertible into Common Stock,
the conversion price of such Indebtedness may not be less than the Conversion
Price immediately prior to the issuance of such Indebtedness.

     

    “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 under clause (b) thereunder, provided that such
Liens are not secured by assets of the Company or its Subsidiaries other than
the assets so acquired or leased, and (d) Liens that do not impair or
adversely affect in any respect the Lien upon any of the Collateral under the
Security Agreement.

     

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

     

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

     

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

    
      
         

      

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

     

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

     

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

     

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

     

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

     

    “Subsidiary” means any
Person, whether now existing or hereafter created, with respect to which a
specified Person directly or indirectly (A) owns a majority of the equity
interests, (B) has the power to elect a majority of that Person’s board of
directors or similar governing body, or (C) otherwise has the power, directly or
indirectly, to direct the business and policies of that Person.

     

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

     

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

     

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

     

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

     

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

    
      
         

      

      
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    Section
2.                       Interest.

     

    a) Payment of Interest in Cash
or Kind.  At the Closing, the Company prepaid the Holder the
first year’s interest by means of an original issue discount.  The
Company shall pay interest to the Holder on the aggregate unconverted and then
outstanding principal amount of this Debenture at the rate of 6% per annum
beginning on the first anniversary of the Original Issue Date until the day
immediately prior to the second anniversary of the Original Issue Date,
increasing to 7% per annum from the second anniversary of the Original Issue
Date, payable on a monthly basis on the fifteenth day of each month, beginning
on the fifteenth day of the 13th month after the Original Issue Date, on each
Conversion Date (as to that principal amount then being converted) and on the
Maturity Date (except that, if any such date is not a Business Day, then such
payment shall be due on the next succeeding Business Day) (each such date, an
“Interest Payment
Date”), in cash or duly authorized, validly issued, fully paid and
non-assessable shares of Common Stock at the Interest Conversion Rate (the
amount to be paid in shares, the “Interest Share
Amount”), or a combination thereof; provided, however,
that (i) except as otherwise provided in Section 8(vi) of the 2008
Settlement Agreement, payment in shares of Common Stock may only occur if during
the 20 Trading Days immediately prior to the applicable Interest Payment
Date  (the “Interest Notice
Period”) and through and including the date such shares of Common Stock
are issued to the Holder all of the Equity Conditions have been met (unless
waived by the Holder in writing), (ii) the Company shall have given the
Holder notice in accordance with the notice requirements set forth below and
(iii) as to such Interest Payment Date, prior to such Interest Notice
Period (but not more than 5 Trading Days prior to the commencement of such
Interest Notice Period), the Company shall have delivered to the Holder’s
account with The Depository Trust Company a number of shares of Common Stock to
be applied against such Interest Share Amount equal to the quotient of
(x) the amount of the interest payment to be made in shares of Common Stock
divided by (y) the lesser of (A) the then Conversion Price or (b) 80% of
the average of the VWAPs for the 20 consecutive Trading Days ending on the sixth
Trading Day prior to the commencement of the applicable Interest Notice Period
(subject to adjustment for any stock dividend, stock split, stock combination or
other similar event affecting the Common Stock during such 20 Trading Day
period) (the “Interest
Conversion Shares”).

     

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

    
      
         

      

      
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    c) Interest
Calculations.  Interest shall be calculated on the basis of a
365-day year and shall accrue daily commencing on the Original Issue Date until
payment in full of the principal sum, together with all accrued and unpaid
interest, liquidated damages and other amounts which may become due hereunder,
has been made.  Payment of interest in shares of Common Stock (other
than the Interest Conversion Shares issued prior to an Interest Notice Period)
shall otherwise occur pursuant to Section 4(d)(ii) herein and, solely for
purposes of the payment of interest in shares, the Interest Payment Date shall
be deemed the Conversion Date.  Interest shall cease to accrue with
respect to any principal amount converted, provided that the Company actually
delivers the Conversion Shares within the time period required by Section
4(d)(ii).  Interest hereunder will be paid to the Person in whose name
this Debenture is registered on the records of the Company regarding
registration and transfers of this Debenture (the “Debenture
Register”).  Except as otherwise provided herein, if at any
time the Company pays interest partially in cash and partially in shares of
Common Stock to the holders of the Debentures, then such payment shall be
distributed ratably among the holders of the then-outstanding Debentures based
on their (or their predecessor’s) principal amount of Debentures held on the
date of the 2008 Settlement Agreement.

     

    d) Late
Fee.  All overdue accrued and unpaid interest to be paid
hereunder shall entail a late fee at an interest rate equal to the lesser of 12%
per annum or the maximum rate permitted by applicable law (“Late Fees”) which
shall accrue daily from the date such interest is due hereunder through and
including the date of payment in full.  Notwithstanding anything to
the contrary contained herein, if on any Interest Payment Date the Company has
elected to pay accrued interest in the form of Common Stock but the Company is
not able to pay accrued interest in Common Stock because it fails to satisfy the
conditions for payment in Common Stock set forth above, then, at the option of
the Holder, the Company, in lieu of delivering either shares of Common Stock
pursuant to this Section 2 or paying the regularly scheduled interest payment in
cash, shall deliver, within three Trading Days of each applicable Interest
Payment Date, an amount in cash equal to the product of (x) the number of
shares of Common Stock otherwise deliverable to the Holder in connection with
the payment of interest due on such Interest Payment Date multiplied by
(y) the highest VWAP during the period commencing on the Interest Payment
Date and ending on the Trading Day prior to the date such payment is
made.  If any Interest Conversion Shares are issued to the Holder in
connection with an Interest Payment Date and are not applied against an Interest
Share Amount, then the Holder shall promptly return such excess shares to the
Company.

     

    e) Prepayment.  Except
as otherwise set forth in this Debenture, the Company may 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.

    
      
         

      

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

     

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

     

    Section
4.                       Conversion.

     

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

     

    b) Conversion
Price.  The conversion price in effect on any Conversion Date
shall be equal to $2.00
(subject to adjustment herein) (the “Conversion
Price”).

    
      
         

      

      
        10

        
          

        

      

      
         

      

    

    c) Conversion
Limitations.

     

    
      	
              i. 
        

            	
              Trading Market
      Limitations.  Notwithstanding anything herein to the
      contrary, but subject to the provisions of this Section 4(c)(i), if the
      Company has not obtained Shareholder Approval (as defined below), then the
      Company may not issue, upon conversion of this Debenture, a number of
      shares of Common Stock which, when aggregated with any shares of Common
      Stock issued on or after the Original Issue Date and prior to such
      Conversion Date (A) in connection with any Debentures issued pursuant
      to the Purchase Agreement, (B) in connection with any Warrants issued
      pursuant to the Purchase Agreement and (C) in connection with any
      warrants issued to any registered broker-dealer as a fee in connection
      with the issuance of the Securities pursuant to the Purchase Agreement,
      would exceed 19.999% of the number of shares of Common Stock outstanding
      on the Trading Day immediately preceding the Original Issue Date (such
      number of shares, the “Issuable
      Maximum”).  Each Holder shall be entitled to a portion of
      the Issuable Maximum equal to the quotient obtained by dividing
      (x) the aggregate principal amount of the Debenture(s) issued and
      sold to such Holder on the Original Issue Date by (y) the aggregate
      principal amount of all Debentures issued and sold by the Company on the
      Original Issue Date.  If any Holder shall no longer hold the
      Debenture(s), then such Holder’s remaining portion of the Issuable
      Maximum, if any, shall be allocated pro-rata among the remaining
      Holders.  If, on any Conversion Date, (1) the applicable
      Conversion Price is such that the shares issuable under this Debenture on
      such Conversion Date, together with the aggregate number of shares of
      Common Stock that would then be issuable upon conversion in full of all
      then outstanding Debentures, would exceed the Issuable Maximum and
      (2) the Company shall not have previously obtained Shareholder
      Approval, then the Company shall issue to the Holder requesting a
      conversion a number of shares of Common Stock equal to such Holder’s
      pro-rata portion (which shall be calculated pursuant to the terms hereof)
      of the Issuable Maximum and, with respect to the remainder of the
      aggregate principal amount of the Debentures (including any accrued
      interest) then held by such Holder for which a conversion in accordance
      with the applicable Conversion Price would result in an issuance of shares
      of Common Stock in excess of such Holder’s pro-rata portion (which shall
      be calculated pursuant to the terms hereof) of the Issuable Maximum (the
      “Excess
      Principal”), the Company shall be prohibited from converting such
      Excess Principal and shall promptly notify the Holder of the reason
      therefor. This Debenture shall thereafter be unconvertible to such extent
      until and unless Shareholder Approval is subsequently obtained, but this
      Debenture shall otherwise remain in full force and effect.  The
      Holder acknowledges and agrees that shares of Common Stock issuable upon
      conversion hereof or exercise of the Warrants are not eligible to vote in
      connection with the Shareholder Approval.  Notwithstanding
      anything contained herein to the contrary, the foregoing provisions of
      this Section 4(c)(i) shall apply only to the extent that Shareholder
      Approval is required by the rules of any Trading Market or of the “Pink
      Sheets” on which the Common Stock is then listed or
  quoted.

            

    

     

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

    
      	
              ii. 
        

