Document:

Securities Purchase Agreement, dated February 28, 2006

    

      EXHIBIT
        4.5

      

      SECURITIES
        PURCHASE AGREEMENT

       

      This
        Securities Purchase Agreement (this “Agreement”)
        is
        dated as of February 28, 2006 among Pacificnet, Inc., a Delaware corporation
        (the “Company”),
        and
        each purchaser identified on the signature pages hereto (each, including
        its
        successors and assigns, a “Purchaser”
and
        collectively the “Purchasers”).

       

      WHEREAS,
        subject to the terms and conditions set forth in this Agreement and pursuant
        to
        Section 4(2) of the Securities Act of 1933, as amended (the “Securities
        Act”)
        and
        Rule 506 promulgated thereunder, the Company desires to issue and sell to
        each
        Purchaser, and each Purchaser, severally and not jointly, desires to purchase
        from the Company, securities of the Company as more fully described in this
        Agreement.

       

      NOW,
        THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement,
        and for other good and valuable consideration the receipt and adequacy of
        which
        are hereby acknowledged, the Company and each Purchaser agree as
        follows:

       

       

      ARTICLE
        I.

      DEFINITIONS

       

      1.1 Definitions.
        In
        addition to the terms defined elsewhere in this Agreement: (a) capitalized
        terms
        that are not otherwise defined herein have the meanings given to such terms
        in
        the Debentures (as defined herein), and (b) the following terms have the
        meanings indicated in this Section 1.1:

       

      “Action”
shall
        have the meaning ascribed to such term in Section 3.1(j).

       

      “Affiliate”
means
        any Person that, directly or indirectly through one or more intermediaries,
        controls or is controlled by or is under common control with a Person, as
        such
        terms are used in and construed under Rule 144 under the Securities
        Act.
        With
        respect to a Purchaser, any investment fund or managed account that is managed
        on a discretionary basis by the same investment manager as such Purchaser
        will
        be deemed to be an Affiliate of such Purchaser.

       

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

       

      “Closing”
means
        the closing of the purchase and sale of the Securities pursuant to Section
        2.1.

       

      “Closing
        Date”
means
        the Trading Day when all of the Transaction Documents have been executed
        and
        delivered by the applicable parties thereto, and all conditions precedent
        to (i)
        the Purchasers’ obligations to pay the Subscription Amount and (ii) the
        Company’s obligations to deliver the Securities have been satisfied or
        waived.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      “Commission”
means
        the Securities and Exchange Commission.

       

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

       

      “Common
        Stock Equivalents”
means
        any securities of the Company or the Subsidiaries which would entitle the
        holder
        thereof to acquire at any time Common Stock, including, without limitation,
        any
        debt, preferred stock, rights, options, warrants or other instrument that
        is at
        any time convertible into or exercisable or exchangeable for, or otherwise
        entitles the holder thereof to receive, Common Stock.

       

      “Company
        Counsel”
means
        Loeb & Loeb, LLP.

       

      “Conversion
        Price”
shall
        have the meaning ascribed to such term in the Debentures.

       

      “Debentures”
means,
        the Variable Rate Convertible Debentures due, subject to the terms therein,
        36
        months from their date of issuance, issued by the Company to the Purchasers
        hereunder, in the form of Exhibit
        A
        hereto.

       

      “Disclosure
        Schedules”
shall
        have the meaning ascribed to such term in Section 3.1.

       

      “Effective
        Date”
means
        the date that the initial Registration Statement filed by the Company pursuant
        to the Registration Rights Agreement is first declared effective by the
        Commission.

       

      “Escrow
        Account”
means
        the escrow account established by CE Unterberg Towbin, the placement agent
        for
        the transaction for the deposit by the Purchasers of their Subscription Amounts
        to be applied to the transactions contemplated hereunder.

       

      “Evaluation
        Date”
shall
        have the meaning ascribed to such term in Section 3.1(r). 

       

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

      

      “Exempt
        Issuance”
means
        the issuance of (a) shares of Common Stock ,options or shares issuable upon
        exercise of options to employees, officers or directors of the Company pursuant
        to any stock or option plan or other equity incentive compensation plan duly
        adopted by a majority of the non-employee members of the Board of Directors
        of
        the Company or a majority of the members of a committee of non-employee
        directors established for such purpose, (b) securities upon the exercise
        or
        exchange of or conversion of any Securities issued hereunder (including Common
        Stock issued in lieu of cash payments of interest on the Debentures) and/or
        other securities exercisable or exchangeable for or convertible into shares
        of
        Common Stock issued and outstanding on the date of this Agreement, provided
        that
        such securities have not been amended since the date of this Agreement to
        increase the number of such securities or to decrease the exercise, exchange
        or
        conversion price of any such securities, and 

      
        
           

        

        
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      (c)
        securities issued pursuant to acquisitions or strategic transactions previously
        approved or to be approved by a majority of the disinterested directors (an
        “Acquisition Transaction”), provided any such issuance shall only be to a Person
        which is, itself or through its subsidiaries, an operating company in a business
        synergistic with the business of the Company (the “Synergistic Business”) and in
        which the Company receives benefits in addition to the investment of funds,
        or
        to such Persons who individually or in the aggregate owns a controlling interest
        in a Synergistic Business, but shall not include a transaction in which the
        Company is issuing securities primarily for the purpose of raising capital
        or to
        an entity whose primary business is investing in securities.

      

      “FW”
means
        Feldman Weinstein LLP with offices located at 420 Lexington Avenue, Suite
        2620,
        New York, New York 10170-0002.

      

      “GAAP”
shall
        have the meaning ascribed to such term in Section 3.1(h).

       

      “Intellectual
        Property Rights”
shall
        have the meaning ascribed to such term in Section 3.1(o).

       

      “Legend
        Removal Date”
shall
        have the meaning ascribed to such term in Section 4.1(c). 

       

      “Liens”
means
        a
        lien, charge, security interest, encumbrance, right of first refusal, preemptive
        right or other restriction. 

       

      “Material
        Adverse Effect”
shall
        have the meaning assigned to such term in Section 3.1(b).

       

      “Material
        Permits”
shall
        have the meaning ascribed to such term in Section 3.1(m).

       

      “Maximum
        Rate”
shall
        have the meaning ascribed to such term in Section 5.17.

       

      “Original
        Issue Date”
shall
        have the meaning ascribed to such term in the Debentures.

       

      “Participation
        Maximum”
shall
        have the meaning ascribed to such term in Section 4.13. 

       

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

       

      “Pre-Notice”
shall
        have the meaning ascribed to such term in Section 4.13. 

       

      “Proceeding”
means
        an action, claim, suit, investigation or proceeding (including, without
        limitation, an investigation or partial proceeding, such as a deposition),
        whether commenced or threatened.

       

      
        
           

        

        
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      “Purchaser
        Party”
shall
        have the meaning ascribed to such term in Section 4.11.

       

      “Registration
        Rights Agreement”
means
        the Registration Rights Agreement, dated the date hereof, among the Company
        and
        the Purchasers, in the form of Exhibit
        B
        attached
        hereto.

       

      “Registration
        Statement”
means
        a
        registration statement meeting the requirements set forth in the Registration
        Rights Agreement and covering the resale of the Underlying Shares by each
        Purchaser as provided for in the Registration Rights Agreement.

       

      “Required
        Approvals”
shall
        have the meaning ascribed to such term in Section 3.1(e).

       

      “Required
        Minimum”
means,
        as of any date, the maximum aggregate number of shares of Common Stock then
        issued or potentially issuable in the future pursuant to the Transaction
        Documents, including any Underlying Shares issuable upon exercise or conversion
        in full of all Warrants and Debentures (including Underlying Shares issuable
        as
        payment of interest), ignoring any conversion or exercise limits set forth
        therein, and assuming that the Conversion Price is at all times on and after
        the
        date of determination 75% of the then Conversion Price on the Trading Day
        immediately prior to the date of determination.

       

      “Rule
        144”
means
        Rule 144 promulgated by the Commission pursuant to the Securities Act, as
        such
        Rule may be amended from time to time, or any similar rule or regulation
        hereafter adopted by the Commission having substantially the same effect
        as such
        Rule.

       

      “SEC
        Reports”
shall
        have the meaning ascribed to such term in Section 3.1(h).

       

      “Securities”
means
        the Debentures, the Warrants, the Warrant Shares and the Underlying
        Shares.

       

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

       

      “Shareholder
        Approval”
means
        such approval as may be required by the applicable rules and regulations
        of the
        Nasdaq National Market (or any successor entity) from the shareholders of
        the
        Company with respect to the transactions contemplated by the Transaction
        Documents, including the issuance of all of the Underlying Shares in excess
        of
        19.99% of the issued and outstanding Common Stock on the Closing
        Date.

       

      “Short
        Sales”
shall
        include all “short sales” as defined in Rule 200 of Regulation SHO under the
        Exchange Act (but shall not be deemed to include the location and/or reservation
        of borrowable shares of Common Stock). 

       

      “Subscription
        Amount”
        means,
        as
        to each Purchaser, the aggregate amount
        to be
        paid for Debentures and Warrants purchased hereunder as specified below such
        Purchaser’s name on the signature page of this Agreement and next to the heading
“Subscription Amount”, in United States Dollars and in immediately available
        funds.

       

      
        
           

        

        
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      “Subsequent
        Financing”
shall
        have the meaning ascribed to such term in Section 4.13.

       

      “Subsequent
        Financing Notice”
shall
        have the meaning ascribed to such term in Section 4.13. 

       

      “Subsidiary”
means
        any subsidiary of the Company as set forth on Schedule
        3.1(a).

       

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

       

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

       

      “Transaction
        Documents”
means
        this Agreement, the Debentures, the Warrants, the Registration Rights Agreement
        and any other documents or agreements executed in connection with the
        transactions contemplated hereunder.

       

      “Underlying
        Shares”
means
        the shares of Common Stock issued and issuable upon conversion or redemption
        of
        the Debentures and upon exercise of the Warrants and issued and issuable
        in lieu
        of the cash payment of interest on the Debentures in accordance with the
        terms
        of the Debentures. 

       

      “VWAP”
means,
        for any date, the price determined by the first of the following clauses
        that
        applies: (a) if the Common Stock is then listed or quoted on a Trading Market,
        the daily volume weighted average price of the Common Stock for such date
        (or
        the nearest preceding date) on the Trading Market on which the Common Stock
        is
        then listed or quoted as reported by Bloomberg Financial L.P. (based on a
        Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b)  if
        the 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 listed or quoted
        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.

       

      “Warrants”
means
        collectively the Common Stock purchase warrants, in the form of Exhibit C
        delivered to the Purchasers at the Closing in accordance with Section 2.2(a)
        hereof, which Warrants shall be exercisable immediately and have a term of
        exercise equal to 5 years.

      

        “Warrant
          Shares”
means
          the shares of Common Stock issuable upon exercise of the Warrants.

         

      

      
        
           

        

        
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      ARTICLE
        II.

      PURCHASE
        AND SALE

       

      2.1 Closing.
        On the
        Closing Date, upon the terms and subject to the conditions set forth herein,
        substantially concurrent with the execution and delivery of this Agreement
        by
        the parties hereto, the Company agrees to sell, and each Purchaser agrees
        to
        purchase in the aggregate, severally and not jointly, up to $8,000,000 principal
        amount of the Debentures. Each Purchaser shall deliver to the Escrow Account
        via
        wire transfer or a certified check immediately available funds equal to their
        Subscription Amount net of 5% of such amount in lieu of interest on the
        Debentures for the first year following the Original Issue Date and the Company
        shall deliver to each Purchaser their respective Debenture and Warrants as
        determined pursuant to Section 2.2(a) and the other items set forth in Section
        2.2 issuable at the Closing. Upon satisfaction of the conditions set forth
        in
        Sections 2.2 and 2.3, the Closing shall occur at the offices of FW, or such
        other location as the parties shall mutually agree.

       

      2.2  Deliveries.

       

      (a) On
        the
        Closing Date, the Company shall deliver or cause to be delivered to each
        Purchaser the following:

       

      
        (i)
this
          Agreement duly executed by the Company;

         

        
          (ii) a
            legal opinion of Company Counsel, in the form of Exhibit
            D
            attached
            hereto;

        

      

       

      (iii) a
        Debenture with a principal amount equal to such Purchaser’s Subscription Amount,
        registered in the name of such Purchaser;

       

      (iv) a
        Warrant
        registered in the name of such Purchaser to purchase up to a number of shares
        of
        Common Stock equal to 50% of such Purchaser’s Subscription Amount divided by the
        initial Conversion Price, with an exercise price equal to $12.20,
        subject
        to adjustment therein;

       

      (v) the
        written agreement, in the form of Exhibit
        E
        attached
        hereto, of all of the officers, directors and shareholders holding more than
        10%
        of the issued and outstanding shares of Common Stock on the date hereof,
        including Victor Tong, Tony Tong, Sean Wang and Sino Mart (other than directors
        beneficially owning less than 1% of the Common Stock as of the Closing Date)
        to
        vote all Common Stock over which such Persons have voting control as of the
        record date for the meeting of shareholders of the Company in favor of
        Shareholder Approval, amounting to, in the aggregate, approximately 27% of
        the
        issued and outstanding Common Stock;

       

      
        
           

        

        
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      (vi) a
        lock up
        agreement, in the form of Exhibit
        F
        attached
        hereto, duly executed by all of the officers, directors and shareholders
        holding
        more than 10% of the issued and outstanding shares of Common Stock, including
        Victor Tong, Tony Tong, Sean Wang and Sino Mart (other than directors
        beneficially owning less than 1% of the Common Stock as of the Closing Date);
        and

       

      (vii) the
        Registration Rights Agreement duly executed by the Company.

       

      (b) On
        the
        Closing Date, each Purchaser shall deliver or cause to be delivered to the
        Company (except as noted) the following: 

       

      (i)
this
        Agreement duly executed by such Purchaser;

       

      (ii) such
        Purchaser’s Subscription Amount, net of 5% of such amount in lieu of interest
        for the first year following the Original Issue Date, by wire transfer to
        the
        Escrow Account; and

       

      (iii) the
        Registration Rights Agreement duly executed by such Purchaser.

       

      2.3 Closing
        Conditions. 

       

      (a) The
        obligations of the Company hereunder in connection with the Closing are subject
        to the following conditions being met:

       

      (i) the
        accuracy in all material respects when made and on the Closing Date of the
        representations and warranties of the Purchasers contained herein;

       

      (ii) all
        obligations, covenants and agreements of the Purchasers required to be performed
        at or prior to the Closing Date shall have been performed; and

       

      (iii) the
        delivery by the Purchasers of the items set forth in Section 2.2(b) of this
        Agreement.

       

      (b) The
        respective obligations of the Purchasers hereunder in connection with the
        Closing are subject to the following conditions being met:

       

      (i) the
        accuracy in all material respects on the Closing Date of the representations
        and
        warranties of the Company contained herein;

       

      (ii) all
        obligations, covenants and agreements of the Company required to be performed
        at
        or prior to the Closing Date shall have been performed; 

       

      (iii) the
        delivery by the Company of the items set forth in Section 2.2(a) of this
        Agreement; 

       

      
        
           

        

        
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      (iv) there
        shall have been no Material Adverse Effect with respect to the Company since
        the
        date hereof; and

       

      (v) from
        the
        date hereof to the Closing Date, trading in the Common Stock shall not have
        been
        suspended by the Commission or the Company’s principal Trading Market (except
        for any suspension of trading of limited duration agreed to by the Company,
        which suspension shall be terminated prior to the Closing), and, at any time
        prior to the Closing Date, trading in securities generally as reported by
        Bloomberg Financial Markets shall not have been suspended or limited, or
        minimum
        prices shall not have been established on securities whose trades are reported
        by such service, or on any Trading Market, nor shall a banking moratorium
        have
        been declared either by the United States or New York State authorities nor
        shall there have occurred any material outbreak or escalation of hostilities
        or
        other national or international calamity of such magnitude in its effect
        on, or
        any material adverse change in, any financial market which, in each case,
        in the
        reasonable judgment of each Purchaser, makes it impracticable or inadvisable
        to
        purchase the Debentures at the Closing.

       

       

      ARTICLE
        III.

