Document:

EXHIBIT 4.19

                          SECURITIES PURCHASE AGREEMENT

         SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of September
__, 2003, by and among Amnis Systems Inc., a Delaware corporation, with
headquarters located at 3450 Hillview Avenue, Palo Alto, California 94304 (the
"COMPANY"), and the purchaser set forth on the signature pages hereto (the
"BUYER").

         WHEREAS:

         A. The Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by the rules and regulations as promulgated by the United States Securities and
Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "1933 Act");

         B. Buyers desire to purchase and the Company desires to issue and sell,
upon the terms and conditions set forth in this Agreement (i) 12% convertible
debentures of the Company, in the form attached hereto as EXHIBIT "A", in the
aggregate principal amount of up to Two Hundred Fifty Thousand Dollars
($250,000) (together with any debenture(s) issued in replacement thereof or as a
dividend thereon or otherwise with respect thereto in accordance with the terms
thereof, the "DEBENTURES"), convertible into shares of common stock, par value
$.0001 per share, of the Company (the "COMMON STOCK"), upon the terms and
subject to the limitations and conditions set forth in such Debentures and (ii)
warrants, in the form attached hereto as EXHIBIT "B", to purchase up to One
Million Two Hundred Fifty Thousand (1,250,000) shares of Common Stock (the
"WARRANTS");

         C. Buyer wishes to purchase, upon the terms and conditions stated in
this Agreement, such principal amount of Debentures and number of Warrants as is
set forth immediately below its name on the signature pages hereto; and

         D. Contemporaneous with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement,
in the form attached hereto as EXHIBIT "C" (the "REGISTRATION RIGHTS
AGREEMENT"), pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.

         NOW THEREFORE, the Company and the Buyer hereby agree as follows:

                  1. PURCHASE AND SALE OF DEBENTURES AND WARRANTS.

                           A. PURCHASE OF DEBENTURES AND WARRANTS. On the
Closing Date (as defined below), the Company shall issue and sell to Buyer and
Buyer agrees to purchase from the Company Two Hundred Fifty Thousand Dollars
($250,000) principal amount of Debentures and Warrants to purchase an aggregate
of One Million Two Hundred Fifty Thousand (1,250,000) shares of Common Stock.

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                           B. FORM OF PAYMENT. On the Closing Date (as defined
below), (i) Buyer shall pay the purchase price for the Debentures and the
Warrants to be issued and sold to it at the Closing (as defined below) (the
"PURCHASE PRICE") by wire transfer of immediately available funds to the
Company, in accordance with the Company's written wiring instructions, against
delivery of the Debentures in the principal amount equal to the Purchase Price
and the number of Warrants set forth above, and (ii) the Company shall deliver
such Debentures and Warrants duly executed on behalf of the Company, to Buyer,
against delivery of such Purchase Price.

                           C. CLOSING DATE. Subject to the satisfaction (or
written waiver) of the conditions thereto set forth in Section 6 and Section 7
below, the date and time of the issuance and sale of the Debentures and the
Warrants pursuant to this Agreement (the "CLOSING DATE") shall be 12:00 noon,
Eastern Standard Time on September __, 2003 or such other mutually agreed upon
time. The closing of the transactions contemplated by this Agreement (the
"CLOSING") shall occur on the Closing Date at such location as may be agreed to
by the parties.

                  2. BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer severally
(and not jointly) represents and warrants to the Company that:

                           A. INVESTMENT PURPOSE. As of the date hereof, the
Buyer is purchasing the Debentures and the Warrants for its own account and not
with a present view towards the public sale or distribution thereof, except
pursuant to sale registered or exempted from registration under the 1933 Act;
PROVIDED, HOWEVER, that by making the representations herein, the Buyer does not
agree to hold any of the Securities for any minimum or other specific term and
reserves the right to dispose of the Securities at any time in accordance with
or pursuant to a registration statement or an exemption under the 1933 Act.

                           B. ACCREDITED INVESTOR STATUS. The Buyer is an
"accredited investor" as that term is defined in Rule 501(a) of Regulation D (an
"ACCREDITED INVESTOR").

                           C. RELIANCE ON EXEMPTIONS. The Buyer understands that
the Securities are being offered and sold to it in reliance upon specific
exemptions from the registration requirements of United States federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of the Buyer
to acquire the Securities.

                           D. INFORMATION. The Buyer and its advisors, if any,
have been, and for so long as the Debentures and Warrants remain outstanding
will continue to be, furnished with all materials relating to the business,
finances and operations of the Company and materials relating to the offer and
sale of the Securities which have been requested by the Buyer or its advisors.
The Buyer and its advisors, if any, have been, and for so long as the Debentures
and Warrants remain outstanding will continue to be, afforded the opportunity to
ask questions of the Company. Notwithstanding the foregoing, the Company has not
disclosed to the Buyer any material nonpublic information and will not disclose
such information unless such information is disclosed to the public prior to or
promptly following such disclosure to the Buyer. Neither such inquiries nor any
other due diligence investigation conducted by Buyer or any of its advisors or
representatives shall modify, amend or affect Buyer's right to rely on the

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Company's representations and warranties contained in Section 3 below. The Buyer
understands that its investment in the Securities involves a significant degree
of risk.

                           E. GOVERNMENTAL REVIEW. The Buyer understands that no
United States federal or state agency or any other government or governmental
agency has passed upon or made any recommendation or endorsement of the
Securities.

                           F. TRANSFER OR RE-SALE. The Buyer understands that
(i) except as provided in the Registration Rights Agreement, the sale or re-sale
of the Securities has not been and is not being registered under the 1933 Act or
any applicable state securities laws, and the Securities may not be transferred
unless (a) the Securities are sold pursuant to an effective registration
statement under the 1933 Act, (b) the Buyer shall have delivered to the Company
an opinion of counsel that shall be in form, substance and scope customary for
opinions of counsel in comparable transactions to the effect that the Securities
to be sold or transferred may be sold or transferred pursuant to an exemption
from such registration, which opinion shall be accepted by the Company, (c) the
Securities are sold or transferred to an "affiliate" (as defined in Rule 144
promulgated under the 1933 Act (or a successor rule) ("RULE 144")) of the Buyer
who agrees to sell or otherwise transfer the Securities only in accordance with
this Section 2(f) and who is an Accredited Investor, (d) the Securities are sold
pursuant to Rule 144, or (e) the Securities are sold pursuant to Regulation S
under the 1933 Act (or a successor rule) ("REGULATION S"), and the Buyer shall
have delivered to the Company an opinion of counsel that shall be in form,
substance and scope customary for opinions of counsel in corporate transactions,
which opinion shall be accepted by the Company; (ii) any sale of such Securities
made in reliance on Rule 144 may be made only in accordance with the terms of
said Rule and further, if said Rule is not applicable, any re-sale of such
Securities under circumstances in which the seller (or the person through whom
the sale is made) may be deemed to be an underwriter (as that term is defined in
the 1933 Act) may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (iii) neither the
Company nor any other person is under any obligation to register such Securities
under the 1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder (in each case, other than pursuant to the
Registration Rights Agreement). Notwithstanding the foregoing or anything else
contained herein to the contrary, the Securities may be pledged as collateral in
connection with a BONA FIDE margin account or other lending arrangement. In the
event that the Company does not accept the opinion of counsel provided by the
Buyer with respect to the transfer of Securities pursuant to an exemption from
registration, such as Rule 144 or Regulation S (provided that such opinion is
correct and complies with all applicable rules and regulations), within three
(3) business days of delivery of the opinion to the Company, the Company shall
pay to the Buyer liquidated damages of two percent (2%) for the first month, and
three percent (3%) for each month thereafter, of the outstanding amount of the
Debentures per month plus accrued and unpaid interest on the Debentures,
prorated for partial months, in cash or shares at the option of the Company
("STANDARD LIQUIDATED DAMAGES AMOUNT"). If the Company elects to pay the
Standard Liquidated Damages Amount in shares of Common Stock, such shares shall
be issued at the Conversion Price (as defined in the Debentures) at the time of
payment of the Standard Liquidated Damages Amount to be delivered not later than
three business days after the end of each month or pro rated portion thereof. In
any event, the Buyer may enter into hedging transactions with third parties,
which may in turn engage in short sales of the Securities in the course of

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hedging the position they assume. The Buyer may also enter into short positions
or other derivative transactions relating to the Securities, or interests in the
Securities, and deliver the Securities, or interests in the Securities, to close
out their short or other positions or otherwise settle short sales or other
transactions, or loan or pledge the Securities, or interests in the Securities,
to third parties that in turn may dispose of these Securities.

                           G. LEGENDS. The Buyer understands that the Debentures
(including, without limitation, such additional shares of Common Stock, if any,
as are issuable (i) on account of interest on the Debentures, (ii) as a result
of the events described in Sections 1.3 and 1.4(g) of the Debentures and Section
2(c) of the Registration Rights Agreement or (iii) in payment of the Standard
Liquidated Damages Amount (as defined in Section 2(f) below) pursuant to this
Agreement, such shares of Common Stock being collectively referred to herein as
the "CONVERSION SHARES") and the Warrants and the shares of Common Stock
issuable upon exercise thereof (the "WARRANT SHARES" and, collectively with the
Debentures, Warrants and Conversion Shares, the "SECURITIES") and, until such
time as the Conversion Shares and Warrant Shares have been registered under the
1933 Act as contemplated by the Registration Rights Agreement or otherwise may
be sold pursuant to Rule 144 or Regulation S without any restriction as to the
number of securities as of a particular date that can then be immediately sold,
the Conversion Shares and Warrant Shares may bear a restrictive legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of the certificates for such Securities):

                  "The securities represented by this certificate have not been
                  registered under the Securities Act of 1933, as amended. The
                  securities may not be sold, transferred or assigned in the
                  absence of an effective registration statement for the
                  securities under said Act, or an opinion of counsel, in form,
                  substance and scope customary for opinions of counsel in
                  comparable transactions, that registration is not required
                  under said Act or unless sold pursuant to Rule 144 or
                  Regulation S under said Act."

         The legend set forth above shall be removed and the Company shall issue
a certificate without such legend to the holder of any Security upon which it is
stamped, if, unless otherwise required by applicable state securities laws, (a)
such Security is registered for sale under an effective registration statement
filed under the 1933 Act or otherwise may be sold pursuant to Rule 144 or
Regulation S without any restriction as to the number of securities as of a
particular date that can then be immediately sold, or (b) such holder provides
the Company with an opinion of counsel, in form, substance and scope customary
for opinions of counsel in comparable transactions, to the effect that a public
sale or transfer of such Security may be made without registration under the
1933 Act, which opinion shall be accepted by the Company so that the sale or
transfer is effected or (c) such holder provides the Company with reasonable
assurances that such Security can be sold pursuant to Rule 144 or Regulation S.
The Buyer agrees to sell all Securities, including those represented by a
certificate(s) from which the legend has been removed, in compliance with
applicable prospectus delivery requirements, if any.

                           H. AUTHORIZATION; ENFORCEMENT. This Agreement, the
Debentures, the Warrants, the Registration Rights Agreement, the Pledge and
Security Agreement, the Funds Escrow Agreement and any and all related
agreements, documents and instruments, each as now existing and as hereafter
amended, modified and supplemented (collectively referred to as the "Transaction
Documents") have been or will be duly and validly authorized. The Transaction

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Documents been duly executed and delivered on behalf of the Buyer, and the
Transaction Documents constitute, and upon execution and delivery by the Buyer
of each of the Transaction Documents will constitute, valid and binding
agreements of the Buyer enforceable in accordance with their terms.

                           I. RESIDENCY. The Buyer is a resident of the
jurisdiction set forth immediately below such Buyer's name on the signature
pages hereto.

                  3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to Buyer that:

                           A. ORGANIZATION AND QUALIFICATION. The Company and
each of its Subsidiaries (as defined below), if any, is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated, with full power and authority
(corporate and other) to own, lease, use and operate its properties and to carry
on its business as and where now owned, leased, used, operated and conducted.
SCHEDULE 3(A) sets forth a list of all of the Subsidiaries of the Company and
the jurisdiction in which each is incorporated. The Company and each of its
Subsidiaries is duly qualified as a foreign corporation to do business and is in
good standing in every jurisdiction in which its ownership or use of property or
the nature of the business conducted by it makes such qualification necessary
except where the failure to be so qualified or in good standing would not have a
Material Adverse Effect. "MATERIAL ADVERSE EFFECT" means any material adverse
effect on the business, operations, assets, financial condition or prospects of
the Company or its Subsidiaries, if any, taken as a whole, or on the
transactions contemplated hereby or by the agreements or instruments to be
entered into in connection herewith. "SUBSIDIARIES" means any corporation or
other organization, whether incorporated or unincorporated, in which the Company
owns, directly or indirectly, any equity or other ownership interest.

                           B. AUTHORIZATION; ENFORCEMENT. (i) The Company has
all requisite corporate power and authority to enter into and perform this
Agreement, the Registration Rights Agreement, the Debentures and the Warrants
and to consummate the transactions contemplated hereby and thereby and to issue
the Securities, in accordance with the terms hereof and thereof, (ii) the
execution and delivery of this Agreement, the Registration Rights Agreement, the
Debentures and the Warrants by the Company and the consummation by it of the
transactions contemplated hereby and thereby (including without limitation, the
issuance of the Debentures and the Warrants and the issuance and reservation for
issuance of the Conversion Shares and Warrant Shares issuable upon conversion or
exercise thereof) have been duly authorized by the Company's Board of Directors
and no further consent or authorization of the Company, its Board of Directors,
or its stockholders is required, (iii) this Agreement has been duly executed and
delivered by the Company by its authorized representative, and such authorized
representative is the true and official representative with authority to sign
this Agreement and the other documents executed in connection herewith and bind
the Company accordingly, and (iv) this Agreement constitutes, and upon execution
and delivery by the Company of the Registration Rights Agreement, the Debentures
and the Warrants, each of such instruments will constitute, a legal, valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms.

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                           C. CAPITALIZATION. As of the date hereof, the
authorized capital stock of the Company consists Common Stock and preferred
stock. The Company is authorized to issue 20,000,000 shares of preferred stock,
of which no shares are issued and outstanding. The Company is authorized to
issue 400,000,000 share of Common Stock of which 137,161,438 shares are issued
and outstanding, 985,537 shares are reserved for issuance pursuant to the
Company's stock option plans; and 13,387,969 shares are reserved for issuance
pursuant to option agreements issued by the Company. In addition, the Company is
required to reserve an aggregate of 252,315,051 shares of common stock pursuant
to various financing agreements entered with Alpha Capital Aktiengesellschaft
("Alpha"), Bristol Investment Fund, Ltd. ("Bristol") and Stonestreet Limited
Partnership ("Stonestreet"). Subject to filing the Certificate of Amendment as
set forth in Section 4(l) of this Agreement, the Company will reserve an
aggregate of 10,000,000 shares for issuance upon conversion of the Debentures
and exercise of the Warrants (subject to adjustment pursuant to the Company's
covenant set forth in Section 4(h) below). All of such outstanding shares of
capital stock are, or upon issuance will be, duly authorized, validly issued,
fully paid and nonassessable. No shares of capital stock of the Company are
subject to preemptive rights or any other similar rights of the stockholders of
the Company or any liens or encumbrances imposed through the actions or failure
to act of the Company. Except as disclosed in SCHEDULE 3(C), as of the effective
date of this Agreement, (i) there are no outstanding options, warrants, scrip,
rights to subscribe for, puts, calls, rights of first refusal, agreements,
understandings, claims or other commitments or rights of any character
whatsoever relating to, or securities or rights convertible into or exchangeable
for any shares of capital stock of the Company or any of its Subsidiaries, or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to issue additional shares of capital stock of the Company or any of its
Subsidiaries, (ii) there are no agreements or arrangements under which the
Company or any of its Subsidiaries is obligated to register the sale of any of
its or their securities under the 1933 Act (except the Registration Rights
Agreement) and (iii) there are no anti-dilution or price adjustment provisions
contained in any security issued by the Company (or in any agreement providing
rights to security holders) that will be triggered by the issuance of the
Debentures, the Warrants, the Conversion Shares or Warrant Shares. The Company
has furnished to the Buyer true and correct copies, certified by an officer of
the Company (the "Officer's Certificate") and the Secretary of the Company (the
"Secretary's Certificate"), of the Company's Certificate of Incorporation as in
effect on the date hereof ("CERTIFICATE OF INCORPORATION"), the Company's
By-laws, as in effect on the date hereof (the "BY-LAWS"), and the terms of all
securities convertible into or exercisable for Common Stock of the Company and
the material rights of the holders thereof in respect thereto.