            	
              Holder’s Restriction
      on Conversion.  The Company shall not effect any
      conversion of this Debenture, and a Holder shall not have the right to
      convert any portion of this Debenture, to the extent that after giving
      effect to the conversion set forth on the applicable Notice of Conversion,
      such Holder (together with such Holder’s Affiliates, and any other person
      or entity acting as a group together with such Holder or any of such
      Holder’s Affiliates) would beneficially own in excess of the Beneficial
      Ownership Limitation (as defined below).  For purposes of the
      foregoing sentence, the number of shares of Common Stock beneficially
      owned by such Holder and its Affiliates shall include the number of shares
      of Common Stock issuable upon conversion of this Debenture with respect to
      which such determination is being made, but shall exclude the number of
      shares of Common Stock which are issuable upon (A) conversion of the
      remaining, unconverted principal amount of this Debenture beneficially
      owned by such Holder or any of its Affiliates and (B) exercise or
      conversion of the unexercised or unconverted portion of any other
      securities of the Company  subject to a limitation on conversion
      or exercise analogous to the limitation contained herein (including,
      without limitation, any other Debentures or the Warrants) beneficially
      owned by such Holder or any of its Affiliates.  Except as set
      forth in the preceding sentence, for purposes of this Section 4(c)(ii),
      beneficial ownership shall be calculated in accordance with Section 13(d)
      of the Exchange Act and the rules and regulations promulgated
      thereunder.  To the extent that the limitation contained in this
      Section 4(c)(ii) applies, the determination of whether this Debenture is
      convertible (in relation to other securities owned by such Holder together
      with any Affiliates) and of which principal amount of this Debenture is
      convertible shall be in the sole discretion of such Holder, and the
      submission of a Notice of Conversion shall be deemed to be such Holder’s
      determination of whether this Debenture may be converted (in relation to
      other securities owned by such Holder together with any Affiliates) and
      which principal amount of this Debenture is convertible, in each case
      subject to such aggregate percentage limitations. To ensure compliance
      with this restriction, each Holder will be deemed to represent to the
      Company each time it delivers a Notice of Conversion that such Notice of
      Conversion has not violated the restrictions set forth in this paragraph
      and the Company shall have no obligation to verify or confirm the accuracy
      of such determination.  In addition, a determination as to any
      group status as contemplated above shall be determined in accordance with
      Section 13(d) of the Exchange Act and the rules and regulations
      promulgated thereunder.  For purposes of this Section 4(c)(ii),
      in determining the number of outstanding shares of Common Stock, a Holder
      may rely on the number of outstanding shares of Common Stock as stated in
      the most recent of the following: (A) the Company’s most recent Form
      10-QSB (or Form 10-Q) or Form 10-KSB (or Form 10-K), as the case may be;
      (B) a more recent public announcement by the Company; or (C) a
      more recent notice by the Company or the Company’s transfer agent setting
      forth the number of shares of Common Stock
  outstanding.

            

    

     

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

    
      	
               
      

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

            

    

     

    d) Mechanics of
Conversion.

     

    
      	
              i. 
        

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

            

    

     

    
      	
              ii.   

            	
              Delivery of
      Certificate Upon Conversion.  Not later than three
      Trading Days after each Conversion Date (the “Share Delivery
      Date”), the Company shall deliver, or cause to be delivered, to the
      Holder (A) a certificate or certificates representing the Conversion
      Shares which, on or after the Effective Date, shall be free of restrictive
      legends and trading restrictions (other than those which may then be
      required by the Purchase Agreement) representing the number of shares of
      Common Stock being acquired upon the conversion of this Debenture
      (including, if the Company has given continuous notice pursuant to Section
      2(b) for payment of interest in shares of Common Stock at least 20 Trading
      Days prior to the date on which the Conversion Notice is delivered to the
      Company, shares of Common Stock representing the payment of accrued
      interest otherwise determined pursuant to Section 2(a) but assuming that
      the Interest Notice Period is the 20 Trading Days period immediately prior
      to the date on which the Conversion Notice is delivered to the Company and
      excluding for such issuance the condition that the Company deliver
      Interest Conversion Shares as to such interest payment) and (B) a
      bank check in the amount of accrued and unpaid interest (if the Company
      has elected or is required to pay accrued interest in cash). On or after
      the Effective Date, the Company shall use its best efforts to deliver any
      certificate or certificates required to be delivered by the Company under
      this Section 4 electronically through the Depository Trust Company or
      another established clearing corporation performing similar
      functions.

            

    

     

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

    
      	
              iii.  

            	
              Failure to Deliver
      Certificates.  If in the case of any Notice of Conversion
      such certificate or certificates are not delivered to or as directed by
      the applicable Holder by the third Trading Day after the Conversion Date,
      the Holder shall be entitled to elect by written notice to the Company at
      any time after such third Trading Day, but on or before its receipt of
      such certificate or certificates, to rescind such Conversion, in which
      event the Company shall promptly return to the Holder any original
      Debenture delivered to the Company and the Holder shall promptly return
      the Common Stock certificates representing the principal amount of this
      Debenture tendered for conversion to the
  Company.

            

    

     

    
      	
              iv.  

            	
              Obligation Absolute;
      Partial Liquidated Damages.  The Company’s obligations to
      issue and deliver the Conversion Shares upon conversion of this Debenture
      in accordance with the terms hereof are absolute and unconditional,
      irrespective of any action or inaction by the Holder to enforce the same,
      any waiver or consent with respect to any provision hereof, the recovery
      of any judgment against any Person or any action to enforce the same, or
      any setoff, counterclaim, recoupment, limitation or termination, or any
      breach or alleged breach by the Holder or any other Person of any
      obligation to the Company or any violation or alleged violation of law by
      the Holder or any other Person, and irrespective of any other circumstance
      which might otherwise limit such obligation of the Company to the Holder
      in connection with the issuance of such Conversion Shares; provided,
      however, that such delivery shall not operate as a waiver by the
      Company of any such action the Company may have against the
      Holder.  In the event the Holder of this Debenture shall elect
      to convert any or all of the outstanding principal amount hereof, the
      Company may not refuse conversion based on any claim that the Holder or
      anyone associated or affiliated with the Holder has been engaged in any
      violation of law, agreement or for any other reason, unless an injunction
      from a court, on notice to Holder, restraining and or enjoining conversion
      of all or part of this Debenture shall have been sought and obtained, and
      the Company posts a surety bond for the benefit of the Holder in the
      amount of 120% of the outstanding principal amount of this Debenture,
      which is subject to the injunction, which bond shall remain in effect
      until the completion of arbitration/litigation of the underlying dispute
      and the proceeds of which shall be payable to such Holder to the extent it
      obtains judgment.  In the absence of such injunction, the
      Company shall issue Conversion Shares or, if applicable, cash, upon a
      properly noticed conversion.  If the Company fails for any
      reason to deliver to the Holder such certificate or certificates pursuant
      to Section 4(d)(ii) by the third Trading Day after the Conversion Date,
      the Company shall pay to such Holder, in cash, as liquidated damages and
      not as a penalty, for each $1000 of principal amount being converted, $10
      per Trading Day (increasing to $20 per Trading Day on the fifth Trading
      Day after such liquidated damages begin to accrue) for each Trading Day
      after such third Trading Day until such certificates are delivered; provided,
      however that if the Holder rescinds or withdraws such conversion
      notice such liquidated damages shall cease to continue to accrue after
      such date.  Nothing herein shall limit a Holder’s right to
      pursue actual damages or declare an Event of Default pursuant to Section 8
      hereof for the Company’s failure to deliver Conversion Shares within the
      period specified herein and such Holder shall have the right to pursue all
      remedies available to it hereunder, at law or in equity including, without
      limitation, a decree of specific performance and/or injunctive
      relief.  The exercise of any such rights shall not prohibit the
      Holder from seeking to enforce damages pursuant to any other Section
      hereof or under applicable law.

            

    

     

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

    
      	
              v.  

            	
              Compensation for
      Buy-In on Failure to Timely Deliver Certificates Upon
      Conversion.  In addition to any other rights available to
      the Holder, if the Company fails for any reason to deliver to the Holder
      such certificate or certificates by the Share Delivery Date pursuant to
      Section 4(d)(ii), and if after such Share Delivery Date the Holder is
      required by its brokerage firm to purchase (in an open market transaction
      or otherwise) shares of Common Stock to deliver in satisfaction of a sale
      by such Holder of the Conversion Shares which the Holder was entitled to
      receive upon the conversion relating to such Share Delivery Date (a “Buy-In”), then
      the Company shall (A) pay in cash to the Holder (in addition to any
      other remedies available to or elected by the Holder) the amount by which
      (x) the Holder’s total purchase price (including any brokerage
      commissions) for the Common Stock so purchased exceeds (y) the
      product of (1) the aggregate number of shares of Common Stock that such
      Holder was entitled to receive from the conversion at issue multiplied by
      (2) the actual sale price at which the sell order giving rise to such
      purchase obligation was executed (including any brokerage commissions) and
      (B) at the option of the Holder, either reissue (if surrendered) this
      Debenture in a principal amount equal to the principal amount of the
      attempted conversion or deliver to the Holder the number of shares of
      Common Stock that would have been issued if the Company had timely
      complied with its delivery requirements under Section
      4(d)(ii).  For example, if the Holder purchases Common Stock
      having a total purchase price of $11,000 to cover a Buy-In with respect to
      an attempted conversion of this Debenture with respect to which the actual
      sale price of the Conversion Shares (including any brokerage commissions)
      giving rise to such purchase obligation was a total of $10,000 under
      clause (A) of the immediately preceding sentence, the Company shall
      be required to pay the Holder $1,000.  The Holder shall provide
      the Company written notice indicating the amounts payable to the Holder in
      respect of the Buy-In and, upon request of the Company, evidence of the
      amount of such loss.  Nothing herein shall limit a Holder’s
      right to pursue any other remedies available to it hereunder, at law or in
      equity including, without limitation, a decree of specific performance
      and/or injunctive relief with respect to the Company’s failure to timely
      deliver certificates representing shares of Common Stock upon conversion
      of this Debenture as required pursuant to the terms
  hereof.

            

    

     

    
      	
              vi.  

            	
              Reservation of Shares
      Issuable Upon Conversion.  The Company covenants that it
      will at all times reserve and keep available out of its authorized and
      unissued shares of Common Stock for the sole purpose of issuance upon
      conversion of this Debenture and payment of interest on this Debenture,
      each as herein provided, free from preemptive rights or any other actual
      contingent purchase rights of Persons other than the Holder (and the other
      holders of the Debentures), not less than such aggregate number of shares
      of the Common Stock as shall (subject to the terms and conditions set
      forth in the Purchase Agreement) be issuable (taking into account the
      adjustments and restrictions of Section 5) upon the conversion of the
      outstanding principal amount of this Debenture and payment of interest
      hereunder.  The Company covenants that all shares of Common
      Stock that shall be so issuable shall, upon issue, be duly authorized,
      validly issued, fully paid and nonassessable and shall be freely tradeable
      without restriction under the Securities Act and applicable state
      securities laws.

            

    

     

    
      
         

      

      
        15

        
          

        

      

      
         

      

    

    
      	
              vii.  