      REPRESENTATIONS
        AND WARRANTIES

       

      3.1 Representations
        and Warranties of the Company.
        Except
        as set forth under the corresponding section of the disclosure schedules
        delivered to the Purchasers concurrently herewith (the “Disclosure
        Schedules”)
        which
        Disclosure Schedules shall be deemed a part hereof and to qualify any
        representation or warranty otherwise made herein to the extent of such
        disclosure, the Company hereby makes the representations and warranties set
        forth below to each Purchaser.

       

      (a) Subsidiaries.
        All of
        the direct and indirect subsidiaries of the Company are set forth on
Schedule
        3.1(a).
        The
        Company owns, directly or indirectly, all of the capital stock or other equity
        interests of each Subsidiary free and clear of any Liens, and all the issued
        and
        outstanding shares of capital stock of each Subsidiary are validly issued
        and
        are fully paid, non-assessable and free of preemptive and similar rights
        to
        subscribe for or purchase securities. If the Company has no subsidiaries,
        then
        all other references in the Transaction Documents to the Subsidiaries or
        any of
        them will be disregarded.

       

      (b) Organization
        and Qualification.
        The
        Company and each of the Subsidiaries is an entity duly incorporated or otherwise
        organized, validly existing and in good standing under the laws of the
        jurisdiction of its incorporation or organization (as applicable), with the
        requisite power and authority to own and use its properties and assets and
        to
        carry on its business as currently conducted. Neither the Company nor any
        Subsidiary is in violation or default of any of the provisions of its respective
        certificate or articles of incorporation, bylaws or other organizational
        or
        charter documents. Each of the Company and the Subsidiaries is duly qualified
        to
        conduct business and is in good standing as a foreign corporation or other
        entity in each jurisdiction in which the nature of the business conducted
        or
        property owned by it makes such qualification necessary, 

       

      
        
           

        

        
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      except
        where the failure to be so qualified or in good standing, as the case may
        be,
        could not have or reasonably be expected to result in (i) a material adverse
        effect on the legality, validity or enforceability of any Transaction Document,
        (ii) a material adverse effect on the results of operations, assets, business,
        prospects or condition (financial or otherwise) of the Company and the
        Subsidiaries, taken as a whole, or (iii) a material adverse effect on the
        Company’s ability to perform in any material respect on a timely basis its
        obligations under any Transaction Document (any of (i), (ii) or (iii), a
        “Material
        Adverse Effect”)
        and no
        Proceeding has been instituted in any such jurisdiction revoking, limiting
        or
        curtailing or seeking to revoke, limit or curtail such power and authority
        or
        qualification.

       

      (c) Authorization;
        Enforcement.
        The
        Company has the requisite corporate power and authority to enter into and
        to
        consummate the transactions contemplated by each of the Transaction Documents
        and otherwise to carry out its obligations hereunder and thereunder. The
        execution and delivery of each of the Transaction Documents by the Company
        and
        the consummation by it of the transactions contemplated hereby thereby have
        been
        duly authorized by all necessary action on the part of the Company and no
        further action is required by the Company, its board of directors or its
        stockholders in connection therewith other than in connection with the Required
        Approvals. Each Transaction Document has been (or upon delivery will have
        been)
        duly executed by the Company and, when delivered in accordance with the terms
        hereof and thereof, will constitute the valid and binding obligation of the
        Company enforceable against the Company in accordance with its terms except
        (i)
        as limited by general equitable principles and applicable bankruptcy,
        insolvency, reorganization, moratorium and other laws of general application
        affecting enforcement of creditors’ rights generally, (ii) as limited by laws
        relating to the availability of specific performance, injunctive relief or
        other
        equitable remedies and (iii) insofar as indemnification and contribution
        provisions may be limited by applicable law.

       

      (d) No
        Conflicts.
        The
        execution, delivery and performance of the Transaction Documents by the Company
        and the consummation by the Company of the other transactions contemplated
        hereby and thereby do not and will not: (i) conflict with or violate any
        provision of the Company’s or any Subsidiary’s certificate or articles of
        incorporation, bylaws or other organizational or charter documents, or (ii)
        conflict with, or constitute a default (or an event that with notice or lapse
        of
        time or both would become a default) under, result in the creation of any
        Lien
        upon any of the properties or assets of the Company or any Subsidiary, or
        give
        to others any rights of termination, amendment, acceleration or cancellation
        (with or without notice, lapse of time or both) of, any agreement, credit
        facility, debt or other instrument (evidencing a Company or Subsidiary debt
        or
        otherwise) or other understanding to which the Company or any Subsidiary
        is a
        party or by which any property or asset of the Company or any Subsidiary
        is
        bound or affected, or (iii) subject to the Required Approvals, conflict with
        or
        result in a violation of any law, rule, regulation, order, judgment, injunction,
        decree or other restriction of any court or governmental authority to which
        the
        Company or a Subsidiary is subject (including federal and state securities
        laws
        and regulations), or by which any property or asset of the Company or a
        Subsidiary is bound or affected; except in the case of each of clauses (ii)
        and
        (iii), such as could not have or reasonably be expected to result in a Material
        Adverse Effect.

       

      
        
           

        

        
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      (e) Filings,
        Consents and Approvals.
        The
        Company is not required to obtain any consent, waiver, authorization or order
        of, give any notice to, or make any filing or registration with, any court
        or
        other federal, state, local or other governmental authority or other Person
        in
        connection with the execution, delivery and performance by the Company of
        the
        Transaction Documents, other than (i) filings required pursuant to Section
        4.6,
        (ii) the filing with the Commission of the Registration Statement, (iii)
        the
        notice and/or application(s) to each applicable Trading Market for the issuance
        and sale of the Securities and the listing of the Underlying Shares for trading
        thereon in the time and manner required thereby, (iv) the filing of Form
        D with
        the Commission and such filings as are required to be made under applicable
        state securities laws and (v) Shareholder Approval, if required (collectively,
        the “Required
        Approvals”).

       

      (f) Issuance
        of the Securities.
        The
        Securities are duly authorized and, when issued and paid for in accordance
        with
        the applicable Transaction Documents, will be duly and validly issued, fully
        paid and nonassessable, free and clear of all Liens imposed by the Company
        other
        than restrictions on transfer provided for in the Transaction Documents.
        The
        Underlying Shares, when issued in accordance with the terms of the Transaction
        Documents, will be validly issued, fully paid and nonassessable, free and
        clear
        of all Liens imposed by the Company. The Company has reserved from its duly
        authorized capital stock a number of shares of Common Stock for issuance
        of the
        Underlying Shares at least equal to the Required Minimum on the date hereof.
        

       

      (g) Capitalization.
        The
        capitalization of the Company is as set forth on Schedule
        3.1(g).
        The
        Company has not issued any capital stock since its most
        recently filed periodic report under the Exchange Act,
        other
        than pursuant to the exercise of employee stock options under the Company’s
        stock option plans, the issuance of shares of Common Stock to employees pursuant
        to the Company’s employee stock purchase plan and pursuant to the conversion or
        exercise of Common Stock Equivalents outstanding as of the date of the most
        recently filed periodic report under the Exchange Act. No Person has any
        right
        of first refusal, preemptive right, right of participation, or any similar
        right
        to participate in the transactions contemplated by the Transaction Documents.
        Except as (i) a result of the purchase and sale of the Securities and (ii)
        as
        set forth on Schedule 3.1(g), there are no outstanding options, warrants,
        script
        rights to subscribe to, calls or commitments of any character whatsoever
        relating to, or securities, rights or obligations convertible into or
        exercisable or exchangeable for, or giving any Person any right to subscribe
        for
        or acquire, any shares of Common Stock, or contracts, commitments,
        understandings or arrangements by which the Company or any Subsidiary is
        or may
        become bound to issue additional shares of Common Stock or Common Stock
        Equivalents. The issuance and sale of the Securities will not obligate the
        Company to issue shares of Common Stock or other securities to any Person
        (other
        than the Purchasers) and will not result in a right of any holder of Company
        securities to adjust the exercise, conversion, exchange or reset price under
        any
        of such securities. All of the outstanding shares of capital stock of the
        Company are validly issued, fully paid and nonassessable, have been issued
        in
        compliance with all federal and state securities laws, and none of such
        outstanding shares was issued in violation of any preemptive rights or similar
        rights to subscribe for or purchase securities. 

       

      
        
           

        

        
          10

          
            

          

        

        
           

        

      

      No
        further approval or authorization of any stockholder, the Board of Directors
        of
        the Company or others is required for the issuance and sale of the Securities.
        Other than the agreements set forth in Section 2.2(a)(v) and (vi), there
        are no
        stockholders agreements, voting agreements or other similar agreements with
        respect to the Company’s capital stock to which the Company is a party or, to
        the knowledge of the Company, between or among any of the Company’s
        stockholders.

       

      (h) SEC
        Reports; Financial Statements.
        The
        Company has filed all reports, schedules, forms, statements and other documents
        required to be filed by it under the Securities Act and the Exchange Act,
        including pursuant to Section 13(a) or 15(d) thereof, for the two years
        preceding the date hereof (or such shorter period as the Company was required
        by
        law or regulation to file such material) (the foregoing materials, including
        the
        exhibits thereto and documents incorporated by reference therein, being
        collectively referred to herein as the “SEC
        Reports”)
        on a
        timely basis or has received a valid extension of such time of filing and
        has
        filed any such SEC Reports prior to the expiration of any such extension.
        As of
        their respective dates, the SEC Reports complied in all material respects
        with
        the requirements of the Securities Act and the Exchange Act and the rules
        and
        regulations of the Commission promulgated thereunder, as applicable, and
        none of
        the SEC Reports, when filed, contained any untrue statement of a material
        fact
        or omitted to state a material fact required to be stated therein or necessary
        in order to make the statements therein, in the light of the circumstances
        under
        which they were made, not misleading. The financial statements of the Company
        included in the SEC Reports comply in all material respects with applicable
        accounting requirements and the rules and regulations of the Commission with
        respect thereto as in effect at the time of filing. Such financial statements
        have been prepared in accordance with United States generally accepted
        accounting principles applied on a consistent basis during the periods involved
        (“GAAP”),
        except as may be otherwise specified in such financial statements or the
        notes
        thereto and except that unaudited financial statements may not contain all
        footnotes required by GAAP, and fairly present in all material respects the
        financial position of the Company and its consolidated subsidiaries as of
        and
        for the dates thereof and the results of operations and cash flows for the
        periods then ended, subject, in the case of unaudited statements, to normal,
        immaterial, year-end audit adjustments.

       

      (i) Material
        Changes.
        Since
        the date of the latest audited financial statements included within the SEC
        Reports, except as specifically disclosed in a subsequent SEC Report, (i)
        there
        has been no event, occurrence or development that has had or that could
        reasonably be expected to result in a Material Adverse Effect, (ii) the Company
        has not incurred any liabilities (contingent or otherwise) other than (A)
        trade
        payables and accrued expenses incurred in the ordinary course of business
        consistent with past practice and (B) liabilities not required to be reflected
        in the Company’s financial statements pursuant to GAAP or disclosed in filings
        made with the Commission, (iii) the Company has not altered its method of
        accounting, (iv) the Company has not declared or made any dividend or
        distribution of cash or other property to its stockholders or purchased,
        redeemed or made any agreements to purchase or redeem any shares of its capital
        stock and (v) the Company has not issued any equity securities to any officer,
        director or Affiliate, except pursuant to existing Company stock option plans.
        

       

      
        
           

        

        
          11

          
            

          

        

        
           

        

      

      The
        Company does not have pending before the Commission any request for confidential
        treatment of information. Except for the issuance of the Securities contemplated
        by this Agreement or as set forth on Schedule
        3.1(i),
        no
        event, liability or development has occurred or exists with respect to the
        Company or its Subsidiaries or their respective business, properties, operations
        or financial condition, that would be required to be disclosed by the Company
        under applicable securities laws at the time this representation is made
        that
        has not been publicly disclosed at least one Trading Day prior to the date
        that
        this representation is made.

       

      (j) Litigation.
        There
        is no action, suit, inquiry, notice of violation, proceeding or investigation
        pending or, to the knowledge of the Company, threatened against or affecting
        the
        Company, any Subsidiary or any of their respective properties before or by
        any
        court, arbitrator, governmental or administrative agency or regulatory authority
        (federal, state, county, local or foreign) (collectively, an “Action”)
        which
        (i) adversely affects or challenges the legality, validity or enforceability
        of
        any of the Transaction Documents or the Securities or (ii) could, if there
        were
        an unfavorable decision, have or reasonably be expected to result in a Material
        Adverse Effect. Neither the Company nor any Subsidiary, nor any director
        or
        officer thereof, is or has been the subject of any Action involving a claim
        of
        violation of or liability under federal or state securities laws or a claim
        of
        breach of fiduciary duty. There has not been, and to the knowledge of the
        Company, there is not pending or contemplated, any investigation by the
        Commission involving the Company or any current or former director or officer
        of
        the Company. The Commission has not issued any stop order or other order
        suspending the effectiveness of any registration statement filed by the Company
        or any Subsidiary under the Exchange Act or the Securities Act. 

       

      (k) Labor
        Relations.
        No
        material labor dispute exists or, to the knowledge of the Company, is imminent
        with respect to any of the employees of the Company which could reasonably
        be
        expected to result in a Material Adverse Effect. None of the Company’s or its
        Subsidiaries’ employees is a member of a union that relates to such employee’s
        relationship with the Company, and neither the Company or any of its
        Subsidiaries is a party to a collective bargaining agreement, and the Company
        and its Subsidiaries believe that their relationships with their employees
        are
        good. No executive officer, to the knowledge of the Company, is, or is now
        expected to be, in violation of any material term of any employment contract,
        confidentiality, disclosure or proprietary information agreement or
        non-competition agreement, or any other contract or agreement or any restrictive
        covenant, and the continued employment of each such executive officer does
        not
        subject the Company or any of its Subsidiaries to any liability with respect
        to
        any of the foregoing matters. The Company and its Subsidiaries are in compliance
        with all U.S. federal, state, local and foreign laws and regulations relating
        to
        employment and employment practices, terms and conditions of employment and
        wages and hours, except where the failure to be in compliance could not,
        individually or in the aggregate, reasonably be expected to have a Material
        Adverse Effect.

       

      
        
           

        

        
          12

          
            

          

        

        
           

        

      

      (l) Compliance.
        Neither
        the Company nor any Subsidiary (i) is in default under or in violation of
        (and
        no event has occurred that has not been waived that, with notice or lapse
        of
        time or both, would result in a default by the Company or any Subsidiary
        under),
        nor has the Company or any Subsidiary received notice of a claim that it
        is in
        default under or that it is in violation of, any indenture, loan or credit
        agreement or any other agreement or instrument to which it is a party or
        by
        which it or any of its properties is bound (whether or not such default or
        violation has been waived), (ii) is in violation of any order of any court,
        arbitrator or governmental body, or (iii) is or has been in violation of
        any
        statute, rule or regulation of any governmental authority, including without
        limitation all foreign, federal, state and local laws applicable to its business
        and all such laws that affect the environment, except in each case as could
        not
        have or reasonably be expected to result in a Material Adverse
        Effect.

       

      (m) Regulatory
        Permits.
        The
        Company and the Subsidiaries possess all certificates, authorizations and
        permits issued by the appropriate federal, state, local or foreign regulatory
        authorities necessary to conduct their respective businesses as described
        in the
        SEC Reports, except where the failure to possess such permits could not have
        or
        reasonably be expected to result in a Material Adverse Effect (“Material
        Permits”),
        and
        neither the Company nor any Subsidiary has received any notice of proceedings
        relating to the revocation or modification of any Material Permit.

       

      (n) Title
        to Assets.
        Except
        as could not have a Material Adverse Effect, the Company and the Subsidiaries
        have good and marketable title in fee simple to all real property owned by
        them
        that is material to the business of the Company and the Subsidiaries and
        good
        and marketable title in all personal property owned by them that is material
        to
        the business of the Company and the Subsidiaries, in each case free and clear
        of
        all Liens, except for Liens as do not materially affect the value of such
        property and do not materially interfere with the use made and proposed to
        be
        made of such property by the Company and the Subsidiaries and Liens for the
        payment of federal, state or other taxes, the payment of which is neither
        delinquent nor subject to penalties. Any real property and facilities held
        under
        lease by the Company and the Subsidiaries are held by them under valid,
        subsisting and enforceable leases with which the Company and the Subsidiaries
        are in compliance.