                           D. ISSUANCE OF SHARES. Subject to the filing the
Certificate of Amendment (as defined in Section 4(1)), the Conversion Shares and
Warrant Shares are duly authorized and reserved for issuance and, upon
conversion of the Debentures and exercise of the Warrants in accordance with
their respective terms, will be validly issued, fully paid and non-assessable,
and free from all taxes, liens, claims and encumbrances with respect to the
issue thereof and shall not be subject to preemptive rights or other similar
rights of stockholders of the Company and will not impose personal liability
upon the holder thereof.

                           E. ACKNOWLEDGMENT OF DILUTION. The Company
understands and acknowledges the potentially dilutive effect to the Common Stock
upon the issuance of the Conversion Shares and Warrant Shares upon conversion of
the Debenture or exercise of the Warrants. The Company further acknowledges that
its obligation to issue Conversion Shares and Warrant Shares upon conversion of
the Debentures or exercise of the Warrants in accordance with this Agreement,
the Debentures and the Warrants is absolute and unconditional regardless of the
dilutive effect that such issuance may have on the ownership interests of other
stockholders of the Company.

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                           F. NO CONFLICTS. The execution and delivery and the
performance, subject to filing the Certificate of Amendment (as defined in
Section 4(1)), of the Transaction Documents by the Company and the consummation
by the Company of the transactions contemplated hereby and thereby (including,
without limitation, the issuance and reservation for issuance of the Conversion
Shares and Warrant Shares) will not (i) conflict with or result in a violation
of any provision of the Certificate of Incorporation or By-laws or (ii) violate
or conflict with, or result in a breach of any provision of, or constitute a
default (or an event which with notice or lapse of time or both could become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture, patent, patent
license or instrument to which the Company or any of its Subsidiaries is a
party, or (iii) result in a violation of any law, rule, regulation, order,
judgment or decree (including federal and state securities laws and regulations
and regulations of any self-regulatory organizations to which the Company or its
securities are subject) applicable to the Company or any of its Subsidiaries or
by which any property or asset of the Company or any of its Subsidiaries is
bound or affected (except for such conflicts, defaults, terminations,
amendments, accelerations, cancellations and violations as would not,
individually or in the aggregate, have a Material Adverse Effect). Neither the
Company nor any of its Subsidiaries is in violation of its Certificate of
Incorporation, By-laws or other organizational documents and neither the Company
nor any of its Subsidiaries is in default (and no event has occurred which with
notice or lapse of time or both could put the Company or any of its Subsidiaries
in default) under, and neither the Company nor any of its Subsidiaries has taken
any action or failed to take any action that would give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which the Company or any of its Subsidiaries is a
party or by which any property or assets of the Company or any of its
Subsidiaries is bound or affected, except for possible defaults as would not,
individually or in the aggregate, have a Material Adverse Effect. The businesses
of the Company and its Subsidiaries, if any, are not being conducted, and shall
not be conducted so long as a Buyer owns any of the Securities, in violation of
any law, ordinance or regulation of any governmental entity. Except as
specifically contemplated by this Agreement and as required under the 1933 Act
and any applicable state securities laws, the Company is not required to obtain
any consent, authorization or order of, or make any filing or registration with,
any court, governmental agency, regulatory agency, self-regulatory organization
or stock market or any third party in order for it to execute, deliver or
perform any of its obligations under this Agreement, the Registration Rights
Agreement, the Debentures or the Warrants in accordance with the terms hereof or
thereof or to issue and sell the Debentures and Warrants in accordance with the
terms hereof and to issue the Conversion Shares upon conversion of the
Debentures and the Warrant Shares upon exercise of the Warrants. Except as
disclosed in SCHEDULE 3(F), all consents, authorizations, orders, filings and
registrations which the Company is required to obtain pursuant to the preceding
sentence have been obtained or effected on or prior to the date hereof. Except
as disclosed in SCHEDULE 3(F), the Company is not in violation of the listing
requirements of the Over-the-Counter Bulletin Board (the "OTCBB") and does not
reasonably anticipate that the Common Stock will be delisted by the OTCBB in the
foreseeable future. The Company and its Subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing.

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                           G. SEC DOCUMENTS; FINANCIAL STATEMENTS. Except as
disclosed in SCHEDULE 3(G), the Company has timely filed all reports, schedules,
forms, statements and other documents required to be filed by it with the SEC
pursuant to the reporting requirements of the Securities Exchange Act of 1934,
as amended (the "1934 ACT") (all of the foregoing filed prior to the date hereof
and all exhibits included therein and financial statements and schedules thereto
and documents (other than exhibits to such documents) incorporated by reference
therein, being hereinafter referred to herein as the "SEC DOCUMENTS"), and the
Company shall continue to timely file all SEC Documents for at least three (3)
years following the Closing Date. The Company has delivered to each Buyer true
and complete copies of the SEC Documents, except for such exhibits and
incorporated documents. As of their respective dates, the SEC Documents complied
in all material respects with the requirements of the 1934 Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. None of the statements made in any such SEC Documents is, or has
been, required to be amended or updated under applicable law (except for such
statements as have been amended or updated in subsequent filings prior the date
hereof). As of their respective dates, the financial statements of the Company
included in the SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto. Such financial statements have been prepared in
accordance with United States generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements) and fairly present in all
material respects the consolidated financial position of the Company and its
consolidated Subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments). Except as
set forth in the financial statements of the Company included in the SEC
Documents, the Company has no liabilities, contingent or otherwise, other than
(i) liabilities incurred in the ordinary course of business subsequent to
December 31, 2001 and (ii) obligations under contracts and commitments incurred
in the ordinary course of business and not required under generally accepted
accounting principles to be reflected in such financial statements, which,
individually or in the aggregate, are not material to the financial condition or
operating results of the Company.

                           H. ABSENCE OF CERTAIN CHANGES. Except as disclosed on
SCHEDULE 3(H), since June 30, 2003, there has been no material adverse change
and no material adverse development in the assets, liabilities, business,
properties, operations, financial condition, results of operations or prospects
of the Company or any of its Subsidiaries.

                           I. ABSENCE OF LITIGATION. There is no action, suit,
claim, proceeding, inquiry or investigation before or by any court, public
board, government agency, self-regulatory organization or body pending or, to
the knowledge of the Company or any of its Subsidiaries, threatened against or
affecting the Company or any of its Subsidiaries, or their officers or directors
in their capacity as such, that could have a Material Adverse Effect. SCHEDULE
3(I) contains a complete list and summary description of any pending or
threatened proceeding against or affecting the Company or any of its
Subsidiaries, without regard to whether it would have a Material Adverse Effect.

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The Company and its Subsidiaries are unaware of any facts or circumstances which
might give rise to any of the foregoing.

                           J. PATENTS, COPYRIGHTS, ETC.

         The Company and each of its Subsidiaries owns or possesses the
requisite licenses or rights to use all patents, patent applications, patent
rights, inventions, know-how, trade secrets, trademarks, trademark applications,
service marks, service names, trade names and copyrights ("INTELLECTUAL
PROPERTY") necessary to enable it to conduct its business as now operated (and,
except as set forth in SCHEDULE 3(J) hereof, to the best of the Company's
knowledge, as presently contemplated to be operated in the future); there is no
claim or action by any person pertaining to, or proceeding pending, or to the
Company's knowledge threatened, which challenges the right of the Company or of
a Subsidiary with respect to any Intellectual Property necessary to enable it to
conduct its business as now operated (and, except as set forth in SCHEDULE 3(J)
hereof, to the best of the Company's knowledge, as presently contemplated to be
operated in the future); to the best of the Company's knowledge, the Company's
or its Subsidiaries' current and intended products, services and processes do
not infringe on any Intellectual Property or other rights held by any person;
and the Company is unaware of any facts or circumstances which might give rise
to any of the foregoing. The Company and each of its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of their Intellectual Property.

                           K. NO MATERIALLY ADVERSE CONTRACTS, ETC. Neither the
Company nor any of its Subsidiaries is subject to any charter, corporate or
other legal restriction, or any judgment, decree, order, rule or regulation
which in the judgment of the Company's officers has or is expected in the future
to have a Material Adverse Effect. Neither the Company nor any of its
Subsidiaries is a party to any contract or agreement which in the judgment of
the Company's officers has or is expected to have a Material Adverse Effect.

                           L. TAX STATUS. Except as set forth on SCHEDULE 3(L),
the Company and each of its Subsidiaries has made or filed all federal, state
and foreign income and all other tax returns, reports and declarations required
by any jurisdiction to which it is subject (unless and only to the extent that
the Company and each of its Subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) and has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and has set aside on
its books provisions reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply. There are no unpaid taxes in any material amount claimed to be due by the
taxing authority of any jurisdiction, and the officers of the Company know of no
basis for any such claim. The Company has not executed a waiver with respect to
the statute of limitations relating to the assessment or collection of any
foreign, federal, state or local tax. Except as set forth on SCHEDULE 3(L), none
of the Company's tax returns is presently being audited by any taxing authority.

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<PAGE>

                           M. CERTAIN TRANSACTIONS. Except as set forth on
SCHEDULE 3(M) and except for arm's length transactions pursuant to which the
Company or any of its Subsidiaries makes payments in the ordinary course of
business upon terms no less favorable than the Company or any of its
Subsidiaries could obtain from third parties and other than the grant of stock
options disclosed on SCHEDULE 3(C), none of the officers, directors, or
employees of the Company is presently a party to any transaction with the
Company or any of its Subsidiaries (other than for services as employees,
officers and directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any officer, director,
or any such employee has a substantial interest or is an officer, director,
trustee or partner.

                           N. DISCLOSURE. All information relating to or
concerning the Company or any of its Subsidiaries set forth in this Agreement
and provided to the Buyers pursuant to Section 2(d) hereof and otherwise in
connection with the transactions contemplated hereby is true and correct in all
material respects and the Company has not omitted to state any material fact
necessary in order to make the statements made herein or therein, in light of
the circumstances under which they were made, not misleading. No event or
circumstance has occurred or exists with respect to the Company or any of its
Subsidiaries or its or their business, properties, prospects, operations or
financial conditions, which, under applicable law, rule or regulation, requires
public disclosure or announcement by the Company but which has not been so
publicly announced or disclosed (assuming for this purpose that the Company's
reports filed under the 1934 Act are being incorporated into an effective
registration statement filed by the Company under the 1933 Act).

                           O. ACKNOWLEDGMENT REGARDING BUYERS' PURCHASE OF
SECURITIES. The Company acknowledges and agrees that the Buyers are acting
solely in the capacity of arm's length purchasers with respect to this Agreement
and the transactions contemplated hereby. The Company further acknowledges that
no Buyer is acting as a financial advisor or fiduciary of the Company (or in any
similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any statement made by any Buyer or any of their
respective representatives or agents in connection with this Agreement and the
transactions contemplated hereby is not advice or a recommendation and is merely
incidental to the Buyers' purchase of the Securities. The Company further
represents to each Buyer that the Company's decision to enter into this
Agreement has been based solely on the independent evaluation of the Company and
its representatives.

                           P. NO INTEGRATED OFFERING. Neither the Company, nor
any of its affiliates, nor any person acting on its or their behalf, has
directly or indirectly made any offers or sales in any security or solicited any
offers to buy any security under circumstances that would require registration
under the 1933 Act of the issuance of the Securities to the Buyers. The issuance
of the Securities to the Buyers will not be integrated with any other issuance
of the Company's securities (past, current or future) for purposes of any
stockholder approval provisions or availability from exemption from registration
under the 1933 Act applicable to the Company or its securities.

                                       10
<PAGE>

                           Q. NO BROKERS. Except as disclosed on SCHEDULE 3(Q),
the Company has taken no action which would give rise to any claim by any person
for brokerage commissions, transaction fees or similar payments relating to this
Agreement or the transactions contemplated hereby.

                           R. PERMITS; COMPLIANCE. The Company and each of its
Subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exemptions, consents, certificates,
approvals and orders necessary to own, lease and operate its properties and to
carry on its business as it is now being conducted (collectively, the "COMPANY
PERMITS"), and there is no action pending or, to the knowledge of the Company,
threatened regarding suspension or cancellation of any of the Company Permits.
Neither the Company nor any of its Subsidiaries is in conflict with, or in
default or violation of, any of the Company Permits, except for any such
conflicts, defaults or violations which, individually or in the aggregate, would
not reasonably be expected to have a Material Adverse Effect. Since December 31,
2001, neither the Company nor any of its Subsidiaries has received any
notification with respect to possible conflicts, defaults or violations of
applicable laws, except for notices relating to possible conflicts, defaults or
violations, which conflicts, defaults or violations would not have a Material
Adverse Effect.

                           S. ENVIRONMENTAL MATTERS.

                                    (i) Except as set forth in SCHEDULE 3(S),
there are, to the Company's knowledge, with respect to the Company or any of its
Subsidiaries or any predecessor of the Company, no past or present violations of
Environmental Laws (as defined below), releases of any material into the
environment, actions, activities, circumstances, conditions, events, incidents,
or contractual obligations which may give rise to any common law environmental
liability or any liability under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 or similar federal, state, local or
foreign laws and neither the Company nor any of its Subsidiaries has received
any notice with respect to any of the foregoing, nor is any action pending or,
to the Company's knowledge, threatened in connection with any of the foregoing.
The term "ENVIRONMENTAL LAWS" means all federal, state, local or foreign laws
relating to pollution or protection of human health or the environment
(including, without limitation, ambient air, surface water, groundwater, land
surface or subsurface strata), including, without limitation, laws relating to
emissions, discharges, releases or threatened releases of chemicals, pollutants
contaminants, or toxic or hazardous substances or wastes (collectively,
"HAZARDOUS MATERIALS") into the environment, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials, as well as all authorizations,
codes, decrees, demands or demand letters, injunctions, judgments, licenses,
notices or notice letters, orders, permits, plans or regulations issued,
entered, promulgated or approved thereunder.

                                    (ii) Other than those that are or were
stored, used or disposed of in compliance with applicable law, no Hazardous
Materials are contained on or about any real property currently owned, leased or
used by the Company or any of its Subsidiaries, and no Hazardous Materials were
released on or about any real property previously owned, leased or used by the
Company or any of its Subsidiaries during the period the property was owned,
leased or used by the Company or any of its Subsidiaries, except in the normal
course of the Company's or any of its Subsidiaries' business.

                                       11
<PAGE>

                                    (iii) Except as set forth in SCHEDULE 3(S),
there are no underground storage tanks on or under any real property owned,
leased or used by the Company or any of its Subsidiaries that are not in
compliance with applicable law.

                           T. TITLE TO PROPERTY. The Company and its
Subsidiaries have good and marketable title in fee simple to all real property
and good and marketable title to all personal property owned by them which is
material to the business of the Company and its Subsidiaries, in each case free
and clear of all liens, encumbrances and defects except such as are described in
SCHEDULE 3(T) or such as would not have a Material Adverse Effect. Any real
property and facilities held under lease by the Company and its Subsidiaries are
held by them under valid, subsisting and enforceable leases with such exceptions
as would not have a Material Adverse Effect.

                           U. INSURANCE. The Company and each of its
Subsidiaries are insured by insurers of recognized financial responsibility
against such losses and risks and in such amounts as management of the Company
believes to be prudent and customary in the businesses in which the Company and
its Subsidiaries are engaged. Neither the Company nor any such Subsidiary has
any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not have a Material Adverse Effect. The Company has provided to Buyer true
and correct copies of all policies relating to directors' and officers'
liability coverage, errors and omissions coverage, and commercial general
liability coverage.