            	
              Fractional
      Shares.  Upon a conversion hereunder the Company shall
      not be required to issue stock certificates representing fractions of
      shares of Common Stock, but may if otherwise permitted, make a cash
      payment in respect of any final fraction of a share based on the VWAP at
      such time.  If the Company elects not, or is unable, to make
      such a cash payment, the Holder shall be entitled to receive, in lieu of
      the final fraction of a share, 1 whole share of Common
    Stock.

            

    

     

    
      	
              viii.  

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

            

    

     

    Section
5.                       Certain
Adjustments.

     

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

    
      
         

      

      
        16

        
          

        

      

      
         

      

    

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

     

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

    
      
         

      

      
        17

        
          

        

      

      
         

      

    

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

     

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

    
      
         

      

      
        18

        
          

        

      

      
         

      

    

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

     

    g) Notice to the
Holder.

     

    
      	
              i.
        

            	
              Adjustment to
      Conversion Price.  Whenever the Conversion Price is
      adjusted pursuant to any provision of this Section 5, the Company shall
      promptly mail to each Holder a notice setting forth the Conversion Price
      after such adjustment and setting forth a brief statement of the facts
      requiring such adjustment.  If the Company issues a variable
      rate security, despite the prohibition thereon in the Purchase Agreement,
      the Company shall be deemed to have issued Common Stock or Common Stock
      Equivalents at the lowest possible conversion or exercise price at which
      such securities may be converted or exercised in the case of a Variable
      Rate Transaction (as defined in the Purchase
  Agreement).

            

    

     

    
      	
              ii.  

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

            

    

     

    
      
         

      

      
        19

        
          

        

      

      
         

      

    

    Section
6.                       Redemption and Forced
Conversion.

     

    a) Monthly
Redemption.  On each Monthly Redemption Date, the Company shall
redeem the Monthly Redemption Amount plus accrued but unpaid interest,
liquidated damages and any other amounts then owing to such Holder in respect of
this Debenture (the “Monthly
Redemption”).  The Monthly Redemption Amount payable on each
Monthly Redemption Date shall be paid in cash; provided, however, as
to any Monthly Redemption and upon 20 Trading Days’ prior written irrevocable
notice (the “Monthly
Redemption Notice” and the 20 Trading Day period immediately following
the Monthly Redemption Notice, the “Monthly Redemption
Period”), in lieu of a cash redemption payment the Company may elect to
pay all or part of a Monthly Redemption Amount in Conversion Shares (such dollar
amount to be paid on a Monthly Redemption Date in Conversion Shares, the “Monthly Redemption Share
Amount”) based on a conversion price equal to the lesser of (i) the
then Conversion Price or (ii) 88% of the average of the VWAPs for the 20
consecutive Trading Days ending on the Trading Day that is immediately prior to
the applicable Monthly Redemption Date (subject to adjustment for any stock
dividend, stock split, stock combination or other similar event affecting the
Common Stock during such 20 Trading Day period) (the price calculated during the
20 Trading Day period immediately prior to the Monthly Redemption Date, the
“Monthly Conversion
Price” and such 20 Trading Day period, the “Monthly Conversion
Period”); provided, further,
that the Company may not pay the Monthly Redemption Amount in Conversion Shares
unless (y) except as otherwise provided in Section 8(vi) of the 2008
Settlement Agreement, from the date the Holder receives the duly delivered
Monthly Redemption Notice through and until the date such Monthly Redemption is
paid in full, the Equity Conditions have been satisfied, unless waived in
writing by the Holder, and (z) as to such Monthly Redemption, prior to such
Monthly Redemption Period (but not more than 5 Trading Days prior to the
commencement of the Monthly Redemption Period), the Company shall have delivered
to the Holder’s account with The Depository Trust Company a number of shares of
Common Stock to be applied against such Monthly Redemption Share Amount equal to
the quotient of (x) the applicable Monthly Redemption Share Amount divided
by (y) the lesser of (A) the then Conversion Price or (b) 88% of the
average of the VWAPs for the 20 consecutive Trading Days ending on the sixth
Trading Day prior to the commencement of the applicable Monthly Redemption
Period (subject to adjustment for any stock dividend, stock split, stock
combination or other similar event affecting the Common Stock during such 20
Trading Day period) (the “Pre-Redemption Conversion
Shares”).  The Holder may convert, pursuant to Section 4(a),
any principal amount of this Debenture subject to a Monthly Redemption at any
time prior to the date that the Monthly Redemption Amount, plus accrued but
unpaid interest, liquidated damages and any other amounts then owing to the
Holder are due and paid in full.  Unless otherwise indicated by the
Holder in the applicable Notice of Conversion, any principal amount of this
Debenture converted during the applicable Monthly Redemption Period until the
date the Monthly Redemption Amount is paid in full shall be first applied to the
principal amount subject to the Monthly Redemption Amount payable in cash and
then to the Monthly Redemption Share Amount.  Any principal amount of
this Debenture converted during the applicable Monthly Redemption Period in
excess of the Monthly Redemption Amount shall be applied against the last
principal amount of this Debenture scheduled to be redeemed hereunder, in
reverse time order from the Maturity Date; provided, however, if
any such conversion is applied against such Monthly Redemption Amount, the
Pre-Redemption Conversion Shares, if any were issued in connection with such
Monthly Redemption or were not already applied to such conversions, shall be
first applied against such conversion.  The Company covenants and
agrees that it will honor all Notice of Conversions tendered up until such
amounts are paid in full.  The Company’s determination to pay a
Monthly Redemption in cash, shares of Common Stock or a combination thereof
shall be applied ratably to all of the holders of the then outstanding
Debentures based on their (or their predecessor’s) principal amount of
Debentures held on the date of the 2008 Settlement Agreement.

    
      
         

      

      
        20

        
          

        

      

      
         

      

    

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

     

    c) Redemption
Procedure.  The payment of cash or issuance of Common Stock, as
applicable, pursuant to an Optional Redemption or Monthly Redemption shall be
made on the Optional Redemption Date or Monthly Redemption Date, as
applicable.  If any portion of the payment pursuant to an Optional
Redemption or Monthly Redemption shall not be paid by the Company by the
applicable due date, interest shall accrue thereon until such amount is paid in
full at an interest rate equal to the lesser of 12% per annum or the maximum
rate permitted by applicable law.  Notwithstanding anything herein
contained to the contrary, if any portion of the Optional Redemption Amount or
Monthly Redemption Amount, as applicable remains unpaid after such date, the
Holder may elect, by written notice to the Company given at any time thereafter,
to invalidate ab
initio such redemption, and, with respect to the Company’s failure to
honor the Optional Redemption, the Company shall have no further right to
exercise such Optional Redemption.  Notwithstanding anything to the
contrary in this Section 6, the Company’s determination to redeem in cash or its
elections under Section 6(b) shall be applied ratably among the Holders of
Debentures.  The Holder may elect to convert the outstanding principal
amount of the Debenture pursuant to Section 4 prior to actual payment in cash
for any redemption under this Section 6 by the delivery of a Notice of
Conversion to the Company.

    
      
         

      

      
        21

        
          

        

      

      
         

      

    

    d) Forced
Conversion.  Notwithstanding anything herein to the contrary,
if after the six month anniversary of the Effective Date, the Closing Price for
each Trading Day during any consecutive 20 calendar days, which period shall
have commenced only after the six month anniversary of the Effective Date, such
period the (“Threshold
Period”) exceeds $15.00 (subject to adjustment for reverse and forward
stock splits, stock dividends, stock combinations and other similar transactions
of the Common Stock that occur after the Original Issue Date) and the average
daily volume for such Threshold Period exceeds 100,000 shares of Common Stock
per Trading Day (subject to adjustment for forward and reverse stock splits,
recapitalizations, stock dividends and the like after the Original Issue Date),
the Company may, within 1 Trading Day after the end of any such Threshold
Period, deliver a written notice to the Holder (a “Forced Conversion
Notice” and the date such notice is delivered to the Holder, the “Forced Conversion Notice
Date”) to cause the Holder to convert up to 50% of the then outstanding
principal amount of Debentures plus, if so specified in the Forced Conversion
Notice, accrued but unpaid interest, it being agreed that the “Conversion Date”
for purposes of Section 4 shall be deemed to occur on the third Trading Day
following the Forced Conversion Notice Date (such third Trading Day, the “Forced Conversion
Date”).  The Company may not deliver a Forced Conversion
Notice, and any Forced Conversion Notice delivered by the Company shall not be
effective, unless all of the Equity Conditions are met on each Trading Day
occurring during the applicable Threshold Period through and including the later
of the Forced Conversion Date and the Trading Day after the date such Conversion
Shares pursuant to such conversion are delivered to the
Holder.  Notwithstanding anything herein to the contrary, the Company
may only deliver an additional Forced Conversion Notice provided that such
second Forced Conversion Notice Date is at least 13 months following the
Original Issue Date and each Forced Conversion Notice is dependent on a separate
Threshold Period from a prior Forced Conversion Notice.  Any Forced
Conversion shall be applied ratably to all Holders based on their initial
purchases of Debentures pursuant to the Purchase Agreement, provided that any
voluntary conversions by a Holder shall be applied against such Holder’s
pro-rata allocation, thereby decreasing the aggregate amount forcibly converted
hereunder if only a portion of this Debenture is forcibly
converted.  For purposes of clarification, a Forced Conversion shall
be subject to all of the provisions of Section 4, including, without limitation,
the provision requiring payment of liquidated damages and limitations on
conversions.

     

    Section
7.                       Negative
Covenants.  As long as 20% of the aggregate principal amount of
all Debentures issued on the Original Issue Date remain outstanding, the Company
shall not, and shall not permit any of its Subsidiaries to, directly or
indirectly, without the prior written consent of the holders of all Debentures
then outstanding (provided, however, that if the principal amount of a holder’s
Debenture is less $50,000, such holder’s consent shall not be
required):

     

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

     

    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;

    
      
         

      

      
        22

        
          

        

      

      
         

      

    

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

     

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

     

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

     

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

     

    At such
time that less than 20% of the aggregate principal amount of all Debentures
issued on the Original Issue Date remain outstanding, the Company shall no
longer be subject to the negative covenants set forth in this Section 7 above or
be required to obtain prior written consent of the holders of the Debentures to
take the foregoing actions.