       

      (o) Patents
        and Trademarks.
        The
        Company and the Subsidiaries have, or have rights to use, all patents, patent
        applications, trademarks, trademark applications, service marks, trade names,
        trade secrets, inventions, copyrights, licenses and other intellectual property
        rights and similar rights necessary or material for use in connection with
        their
        respective businesses as described in the SEC Reports and which the failure
        to
        so have could have a Material Adverse Effect (collectively, the “Intellectual
        Property Rights”).
        Neither the Company nor any Subsidiary has received a notice (written or
        otherwise) that the Intellectual Property Rights used by the Company or any
        Subsidiary violates or infringes upon the rights of any Person. To the knowledge
        of the Company, all such Intellectual Property Rights are enforceable and
        there
        is no existing infringement by another Person of any of the Intellectual
        Property Rights. The Company and its Subsidiaries have taken reasonable security
        measures to protect the secrecy, confidentiality and value of all of their
        intellectual properties, except where failure to do so could not, individually
        or in the aggregate, reasonably be expect to have a Material Adverse
        Effect.

       

      
        
           

        

        
          13

          
            

          

        

        
           

        

      

      (p) Insurance.
        The
        Company and the Subsidiaries are insured by insurers of recognized financial
        responsibility against such losses and risks and in such amounts as are prudent
        and customary in the businesses in which the Company and the Subsidiaries
        are
        engaged, including, but not limited to, directors and officers insurance
        coverage at least equal to the aggregate Subscription Amount. Neither the
        Company nor any Subsidiary has any reason to believe that it will not be
        able to
        renew its existing insurance coverage as and when such coverage expires or
        to
        obtain similar coverage from similar insurers as may be necessary to continue
        its business without a significant increase in cost.

       

      (q) Transactions
        With Affiliates and Employees.
        Except
        as set forth in the SEC Reports, none of the officers or directors of the
        Company and, to the knowledge of the Company, none of the employees of the
        Company is presently a party to any transaction with the Company or any
        Subsidiary (other than for services as employees, officers and directors),
        including any contract, agreement or other arrangement providing for the
        furnishing of services to or by, providing for rental of real or personal
        property to or from, or otherwise requiring payments to or from any officer,
        director or such employee or, to the knowledge of the Company, any entity
        in
        which any officer, director, or any such employee has a substantial interest
        or
        is an officer, director, trustee or partner, in each case in excess of $60,000
        other than (i) for payment of salary or consulting fees for services rendered,
        (ii) reimbursement for expenses incurred on behalf of the Company and (iii)
        for
        other employee benefits, including stock option agreements under any stock
        option plan of the Company.

       

      (r) Sarbanes-Oxley;
        Internal Accounting Controls.
        The
        Company is in material compliance with all provisions of the Sarbanes-Oxley
        Act
        of 2002 which are applicable to it as of the Closing Date. The
        Company and the Subsidiaries maintain a system of internal accounting controls
        sufficient to provide reasonable assurance that (i) transactions are executed
        in
        accordance with management’s general or specific authorizations, (ii)
        transactions are recorded as necessary to permit preparation of financial
        statements in conformity with GAAP and to maintain asset accountability,
        (iii)
        access to assets is permitted only in accordance with management’s general or
        specific authorization, and (iv) the recorded accountability for assets is
        compared with the existing assets at reasonable intervals and appropriate
        action
        is taken with respect to any differences. The Company has established disclosure
        controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
        15d-15(e)) for the Company and designed such disclosure controls and procedures
        to ensure that information required to be disclosed by the Company in the
        reports it files or submits under the Exchange Act is recorded, processed,
        summarized and reported, within the time periods specified in the Commission’s
        rules and forms. The Company’s certifying officers have evaluated the
        effectiveness of the Company’s disclosure controls and procedures as of the end
        of the period covered by the Company’s most recently filed periodic report under
        the Exchange Act (such date, the “Evaluation
        Date”).
        The
        Company presented in its most recently filed periodic report under the Exchange
        Act the conclusions of the certifying officers about the effectiveness of
        the
        disclosure controls and procedures based on their evaluations as of the
        Evaluation Date. Since the Evaluation Date, there have been no changes in
        the
        Company’s internal control over financial reporting (as such term is defined in
        the Exchange Act) that has materially affected, or is reasonably likely to
        materially affect, the Company’s internal control over financial
        reporting.

       

      
        
           

        

        
          14

          
            

          

        

        
           

        

      

      (s) Certain
        Fees.
        Except
        as set forth on Schedule 3.1(s), no brokerage or finder’s fees or commissions
        are or will be payable by the Company to any broker, financial advisor or
        consultant, finder, placement agent, investment banker, bank or other Person
        with respect to the transactions contemplated by the Transaction Documents.
        The
        Purchasers shall have no obligation with respect to any fees or with respect
        to
        any claims made by or on behalf of other Persons for fees of a type contemplated
        in this Section that may be due in connection with the transactions contemplated
        by the Transaction Documents. 

       

      (t) Private
        Placement.
        Assuming the accuracy of the Purchasers representations and warranties set
        forth
        in Section 3.2, no registration under the Securities Act is required for
        the
        offer and sale of the Securities by the Company to the Purchasers as
        contemplated hereby. The issuance and sale of the Securities hereunder does
        not
        contravene the rules and regulations of the Trading Market.

       

      (u) Investment
        Company.
        The
        Company is not, and is not an Affiliate of, and immediately after receipt
        of
        payment for the Securities, will not be or be an Affiliate of, an “investment
        company” within the meaning of the Investment Company Act of 1940, as amended.
        The Company shall conduct its business in a manner so that it will not become
        subject to the Investment Company Act.

       

      (v) Registration
        Rights.
        Other
        than each of the Purchasers, no Person has any right to cause the Company
        to
        effect the registration under the Securities Act of any securities of the
        Company.

       

      (w) Listing
        and Maintenance Requirements.
        The
        Company’s Common Stock is registered pursuant to Section 12(b) or 12(g) of the
        Exchange Act, and the Company has taken no action designed to, or which to
        its
        knowledge is likely to have the effect of, terminating the registration of
        the
        Common Stock under the Exchange Act nor has the Company received any
        notification that the Commission is contemplating terminating such registration.
        The Company has not, in the 12 months preceding the date hereof, received
        notice
        from any Trading Market on which the Common Stock is or has been listed or
        quoted to the effect that the Company is not in compliance with the listing
        or
        maintenance requirements of such Trading Market. The Company is, and has
        no
        reason to believe that it will not in the foreseeable future continue to
        be, in
        compliance with all such listing and maintenance requirements.

       

      (x) Application
        of Takeover Protections.
        The
        Company and its Board of Directors have taken all necessary action, if any,
        in
        order to render inapplicable any control share acquisition, business
        combination, poison pill (including any distribution under a rights agreement)
        or other similar anti-takeover provision under the Company’s Certificate of
        Incorporation (or similar charter documents) or the laws of its state of
        incorporation that is or could become applicable to the Purchasers as a result
        of the Purchasers and the Company fulfilling their obligations or exercising
        their rights under the Transaction Documents, including without limitation
        as a
        result of the Company’s issuance of the Securities and the Purchasers’ ownership
        of the Securities.

       

      
        
           

        

        
          15

          
            

          

        

        
           

        

      

      (y) Disclosure.
        Except
        with respect to the material terms and conditions of the transactions
        contemplated by the Transaction Documents, the Company confirms that neither
        it
        nor any other Person acting on its behalf has provided any of the Purchasers
        or
        their agents or counsel with any information that it believes constitutes
        or
        might constitute material, nonpublic information. The Company understands
        and
        confirms that the Purchasers will rely on the foregoing representation in
        effecting transactions in securities of the Company. All disclosure furnished
        by
        or on behalf of the Company to the Purchasers regarding the Company, its
        business and the transactions contemplated hereby, including the Disclosure
        Schedules to this Agreement, with respect to the representations and warranties
        made herein are true and correct with respect to such representations and
        warranties and do not contain any untrue statement of a material fact or
        omit to
        state any material fact necessary in order to make the statements made therein,
        in light of the circumstances under which they were made, not misleading.
        The
        Company acknowledges and agrees that no Purchaser makes or has made any
        representations or warranties with respect to the transactions contemplated
        hereby other than those specifically set forth in Section 3.2
        hereof.

       

      (z) No
        Integrated Offering.
        Assuming
        the accuracy of the Purchasers’ representations and warranties set forth in
        Section 3.2, neither the Company, nor any of its affiliates, nor any Person
        acting on its or their behalf has, directly or indirectly, made any offers
        or
        sales of any security or solicited any offers to buy any security, under
        circumstances that would cause this offering of the Securities to be integrated
        with prior offerings by the Company for purposes of the Securities Act or
        any
        applicable shareholder approval provision of any Trading Market on which
        any of
        the securities of the Company are listed or designated.

       

      (aa) Solvency.
        Based
        on the financial condition of the Company as of the Closing Date after giving
        effect to the receipt by the Company of the proceeds from the sale of the
        Securities hereunder, (i) the fair saleable value of the Company’s assets
        exceeds the amount that will be required to be paid on or in respect of the
        Company’s existing debts and other liabilities (including known contingent
        liabilities) as they mature; (ii) the Company’s assets do not constitute
        unreasonably small capital to carry on its business as now conducted and
        as
        proposed to be conducted including its capital needs taking into account
        the
        particular capital requirements of the business conducted by the Company,
        and
        projected capital requirements and capital availability thereof; and (iii)
        the
        current cash flow of the Company, together with the proceeds the Company
        would
        receive, were it to liquidate all of its assets, after taking into account
        all
        anticipated uses of the cash, would be sufficient to pay all amounts on or
        in
        respect of its liabilities when such amounts are required to be paid. The
        Company does not intend to incur debts beyond its ability to pay such debts
        as
        they mature (taking into account the timing and amounts of cash to be payable
        on
        or in respect of its debt). The Company has no knowledge of any facts or
        circumstances which lead it to believe that it will file for reorganization
        or
        liquidation under the bankruptcy or reorganization laws of any jurisdiction
        within one year from the Closing Date. The SEC Reports set forth as of the
        dates
        thereof all outstanding secured and unsecured Indebtedness of the Company
        or any
        Subsidiary, or for which the Company or any Subsidiary has commitments.

       

      
        
           

        

        
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      For
        the
        purposes of this Agreement, “Indebtedness”
shall
        mean (a) any liabilities for borrowed money or amounts owed in excess of
        $75,000
        (other than trade accounts payable incurred in the ordinary course of business),
        (b) all guaranties, endorsements and other contingent obligations in respect
        of
        Indebtedness of others, whether or not the same are or should be reflected
        in
        the Company’s balance sheet (or the notes thereto), except guaranties by
        endorsement of negotiable instruments for deposit or collection or similar
        transactions in the ordinary course of business; and (c) the present value
        of
        any lease payments
        in excess of $75,000 due under leases required to be capitalized in accordance
        with GAAP. Neither
        the Company nor any Subsidiary is in default with respect to any
        Indebtedness.

       

      (bb) Tax
        Status.
         
        Except
        for matters that would not, individually or in the aggregate, have or reasonably
        be expected to result in a Material Adverse Effect, the Company and each
        Subsidiary has filed all necessary federal, state and foreign income and
        franchise tax returns and has paid or accrued all taxes shown as due thereon,
        and the Company has no knowledge of a tax deficiency which has been asserted
        or
        threatened against the Company or any Subsidiary.

       

      (cc) No
        General Solicitation.
        Neither
        the Company nor any person acting on behalf of the Company has offered or
        sold
        any of the Securities by any form of general solicitation or general
        advertising. The Company has offered the Securities for sale only to the
        Purchasers and certain other “accredited investors” within the meaning of Rule
        501 under the Securities Act.

       

      (dd) Foreign
        Corrupt Practices.
        Neither
        the Company, nor to the knowledge of the Company, any agent or other person
        acting on behalf of the Company, has (i) directly or indirectly, used any
        funds
        for unlawful contributions, gifts, entertainment or other unlawful expenses
        related to foreign or domestic political activity, (ii) made any unlawful
        payment to foreign or domestic government officials or employees or to any
        foreign or domestic political parties or campaigns from corporate funds,
        (iii)
        failed to disclose fully any contribution made by the Company (or made by
        any
        person acting on its behalf of which the Company is aware) which is in violation
        of law, or (iv) violated in any material respect any provision of the Foreign
        Corrupt Practices Act of 1977, as amended.

       

      (ee) Accountants.
        The
        Company’s accountants are set forth on Schedule
        3.1(ee)
        of the
        Disclosure Schedule. To the knowledge of the Company, such accountants, who
        the
        Company expects will express their opinion with respect to the financial
        statements to be included in the Company’s Annual Report on Form 10-KSB for the
        year ended December 31, 2005 are a registered public accounting firm as required
        by the Securities Act.

       

      (ff) Seniority.
        As of
        the Closing Date, no Indebtedness or other claim against the Company is senior
        to the Debentures in right of payment, whether with respect to interest or
        upon
        liquidation or dissolution, or otherwise, other than indebtedness secured
        by
        purchase money security interests (which is senior only as to underlying
        assets
        covered thereby) and capital lease obligations (which is senior only as to
        the
        property covered thereby).

       

      
        
           

        

        
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      (gg) No
        Disagreements with Accountants and Lawyers.
        There
        are no disagreements of any kind presently existing, or reasonably anticipated
        by the Company to arise, between the Company and the accountants and lawyers
        formerly or presently employed by the Company and the Company is current
        with
        respect to any fees owed to its accountants and lawyers.

       

      (hh) Acknowledgment
        Regarding Purchasers’ Purchase of Securities.
        The
        Company acknowledges and agrees that each of the Purchasers is acting solely
        in
        the capacity of an arm’s length purchaser with respect to the Transaction
        Documents and the transactions contemplated thereby. The Company further
        acknowledges that no Purchaser is acting as a financial advisor or fiduciary
        of
        the Company (or in any similar capacity) with respect to the Transaction
        Documents and the transactions contemplated thereby and any advice given
        by any
        Purchaser or any of their respective representatives or agents in connection
        with the Transaction Documents and the transactions contemplated thereby
        is
        merely incidental to the Purchasers’ purchase of the Securities. The Company
        further represents to each Purchaser that the Company’s decision to enter into
        this Agreement and the other Transaction Documents has been based solely
        on the
        independent evaluation of the transactions contemplated hereby by the Company
        and its representatives.

       

      (ii) Acknowledgement
        Regarding Purchasers’ Trading Activity.
        Anything in this Agreement or elsewhere herein to the contrary notwithstanding
        (except for Sections 3.2(f) and 4.16 hereof), it is understood and acknowledged
        by the Company (i) that none of the Purchasers have been asked to agree,
        nor has
        any Purchaser agreed, to desist from purchasing or selling, long and/or short,
        securities of the Company, or “derivative” securities based on securities issued
        by the Company or to hold the Securities for any specified term; (ii) that
        past
        or future open market or other transactions by any Purchaser, including Short
        Sales, and specifically including, without limitation, Short Sales or
“derivative” transactions, before or after the closing of this or future private
        placement transactions, may negatively impact the market price of the Company’s
        publicly-traded securities; (iii) that any Purchaser, and counter-parties
        in
“derivative” transactions to which any such Purchaser is a party, directly or
        indirectly, presently may have a “short” position in the Common Stock, and (iv)
        that each Purchaser shall not be deemed to have any affiliation with or control
        over any arm’s length counter-party in any “derivative” transaction.
The
        Company further understands and acknowledges that (a) one or more Purchasers
        may
        engage in hedging activities at various times during the period that the
        Securities are outstanding, including, without limitation, during the periods
        that the value of the Underlying Shares deliverable with respect to Securities
        are being determined and (b) such hedging activities (if any) could reduce
        the
        value of the existing stockholders' equity interests in the Company at and
        after
        the time that the hedging activities are being conducted.  The Company
        acknowledges that such aforementioned hedging activities do not constitute
        a
        breach of any of the Transaction Documents.

       

      
        
           

        

        
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      (jj) Manipulation
        of Price. 
        The Company has not, and to its knowledge no one acting on its behalf has,
        (i)
        taken, directly or indirectly, any action designed to cause or to result
        in the
        stabilization or manipulation of the price of any security of the Company
        to
        facilitate the sale or resale of any of the Securities, (ii) sold, bid for,
        purchased, or, paid any compensation for soliciting purchases of, any of
        the
        Securities or (iii) paid or agreed to pay to any person any compensation
        for
        soliciting another to purchase any other securities of the Company, other
        than,
        in the case of clauses (ii) and (iii), compensation paid to the Company’s
        placement agent in connection with the placement of the Securities.

