Document:

Exhibit 4.3

 

NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH
THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR RULE 144 UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION
NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN
ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH
SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. 
THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN
SECURED BY SUCH SECURITIES.

 

COMMON STOCK PURCHASE WARRANT

 

ETELOS, INCORPORATED

 

Warrant Shares:                           
                                                                               Initial
Exercise Date: April 22, 2008

 

THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”)
certifies that, for value received,
                   
(the “Holder”) is entitled, upon the terms and subject to the limitations
on exercise and the conditions hereinafter set forth, at any time on or after
the date hereof (the “Initial Exercise Date”) and on or prior to the
close of business on the 3 year anniversary of the Initial Exercise Date (the “Termination
Date”) but not thereafter, to subscribe for and purchase from Etelos,
Incorporated, a Washington corporation (the “Company”), up to
             shares
(the “Warrant Shares”) of Common Stock. 
The purchase price of one share of Common Stock under this Warrant shall
be equal to the Exercise Price, as defined in Section 2(b).

 

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

 

Section 2.               Exercise.

 

a)             Exercise of
Warrant.  Exercise of the purchase
rights represented by this Warrant may be made, in whole or in part, at any
time or times on or after the Initial Exercise Date and on or before the
Termination Date by delivery to the Company of a duly executed facsimile copy
of the Notice of Exercise Form annexed hereto (or such other office or
agency of the Company as it may designate by notice in writing to the
registered Holder at the address of the Holder appearing on the books of the
Company); 

 

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

 

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

 

c)             Cashless Exercise.  If at any time after the earlier of (i) the
one year anniversary of the date of the Purchase Agreement and (ii) the
completion of the then-applicable holding period required by Rule 144, or
any successor provision then in effect, there is no effective Registration
Statement registering, or no current prospectus available for, the resale of
the Warrant Shares by the Holder, then this Warrant may also be exercised at
such time by means of a “cashless exercise” in which the Holder shall be
entitled to receive a certificate for the number of Warrant Shares equal to the
quotient obtained by dividing [(A-B) (X)] by (A), where:

 

(A) = the VWAP on the Trading Day immediately
preceding the date of such election;

 

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

 

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

 

Notwithstanding anything herein to the contrary, on
the Termination Date, this Warrant shall be automatically exercised via
cashless exercise pursuant to this Section 2(c).

 

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d)            Exercise
Limitations.  The Company shall not
effect any exercise of this Warrant, and a Holder shall not have the right to
exercise any portion of this Warrant, pursuant to Section 2 or otherwise,
to the extent that after giving effect to such issuance after exercise as set
forth on the applicable Notice of Exercise, the Holder (together with the
Holder’s Affiliates, and any other person or entity acting as a group together
with the Holder or any of the Holder’s Affiliates), would beneficially own in
excess of the Beneficial Ownership Limitation (as defined below).  For
purposes of the foregoing sentence, the number of shares of Common Stock
beneficially owned by the Holder and its Affiliates shall include the number of
shares of Common Stock issuable upon exercise of this Warrant with respect to
which such determination is being made, but shall exclude the number of shares
of Common Stock which would be issuable upon (A) exercise of the
remaining, nonexercised portion of this Warrant beneficially owned by the
Holder or any of its Affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any other 
Common Stock Equivalents) subject to a limitation on conversion or
exercise analogous to the limitation contained herein beneficially owned by the
Holder or any of its affiliates.  Except as set forth in the preceding
sentence, for purposes of this Section 2(d), beneficial ownership shall be
calculated in accordance with Section 13(d) of the Exchange Act and
the rules and regulations promulgated thereunder, it being acknowledged by
the Holder that the Company is not representing to the Holder that such
calculation is in compliance with Section 13(d) of the Exchange Act
and the Holder is solely responsible for any schedules required to be filed in
accordance therewith.   To the extent
that the limitation contained in this Section 2(d) applies, the
determination of whether this Warrant is exercisable (in relation to other
securities owned by the Holder together with any Affiliates) and of which
portion of this Warrant is exercisable shall be in the sole discretion of the
Holder, and the submission of a Notice of Exercise shall be deemed to be the
Holder’s determination of whether this Warrant is exercisable (in relation to
other securities owned by the Holder together with any Affiliates) and of which
portion of this Warrant is exercisable, in each case subject to the Beneficial
Ownership Limitation, and the Company shall have no obligation to verify or
confirm the accuracy of such determination.  
In addition, a determination as to any group status as contemplated
above shall be determined in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder.  For purposes of this Section 2(d), in
determining the number of outstanding shares of Common Stock, a Holder may rely
on the number of outstanding shares of Common Stock as reflected in (x) the
Company’s most recent periodic or annual report, as the case may be, (y) a
more recent public announcement by the Company or (z) any other notice by
the Company or the Company’s Transfer Agent setting forth the number of shares
of Common Stock outstanding.  Upon the written or oral request of a
Holder, the Company shall within two Trading Days confirm orally and in writing
to the Holder the number of shares of Common Stock then outstanding.  In
any case, the number of outstanding shares of Common Stock shall be determined
after giving effect to the conversion or exercise of securities of the Company,
including this Warrant, by the Holder or its Affiliates since the date as of
which such number of outstanding shares of Common Stock was reported.  The “Beneficial Ownership Limitation”
shall be 4.99% of the number of shares of the Common Stock outstanding
immediately after giving effect to the issuance of shares of 

 

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Common Stock issuable
upon exercise of this Warrant.  The
Holder, upon not less than 61 days’ prior notice to the Company, may increase
or decrease the Beneficial Ownership Limitation provisions of this Section 2(d),
provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of
the number of shares of the Common Stock outstanding immediately after giving
effect to the issuance of shares of Common Stock upon exercise of this Warrant
held by the Holder and the provisions of this Section 2(d) shall
continue to apply.  Any such increase or decrease will not be effective until the 61st day after such notice is
delivered to the Company.  The
provisions of this paragraph shall be construed and implemented in a manner
otherwise than in strict conformity with the terms of this Section 2(d) to
correct this paragraph (or any portion hereof) which may be defective or
inconsistent with the intended Beneficial Ownership Limitation herein contained
or to make changes or supplements necessary or desirable to properly give
effect to such limitation. The limitations contained in this paragraph shall
apply to a successor holder of this Warrant.

 

e)             Mechanics of
Exercise.

 

i.      Delivery of Certificates
Upon Exercise.  Certificates for
shares purchased hereunder shall be transmitted by the transfer agent of the
Company to the Holder by crediting the account of the Holder’s prime broker
with the Depository Trust Company through its Deposit Withdrawal Agent
Commission (“DWAC”) system if the Company is a participant in such
system and there is an effective Registration Statement permitting the resale
of the Warrant Shares by the Holder, and otherwise by physical delivery to the
address specified by the Holder in the Notice of Exercise within 3 Trading Days
from the delivery to the Company of the Notice of Exercise Form, surrender of
this Warrant (if required) and payment of the aggregate Exercise Price as set
forth above (“Warrant Share Delivery Date”).  This Warrant shall be deemed to have been
exercised on the date the Exercise Price is received by the Company.  The Warrant Shares shall be deemed to have
been issued, and Holder or any other person so designated to be named therein
shall be deemed to have become a holder of record of such shares for all
purposes, as of the date the Warrant has been exercised by payment to the
Company of the Exercise Price (or by cashless exercise, if permitted) and all
taxes required to be paid by the Holder, if any, pursuant to Section 2(e)(vi) prior
to the issuance of such shares, have been paid. If the Company fails for any
reason to deliver to the Holder certificates evidencing the Warrant Shares
subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company
shall pay to the Holder, in cash, as liquidated damages and not as a penalty,
for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP
of the Common Stock on the date of the applicable Notice of Exercise), $10 per
Trading Day (increasing to $20 per Trading Day on the fifth Trading Day after
such liquidated damages begin to accrue) for each Trading Day after such
Warrant Share Delivery Date until such certificates are delivered.