     

    Section
8.                       Events of
Default.

     

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

     

    
      	
              i.  

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

            

    

     

    
      	
              ii.  

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

            

    

     

    
      
         

      

      
        23

        
          

        

      

      
         

      

    

    
      	
              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, (B) any of the 2008 Settlement
      Documents or (C) 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 other 2008 Settlement Document, any written statement
      pursuant hereto or thereto or any other report, financial statement or
      certificate made or delivered to the Holder or any other Holder shall be
      untrue or incorrect in any material respect as of the date when made or
      deemed made;

            

    

     

    
      	
              v.  

            	
              the
      Company or any Significant Subsidiary shall be subject to a Bankruptcy
      Event, other than the involuntary bankruptcy petition pending in the
      United States Bankruptcy Court for the District of Delaware Case No.
      08-10528;

            

    

     

    
      	
              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.  

            	
              Intentionally
      Omitted;

            

    

     

    
      	
              viii.  

            	
              the
      Company shall be a party to any Change of Control Transaction or
      Fundamental Transaction or shall agree to sell or dispose of all or in
      excess of 33% of its assets in one transaction or a series of related
      transactions (whether or not such sale would constitute a Change of
      Control Transaction);

            

    

     

    
      	
              ix.  

            	
              Intentionally
      Omitted.

            

    

     

    
      	
              x.  

            	
              Intentionally
      Omitted.

            

    

     

    
      	
              xi.  

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

            

    

     

    
      
         

      

      
        24

        
          

        

      

      
         

      

    

    
      	
              xii.  

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

            

    

     

    
      	
              xiii.  

            	
              any
      monetary judgment, writ or similar final process shall be entered or filed
      against the Company, any Subsidiary or any of their respective property or
      other assets for more than $50,000, and such judgment, writ or similar
      final process shall remain unvacated, unbonded or unstayed for a period of
      45 calendar days.

            

    

     

    
      	
               
      

            	
              xiv.  
      

            	
              the
      shares issued pursuant to Section 5 or 10 of the 2008 Settlement Agreement
      are not or cease to be free trading
securities.

            

    

     

    b) Remedies Upon Event of
Default.  If any Event of Default occurs, the outstanding
principal amount of this Debenture, plus accrued but unpaid interest, liquidated
damages and other amounts owing in respect thereof through the date of
acceleration, shall become, at the Holder’s election, immediately due and
payable in cash at the Mandatory Default Amount.  Commencing 5 days
after the occurrence of any Event of Default that results in the eventual
acceleration of this Debenture, the interest rate on this Debenture shall accrue
at an interest rate equal to the lesser of 12% 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.

     

    c) Conversion Price
Adjustment.  If any Event of Default occurs, the Conversion
Price will be adjusted to equal the lesser of (i) the then Conversion Price or
(ii) the average of the VWAPs for the 10 consecutive Trading Days ending on the
Trading Day that is immediately prior to the date of the Holder’s notice
pursuant to which it notifies the Company of such adjustment.

    
      
         

      

      
        25

        
          

        

      

      
         

      

    

    Section
9.                       Miscellaneous.

     

    a) Notices.  Any
and all notices or other communications or deliveries to be provided by the
Holder hereunder, including, without limitation, any Notice of Conversion, shall
be in writing and delivered personally, by facsimile, or sent by a nationally
recognized overnight courier service, addressed to the Company, at the address
set forth above, facsimile number 86-010-59225001, Attn: Victor Tong,
President with a copy to Loeb & Loeb LP, Attn: Mitchell S. Nussbaum,
Esq., facsimile number 212-407-4990 or such other facsimile number or address as
the Company may specify for such purpose by notice to the Holder delivered in
accordance with this Section 9.  Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile, or sent by a nationally
recognized overnight courier service addressed to each Holder at the facsimile
number or address of such Holder appearing on the books of the Company, or if no
such facsimile number or address appears, at the principal place of business of
the Holder.  Any notice or other communication or deliveries hereunder
shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section 9 prior to 5:30 p.m. (New York City
time), (ii) the date immediately following the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
specified in this Section 9 between 5:30 p.m. (New York City time) and 11:59
p.m. (New York City time) on any date, (iii) the second Business Day
following the date of mailing, if sent by nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such
notice is required to be given.

     

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

     

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

    
      
         

      

      
        26

        
          

        

      

      
         

      

    

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

     

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

     

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

    
      
         

      

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

     

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

     

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

     

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

    
      
         

      

      
        28

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the Company has caused this Second Amended and Restated
Variable Rate Secured Convertible Debenture to be duly executed by a duly
authorized officer as of the date first above indicated.

     

    
      	 
      	
              PACIFICNET
      INC.

            
	 
      	 
      
	 
      	
              By:

            	 
      
	 
      	 
      	
              Name:

            	 
      
	 
      	 
      	
              Title:

            	 
      

    

    

    
      
         

      

      
        29

        
          

        

      

      
         

      

    

    ANNEX
A

     

    NOTICE
OF CONVERSION

     

    The
undersigned hereby elects to convert principal under the Second Amended and
Restated Variable Rate Secured Convertible Debenture of PacificNet Inc., a
Delaware corporation (the “Company”), due on
July 15, 2009, into shares of common stock, par value $.0001 per share (the
“Common
Stock”), of the Company according to the conditions hereof, as of the
date written below.  If shares are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates and
opinions as reasonably requested by the Company in accordance
therewith.  No fee will be charged to the holder for any conversion,
except for such transfer taxes, if any.

     

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

     

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

     

    
      	
              Conversion
      calculations:

            	 
      	
              Date
      to Effect Conversion:

            
	 
      	 
      	 
      
	 
      	 
      	
              Principal
      Amount of Debenture to be Converted:

            
	 
      	 
      	 
      
	 
      	 
      	
              Payment
      of Interest in Common Stock __ yes  __ no

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

            
	 
      	 
      	 
      
	 
      	 
      	
              Conversion
      Price:              $2.00

            
	 
      	 
      	 
      
	 
      	 
      	
              Number
      of shares of Common Stock to be issued:

            
	 
      	 
      	 
      
	 
      	 
      	
              Signature:

            
	 
      	 
      	 
      
	 
      	 
      	
              Name:

            
	 
      	 
      	 
      
	 
      	 
      	
              Address:

            

    

    

    
      
         

      

      
        30

        
          

        

      

      
         

      

    

    Schedule
1

     

    CONVERSION
SCHEDULE

     

    The
Second Amended and Restated Variable Rate Secured Convertible Debentures due on
July 15, 2009, in the aggregate principal amount of $____________ issued by
PacificNet Inc.  This Conversion Schedule reflects conversions made
under Section 4 of the above referenced Debenture.

     

    Dated:

     

    
      	
              Date
      of Conversion

              (or
      for first entry, 

              Original
      Issue Date)

            	
              Amount
      of Conversion

            	
              Aggregate
      Principal Amount Remaining Subsequent to Conversion(or original Principal
      Amount)

            	
              Company
      Attest

            
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      

    

    

     

     

     

     

    31pacificnet_8k-ex1003.htm

    Exhibit
10.3

     

     

     

    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: February 6,
2007

    

    

    FORM
OF AMENDED AND RESTATED VARIABLE RATE

    SECURED
CONVERTIBLE DEBENTURE DUE JULY 2009

    

    THIS AMENDED AND RESTATED VARIABLE
RATE SECURED CONVERTIBLE DEBENTURE is one of a series of duly authorized and
validly issued Secured Convertible Debentures of PacificNet Inc., a
Delaware  corporation, having its principal place of business at 23/F,
Tower A, Timecourt, No.6 Shuguang Xili, Chaoyang District, Beijing, China 100028
(the “Company”), designated
as its Amended and Restated Variable Rate Secured Convertible Debenture, due
July 2009 (this debenture, the “Debenture” and
collectively with the other such series of debentures, the “Debentures”).

    

    The obligations under this Debenture
are secured by that certain Security Agreement, dated as of August 29, 2008,
between the Company and __________________________, as agent (as the same may be
amended from time to time, the “Security
Agreement”).  To secure the prompt and complete payment and
performance in full of all of the obligations of the Company under this
Debenture, the Company hereby grants, assigns, conveys, mortgages, pledges,
hypothecates and transfers to the Holder a lien and continuing security interest
in and upon all of its right, title and interest in, to and under all of the
Collateral (as defined in the Security Agreement).  Additional rights
of the Holder are set forth in the Security Agreement.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    FOR VALUE
RECEIVED, the Company promises to pay to ______________________ or its
registered assigns (the “Holder”), or shall
have paid pursuant to the terms hereunder, the principal sum of $__________ by
July 15, 2009, or such earlier date as this Debenture is required or permitted
to be repaid as provided hereunder (the “Maturity Date”), and
to pay interest to the Holder on the aggregate unconverted and then outstanding
principal amount of this Debenture in accordance with the provisions
hereof.  This Debenture is subject to the following additional
provisions:

    

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

    

    “2008 Settlement
Agreement” means the Settlement and Release Agreement, dated as of August
29, 2008, by and among the Company and each of Iroquois Master Fund, Ltd., C.E.
Unterberg, Towbin Capital Partners I (n/k/a Collins Stewart), Alpha Capital AG,
Whalehaven Capital Fund Ltd., DKR Soundshore Oasis Holding Fund, Ltd., Basso
Fund Ltd., Basso Multi-Strategy Holding Fund Ltd., and Basso Private
Opportunities Holding Fund Ltd.

    

    “2008 Settlement
Documents” shall have the meaning set forth in the 2008 Settlement
Agreement.

    

    “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 other than the involuntary bankruptcy petition
pending in the United States Bankruptcy Court for the District of Delaware Case
No. 08-10528; (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.