       

      

      3.2 Representations
        and Warranties of the Purchasers.
        Each
        Purchaser hereby, for itself and for no other Purchaser, represents and warrants
        as of the date hereof and as of the Closing Date to the Company as
        follows:

       

      (a) Organization;
        Authority.
        Such
        Purchaser is an entity duly organized, validly existing and in good standing
        under the laws of the jurisdiction of its organization with full right,
        corporate or partnership power and authority to enter into and to consummate
        the
        transactions contemplated by the Transaction Documents and otherwise to carry
        out its obligations hereunder and thereunder. The execution, delivery and
        performance by such Purchaser of the transactions contemplated by this Agreement
        have been duly authorized by all necessary corporate or similar action on
        the
        part of such Purchaser. Each Transaction Document to which it is a party
        has
        been duly executed by such Purchaser, and when delivered by such Purchaser
        in
        accordance with the terms hereof, will constitute the valid and legally binding
        obligation of such Purchaser, enforceable against it in accordance with its
        terms, except (i) as limited by general equitable principles and applicable
        bankruptcy, insolvency, reorganization, moratorium and other laws of general
        application affecting enforcement of creditors’ rights generally, (ii) as
        limited by laws relating to the availability of specific performance, injunctive
        relief or other equitable remedies and (iii) insofar as indemnification and
        contribution provisions may be limited by applicable law.

       

      (b) Own
        Account.
        Such
        Purchaser understands that the Securities are “restricted securities” and have
        not been registered under the Securities Act or any applicable state securities
        law and is acquiring the Securities as principal for its own account and
        not
        with a view to or for distributing or reselling such Securities or any part
        thereof in violation of the Securities Act or any applicable state securities
        law, has no present intention of distributing any of such Securities in
        violation of the Securities Act or any applicable state securities law and
        has
        no direct or indirect arrangement or understandings with any other persons
        to
        distribute or regarding the distribution of such Securities (this representation
        and warranty not limiting such Purchaser’s right to sell the Securities pursuant
        to the Registration Statement or otherwise in compliance with applicable
        federal
        and state securities laws) in violation of the Securities Act or any applicable
        state securities law. Such Purchaser is acquiring the Securities hereunder
        in
        the ordinary course of its business.

       

      
        
           

        

        
          19

          
            

          

        

        
           

        

      

      (c) Purchaser
        Status.
        At the
        time such Purchaser was offered the Securities, it was, and at the date hereof
        it is, and on each date on which it exercises any Warrants or converts any
        Debentures it will be either: (i) an “accredited investor” as defined in Rule
        501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii)
        a
“qualified institutional buyer” as defined in Rule 144A(a) under the Securities
        Act. Such Purchaser is not required to be registered as a broker-dealer under
        Section 15 of the Exchange Act.

       

      (d) Experience
        of Such Purchaser.
        Such
        Purchaser, either alone or together with its representatives, has such
        knowledge, sophistication and experience in business and financial matters
        so as
        to be capable of evaluating the merits and risks of the prospective investment
        in the Securities, and has so evaluated the merits and risks of such investment.
        Such Purchaser is able to bear the economic risk of an investment in the
        Securities and, at the present time, is able to afford a complete loss of
        such
        investment.

       

      (e) General
        Solicitation.
        Such
        Purchaser is not purchasing the Securities as a result of any advertisement,
        article, notice or other communication regarding the Securities published
        in any
        newspaper, magazine or similar media or broadcast over television or radio
        or
        presented at any seminar or any other general solicitation or general
        advertisement.

       

      (f)
Short
        Sales and Confidentiality Prior To The
        Date Hereof.
        Other
        than the transaction contemplated hereunder, such Purchaser has not directly
        or
        indirectly, nor has any Person acting on behalf of or pursuant to any
        understanding with such Purchaser, executed any disposition, including Short
        Sales, in the securities of the Company during the period commencing
        from
        the time
        that such Purchaser first received a term sheet (written or oral) from the
        Company or any other Person setting forth the material terms of the transactions
        contemplated hereunder until the date hereof (“Discussion
        Time”).
        Notwithstanding
        the foregoing, in the case of a Purchaser that is a multi-managed investment
        vehicle whereby separate portfolio managers manage separate portions of such
        Purchaser's assets and the portfolio managers have no direct knowledge of
        the
        investment decisions made by the portfolio managers managing other portions
        of
        such Purchaser's assets, the representation set forth above shall only apply
        with respect to the portion of assets managed by the portfolio manager that
        made
        the investment decision to purchase the Securities covered by this Agreement.
        Other than to other Persons party to this Agreement, such Purchaser has
        maintained the confidentiality of all disclosures made to it in connection
        with
        this transaction (including the existence and terms of this
        transaction). 

       

      

        
          
             

          

          
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      ARTICLE
        IV.

      OTHER
        AGREEMENTS OF THE PARTIES

       

      4.1 Transfer
        Restrictions.

       

      (a) The
        Securities may only be disposed of in compliance with state and federal
        securities laws. In connection with any transfer of Securities other than
        pursuant to an effective registration statement or Rule 144, to the Company
        or
        to an affiliate of a Purchaser or in connection with a pledge as contemplated
        in
        Section 4.1(b), the Company may require the transferor thereof to provide
        to the
        Company an opinion of counsel selected by the transferor and reasonably
        acceptable to the Company, the form and substance of which opinion shall
        be
        reasonably satisfactory to the Company, to the effect that such transfer
        does
        not require registration of such transferred Securities under the Securities
        Act. As a condition of transfer, any such transferee shall agree in writing
        to
        be bound by the terms of this Agreement and shall have the rights of a Purchaser
        under this Agreement and the Registration Rights Agreement.

       

      (b) The
        Purchasers agree to the imprinting, so long as is required by this Section
        4.1(b), of a legend on any of the Securities in the following form:

       

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

       

      The
        Company acknowledges and agrees that a Purchaser may from time to time pledge
        pursuant to a bona fide margin agreement with a registered broker-dealer
        or
        grant a security interest in some or all of the Securities to a financial
        institution that is an “accredited investor” as defined in Rule 501(a) under the
        Securities Act and who agrees to be bound by the provisions of this Agreement
        and the Registration Rights Agreement and, if required under the terms of
        such
        arrangement, such Purchaser may transfer pledged or secured Securities to
        the
        pledgees or secured parties. Such a pledge or transfer would not be subject
        to
        approval of the Company and no legal opinion of legal counsel of the pledgee,
        secured party or pledgor shall be required in connection therewith.

       

      
        
           

        

        
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      Further,
        no notice shall be required of such pledge. At the appropriate Purchaser’s
        expense, the Company will execute and deliver such reasonable documentation
        as a
        pledgee or secured party of Securities may reasonably request in connection
        with
        a pledge or transfer of the Securities, including, if the Securities are
        subject
        to registration pursuant to the Registration Rights Agreement, the preparation
        and filing of any required prospectus supplement under Rule 424(b)(3) under
        the
        Securities Act or other applicable provision of the Securities Act to
        appropriately amend the list of Selling Stockholders thereunder.

       

      (c) Certificates
        evidencing the Underlying Shares shall not contain any legend (including
        the
        legend set forth in Section 4.1(b) hereof): (i) while a registration statement
        (including the Registration Statement) covering the resale of such security
        is
        effective under the Securities Act, or (ii) following any sale of such
        Underlying Shares pursuant to Rule 144, or (iii) if such Underlying Shares
        are
        eligible for sale under Rule 144(k), or (iv) if such legend is not required
        under applicable requirements of the Securities Act (including judicial
        interpretations and pronouncements issued by the staff of the Commission).
        The
        Company shall cause its counsel to issue a legal opinion to the Company’s
        transfer agent promptly after the Effective Date if required by the Company’s
        transfer agent to effect the removal of the legend hereunder. If all or any
        portion of a Debenture or Warrant is converted or exercised (as applicable)
        at a
        time when there is an effective registration statement to cover the resale
        of
        the Underlying Shares, or if such Underlying Shares may be sold under Rule
        144(k) or if such legend is not otherwise required under applicable requirements
        of the Securities Act (including judicial interpretations and pronouncements
        issued by the staff of the Commission) then such Underlying Shares shall
        be
        issued free of all legends. The Company agrees that following the Effective
        Date
        or at such time as such legend is no longer required under this Section 4.1(c),
        it will, no later than three Trading Days following the delivery by a Purchaser
        to the Company or the Company’s transfer agent of a certificate representing
        Underlying Shares, as applicable, issued with a restrictive legend (such
        third
        Trading Day, the “Legend
        Removal Date”),
        deliver or cause to be delivered to such Purchaser a certificate representing
        such shares that is free from all restrictive and other legends. The Company
        may
        not make any notation on its records or give instructions to any transfer
        agent
        of the Company that enlarge the restrictions on transfer set forth in this
        Section. Certificates for Underlying Shares subject to legend removal hereunder
        shall be transmitted by the transfer agent of the Company to the Purchasers
        by
        crediting the account of the Purchaser’s prime broker with the Depository Trust
        Company System.

      

      (d) In
        addition to such Purchaser’s other available remedies, the Company shall pay to
        a Purchaser, in cash, as partial liquidated damages and not as a penalty,
        for
        each $1,000 of Underlying Shares (based on the VWAP of the Common Stock on
        the
        date such Securities are submitted to the Company’s transfer agent) delivered
        for removal of the restrictive legend and subject to Section 4.1(c), $10
        per
        Trading Day (increasing to $20 per Trading Day 5 Trading Days after such
        damages
        have begun to accrue) for each Trading Day after the Legend Removal Date
        until
        such certificate is delivered without a legend. Nothing herein shall limit
        such
        Purchaser’s right to pursue actual damages for the Company’s failure to deliver
        certificates representing any Securities as required by the Transaction
        Documents, and such Purchaser shall have the right to pursue all remedies
        available to it at law or in equity including, without limitation, a decree
        of
        specific performance and/or injunctive relief.

       

      
        
           

        

        
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      (e) Each
        Purchaser, severally and not jointly with the other Purchasers, agrees that
        the
        removal of the restrictive legend from certificates representing Securities
        as
        set forth in this Section 4.1 is predicated upon the Company’s reliance that the
        Purchaser will sell any Securities pursuant to either the registration
        requirements of the Securities Act, including any applicable prospectus delivery
        requirements, or an exemption therefrom, and that if Securities are sold
        pursuant to a Registration Statement, they will be sold in compliance with
        the
        plan of distribution set forth therein.

       

      4.2 Acknowledgment
        of Dilution.
        The
        Company acknowledges that the issuance of the Securities may result in dilution
        of the outstanding shares of Common Stock, which dilution may be substantial
        under certain market conditions. The Company further acknowledges that its
        obligations under the Transaction Documents, including without limitation
        its
        obligation to issue the Underlying Shares pursuant to the Transaction Documents,
        are unconditional and absolute and not subject to any right of set off,
        counterclaim, delay or reduction, regardless of the effect of any such dilution
        or any claim the Company may have against any Purchaser and regardless of
        the
        dilutive effect that such issuance may have on the ownership of the other
        stockholders of the Company.

       

      4.3 Furnishing
        of Information.
        As long
        as any Purchaser owns Securities, the Company covenants to timely file (or
        obtain extensions in respect thereof and file within the applicable grace
        period) all reports required to be filed by the Company after the date hereof
        pursuant to the Exchange Act. As long as any Purchaser owns Securities, if
        the
        Company is not required to file reports pursuant to the Exchange Act, it
        will
        prepare and furnish to the Purchasers and make publicly available in accordance
        with Rule 144(c) such information as is required for the Purchasers to sell
        the
        Securities under Rule 144. The Company further covenants that it will take
        such
        further action as any holder of Securities may reasonably request, to the
        extent
        required from time to time to enable such Person to sell such Securities
        without
        registration under the Securities Act within the requirements of the exemption
        provided by Rule 144.

       

      4.4 Integration.
        The
        Company shall not sell, offer for sale or solicit offers to buy or otherwise
        negotiate in respect of any security (as defined in Section 2 of the Securities
        Act) that would be integrated with the offer or sale of the Securities in
        a
        manner that would require the registration under the Securities Act of the
        sale
        of the Securities to the Purchasers or that would be integrated with the
        offer
        or sale of the Securities for purposes of the rules and regulations of any
        Trading Market.

       

      4.5 Conversion
        and Exercise Procedures.
        The
        form of Notice of Exercise included in the Warrants and the form of Notice
        of
        Conversion included in the Debentures set
        forth
        the totality of the procedures required of the Purchasers in order to exercise
        the Warrants or convert the Debentures. No additional legal opinion or other
        information or instructions shall be required of the Purchasers to exercise
        their Warrants or convert their Debentures. The Company shall honor exercises
        of
        the Warrants and conversions of the Debentures and shall deliver Underlying
        Shares in accordance with the terms, conditions and time periods set forth
        in
        the Transaction Documents.

       

      
        
           

        

        
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      4.6 Securities
        Laws Disclosure; Publicity.
        The
        Company shall, by 8:30 a.m. Eastern time on the Trading Day following the
        date
        hereof, issue a Current Report on Form 8-K disclosing the material terms
        of the
        transactions contemplated hereby, and shall attach the Transaction Documents
        thereto. The Company and each Purchaser shall consult with each other in
        issuing
        any other press releases with respect to the transactions contemplated hereby,
        and neither the Company nor any Purchaser shall issue any such press release
        or
        otherwise make any such public statement without the prior consent of the
        Company, with respect to any press release of any Purchaser, or without the
        prior consent of each Purchaser, with respect to any press release of the
        Company, which consent shall not unreasonably be withheld or delayed, except
        if
        such disclosure is required by law, in which case the disclosing party shall
        promptly provide the other party with prior notice of such public statement
        or
        communication. Notwithstanding the foregoing, the Company shall not publicly
        disclose the name of any Purchaser, or include the name of any Purchaser
        in any
        filing with the Commission or any regulatory agency or Trading Market, without
        the prior written consent of such Purchaser, except (i) as required by federal
        securities law in connection with (A) any registration statement contemplated
        by
        the Registration Rights Agreement and (B) the filing of final Transaction
        Documents (including signature pages thereto) with the Commission and (ii)
        to
        the extent such disclosure is required by law or Trading Market regulations,
        in
        which case the Company shall provide the Purchasers with prior notice of
        such
        disclosure permitted under this subclause (ii).

       

      4.7 Shareholder
        Rights Plan.
        No
        claim will be made or enforced by the Company or, with the consent of the
        Company, any other Person, that any Purchaser is an “Acquiring Person” under any
        control share acquisition, business combination, poison pill (including any
        distribution under a rights agreement) or similar anti-takeover plan or
        arrangement in effect or hereafter adopted by the Company, or that any Purchaser
        could be deemed to trigger the provisions of any such plan or arrangement,
        by
        virtue of receiving Securities under the Transaction Documents or under any
        other agreement between the Company and the Purchasers.

       

      4.8 Non-Public
        Information.
        Except
        with respect to the material terms and conditions of the transactions
        contemplated by the Transaction Documents, the Company covenants and agrees
        that
        neither it nor any other Person acting on its behalf will provide any Purchaser
        or its agents or counsel with any information that the Company believes
        constitutes material non-public information, unless prior thereto such Purchaser
        shall have executed a written agreement regarding the confidentiality and
        use of
        such information. The Company understands and confirms that each Purchaser
        shall
        be relying on the foregoing representations in effecting transactions in
        securities of the Company.

       

      4.9 Use
        of
        Proceeds.
        Except
        as set forth on Schedule
        4.9
        attached
        hereto, the Company shall use the net proceeds from the sale of the Securities
        hereunder for working capital purposes and not for the satisfaction of any
        portion of the Company’s debt (other than payment of trade payables in the
        ordinary course of the Company’s business and prior practices), to redeem any
        Common Stock or Common Stock Equivalents or to settle any outstanding
        litigation.