 

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

 

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

 

iv.    Compensation for Buy-In on
Failure to Timely Deliver Certificates Upon Exercise.  In addition to any other rights available to
the Holder, if the Company fails to cause its transfer agent to transmit to the
Holder a certificate or certificates representing the Warrant Shares pursuant
to an exercise on or before the Warrant Share Delivery Date, and if after such
date the Holder is required by its broker to purchase (in an open market
transaction or otherwise) or the Holder’s brokerage firm otherwise purchases,
shares of Common Stock to deliver in satisfaction of a sale by the Holder of
the Warrant Shares which the Holder anticipated receiving upon such exercise (a
“Buy-In”), then the Company shall (1) pay in cash to the Holder the
amount by which (x) the Holder’s total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased exceeds (y) the
amount obtained by multiplying (A) the number of Warrant Shares that the
Company was required to deliver to the Holder in connection with the exercise
at issue times (B) the price at which the sell order giving rise to such
purchase obligation was executed, and (2) at the option of the Holder,
either reinstate the portion of the Warrant and equivalent number of Warrant
Shares for which such exercise was not honored or deliver to the Holder the
number of shares of Common Stock that would have been issued had the Company
timely complied with its exercise and delivery obligations hereunder.  For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect
to an attempted exercise of shares of Common Stock with an aggregate sale price
giving rise to such purchase obligation of $10,000, under clause (1) of
the immediately preceding sentence the Company shall be required to pay the
Holder $1,000. The Holder shall provide the Company written notice indicating
the amounts payable to the Holder in respect of the Buy-In and, upon request of
the Company, evidence of the amount of such loss.  Nothing herein shall limit a Holder’s right
to pursue any other remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Company’s failure 

 

5

 

to timely deliver
certificates representing shares of Common Stock upon exercise of the Warrant
as required pursuant to the terms hereof.

 

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

 

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

 

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

 

Section 3.               Certain Adjustments.

 

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

 

6

 

and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.

 

b)            Subsequent Equity
Sales. If the Company or any Subsidiary thereof, as applicable, at any time
while this Warrant is outstanding, shall sell or grant any option to purchase,
or sell or grant any right to reprice, or otherwise dispose of or issue (or
announce any offer, sale, grant or any option to purchase or other disposition)
any Common Stock or Common Stock Equivalents entitling any Person to acquire
shares of Common Stock, at an effective price per share less than the then
Exercise Price (such lower price, the “Base Share Price” and such
issuances collectively, a “Dilutive Issuance”) (if the holder of the
Common Stock or Common Stock Equivalents so issued shall at any time, whether
by operation of purchase price adjustments, reset provisions, floating conversion,
exercise or exchange prices or otherwise, or due to warrants, options or rights
per share which are issued in connection with such issuance, be entitled to
receive shares of Common Stock at an effective price per share which is less
than the Exercise Price, such issuance shall be deemed to have occurred for
less than the Exercise Price on such date of the Dilutive Issuance), then the
Exercise Price shall be reduced and only reduced to equal the Base Share Price
and the number of Warrant Shares issuable hereunder shall be increased such
that the aggregate Exercise Price payable hereunder, after taking into account
the decrease in the Exercise Price, shall be equal to the aggregate Exercise
Price prior to such adjustment.  Such
adjustment shall be made whenever such Common Stock or Common Stock Equivalents
are issued.  Notwithstanding the
foregoing, no adjustments shall be made, paid or issued under this Section 3(b) in
respect of an Exempt Issuance.  The
Company shall notify the Holder in writing, no later than the Trading Day
following the issuance of any Common Stock or Common Stock Equivalents subject
to this Section 3(b), indicating therein the applicable issuance price, or
applicable reset price, exchange price, conversion price and other pricing
terms (such notice the “Dilutive Issuance Notice”).  For purposes of clarification, whether or not
the Company provides a Dilutive Issuance Notice pursuant to this Section 3(b),
upon the occurrence of any Dilutive Issuance, after the date of such Dilutive
Issuance the Holder is entitled to receive a number of Warrant Shares based
upon the Base Share Price regardless of whether the Holder accurately refers to
the Base Share Price in the Notice of Exercise.

 

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

 

7

 

effective immediately
after the record date for the determination of stockholders entitled to receive
such rights, options or warrants.

 

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

 

e)             Fundamental
Transaction. If, at any time while this Warrant is outstanding, (A) the
Company effects any merger or consolidation of the Company with or into another
Person, (B) the Company effects any sale of all or substantially all of
its assets in one or a series of related transactions, (C) any tender
offer or exchange offer (whether by the Company or another Person) is completed
pursuant to which holders of Common Stock are permitted to tender or exchange
their shares for other securities, cash or property, or (D) the Company
effects any reclassification of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property (each “Fundamental
Transaction”), then, upon any
subsequent exercise of this Warrant, the Holder
shall have the right to receive, for each Warrant Share that would have
been issuable upon such exercise immediately prior to the occurrence of such
Fundamental Transaction, the number of shares of
Common Stock of the successor or acquiring corporation or of the Company, if it
is the surviving corporation, and any additional consideration (the “Alternate
Consideration”) receivable as a result of
such merger, consolidation or disposition of assets by a holder of the number
of shares of Common Stock for which this Warrant is exercisable immediately
prior to such event. For purposes of any such exercise, the determination
of the Exercise Price shall be appropriately adjusted to apply to such
Alternate Consideration based on the amount of Alternate Consideration issuable
in respect of one share of Common Stock in such Fundamental Transaction, and
the Company shall apportion the Exercise Price among the Alternate
Consideration in a reasonable manner reflecting the relative value of any
different components of the Alternate Consideration.  If holders of Common Stock are given any
choice as to the securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any exercise of this Warrant following such
Fundamental Transaction.  To the extent
necessary to effectuate the foregoing provisions, any successor to the Company
or 

 

8

 

surviving entity in such
Fundamental Transaction shall issue to the Holder a new warrant consistent with
the foregoing provisions and evidencing the Holder’s right to exercise such
warrant into Alternate Consideration. The terms of any agreement pursuant to
which a Fundamental Transaction is effected shall include terms requiring any
such successor or surviving entity to comply with the provisions of this Section 3(e) and
insuring that this Warrant (or any such replacement security) will be similarly
adjusted upon any subsequent transaction analogous to a Fundamental Transaction. Notwithstanding anything to the contrary, in
the event of a Fundamental Transaction that is (1) an all cash
transaction, (2) a “Rule 13e-3 transaction” as defined in Rule 13e-3
under the Securities Exchange Act of 1934, as amended, or (3) a
Fundamental Transaction involving a person or entity not traded on a national
securities exchange, the Nasdaq Global Select Market, the Nasdaq Global Market,
or the Nasdaq Capital Market, the Company or any successor entity shall pay at
the Holder’s option, exercisable at any time concurrently with or within 30
days after the consummation of the Fundamental Transaction, an amount of cash
equal to the value of this Warrant as determined in accordance with the Black
Scholes Option Pricing Model obtained from the “OV” function on Bloomberg L.P.
using (i) a price per share of Common Stock equal to the VWAP of the
Common Stock for the Trading Day immediately preceding the date of consummation
of the applicable  Fundamental
Transaction, (ii) a risk-free interest rate corresponding to the U.S.
Treasury rate for a period equal to the remaining term of this Warrant as of
the date of consummation of the applicable Fundamental Transaction and (iii) an
expected volatility equal to the 100 day volatility obtained from the “HVT”
function on Bloomberg L.P. determined as of the Trading Day immediately following
the public announcement of the applicable Fundamental Transaction.