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

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

    

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

    

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

    

    “Change of Control
Transaction” means the occurrence after the date hereof of any of the
following: (i) an acquisition after the date hereof by an individual or legal
entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the
Exchange Act) of effective control (whether through legal or beneficial
ownership of capital stock of the Company, by contract or otherwise) of in
excess of 33% of the voting securities of the Company (other than by means of
conversion or exercise of the Debentures and the Securities issued together with
the Debentures), or (ii) the Company merges into or consolidates with any other
Person, or any Person merges into or consolidates with the Company and, after
giving effect to such transaction, the stockholders of the Company immediately
prior to such transaction own less than 66% of the aggregate voting power of the
Company or the successor entity of such transaction, or (iii) the Company sells
or transfers all or substantially all of its assets to another Person and the
stockholders of the Company immediately prior to such transaction own less than
66% of the aggregate voting power of the acquiring entity immediately after the
transaction, or (iv) a replacement at one time or within a two year period of
more than one-half of the members of the Company’s board of directors which is
not approved by a majority of those individuals who are members of the board of
directors on the date hereof (or by those individuals who are serving as members
of the board of directors on any date whose nomination to the board of directors
was approved by a majority of the members of the board of directors who are
members on the date hereof), or (v) the execution by the Company of an agreement
to which the Company  is a party or by which it is bound, providing
for any of the events set forth in clauses (i) through (iv) above.

    

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

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

    “Equity Conditions”
shall mean, during the period in question, (i) the
Company shall have duly honored all conversions and redemptions
scheduled to occur or occurring by virtue of one or more Notices of Conversion
of the Holder, if any, (ii) the Company shall have paid all amounts owing to the
Holder in respect of this Debenture, (iii) the Company shall have filed,
during the 12 months preceding the date of such notice, all reports required to
be filed by it under Section 13 or Section 15(d) of the Exchange Act, (iv) upon
issuance, the shares in question will be freely tradeable without restriction
under the Securities Act and applicable state securities laws and will not be
subject to any restrictive legends, (v) the Common Stock is trading on a Trading
Market and all of the shares issuable pursuant to this Debenture are listed or
otherwise eligible 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), (vi) there is a sufficient
number of authorized but unissued and otherwise unreserved shares of Common
Stock for the issuance of all of the shares issuable pursuant to this Debenture,
(vii) there is no existing Event of Default or no existing event which, with the
passage of time or the giving of notice, would constitute an Event of Default,
(viii) after the issuance of the shares in question (or, in the case of a
Monthly Redemption, the shares issuable upon conversion in full of the Monthly
Redemption Amount), the issuance of all Conversion Shares under the series of
Debentures, of which this Debenture is part would not violate the limitations
set forth in Section 4(c)(i) and Section 4(c)(ii) herein, (ix) there has been no public announcement of a pending
or proposed Fundamental Transaction or Change of Control Transaction that has
not been consummated and (x) the Holder is not in possession of any information
that is, or might constitute, material nonpublic
information.

    

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

    

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

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

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

    

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

    

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

    

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

    

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

    

    “Interest Conversion
Rate” means the lesser of (a) the Conversion Price or (b) the 80% of the
lesser of (i) the average of the VWAPs for the 20 consecutive Trading Days
ending on the Trading Day that is immediately prior to the applicable Interest
Payment Date or (ii) the average of the VWAPs for the 20 consecutive Trading
Days ending on the Trading Day that is immediately prior to the date the
applicable Interest Conversion Shares are issued and delivered if after the
Interest Payment Date (in each case, subject to adjustment for any stock
dividend, stock split, stock combination or other similar event affecting the
Common Stock during such 20 Trading Day period).

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

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

    

    “Monthly Redemption
Amount” means, as to a Monthly Redemption, $44,931.95.

    

    “Monthly Redemption
Date” means October 15, 2008 and the 15th of each month thereafter and
terminating upon the full redemption of this Debenture.

    

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

    

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

    

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

    

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

    

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

    

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

    

    “Optional Redemption
Amount” means the sum of (i) 120% of the principal amount of the
Debenture then outstanding, (ii) accrued but unpaid interest and (iii) all
amounts due in respect of the Debenture.

    

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

    

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

    

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

     

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

    

    “Permitted
Indebtedness” means (a) the Indebtedness existing on the Original Issue
Date and set forth on Schedule 3.1(ff)
attached to the Purchase Agreement, (b) lease obligations and purchase money
indebtedness of up to $20,000,000, in the aggregate, incurred in connection with
the acquisition of capital assets and lease obligations with respect to newly
acquired or leased assets, provided that such Indebtedness does not mature or
require payments of principal prior to the Maturity Date and is made expressly
subordinate in right of payment to the Indebtedness evidenced by this Debenture,
as reflected in a written agreement reasonably acceptable to, and approved by,
the Holder in writing, and (c) up to $50,000,000 of additional Indebtedness
incurred by the Company in connection with raising capital, provided that, if
such Indebtedness is convertible into Common Stock, the conversion price of such
Indebtedness may not be less than the Conversion Price immediately prior to the
issuance of such Indebtedness.

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

    “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 under clause (b) thereunder, provided that such Liens are not
secured by assets of the Company or its Subsidiaries other than the assets so
acquired or leased, and (d) Liens that do not impair or adversely affect in any
respect the Lien upon any of the Collateral under the Security
Agreement.

     

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

    

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

    

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

    

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

    

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

    

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

    

    “Subsidiary” means any
Person, whether now existing or hereafter created, with respect to which a
specified Person directly or indirectly (A) owns a majority of the equity
interests, (B) has the power to elect a majority of that Person’s board of
directors or similar governing body, or (C) otherwise has the power, directly or
indirectly, to direct the business and policies of that Person.

    

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

    

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

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

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

    

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

    

    Section
2.                                Interest.

    

    a) Payment of Interest in Cash
or Kind. The Company shall pay interest to the Holder on the aggregate
unconverted and then outstanding principal amount of this Debenture at the rate
of 6% per annum beginning on April 1, 2007 until March 31, 2008, increasing to
7% per annum beginning on March 31, 2008 until payment in full of the principal
sum has been made, payable on a monthly basis on the fifteenth day of each
month, on each Conversion Date and on the Maturity Date (except that, if any
such date is not a Business Day, then such payment shall be due on the next
succeeding Business Day) (each such date, an “Interest Payment
Date”), in cash or duly authorized, validly issued, fully paid and
non-assessable shares of Common Stock at the Interest Conversion Rate (the
amount to be paid in shares, the “Interest Share
Amount”), or a combination thereof; provided, however, that (i)
except as otherwise provided in Section 8(vi) of the 2008 Settlement Agreement,
payment in shares of Common Stock may only occur if during the 20 Trading Days
immediately prior to the applicable Interest Payment Date  (the “Interest Notice
Period”) and through and including the date such shares of Common Stock
are issued to the Holder all of the Equity Conditions have been met (unless
waived by the Holder in writing), (ii) the Company shall have given the Holder
notice in accordance with the notice requirements set forth below and (iii) as
to such Interest Payment Date, prior to such Interest Notice Period (but not
more than 5 Trading Days prior to the commencement of such Interest Notice
Period), the Company shall have delivered to the Holder’s account with the
Depository Trust Company a number of shares of Common Stock to be applied
against such Interest Share Amount equal to the quotient of (x) the amount of
the interest payment to be made in shares of Common Stock divided by (y) the
lesser of (A) the then Conversion Price or (b) 80% of the average of the VWAPs
for the 20 consecutive Trading Days ending on the sixth Trading Day prior to the
commencement of the applicable Interest Notice Period (subject to adjustment for
any stock dividend, stock split, stock combination or other similar event
affecting the Common Stock during such 20 Trading Day period) (the “Interest Conversion
Shares”).

    
      
         

      

      
        8

        
          

        

      

      
         

      

    

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

    

    c) Interest
Calculations. Interest shall be calculated on the basis of a 365-day year
and shall accrue daily commencing on the Original Issue Date until payment in
full of the principal sum, together with all accrued and unpaid interest,
liquidated damages and other amounts which may become due hereunder, has been
made.  Payment of interest in shares of Common Stock (other than the
Interest Conversion Shares issued prior to an Interest Notice Period) shall
otherwise occur pursuant to Section 4(d)(ii) herein and, solely for purposes of
the payment of interest in shares, the Interest Payment Date shall be deemed the
Conversion Date.  Interest shall cease to accrue with respect to any
principal amount converted, provided that the Company actually delivers the
Conversion Shares within the time period required by Section
4(d)(ii).  Interest hereunder will be paid to the Person in whose name
this Debenture is registered on the records of the Company regarding
registration and transfers of this Debenture (the “Debenture Register”).
Except as otherwise provided herein, if at any time the Company pays interest
partially in cash and partially in shares of Common Stock to the holders of the
Debentures, then such payment shall be distributed ratably among the holders of
the then-outstanding Debentures based on their principal amount of Debentures
held on the date of the 2008 Settlement Agreement.

    

    d) Late
Fee.  All overdue accrued and unpaid interest to be paid
hereunder shall entail a late fee at an interest rate equal to the lesser of 12%
per annum or the maximum rate permitted by applicable law (“Late Fees”) which
shall accrue daily from the date such interest is due hereunder through and
including the date of payment in full. Notwithstanding anything to the contrary
contained herein, if on any Interest Payment Date the Company has elected to pay
accrued interest in the form of Common Stock but the Company is not able to pay
accrued interest in Common Stock because it fails to satisfy the conditions for
payment in Common Stock set forth above, then, at the option of the Holder, the
Company, in lieu of delivering either shares of Common Stock pursuant to this
Section 2 or paying the regularly scheduled interest payment in cash, shall
deliver, within three Trading Days of each applicable Interest Payment Date, an
amount in cash equal to the product of (x) the number of shares of Common Stock
otherwise deliverable to the Holder in connection with the payment of interest
due on such Interest Payment Date multiplied by (y) the highest VWAP during the
period commencing on the Interest Payment Date and ending on the Trading Day
prior to the date such payment is made.  If any Interest Conversion
Shares are issued to the Holder in connection with an Interest Payment Date and
are not applied against an Interest Share Amount, then the Holder shall promptly
return such excess shares to the Company.

    
      
         

      

      
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    e) Prepayment.  Except
as otherwise set forth in this Debenture, the Company may 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 on the basis that the
original Holder set forth above shall be deemed to have made certain investment
representations as set forth in the Purchase Agreement and may be transferred or
exchanged only in compliance with applicable federal and state securities laws
and regulations.

    

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

    

    Section
4.                        Conversion.

    

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

    
      
         

      

      
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    b) Conversion
Price.  The conversion price in effect on any Conversion Date
shall be equal to $2.00
(subject to adjustment herein) (the “Conversion
Price”).