       

      
        
           

        

        
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      4.10 Reimbursement.
        If any
        Purchaser becomes involved in any capacity in any Proceeding by or against
        any
        Person who is a stockholder of the Company (except as a result of sales,
        pledges, margin sales and similar transactions by such Purchaser to or with
        any
        other stockholder), solely as a result of such Purchaser’s acquisition of the
        Securities under this Agreement, the Company will reimburse such Purchaser
        for
        its reasonable legal and other expenses (including the cost of any investigation
        preparation and travel in connection therewith) incurred in connection
        therewith, as such expenses are incurred. The reimbursement obligations of
        the
        Company under this paragraph shall be in addition to any liability which
        the
        Company may otherwise have, shall extend upon the same terms and conditions
        to
        any Affiliates of the Purchasers who are actually named in such action,
        proceeding or investigation, and partners, directors, agents, employees and
        controlling persons (if any), as the case may be, of the Purchasers and any
        such
        Affiliate, and shall be binding upon and inure to the benefit of any successors,
        assigns, heirs and personal representatives of the Company, the Purchasers
        and
        any such Affiliate and any such Person. The Company also agrees that neither
        the
        Purchasers nor any such Affiliates, partners, directors, agents, employees
        or
        controlling persons shall have any liability to the Company or any Person
        asserting claims on behalf of or in right of the Company solely as a result
        of
        acquiring the Securities under this Agreement.

       

      4.11 
        Indemnification of Purchasers.
        Subject
        to the provisions of this Section 4.11, the Company will indemnify and hold
        each
        Purchaser and its directors, officers, shareholders, members, partners,
        employees and agents (and any other Persons with a functionally equivalent
        role
        of a Person holding such titles notwithstanding a lack of such title or any
        other title), each Person who controls such Purchaser (within the meaning
        of
        Section 15 of the Securities Act and Section 20 of the Exchange Act), and
        the
        directors, officers, shareholders, agents, members, partners or employees
        (and
        any other Persons with a functionally equivalent role of a Person holding
        such
        titles notwithstanding a lack of such title or any other title) of such
        controlling person (each, a “Purchaser
        Party”)
        harmless from any and all losses, liabilities, obligations, claims,
        contingencies, damages, costs and expenses, including all judgments, amounts
        paid in settlements, court costs and reasonable attorneys’ fees and costs of
        investigation that any such Purchaser Party may suffer or incur as a result
        of
        or relating to (a) any breach of any of the representations, warranties,
        covenants or agreements made by the Company in this Agreement or in the other
        Transaction Documents or (b) any action instituted against a Purchaser, or
        any
        of them or their respective Affiliates, by any stockholder of the Company
        who is
        not an Affiliate of such Purchaser, with respect to any of the transactions
        contemplated by the Transaction Documents (unless such action is based upon
        a
        breach of such Purchaser’s representations, warranties or covenants under the
        Transaction Documents or any agreements or understandings such Purchaser
        may
        have with any such stockholder or any violations by the Purchaser of state
        or
        federal securities laws or any conduct by such Purchaser which constitutes
        fraud, gross negligence, willful misconduct or malfeasance). If any action
        shall
        be brought against any Purchaser Party in respect of which indemnity may
        be
        sought pursuant to this Agreement, such Purchaser Party shall promptly notify
        the Company in writing, and the Company shall have the right to assume the
        defense thereof with counsel of its own choosing reasonably acceptable to
        the
        Purchaser Party. Any Purchaser Party shall have the right to employ separate
        counsel in any such action and participate in the defense thereof, but the
        fees
        and expenses of such counsel shall be at the expense of such Purchaser Party
        except to the extent that (i) the employment thereof has been specifically
        authorized by the Company in writing, (ii) the Company has failed after a
        reasonable period of time to assume such defense and to employ counsel or
        (iii)
        in such action there is, in the reasonable opinion of such separate counsel,
        a
        material conflict on any material issue between the position of the Company
        and
        the position of such Purchaser Party, in which case the Company shall be
        responsible for the reasonable fees and expenses of no more than one such
        separate counsel. 

       

      
        
           

        

        
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      The
        Company will not be liable to any Purchaser Party under this Agreement (i)
        for
        any settlement by a Purchaser Party effected without the Company’s prior written
        consent, which shall not be unreasonably withheld or delayed; or (ii) to
        the
        extent, but only to the extent that a loss, claim, damage or liability is
        attributable to any Purchaser Party’s breach of any of the representations,
        warranties, covenants or agreements made by such Purchaser Party in this
        Agreement or in the other Transaction Documents.

       

      4.12 Reservation
        and Listing of Securities.

       

      (a) The
        Company shall maintain a reserve from its duly authorized shares of Common
        Stock
        for issuance pursuant to the Transaction Documents in such amount as may
        be
        required to fulfill its obligations in full under the Transaction
        Documents.

       

      (b) If,
        on
        any date, the number of authorized but unissued (and otherwise unreserved)
        shares of Common Stock is less than the Required Minimum on such date, then
        the
        Board of Directors of the Company shall use commercially reasonable efforts
        to
        amend the Company’s certificate or articles of incorporation to increase the
        number of authorized but unissued shares of Common Stock to at least the
        Required Minimum at such time, as soon as possible and in any event not later
        than the 75th day after such date.

       

      (c) The
        Company shall, if applicable: (i) in the time and manner required by the
        principal Trading Market, prepare and file with such Trading Market an
        additional shares listing application covering a number of shares of Common
        Stock at least equal to the Required Minimum on the date of such application,
        (ii) take all steps necessary to cause such shares of Common Stock to be
        approved for listing on such Trading Market as soon as possible thereafter,
        (iii) provide to the Purchasers evidence of such listing, and (iv) maintain
        the
        listing of such Common Stock on any date at least equal to the Required Minimum
        on such date on such Trading Market or another Trading Market. In addition,
        the
        Company shall hold a special meeting of shareholders (which may also be at
        the
        annual meeting of shareholders) on the earliest practical date after the
        date
        the number of shares of Common Stock issuable pursuant to this Agreement
        on a
        fully converted or exercised basis (ignoring for such purposes any conversion
        or
        exercise limitations therein) exceeds 15% of the issued and outstanding shares
        of Common Stock on the Closing Date for the purpose of obtaining Shareholder
        Approval, with the recommendation of the Company’s Board of Directors that such
        proposal be approved, and the Company shall solicit proxies from its
        shareholders in connection therewith in the same manner as all other management
        proposals in such proxy statement and all management-appointed proxyholders
        shall vote their proxies in favor of such proposal. If the Company does not
        obtain Shareholder Approval at the first meeting, the Company shall call
        a
        meeting as soon as practicable thereafter, and in any event every six months
        thereafter, to seek Shareholder Approval until the earlier of the date
        Shareholder Approval is obtained or the Debentures are no longer
        outstanding.

       

      
        
           

        

        
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      4.13 Participation
        in Future Financing.
        

       

      (a) From
        the
        date hereof until the date that is the 6 month anniversary of the Effective
        Date, upon any issuance by the Company or any of its Subsidiaries of Common
        Stock or Common Stock Equivalents (a “Subsequent
        Financing”),
        each
        Purchaser shall have the right to participate in up to an amount of the
        Subsequent Financing equal to 100% of the Subsequent Financing (the
“Participation
        Maximum”)
        on the
        same terms, conditions and price provided for in the Subsequent Financing.
        

       

      (b) At
        least
        5 Trading Days prior to the closing of the Subsequent Financing, the Company
        shall deliver to each Purchaser a written notice of its intention to effect
        a
        Subsequent Financing (“Pre-Notice”),
        which
        Pre-Notice shall ask such Purchaser if it wants to review the details of
        such
        financing (such additional notice, a “Subsequent
        Financing Notice”).
        Upon
        the request of a Purchaser, and only upon a request by such Purchaser, for
        a
        Subsequent Financing Notice, the Company shall promptly, but no later than
        1
        Trading Day after such request, deliver a Subsequent Financing Notice to
        such
        Purchaser. The Subsequent Financing Notice shall describe in reasonable detail
        the proposed terms of such Subsequent Financing, the amount of proceeds intended
        to be raised thereunder, the Person or Persons through or with whom such
        Subsequent Financing is proposed to be effected, and attached to which shall
        be
        a term sheet or similar document relating thereto. 

       

      (c) Any
        Purchaser desiring to participate in such Subsequent Financing must provide
        written notice to the Company by not later than 5:30 p.m. (New York City
        time)
        on the 5th
        Trading
        Day after all of the Purchasers have received the Pre-Notice that the Purchaser
        is willing to participate in the Subsequent Financing, the amount of the
        Purchaser’s participation, and that the Purchaser has such funds ready, willing,
        and available for investment on the terms set forth in the Subsequent Financing
        Notice. If the Company receives no notice from a Purchaser as of such
        5th
        Trading
        Day, such Purchaser shall be deemed to have notified the Company that it
        does
        not elect to participate. 

       

      (d) If
        by
        5:30 p.m. (New York City time) on the 5th
        Trading
        Day after all of the Purchasers have received the Pre-Notice, notifications
        by
        the Purchasers of their willingness to participate in the Subsequent Financing
        (or to cause their designees to participate) is, in the aggregate, less than
        the
        total amount of the Subsequent Financing, then the Company may effect the
        remaining portion of such Subsequent Financing on the terms and with the
        Persons
        set forth in the Subsequent Financing Notice. 

       

      (e) If
        by
        5:30 p.m. (New York City time) on the 5th
        Trading
        Day after all of the Purchasers have received the Pre-Notice, the Company
        receives responses to a Subsequent Financing Notice from Purchasers seeking
        to
        purchase more than the aggregate amount of the Participation Maximum, each
        such
        Purchaser shall have the right to purchase the greater of (a) their Pro Rata
        Portion (as defined below) of the Participation Maximum and (b) the difference
        between the Participation Maximum and the aggregate amount of participation
        by
        all other Purchasers.  “Pro
        Rata Portion”
is
        the
        ratio of (x) the Subscription Amount of Securities purchased on the Closing
        Date
        by a Purchaser participating under this Section 4.13 and (y) the sum of the
        aggregate Subscription Amounts of Securities purchased on the Closing Date
        by
        all Purchasers participating under this Section 4.13.

       

      
        
           

        

        
          27

          
            

          

        

        
           

        

      

      (f) The
        Company must provide the Purchasers with a second Subsequent Financing Notice,
        and the Purchasers will again have the right of participation set forth above
        in
        this Section 4.13, if the Subsequent Financing subject to the initial Subsequent
        Financing Notice is not consummated for any reason on the terms set forth
        in
        such Subsequent Financing Notice within 60 Trading Days after the date of
        the
        initial Subsequent Financing Notice. 

       

      (g) Notwithstanding
        the foregoing, this Section 4.13 shall not apply in respect of an Exempt
        Issuance.

       

      4.14 Subsequent
        Equity Sales.
        

       

      (a) From
        the
        date hereof until 90 days after the Effective Date, neither the Company nor
        any
        Subsidiary shall issue shares of Common Stock or Common Stock Equivalents;
        provided,
        however,
        the 90
        day period set forth in this Section 4.14 shall be extended for the number
        of
        Trading Days during such period in which (i) trading in the Common Stock
        is
        suspended by any Trading Market, or (ii) following the Effective Date, the
        Registration Statement is not effective or the prospectus included in the
        Registration Statement may not be used by the Purchasers for the resale of
        the
        Underlying Shares. 

       

      (b) From
        the
        date hereof until such time as no Purchaser holds any of the Securities,
        the
        Company shall be prohibited from effecting or entering into an agreement
        to
        effect any Subsequent Financing involving a “Variable Rate Transaction”. The
        term “Variable
        Rate Transaction”
shall
        mean a transaction in which the Company issues or sells (i) any debt or equity
        securities that are convertible into, exchangeable or exercisable for, or
        include the right to receive additional shares of Common Stock either (A)
        at a
        conversion, exercise or exchange rate or other price that is based upon and/or
        varies with the trading prices of or quotations for the shares of Common
        Stock
        at any time after the initial issuance of such debt or equity securities,
        or (B)
        with a conversion, exercise or exchange price that is subject to being reset
        at
        some future date after the initial issuance of such debt or equity security
        or
        upon the occurrence of specified or contingent events directly or indirectly
        related to the business of the Company or the market for the Common Stock
        or
        (ii) enters into any agreement, including, but not limited to, an equity
        line of
        credit, whereby the Company may sell securities at a future determined
        price.

       

      (c) Unless
        Shareholder Approval has been obtained and deemed effective, neither the
        Company
        nor any Subsidiary shall make any issuance whatsoever of Common Stock or
        Common
        Stock Equivalents which would cause any adjustment of the Conversion Price
        to
        the extent the holders of Debentures would not be permitted, pursuant to
        Section
        4(c)(i) of the Debentures, to convert their respective outstanding Debentures
        and exercise their respective Warrants in full, ignoring for such purposes
        the
        conversion or exercise limitations therein. Any Purchaser shall be entitled
        to
        obtain injunctive relief against the Company to preclude any such issuance,
        which remedy shall be in addition to any right to collect damages.

       

      
        
           

        

        
          28

          
            

          

        

        
           

        

      

      (d) Notwithstanding
        the foregoing, this Section 4.14 shall not apply in respect of an Exempt
        Issuance, except that no Variable Rate Transaction shall be an Exempt
        Issuance.

       

      4.15 Equal
        Treatment of Purchasers.
        No
        consideration shall be offered or paid to any Person to amend or consent
        to a
        waiver or modification of any provision of any of the Transaction Documents
        unless the same consideration is also offered to all of the parties to the
        Transaction Documents. Further, the Company shall not make any payment of
        principal or interest on the Debentures in amounts which are disproportionate
        to
        the respective principal amounts outstanding on the Debentures at any applicable
        time. For clarification purposes, this provision constitutes a separate right
        granted to each Purchaser by the Company and negotiated separately by each
        Purchaser, and is intended for the Company to treat the Purchasers as a class
        and shall not in any way be construed as the Purchasers acting in concert
        or as
        a group with respect to the purchase, disposition or voting of Securities
        or
        otherwise.

       

      4.16 Short
        Sales and Confidentiality After The Date Hereof.
        Each
        Purchaser severally and not jointly with the other Purchasers covenants that
        neither it nor any Affiliate acting on its behalf or pursuant to any
        understanding with it will execute any Short Sales during the period commencing
        at the Discussion Time and ending at the time that the transactions contemplated
        by this Agreement are first publicly announced as described in Section 4.6.
        Each
        Purchaser, severally and not jointly with the other Purchasers, covenants
        that
        until such time as the transactions contemplated by this Agreement are publicly
        disclosed by the Company as described in Section 4.6, such Purchaser will
        maintain the confidentiality of all disclosures made to it in connection
        with
        this transaction (including the existence and terms of this transaction).
        Each
        Purchaser understands and acknowledges, severally and not jointly with any
        other
        Purchaser, that the Commission currently takes the position that coverage
        of
        short sales of shares of the Common Stock “against the box” prior to the
        Effective Date of the Registration Statement with the Securities is a violation
        of Section 5 of the Securities Act, as set forth in Item 65, Section A, of
        the
        Manual of Publicly Available Telephone Interpretations, dated July 1997,
        compiled by the Office of Chief Counsel, Division of Corporation Finance.
        Notwithstanding the foregoing, no Purchaser makes any representation, warranty
        or covenant hereby that it will not engage in Short Sales in
        the
        securities of the Company after the time that the transactions contemplated
        by
        this Agreement are first publicly announced as described in Section 4.6.
        Notwithstanding the foregoing, in the case of a Purchaser that is a
        multi-managed investment vehicle whereby separate portfolio managers manage
        separate portions of such Purchaser's assets and the portfolio managers have
        no
        direct knowledge of the investment decisions made by the portfolio managers
        managing other portions of such Purchaser's assets, the covenant set forth
        above
        shall only apply with respect to the portion of assets managed by the portfolio
        manager that made the investment decision to purchase the Securities covered
        by
        this Agreement.

       

      4.17 Form
        D; Blue Sky Filings.
        The
        Company agrees to timely file a Form D with respect to the Securities as
        required under Regulation D and to provide a copy thereof, promptly upon
        request
        of any Purchaser. The Company shall take such action as the Company shall
        reasonably determine is necessary in order to obtain an exemption for, or
        to
        qualify the Securities for, sale to the Purchasers at the Closing under
        applicable securities or “Blue Sky” laws of the states of the United States, and
        shall provide evidence of such actions promptly upon request of any
        Purchaser.

       

      
        
           

        

        
          29

          
            

          

        

        
           

        

      

      4.18 Capital
        Changes.
        Until
        the one year anniversary of the Effective Date, the Company shall not undertake
        a reverse or forward stock split or reclassification of the Common Stock
        without
        the prior written consent of the Purchasers holding a majority in principal
        amount outstanding of the Debentures.