 

f)             Calculations.
All calculations under this Section 3 shall be made to the nearest cent or
the nearest 1/100th of a share, as the case may be. For purposes of this Section 3,
the number of shares of Common Stock deemed to be issued and outstanding as of
a given date shall be the sum of the number of shares of Common Stock
(excluding treasury shares, if any) issued and outstanding.

 

g)            Voluntary
Adjustment By Company. The Company may at any time during the term of this
Warrant reduce the then current Exercise Price to any amount and for any period
of time deemed appropriate by the Board of Directors of the Company.

 

h)            Notice to Holder.

 

i.      Adjustment to Exercise
Price. Whenever the Exercise Price is adjusted pursuant to any provision of
this Section 3, the Company shall promptly mail to the Holder a notice
setting forth the Exercise Price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment. If the Company enters
into a Variable Rate Transaction (as defined in the Purchase Agreement),
despite the prohibition thereon in the Purchase Agreement, the Company shall be
deemed to have issued Common Stock or Common Stock Equivalents at the lowest possible
conversion or exercise price at which such securities may be converted or
exercised.

 

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

 

Section 4.               Transfer of Warrant.

 

a)             Transferability.  Subject to compliance with any applicable
securities laws and the conditions set forth in Section 4(d) hereof
and to the provisions of Section 4.1 of the Purchase Agreement, this
Warrant and all rights hereunder (including, without limitation, any
registration rights) are transferable, in whole or in part, upon surrender of
this Warrant at the principal office of the Company or its designated agent,
together with a written assignment of this Warrant substantially in the form
attached hereto duly executed by the Holder or its agent or attorney and funds
sufficient to pay any transfer taxes payable upon the making of such
transfer.  Upon such surrender and, if
required, such payment, the Company shall execute and deliver a new Warrant or
Warrants in the name of the assignee or assignees and in the denomination or
denominations specified in such instrument of assignment, and shall issue to
the assignor a new Warrant evidencing 

 

10

 

the portion of this
Warrant not so assigned, and this Warrant shall promptly be cancelled.  A Warrant, if properly assigned, may be
exercised by a new holder for the purchase of Warrant Shares without having a
new Warrant issued.

 

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

 

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

 

d)            Transfer
Restrictions. If, at the time of the surrender of this Warrant in
connection with any transfer of this Warrant, the transfer of this Warrant
shall not be registered pursuant to an effective registration statement under
the Securities Act and under applicable state securities or blue sky laws, the
Company may require, as a condition of allowing such transfer, that the Holder
or transferee of this Warrant, as the case may be, comply with the provisions
of Section 5.7 of the Purchase Agreement.

 

Section 5.               Miscellaneous.

 

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

 

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

 

c)             Saturdays,
Sundays, Holidays, etc.  If the last
or appointed day for the taking of any action or the expiration of any right
required or granted herein shall not be a 

 

11

 

Business Day, then such
action may be taken or such right may be exercised on the next succeeding
Business Day.

 

d)            Authorized Shares.

 

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

 

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

 

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

 

12

 

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

 

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

 

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

 

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

 

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

 

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

 

k)             Successors and
Assigns.  Subject to applicable
securities laws, this Warrant and the rights and obligations evidenced hereby
shall inure to the benefit of and be binding upon the successors of the Company
(including, without limitation, by merger, “share exchange” or other similar
corporate reorganization or similar transaction)  and the successors and permitted assigns of
Holder.  The provisions of this Warrant
are intended to be for the benefit of all Holders from time to time of this
Warrant and shall be enforceable by the Holder or holder of Warrant Shares.

 

l)              Amendment.  This Warrant may be modified or amended or
the provisions hereof waived with the written consent of the Company and the
Holder.

 

13

 

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

 

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

 

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

 

14

 

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

 

 

	
   

  	
  ETELOS, INCORPORATED

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Jeffrey L. Garon 

  
	
   

  	
   

  	
  Title:

  	
  President and Chief Executive Officer

  

 

15

 

Schedule of Holders of the Form of Warrant

 

(Provided per Instruction 2 to Item 6 of
Regulation S-K)

 

	
  Investor

  	
   

  	
  Number of Warrant Shares

  	
   

  
	
  Enable Growth Partners LP

  	
   

  	
  333,333

  	
   

  
	
  Hudson Bay Overseas Fund LTD

  	
   

  	
  55,556

  	
   

  

 

16Exhibit 4.4

 

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

 

Original
Issue Date: April 22, 2008

Original
Conversion Price (subject to adjustment herein): $0.45

 

$                           

 

6% SECURED CONVERTIBLE DEBENTURE

DUE APRIL 30, 2010

 

                                                             THIS DEBENTURE is one of a series of duly authorized and validly issued 6% Secured Convertible Debentures of Etelos, Incorporated, a Washington corporation  (the “Company”), having its principal place of business at 1900 O’Farrell St., Suite 320, San Mateo, CA 94403, designated as its 6% Secured Convertible Debenture due April 30, 2010 (this debenture, the “Debenture” and, collectively with the other debentures of such series, the “Debentures”).
 

FOR VALUE RECEIVED, the Company promises to pay to
                                                
or its registered assigns (the “Holder”), or shall have paid pursuant to
the terms hereunder, the principal sum of
$                              
on April 30, 2010 (the “Maturity
Date”) or such earlier date
as this Debenture is required or permitted to be repaid as provided hereunder,
and to pay interest to the Holder on the aggregate unconverted and then
outstanding principal amount of this Debenture in accordance with the
provisions hereof.  This Debenture is
subject to the following additional provisions:

 

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

 

1

 

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

 

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

 

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

 

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

 

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

 

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

 

2

 

replacement at one time or within a two year period of more than
one-half of the members of the Company’s board of directors which is not
approved by a majority of those individuals who are members of the board of
directors on the date hereof (or by those individuals who are serving as
members of the board of directors on any date whose nomination to the board of
directors was approved by a majority of the members of the board of directors
who are members on the date hereof), or (v) the execution by the Company
of an agreement to which the Company is a party or by which it is bound,
providing for any of the events set forth in clauses (i) through (iv) above.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“Equity Conditions” means, during the period in question, (i) the
Company shall have duly honored all conversions and redemptions scheduled to
occur or occurring by virtue of one or more Notices of Conversion of the
Holder, if any, (ii) the Company shall have paid all liquidated damages
and other amounts owing to the Holder in respect of this Debenture, (iii)(a) there
is an effective Registration Statement pursuant to which the Holder is
permitted to utilize the prospectus thereunder to resell all of the shares of
Common Stock issuable pursuant to the Transaction Documents (and the Company
believes, in good faith, that such effectiveness will continue uninterrupted
for the foreseeable future) or (b) all of the Conversion Shares issuable
pursuant to the Transaction Documents may be resold pursuant to Rule 144
without volume or manner-of-sale restrictions as determined by the counsel to
the Company pursuant to a written opinion letter to such effect, addressed and
acceptable to the Transfer Agent and the Holder, (iv) the Common Stock is
trading on a Trading Market and all of the shares issuable pursuant to the
Transaction Documents are listed or quoted for trading on such Trading Market
(and the Company believes, in good faith, that trading of the Common Stock on a
Trading Market will continue uninterrupted for the foreseeable future), (v) there
is a sufficient number of authorized but unissued and otherwise unreserved
shares of Common Stock for the issuance of all of the shares issuable pursuant
to the Transaction Documents, (vi) there is no existing Event of Default
or no existing event which, with the passage of time or the giving of notice,
would constitute an Event of Default, (vii) the issuance of the shares in
question (or, in the case of an Optional or 