                           V. INTERNAL ACCOUNTING CONTROLS. The Company and each
of its Subsidiaries maintain a system of internal accounting controls
sufficient, in the judgment of the Company's board of directors, to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with management's general
or specific authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.

                           W. FOREIGN CORRUPT PRACTICES. Neither the Company,
nor any of its Subsidiaries, nor any director, officer, agent, employee or other
person acting on behalf of the Company or any Subsidiary has, in the course of
his actions for, or on behalf of, the Company, used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses relating
to political activity; made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended, or made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment to any foreign or domestic
government official or employee.

                           X. SOLVENCY. The Company (after giving effect to the
transactions contemplated by this Agreement) is solvent (I.E., its assets have a
fair market value in excess of the amount required to pay its current
liabilities on its existing debts as they become absolute and matured) and
currently the Company has no information that would lead it to reasonably
conclude that the Company would not, after giving effect to the transaction
contemplated by this Agreement, have the ability to, nor does it intend to take
any action that would impair its ability to, pay its debts from time to time

                                       12
<PAGE>

incurred in connection therewith as such debts mature. Except as disclosed on
SCHEDULE 3(X), the Company did not receive a qualified opinion from its auditors
with respect to its most recent fiscal year end and, after giving effect to the
transactions contemplated by this Agreement, does not anticipate or know of any
basis upon which its auditors might issue a qualified opinion in respect of its
current fiscal year.

                           Y. NO INVESTMENT COMPANY. The Company is not, and
upon the issuance and sale of the Securities as contemplated by this Agreement
will not be an "investment company" required to be registered under the
Investment Company Act of 1940 (an "INVESTMENT COMPANY"). The Company is not
controlled by an Investment Company.

                           Z. BREACH OF REPRESENTATIONS AND WARRANTIES BY THE
COMPANY. If the Company breaches any of the representations or warranties set
forth in this Section 3, and in addition to any other remedies available to the
Buyers pursuant to this Agreement, the Company shall pay to the Buyer the
Standard Liquidated Damages Amount in cash or in shares of Common Stock at the
option of the Company, until such breach is cured. If the Company elects to pay
the Standard Liquidated Damages Amounts in shares of Common Stock, such shares
shall be issued at the Conversion Price at the time of payment.

                  4. COVENANTS.

                           A. BEST EFFORTS. The parties shall use their best
efforts to satisfy timely each of the conditions described in Section 6 and 7 of
this Agreement.

                           B. FORM D; BLUE SKY LAWS. The Company agrees to file
a Form D with respect to the Securities as required under Regulation D and to
provide a copy thereof to Buyer promptly after such filing. The Company shall,
on or before the Closing Date, take such action as the Company shall reasonably
determine is necessary to qualify the Securities for sale to the Buyer at the
applicable closing pursuant to this Agreement under applicable securities or
"blue sky" laws of the states of the United States (or to obtain an exemption
from such qualification), and shall provide evidence of any such action so taken
to Buyer on or prior to the Closing Date.

                           C. REPORTING STATUS; ELIGIBILITY TO USE FORM S-3,
SB-2 OR FORM S-1. The Company's Common Stock is registered under Section 12(g)
of the 1934 Act. The Company represents and warrants that it meets the
requirements for the use of Form S-3 (or if the Company is not eligible for the
use of Form S-3 as of the Filing Date (as defined in the Registration Rights
Agreement), the Company may use the form of registration for which it is
eligible at that time) for registration of the sale by the Buyer of the
Registrable Securities (as defined in the Registration Rights Agreement). So
long as the Buyer beneficially owns any of the Securities, the Company shall
timely file all reports required to be filed with the SEC pursuant to the 1934
Act, and the Company shall not terminate its status as an issuer required to
file reports under the 1934 Act even if the 1934 Act or the rules and
regulations thereunder would permit such termination. The Company further agrees
to file all reports required to be filed by the Company with the SEC in a timely
manner so as to become eligible, and thereafter to maintain its eligibility, for
the use of Form S-3. The Company shall issue a press release describing the
materials terms of the transaction contemplated hereby as soon as practicable

                                       13
<PAGE>

following the Closing Date but in no event more than two (2) business days of
the Closing Date, which press release shall be subject to prior review by the
Buyer. The Company agrees that such press release shall not disclose the name of
the Buyer unless expressly consented to in writing by the Buyer or unless
required by applicable law or regulation, and then only to the extent of such
requirement.

                           D. USE OF PROCEEDS. The proceeds from the sale of the
Debentures and the Warrants will be used by the Company for purposes as
disclosed on SCHEDULE 4(D) and shall not be used, directly or indirectly, to
repay any outstanding indebtedness or any loans to officer, director, affiliate
or insider of the Company, or for any loan to or investment in any other
corporation, partnership, enterprise or other person.

                           E. FUTURE OFFERINGS. Subject to the exceptions
described below, the Company will not, without the prior written consent of the
Buyer, not to be unreasonably withheld, negotiate or contract with any party to
obtain additional equity financing (including debt financing with an equity
component) that involves (A) the issuance of Common Stock at a discount to the
market price of the Common Stock on the date of issuance (taking into account
the value of any warrants or options to acquire Common Stock issued in
connection therewith) or (B) the issuance of convertible securities that are
convertible into an indeterminate number of shares of Common Stock or (C) the
issuance of warrants during the period (the "LOCK-UP PERIOD") beginning on the
Closing Date and ending on the later of (i) two hundred seventy (270) days from
the Closing Date and (ii) one hundred eighty (180) days from the date the
Registration Statement (as defined in the Registration Rights Agreement) is
declared effective (plus any days in which sales cannot be made thereunder). In
addition, subject to the exceptions described below, the Company will not
conduct any equity financing (including debt with an equity component) ("FUTURE
OFFERINGS") during the period beginning on the Closing Date and ending two (2)
years after the end of the Lock-up Period unless it shall have first delivered
to each Buyer, at least twenty (20) business days prior to the closing of such
Future Offering, written notice describing the proposed Future Offering,
including the terms and conditions thereof and proposed definitive documentation
to be entered into in connection therewith, and providing Buyer an option during
the fifteen (15) day period following delivery of such notice to purchase the
securities being offered in the Future Offering on the same terms as
contemplated by such Future Offering (the limitations referred to in this
sentence and the preceding sentence are collectively referred to as the "CAPITAL
RAISING LIMITATIONS"). In the event the terms and conditions of a proposed
Future Offering are amended in any respect after delivery of the notice to the
Buyer concerning the proposed Future Offering, the Company shall deliver a new
notice to Buyer describing the amended terms and conditions of the proposed
Future Offering and Buyer thereafter shall have an option during the fifteen
(15) day period following delivery of such new notice to purchase the securities
being offered on the same terms as contemplated by such proposed Future
Offering, as amended. The foregoing sentence shall apply to successive
amendments to the terms and conditions of any proposed Future Offering. The
Capital Raising Limitations shall not apply to any transaction involving (i)
issuances of securities in a firm commitment underwritten public offering

                                       14
<PAGE>

(excluding a continuous offering pursuant to Rule 415 under the 1933 Act) or
(ii) issuances of securities as consideration for a merger, consolidation or
purchase of assets, or in connection with any strategic partnership or joint
venture (the primary purpose of which is not to raise equity capital), or in
connection with the disposition or acquisition of a business, product or license
by the Company. The Capital Raising Limitations also shall not apply to the
issuance of securities upon exercise or conversion of the Company's options,
warrants or other convertible securities outstanding as of the date hereof. In
the event that the Company completes a Future Offering on terms more favorable
to another investor than the transaction contemplated hereby, the terms of the
Debentures and the Warrants are deemed to be automatically amended to reflect
such more favorable terms and the Company is required to deliver such documents
reflecting the amendment as may be reasonably requested by the Buyer.

                           F. EXPENSES. At the Closing and any time thereafter,
the Company shall reimburse Buyer for expenses incurred by Buyer in connection
with the negotiation, preparation, execution, delivery and performance of this
Agreement and the other agreements to be executed in connection herewith
("DOCUMENTS"), including, without limitation, attorneys' and consultants' fees
and expenses, transfer agent fees, fees for stock quotation services, fees
relating to any amendments or modifications of the Documents or any consents or
waivers of provisions in the Documents, fees for the preparation of opinions of
counsel, escrow fees, and costs of restructuring the transactions contemplated
by the Documents. When possible, the Company must pay these fees directly,
otherwise the Company must make immediate payment for reimbursement to the Buyer
for all fees and expenses immediately upon written notice by the Buyer or the
submission of an invoice by the Buyer. If the Company fails to reimburse the
Buyer in full within five (5) business days of the written notice or submission
of invoice by the Buyer, the Company shall pay interest on the total amount of
fees to be reimbursed at a rate of 15% per annum.

                           G. FINANCIAL INFORMATION. The Company agrees to send
the following reports to Buyer until Buyer transfers, assigns, or sells all of
the Securities: (i) within ten (10) days after the filing with the SEC, a copy
of its Annual Report on Form 10-KSB, its Quarterly Reports on Form 10-QSB and
any Current Reports on Form 8-K; (ii) within one (1) day after release, copies
of all press releases issued by the Company or any of its Subsidiaries; and
(iii) contemporaneously with the making available or giving to the stockholders
of the Company, copies of any notices or other information the Company makes
available or gives to such stockholders.

                           H. AUTHORIZATION AND RESERVATION OF SHARES. Subject
to filing the Certificate of Amendment (as defined in Section 4(1)), the Company
shall at all times have authorized, and reserved for the purpose of issuance,
two (2) times the number of shares of common stock that is then actually
issuable upon full conversion of the Debentures and upon exercise of the
Warrants (based on the Conversion Price of the Debentures or Exercise Price of
the Warrants in effect from time to time) and as otherwise required by the
Debentures. IF THE COMPANY AT ANY TIME IS ABLE TO RESERVE PART OF THE REQUIRED
RESERVE SHARES PURSUANT TO THIS SECTION 4(H), THEN SUCH SHARES SHALL IMMEDIATELY
BE ALLOCATED TO THE BUYER. UNTIL THE COMPANY FILED THE CERTIFICATE OF AMENDMENT
(AS DEFINED IN SECTION 4(1)), THE BUYER WILL ONLY BE ABLE TO CONVERT THE
DEBENTURES OR EXERCISE THE WARRANTS WITH RESPECT TO THE NUMBER OF SHARES
AVAILABLE FOR SUCH CONVERSION OR EXERCISE. The Company shall not reduce the
number of shares of Common Stock reserved for issuance upon conversion of
Debentures and exercise of the Warrants without the consent of each Buyer. The
Company shall at all times maintain the number of shares of Common Stock so
reserved for issuance at an amount ("RESERVED AMOUNT") equal to no less than two
(2) times the number that is then actually issuable upon full conversion of the
Debentures and upon exercise of the Warrants (based on the Conversion Price of
the Debentures or the Exercise Price of the Warrants in effect from time to

                                       15
<PAGE>

time). If at any time the number of shares of Common Stock authorized and
reserved for issuance ("AUTHORIZED AND RESERVED SHARES") is below the Reserved
Amount, the Company will promptly take all corporate action necessary to
authorize and reserve a sufficient number of shares, including, without
limitation, calling a special meeting of stockholders to authorize additional
shares to meet the Company's obligations under this Section 4(h), in the case of
an insufficient number of authorized shares, obtain stockholder approval of an
increase in such authorized number of shares, and voting the management shares
of the Company in favor of an increase in the authorized shares of the Company
to ensure that the number of authorized shares is sufficient to meet the
Reserved Amount. If the Company fails to obtain such stockholder approval within
thirty (30) days following the date on which the number of Authorized and
Reserved Shares exceeds the Reserved Amount, the Company shall pay to the Buyer
the Standard Liquidated Damages Amount, in cash or in shares of Common Stock at
the option of the Company. If the Company elects to be pay the Standard
Liquidated Damages Amount in shares of Common Stock, such shares shall be issued
at the Conversion Price at the time of payment. In order to ensure that the
Company has authorized a sufficient amount of shares to meet the Reserved Amount
at all times, the Company must deliver to the Buyer at the end of every month a
list detailing (1) the current amount of shares authorized by the Company and
reserved for the Buyer; and (2) amount of shares issuable upon conversion of the
Debentures and upon exercise of the Warrants and as payment of interest accrued
on the Debentures for one year. If the Company fails to provide such list within
five (5) business days of the end of each month, the Company shall pay the
Standard Liquidated Damages Amount, in cash or in shares of Common Stock at the
option of the Company, until the list is delivered. If the Company elects to be
pay the Standard Liquidated Damages Amount in shares of Common Stock, such
shares shall be issued at the Conversion Price at the time of payment. In the
event the Company fails to file the Certificate of Amendment with the Secretary
of State of the State of Delaware on or beforeOctober 5, 2003, or if the Company
does not reserve 10,000,000 shares referred to in Section 3 of this Agreement on
behalf of the Buyer for the purposes set forth in Section 3.c, then in addition
to any other remedies available to Buyer, at the Buyer's election, the Company
must pay to the Buyer ten (10) business days after request by the Buyer, a sum
of money determined by multiplying up to the outstanding principal amount of the
Debenture designated by the Buyer by 130%, together with accrued but unpaid
interest thereon ("Mandatory Redemption Payment"). Upon receipt of the Mandatory
Redemption Payment, the corresponding Debenture principal and interest will be
deemed paid and no longer outstanding.

                           I. LISTING. The Company shall promptly secure any
required listing of the Conversion Shares and Warrant Shares upon each national
securities exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed (subject to official notice of issuance) and, so
long as any Buyer owns any of the Securities, shall maintain, so long as any
other shares of Common Stock shall be so listed, such listing of all Conversion
Shares and Warrant Shares from time to time issuable upon conversion of the
Debentures or exercise of the Warrants. tThe Company will maintain the listing
and trading of its Common Stock on the OTCBB, the Nasdaq National Market
("NASDAQ"), the Nasdaq SmallCap Market ("NASDAQ SMALLCAP"), the New York Stock
Exchange ("NYSE"), or the American Stock Exchange ("AMEX") and will comply in
all respects with the Company's reporting, filing and other obligations under
the bylaws or rules of the National Association of Securities Dealers ("NASD")
and such exchanges, as applicable. The Company shall promptly provide to Buyer
copies of any notices it receives from the OTCBB and any other exchanges or
quotation systems on which the Common Stock is then listed regarding the
continued eligibility of the Common Stock for listing on such exchanges and
quotation systems.

                                       16
<PAGE>

                           J. CORPORATE EXISTENCE. So long as a Buyer
beneficially owns any Debentures or Warrants, the Company shall maintain its
corporate existence and shall not sell all or substantially all of the Company's
assets, except in the event of a merger or consolidation or sale of all or
substantially all of the Company's assets, where the surviving or successor
entity in such transaction (i) assumes the Company's obligations hereunder and
under the agreements and instruments entered into in connection herewith and
(ii) except as disclosed on SCHEDULE 3(F), is a publicly traded corporation
whose Common Stock is listed for trading on the OTCBB, Nasdaq, Nasdaq SmallCap,
NYSE or AMEX.

                           K. NO INTEGRATION. The Company shall not make any
offers or sales of any security (other than the Securities) under circumstances
that would require registration of the Securities being offered or sold
hereunder under the 1933 Act or cause the offering of the Securities to be
integrated with any other offering of securities by the Company for the purpose
of any stockholder approval provision or availability from exemption from
registration under the 1933 Act applicable to the Company or its securities.

                           L. CERTIFICATE OF AMENDMENT TO CERTIFICATE OF
INCORPORATION. The Company shall file on or before October 5, 2003 a Certificate
of Amendment with the Secretary of State of the State of Delaware that increases
its authorized capital to enable the Company to issue all of the shares of
Common Stock issuable upon conversion or exercise of the Debentures and the
Warrants in accordance with Delaware law and any applicable rules or regulations
of the OTCBB and Nasdaq and obtain approval for reservation of the shares of
Common Stock underlying the Debentures and Warrants as set forth in Section 4(h)
of this Agreement (the "CERTIFICATE OF AMENDMENT").