       

       

      ARTICLE
        V.

      MISCELLANEOUS

       

      5.1 Termination. 
        This Agreement may be terminated by any Purchaser, as to such Purchaser’s
        obligations hereunder only and without any effect whatsoever on the obligations
        between the Company and the other Purchasers, by written notice to the other
        parties, if the Closing has not been consummated on or before March 1, 2006;
        provided,
        however,
        that no
        such termination will affect the right of any party to sue for any breach
        by the
        other party (or parties).

       

      5.2 Fees
        and Expenses.
        At the
        Closing, the Company has agreed to reimburse Alpha Capital AG (“Alpha”) the
        non-accountable sum of $30,000, for its legal fees and expenses, none which
        has
        been paid prior to the Closing. The Company shall deliver, prior to the Closing,
        a completed and executed copy of the Closing Statement, attached hereto as
        Annex
        A.
        Except
        as expressly set forth in the Transaction Documents to the contrary, each
        party
        shall pay the fees and expenses of its advisers, counsel, accountants and
        other
        experts, if any, and all other expenses incurred by such party incident to
        the
        negotiation, preparation, execution, delivery and performance of this Agreement.
        The Company shall pay all transfer agent fees, stamp taxes and other taxes
        and
        duties levied in connection with the delivery of any Securities to the
        Purchasers.

       

      5.3 Entire
        Agreement.
        The
        Transaction Documents, together with the exhibits and schedules thereto,
        contain
        the entire understanding of the parties with respect to the subject matter
        hereof and supersede all prior agreements and understandings, oral or written,
        with respect to such matters, which the parties acknowledge have been merged
        into such documents, exhibits and schedules.

       

      5.4 Notices.
        Any and
        all notices or other communications or deliveries required or permitted to
        be
        provided hereunder shall be in writing and shall be deemed given and effective
        on the earliest of (a) the date of transmission, if such notice or communication
        is delivered via facsimile at the facsimile number set forth on the signature
        pages attached hereto prior to 5:30 p.m. (New York City time) on a Trading
        Day,
        (b) the next Trading Day after the date of transmission, if such notice or
        communication is delivered via facsimile at the facsimile number set forth
        on
        the signature pages attached hereto on a day that is not a Trading Day or
        later
        than 5:30 p.m. (New York City time) on any Trading Day, (c) the 2nd
        Trading
        Day following the date of mailing, if sent by U.S. nationally recognized
        overnight courier service, or (d) upon actual receipt by the party to whom
        such
        notice is required to be given. The address for such notices and communications
        shall be as set forth on the signature pages attached hereto.

       

      
        
           

        

        
          30

          
            

          

        

        
           

        

      

      5.5 Amendments;
        Waivers.
        No
        provision of this Agreement may be waived, modified, supplemented or amended
        except in a written instrument signed, in the case of an amendment, by the
        Company and each Purchaser (provided, however, if the outstanding principal
        amount of Purchaser’s Debenture is less than $50,000, such Purchaser’s written
        consent shall not be required to amend this Agreement unless the principal
        amount of each Debenture then outstanding is less than $50,000, in which
        case
        the written consent of the Purchasers holding a majority of the principal
        amount
        of Debentures then outstanding shall be required to effect amendments to
        this
        Agreement) or, in the case of a waiver, by the party against whom enforcement
        of
        any such waived provision is sought. No waiver of any default with respect
        to
        any provision, condition or requirement of this Agreement shall be deemed
        to be
        a continuing waiver in the future or a waiver of any subsequent default or
        a
        waiver of any other provision, condition or requirement hereof, nor shall
        any
        delay or omission of any party to exercise any right hereunder in any manner
        impair the exercise of any such right.

       

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

       

      5.7 Successors
        and Assigns.
        This
        Agreement shall be binding upon and inure to the benefit of the parties and
        their successors and permitted assigns. The Company may not assign this
        Agreement or any rights or obligations hereunder without the prior written
        consent of each Purchaser (other than by merger). Any Purchaser may assign
        any
        or all of its rights under this Agreement to any Person to whom such Purchaser
        assigns or transfers any Securities, provided such transferee agrees in writing
        to be bound, with respect to the transferred Securities, by the provisions
        of
        the Transaction Documents that apply to the “Purchasers”.

       

      5.8 No
        Third-Party Beneficiaries.
        This
        Agreement is intended for the benefit of the parties hereto and their respective
        successors and permitted assigns and is not for the benefit of, nor may any
        provision hereof be enforced by, any other Person, except as otherwise set
        forth
        in Section 4.11.

       

      5.9 Governing
        Law.
        All
        questions concerning the construction, validity, enforcement and interpretation
        of the Transaction Documents shall be governed by and construed and enforced
        in
        accordance with the internal laws of the State of New York, without regard
        to
        the principles of conflicts of law thereof. Each party agrees that all legal
        proceedings concerning the interpretations, enforcement and defense of the
        transactions contemplated by this Agreement and any other Transaction Documents
        (whether brought against a party hereto or its respective affiliates, directors,
        officers, shareholders, employees or agents) shall be commenced exclusively
        in
        the state and federal courts sitting in the City of New York. Each party
        hereby
        irrevocably submits to the exclusive jurisdiction of the state and federal
        courts sitting in the City of New York, borough of Manhattan for the
        adjudication of any dispute hereunder or in connection herewith or with any
        transaction contemplated hereby or discussed herein (including with respect
        to
        the enforcement of any of the Transaction Documents), and hereby irrevocably
        waives, and agrees not to assert in any suit, action or proceeding, any claim
        that it is not personally subject to the jurisdiction of any such court,
        that
        such suit, action or proceeding is improper or is an 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 Agreement and agrees that such service shall constitute
        good
        and sufficient service of process and notice thereof. 

       

      
        
           

        

        
          31

          
            

          

        

        
           

        

      

      Nothing
        contained herein shall be deemed to limit in any way any right to serve process
        in any other manner permitted by law. The parties hereby waive all rights
        to a
        trial by jury. If either party shall commence an action or proceeding to
        enforce
        any provisions of the Transaction Documents, then the prevailing party in
        such
        action or proceeding shall be reimbursed by the other party for its reasonable
        attorneys’ fees and other costs and expenses incurred with the investigation,
        preparation and prosecution of such action or proceeding.

       

      5.10 Survival.
        The
        representations, warranties, covenants and other agreements contained herein
        shall survive the Closing and the delivery, exercise and/or conversion of
        the
        Securities, as applicable for the applicable statue of limitations.

       

      5.11 Execution.
        This
        Agreement may be executed in two or more counterparts, all of which when
        taken
        together shall be considered one and the same agreement and shall become
        effective when counterparts have been signed by each party and delivered
        to the
        other party, it being understood that both parties need not sign the same
        counterpart. In the event that any signature is delivered by facsimile
        transmission or by e-mail delivery of a “.pdf” format data file, such signature
        shall create a valid and binding obligation of the party executing (or on
        whose
        behalf such signature is executed) with the same force and effect as if such
        facsimile or “.pdf” signature page were an original thereof.

       

      5.12 Severability.
        If any
        term, provision, covenant or restriction of this Agreement is held by a court
        of
        competent jurisdiction to be invalid, illegal, void or unenforceable, the
        remainder of the terms, provisions, covenants and restrictions set forth
        herein
        shall remain in full force and effect and shall in no way be affected, impaired
        or invalidated, and the parties hereto shall use their commercially reasonable
        efforts to find and employ an alternative means to achieve the same or
        substantially the same result as that contemplated by such term, provision,
        covenant or restriction. It is hereby stipulated and declared to be the
        intention of the parties that they would have executed the remaining terms,
        provisions, covenants and restrictions without including any of such that
        may be
        hereafter declared invalid, illegal, void or unenforceable.

       

      5.13 Rescission
        and Withdrawal Right.
        Notwithstanding anything to the contrary contained in (and without limiting
        any
        similar provisions of) any of the other Transaction Documents, whenever any
        Purchaser exercises a right, election, demand or option under a Transaction
        Document and the Company does not timely perform its related obligations
        within
        the periods therein provided, then such Purchaser may rescind or withdraw,
        in
        its sole discretion from time to time upon written notice to the Company,
        any
        relevant notice, demand or election in whole or in part without prejudice
        to its
        future actions and rights; provided,
        however,
        in the
        case of a rescission of a conversion of a Debenture or exercise of a Warrant,
        the Purchaser shall be required to return any shares of Common Stock subject
        to
        any such rescinded conversion or exercise notice; provided,
        further
        that,
        any liquidated damages with respect to such right, election, demand or option
        of
        a Purchaser under the Transaction Documents shall cease accruing on the date
        a
        Purchaser exercises its right to rescind or withdraw such notice, demand
        or
        election.  

       

      
        
           

        

        
          32

          
            

          

        

        
           

        

      

      5.14 Replacement
        of Securities.
        If any
        certificate or instrument evidencing any Securities is mutilated, lost, stolen
        or destroyed, the Company shall issue or cause to be issued in exchange and
        substitution for and upon cancellation thereof (in the case of mutilation),
        or
        in lieu of and substitution therefor, a new certificate or instrument, but
        only
        upon receipt of evidence reasonably satisfactory to the Company of such loss,
        theft or destruction. The applicant for a new certificate or instrument under
        such circumstances shall also pay any reasonable third-party costs (including
        customary indemnity) associated with the issuance of such replacement
        Securities.

       

      5.15 Remedies.
        In
        addition to being entitled to exercise all rights provided herein or granted
        by
        law, including recovery of damages, each of the Purchasers and the Company
        will
        be entitled to specific performance under the Transaction Documents. The
        parties
        agree that monetary damages may not be adequate compensation for any loss
        incurred by reason of any breach of obligations contained in the Transaction
        Documents and hereby agrees to waive and not to assert in any action for
        specific performance of any such obligation the defense that a remedy at
        law
        would be adequate. 

       

      5.16 Payment
        Set Aside.
        To the
        extent that the Company makes a payment or payments to any Purchaser pursuant
        to
        any Transaction Document or a Purchaser enforces or exercises its rights
        thereunder, and such payment or payments or the proceeds of such enforcement
        or
        exercise or any part thereof are subsequently invalidated, declared to be
        fraudulent or preferential, set aside, recovered from, disgorged by or are
        required to be refunded, repaid or otherwise restored to the Company, a trustee,
        receiver or any other person under any law (including, without limitation,
        any
        bankruptcy law, state or federal law, common law or equitable cause of action),
        then to the extent of any such restoration the obligation or part thereof
        originally intended to be satisfied shall be revived and continued in full
        force
        and effect as if such payment had not been made or such enforcement or setoff
        had not occurred.

       

      5.17 Usury.
        To the
        extent it may lawfully do so, the Company hereby agrees not to insist upon
        or
        plead or in any manner whatsoever claim, and will resist any and all efforts
        to
        be compelled to take the benefit or advantage of, usury laws wherever enacted,
        now or at any time hereafter in force, in connection with any claim, action
        or
        proceeding that may be brought by any Purchaser in order to enforce any right
        or
        remedy under any Transaction Document. Notwithstanding any provision to the
        contrary contained in any Transaction Document, it is expressly agreed and
        provided that the total liability of the Company under the Transaction Documents
        for payments in the nature of interest shall not exceed the maximum lawful
        rate
        authorized under applicable law (the “Maximum
        Rate”),
        and,
        without limiting the foregoing, in no event shall any rate of interest or
        default interest, or both of them, when aggregated with any other sums in
        the
        nature of interest that the Company may be obligated to pay under the
        Transaction Documents exceed such Maximum Rate. It is agreed that if the
        maximum
        contract rate of interest allowed by law and applicable to the Transaction
        Documents is increased or decreased by statute or any official governmental
        action subsequent to the date hereof, the new maximum contract rate of interest
        allowed by law will be the Maximum Rate applicable to the Transaction Documents
        from the effective date forward, unless such application is precluded by
        applicable law. If under any circumstances whatsoever, interest in excess
        of the
        Maximum Rate is paid by the Company to any Purchaser with respect to
        indebtedness evidenced by the Transaction Documents, such excess shall be
        applied by such Purchaser to the unpaid principal balance of any such
        indebtedness or be refunded to the Company, the manner of handling such excess
        to be at such Purchaser’s election.

       

      
        
           

        

        
          33

          
            

          

        

        
           

        

      

      5.18 Independent
        Nature of Purchasers’ Obligations and Rights.
        The
        obligations of each Purchaser under any Transaction Document are several
        and not
        joint with the obligations of any other Purchaser, and no Purchaser shall
        be
        responsible in any way for the performance or non-performance of the obligations
        of any other Purchaser under any Transaction Document. Nothing contained
        herein
        or in any other Transaction Document, and no action taken by any Purchaser
        pursuant thereto, shall be deemed to constitute the Purchasers as a partnership,
        an association, a joint venture or any other kind of entity, or create a
        presumption that the Purchasers are in any way acting in concert or as a
        group
        with respect to such obligations or the transactions contemplated by the
        Transaction Documents. Each Purchaser shall be entitled to independently
        protect
        and enforce its rights, including without limitation the rights arising out
        of
        this Agreement or out of the other Transaction Documents, and it shall not
        be
        necessary for any other Purchaser to be joined as an additional party in
        any
        proceeding for such purpose. Each Purchaser has been represented by its own
        separate legal counsel in their review and negotiation of the Transaction
        Documents. For reasons of administrative convenience only, Purchasers and
        their
        respective counsel have chosen to communicate with the Company through FW.
        FW
        does not represent all of the Purchasers but only Alpha. The Company has
        elected
        to provide all Purchasers with the same terms and Transaction Documents for
        the
        convenience of the Company and not because it was required or requested to
        do so
        by the Purchasers.

       

      5.19 Liquidated
        Damages.
        The
        Company’s obligations to pay any partial liquidated damages or other amounts
        owing under the Transaction Documents is a continuing obligation of the Company
        and shall not terminate until all unpaid partial liquidated damages and other
        amounts have been paid notwithstanding the fact that the instrument or security
        pursuant to which such partial liquidated damages or other amounts are due
        and
        payable shall have been canceled.

       

      5.20 Construction.
        The
        parties agree that each of them and/or their respective counsel has reviewed
        and
        had an opportunity to revise the Transaction Documents and, therefore, the
        normal rule of construction to the effect that any ambiguities are to be
        resolved against the drafting party shall not be employed in the interpretation
        of the Transaction Documents or any amendments hereto.

       

      (Signature
        Pages Follow)

       

      
        
           

        

        
          34

          
            

          

        

        
           

        

      

      IN
        WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
        Agreement to be duly executed by their respective authorized signatories
        as of
        the date first indicated above.

       

      
        	
                PACIFICNET,
                  INC.

                 

              	
                Address
                  for Notice:

              
	
                By:
                  /s/
                  Victor Tong

                Name:
                  Victor Tong

                Title:
                  President

              	
                601
                  ‘New Bright Building

                11
                  Sheung Yuet Road

                Kowloon
                  Bay, Kowloon

                Hong
                  Kong

                Telephone:
                  011-85-22-876-2900

                Facsimile:
                  011-8522-793-0689

              
	
                With
                  a copy to (which shall not constitute notice):

                Loeb
                  & Loeb LLP

                345
                  Park Avenue

                New
                  York, New York 10154

                Attn:
                  Mitchell S. Nusbaum

                Telephone:
                  212-407-4159

                Facsimile:
                  212-407-4990

                 

                 

              	 

      

      

      [REMAINDER
        OF PAGE INTENTIONALLY LEFT BLANK

      SIGNATURE
        PAGE FOR PURCHASER FOLLOWS]

       

      
        
           

        

        
          35

          
            

          

        

        
           

        

      

      [PURCHASER
        SIGNATURE PAGES TO PACT SECURITIES PURCHASE AGREEMENT]

      

      IN
        WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement
        to be duly executed by their respective authorized signatories as of the
        date
        first indicated above.

       

      Name
        of
        Purchaser: Alpha
        Capital
        AG                                                                                                              

             

      Signature
        of Authorized Signatory of Purchaser:
        /s/
        Konrad
        Ackermann                                               
   

       

      Name
        of
        Authorized Signatory: Konrad
        Ackermann                                                                                     
 
             

       

      Title
        of
        Authorized Signatory:
 ____________________________________________________

       

      Email
        Address of
        Purchaser: ______________________________________________________

       

      Facsimile
        Number of Purchaser: 
___________________________________________________

      

       

      Address
        for Notice of Purchaser:

      

      

      

      

      Address
        for Delivery of Securities for Purchaser (if not same as above):

      

      

      

      

      

      Subscription
        Amount: $1,000,000

      Warrant
        Shares: 50,000

      

      

      

      

      EIN
        Number: [PROVIDE
        THIS UNDER SEPARATE COVER]

      

      [SIGNATURE
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        SIGNATURE PAGES TO PACT SECURITIES PURCHASE AGREEMENT]

      

      IN
        WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement
        to be duly executed by their respective authorized signatories as of the
        date
        first indicated above.