 

3

 

Monthly Redemption, the shares issuable upon conversion in full of the
Optional or Monthly Redemption Amount) to the Holder would not violate the
limitations set forth in Section 4(c) herein, (viii) there has
been no public announcement of a pending or proposed Fundamental Transaction or
Change of Control Transaction that has not been consummated, (ix) the
Holder is not in possession of any information provided by the Company that
constitutes, or may constitute, material non-public information and (x) for
each Trading Day in a period of 20 consecutive Trading Days prior to the
applicable date in question, the daily dollar trading volume for the Common
Stock on the principal Trading Market exceeds $250,000 per Trading Day.

 

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

 

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

 

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

 

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

 

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

 

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

 

“Interest Conversion Rate” means the lesser of (a) the
Conversion Price or (b) 90% of the lesser of (i) the average of the
VWAPs for the 10 consecutive Trading Days ending on the Trading Day that is
immediately prior to the applicable Interest Payment Date or (ii) the
average of the VWAPs for the 10 consecutive Trading Days ending on the Trading
Day that is immediately prior to the date the applicable Interest Conversion
Shares are issued and delivered if such delivery is after the Interest Payment
Date.

 

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

 

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

 

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

 

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

 

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

 

“Mandatory Default Amount” 
means the sum of (i) the greater of (A) the outstanding
principal amount of this Debenture, plus all accrued and unpaid interest
hereon, divided by the Conversion Price on the date the Mandatory Default
Amount is either (1) demanded (if demand or notice is required to create
an Event of Default) or otherwise due or (2) paid in full, whichever has a
lower Conversion Price, multiplied by the VWAP on the date the Mandatory
Default Amount is either (x) demanded or 

 

4

 

otherwise due or (y) paid in full, whichever has a higher VWAP and
(B) 130% of the outstanding principal amount of this Debenture, plus 100%
of accrued and unpaid interest hereon, and (ii) all other amounts, costs,
expenses and liquidated damages due in respect of this Debenture.

 

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

 

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

 

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

 

 “Monthly Redemption Amount”
means, as to a Monthly Redemption,
$[          (1), plus accrued but unpaid interest, liquidated
damages and any other amounts then owing to the Holder in respect of this
Debenture.

 

“Monthly Redemption Date” means the 1st of each month,
commencing on November 1, 2008, and terminating upon the full redemption
of this Debenture.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(1)                                  1/18th
of the original principal amount of this debenture.

 

5

 

“Permitted Indebtedness” means (a) the Indebtedness
existing on the Original Issue Date and set forth on Schedule 3.1(aa)
attached to the Purchase Agreement, (b) Indebtedness under the existing
working capital line of credit with Bridge Bank, National Association or
extension, modification or renewal thereof in an amount up to $500,000, (c) lease
obligations and purchase money indebtedness of up to $250,000, in the
aggregate, incurred in connection with the acquisition of capital assets and
lease obligations with respect to newly acquired or leased assets, (d) indebtedness
to a national or state chartered bank under a credit facility, provided that
such credit facility (i) may only be collateralized by accounts receivable
and inventory and (ii) must be principally applied by the Company to
acquiring or paying for inventory in connection with a purchase order, and (e) indebtedness
that (i) is expressly subordinate to the Debentures pursuant to a written
subordination agreement with the Purchasers that is acceptable to each
Purchaser in its sole and absolute discretion and (ii) matures at a date
later than the Maturity Date.

 

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

 

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

 

“Registration Rights Agreement” means the Registration Rights
Agreement, dated as of January 31, 2008, among the Company and the
original Holders, as amended, modified or supplemented from time to time in
accordance with its terms.

 

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

 

6

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Section 2.                                            Interest.

 

a)                                      Payment of
Interest in Cash or Kind. The Company shall pay interest to the
Holder on the aggregate unconverted and then outstanding principal amount of
this Debenture at the rate of 6% per annum, payable semiannually on January 1
and July 1, beginning on the first such date after the Original Issue
Date, on each Monthly Redemption Date (as to that principal amount then being
redeemed), on each Conversion Date (as to that principal amount then being
converted), on each Optional Redemption Date (as to that principal amount then
being redeemed) and on the Maturity Date (each 

 

7

 

such date, an “Interest Payment Date”) (if any Interest Payment
Date is not a Business Day, then the applicable payment shall be due on the
next succeeding Business Day), in cash or, at the Company’s option, in duly
authorized, validly issued, fully paid and non-assessable shares of Common
Stock at the Interest Conversion Rate (the dollar amount to be paid in shares,
the “Interest Share Amount”) or a combination thereof; provided, however,
that payment in shares of Common Stock may only occur if (i) all of the
Equity Conditions have been met (unless waived by the Holder in writing) during
the 20 Trading Days immediately prior to the applicable Interest Payment Date
(the “Interest Notice Period”) and through and including the date such
shares of Common Stock are actually issued to the Holder, (ii) the Company
shall have given the Holder notice in accordance with the notice requirements
set forth below and (iii) as to such Interest Payment Date, prior to such
Interest Notice Period (but not more than five (5) Trading Days prior to
the commencement of such Interest Notice Period), the Company shall have
delivered to the Holder’s account with The Depository Trust Company a number of
shares of Common Stock to be applied against such Interest Share Amount equal
to the quotient of (x) the applicable Interest Share Amount divided by (y) the
then Conversion Price (the “Interest Conversion Shares”).

 

b)                                     Company’s
Election to Pay Interest in Kind.  Subject to the terms and conditions herein,
the decision whether to pay interest hereunder in cash, shares of Common Stock
or a combination thereof shall be at the sole discretion of the Company.  Prior to the commencement of any Interest
Notice Period, the Company shall deliver to the Holder a written notice of its
election to pay interest hereunder on the applicable Interest Payment Date either
in cash, shares of Common Stock or a combination thereof and the Interest Share
Amount as to the applicable Interest Payment Date, provided that the Company
may indicate in such notice that the election contained in such notice shall
apply to future Interest Payment Dates until revised by a subsequent
notice.  During any Interest Notice
Period, the Company’s election (whether specific to an Interest Payment Date or
continuous) shall be irrevocable as to such Interest Payment Date.  Subject to the aforementioned conditions,
failure to timely deliver such written notice to the Holder shall be deemed an
election by the Company to pay the interest on such Interest Payment Date in
cash.  At any time the Company delivers a
notice to the Holder of its election to pay the interest in shares of Common
Stock, the Company shall timely file a prospectus supplement pursuant to Rule 424
disclosing such election.  The aggregate
number of shares of Common Stock otherwise issuable to the Holder on an
Interest Payment Date shall be reduced by the number of Interest Conversion
Shares previously issued to the Holder in connection with such Interest Payment
Date.