    

    c) Conversion
Limitations.

    

    i. Trading Market
Limitations.   Notwithstanding anything herein to the
contrary, but subject to the provisions of this Section 4(c)(i), if the Company
has not obtained Shareholder Approval (as defined below), then the Company may
not issue, upon conversion of this Debenture, a number of shares of Common Stock
which, when aggregated with any shares of Common Stock issued on or after the
Original Issue Date and prior to such Conversion Date (A) in connection with any
Debentures issued pursuant to the Purchase Agreement, (B) in connection with any
Warrants issued pursuant to the Purchase Agreement and (C) in connection with
any warrants issued to any registered broker-dealer as a fee in connection with
the issuance of the Securities pursuant to the Purchase Agreement, would exceed
19.999% of the number of shares of Common Stock outstanding on the Trading Day
immediately preceding the Original Issue Date (such number of shares, the “Issuable
Maximum”).  Each Holder shall be entitled to a portion of the
Issuable Maximum equal to the quotient obtained by dividing (x) the aggregate
principal amount of the Debenture(s) issued and sold to such Holder on the
Original Issue Date by (y) the aggregate principal amount of all Debentures
issued and sold by the Company on the Original Issue Date.  If any
Holder shall no longer hold the Debenture(s), then such Holder’s remaining
portion of the Issuable Maximum, if any, shall be allocated pro-rata among the
remaining Holders.  If, on any Conversion Date, (1) the applicable
Conversion Price is such that the shares issuable under this Debenture on such
Conversion Date, together with the aggregate number of shares of Common Stock
that would then be issuable upon conversion in full of all then outstanding
Debentures, would exceed the Issuable Maximum and (2) the Company shall not have
previously obtained Shareholder Approval, then the Company shall issue to the
Holder requesting a conversion a number of shares of Common Stock equal to such
Holder’s pro-rata portion (which shall be calculated pursuant to the terms
hereof) of the Issuable Maximum and, with respect to the remainder of the
aggregate principal amount of the Debentures (including any accrued interest)
then held by such Holder for which a conversion in accordance with the
applicable Conversion Price would result in an issuance of shares of Common
Stock in excess of such Holder’s pro-rata portion (which shall be calculated
pursuant to the terms hereof) of the Issuable Maximum (the “Excess Principal”),
the Company shall be prohibited from converting such Excess Principal and shall
promptly notify the Holder of the reason therefor. This Debenture shall
thereafter be unconvertible to such extent until and unless Shareholder Approval
is subsequently obtained, but this Debenture shall otherwise remain in full
force and effect.  The Holder acknowledges and agrees that shares of
Common Stock issuable upon conversion hereof or exercise of the Warrants are not
eligible to vote in connection with the Shareholder
Approval.  Notwithstanding anything contained herein to the contrary,
the foregoing provisions of this Section 4(c)(i) shall apply only to the extent
that Shareholder Approval is required by the rules of any Trading Market or of
the “Pink Sheets” on which the Common Stock is then listed or
quoted.

    
      
         

      

      
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    ii. Holder’s Restriction on
Conversion. The Company shall not effect any conversion of this
Debenture, and a Holder shall not have the right to convert any portion of this
Debenture, to the extent that after giving effect to the conversion set forth on
the applicable Notice of Conversion, such Holder (together with such Holder’s
Affiliates, and any other person or entity acting as a group together with such
Holder or any of such Holder’s Affiliates) would beneficially own in excess of
the Beneficial Ownership Limitation (as defined below).  For purposes of
the foregoing sentence, the number of shares of Common Stock beneficially owned
by such Holder and its Affiliates shall include the number of shares of Common
Stock issuable upon conversion of this Debenture with respect to which such
determination is being made, but shall exclude the number of shares of Common
Stock which are issuable upon (A) conversion of the remaining, unconverted
principal amount of this Debenture beneficially owned by such Holder or any of
its Affiliates and (B) exercise or conversion of the unexercised or unconverted
portion of any other securities of the Company  subject to a
limitation on conversion or exercise analogous to the limitation contained
herein (including, without limitation, any other Debentures or the Warrants)
beneficially owned by such Holder or any of its Affiliates.  Except as set
forth in the preceding sentence, for purposes of this Section 4(c)(ii),
beneficial ownership shall be calculated in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder.  To
the extent that the limitation contained in this Section 4(c)(ii) applies, the
determination of whether this Debenture is convertible (in relation to other
securities owned by such Holder together with any Affiliates) and of which
principal amount of this Debenture is convertible shall be in the sole
discretion of such Holder, and the submission of a Notice of Conversion shall be
deemed to be such Holder’s determination of whether this Debenture may be
converted (in relation to other securities owned by such Holder together with
any Affiliates) and which principal amount of this Debenture is convertible, in
each case subject to such aggregate percentage limitations. To ensure compliance
with this restriction, each Holder will be deemed to represent to the Company
each time it delivers a Notice of Conversion that such Notice of Conversion has
not violated the restrictions set forth in this paragraph and the Company shall
have no obligation to verify or confirm the accuracy of such
determination.  In addition, a
determination as to any group status as contemplated above shall be determined
in accordance with Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder.   For purposes of this Section
4(c)(ii), in determining the number of outstanding shares of Common Stock, a
Holder may rely on the number of outstanding shares of Common Stock as stated in
the most recent of the following: (A) the Company’s most recent Form 10-Q or
Form 10-K, (B) a more recent public announcement by the Company; or (C) a more
recent notice by the Company or the Company’s transfer agent setting forth the
number of shares of Common Stock outstanding.  Upon the written or oral
request of a Holder, the Company shall within two Trading Days confirm orally
and in writing to such Holder the number of shares of Common Stock then
outstanding. 

    

    
      
         

      

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

    

    
      	
              d)  

            	
              Mechanics of
      Conversion.

            

    

    

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

    

    ii. Delivery of Certificate Upon
Conversion. Not later than three Trading Days after each Conversion Date
(the “Share Delivery
Date”), the Company shall deliver, or cause to be delivered, to the
Holder (A) a certificate or certificates representing the Conversion Shares
which shall be free of restrictive legends and trading restrictions,
representing the number of shares of Common Stock being acquired upon the
conversion of this Debenture (including, if the Company has given continuous
notice pursuant to Section 2(b) for payment of interest in shares of Common
Stock at least 20 Trading Days prior to the date on which the Conversion Notice
is delivered to the Company, shares of Common Stock representing the payment of
accrued interest otherwise determined pursuant to Section 2(a) but assuming that
the Interest Notice Period is the 20 Trading Days period immediately prior to
the date on which the Conversion Notice is delivered to the Company and
excluding for such issuance the condition that the Company deliver Interest
Conversion Shares as to such interest payment) and (B) a bank check in the
amount of accrued and unpaid interest (if the Company has elected or is required
to pay accrued interest in cash).  The Company shall use its best
efforts to deliver any certificate or certificates required to be delivered by
the Company under this Section 4 electronically through the Depository Trust
Company or another established clearing corporation performing similar
functions.

    
      
         

      

      
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    iii. Intentionally
Omitted.

    

    iv. Intentionally
Omitted.

    

    v. Failure to Deliver
Certificates.  If in the case of any Notice of Conversion such
certificate or certificates are not delivered to or as directed by the
applicable Holder by the third Trading Day after the Conversion Date, the Holder
shall be entitled to elect by written notice to the Company at any time after
such third Trading Day, but on or before its receipt of such certificate or
certificates, to rescind such Conversion, in which event the Company shall
promptly return to the Holder any original Debenture delivered to the Company
and the Holder shall promptly return the Common Stock certificates representing
the principal amount of this Debenture tendered for conversion to the
Company.

    

    vi. Obligation Absolute; Partial
Liquidated Damages.  The Company’s obligations to issue and
deliver the Conversion Shares upon conversion of this Debenture in accordance
with the terms hereof are absolute and unconditional, irrespective of any action
or inaction by the Holder to enforce the same, any waiver or consent with
respect to any provision hereof, the recovery of any judgment against any Person
or any action to enforce the same, or any setoff, counterclaim, recoupment,
limitation or termination, or any breach or alleged breach by the Holder or any
other Person of any obligation to the Company or any violation or alleged
violation of law by the Holder or any other Person, and irrespective of any
other circumstance which might otherwise limit such obligation of the Company to
the Holder in connection with the issuance of such Conversion Shares; provided, however, that such
delivery shall not operate as a waiver by the Company of any such action the
Company may have against the Holder.  In the event the Holder of this
Debenture shall elect to convert any or all of the outstanding principal amount
hereof, the Company may not refuse conversion based on any claim that the Holder
or anyone associated or affiliated with the Holder has been engaged in any
violation of law, agreement or for any other reason, unless an injunction from a
court, on notice to Holder, restraining and or enjoining conversion of all or
part of this Debenture shall have been sought and obtained, and the Company
posts a surety bond for the benefit of the Holder in the amount of 120% of the
outstanding principal amount of this Debenture, which is subject to the
injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the underlying dispute and the proceeds of which shall
be payable to such Holder to the extent it obtains judgment.  In the
absence of such injunction, the Company shall issue Conversion Shares or, if
applicable, cash, upon a properly noticed conversion.  If the Company
fails for any reason to deliver to the Holder such certificate or certificates
pursuant to Section 4(d)(ii) by the third Trading Day after the Conversion Date,
the Company shall pay to such Holder, in cash, as liquidated damages and not as
a penalty, for each $1000 of principal amount being converted, $10 per Trading
Day (increasing to $20 per Trading Day on the fifth Trading Day after such
liquidated damages begin to accrue) for each Trading Day after such third
Trading Day until such certificates are delivered; provided, however that if the
Holder rescinds or withdraws such conversion notice such liquidated damages
shall cease to continue to accrue after such
date.    Nothing herein shall limit a Holder’s right to
pursue actual damages or declare an Event of Default pursuant to Section 8
hereof for the Company’s failure to deliver Conversion Shares within the period
specified herein and such Holder shall have the right to pursue all remedies
available to it hereunder, at law or in equity including, without limitation, a
decree of specific performance and/or injunctive relief.  The exercise
of any such rights shall not prohibit the Holder from seeking to enforce damages
pursuant to any other Section hereof or under applicable law.