       

      Name
        of
        Purchaser: Iroquois
        Master Fund
        Ltd.                                                                                              
      

       

      Signature
        of Authorized Signatory of Purchaser:
        /s/
        Joshua
        Silverman                                                    
   

       

      Name
        of
        Authorized Signatory: Joshua
        Silverman                                                                                          
      

       

      Title
        of
        Authorized Signatory:
        _____________________________________________________

       

      Email
        Address of Purchaser: 
______________________________________________________

       

      Facsimile
        Number of Purchaser:
        ____________________________________________________

      

       

      Address
        for Notice of Purchaser:

      

      

      

      

      Address
        for Delivery of Securities for Purchaser (if not same as above):

      

      

      

      

      

      Subscription
        Amount: $3,000,000

      Warrant
        Shares: 150,000

      

      

      

      

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      IN
        WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement
        to be duly executed by their respective authorized signatories as of the
        date
        first indicated above.

       

      Name
        of
        Purchaser: Whalehaven
        Capital Fund
        Limited                                                                        
     

       

      Signature
        of Authorized Signatory of Purchaser:
        /s/Evan
        Schemenauer                                         
   

       

      Name
        of
        Authorized Signatory: Evan
        Schemenauer                                                                              
      

       

      Title
        of
        Authorized Signatory:  CEO                                                                                                          
        

                

      Email
        Address of Purchaser: 
__________________________________________________

       

      Facsimile
        Number of Purchaser:
        ________________________________________________

      

       

      Address
        for Notice of Purchaser:

      

      

      

      

      Address
        for Delivery of Securities for Purchaser (if not same as above):

      

      

      

      

      

      Subscription
        Amount: $1,000,000

      Warrant
        Shares: 50,000

      

      

      

      

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      IN
        WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement
        to be duly executed by their respective authorized signatories as of the
        date
        first indicated above.

       

      Name
        of
        Purchaser: DKR
        SoundShore Oasis Holding Fund
        Ltd.                                                         
    

       

      Signature
        of Authorized Signatory of Purchaser:
        /s/
        Barbara
        Burger                                                
 
           

       

      Name
        of
        Authorized Signatory: Barbara
        Burger                                                                                              

       

      Title
        of
        Authorized Signatory: Director                                                                                                    
                

       

      Email
        Address of Purchaser:  
__________________________________________________

       

      Facsimile
        Number of Purchaser: 
________________________________________________

      

       

      Address
        for Notice of Purchaser:

      

      

      

      

      Address
        for Delivery of Securities for Purchaser (if not same as above):

      

      

      

      

      

      Subscription
        Amount: $1,500,000

      Warrant
        Shares: 75,000

      

      

      

      

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      IN
        WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement
        to be duly executed by their respective authorized signatories as of the
        date
        first indicated above.

       

      Name
        of
        Purchaser: Basso
        Fund
        Ltd.                                                                                                                  

       

      Signature
        of Authorized Signatory of Purchaser:
        /s/
        Howard I.
        Fischer                                             
   

       

      Name
        of
        Authorized Signatory: Howard
        I.
        Fischer                                                                                   
     

       

      Title
        of
        Authorized Signatory:
        __________________________________________________

       

      Email
        Address of Purchaser: 
___________________________________________________

       

      Facsimile
        Number of Purchaser:
        _________________________________________________

      

       

      Address
        for Notice of Purchaser:

      

      

      

      

      Address
        for Delivery of Securities for Purchaser (if not same as above):

      

      

      

      

      

      Subscription
        Amount: $200,000

      Warrant
        Shares: 10,000

      

      

      

      

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      IN
        WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement
        to be duly executed by their respective authorized signatories as of the
        date
        first indicated above.

       

      Name
        of
        Purchaser: Basso
        Multi-Strategy Holding Fund
        Ltd.                                                                      
    

       

      Signature
        of Authorized Signatory of Purchaser:
        /s/
        Howard I.
        Fischer                                                    
   

       

      Name
        of
        Authorized Signatory: Howard
        I.
        Fischer                                                                                          
      

       

      Title
        of
        Authorized Signatory:
        _____________________________________________________

       

      Email
        Address of Purchaser: 
______________________________________________________

       

      Facsimile
        Number of Purchaser:
        ____________________________________________________

      

       

      Address
        for Notice of Purchaser:

      

      

      

      

      Address
        for Delivery of Securities for Purchaser (if not same as above):

      

      

      

      

      

      Subscription
        Amount: $550,000

      Warrant
        Shares: 27,500

      

      

      

      

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      IN
        WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement
        to be duly executed by their respective authorized signatories as of the
        date
        first indicated above.

       

      Name
        of
        Purchaser: Basso
        Private Opportunities Holding Fund
        Ltd.                                                         
    

       

      Signature
        of Authorized Signatory of Purchaser:
        /s/
        Howard I.
        Fischer                                                   
    

       

      Name
        of
        Authorized Signatory: Howard
        I.
        Fischer                                                                                         
      

       

      Title
        of
        Authorized Signatory:
        _____________________________________________________

       

      Email
        Address of
        Purchaser:  _____________________________________________________

       

      Facsimile
        Number of Purchaser:
        ____________________________________________________

      

       

      Address
        for Notice of Purchaser:

      

      

      

      

      Address
        for Delivery of Securities for Purchaser (if not same as above):

      

      

      

      

      

      Subscription
        Amount: $250,000

      Warrant
        Shares: 12,500

      

      

      

      

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      IN
        WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement
        to be duly executed by their respective authorized signatories as of the
        date
        first indicated above.

       

      Name
        of
        Purchaser: C.E.
        Unterberg, Towbin Capital Partners I,
        LP                                                               

       

      Signature
        of Authorized Signatory of Purchaser:
        /s/
        Howard
        Sutherland                                                  

       

      Name
        of
        Authorized Signatory: Howard
        Sutherland                                                                                        

       

      Title
        of
        Authorized Signatory:
        _____________________________________________________

       

      Email
        Address of Purchaser: 
______________________________________________________

       

      Facsimile
        Number of Purchaser:
        ____________________________________________________

      

       

      Address
        for Notice of Purchaser:

      

      

      

      

      Address
        for Delivery of Securities for Purchaser (if not same as above):

      

      

      

      

      

      Subscription
        Amount: $500,000

      Warrant
        Shares: 25,000

      

      

      

      

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      Annex
        A 

      

      CLOSING
        STATEMENT

      

      Pursuant
        to the attached Securities Purchase Agreement, dated as of the date hereto,
        the
        purchasers shall purchase up to $8,000,000 of Debentures and Warrants from
        Pacificnet, Inc. (the “Company”).
        All
        funds will be wired into the Escrow Account. All funds will be disbursed
        in
        accordance with this Closing Statement. Escrow Account wiring instructions
        are
        as follows:

      

      

      Disbursement
        Date: 

       

        
          

        

      

      

      
        	
                I. 
                  PURCHASE
                  PRICE

              	 
	
                Gross
                  Proceeds to be Received in Escrow

              	
                $

              
	 	 
	
                II. DISBURSEMENTS

              	 
	
                 

              	
                $

              
	
                 

              	
                $

              
	 	
                $

              
	 	
                $

              
	 	
                $

              
	 	 
	
                Total
                  Amount Disbursed:

              	
                $

              
	 	 
	
                WIRE
                  INSTRUCTIONS:

                 

              	 
	
                To:
                  _____________________________________

                 

                 

              	 
	
                To:
                  _____________________________________

                 

              	 

      

       

       

      44Form of Variable Rate Convertible Debenture due March 2009

    EXHIBIT
      4.6

    

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

    

    Original
      Issue Date: March
      __, 2006

    Original
      Conversion Price (subject to adjustment herein): $10.00

    

    $_______________

    

    

    VARIABLE
      RATE CONVERTIBLE DEBENTURE

    DUE
      MARCH 2009

    

    THIS
      VARIABLE RATE CONVERTIBLE DEBENTURE is one of a series of duly authorized and
      validly issued Convertible Debentures of PacificNet, Inc., a Delaware
      corporation, having its principal place of business at 601 New Bright Building,
      11 Sheung Yuet Road, Kowloon Bay, Kowloon, Hong Kong (the “Company”),
      designated as its Variable Rate Convertible Debenture, due March 2009 (this
      debenture, the “Debenture”
and
      collectively with the other such series of debentures, 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
      $_______________ by March ___, 2009, or such earlier date as this Debenture
      is
      required or permitted to be repaid as provided hereunder (the “Maturity
      Date”),
      and
      to pay interest to the Holder on the aggregate unconverted and then outstanding
      principal amount of this Debenture in accordance with the provisions hereof.
      This Debenture is subject to the following additional provisions:

    

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

    

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

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

    

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

    

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

    

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

    

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

    “Equity
      Conditions”
shall
      mean, during the period in question, (i)
      the
      Company shall have duly honored all conversions and redemptions scheduled to
      occur or occurring by virtue of one or more Notices of Conversion of the Holder,
      if any, (ii) the Company shall have paid all liquidated damages and other
      amounts owing to the Holder in respect of this Debenture, (iii)
      there is an effective Registration Statement pursuant to which the Holder is
      permitted to utilize the prospectus thereunder to resell all of the shares
      issuable pursuant to the Transaction Documents (and the Company believes, in
      good faith, that such effectiveness will continue uninterrupted for the
      foreseeable future), (iv) the Common Stock is trading on a Trading Market and
      all of the shares issuable pursuant to the Transaction Documents are listed
      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), 

     

     

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

     

    (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) after the issuance of the shares in
      question (or, in the case of a Monthly Redemption, the shares issuable upon
      conversion in full of the Monthly Redemption Amount)), the issuance of all
      Conversion Shares under the Debentures and all Warrant Shares under the Warrants
      upon conversion or exercise in full would not violate the limitations set forth
      in Section 4(c)(i) and Section 4(c)(ii) herein, (viii)
      there has been no public announcement of a pending or proposed Fundamental
      Transaction or Change of Control Transaction that has not been consummated
      and
      (ix) the Holder is not in possession of any information that is, or might
      constitute, material nonpublic information.

    

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

    

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

     

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

    

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

    

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

    

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

    

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

     

    “Interest
      Conversion Rate”
means
      the
      lesser of (a) the Conversion Price or (b) the
      80%
      of the lesser of (i) the average of the VWAPs for the 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 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).

    

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

    “Mandatory
      Default Amount”
means
      the sum of (i) the greater of (A) 130% of the outstanding principal amount
      of
      this Debenture, plus all accrued and unpaid interest hereon, or (B) the
      outstanding principal amount of this Debenture, plus all accrued and unpaid
      interest hereon, divided by the Conversion Price on the date the Mandatory
      Default Amount is either (a) demanded (if demand or notice is required to create
      an Event of Default) or otherwise due or (b) paid in full, whichever has a
      lower
      Conversion Price, multiplied by the VWAP on the date the Mandatory Default
      Amount is either (x) demanded or otherwise due or (y) paid in full, whichever
      has a higher VWAP, and (ii) all other amounts, costs, expenses and liquidated
      damages due in respect of this Debenture.

    

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

     

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

     

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

     

    “Monthly
      Redemption Amount”
means,
      as to a Monthly Redemption, $320,000.

    

    “Monthly
      Redemption Date”
means
      January 1, 2007 and the 1st of each month thereafter and terminating upon the
      full redemption of this Debenture. 

    

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

     

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

     

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

    

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

    

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

    

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

    

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

    

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

    

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

    

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

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

     

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

    

    “Permitted
      Indebtedness”
      means (a) the
      Indebtedness existing on the Original Issue Date and set forth on Schedule
      3.1(ff)
      attached
      to the Purchase Agreement, (b) lease obligations and purchase money indebtedness
      of up to $20,000,000, in the aggregate, incurred in connection with the
      acquisition of capital assets and lease obligations with respect to newly
      acquired or leased assets and (c) up to $50,000,000 of additional Indebtedness
      incurred by the Company in connection with raising capital for the acquisition
      of another entity (by merger, consolidation, the acquisition of all or
      substantially of the assets of such entity or similar transaction), provided
      that in the case of (b) and (c) above, such Indebtedness does not mature or
      require payments of principal prior to the Maturity Date and is made expressly
      subordinate in right of payment to the Indebtedness evidenced by this Debenture,
      as reflected in a written agreement reasonably acceptable to, and approved
      by,
      the Holder in writing.

    

    “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; and (c) Liens incurred in connection with Permitted
      Indebtedness under clause (b) thereunder, provided that such Liens are not
      secured by assets of the Company or its Subsidiaries other than the assets
      so
      acquired or leased.

     

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

    

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

    

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

    

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

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

    

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

    

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

    

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

    

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

    

    “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 principal Trading Market is open for business.

    

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

    

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

    

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

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

    

    Section
      2. Interest.

     

    a) Payment
      of Interest in Cash or Kind.
      At the
      Closing, the Company prepaid the Holder the first year’s interest by means of an
      original issue discount. The Company shall pay interest to the Holder on the
      aggregate unconverted and then outstanding principal amount of this Debenture
      at
      the rate of 6% per annum beginning on the first anniversary of the Original
      Issue Date until the day immediately prior to the second anniversary of the
      Original Issue Date, increasing to 7% per annum from the second anniversary
      of
      the Original Issue Date, payable on a monthly basis on the first day of each
      month, beginning on the first day of the 13th
      month
      after the Original Issue Date, on each Conversion Date (as to that principal
      amount then being converted) and on the Maturity Date (except that, if any
      such
      date is not a Business Day, then such payment shall be due on the next
      succeeding Business Day) (each such date, an “Interest
      Payment Date”),
      in
      cash or duly authorized, validly issued, fully paid and non-assessable shares
      of
      Common Stock at the Interest Conversion Rate (the amount to be paid in shares,
      the “Interest
      Share Amount”),
      or a
      combination thereof; provided,
      however,
      that
      (i) payment in shares of Common Stock may only occur if during the 20 Trading
      Days immediately prior to the applicable Interest Payment Date (the
“Interest
      Notice Period”)
      and
      through and including the date such shares of Common Stock are issued to the
      Holder all of the Equity Conditions have been met (unless waived by the Holder
      in writing), (ii) the Company shall have given the Holder notice in accordance
      with the notice requirements set forth below and (iii) as to such Interest
      Payment Date, prior to such Interest Notice Period (but not more than 5 Trading
      Days prior to the commencement of such Interest Notice Period), the Company
      shall have delivered to the Holder’s account with The Depository Trust Company a
      number of shares of Common Stock to be applied against such Interest Share
      Amount equal to the quotient of (x) the 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 or shares of Common Stock shall be at the discretion of the
      Company. Prior to the commencement of any Interest Notice Period, the Company
      shall deliver to the Holder a written notice of its election to pay interest
      hereunder on the applicable Interest Payment Date either in cash, shares of
      Common Stock or a combination thereof and the Interest Share Amount as to the
      applicable Interest Payment Date, provided that the Company may indicate in
      such
      notice that the election contained in such notice shall apply to future Interest
      Payment Dates until revised by a subsequent notice. During any Interest Notice
      Period, the Company’s election (whether specific to an Interest Payment Date or
      continuous) shall be irrevocable as to such Interest Payment Date. Subject
      to
      the aforementioned conditions, failure to timely provide such written notice
      shall be deemed an election by the Company to pay the interest on such Interest
      Payment Date in cash. 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.