 

c)                                      Interest
Calculations. Interest shall be calculated on the basis of a
360-day year, consisting of twelve 30 calendar day periods, and shall accrue
daily commencing on the Original Issue Date until payment in full of the
outstanding principal, together with all accrued and unpaid interest,
liquidated damages and other amounts which may become due hereunder, has been
made.  Payment of interest in shares of
Common Stock (other than the Interest Conversion Shares issued prior to an
Interest Notice Period) shall otherwise occur pursuant to Section 4(d)(ii) herein
and, solely for purposes of the payment of interest in shares, the Interest
Payment Date shall be deemed the Conversion 

 

8

 

Date.  Interest shall cease to
accrue with respect to any principal amount converted, provided that, the
Company actually delivers the Conversion Shares within the time period required
by Section 4(d)(ii) herein. 
Interest hereunder will be paid to the Person in whose name this
Debenture is registered on the records of the Company regarding registration
and transfers of this Debenture (the “Debenture Register”). Except as
otherwise provided herein, if at any time the Company pays interest partially
in cash and partially in shares of Common Stock to the holders of the
Debentures, then such payment of cash shall be distributed ratably among the holders
of the then-outstanding Debentures based on their (or their predecessor’s)
initial purchases of Debentures pursuant to the Purchase Agreement.

 

d)                                     Late Fee.  All overdue accrued and unpaid interest to be
paid hereunder shall entail a late fee at an interest rate equal to the lesser
of 18% per annum or the maximum rate permitted by applicable law (“Late Fees”)
which shall accrue daily from the date such interest is due hereunder through
and including the date of actual payment in full. Notwithstanding anything to
the contrary contained herein, if, on any Interest Payment Date the Company has
elected to pay accrued interest in the form of Common Stock but the Company is
not permitted to pay accrued interest in Common Stock because it fails to
satisfy the conditions for payment in Common Stock set forth in Section 2(a) herein,
then, at the option of the Holder, the Company, in lieu of delivering either
shares of Common Stock pursuant to this Section 2 or paying the regularly
scheduled interest payment in cash, shall deliver, within three (3) Trading
Days of each applicable Interest Payment Date, an amount in cash equal to the
product of (x) the number of shares of Common Stock otherwise deliverable
to the Holder in connection with the payment of interest due on such Interest
Payment Date multiplied by (y) the highest VWAP during the period
commencing on the Interest Payment Date and ending on the Trading Day prior to
the date such payment is actually made. 
If any Interest Conversion Shares are issued to the Holder in connection
with an Interest Payment Date and are not applied against an Interest Share
Amount, then the Holder shall promptly return such excess shares to the
Company.

 

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

 

Section 3.                                            Registration of
Transfers and Exchanges.

 

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

 

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

 

9

 

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

 

Section 4.                                            Conversion.

 

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

 

b)                                     Conversion
Price.  The conversion price in effect
on any Conversion Date shall be equal to $0.45, subject to adjustment herein (the
“Conversion Price”).

 

c)                                      Conversion
Limitations.  If the
Company is subject to the reporting requirements of the Exchange Act, then the
Company shall not effect any conversion of this Debenture, and a Holder shall
not have the right to convert any portion of this Debenture, to the extent that
after giving effect to the conversion set forth on the applicable Notice of
Conversion, the Holder (together with the Holder’s Affiliates, and any other
person or entity acting as a group together with the Holder or any of the
Holder’s Affiliates) would beneficially own in excess of the Beneficial
Ownership Limitation (as defined below).  For purposes of the foregoing
sentence, the number of shares of Common Stock beneficially owned by the Holder
and its Affiliates shall include 

 

10

 

the number of shares of Common Stock issuable upon conversion of this
Debenture with respect to which such determination is being made, but shall
exclude the number of shares of Common Stock which are issuable upon (A) conversion
of the remaining, unconverted principal amount of this Debenture beneficially
owned by the Holder or any of its Affiliates, and (B) exercise or conversion
of the unexercised or unconverted portion of any other securities of the
Company subject to a limitation on conversion or exercise analogous to the
limitation contained herein (including, without limitation, any other
Debentures or the Warrants) beneficially owned by the Holder or any of its
Affiliates.  Except as set forth in the preceding sentence, for purposes
of this Section 4(c), beneficial ownership shall be calculated in
accordance with Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder.  To
the extent that the limitation contained in this Section 4(c) applies,
the determination of whether this Debenture is convertible (in relation to
other securities owned by the Holder together with any Affiliates) and of which
principal amount of this Debenture is convertible shall be in the sole
discretion of the Holder, and the submission of a Notice of Conversion shall be
deemed to be the Holder’s determination of whether this Debenture may be
converted (in relation to other securities owned by the Holder together with
any Affiliates) and which principal amount of this Debenture is convertible, in
each case subject to the Beneficial Ownership Limitation. To ensure compliance
with this restriction, the Holder will be deemed to represent to the Company
each time it delivers a Notice of Conversion that such Notice of Conversion has
not violated the restrictions set forth in this paragraph and the Company shall
have no obligation to verify or confirm the accuracy of such determination.  In addition, a determination as to any group
status as contemplated above shall be determined in accordance with Section 13(d) of
the Exchange Act and the rules and regulations promulgated
thereunder.   For purposes of this Section 4(c),
in determining the number of outstanding shares of Common Stock, the Holder may
rely on the number of outstanding shares of Common Stock as stated in the most
recent of the following: (A) the Company’s most recent periodic or annual
report, as the case may be; (B) a more recent public announcement by the
Company; or (C) a more recent notice by the Company or the Company’s
transfer agent setting forth the number of shares of Common Stock
outstanding.  Upon the written or oral request of a Holder, the Company
shall within two Trading Days confirm orally and in writing to the Holder the
number of shares of Common Stock then outstanding.  In any case, the
number of outstanding shares of Common Stock shall be determined after giving
effect to the conversion or exercise of securities of the Company, including
this Debenture, by the Holder or its Affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. The “Beneficial
Ownership Limitation” shall be 4.99% of the number of shares of the Common
Stock outstanding immediately after giving effect to the issuance of shares of
Common Stock issuable upon conversion of this Debenture held by the
Holder.  The Holder, upon not less than
61 days’ prior notice to the Company, may increase or decrease the Beneficial
Ownership Limitation provisions of this Section 4(c), provided that the
Beneficial Ownership Limitation in no event exceeds 9.99% of the number of
shares of the Common Stock outstanding immediately after giving effect to the
issuance of shares of Common Stock upon conversion of this Debenture held by
the Holder and the provisions of this Section 4(c) shall continue to
apply.  Any such increase or decrease
will not be effective until the 61st day after such notice is
delivered to the Company.  The 

 

11

 

provisions of this paragraph shall be construed and implemented in a
manner otherwise than in strict conformity with the terms of this Section 4(c) to
correct this paragraph (or any portion hereof) which may be defective or
inconsistent with the intended Beneficial Ownership Limitation herein contained
or to make changes or supplements necessary or desirable to properly give
effect to such limitation. The limitations contained in this paragraph shall
apply to a successor holder of this Debenture.

 

d)                                     Mechanics of
Conversion.