                           M. NO REVERSE SPLIT. The Company shall not effectuate
a reverse split of the Common Stock without the prior written consent of the
Buyer. If the Company breaches this Section 4(m), the Company shall be deemed to
be in default under the Debentures.

                           N. BANKRUPTCY. The Company has no knowledge of or
reason to believe that it will file for bankruptcy within one year of the
Initial Closing Date.

                           O. MANAGEMENT AND EMPLOYEE INFORMATION. At the
Closing, the Company shall provide to the Buyers contact information including
the phone number, fax number, address and e-mail address for the following
people: (i) all executives at the Company including but not limited to the Chief
Executive Officer, Chief Financial Officer and in-house counsel, if any; (ii)
corporate counsel, securities counsel (if different from corporate counsel),
accountants for the Company and transfer agent for the Company; and (iii) all
employees of the Company. The Company shall further provide an organizational
chart of employees to the Buyers.

                           P. NO DISAGREEMENTS WITH ACCOUNTANTS AND LAWYERS.
There are no disagreements of any kind presently existing, or reasonably
anticipated by the Company to arise, between the accountants and lawyers
formerly or presently employed by the Company.

                                       17
<PAGE>

                           Q. SECURITIES LAWS DISCLOSURE; PUBLICITY. The Company
shall, within one business day after the Closing Date, issue a press release or
file a Current Report on Form 8-K reasonably acceptable to the Buyer disclosing
all material terms of the transactions contemplated hereby. The Company and the
Buyer shall consult with each other in issuing any press releases with respect
to the transactions contemplated hereby. Notwithstanding the foregoing, other
than in any registration statement filed pursuant to the Registration Rights
Agreement and filings related thereto and as required by the rules and
regulations of the Commission, the Company shall not publicly disclose the name
of any Buyer, or include the name of any Buyer in any filing with the Commission
or any regulatory agency or Principal Market, without the prior written consent
of such Buyer, except to the extent such disclosure is required by law or
Principal Market regulations, in which case the Company shall provide the Buyer
with prior notice of such disclosure.

                           R. BREACH OF COVENANTS. If the Company breaches any
of the covenants set forth in this Section 4, and in addition to any other
remedies available to the Buyer pursuant to this Agreement, the Company shall
pay to the Buyer the Standard Liquidated Damages Amount, in cash or in shares of
Common Stock at the option of the Company, until such breach is cured. If the
Company elects to be pay the Standard Liquidated Damages Amount in shares, such
shares shall be issued at the Conversion Price at the time of payment.

                  5. TRANSFER AGENT INSTRUCTIONS. The Company shall issue
irrevocable instructions to its transfer agent to issue certificates, registered
in the name of Buyer or its nominee, for the Conversion Shares and Warrant
Shares in such amounts as specified from time to time by Buyer to the Company
upon conversion of the Debentures or exercise of the Warrants in accordance with
the terms thereof (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to
registration of the Conversion Shares and Warrant Shares under the 1933 Act or
the date on which the Conversion Shares and Warrant Shares may be sold pursuant
to Rule 144 without any restriction as to the number of Securities as of a
particular date that can then be immediately sold, all such certificates shall
bear the restrictive legend specified in Section 2(g) of this Agreement. The
Company warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this Section 5, and stop transfer instructions to
give effect to Section 2(f) hereof (in the case of the Conversion Shares and
Warrant Shares, prior to registration of the Conversion Shares and Warrant
Shares under the 1933 Act or the date on which the Conversion Shares and Warrant
Shares may be sold pursuant to Rule 144 without any restriction as to the number
of Securities as of a particular date that can then be immediately sold), will
be given by the Company to its transfer agent and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement and the Registration Rights Agreement.
Nothing in this Section shall affect in any way the Buyer's obligations and
agreement set forth in Section 2(g) hereof to comply with all applicable
prospectus delivery requirements, if any, upon re-sale of the Securities. If a
Buyer provides the Company with (i) an opinion of counsel in form, substance and
scope customary for opinions in comparable transactions, to the effect that a
public sale or transfer of such Securities may be made without registration
under the 1933 Act and such sale or transfer is effected or (ii) the Buyer
provides reasonable assurances that the Securities can be sold pursuant to Rule
144, the Company shall permit the transfer, and, in the case of the Conversion
Shares and Warrant Shares, promptly instruct its transfer agent to issue one or
more certificates, free from restrictive legend, in such name and in such
denominations as specified by such Buyer. The Company acknowledges that a breach
by it of its obligations hereunder will cause irreparable harm to the Buyer, by

                                       18
<PAGE>

vitiating the intent and purpose of the transactions contemplated hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of its
obligations under this Section 5 may be inadequate and agrees, in the event of a
breach or threatened breach by the Company of the provisions of this Section,
that the Buyer shall be entitled, in addition to all other available remedies,
to an injunction restraining any breach and requiring immediate transfer,
without the necessity of showing economic loss and without any bond or other
security being required.

                  6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The
obligation of the Company hereunder to issue and sell the Debentures and
Warrants to Buyer at the Closing is subject to the satisfaction, at or before
the Closing Date of each of the following conditions thereto, provided that
these conditions are for the Company's sole benefit and may be waived by the
Company at any time in its sole discretion:

                           A. Buyer shall have executed this Agreement and the
Registration Rights Agreement, and delivered the same to the Company.

                           B. Buyer shall have delivered the Purchase Price in
accordance with Section 1(b) above.

                           C. The representations and warranties of Buyer shall
be true and correct in all material respects as of the date when made and as of
the Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date), and Buyer shall have performed,

                                       19
<PAGE>

satisfied and complied in all material respects with the covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by Buyer at or prior to the Closing Date.

                           D. No litigation, statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by or in any court or governmental authority of
competent jurisdiction or any self-regulatory organization having authority over
the matters contemplated hereby which prohibits the consummation of any of the
transactions contemplated by this Agreement.

                  7. CONDITIONS TO BUYER'S OBLIGATION TO PURCHASE. The
obligation of Buyer hereunder to purchase the Debentures and Warrants at the
Closing is subject to the satisfaction, at or before the Closing Date of each of
the following conditions, provided that these conditions are for Buyer's sole
benefit and may be waived by Buyer at any time in its sole discretion:

                           A. The Company shall have executed this Agreement and
the Registration Rights Agreement, and delivered the same to the Buyer.

                           B. The Company shall have delivered to Buyer duly
executed Debenture (in such denominations as the Buyer shall request) and
Warrants in accordance with Section 1(b) above.

                           C. The Irrevocable Transfer Agent Instructions shall
have been delivered to and acknowledged in writing by the Company's Transfer
Agent.

                                       19
<PAGE>

                           D. The representations and warranties of the Company
shall be true and correct in all material respects as of the date when made and
as of the Closing Date as though made at such time (except for representations
and warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Closing Date. The Buyer shall
have received a certificate or certificates, executed by the chief executive
officer of the Company, dated as of the Closing Date, to the foregoing effect
and as to such other matters as may be reasonably requested by such Buyer
including, but not limited to certificates with respect to the Company's
Certificate of Incorporation, By-laws and Board of Directors' resolutions
relating to the transactions contemplated hereby.

                           E. No litigation, statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by or in any court or governmental authority of
competent jurisdiction or any self-regulatory organization having authority over
the matters contemplated hereby which prohibits the consummation of any of the
transactions contemplated by this Agreement.

                           F. No event shall have occurred which could
reasonably be expected to have a Material Adverse Effect on the Company.

                           G. The Buyer shall have received an opinion of the
Company's counsel, dated as of the Closing Date, in form, scope and substance
reasonably satisfactory to the Buyer and in substantially the same form as
EXHIBIT "D" attached hereto.

                           H. The Buyer shall have received the Officer's
Certificate and Secretary's Certificate described in Section 3(c) above, dated
as of the Closing Date.

                           I. The Buyer shall have received an executed Security
Agreement and the Transaction Fee Agreement.

                  8. GOVERNING LAW; MISCELLANEOUS.

                           A. GOVERNING LAW. THIS AGREEMENT SHALL BE ENFORCED,
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE PARTIES HERETO HEREBY
SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE STATE COURTS OR THE UNITED STATES
FEDERAL COURTS LOCATED IN NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER
THIS AGREEMENT, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE
DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING.
BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST
CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON
THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER
PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BOTH
PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR
PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY
SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT

                                       20
<PAGE>

PREVAIL IN ANY DISPUTE ARISING UNDER THIS AGREEMENT SHALL BE RESPONSIBLE FOR ALL
FEES AND EXPENSES, INCLUDING ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY
IN CONNECTION WITH SUCH DISPUTE.

                           B. COUNTERPARTS; SIGNATURES BY FACSIMILE. This
Agreement may be executed in one or more counterparts, each of which shall be
deemed an original but all of which shall constitute one and the same agreement
and shall become effective when counterparts have been signed by each party and
delivered to the other party. This Agreement, once executed by a party, may be
delivered to the other party hereto by facsimile transmission of a copy of this
Agreement bearing the signature of the party so delivering this Agreement.

                           C. HEADINGS. The headings of this Agreement are for
convenience of reference only and shall not form part of, or affect the
interpretation of, this Agreement.

                           D. SEVERABILITY. In the event that any provision of
this Agreement is invalid or unenforceable under any applicable statute or rule
of law, then such provision shall be deemed inoperative to the extent that it
may conflict therewith and shall be deemed modified to conform with such statute
or rule of law. Any provision hereof which may prove invalid or unenforceable
under any law shall not affect the validity or enforceability of any other
provision hereof.

                           E. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and
the instruments referenced herein contain the entire understanding of the
parties with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor the Buyer
makes any representation, warranty, covenant or undertaking with respect to such
matters. No provision of this Agreement may be waived or amended other than by
an instrument in writing signed by the party to be charged with enforcement.

                           F. NOTICES. Any notices required or permitted to be
given under the terms of this Agreement shall be sent by certified or registered
mail (return receipt requested) or delivered personally or by courier (including
a recognized overnight delivery service) or by facsimile and shall be effective
five days after being placed in the mail, if mailed by regular United States
mail, or upon receipt, if delivered personally or by courier (including a
recognized overnight delivery service) or by facsimile, in each case addressed
to a party. The addresses for such communications shall be:

                           If to the Company:

                                    3450 Hillview Avenue
                                    Palo Alto, California 94304
                                    Attention:  Lawrence Bartlett
                                    Facsimile:  (650) 855-0222

                           With copies to:

                                    Sichenzia Ross Friedman Ference LLP
                                    1065 Avenue of the Americas, 21st Floor
                                    Attention:  Gregory Sichenzia, Esq.
                                    Facsimile:  (212) 930-9725

                                       21
<PAGE>

                           If to a Buyer: To the address set forth immediately
                           below Buyer's name on the signature pages hereto.

         Each party shall provide notice to the other party of any change in
address.

                  G. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties and their successors and assigns.
Neither the Company nor any Buyer shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other.
Notwithstanding the foregoing, subject to Section 2(f), any Buyer may assign its
rights hereunder to any person that purchases Securities in a private
transaction from a Buyer or to any of its "affiliates," as that term is defined
under the 1934 Act, without the consent of the Company.

                  H. THIRD PARTY BENEFICIARIES. This Agreement is intended for
the benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.

                  I. SURVIVAL. The representations and warranties of the Company
and the agreements and covenants set forth in Sections 3, 4, 5 and 8 shall
survive for a period of one (1) year after the closing hereunder notwithstanding
any due diligence investigation conducted by or on behalf of the Buyer. Each
party hereto agrees to indemnify and hold harmless each of the other parties
hereto and all their officers, directors, employees and agents for loss or
damage arising as a result of or related to any breach or alleged breach by such
party of any of its representations, warranties and covenants set forth in
Sections 2, 3 and 4 hereof or any of its covenants and obligations under this
Agreement or the Registration Rights Agreement, including advancement of
expenses as they are incurred.

                  J. PUBLICITY. The Company and Buyer shall have the right to
review a reasonable period of time before issuance of any press releases, SEC,
OTCBB or NASD filings, or any other public statements with respect to the
transactions contemplated hereby; PROVIDED, HOWEVER, that the Company shall be
entitled, without the prior approval of each of the Buyers, to make any press
release or SEC, OTCBB (or other applicable trading market) or NASD filings with
respect to such transactions as is required by applicable law and regulations
(although each of the Buyers shall be consulted by the Company in connection
with any such press release prior to its release and shall be provided with a
copy thereof and be given an opportunity to comment thereon).

                  K. FURTHER ASSURANCES. Each party shall do and perform, or
cause to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments and
documents, as the other party may reasonably request in order to carry out the
intent and accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

                                       22
<PAGE>

                  L. NO STRICT CONSTRUCTION. The language used in this Agreement
will be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.

                  M. REMEDIES. The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to the Buyers by vitiating
the intent and purpose of the transaction contemplated hereby. Accordingly, the
Company acknowledges that the remedy at law for a breach of its obligations
under this Agreement will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Agreement, that the
Buyers shall be entitled, in addition to all other available remedies at law or
in equity, and in addition to the penalties assessable herein, to an injunction
or injunctions restraining, preventing or curing any breach of this Agreement
and to enforce specifically the terms and provisions hereof, without the
necessity of showing economic loss and without any bond or other security being
required.

                                       23
<PAGE>

         IN WITNESS WHEREOF, the undersigned Buyers and the Company have caused
this Agreement to be duly executed as of the date first above written.

AMNIS SYSTEMS INC.

--------------------------------
Scott Mac Caughern
Chairman and Chief Executive Officer

STONESTREET LIMITED PARTNERSHIP

--------------------------------------
Name:
Title:

RESIDENCE:

ADDRESS:

AGGREGATE SUBSCRIPTION AMOUNT:

         Aggregate Principal Amount of Debentures:                     $250,000
         Number of Warrants:                                          1,250,000
         Aggregate Purchase Price:                                     $250,000

                                       24EXHIBIT 4.20

         THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
         UNDER  THE  SECURITIES  ACT  OF  1933,  AS  AMENDED  (THE  "ACT").  THE
         SECURITIES  MAY NOT BE SOLD,  TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
         AN EFFECTIVE  REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT,
         OR AN OPINION OF COUNSEL IN FORM,  SUBSTANCE  AND SCOPE  CUSTOMARY  FOR
         OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS THAT REGISTRATION IS NOT
         REQUIRED  UNDER  SAID  ACT OR  UNLESS  SOLD  PURSUANT  TO  RULE  144 OR
         REGULATION S UNDER SAID ACT.