    
      
         

      

      
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    vii. Compensation for Buy-In on
Failure to Timely Deliver Certificates Upon Conversion. In addition to
any other rights available to the Holder, if the Company fails for any reason to
deliver to the Holder such certificate or certificates by the Share Delivery
Date pursuant to Section 4(d)(ii), and if after such Share Delivery Date the
Holder is required by its brokerage firm to purchase (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of a
sale by such Holder of the Conversion Shares which the Holder was entitled to
receive upon the conversion relating to such Share Delivery Date (a “Buy-In”), then the
Company shall (A) pay in cash to the Holder (in addition to any other remedies
available to or elected by the Holder) the amount by which (x) the Holder’s
total purchase price (including any brokerage commissions) for the Common Stock
so purchased exceeds (y) the product of (1) the aggregate number of shares of
Common Stock that such Holder was entitled to receive from the conversion at
issue multiplied by (2) the actual sale price at which the sell order giving
rise to such purchase obligation was executed (including any brokerage
commissions) and (B) at the option of the Holder, either reissue (if
surrendered) this Debenture in a principal amount equal to the principal amount
of the attempted conversion or deliver to the Holder the number of shares of
Common Stock that would have been issued if the Company had timely complied with
its delivery requirements under Section 4(d)(ii).  For example, if the
Holder purchases Common Stock having a total purchase price of $11,000 to cover
a Buy-In with respect to an attempted conversion of this Debenture with respect
to which the actual sale price of the Conversion Shares (including any brokerage
commissions) giving rise to such purchase obligation was a total of $10,000
under clause (A) of the immediately preceding sentence, the Company shall be
required to pay the Holder $1,000.  The Holder shall provide the
Company written notice indicating the amounts payable to the Holder in respect
of the Buy-In and, upon request of the Company, evidence of the amount of such
loss.  Nothing herein shall limit a Holder’s right to pursue any other
remedies available to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief with
respect to the Company’s failure to timely deliver certificates representing
shares of Common Stock upon conversion of this Debenture as required pursuant to
the terms hereof.

    

    viii. Reservation of Shares
Issuable Upon Conversion. The Company covenants that it will at all times
reserve and keep available out of its authorized and unissued shares of Common
Stock for the sole purpose of issuance upon conversion of this Debenture and
payment of interest on this Debenture, each as herein provided, free from
preemptive rights or any other actual contingent purchase rights of Persons
other than the Holder (and the other holders of the Debentures), not less than
such aggregate number of shares of the Common Stock as shall (subject to the
terms and conditions set forth in the Purchase Agreement) be issuable (taking
into account the adjustments and restrictions of Section 5) upon the conversion
of the outstanding principal amount of this Debenture and payment of interest
hereunder.  The Company covenants that all shares of Common Stock that
shall be so issuable shall, upon issue, be duly authorized, validly issued,
fully paid and nonassessable and shall be freely tradeable without restriction
under the Securities Act and applicable state securities laws.

    
      
         

      

      
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    ix. Fractional Shares.
Upon a conversion hereunder the Company shall not be required to issue stock
certificates representing fractions of shares of Common Stock, but may if
otherwise permitted, make a cash payment in respect of any final fraction of a
share based on the VWAP at such time.  If the Company elects not, or
is unable, to make such a cash payment, the Holder shall be entitled to receive,
in lieu of the final fraction of a share, 1 whole share of Common
Stock.

    

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

    

    Section
5.                                   Certain
Adjustments.

    

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

    
      
         

      

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

     

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

    
      
         

      

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

    

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

    
      
         

      

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

    

    g) Notice to the
Holder.

    

    i. Adjustment to Conversion
Price.  Whenever the Conversion Price is adjusted pursuant to
any provision of this Section 5, the Company shall promptly mail to each Holder
a notice setting forth the Conversion Price after such adjustment and setting
forth a brief statement of the facts requiring such adjustment.  If
the Company issues a variable rate security, despite the prohibition thereon in
the Purchase Agreement, the Company shall be deemed to have issued Common Stock
or Common Stock Equivalents at the lowest possible conversion or exercise price
at which such securities may be converted or exercised in the case of a Variable
Rate Transaction (as defined in the Purchase Agreement).

    

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

    
      
         

      

      
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    Section
6.                                   Redemption and Forced
Conversion.

    

    a) Monthly
Redemption.  On each Monthly Redemption Date, the Company shall
redeem the Monthly Redemption Amount plus accrued but unpaid interest,
liquidated damages and any other amounts then owing to such Holder in respect of
this Debenture (the “Monthly Redemption”).
The Monthly Redemption Amount payable on each Monthly Redemption Date shall be
paid in cash; provided, however, as to any
Monthly Redemption and upon 20 Trading Days’ prior written irrevocable notice
(the “Monthly
Redemption Notice” and the 20 Trading Day period immediately following
the Monthly Redemption Notice, the “Monthly Redemption
Period”), in lieu of a cash redemption payment the Company may elect to
pay all or part of a Monthly Redemption Amount in Conversion Shares (such dollar
amount to be paid on a Monthly Redemption Date in Conversion Shares, the “Monthly Redemption Share
Amount”) based on a conversion price equal to the lesser of (i) the then
Conversion Price or (ii) 88% of the average of the VWAPs for the 20 consecutive
Trading Days ending on the Trading Day that is immediately prior to the
applicable Monthly Redemption Date (subject to adjustment for any stock
dividend, stock split, stock combination or other similar event affecting the
Common Stock during such 20 Trading Day period) (the price calculated during the
20 Trading Day period immediately prior to the Monthly Redemption Date, the
“Monthly Conversion
Price” and such 20 Trading Day period, the “Monthly Conversion
Period”); provided, further, that the
Company may not pay the Monthly Redemption Amount in Conversion Shares unless
(y) except as otherwise provided in Section 8(vi) of the 2008 Settlement
Agreement, from the date the Holder receives the duly delivered Monthly
Redemption Notice through and until the date such Monthly Redemption is paid in
full, the Equity Conditions have been satisfied, unless waived in writing by the
Holder, and (z) as to such Monthly Redemption, prior to such Monthly Redemption
Period (but not more than 5 Trading Days prior to the commencement of the
Monthly Redemption Period), the Company shall have delivered to the Holder’s
account with the Depository Trust Company a number of shares of Common Stock to
be applied against such Monthly Redemption Share Amount equal to the quotient of
(x) the applicable Monthly Redemption Share Amount divided by (y) the lesser of
(A) the then Conversion Price or (b) 88% of the average of the VWAPs for the 20
consecutive Trading Days ending on the sixth Trading Day prior to the
commencement of the applicable Monthly Redemption Period (subject to adjustment
for any stock dividend, stock split, stock combination or other similar event
affecting the Common Stock during such 20 Trading Day period) (the “Pre-Redemption Conversion
Shares”).  The Holder may convert, pursuant to Section 4(a),
any principal amount of this Debenture subject to a Monthly Redemption at any
time prior to the date that the Monthly Redemption Amount, plus accrued but
unpaid interest, liquidated damages and any other amounts then owing to the
Holder are due and paid in full.  Unless otherwise indicated by the
Holder in the applicable Notice of Conversion, any principal amount of this
Debenture converted during the applicable Monthly Redemption Period until the
date the Monthly Redemption Amount is paid in full shall be first applied to the
principal amount subject to the Monthly Redemption Amount payable in cash and
then to the Monthly Redemption Share Amount.  Any principal amount of
this Debenture converted during the applicable Monthly Redemption Period in
excess of the Monthly Redemption Amount shall be applied against the last
principal amount of this Debenture scheduled to be redeemed hereunder, in
reverse time order from the Maturity Date; provided, however, if any such
conversion is applied against such Monthly Redemption Amount, the Pre-Redemption
Conversion Shares, if any were issued in connection with such Monthly Redemption
or were not already applied to such conversions, shall be first applied against
such conversion.  The Company covenants and agrees that it will honor
all Notice of Conversions tendered up until such amounts are paid in
full.  The Company’s determination to pay a Monthly Redemption in
cash, shares of Common Stock or a combination thereof shall be applied ratably
to all of the holders of the then outstanding Debentures based on their (or
their predecessor’s) principal amount of Debentures held on the date of the 2008
Settlement Agreement.

    
      
         

      

      
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    b) Optional Redemption at
Election of Company.  Subject to
the provisions of this Section 6, at any time after the 12-month anniversary of
the Original Issue Date, the Company may deliver a notice to the Holder (an
“Optional Redemption Notice” and the date such
notice is deemed delivered hereunder, the “Optional Redemption Notice Date”) of
its irrevocable election to redeem some or all of the then outstanding Debentures
for cash in an amount equal to the Optional Redemption Amount on the
20th Trading Day following the Optional Redemption Notice
Date (such date, the “Optional Redemption Date” and such
redemption, the “Optional Redemption”).  The Optional Redemption
Amount is payable in full on the Optional Redemption Date.  The
Company may only effect an Optional Redemption if on each Trading Day during the
period commencing on the Optional Redemption Notice Date through to the Optional
Redemption Date and through and including the date payment of the
Optional Redemption Amount is actually made, each
of the Equity Conditions shall have been met.  If any of the Equity
Conditions shall cease to be satisfied at any time during the 20 Trading Day
period, then the Holder may elect to nullify the Optional Redemption Notice by
notice to the Company within 3 Trading Days after the first day on which any
such Equity Condition has not been met in which case the Optional Redemption
Notice shall be null and void, ab initio.  The Company covenants
and
agrees that it will honor all Notices of Conversion tendered from the time of
delivery of the Optional Redemption Notice through the date all amounts owing
thereon are due and paid in full.