 

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

 

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

 

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

 

12

 

iv.                                   Obligation Absolute; Partial
Liquidated Damages.  The Company’s
obligations to issue and deliver the Conversion Shares upon conversion of this
Debenture in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the same, any
waiver or consent with respect to any provision hereof, the recovery of any
judgment against any Person or any action to enforce the same, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by the Holder or any other Person of any obligation to the Company or
any violation or alleged violation of law by the Holder or any other Person,
and irrespective of any other circumstance which might otherwise limit such obligation
of the Company to the Holder in connection with the issuance of such Conversion
Shares; provided, however, that such delivery shall not operate
as a waiver by the Company of any such action the Company may have against the
Holder.  In the event the Holder of this
Debenture shall elect to convert any or all of the outstanding principal amount
hereof, the Company may not refuse conversion based on any claim that the
Holder or anyone associated or affiliated with the Holder has been engaged in
any violation of law, agreement or for any other reason, unless an injunction
from a court, on notice to Holder, restraining and or enjoining conversion of
all or part of this Debenture shall have been sought and obtained.  In the absence of such injunction, the Company
shall issue Conversion Shares or, if applicable, cash, upon a properly noticed
conversion.  If the Company fails for any
reason to deliver to the Holder such certificate or certificates pursuant to Section 4(d)(ii) by
the third Trading Day after the Conversion Date, the Company shall pay to the
Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of
principal amount being converted, $10 per Trading Day (increasing to $20 per
Trading Day on the fifth (5th) Trading Day after such liquidated damages begin
to accrue) for each Trading Day after such third (3rd) Trading Day until such
certificates are delivered.    Nothing
herein shall limit a Holder’s right to pursue actual damages or declare an
Event of Default pursuant to Section 8 hereof for the Company’s failure to
deliver Conversion Shares within the period specified herein and the Holder
shall have the right to pursue all remedies available to it hereunder, at law
or in equity including, without limitation, a decree of specific performance
and/or injunctive relief.  The exercise
of any such rights shall not prohibit the Holder from seeking to enforce
damages pursuant to any other Section hereof or under applicable law.

 

v.                                      Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon Conversion.  In addition to any other rights available to
the Holder, if the Company fails for any reason to deliver to the Holder such
certificate or certificates by the Share Delivery Date pursuant to Section 4(d)(ii),
and if after such Share Delivery Date the Holder is required by its brokerage
firm to purchase (in an open market transaction or otherwise), or the Holder’s
brokerage firm otherwise purchases, shares of Common Stock to deliver in
satisfaction of a sale 

 

13

 

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

 

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

 

14

 

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

 

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

 

Section 5.                                            Certain
Adjustments.

 

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

 

b)                               Subsequent
Equity Sales.  If, at any
time while this Debenture is outstanding, 
the Company or any Subsidiary, as applicable, sells or grants any option
to purchase or sells or grants any right to reprice, or otherwise disposes of
or issues (or announces any sale, grant or any option to purchase or other
disposition), any Common Stock or Common Stock Equivalents entitling any Person
to acquire shares of Common Stock at an effective price per share that is lower
than the then Conversion Price (such 

 

15

 

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

 

c)                                      Subsequent
Rights Offerings.  If the
Company, at any time while the Debenture is outstanding, shall issue rights,
options or warrants to all holders of Common Stock (such rights, options or
warrants, without regard to exercise price, the “Purchase Rights”) (and
not to Holders) entitling them to subscribe for or purchase shares of Common
Stock at a price per share that is lower than the VWAP on the record date
referenced below, then the Conversion Price shall be multiplied by a fraction
of which the denominator shall be the number of shares of the Common Stock
outstanding on the date of issuance of such rights or warrants plus the number
of additional shares of Common Stock offered for subscription or purchase, and
of which the numerator shall be the number of shares of the Common Stock
outstanding on the date of issuance of such rights or warrants plus the number
of shares which the aggregate offering price of the total number of shares so
offered (assuming delivery to the Company in full of all consideration payable
upon exercise of such rights, options or warrants) would purchase at such
VWAP.  Such adjustment shall be made
whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such rights, options or warrants.

 

d)                                     Pro Rata
Distributions.  If the
Company, at any time while this Debenture is outstanding, distributes to all
holders of Common Stock (and not to the Holders) evidences of its indebtedness
or assets (including cash and cash dividends) or rights or 

 

16

 

warrants to subscribe for or purchase any security (other than the
Common Stock, which shall be subject to Section 5(b)), then in each such
case the Conversion Price shall be adjusted by multiplying such Conversion
Price in effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the VWAP determined as of the record date mentioned above,
and of which the numerator shall be such VWAP on such record date less the then
fair market value at such record date of the portion of such assets or evidence
of indebtedness so distributed applicable to 1 outstanding share of the Common
Stock as determined by the Board of Directors of the Company in good
faith.  In either case the adjustments
shall be described in a statement delivered to the Holder describing the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to 1 share of Common Stock.  Such adjustment shall be made whenever any
such distribution is made and shall become effective immediately after the
record date mentioned above.

 

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

 

17

 

any such successor or surviving entity to comply with the provisions of
this Section 5(e) and insuring that this Debenture (or any such
replacement security) will be similarly adjusted upon any subsequent
transaction analogous to a Fundamental Transaction.

 

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

 

g)                                     Notice to the
Holder.

 

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

 

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

 

18

 

therein or in the delivery thereof shall not affect the validity of the
corporate action required to be specified in such notice.  The Holder is entitled to convert this
Debenture during the 20-day period commencing on the date of such notice
through the effective date of the event triggering such notice.

 

h)                                     Other
Adjustment.  In the event
that the Common Stock is not listed or quoted for trading on a Trading Market
on or before the nine month anniversary of the Original Issue Date, the
Conversion Price shall be reduced to equal the lesser of (i) the then
Conversion Price and (ii) $0.25. 
For clarity, the Conversion Price can only be adjusted downward pursuant
to this Section 5(h).

 

i)                                         Participation.  The Holder, as the holder of this Debenture,
shall be entitled to receive (i) any Purchase Rights and (ii) any
dividends paid and distributions made to the holders of Common Stock to the
same extent as if the Holder had converted this Debenture into Common Stock
(without regard to any limitations on conversion herein or elsewhere) and had
held such shares of Common Stock on the record date for such Purchase Rights,
dividends or distributions.  Issuances or
payments under the preceding sentence shall be made concurrently with the
issuance of the Purchase Rights or the making of such dividend or distribution
to the holders of Common Stock.

 

Section 6.                                            Redemption.