                          SECURED CONVERTIBLE DEBENTURE

Palo Alto, California
September  12, 2003                                                    $250,000

                  FOR VALUE RECEIVED, AMNIS SYSTEMS INC., a Delaware corporation
(hereinafter  called the  "Borrower"),  hereby  promises  to pay to the order of
Stonestreet  Limited Partnership or registered assigns (the "Holder") the sum of
Two Hundred  Fifty  Thousand  Dollars  ($250,000),  on  September  12, 2005 (the
"Maturity Date"),  and to pay interest on the unpaid principal balance hereof at
the rate of twelve  percent (12%) per annum from  September 12, 2003 (the "Issue
Date")  until the same  becomes  due and  payable,  whether at  maturity or upon
acceleration or by prepayment or otherwise.  Any amount of principal or interest
on this Debenture  which is not paid when due shall bear interest at the rate of
fifteen percent (15%) per annum from the due date thereof until the same is paid
("Default Interest").  Interest shall commence accruing on the issue date, shall
be computed on the basis of a 365-day year and the actual number of days elapsed
and shall be payable, at the option of the Holder, either quarterly on March 31,
June 30,  September  30 and  December 31 of each year  beginning on December 31,
2003,  or at the time of  conversion  of the  principal  to which such  interest
relates in accordance  with Article I below.  All payments due hereunder (to the
extent not  converted  into  common  stock,  $.0001 par value per share,  of the
Borrower (the "Common Stock") in accordance with the terms hereof) shall be made
in lawful  money of the  United  States  of  America  or,  at the  option of the
Borrower,  in whole or in part, in shares of Common Stock of the Borrower valued
at the then applicable  Conversion Price (as defined herein). All payments shall
be made at such  address as the Holder shall  hereafter  give to the Borrower by
written  notice  made in  accordance  with  the  provisions  of this  Debenture.
Whenever any amount expressed to be due by the terms of this Debenture is due on
any day which is not a business  day, the same shall  instead be due on the next
succeeding day which is a business day and, in the case of any interest  payment
date  which  is not the  date on  which  this  Debenture  is paid in  full,  the
extension of the due date  thereof  shall not be taken into account for purposes
of  determining  the  amount  of  interest  due on  such  date.  As used in this
Debenture,  the term  "business  day" shall mean any day other than a  Saturday,

<PAGE>

Sunday or a day on which commercial  banks in the city of Palo Alto,  California
are  authorized  or required by law or executive  order to remain  closed.  Each
capitalized term used herein, and not otherwise defined,  shall have the meaning
ascribed thereto in that certain Securities Purchase Agreement,  dated September
12, 2003,  pursuant to which this Debenture was originally issued (the "Purchase
Agreement").

                  This  Debenture  is free from all  taxes,  liens,  claims  and
encumbrances  with  respect  to the issue  thereof  and shall not be  subject to
preemptive  rights or other similar rights of  stockholders  of the Borrower and
will not impose personal  liability upon the holder thereof.  The obligations of
the Borrower  under this  Debenture  shall be secured by that  certain  Security
Agreement  dated  by and  between  the  Borrower  and the  Holder  of even  date
herewith.

                  The following terms shall apply to this Debenture:

                          ARTICLE I. CONVERSION RIGHTS

         1.1 Conversion  Right.  Subject to filing the  Certificate of Amendment
(as defined in Section  4(1) of the Purchase  Agreement),  the Holder shall have
the right from time to time, and at any time on or prior to the later of (i) the
Maturity Date and (ii) the date of payment in full of the outstanding  principal
amount of this Debenture plus accrued and unpaid  interest and any other amounts
owed to the Holder under the Debenture or  Transaction  Documents (as defined in
Section  2(h) of the  Purchase  Agreement)  to  convert  all or any  part of the
outstanding  and unpaid  principal  amount of this Debenture into fully paid and
non-assessable  shares of Common Stock, as such Common Stock exists on the Issue
Date,  or any shares of capital  stock or other  securities of the Borrower into
which such  Common  Stock  shall  hereafter  be changed or  reclassified  at the
conversion  price (the  "Conversion  Price")  determined  as provided  herein (a
"Conversion");  provided, however, that in no event shall the Holder be entitled
to convert  any  portion  of this  Debenture  in excess of that  portion of this
Debenture upon conversion of which the sum of (1) the number of shares of Common
Stock  beneficially owned by the Holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unconverted  portion of the Debentures or the unexercised or unconverted portion
of any other  security  of the  Borrower  (including,  without  limitation,  the
warrants issued by the Borrower pursuant to the Purchase Agreement) subject to a
limitation  on  conversion or exercise  analogous to the  limitations  contained
herein)  and (2) the  number  of  shares  of  Common  Stock  issuable  upon  the
conversion  of  the  portion  of  this  Debenture  with  respect  to  which  the
determination  of this  proviso  is  being  made,  would  result  in  beneficial
ownership by the Holder and its affiliates of more than 9.9% of the  outstanding
shares of Common Stock.  The Borrower shall have the authority and obligation to
determine  whether the restriction  contained in this Section 1.1 will limit any
conversion  hereunder  and to the  extent  that a Borrower  determines  that the
limitation contained in this Section applies, the determination of which portion
of this Debenture is convertible shall be the  responsibility  and obligation of
each such  Borrower.  A Borrower may allocate which of the equity of the Company
deemed  beneficially owned by such Borrower shall be included in the 9.9% amount
described  above and which shall be  allocated  to the excess  above  9.9%.  For
purposes  of the  proviso  to the  immediately  preceding  sentence,  beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended,  and Regulations 13D-G  thereunder,  except as

                                       2
<PAGE>

otherwise  provided in clause (1) of such proviso.  The Holder of this Debenture
may waive the limitations set forth herein by sixty-one (61) days written notice
to the  Company.  The  number of shares of Common  Stock to be issued  upon each
conversion of this  Debenture  shall be  determined  by dividing the  Conversion
Amount (as defined below) by the applicable  Conversion  Price then in effect on
the date specified in the notice of conversion,  in the form attached  hereto as
Exhibit A (the "Notice of Conversion"),  delivered to the Borrower by the Holder
in accordance with Section 1.4 below;  provided that the Notice of Conversion is
submitted by facsimile (or by other means  resulting in, or reasonably  expected
to result in, notice) to the Borrower  before 6:00 p.m.,  Palo Alto,  California
time on such  conversion  date (the  "Conversion  Date").  The term  "Conversion
Amount" means, with respect to any conversion of this Debenture,  the sum of (1)
the principal  amount of this Debenture to be converted in such  conversion plus
(2)  accrued  and  unpaid  interest,  if any,  on such  principal  amount at the
interest  rates  provided  in this  Debenture  to the  Conversion  Date plus (3)
Default  Interest,  if  any,  on the  amounts  referred  to in  the  immediately
preceding  clauses (1) and/or (2) plus (4) at the Holder's  option,  any amounts
owed to the Holder  pursuant  to Sections  1.3 and 1.4(g)  hereof or pursuant to
Section  2(c)  of  that  certain  Registration  Rights  Agreement,  dated  as of
September  12, 2003,  executed in connection  with the initial  issuance of this
Debenture and the other Debentures  issued on the Issue Date (the  "Registration
Rights Agreement").

         1.2 Conversion Price.

                  (a)  Calculation of Conversion  Price.  The  Conversion  Price
shall be the lesser of (i) the Variable Conversion Price (as defined herein) and
(ii) the Fixed Conversion Price (as defined herein)  (subject,  in each case, to
equitable  adjustments for stock splits,  stock dividends or rights offerings by
the Borrower  relating to the  Borrower's  securities  or the  securities of any
subsidiary of the Borrower, combinations,  recapitalization,  reclassifications,
extraordinary distributions and similar events). The "Variable Conversion Price"
shall mean the  Applicable  Percentage  (as defined  herein)  multiplied  by the
Market Price (as defined herein). "Market Price" means the average of the lowest
three (3) Trading  Prices (as  defined  below) for the Common  Stock  during the
thirty  (30)  Trading  Day period  ending one  Trading Day prior to the date the
Conversion  Notice is sent by the  Holder to the  Borrower  via  facsimile  (the
"Conversion Date").  "Trading Price" means, for any security as of any date, the
lowest  intraday  trading  price on the  Over-the-Counter  Bulletin  Board  (the
"OTCBB") as reported by Bloomberg or, if the OTCBB is not the principal  trading
market for such  security,  the intraday  trading  price of such security on the
principal securities exchange or trading market where such security is listed or
traded or, if no intraday  trading price of such security is available in any of
the foregoing manners,  the average of the intraday trading prices of any market
makers for such  security  that are listed in the "pink  sheets" by the National
Quotation  Bureau,  Inc.  If the Trading  Price  cannot be  calculated  for such
security on such date in the manner provided  above,  the Trading Price shall be
the fair market value as mutually  determined by the Borrower and the holders of
a  majority  in  interest  of the  Debentures  being  converted  for  which  the
calculation  of the  Trading  Price  is  required  in  order  to  determine  the
Conversion Price of such  Debentures.  "Trading Day" shall mean any day on which
the Common  Stock is  actually  traded  for any  period on the OTCBB,  or on the
principal  securities  exchange or other  securities  market on which the Common
Stock is then being traded. "Applicable Percentage" shall mean 65.0%. The "Fixed
Conversion Price" shall mean $.05.

                                       3
<PAGE>

                  (b)    Conversion    Price   During    Major    Announcements.
Notwithstanding  anything  contained in Section  1.2(a) to the contrary,  in the
event  the  Borrower  (i)  makes  a  public  announcement  that  it  intends  to
consolidate  or merge with any other  corporation  (other than a merger in which
the Borrower is the surviving or continuing corporation and its capital stock is
unchanged)  or sell or transfer  all or  substantially  all of the assets of the
Borrower or (ii) any person,  group or entity (including the Borrower)  publicly
announces a tender offer to purchase 50% or more of the Borrower's  Common Stock
(or any other  takeover  scheme)  (the date of the  announcement  referred to in
clause (i) or (ii) is hereinafter referred to as the "Announcement  Date"), then
the Conversion Price shall,  effective upon the Announcement Date and continuing
through the Adjusted  Conversion Price  Termination Date (as defined below),  be
equal to the lower of (x) the Conversion  Price which would have been applicable
for a Conversion occurring on the Announcement Date and (y) the Conversion Price
that would otherwise be in effect.  From and after the Adjusted Conversion Price
Termination  Date, the Conversion Price shall be determined as set forth in this
Section 1.2(a).  For purposes hereof,  "Adjusted  Conversion  Price  Termination
Date" shall mean,  with respect to any proposed  transaction or tender offer (or
takeover scheme) for which a public announcement as contemplated by this Section
1.2(b) has been made,  the date upon which the  Borrower  (in the case of clause
(i) above) or the  person,  group or entity (in the case of clause  (ii)  above)
consummates or publicly announces the termination or abandonment of the proposed
transaction  or tender  offer (or  takeover  scheme)  which  caused this Section
1.2(b) to become operative.

                  (c)  Injunction - Posting of Bond. In the event a Holder shall
elect to convert a Note or part thereof,  the Company may not refuse  conversion
based on any claim that such Holder or any one  associated  or  affiliated  with
such Holder has been engaged in any  violation of law, or for any other  reason,
unless,  an injunction  from a court,  on notice,  restraining  and or enjoining
conversion  of all or part of said Note shall have been sought and  obtained and
the  Company  has posted a surety  bond for the  benefit  of such  Holder in the
amount of 130% of the amount of the Note,  which is  subject to the  injunction,
which bond shall remain in effect until the completion of arbitration/litigation
of the dispute and the  proceeds of which shall be payable to such Holder to the
extent Holder obtains judgment.

         1.3 Authorized  Shares.  Subject to filing the Certificate of Amendment
(as defined in Section 4(1) of the Purchase  Agreement),  the Borrower covenants
that during the period the  conversion  right exists,  the Borrower will reserve
from its  authorized  and unissued  Common Stock a sufficient  number of shares,
free from  preemptive  rights,  to provide for the issuance of Common Stock upon
the full conversion of this Debenture and the other  Debentures  issued pursuant
to the  Purchase  Agreement.  The  Borrower  is  required  at all  times to have
authorized and reserved two times the number of shares that is actually issuable
upon full  conversion of the Debentures  (based on the  Conversion  Price of the
Debentures  or the  Exercise  Price of the Warrants in effect from time to time)
(the  "Reserved  Amount").  The Reserved  Amount shall be increased from time to
time in accordance with the Borrower's  obligations  pursuant to Section 4(h) of
the Purchase  Agreement.  Subject to filing the  Certificate  of  Amendment  (as
defined in Section 4(1) of the Purchase Agreement), the Borrower represents that
upon  issuance,  such  shares will be duly and  validly  issued,  fully paid and
non-assessable.  In addition, if the Borrower shall issue any securities or make

                                       4
<PAGE>

any change to its capital  structure  which would change the number of shares of
Common Stock into which the Debentures  shall be convertible at the then current
Conversion  Price,  the Borrower shall at the same time make proper provision so
that  thereafter  there shall be a  sufficient  number of shares of Common Stock
authorized  and reserved,  free from  preemptive  rights,  for conversion of the
outstanding  Debentures.  The Borrower (i) acknowledges  that it has irrevocably
instructed  its  transfer  agent  to issue  certificates  for the  Common  Stock
issuable upon conversion of this Debenture, and (ii) agrees that its issuance of
this Debenture  shall  constitute  full authority to its officers and agents who
are charged with the duty of executing  stock  certificates to execute and issue
the necessary  certificates  for shares of Common Stock in  accordance  with the
terms and conditions of this Debenture.

         If,  at any  time a  Holder  of this  Debenture  submits  a  Notice  of
Conversion,  and the Borrower does not have  sufficient  authorized but unissued
shares of Common Stock  available to effect such  conversion in accordance  with
the  provisions of this Article I (a "Conversion  Default"),  subject to Section
4.8,  the  Borrower  shall issue to the Holder all of the shares of Common Stock
which  are then  available  to  effect  such  conversion.  The  portion  of this
Debenture which the Holder  included in its Conversion  Notice and which exceeds
the amount which is then  convertible into available shares of Common Stock (the
"Excess  Amount")  shall,  notwithstanding  anything to the  contrary  contained
herein, not be convertible into Common Stock in accordance with the terms hereof
until (and at the Holder's option at any time after) the date additional  shares
of Common Stock are  authorized  by the Borrower to permit such  conversion,  at
which time the  Conversion  Price in respect  thereof shall be the lesser of (i)
the Conversion Price on the Conversion  Default Date (as defined below) and (ii)
the Conversion Price on the Conversion Date thereafter  elected by the Holder in
respect  thereof.  In addition,  the Borrower  shall pay to the Holder  payments
("Conversion  Default  Payments") for a Conversion  Default in the amount of (x)
the sum of (1) the then outstanding  principal amount of this Debenture plus (2)
accrued and unpaid  interest on the unpaid  principal  amount of this  Debenture
through the Authorization Date (as defined below) plus (3) Default Interest,  if
any, on the amounts  referred  to in clauses (1) and/or (2),  multiplied  by (y)
..24,  multiplied  by (z) (N/365),  where N = the number of days from the day the
holder submits a Notice of Conversion  giving rise to a Conversion  Default (the
"Conversion  Default  Date") to the date  (the  "Authorization  Date")  that the
Borrower  authorizes  a  sufficient  number of shares of Common  Stock to effect
conversion of the full  outstanding  principal  balance of this  Debenture.  The
Borrower  shall use its best efforts to authorize a sufficient  number of shares
of Common Stock as soon as  practicable  following  the earlier of (i) such time
that the Holder  notifies the Borrower or that the  Borrower  otherwise  becomes
aware that there are or likely  will be  insufficient  authorized  and  unissued
shares to allow full  conversion  thereof  and (ii) a  Conversion  Default.  The
Borrower  shall send  notice to the Holder of the  authorization  of  additional
shares  of Common  Stock,  the  Authorization  Date and the  amount of  Holder's
accrued Conversion Default Payments. The accrued Conversion Default Payments for
each calendar  month shall be paid in cash or shall be  convertible  into Common
Stock (at such time as there are sufficient  authorized  shares of Common Stock)
at the applicable Conversion Price, at the Holder's option, as follows:

                  (a) In the event  Holder  elects to take such payment in cash,
cash  payment  shall be made to  Holder  by the  fifth  (5th)  day of the  month
following the month in which it has accrued; and

                  (b) In the event Holder  elects to take such payment in Common
Stock,  the Holder may convert  such  payment  amount  into Common  Stock at the
Conversion  Price (as in effect at the time of conversion) at any time after the
fifth day of the month following the month in which it has accrued in accordance
with the terms of this Article I (so long as there is then a  sufficient  number
of authorized shares of Common Stock).

                                       5
<PAGE>

         The Holder's  election  shall be made in writing to the Borrower at any
time prior to 6:00 p.m.,  Palo Alto,  California  time,  on the third day of the
month following the month in which Conversion Default payments have accrued.  If
no election is made, the Holder shall be deemed to have elected to receive cash.
Nothing  herein shall limit the Holder's  right to pursue actual damages (to the
extent in excess of the Conversion  Default Payments) for the Borrower's failure
to maintain a sufficient  number of authorized  shares of Common Stock, and each
holder shall have the right to pursue all remedies available at law or in equity
(including degree of specific performance and/or injunctive relief).