    

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

    c) Interest
      Calculations.
      Interest shall be calculated on the basis of a 365-day year and shall accrue
      daily commencing on the Original Issue Date until payment in full of the
      principal sum, together with all accrued and unpaid interest, liquidated damages
      and other amounts which may become due hereunder, has been made. Payment of
      interest in shares of Common Stock (other than the Interest Conversion Shares
      issued prior to an Interest Notice Period) shall otherwise occur pursuant to
      Section 4(d)(ii) herein and, solely for purposes of the payment of interest
      in
      shares, the Interest Payment Date shall be deemed the Conversion Date. Interest
      shall cease to accrue with respect to any principal amount converted, provided
      that the Company actually delivers the Conversion Shares within the time period
      required by Section 4(d)(ii). Interest hereunder will be paid to the Person
      in
      whose name this Debenture is registered on the records of the Company regarding
      registration and transfers of this Debenture (the “Debenture
      Register”).
      Except as otherwise provided herein, if at any time the Company pays interest
      partially in cash and partially in shares of Common Stock to the holders of
      the
      Debentures, then such payment shall be distributed ratably among the holders
      of
      the then-outstanding Debentures based on their (or their predecessor’s) 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 payment in full. Notwithstanding anything to the contrary contained
      herein, if on any Interest Payment Date the Company has elected to pay accrued
      interest in the form of Common Stock but the Company is not able to pay accrued
      interest in Common Stock because it fails to satisfy the conditions for payment
      in Common Stock set forth above, then, at the option of the Holder, the Company,
      in lieu of delivering either shares of Common Stock pursuant to this Section
      2
      or paying the regularly scheduled interest payment in cash, shall deliver,
      within three Trading Days of each applicable Interest Payment Date, an amount
      in
      cash equal to the product of (x) the number of shares of Common Stock otherwise
      deliverable to the Holder in connection with the payment of interest due on
      such
      Interest Payment Date multiplied by (y) the highest VWAP during the period
      commencing on the Interest Payment Date and ending on the Trading Day prior
      to
      the date such payment is made. If any Interest Conversion Shares are issued
      to
      the Holder in connection with an Interest Payment Date and are not applied
      against an Interest Share Amount, then the Holder shall promptly return such
      excess shares to the Company.

     

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

    

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    Section
      3.  Registration
      of Transfers and Exchanges.
      

     

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

     

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

    

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

    

    Section
      4.  Conversion.

     

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

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    b) Conversion
      Price.
      The
      conversion price in effect on any Conversion Date shall be equal to $10.00
      (subject
      to adjustment herein) (the “Conversion
      Price”).

    

    c) Conversion
      Limitations.
      

    

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

     

     

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

     

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

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

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

    
d) Mechanics
      of Conversion.

     

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

    

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

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    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 after such third Trading Day, but on or before
      its receipt of such certificate or certificates, to rescind such Conversion,
      in
      which event the Company shall promptly return to the Holder any original
      Debenture delivered to the Company and the Holder shall promptly return the
      Common Stock certificates representing the principal amount of this Debenture
      tendered for conversion to the Company. 

     

    iv. Obligation
      Absolute; Partial Liquidated Damages.
      The
      Company’s obligations to issue and deliver the Conversion Shares upon conversion
      of this Debenture in accordance with the terms hereof are absolute and
      unconditional, irrespective of any action or inaction by the Holder to enforce
      the same, any waiver or consent with respect to any provision hereof, the
      recovery of any judgment against any Person or any action to enforce the same,
      or any setoff, counterclaim, recoupment, limitation or termination, or any
      breach or alleged breach by the Holder or any other Person of any obligation
      to
      the Company or any violation or alleged violation of law by the Holder or any
      other Person, and irrespective of any other circumstance which might otherwise
      limit such obligation of the Company to the Holder in connection with the
      issuance of such Conversion Shares; provided,
      however,
      that
      such delivery shall not operate as a waiver by the Company of any such action
      the Company may have against the Holder. In the event the Holder of this
      Debenture shall elect to convert any or all of the outstanding principal amount
      hereof, the Company may not refuse conversion based on any claim that the Holder
      or anyone associated or affiliated with the Holder has been engaged in any
      violation of law, agreement or for any other reason, unless an injunction from
      a
      court, on notice to Holder, restraining and or enjoining conversion of all
      or
      part of this Debenture shall have been sought and obtained, and the Company
      posts a surety bond for the benefit of the Holder in the amount of 150% of
      the
      outstanding principal amount of this Debenture, which is subject to the
      injunction, which bond shall remain in effect until the completion of
      arbitration/litigation of the underlying dispute and the proceeds of which
      shall
      be payable to such Holder to the extent it obtains judgment. In the absence
      of
      such injunction, the Company shall issue Conversion Shares or, if applicable,
      cash, upon a properly noticed conversion. If the Company fails for any reason
      to
      deliver to the Holder such certificate or certificates pursuant to Section
      4(d)(ii) by the third Trading Day after the Conversion Date, the Company shall
      pay to such Holder, in cash, as liquidated damages and not as a penalty, for
      each $1000 of principal amount being converted, $10 per Trading Day (increasing
      to $20 per Trading Day on the fifth Trading Day after such liquidated damages
      begin to accrue) for each Trading Day after such third Trading Day until such
      certificates are delivered; provided, however that if the Holder rescinds or
      withdraws such conversion notice such liquidated damages shall cease to continue
      to accrue after such date. 

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

    Nothing
      herein shall limit a Holder’s right to pursue actual damages or declare an Event
      of Default pursuant to Section 8 hereof for the Company’s failure to deliver
      Conversion Shares within the period specified herein and such Holder shall
      have
      the right to pursue all remedies available to it hereunder, at law or in equity
      including, without limitation, a decree of specific performance and/or
      injunctive relief. The exercise of any such rights shall not prohibit the Holder
      from seeking to enforce damages pursuant to any other Section hereof or under
      applicable law.

     

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

     

    
      
        
        

      

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

    

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

    

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

    

    
      
        
        

      

      
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    Section
      5. Certain
      Adjustments.

     

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

     

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

     

    
      
        
        

      

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

     

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

     

    e) Fundamental
      Transaction.
      If, at
      any time while this Debenture is outstanding, (A) the Company effects any merger
      or consolidation of the Company with or into another Person, (B) the Company
      effects any sale of all or substantially all of its assets in one transaction
      or
      a series of related transactions, (C) any tender offer or exchange offer
      (whether by the Company or another Person) is completed pursuant to which
      holders of Common Stock are permitted to tender or exchange their shares for
      other securities, cash or property, or (D) the Company effects any
      reclassification of the Common Stock or any compulsory share exchange pursuant
      to which the Common Stock is effectively converted into or exchanged for other
      securities, cash or property (in any such case, a “Fundamental
      Transaction”),
      then,
      upon any subsequent conversion of this Debenture, the Holder shall have the
      right to receive, for each Conversion Share that would have been issuable upon
      such conversion immediately prior to the occurrence of such Fundamental
      Transaction, the same kind and amount of securities, cash or property as it
      would have been entitled to receive upon the occurrence of such Fundamental
      Transaction if it had been, immediately prior to such Fundamental Transaction,
      the holder of 1 share of Common Stock (the “Alternate
      Consideration”).
      

    
      
        
        

      

      
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    For
      purposes of any such conversion, the determination of the Conversion Price
      shall
      be appropriately adjusted to apply to such Alternate Consideration based on
      the
      amount of Alternate Consideration issuable in respect of 1 share of Common
      Stock
      in such Fundamental Transaction, and the Company shall apportion the Conversion
      Price among the Alternate Consideration in a reasonable manner reflecting the
      relative value of any different components of the Alternate Consideration.
      If
      holders of Common Stock are given any choice as to the securities, cash or
      property to be received in a Fundamental Transaction, then the Holder shall
      be
      given the same choice as to the Alternate Consideration it receives upon any
      conversion of this Debenture following such Fundamental Transaction. To the
      extent necessary to effectuate the foregoing provisions, any successor to the
      Company or surviving entity in such Fundamental Transaction shall issue to
      the
      Holder a new debenture consistent with the foregoing provisions and evidencing
      the Holder’s right to convert such debenture into Alternate Consideration. The
      terms of any agreement pursuant to which a Fundamental Transaction is effected
      shall include terms requiring any such successor or surviving entity to comply
      with the provisions of this Section 5(e) and insuring that this Debenture (or
      any such replacement security) will be similarly adjusted upon any subsequent
      transaction analogous to a Fundamental Transaction.

     

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

    

    g) Notice
      to the Holder.

    

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

     

    
      
        
        

      

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

     

    Section
      6. Redemption
      and Forced Conversion.

    

    a) Monthly
      Redemption.
      On each
      Monthly Redemption Date, the Company shall redeem the Monthly Redemption Amount
      plus accrued but unpaid interest, liquidated damages and any other amounts
      then
      owing to such Holder in respect of this Debenture (the “Monthly
      Redemption”).
      The
      Monthly Redemption Amount payable on each Monthly Redemption Date shall be
      paid
      in cash; provided,
      however,
      as to
      any Monthly Redemption and upon 20 Trading Days’ prior written irrevocable
      notice (the “Monthly
      Redemption Notice”
and
      the
      20 Trading Day period immediately following the Monthly Redemption Notice,
      the
“Monthly
      Redemption Period”),
      in
      lieu of a cash redemption payment the Company may elect to pay all or part
      of a
      Monthly Redemption Amount in Conversion Shares (such dollar amount to be paid
      on
      a Monthly Redemption Date in Conversion Shares, the “Monthly
      Redemption Share Amount”)
      based
      on a conversion price equal to the lesser of (i) the then Conversion Price
      and

    
      
        
        

      

      
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    (ii)
      88%
      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 Redemption
      Period (but not more than 5 Trading Days prior to the commencement of the
      Monthly Redemption Period), the Company shall have delivered to the Holder’s
      account with The Depository Trust Company a number of shares of Common Stock
      to
      be applied against such Monthly Redemption Share Amount equal to the quotient
      of
      (x) the applicable Monthly Redemption Share Amount divided by (y) the then
      Conversion Price (the “Pre-Redemption
      Conversion Shares”).
      The
      Holder may convert, pursuant to Section 4(a), any principal amount of this
      Debenture subject to a Monthly Redemption at any time prior to the date that
      the
      Monthly Redemption Amount, plus accrued but unpaid interest, liquidated damages
      and any other amounts then owing to the Holder are due and paid in full. Unless
      otherwise indicated by the Holder in the applicable Notice of Conversion, any
      principal amount of this Debenture converted during the applicable Monthly
      Redemption Period until the date the Monthly Redemption Amount is paid in full
      shall be first applied to the principal amount subject to the Monthly Redemption
      Amount payable in cash and then to the Monthly Redemption Share Amount. Any
      principal amount of this Debenture converted during the applicable Monthly
      Redemption Period in excess of the Monthly Redemption Amount shall be applied
      against the last principal amount of this Debenture scheduled to be redeemed
      hereunder, in reverse time order from the Maturity Date; provided,
      however,
      if any
      such conversion is applied against such Monthly Redemption Amount, the
      Pre-Redemption Conversion Shares, if any were issued in connection with such
      Monthly Redemption or were not already applied to such conversions, shall be
      first applied against such conversion. The Company covenants and agrees that
      it
      will honor all Notice of Conversions tendered up until such amounts are paid
      in
      full. The Company’s determination to pay a Monthly Redemption in cash, shares of
      Common Stock or a combination thereof shall be applied ratably to all of the
      holders of the then outstanding Debentures based on their (or their
      predecessor’s) 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.

    

    
      
        
        

      

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

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

     

    
      
        
        

      

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

    

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

    

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

     

    
      
        
        

      

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

    

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

    

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

    

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

    

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

    

    At
      such
      time that less than 20% of the aggregate principal amount of all Debentures
      issued on the Original Issue Date remain outstanding, the Company shall no
      longer be subject to the negative covenants set forth in this Section 8 above
      or
      be required to obtain prior written consent of the holders of the Debentures
      to
      take the foregoing actions.

     

    Section
      8. Events
      of Default.
      

    

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

    

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

     

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

     

    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 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. 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 33% of
      its
      assets in one transaction or a series of related transactions (whether or not
      such sale would constitute a Change of Control Transaction);

     

    ix. a
      Registration Statement shall not have been declared effective by the Commission
      on or prior to the 180th calendar
      day after the Closing Date;

    
 

    
      
        
        

      

      
        25

        
          

        

      

      
        
        

      

    

    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 20 consecutive Trading Days
      or
      60 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 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;

    

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

    

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

     

    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.

    

    
      
        
        

      

      
        26

        
          

        

      

      
        
        

      

    

    

    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 011-852-279-30689,
      Attn: Victor Tong, President with
      a
      copy to Loeb & Loeb LP, Attn: Mitchell S. Nussbaum, Esq., facsimile number
      212-407-4990 or
      such
      other facsimile number or address as the Company may specify for such purpose
      by
      notice to the Holder delivered in accordance with this Section 9. Any and all
      notices or other communications or deliveries to be provided by the Company
      hereunder shall be in writing and delivered personally, by facsimile, or sent
      by
      a nationally recognized overnight courier service addressed to each Holder
      at
      the facsimile number or address of such Holder appearing on the books of the
      Company, or if no such facsimile number or address appears, at the principal
      place of business of the Holder. Any notice or other communication or deliveries
      hereunder shall be deemed given and effective on the earliest of (i) the date
      of
      transmission, if such notice or communication is delivered via facsimile at
      the
      facsimile number specified in this Section 9 prior to 5:30 p.m. (New York City
      time), (ii) the date immediately following the date of transmission, if such
      notice or communication is delivered via facsimile at the facsimile number
      specified in this Section 9 between 5:30 p.m. (New York City time) and 11:59
      p.m. (New York City time) on any date, (iii) the second Business Day following
      the date of mailing, if sent by nationally recognized overnight courier service,
      or (iv) upon actual receipt by the party to whom such notice is required to
      be
      given.

     

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

     

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

    

    
      
        
        

      

      
        27

        
          

        

      

      
        
        

      

    

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

     

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

     

    f) Severability.
      If any
      provision of this Debenture is invalid, illegal or unenforceable, the balance
      of
      this Debenture shall remain in effect, and if any provision is inapplicable
      to
      any Person or circumstance, it shall nevertheless remain applicable to all
      other
      Persons and circumstances. If it shall be found that any interest or other
      amount deemed interest due hereunder violates the applicable law governing
      usury, the applicable rate of interest due hereunder shall automatically be
      lowered to equal the maximum rate of interest permitted under applicable law.
      

    
      
        
        

      

      
        28

        
          

        

      

      
        
        

      

    

    The
      Company covenants (to the extent that it may lawfully do so) that it shall
      not
      at any time insist upon, plead, or in any manner whatsoever claim or take the
      benefit or advantage of, any stay, extension or usury law or other law which
      would prohibit or forgive the Company from paying all or any portion of the
      principal of or interest on this Debenture as contemplated herein, wherever
      enacted, now or at any time hereafter in force, or which may affect the
      covenants or the performance of this indenture, and the Company (to the extent
      it may lawfully do so) hereby expressly waives all benefits or advantage of
      any
      such law, and covenants that it will not, by resort to any such law, hinder,
      delay or impeded the execution of any power herein granted to the Holder, but
      will suffer and permit the execution of every such as though no such law has
      been enacted.

     

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

    

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

    

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

    

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

    
      
        
        

      

      
        29

        
          

        

      

      
        
        

      

    

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

    

    

    
      	
              PACIFICNET,
                INC.

               

            
	
              By:__________________________________________

              Name:

              Title:

            

    

    

    
      
        
        

      

      
        30

        
          

        

      

      
        
        

      

    

    ANNEX
      A

    

    NOTICE
      OF CONVERSION

     

    

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

    

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

    

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

    

    Conversion
      calculations:   

    Date
      to
      Effect Conversion:

    

    Principal
      Amount of Debenture to be Converted:

    

    Payment
      of Interest in Common Stock __ yes __ no

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

     

    Number
      of
      shares of Common Stock to be issued:

     

    Signature:

     

    Name:

     

    Address:

    

    
      
        
        

      

      
        31

        
          

        

      

      
        
        

      

    

    

    Schedule
      1

    

    CONVERSION
      SCHEDULE

    

    The
      Variable Rate Convertible Debentures due on February ___, 2009, in the aggregate
      principal amount of $____________ issued by Pacificnet, Inc. This Conversion
      Schedule reflects conversions made under Section 4 of the above referenced
      Debenture.

    

    Dated:
      

    

    

    
      	
               

              Date
                of Conversion

              (or
                for first entry, 
Original Issue Date)

            	
               

              Amount
                of Conversion

            	
               

              Aggregate
                Principal 
Amount Remaining 
Subsequent to Conversion

              (or
                original Principal Amount)

            	
               

              Company
                Attest

            
	 	 	 	 
	 	 	 	 
	
               

            	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 

    

    

     

    32

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