    

    c) Redemption
Procedure.  The payment of cash or issuance of Common Stock, as
applicable, pursuant to an Optional Redemption or Monthly Redemption shall be
made on the Optional Redemption Date or Monthly Redemption Date, as
applicable.  If any portion of the payment pursuant to an Optional
Redemption or Monthly Redemption shall not be paid by the Company by the
applicable due date, interest shall accrue thereon until such amount is paid in
full at an interest rate equal to the lesser of 12% per annum or the maximum
rate permitted by applicable law.  Notwithstanding anything herein
contained to the contrary, if any portion of the Optional Redemption Amount or
Monthly Redemption Amount, as applicable remains unpaid after such date, the
Holder may elect, by written notice to the Company given at any time thereafter,
to invalidate ab initio such
redemption, and, with respect to the Company’s failure to honor the Optional
Redemption, the Company shall have no further right to exercise such Optional
Redemption.  Notwithstanding anything to the contrary in this Section
6, the Company’s determination to redeem in cash or its elections under Section
6(b) shall be applied ratably among the Holders of Debentures. The Holder may elect to convert the outstanding principal
amount of the Debenture pursuant to Section 4 prior to actual payment in cash
for any redemption under this Section 6 by the delivery of a Notice of
Conversion to the Company.

    
      
         

      

      
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    d) Forced Conversion.
Notwithstanding anything herein to the contrary, if after the 12 month
anniversary of the Original Issue Date, the Closing Price for each Trading Day
during any consecutive 20 calendar days, which period shall have commenced only
after the 12 month anniversary of the Original Issue Date, such period the
“Threshold
Period”)) exceeds $15.00 (subject to adjustment for reverse and forward
stock splits, stock dividends, stock combinations and other similar transactions
of the Common Stock that occur after the Original Issue Date) and the average
daily volume for such Threshold Period exceeds 100,000 shares of Common Stock
per Trading Day (subject to adjustment for forward and reverse stock splits,
recapitalizations, stock dividends and the like after the Original Issue Date),
the Company may, within 1 Trading Day after the end of any such Threshold
Period, deliver a written notice to the Holder (a “Forced Conversion
Notice” and the date such notice is delivered to the Holder, the “Forced Conversion Notice
Date”) to cause the Holder to convert up to 50% of the then outstanding
principal amount of Debentures plus, if so specified in the Forced Conversion
Notice, accrued but unpaid interest, it being agreed that the “Conversion Date”
for purposes of Section 4 shall be deemed to occur on the third Trading Day
following the Forced Conversion Notice Date (such third Trading Day, the “Forced Conversion
Date”).  The Company may not deliver a Forced Conversion
Notice, and any Forced Conversion Notice delivered by the Company shall not be
effective, unless all of the Equity Conditions are met on each Trading Day
occurring during the applicable Threshold Period through and including the later
of the Forced Conversion Date and the Trading Day after the date such Conversion
Shares pursuant to such conversion are delivered to the Holder. Notwithstanding
anything herein to the contrary, the Company may only deliver an additional
Forced Conversion Notice provided that such second Forced Conversion Notice Date
is at least 18 months following the Original Issue Date and each Forced
Conversion Notice is dependent on a separate Threshold Period from a prior
Forced Conversion Notice. Any Forced Conversion shall be applied ratably to all
Holders based on the then current principal amount of the Debentures, provided
that any voluntary conversions by a Holder shall be applied against such
Holder’s pro-rata allocation, thereby decreasing the aggregate amount forcibly
converted hereunder if only a portion of this Debenture is forcibly
converted.  For purposes of clarification, a Forced Conversion shall
be subject to all of the provisions of Section 4, including, without limitation,
the provision requiring payment of all amounts owing under this Debenture and
limitations on conversions.

    

    Section
7.                                   Negative Covenants.
As long as 20% of the aggregate principal amount of all Debentures remain
outstanding, the Company shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, without the prior written consent of the holders of
all Debentures then outstanding (provided, however, that if the principal amount
of a holder’s Debenture is less $50,000, such holder’s consent shall not be
required):

    

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

    
      
         

      

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

    

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

    

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

    

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

    

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

    

    At
such time that less than 20% of the
aggregate principal amount of all Debentures remain outstanding, the Company
shall no longer be subject to the negative covenants set forth in this Section 7
above or be required to obtain prior written consent of the holders of the
Debentures to take the foregoing actions.

    

    Section
8.                                Events of
Default.

    

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

    

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

    
      
         

      

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

    

    iii. a default
or event of default (subject to any grace or cure period provided in the
applicable agreement, document or instrument) shall occur under any of the 2008
Settlement Documents or 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, warranty or covenant made in this Debenture, any other 2008
Settlement Document, any written statement pursuant hereto or thereto or any
other report, financial statement or certificate made or delivered to the Holder
or any other Holder shall be untrue or incorrect in any material respect as of
the date when made or deemed made;

    

    v. the
Company or any Significant Subsidiary shall be subject to a Bankruptcy Event,
other than the involuntary bankruptcy petition pending in the Untied States
Bankruptcy Court for the District of Delaware, Case No. 08-10528;

    

    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. Intentionally
Omitted.

    

    viii. the
Company shall be a party to any Change of Control Transaction or Fundamental
Transaction or shall agree to sell or dispose of all or in excess of 33% of its
assets in one transaction or a series of related transactions (whether or not
such sale would constitute a Change of Control Transaction);

    

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

    
      
         

      

      
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    x. any
monetary judgment, writ or similar final process shall be entered or filed
against the Company, any Subsidiary or any of their respective property or other
assets for more than $50,000, and such judgment, writ or similar final process
shall remain unvacated, unbonded or unstayed for a period of 45 calendar days;
or

    

    xi. the
shares issued pursuant to Section 5 or 10 of the 2008 Settlement Agreement are
not or cease to be free trading securities.

    

    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 Business Days after the
occurrence of any Event of Default that results in the eventual acceleration of
this Debenture, the interest rate on this Debenture shall accrue at an interest
rate equal to the lesser of 12% 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.

    

    
      c)
Conversion Price
Adjustment.  If any Event of Default occurs, the Conversion
Price will be adjusted to equal the lesser of (i) the then Conversion Price or
(ii) the average of the VWAPs for the 10 consecutive Trading Days ending on the
Trading Day that is immediately prior to the date of the Holder’s notice
pursuant to which it notifies the Company of such
adjustment.

    

    
      
         

      

      
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    Section
9.                                Miscellaneous.

     

    a) Notices.  Any
and all notices or other communications or deliveries to be provided by the
Holder hereunder, including, without limitation, any Notice of Conversion, shall
be in writing and delivered personally, by facsimile, or sent by a nationally
recognized overnight courier service, addressed to the Company, at the address
set forth above, facsimile number 86-010-59225001, Attn: Victor Tong,
President with a copy to Loeb & Loeb LP, Attn: Mitchell S. Nussbaum,
Esq., facsimile number 212-407-4990 or such other facsimile number or address as
the Company may specify for such purpose by notice to the Holder delivered in
accordance with this Section 9.  Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile, or sent by a nationally
recognized overnight courier service addressed to each Holder at the facsimile
number or address of such Holder appearing on the books of the Company, or if no
such facsimile number or address appears, at the principal place of business of
the Holder.  Any notice or other communication or deliveries hereunder
shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section 9 prior to 5:30 p.m. (New York City
time), (ii) the date immediately following the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number
specified in this Section 9 between 5:30 p.m. (New York City time) and 11:59
p.m. (New York City time) on any date, (iii) the second Business Day following
the date of mailing, if sent by nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required to be
given.

    

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

    

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

    
      
         

      

      
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    d) Governing
Law.  All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflict of laws
thereof.  Each party agrees that all legal proceedings concerning the
interpretation, enforcement and defense of this Debenture (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, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of such New York Courts, or such New York
Courts are improper or inconvenient venue for such proceeding.  Each
party hereby irrevocably waives personal service of process and consents to
process being served in any such suit, action or proceeding by mailing a copy
thereof via registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it under this
Debenture and agrees that such service shall constitute good and sufficient
service of process and notice thereof.  Nothing contained herein shall
be deemed to limit in any way any right to serve process in any other manner
permitted by applicable law. Each party hereto hereby irrevocably waives, to the
fullest extent permitted by applicable law, any and all right to trial by jury
in any legal proceeding arising out of or relating to this Debenture or the
transactions contemplated hereby. If either party shall commence an action or
proceeding to enforce any provisions of this Debenture, then the prevailing
party in such action or proceeding shall be reimbursed by the other party for
its attorneys fees and other costs and expenses incurred in the investigation,
preparation and prosecution of such action or proceeding.

    

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

    

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

    
      
         

      

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

    

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

    

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

    

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

    
      
         

      

      
        28

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the Company has caused this Amended and Restated Variable Rate
Secured Convertible Debenture to be duly executed by a duly authorized officer
as of the date first above indicated.

    

    

    
      	
              PACIFICNET
      INC.

               

               

            
	
              By:_________________________________

                   Name:

                   Title:

               

            

    

    

    
      
         

      

      
        29

        
          

        

      

      
         

      

    

    ANNEX
A

    

    NOTICE
OF CONVERSION

    

    

    The undersigned hereby elects to
convert principal under the Amended and Restated Variable Rate Secured
Convertible Debenture of PacificNet Inc., a Delaware corporation (the “Company”), due on
July 15, 2009, into shares of common stock, par value $.0001 per share (the
“Common
Stock”), of the Company according to the conditions hereof, as of the
date written below.  If shares are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates and
opinions as reasonably requested by the Company in accordance
therewith.  No fee will be charged to the holder for any conversion,
except for such transfer taxes, if any.

    

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

    

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

    

    Conversion
calculations:

    Date to
Effect Conversion:

    

    Principal
Amount of Debenture to be Converted:

    

    Payment
of Interest in Common Stock __ yes  __ no

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

    

    Number of
shares of Common Stock to be issued:

    

    

    Conversion
Price:       $2.00

    

    Signature:

    

    Name:

    

    Address:

    

    
      
         

      

      
        30

        
          

        

      

      
         

      

    

    Schedule
1

    

    CONVERSION
SCHEDULE

    

    The
Amended and Restated Variable Rate Secured Convertible Debentures due on July
15, 2009, in the aggregate principal amount of $____________ issued by
PacificNet Inc.  This Conversion Schedule reflects conversions made
under Section 4 of the above referenced Debenture.

     

    

    Dated:

    

    
      	
              Date
      of Conversion

              (or
      for first entry, 

              Original
      Issue Date)

            	
              Amount
      of 

              Conversion

            	
              Aggregate
      Principal Amount Remaining Subsequent to Conversion

              (or
      original Principal Amount)

            	
              Company
      Attest

            
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      

    

    

    

     

     

    31

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