         1.4 Method of Conversion.

                  (a)  Mechanics of  Conversion.  Subject to Section  1.1,  this
Debenture  may be  converted  by the Holder in whole or in part at any time from
time to time after the Issue Date, by (A) submitting to the Borrower a Notice of
Conversion (by facsimile or other reasonable  means of communication  dispatched
on the Conversion Date prior to 6:00 p.m., Palo Alto,  California  time) and (B)
subject to Section 1.4(b),  surrendering  this Debenture at the principal office
of the Borrower.

                  (b) Surrender of Debenture  Upon  Conversion.  Notwithstanding
anything to the contrary set forth herein,  upon conversion of this Debenture in
accordance with the terms hereof, the Holder shall not be required to physically
surrender  this  Debenture to the Borrower  unless the entire  unpaid  principal
amount of this  Debenture is so  converted.  The Holder and the  Borrower  shall
maintain records showing the principal amount so converted and the dates of such
conversions  or shall use such  other  method,  reasonably  satisfactory  to the
Holder  and  the  Borrower,  so as not to  require  physical  surrender  of this
Debenture upon each such conversion. In the event of any dispute or discrepancy,
such records of the  Borrower  shall be  controlling  and  determinative  in the
absence of manifest error. Notwithstanding the foregoing, if any portion of this
Debenture is converted as aforesaid,  the Holder may not transfer this Debenture
unless the Holder first  physically  surrenders  this Debenture to the Borrower,
whereupon  the Borrower will  forthwith  issue and deliver upon the order of the
Holder a new Debenture of like tenor,  registered as the Holder (upon payment by
the Holder of any applicable  transfer  taxes) may request,  representing in the
aggregate the remaining unpaid  principal  amount of this Debenture.  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
represented  by this  Debenture  may be less than the amount  stated on the face
hereof.

                  (c) Payment of Taxes.  The  Borrower  shall not be required to
pay any tax which may be  payable in respect  of any  transfer  involved  in the
issue and delivery of shares of Common Stock or other  securities or property on
conversion  of this  Debenture  in a name  other  than that of the Holder (or in
street  name),  and the  Borrower  shall not be required to issue or deliver any
such  shares or other  securities  or  property  unless  and until the person or
persons (other than the Holder or the custodian in whose street name such shares
are to be held for the Holder's  account)  requesting the issuance thereof shall

                                       6
<PAGE>

have paid to the Borrower  the amount of any such tax or shall have  established
to the satisfaction of the Borrower that such tax has been paid.

                  (d) Delivery of Common Stock Upon Conversion.  Upon receipt by
the Borrower from the Holder of a facsimile  transmission  (or other  reasonable
means of communication)  of a Notice of Conversion  meeting the requirements for
conversion as provided in this Section 1.4, the Borrower shall issue and deliver
or  cause  to be  issued  and  delivered  to or upon  the  order  of the  Holder
certificates  for the Common Stock issuable upon such conversion  within two (2)
business days after such receipt  (and,  solely in the case of conversion of the
entire unpaid principal amount hereof, surrender of this Debenture) (such second
business day being hereinafter referred to as the "Deadline") in accordance with
the terms hereof and the Purchase Agreement (including,  without limitation,  in
accordance with the requirements of Section 2(g) of the Purchase  Agreement that
certificates for shares of Common Stock issued on or after the effective date of
the Registration  Statement upon conversion of this Debenture shall not bear any
restrictive legend).

                  (e)  Obligation  of Borrower  to Deliver  Common  Stock.  Upon
receipt by the Borrower of a Notice of Conversion, the Holder shall be deemed to
be the holder of record of the Common Stock issuable upon such  conversion,  the
outstanding  principal  amount and the amount of accrued and unpaid  interest on
this  Debenture  shall be reduced to reflect such  conversion,  and,  unless the
Borrower  defaults  on its  obligations  under this  Article I, all rights  with
respect to the portion of this  Debenture  being so  converted  shall  forthwith
terminate except the right to receive the Common Stock or other securities, cash
or other assets,  as herein provided,  on such  conversion.  If the Holder shall
have given a Notice of Conversion as provided herein, the Borrower's  obligation
to issue and deliver the  certificates  for Common  Stock shall be absolute  and
unconditional,  irrespective  of the  absence  of any  action  by the  Holder to
enforce the same,  any waiver or consent with respect to any provision  thereof,
the  recovery  of any  judgment  against any person or any action to enforce the
same,  any failure or delay in the  enforcement  of any other  obligation of the
Borrower  to the  holder of record,  or any  setoff,  counterclaim,  recoupment,
limitation or termination,  or any breach or alleged breach by the Holder of any
obligation to the Borrower,  and  irrespective of any other  circumstance  which
might  otherwise  limit  such  obligation  of  the  Borrower  to the  Holder  in
connection with such conversion.  The Conversion Date specified in the Notice of
Conversion  shall be the Conversion  Date so long as the Notice of Conversion is
received by the Borrower before 6:00 p.m., Palo Alto,  California  time, on such
date.

                  (f) Delivery of Common Stock by Electronic  Transfer.  In lieu
of delivering physical certificates  representing the Common Stock issuable upon
conversion,  provided the  Borrower's  transfer  agent is  participating  in the
Depository  Trust Company ("DTC") Fast Automated  Securities  Transfer  ("FAST")
program,  upon  request  of the Holder and its  compliance  with the  provisions
contained in Section 1.1 and in this  Section  1.4,  the Borrower  shall use its
best efforts to cause its transfer agent to  electronically  transmit the Common
Stock  issuable  upon  conversion  to the  Holder by  crediting  the  account of
Holder's Prime Broker with DTC through its Deposit  Withdrawal  Agent Commission
("DWAC") system.

                                       7
<PAGE>

                  (g) Failure to Deliver Common Stock Prior to Deadline. Without
in any way  limiting  the Holder's  right to pursue  other  remedies,  including
actual damages and/or  equitable  relief,  the parties agree that if delivery of
the Common Stock issuable upon conversion of this Debenture is more than two (2)
days after the Deadline (other than a failure due to the circumstances described
in Section 1.3 above,  which  failure  shall be governed  by such  Section)  the
Borrower  shall pay to the Holder in cash,  as  liquidated  damages and not as a
penalty,  for each $5,000 of principal amount being  converted,  $50 per Trading
Day  (increasing  to $100 per Trading Day on the third Trading Day following the
Deadline and  increasing  to $200 per Trading Day on the sixth Trading Day after
the Deadline) for each Trading Day after the Deadline until the shares of Common
Stock are  delivered.  Such cash amount shall be paid to Holder by the fifth day
of the month  following  the month in which it has  accrued or, at the option of
the  Holder (by  written  notice to the  Borrower  by the first day of the month
following  the month in which it has  accrued),  shall be added to the principal
amount of this  Debenture,  in which  event  interest  shall  accrue  thereon in
accordance with the terms of this Debenture and such additional principal amount
shall be  convertible  into Common  Stock in  accordance  with the terms of this
Debenture.

                  (h) Buy-In.  In addition to any other rights  available to the
Holder,  if the Company fails to deliver to the Holder such shares issuable upon
conversion of a Note by the Deadline and if ten (10) days after the Deadline the
Holder purchases (in an open market  transaction or otherwise)  shares of Common
Stock to deliver in  satisfaction  of a sale by such Holder of the Common  Stock
which the Subscriber  anticipated  receiving upon such  conversion (a "Buy-In"),
then the Company  shall pay in cash to the Holder (in  addition to any  remedies
available to or elected by the  Subscriber) the amount by which (A) the Holder's
total purchase price (including brokerage commissions, if any) for the shares of
Common Stock so purchased  exceeds (B) the aggregate  principal  and/or interest
amount of the Note for which such  conversion was not timely  honored,  together
with interest thereon at a rate of 15% per annum, accruing until such amount and
any  accrued  interest  thereon is paid in full (which  amount  shall be paid as
liquidated damages and not as a penalty).  For example,  if the Holder purchases
shares of Common  Stock  having a total  purchase  price of  $11,000  to cover a
Buy-In with  respect to an  attempted  conversion  of $10,000 of note  principal
and/or  interest,  the Company shall be required to pay the Holder $1,000,  plus
interest.  The Holder shall provide the Company  written  notice  indicating the
amounts  payable to the Holder in respect of the Buy-In.  The  delivery  date by
which Common Stock must be  delivered  pursuant to this Section  shall be tolled
for the amount of days that the Holder does not deliver  information  reasonably
requested by the Company's transfer agent.

         1.5  Concerning  the Shares.  The shares of Common Stock  issuable upon
conversion  of this  Debenture  may not be sold or  transferred  unless (i) such
shares are sold pursuant to an effective registration statement under the Act or
(ii) the  Borrower  or its  transfer  agent  shall have been  furnished  with an
opinion  of  counsel  (which  opinion  shall be in  form,  substance  and  scope
customary for opinions of counsel in comparable transactions) to the effect that
the shares to be sold or transferred  may be sold or transferred  pursuant to an
exemption  from such  registration  or (iii) such shares are sold or transferred
pursuant to Rule 144 under the Act (or a successor  rule)  ("Rule  144") or (iv)
such shares are  transferred to an  "affiliate"  (as defined in Rule 144) of the
Borrower who agrees to sell or otherwise  transfer the shares only in accordance
with this  Section  1.5 and who is an  Accredited  Investor  (as  defined in the
Purchase Agreement). Except as otherwise provided in the Purchase Agreement (and
subject  to the  removal  provisions  set forth  below),  until such time as the
shares of Common Stock  issuable  upon  conversion of this  Debenture  have been
registered under the Act as contemplated by the Registration Rights Agreement or
otherwise  may be sold  pursuant to Rule 144 without any  restriction  as to the
number of securities as of a particular date that can then be immediately  sold,
each  certificate  for shares of Common Stock  issuable upon  conversion of this
Debenture that has not been so included in an effective  registration  statement
or that has not been sold pursuant to an effective  registration statement or an
exemption that permits removal of the legend,  shall bear a legend substantially
in the following form, as appropriate:

                                       8
<PAGE>

         "THE  SECURITIES   REPRESENTED  BY  THIS   CERTIFICATE  HAVE  NOT  BEEN
         REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES
         MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
         REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION
         OF COUNSEL IN FORM,  SUBSTANCE  AND SCOPE  CUSTOMARY  FOR  OPINIONS  OF
         COUNSEL IN COMPARABLE  TRANSACTIONS,  THAT REGISTRATION IS NOT REQUIRED
         UNDER SAID ACT UNLESS SOLD  PURSUANT TO RULE 144 OR  REGULATION S UNDER
         SAID ACT."

                  The legend set forth above  shall be removed and the  Borrower
shall issue to the Holder a new certificate therefor free of any transfer legend
if (i) the  Borrower or its  transfer  agent  shall have  received an opinion of
counsel,  in form,  substance  and scope  customary  for  opinions of counsel in
comparable  transactions,  to the effect  that a public sale or transfer of such
Common Stock may be made without  registration  under the Act and the shares are
so sold or  transferred,  (ii) such Holder provides the Borrower or its transfer
agent with reasonable  assurances that the Common Stock issuable upon conversion
of this  Debenture  (to the  extent  such  securities  are  deemed  to have been
acquired on the same date) can be sold pursuant to Rule 144 or (iii) in the case
of the Common Stock issuable upon conversion of this Debenture, such security is
registered  for sale by the Holder  under an  effective  registration  statement
filed under the Act or  otherwise  may be sold  pursuant to Rule 144 without any
restriction as to the number of securities as of a particular date that can then
be immediately  sold.  Nothing in this Debenture  shall (i) limit the Borrower's
obligation under the Registration Rights Agreement or (ii) affect in any way the
Holder's obligations to comply with applicable  prospectus delivery requirements
upon the resale of the securities referred to herein.

         1.6 Effect of Certain Events.

                  (a) Effect of Merger, Consolidation, Etc. At the option of the
Holder,  the sale,  conveyance or disposition of all or substantially all of the
assets of the Borrower,  the  effectuation  by the Borrower of a transaction  or
series of related transactions in which more than 50% of the voting power of the
Borrower  is  disposed  of,  or the  consolidation,  merger  or  other  business
combination  of the Borrower with or into any other Person (as defined below) or
Persons when the Borrower is not the survivor shall either:  (i) be deemed to be
an Event of Default (as defined in Article  III)  pursuant to which the Borrower
shall  be  required  to pay to the  Holder  upon  the  consummation  of and as a
condition to such  transaction an amount equal to the Default Amount (as defined
in Article III) or (ii) be treated  pursuant to Section 1.6(b) hereof.  "Person"

                                       9
<PAGE>

shall mean any individual,  corporation, limited liability company, partnership,
association, trust or other entity or organization.

                  (b) Adjustment Due to Merger,  Consolidation,  Etc. If, at any
time when this  Debenture is issued and  outstanding  and prior to conversion of
all of the  Debentures,  there shall be any merger,  consolidation,  exchange of
shares, recapitalization, reorganization, or other similar event, as a result of
which shares of Common Stock of the Borrower shall be changed into the same or a
different number of shares of another class or classes of stock or securities of
the Borrower or another  entity,  or in case of any sale or conveyance of all or
substantially  all of the assets of the Borrower other than in connection with a
plan of complete liquidation of the Borrower,  then the Holder of this Debenture
shall  thereafter  have the right to receive upon  conversion of this Debenture,
upon the basis and upon the terms and conditions specified herein and in lieu of
the shares of Common Stock  immediately  theretofore  issuable upon  conversion,
such stock,  securities  or assets which the Holder would have been  entitled to
receive  in  such   transaction  had  this  Debenture  been  converted  in  full
immediately  prior to such  transaction  (without  regard to any  limitations on
conversion set forth herein), and in any such case appropriate  provisions shall
be made with respect to the rights and interests of the Holder of this Debenture
to the end that the provisions hereof (including, without limitation, provisions
for adjustment of the Conversion Price and of the number of shares issuable upon
conversion of the Debenture) shall thereafter be applicable, as nearly as may be
practicable in relation to any securities or assets thereafter  deliverable upon
the conversion hereof.  The Borrower shall not effect any transaction  described
in this Section  1.6(b)  unless (a) it first gives,  to the extent  practicable,
thirty (30) days prior  written  notice (but in any event at least  fifteen (15)
days  prior  written  notice)  of the  record  date of the  special  meeting  of
stockholders  to approve,  or if there is no such record date, the  consummation
of,  such   merger,   consolidation,   exchange  of  shares,   recapitalization,
reorganization  or other similar event or sale of assets  (during which time the
Holder  shall be  entitled  to convert  this  Debenture)  and (b) the  resulting
successor  or  acquiring  entity  (if  not  the  Borrower)  assumes  by  written
instrument the obligations of this Section 1.6(b).  The above  provisions  shall
similarly apply to successive consolidations, mergers, sales, transfers or share
exchanges.

                  (c)  Adjustment  Due to  Distribution.  If the Borrower  shall
declare or make any distribution of its assets (or rights to acquire its assets)
to holders of Common Stock as a dividend, stock repurchase,  by way of return of
capital or otherwise  (including any dividend or  distribution to the Borrower's
stockholders in cash or shares (or rights to acquire shares) of capital stock of
a subsidiary  (i.e.,  a spin-off)) (a  "Distribution"),  then the Holder of this
Debenture  shall be entitled,  upon any conversion of this  Debenture  after the
date of record for determining  stockholders  entitled to such Distribution,  to
receive  the amount of such assets  which would have been  payable to the Holder
with respect to the shares of Common Stock  issuable  upon such  conversion  had
such Holder  been the holder of such  shares of Common  Stock on the record date
for the determination of stockholders entitled to such Distribution.