 

a)                                      Monthly
Redemption.  On each
Monthly Redemption Date, the Company shall redeem the Monthly Redemption Amount
(the “Monthly Redemption”). The Monthly Redemption Amount payable on
each Monthly Redemption Date shall be paid in cash; provided, however,
as to any Monthly Redemption and upon 10 Trading Days’ prior written
irrevocable notice (the “Monthly Redemption Notice”), in lieu of a cash
redemption payment the Company may elect to pay all or part of a Monthly
Redemption Amount in Conversion Shares based on a conversion price equal to the
lesser of (i) the then Conversion Price and (ii) 85% of the average
of the VWAPs for the 10 consecutive Trading Days ending on the Trading Day that
is immediately prior to the applicable Monthly Redemption Date (subject to
adjustment for any stock dividend, stock split, stock combination or other
similar event affecting the Common Stock during such 10 Trading Day period)
(the price calculated during the 10 Trading Day period immediately prior to the
Monthly Redemption Date, the “Monthly Conversion Price” and such 10 Trading
Day period, the “Monthly Conversion Period”); provided, further,
that the Company may not pay the Monthly Redemption Amount in Conversion Shares
unless (y) from the date the Holder receives the duly delivered Monthly
Redemption Notice through and until the date such Monthly Redemption is paid in
full, the Equity Conditions have been satisfied, unless waived in writing by
the Holder, and (z) as to such Monthly Redemption, prior to such Monthly
Conversion Period (but not more than 5 Trading Days prior to the commencement
of the Monthly Conversion Period), the Company shall have delivered to the
Holder’s account with The Depository Trust Company a number of shares of Common
Stock to be applied against such Monthly Redemption Amount equal to the
quotient of (x) the applicable Monthly Redemption Amount divided by (y) the

 

19

 

lesser of (A) the Conversion Price and (B) 85% of the average
of the 10 VWAPs during the period ending on the 3rd Trading Day
immediately prior to the date of the Monthly Redemption Notice (the “Pre-Redemption Conversion Shares”).  The Holder may convert, pursuant to Section 4(a),
any principal amount of this Debenture subject to a Monthly Redemption at any
time prior to the date that the Monthly Redemption Amount, plus accrued but
unpaid interest, liquidated damages and any other amounts then owing to the
Holder are due and paid in full.  Unless
otherwise indicated by the Holder in the applicable Notice of Conversion, any
principal amount of this Debenture converted during the applicable Monthly
Conversion Period until the date the Monthly Redemption Amount is paid in full
shall be first applied to the principal amount subject to the Monthly
Redemption Amount payable in cash and then to the Monthly Redemption Amount
payable in Conversion Shares.  Any
principal amount of this Debenture converted during the applicable Monthly
Conversion Period in excess of the Monthly Redemption Amount shall be applied
against the last principal amount of this Debenture scheduled to be redeemed
hereunder, in reverse time order from the Maturity Date; provided, however,
if any such conversion is applied against such Monthly Redemption Amount, the
Pre-Redemption Conversion Shares, if any were issued in connection with such
Monthly Redemption or were not already applied to such conversions, shall be
first applied against such conversion. 
The Company covenants and agrees that it will honor all Notice of
Conversions tendered up until such amounts are paid in full.  The Company’s determination to pay a Monthly
Redemption in cash, shares of Common Stock or a combination thereof shall be
applied ratably to all of the holders of the then outstanding Debentures based
on their (or their predecessor’s) initial purchases of Debentures pursuant to
the Purchase Agreement.  At any time the
Company delivers a notice to the Holder of its election to pay the Monthly
Redemption Amount in shares of Common Stock, the Company shall file a prospectus
supplement pursuant to Rule 424 disclosing such election.

 

b)                                     Optional
Redemption at Election of Company.  Subject to the provisions of this Section 6,
at any time after the Effective Date, the Company may deliver a notice to the
Holder (an “Optional Redemption Notice” and the date such notice is
deemed delivered hereunder, the “Optional Redemption Notice Date”) of
its irrevocable election to redeem some or all of the then outstanding
principal amount of this Debenture for cash in an amount equal to the Optional
Redemption Amount on the 10th Trading Day following the Optional
Redemption Notice Date (such date, the “Optional Redemption Date” and
such redemption, the “Optional Redemption”).  The Optional Redemption Amount is payable in
full on the Optional Redemption Date. 
The Company may only effect an Optional Redemption if each of the Equity
Conditions shall have been met (unless waived in writing by the Holder) on each
Trading Day during the period commencing on the Optional Redemption Notice Date
through to the Optional Redemption Date and through and including the date
payment of the Optional Redemption Amount is actually made in full.  If any of the Equity Conditions shall cease
to be satisfied at any time during the 10 Trading Day period, then the Holder
may elect to nullify the Optional Redemption Notice by notice to the Company
within 3 Trading Days after the first day on which any such Equity Condition
has not been met (provided that if, 

 

20

 

by a provision of the Transaction Documents, the Company is obligated
to notify the Holder of the non-existence of an Equity Condition, such notice
period shall be extended to the third Trading Day after proper notice from the
Company) in which case the Optional Redemption Notice shall be null and void, ab
initio.  The Company covenants and
agrees that it will honor all Notices of Conversion tendered from the time of
delivery of the Optional Redemption Notice through the date all amounts owing
thereon are due and paid in full.  Any
Optional Redemption shall be applied ratably to all Holders based on their
initial purchases of Debentures pursuant to the Purchase Agreement.

 

c)                                      Redemption Procedure.  The payment of cash or issuance of Common
Stock, as applicable, pursuant to an Optional Redemption or Monthly Redemption
shall be payable on the Optional Redemption Date or Monthly Redemption
Date.  If any portion of the payment
pursuant to an Optional Redemption or Monthly Redemption shall not be paid by
the Company by the applicable due date, interest shall accrue thereon at an
interest rate equal to the lesser of 18% per annum or the maximum rate
permitted by applicable law until such amount is paid in full.  Notwithstanding anything herein contained to
the contrary, if any portion of the Optional Redemption Amount or Monthly
Redemption Amount remains unpaid after such date, the Holder may elect, by
written notice to the Company given at any time thereafter, to invalidate
such Optional Redemption or Monthly Redemption, ab  initio, and,
with respect to the Company’s failure to honor the Optional Redemption, the
Company shall have no further right to exercise such Optional Redemption.  Notwithstanding anything to the contrary in
this Section 6, the Company’s determination to redeem in cash or its
elections under Section 6(a) shall be applied ratably among the
Holders of Debentures. The Holder may elect to convert the outstanding
principal amount of the Debenture pursuant to Section 4 prior to actual
payment in cash for any redemption under this Section 6 by the delivery of
a Notice of Conversion to the Company.

 

d)                                     Forced
Conversion.  Notwithstanding anything herein to the
contrary, if after the Effective Date, the VWAP for each of any 20 Trading Days
in any 30 consecutive Trading Day period, which 30 day period shall have
commenced only after the Effective Date (such 30 day period, the “Threshold
Period”), exceeds $1.13 (subject to adjustment for reverse and forward
stock splits, stock dividends, stock combinations and other similar
transactions of the Common Stock that occur after the Original Issue Date), the
Company may, within 1 Trading Day after the end of any such Threshold Period,
deliver a written notice to the Holder (a “Forced Conversion Notice” and
the date such notice is delivered to the Holder, the “Forced Conversion
Notice Date”) to cause the Holder to convert all or part of the then
outstanding principal amount of this Debenture plus, if so specified in the
Forced Conversion Notice, accrued but unpaid interest, liquidated damages and
other amounts owing to the Holder under this Debenture, it being agreed that
the “Conversion Date” for purposes of Section 4 shall be deemed to occur
on the third Trading Day following the Forced Conversion Notice Date (such
third Trading Day, the “Forced Conversion Date”).  The Company may not deliver a Forced
Conversion Notice, and any Forced Conversion Notice delivered by the Company
shall not be effective, unless all of the Equity Conditions are met (unless
waived in writing by 

 

21

 

the Holder) on each Trading Day occurring during the applicable
Threshold Period through and including the later of the Forced Conversion Date
and the Trading Day after the date such Conversion Shares pursuant to such
conversion are delivered to the Holder. 
Any Forced Conversion shall be applied ratably to all Holders based on
their initial purchases of Debentures pursuant to the Purchase Agreement,
provided that any voluntary conversions by a Holder shall be applied against
the Holder’s pro rata allocation, thereby decreasing the aggregate amount
forcibly converted hereunder if only a portion of this Debenture is forcibly
converted.  For purposes of
clarification, a Forced Conversion shall be subject to all of the provisions of
Section 4, including, without limitation, the provision requiring payment
of liquidated damages and limitations on conversions.