                  (d) Adjustment Due to Dilutive Issuance. If the Company or any
subsidiary thereof, as applicable, at any time while Debentures are outstanding,
shall  offer,  sell,  grant any option to purchase  or offer,  sell or grant any
right to reprice its securities,  or otherwise  dispose of or issue (or announce
any offer,  sale,  grant or any option to  purchase  or other  disposition)  any
Common  Stock or any  equity  or equity  equivalent  securities  (including  any
equity,  debt or  other  instrument  that is at any time  over the life  thereof

                                       10
<PAGE>

convertible into or exchangeable for Common Stock) (collectively,  "Common Stock
Equivalents") entitling any person to acquire shares of Common Stock, at a price
per share less than the  Conversion  Price (if the holder of the Common Stock or
Common Stock  Equivalent  so issued  shall at any time,  whether by operation of
purchase price adjustments, reset provisions,  floating conversion,  exercise or
exchange  prices or otherwise,  or due to warrants,  options or rights per share
which is issued in connection with such issuance,  be entitled to receive shares
of Common  Stock at a price per share which is less than the  Conversion  Price,
such  issuance  shall be deemed to have  occurred  for less than the  Conversion
Price),  then,  the Conversion  Price shall be adjusted for such  conversions as
Holders  shall  indicate  in its  Conversion  Notices  to equal the  conversion,
exchange or purchase  price for such Common  Stock or Common  Stock  Equivalents
(including any reset provisions thereof) at issue. Such adjustment shall be made
whenever such Common Stock or Common Stock  Equivalents are issued.  The Company
shall notify the Holder in writing, no later than the business day following the
issuance of any Common Stock or Common Stock Equivalent subject to this section,
indicating therein the applicable  issuance price, or of applicable reset price,
exchange price, conversion price and other pricing terms.

                  (e) Purchase  Rights.  If, at any time when any Debentures are
issued and outstanding, the Borrower issues any convertible securities or rights
to  purchase  stock,  warrants,  securities  or other  property  (the  "Purchase
Rights") pro rata to the record  holders of any class of Common Stock,  then the
Holder of this Debenture will be entitled to acquire,  upon the terms applicable
to such Purchase Rights,  the aggregate  Purchase Rights which such Holder could
have  acquired  if such  Holder  had held the  number of shares of Common  Stock
acquirable  upon complete  conversion of this Debenture  (without  regard to any
limitations on conversion contained herein) immediately before the date on which
a record is taken for the grant, issuance or sale of such Purchase Rights or, if
no such record is taken, the date as of which the record holders of Common Stock
are to be determined for the grant, issue or sale of such Purchase Rights.

                  (f)  Notice  of  Adjustments.  Upon  the  occurrence  of  each
adjustment or  readjustment  of the  Conversion  Price as a result of the events
described  in this Section 1.6, the  Borrower,  at its expense,  shall  promptly
compute such adjustment or readjustment and prepare and furnish to the Holder of
a certificate  setting  forth such  adjustment  or  readjustment  and showing in
detail the facts  upon  which such  adjustment  or  readjustment  is based.  The
Borrower shall,  upon the written request at any time of the Holder,  furnish to
such  Holder  a  like   certificate   setting  forth  (i)  such   adjustment  or
readjustment,  (ii) the  Conversion  Price at the time in  effect  and (iii) the
number of shares of Common Stock and the amount,  if any, of other securities or
property which at the time would be received upon conversion of the Debenture.

         1.7 Status as Stockholder. Upon submission of a Notice of Conversion by
a Holder,  (i) the shares covered thereby (other than the shares,  if any, which
cannot be issued  because their  issuance  would exceed such Holder's  allocated
portion  of the  Reserved  Amount  or  Maximum  Share  Amount)  shall be  deemed
converted  into shares of Common Stock and (ii) the Holder's  rights as a Holder
of such converted portion of this Debenture shall cease and terminate, excepting
only the right to receive  certificates  for such shares of Common  Stock and to

                                       11
<PAGE>

any remedies provided herein or otherwise  available at law or in equity to such
Holder  because of a failure by the  Borrower  to comply  with the terms of this
Debenture.   Notwithstanding  the  foregoing,  if  a  Holder  has  not  received
certificates  for all shares of Common Stock prior to the tenth (10th)  business
day after the  expiration  of the Deadline  with respect to a conversion  of any
portion of this  Debenture  for any reason,  then  (unless the Holder  otherwise
elects to retain  its  status as a holder of Common  Stock by so  notifying  the
Borrower) the Holder shall regain the rights of a Holder of this  Debenture with
respect to such  unconverted  portions of this Debenture and the Borrower shall,
as soon as practicable,  return such unconverted  Debenture to the Holder or, if
the Debenture has not been surrendered,  adjust its records to reflect that such
portion of this Debenture has not been converted. In all cases, the Holder shall
retain all of its rights and remedies  (including,  without limitation,  (i) the
right to receive  Conversion  Default  Payments  pursuant  to Section 1.3 to the
extent  required  thereby  for  such  Conversion   Default  and  any  subsequent
Conversion  Default and (ii) the right to have the Conversion Price with respect
to subsequent  conversions  determined  in accordance  with Section 1.3) for the
Borrower's failure to convert this Debenture.

                         ARTICLE II. CERTAIN COVENANTS

         2.1  Distributions on Capital Stock. So long as the Borrower shall have
any obligation under this Debenture, the Borrower shall not without the Holder's
written consent (a) pay, declare or set apart for such payment,  any dividend or
other distribution  (whether in cash, property or other securities) on shares of
capital stock other than  dividends on shares of Common Stock solely in the form
of  additional  shares of Common Stock or (b) directly or  indirectly or through
any subsidiary  make any other payment or distribution in respect of its capital
stock except for distributions  pursuant to any shareholders'  rights plan which
is approved by a majority of the Borrower's disinterested directors.

         2.2  Restriction  on Stock  Repurchases.  So long as the Borrower shall
have any  obligation  under this  Debenture,  the Borrower shall not without the
Holder's  written consent redeem,  repurchase or otherwise  acquire (whether for
cash or in exchange for property or other  securities  or  otherwise) in any one
transaction or series of related transactions any shares of capital stock of the
Borrower  or any  warrants,  rights or options to  purchase  or acquire any such
shares.

         2.3 Borrowings. So long as the Borrower shall have any obligation under
this Debenture,  the Borrower shall not,  without the Holder's  written consent,
create,  incur,  assume or suffer to exist any  liability  for  borrowed  money,
except (a)  borrowings in existence or committed on the date hereof and of which
the  Borrower  has  informed  Holder in writing  prior to the date  hereof,  (b)
indebtedness  to trade  creditors  or  financial  institutions  incurred  in the
ordinary  course of business or (c)  borrowings,  the proceeds of which shall be
used to repay this Debenture.

         2.4 Sale of Assets.  So long as the Borrower  shall have any obligation
under this  Debenture,  the Borrower  shall not,  without the  Holder's  written
consent,  sell,  lease or otherwise  dispose of any  significant  portion of its
assets outside the ordinary  course of business.  Any consent to the disposition
of any  assets  may be  conditioned  on a  specified  use  of  the  proceeds  of
disposition.

                                       12
<PAGE>

         2.5  Advances  and  Loans.  So  long as the  Borrower  shall  have  any
obligation  under this Debenture,  the Borrower shall not,  without the Holder's
written consent,  lend money, give credit or make advances to any person,  firm,
joint  venture  or  corporation,   including,   without  limitation,   officers,
directors, employees, subsidiaries and affiliates of the Borrower, except loans,
credits or advances  (a) in  existence or committed on the date hereof and which
the Borrower has informed  Holder in writing prior to the date hereof,  (b) made
in the ordinary course of business or (c) not in excess of $25,000.

         2.6  Contingent  Liabilities.  So long as the  Borrower  shall have any
obligation  under this Debenture,  the Borrower shall not,  without the Holder's
written consent, assume, guarantee,  endorse,  contingently agree to purchase or
otherwise  become liable upon the obligation of any person,  firm,  partnership,
joint  venture  or   corporation,   except  by  the  endorsement  of  negotiable
instruments  for  deposit  or  collection  and except  assumptions,  guarantees,
endorsements and  contingencies (a) in existence or committed on the date hereof
and which the Borrower has informed  Holder in writing prior to the date hereof,
and (b) similar transactions in the ordinary course of business.

                         ARTICLE III. EVENTS OF DEFAULT

         If any of the following events of default (each, an "Event of Default")
shall occur:

         3.1 Failure to Pay Principal or Interest. The Borrower fails to pay the
principal  hereof or interest  thereon  when due on this  Debenture,  whether at
maturity, upon acceleration or otherwise.

         3.2  Conversion  and the Shares.  The Borrower fails to issue shares of
Common Stock to the Holder (or announces or threatens that it will not honor its
obligation to do so) upon exercise by the Holder of the conversion rights of the
Holder in accordance  with the terms of this Debenture (for a period of at least
seven  (7) days,  if such  failure  is  solely as a result of the  circumstances
governed by Section 1.3 and the  Borrower is using its best efforts to authorize
a sufficient number of shares of Common Stock as soon as practicable),  fails to
transfer  or  cause  its  transfer  agent  to  transfer  (electronically  or  in
certificated  form) any  certificate  for shares of Common  Stock  issued to the
Holder upon  conversion of or otherwise  pursuant to this  Debenture as and when
required by this Debenture or the  Registration  Rights  Agreement,  or fails to
remove any restrictive legend (or to withdraw any stop transfer  instructions in
respect thereof) on any certificate for any shares of Common Stock issued to the
Holder upon  conversion of or otherwise  pursuant to this  Debenture as and when
required by this Debenture or the  Registration  Rights  Agreement (or makes any
announcement,  statement  or  threat  that it  does  not  intend  to  honor  the
obligations  described in this  paragraph)  and any such failure shall  continue
uncured (or any  announcement,  statement or threat not to honor its obligations
shall not be rescinded  in writing)  for five (5) days after the Borrower  shall
have been notified thereof in writing by the Holder.

                                       13
<PAGE>

         3.3 Failure to Timely File  Registration  or Effect  Registration.  The
Borrower fails to file the Registration  Statement on or before October 5, 2003,
or obtain  effectiveness  with the  Securities  and Exchange  Commission  of the
Registration  Statement  on or before  January  3,  2004,  or such  Registration
Statement  lapses  in effect  (or  sales  cannot  otherwise  be made  thereunder
effective,  whether by reason of the  Borrower's  failure to amend or supplement
the  prospectus  included  therein in accordance  with the  Registration  Rights
Agreement or otherwise) for more than twenty (20) consecutive days or forty (40)
days in any  twelve  month  period  after  the  Registration  Statement  becomes
effective;

         3.4 Breach of Covenants. The Borrower breaches any material covenant or
other  material  term or  condition  contained  in  Sections  1.3 or 1.6 of this
Debenture,  Sections  4(c),  4(e),  4(h),  4(i),  4(j),  4(l),  4(m) or 5 of the
Purchase  Agreement or Section 2 of the  Registration  Rights Agreement and such
breach  continues for a period of five (5) days after written  notice thereof to
the Borrower from the Holder;

         3.5 Failure to Pay Standard Liquidated Damages and/or other amounts due
under Transaction  Documents.  The Borrower fails to pay any Standard Liquidated
Damages due under the  Securities  Purchase  Agreement or any other  amounts due
under the  Transaction  Documents  within  five (5) days  after  written  notice
thereof to the Borrower from the Holder.

         3.6  Failure to remove  legend  from  shares  upon valid 144 sale.  The
Borrower  fails to instruct its transfer agent to remove any legends from shares
of Common  Stock  eligible to be sold under Rule 144 of the  Securities  Act and
issue such unlegended  certificates to the Holder within three (3) business days
of the  Holder's  request  so long  as the  Holder  has  provided  the  standard
representations regarding the Rule 144 sale.

         3.7 Breach of  Representations  and Warranties.  Any  representation or
warranty  of  the  Borrower  made  herein  or in  any  agreement,  statement  or
certificate  given  in  writing  pursuant  hereto  or  in  connection   herewith
(including,  without  limitation,  the Purchase  Agreement and the  Registration
Rights  Agreement),  shall be false or misleading  in any material  respect when
made and the  breach of which  has (or with the  passage  of time  will  have) a
material  adverse  effect  on the  rights of the  Holder  with  respect  to this
Debenture, the Purchase Agreement or the Registration Rights Agreement;

         3.8 Receiver or Trustee. The Borrower or any subsidiary of the Borrower
shall make an assignment  for the benefit of creditors,  or apply for or consent
to the appointment of a receiver or trustee for it or for a substantial  part of
its  property or  business,  or such a receiver or trustee  shall  otherwise  be
appointed;

         3.9 Judgments.  Any money  judgment,  writ or similar  process shall be
entered or filed  against the Borrower or any  subsidiary of the Borrower or any
of its  property  or other  assets  for more  than  $50,000,  and  shall  remain
unvacated,  unbonded  or  unstayed  for a period  of  twenty  (20)  days  unless
otherwise  consented to by the Holder,  which  consent will not be  unreasonably
withheld;

                                       14
<PAGE>

         3.10 Bankruptcy. Bankruptcy, insolvency,  reorganization or liquidation
proceedings or other  proceedings for relief under any bankruptcy law or any law
for the relief of debtors  shall be instituted by or against the Borrower or any
subsidiary of the Borrower;

         3.11 Delisting of Common Stock. The Borrower shall fail to maintain the
listing of the Common  Stock on at least one of the OTCBB,  the Nasdaq  National
Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the American
Stock Exchange;

         3.12 Failure to File the  Certificate of Amendment.  The Borrower shall
fail to file the Certificate of Amendment according to the timeline as set forth
in  Section  4(l) of the  Securities  Purchase  Agreement  or at any time  after
September 30, 2003 fail to have sufficient  shares reserved  pursuant to Section
3(c) of the Securities Purchase Agreement.

         3.13 Default Under Other  Debentures.  An Event of Default has occurred
and is  continuing  under any of the other  Debentures  issued  pursuant  to the
Purchase Agreement or any other stock purchase agreement,

then,  upon the occurrence and during the  continuation  of any Event of Default
specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 3.9, 3.11, 3.12, or 3.13
at the option of the Holders of a majority of the aggregate  principal amount of
the outstanding Debentures issued pursuant to the Purchase Agreement exercisable
through the  delivery of written  notice to the  Borrower by such  Holders  (the
"Default  Notice"),  and upon the occurrence of an Event of Default specified in
Section 3.6 or 3.8, the Debentures shall become  immediately due and payable and
the Borrower shall pay to the Holder,  in full  satisfaction  of its obligations
hereunder,  an amount  equal to the greater of (i) 135% times the sum of (w) the
then outstanding  principal amount of this Debenture plus (x) accrued and unpaid
interest on the unpaid principal amount of this Debenture to the date of payment
(the  "Mandatory  Prepayment  Date") plus (y) Default  Interest,  if any, on the
amounts  referred to in clauses (w) and/or (x) plus (z) any amounts  owed to the
Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section 2(c) of
the Registration Rights Agreement (the then outstanding principal amount of this
Debenture  to the date of payment  plus the amounts  referred to in clauses (x),
(y) and (z)  shall  collectively  be  known  as the  "Default  Sum") or (ii) the
"parity  value" of the Default Sum to be prepaid,  where  parity value means (a)
the highest  number of shares of Common Stock  issuable  upon  conversion  of or
otherwise  pursuant to such Default Sum in  accordance  with Article I, treating
the Trading Day  immediately  preceding  the  Mandatory  Prepayment  Date as the
"Conversion Date" for purposes of determining the lowest  applicable  Conversion
Price,  unless the Default  Event arises as a result of a breach in respect of a
specific  Conversion  Date in  which  case  such  Conversion  Date  shall be the
Conversion  Date),  multiplied  by (b) the highest  Closing Price for the Common
Stock during the period  beginning on the date of first  occurrence of the Event
of  Default  and  ending  one day prior to the  Mandatory  Prepayment  Date (the
"Default  Amount") and all other amounts  payable  hereunder  shall  immediately
become due and payable, all without demand,  presentment or notice, all of which
hereby  are  expressly  waived,  together  with all  costs,  including,  without
limitation,  legal fees and  expenses,  of  collection,  and the Holder shall be
entitled  to  exercise  all other  rights and  remedies  available  at law or in
equity. If the Borrower fails to pay the Default Amount within five (5) business
days of written  notice  that such  amount is due and  payable,  then the Holder
shall  have the right at any time,  so long as the  Borrower  remains in default
(and so long and to the extent that there are sufficient  authorized shares), to
require the Borrower,  upon written notice, to immediately issue, in lieu of the
Default  Amount,  the number of shares of Common Stock of the Borrower  equal to
the Default Amount divided by the Conversion Price then in effect.

                                       15
<PAGE>

                           ARTICLE IV. MISCELLANEOUS

         4.1 Failure or Indulgence  Not Waiver.  No failure or delay on the part
of the Holder in the exercise of any power,  right or privilege  hereunder shall
operate as a waiver  thereof,  nor shall any single or partial  exercise  of any
such power,  right or privilege preclude other or further exercise thereof or of
any other right, power or privileges. All rights and remedies existing hereunder
are  cumulative  to, and not  exclusive  of, any  rights or  remedies  otherwise
available.

         4.2 Notices.  Any notice herein required or permitted to be given shall
be in writing and may be  personally  served or  delivered by courier or sent by
United  States  mail and  shall be deemed to have been  given  upon  receipt  if
personally served (which shall include telephone line facsimile transmission) or
sent by courier or three (3) days after  being  deposited  in the United  States
mail, certified,  with postage pre-paid and properly addressed, if sent by mail.
For the  purposes  hereof,  the  address of the Holder  shall be as shown on the
records of the Borrower;  and the address of the Borrower shall be 3450 Hillview
Avenue, Palo Alto, California 94304,  facsimile number:  650-855-0222.  Both the
Holder and the Borrower may change the address for service by service of written
notice to the other as herein provided.

         4.3  Amendments.  This  Debenture and any provision  hereof may only be
amended by an instrument in writing  signed by the Borrower and the Holder.  The
term "Debenture" and all reference thereto,  as used throughout this instrument,
shall mean this  instrument  (and the other  Debentures  issued  pursuant to the
Purchase Agreement) as originally executed, or if later amended or supplemented,
then as so amended or supplemented.

         4.4  Assignability.  This Debenture  shall be binding upon the Borrower
and its successors and assigns,  and shall inure to be the benefit of the Holder
and its  successors  and assigns.  Each  transferee of this Debenture must be an
"accredited   investor"   (as   defined  in  Rule   501(a)  of  the  1933  Act).
Notwithstanding  anything in this Debenture to the contrary,  this Debenture may
be pledged as collateral in connection  with a bona fide margin account or other
lending arrangement.

         4.5 Cost of  Collection.  If  default  is made in the  payment  of this
Debenture,  the  Borrower  shall  pay the  Holder  hereof  costs of  collection,
including reasonable attorneys' fees.

         4.6 Governing  Law. THIS AGREEMENT  SHALL BE ENFORCED,  GOVERNED BY AND
CONSTRUED IN ACCORDANCE  WITH THE LAWS OF THE STATE OF NEW YORK,  WITHOUT REGARD
TO THE  PRINCIPLES OF CONFLICT OF LAWS.  THE PARTIES HERETO HEREBY SUBMIT TO THE
EXCLUSIVE  JURISDICTION  OF THE STATE COURTS OR THE UNITED STATES FEDERAL COURTS
LOCATED IN NEW YORK WITH RESPECT TO ANY DISPUTE  ARISING  UNDER THIS  AGREEMENT,
THE  AGREEMENTS  ENTERED  INTO  IN  CONNECTION   HEREWITH  OR  THE  TRANSACTIONS

                                       16
<PAGE>

CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN
INCONVENIENT  FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING.  BOTH PARTIES
FURTHER  AGREE THAT  SERVICE OF PROCESS  UPON A PARTY MAILED BY FIRST CLASS MAIL
SHALL BE DEEMED IN EVERY RESPECT  EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN
ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO
SERVE  PROCESS IN ANY OTHER MANNER  PERMITTED BY LAW.  BOTH PARTIES AGREE THAT A
FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE
AND MAY BE ENFORCED IN OTHER  JURISDICTIONS  BY SUIT ON SUCH  JUDGMENT OR IN ANY
OTHER  LAWFUL  MANNER.  THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE  ARISING
UNDER THIS AGREEMENT SHALL BE RESPONSIBLE  FOR ALL FEES AND EXPENSES,  INCLUDING
ATTORNEYS'  FEES,  INCURRED  BY THE  PREVAILING  PARTY IN  CONNECTION  WITH SUCH
DISPUTE.

         4.7 Certain Amounts.  Whenever  pursuant to this Debenture the Borrower
is required to pay an amount in excess of the outstanding  principal  amount (or
the portion  thereof  required to be paid at that time) plus  accrued and unpaid
interest  plus Default  Interest on such  interest,  the Borrower and the Holder
agree that the actual  damages to the Holder from the receipt of cash payment on
this Debenture may be difficult to determine and the amount to be so paid by the
Borrower  represents  stipulated  damages  and not a penalty  and is intended to
compensate  the  Holder  in part for loss of the  opportunity  to  convert  this
Debenture and to earn a return from the sale of shares of Common Stock  acquired
upon  conversion  of this  Debenture  at a price in excess of the price paid for
such shares pursuant to this Debenture. The Borrower and the Holder hereby agree
that such amount of stipulated  damages is not plainly  disproportionate  to the
possible  loss to the Holder  from the  receipt of a cash  payment  without  the
opportunity to convert this Debenture into shares of Common Stock.

         4.8  Allocations  of Maximum  Share  Amount and  Reserved  Amount.  The
Maximum  Share Amount and Reserved  Amount shall be allocated pro rata among the
Holders of Debentures based on the principal amount of such Debentures issued to
each Holder. Each increase to the Maximum Share Amount and Reserved Amount shall
be allocated  pro rata among the Holders of  Debentures  based on the  principal
amount of such Debentures held by each Holder at the time of the increase in the
Maximum  Share  Amount or Reserved  Amount.  In the event a Holder shall sell or
otherwise  transfer any of such Holder's  Debentures,  each transferee  shall be
allocated  a pro rata  portion of such  transferor's  Maximum  Share  Amount and
Reserved  Amount.  Any portion of the Maximum  Share  Amount or Reserved  Amount
which  remains  allocated  to any  person  or  entity  which  does  not hold any
Debentures shall be allocated to the remaining  Holders of Debentures,  pro rata
based on the principal amount of such Debentures then held by such Holders.

         4.9 Damages Shares.  The shares of Common Stock that may be issuable to
the Holder  pursuant to Sections  1.3 and 1.4(g)  hereof and pursuant to Section
2(c) of the Registration Rights Agreement ("Damages Shares") shall be treated as
Common Stock issuable upon  conversion of this Debenture for all purposes hereof
and shall be subject to all of the limitations and afforded all of the rights of
the  other  shares  of  Common  Stock  issuable  hereunder,   including  without
limitation,  the  right  to be  included  in the  Registration  Statement  filed
pursuant to the  Registration  Rights  Agreement.  For  purposes of  calculating
interest payable on the outstanding principal amount hereof, except as otherwise
provided herein,  amounts  convertible  into Damages Shares ("Damages  Amounts")
shall not bear  interest but must be converted  prior to the  conversion  of any
outstanding  principal amount hereof,  until the outstanding  Damages Amounts is
zero.

                                       17
<PAGE>

         4.10  Denominations.  At the request of the Holder,  upon  surrender of
this  Debenture,  the  Borrower  shall  promptly  issue  new  Debentures  in the
aggregate  outstanding  principal  amount  hereof,  in the form hereof,  in such
denominations of at least $50,000 as the Holder shall request,  or in the amount
of the balance of the Debenture.

         4.11 Purchase  Agreement.  By its  acceptance of this  Debenture,  each
Holder agrees to be bound by the applicable terms of the Purchase Agreement.

         4.12 Notice of Corporate  Events.  Except as otherwise  provided below,
the Holder of this  Debenture  shall have no rights as a Holder of Common  Stock
unless and only to the extent that it converts this Debenture into Common Stock.
The Borrower shall provide the Holder with prior  notification of any meeting of
the Borrower's stockholders (and copies of proxy materials and other information
sent to stockholders). In the event of any taking by the Borrower of a record of
its stockholders for the purpose of determining stockholders who are entitled to
receive  payment of any dividend or other  distribution,  any right to subscribe
for, purchase or otherwise acquire  (including by way of merger,  consolidation,
reclassification  or  recapitalization)  any  share of any  class  or any  other
securities  or property,  or to receive any other  right,  or for the purpose of
determining  stockholders  who  are  entitled  to vote in  connection  with  any
proposed sale, lease or conveyance of all or substantially  all of the assets of
the  Borrower  or any  proposed  liquidation,  dissolution  or winding up of the
Borrower,  the Borrower shall mail a notice to the Holder,  at least twenty (20)
days prior to the record  date  specified  therein (or thirty (30) days prior to
the consummation of the transaction or event, whichever is earlier), of the date
on which  any such  record  is to be taken  for the  purpose  of such  dividend,
distribution,  right or other event, and a brief statement  regarding the amount
and character of such dividend, distribution, right or other event to the extent
known at such time. The Borrower shall make a public  announcement  of any event
requiring notification to the Holder hereunder substantially simultaneously with
the  notification  to the Holder in  accordance  with the terms of this  Section
4.12.

         4.13  Remedies.  The Borrower  acknowledges  that a breach by it of its
obligations  hereunder will cause  irreparable harm to the Holder,  by vitiating
the intent and purpose of the transaction contemplated hereby. Accordingly,  the
Borrower  acknowledges  that the  remedy at law for a breach of its  obligations
under this Debenture will be inadequate and agrees,  in the event of a breach or
threatened breach by the Borrower of the provisions of this Debenture,  that the
Holder shall be entitled,  in addition to all other available remedies at law or
in equity, and in addition to the penalties  assessable herein, to an injunction
or  injunctions  restraining,  preventing or curing any breach of this Debenture
and to  enforce  specifically  the terms and  provisions  thereof,  without  the
necessity of showing  economic loss and without any bond or other security being
required.

                                       18
<PAGE>

                         ARTICLE V. OPTIONAL PREPAYMENT

         5.1  Optional  Prepayment.  Notwithstanding  anything  to the  contrary
contained  in this  Article  V, for not more than  sixty (60) days from the date
hereof,  so long as (i) no Event of Default or Trading Market  Prepayment  Event
shall have  occurred and be  continuing,  and (ii) the Borrower has a sufficient
number of  authorized  shares of Common Stock  reserved  for issuance  upon full
conversion  of the  Debentures,  then at any time  after  the  Issue  Date,  the
Borrower  shall have the right,  exercisable  on not less than ten (10)  Trading
Days prior written notice to the Holders of the Debentures (which notice may not
be sent to the Holders of the  Debentures  until the  Borrower is  permitted  to
prepay  the  Debentures  pursuant  to this  Section  5.1),  to prepay all of the
outstanding  Debentures  in  accordance  with this  Section  5.1.  Any notice of
prepayment  hereunder  (an  "Optional  Prepayment")  shall be  delivered  to the
Holders of the Debentures at their registered  addresses  appearing on the books
and records of the Borrower and shall state (1) that the Borrower is  exercising
its right to prepay all of the  Debentures  issued on the Issue Date and (2) the
date of prepayment  (the "Optional  Prepayment  Notice").  On the date fixed for
prepayment (the "Optional  Prepayment Date"), the Borrower shall make payment of
the Optional  Prepayment  Amount (as defined  below) to or upon the order of the
Holders as  specified by the Holders in writing to the Borrower at least one (1)
business day prior to the Optional  Prepayment  Date. If the Borrower  exercises
its right to prepay the  Debentures,  the  Borrower  shall  make  payment to the
holders of an amount in cash (the "Optional  Prepayment  Amount") equal to 130%,
for the first 60 days from the date hereof and 150%  thereafter,  multiplied  by
the sum of (w) the then outstanding  principal amount of this Debenture plus (x)
accrued and unpaid interest on the unpaid  principal amount of this Debenture to
the Optional  Prepayment Date plus (y) Default Interest,  if any, on the amounts
referred  to in  clauses  (w) and (x) plus (z) any  amounts  owed to the  Holder
pursuant to Sections  1.3 and 1.4(g)  hereof or pursuant to Section  2(c) of the
Registration  Rights  Agreement (the then  outstanding  principal amount of this
Debenture  to the date of payment  plus the amounts  referred to in clauses (x),
(y) and (z)  shall  collectively  be known as the  "Optional  Prepayment  Sum").
Notwithstanding notice of an Optional Prepayment, the Holders shall at all times
prior to the Optional  Prepayment  Date maintain the right to convert all or any
portion  of the  Debentures  in  accordance  with  Article I and any  portion of
Debentures so converted after receipt of an Optional Prepayment Notice and prior
to the  Optional  Prepayment  Date set forth in such  notice and  payment of the
aggregate Optional Prepayment Amount shall be deducted from the principal amount
of Debentures which are otherwise subject to prepayment pursuant to such notice.
If the  Borrower  delivers  an Optional  Prepayment  Notice and fails to pay the
Optional  Prepayment  Amount due to the Holders of the Debentures within two (2)
business days following the Optional Prepayment Date, the Borrower shall forever
forfeit its right to redeem the Debentures pursuant to this Section 5.1.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       19
<PAGE>

         IN WITNESS WHEREOF,  Borrower has caused this Debenture to be signed in
its name by its duly authorized officer this 12 day of September, 2003.

                                    AMNIS SYSTEMS INC.

                                    By:    ______________________________
                                           Scott Mac Caughern
                                           Chairman and Chief Executive Officer

                                       20
<PAGE>

                                                                    EXHIBIT A

                              NOTICE OF CONVERSION
                    (To be Executed by the Registered Holder
                       in order to Convert the Debentures)

                  The   undersigned   hereby   irrevocably   elects  to  convert
$________principal amount of the Debenture (defined below) into shares of common
stock,  par value $.0001 per share  ("Common  Stock"),  of Amnis Systems Inc., a
Delaware  corporation  (the  "Borrower")  according  to  the  conditions  of the
convertible  debentures  of the  Borrower  dated as of  September__,  2003  (the
"Debentures"),  as of the date written below.  If securities 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.  No fee will be charged to the Holder for any  conversion,  except
for transfer  taxes,  if any. A copy of each  Debenture  is attached  hereto (or
evidence of loss, theft or destruction thereof).

                  The Borrower  shall  electronically  transmit the Common Stock
issuable pursuant to this Notice of Conversion to the account of the undersigned
or its nominee with DTC through its Deposit Withdrawal Agent Commission system (
"DWAC Transfer").

              Name of DTC Prime Broker:
              Account Number:

                  In lieu of receiving shares of Common Stock issuable  pursuant
to this Notice of Conversion by way of a DWAC Transfer,  the undersigned  hereby
requests that the Borrower issue a certificate or certificates for the number of
shares of Common Stock set forth below (which  numbers are based on the Holder's
calculation  attached hereto) in the name(s) specified  immediately below or, if
additional space is necessary, on an attachment hereto:

              Name:
              Address:

                  The  undersigned  represents  and warrants that all offers and
sales by the  undersigned of the  securities  issuable to the  undersigned  upon
conversion  of the  Debentures  shall be made  pursuant to  registration  of the
securities under the Securities Act of 1933, as amended (the "Act"), or pursuant
to an exemption from registration under the Act.

                    Date of Conversion:___________________________
                    Applicable Conversion Price:____________________
                    Number of Shares of Common Stock to be Issued Pursuant to
                    Conversion of the Debentures:______________
                    Signature:___________________________________
                    Name:______________________________________
                    Address:____________________________________

                  The Borrower shall issue and deliver shares of Common Stock to
an overnight courier not later than three business days following receipt of the
original  Debenture(s) to be converted,  and shall make payments pursuant to the
Debentures for the number of business days such issuance and delivery is late.

                                      A-1

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