 

Section 7.                                            Negative
Covenants.  As long as
any portion of this Debenture remains outstanding, unless the holders of at
least 67% in principal amount of the then outstanding Debentures shall have
otherwise given prior written consent, the Company shall not, and shall not
permit any of its subsidiaries (whether or not a Subsidiary on the Original
Issue Date) to, directly or indirectly:

 

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

 

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

 

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

 

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

 

e)                                      repay,
repurchase or offer to repay, repurchase or otherwise acquire any Indebtedness,
other than the Debentures if on a pro-rata basis, other than regularly
scheduled principal and interest payments as such terms are in effect as of the
Original Issue Date; provided, however, that no regularly
scheduled principal and interest payments may be made if, at the time such
payment is due or is otherwise made or after giving effect to such payment, an
event constituting, or that with the passage of time and 

 

22

 

without
being cured would constitute, an Event of Default has occurred and is
continuing under Section 8(a)(i);

 

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

 

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

 

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

 

Section 8.                                            Events of
Default.

 

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

 

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

 

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

 

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

 

iv.                                   any
representation or warranty made in this Debenture, any other Transaction
Documents, any written statement pursuant hereto or thereto or any 

 

23

 

other
report, financial statement or certificate made or delivered to the Holder or
any other Holder shall be untrue or incorrect in any material respect as of the
date when made or deemed made;

 

v.                                      the Company or
any Significant Subsidiary shall be subject to a Bankruptcy Event;

 

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

 

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

 

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

 

ix.                                     RESERVED;

 

x.                                        if, during the
Effectiveness Period (as defined in the Registration Rights Agreement), either (a) the
effectiveness of the Registration Statement lapses for any reason or (b) the
Holder shall not be permitted to resell Registrable Securities (as defined in
the Registration Rights Agreement) under the Registration Statement for a
period of more than 30 consecutive Trading Days or 60 non-consecutive Trading
Days (or, in the event the Company suspends effectiveness of the Registration
Statement in connection with a corporate development that, in the good faith
judgment of the board of directors of the Company, requires suspension under
the Securities Act, 75 non consecutive Trading Days) during any 12 month
period; provided, however, that if the Company is negotiating a
merger, consolidation, acquisition or sale of all or substantially all of its
assets or a similar transaction and, in the written opinion of counsel to the
Company, the Registration Statement would be required to be amended to include
information concerning such pending transaction(s) or the parties thereto
which information is not available or may not be publicly disclosed at the
time, the Company shall be permitted an additional 10 consecutive Trading 

 

24

 

Days
during any 12 month period pursuant to this Section 8(a)(x); provided,
further, in the event that the Commission elects to review any post
effective amendment to a Registration Statement, the Company shall be permitted
45 Trading Days during any 12 month period pursuant to this Section 8(a)(x);

 

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

 

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

 

b)                               Remedies Upon
Event of Default.  If any
Event of Default occurs, the outstanding principal amount of this Debenture,
plus accrued but unpaid interest, liquidated damages and other amounts owing in
respect thereof through the date of acceleration, shall become, at the Holder’s
election, immediately due and payable in cash at the Mandatory Default
Amount.  Commencing 5 days after the
occurrence of any Event of Default that results in the eventual acceleration of
this Debenture, the interest rate on this Debenture shall accrue at an interest
rate equal to the lesser of 18% per annum or the maximum rate permitted under
applicable law.  Upon the payment in full
of the Mandatory Default Amount, the Holder shall promptly surrender this
Debenture to or as directed by the Company. 
In connection with such acceleration described herein, the Holder need
not provide, and the Company hereby waives, any presentment, demand, protest or
other notice of any kind, and the Holder may immediately and without expiration
of any grace period enforce any and all of its rights and remedies hereunder
and all other remedies available to it under applicable law.  Such acceleration may be rescinded and
annulled by Holder at any time prior to payment hereunder and the Holder shall
have all rights as a holder of the Debenture until such time, if any, as the
Holder receives full payment pursuant to this Section 8(b).  No such rescission or annulment shall affect
any subsequent Event of Default or impair any right consequent thereon.

 

Section 9.                                           Miscellaneous. 

 

a)                                Notices.  Any and all notices or other communications
or deliveries to be provided by the Holder hereunder, including, without
limitation, any Notice of Conversion, shall be in writing and delivered
personally, by facsimile, or sent by a nationally recognized overnight courier
service, addressed to the Company, at the address set forth above, facsimile
number (408) 516-8425, Attention: Jeff Garon or such other facsimile number or
address as the Company may specify for such purpose by notice to 

 

25

 

the Holder delivered in accordance with this Section 9.  Any and all notices or other communications
or deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, or sent by a nationally recognized
overnight courier service addressed to each Holder at the facsimile number or
address of the Holder appearing on the books of the Company, or if no such
facsimile number or address appears, at the principal place of business of the
Holder.  Any notice or other
communication or deliveries hereunder shall be deemed given and effective on
the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in
this Section 9 prior to 5:30 p.m. (New York City time), (ii) the
date immediately following the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in
this Section 9 between 5:30 p.m. (New York City time) and 11:59 p.m.
(New York City time) on any date, (iii) the second Business Day following
the date of mailing, if sent by nationally recognized overnight courier
service, or (iv) upon actual receipt by the party to whom such notice is
required to be given.

 

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

 

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

 

d)                                     Governing Law.  All questions concerning the construction,
validity, enforcement and interpretation of this Debenture shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflict of laws thereof.  Each party agrees that all legal proceedings
concerning the interpretation, enforcement and defense of the transactions
contemplated by any of the Transaction Documents (whether brought against a
party hereto or its respective Affiliates, directors, officers, shareholders,
employees or agents) shall be commenced in the state and federal courts sitting
in the City of New York, Borough of Manhattan (the “New York Courts”).  Each party hereto hereby irrevocably submits
to the exclusive jurisdiction of the New York Courts for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein (including with respect to the
enforcement of any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or 

 

26

 

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

 

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

 

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

 

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

 

27

 

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

 

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

 

j)                                         Secured
Obligation.  The
obligations of the Company under this Debenture are secured by all assets of
the Company and each Subsidiary pursuant to the Security Agreement, dated as of
January 31, 2008, between the Company, the Subsidiaries of the Company and
the Secured Parties (as defined therein).

 

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

 

28

 

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

 

 

	
   

  	
  ETELOS, INCORPORATED

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name: Jeffrey L. Garon

  
	
   

  	
   

  	
  Title: President and Chief Executive
  Officer  

  
	
   

  	
  Facsimile No. for delivery of Notices:
  (408) 516-8425

  

 

29

 

Schedule
of Holders of the Form of Debenture

 

(Provided
per Instruction 2 to Item 6 of Regulation S-K)

 

	
  Investor

  	
   

  	
  Principal Original Amount

  	
   

  
	
  Enable Growth Partners LP

  	
   

  	
  $

  	
  3,000,000

  	
   

  
	
  Hudson Bay Overseas Fund LTD

  	
   

  	
  $

  	
  500,000

  	
   

  

 

30

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