Document:

NEITHER THESE
SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE 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 CONVERSION OF THESE SECURITIES MAY
BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED
BY SUCH SECURITIES.

THIS DEBENTURE/NOTE IS
SUBJECT TO THE TERMS AND PROVISIONS OF THE SUBORDINATION AGREEMENT EXECUTED BY
THE PAYEE IN FAVOR OF THE CIT GROUP/COMMERCIAL SERVICES, INC.

Date of Issuance: June
21, 2007

$_________

12.0% SUBORDINATED
CONVERTIBLE DEBENTURE 
DUE December 31, 2009

     THIS DEBENTURE is a duly authorized
and issued 12.0% Subordinated Convertible Debenture of Nitches, Inc., a
California corporation, having a principal place of business 10280 Camino Sante
Fe, San Diego, California, 92121 (the “Company”), designated as its 12.0%
Subordinated Convertible Debenture, due December 31, 2009 (the
“Debenture”).

     FOR VALUE RECEIVED, the Company
promises to pay to ________________, or its registered assigns (the
“Holder”), or shall have paid pursuant to the terms hereunder, the
principal sum of _______________________ on or prior to the Maturity Date (as
defined herein), and to pay interest to the Holder on the aggregate then
outstanding principal amount of this Debenture at the rate of 12.0% per annum,
payable quarterly on February 28, May 31, August 31 and November 30, beginning
on the first such date after the Original Issue Date and on the Maturity Date
(except that, if any such date is not a Business Day, then such payment shall be
due on the next succeeding Business Day) (each such date, an “Interest
Payment Date”), in cash, so long as such payment shall not violate the terms
of any provisions of the debt instruments and agreements with the holders of the
Company’s Senior Debt.

     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 has been made of the principal amount of this
Debenture, together with all accrued and unpaid interest and other amounts
which

may become due
hereunder. Interest shall cease to accrue with respect to any principal amount
that has been converted or otherwise paid, provided that in the case of a
conversion the Company in fact delivers the Underlying Shares within the time
period required by Section 4(c)(ii). Interest hereunder shall be paid to the
Person in whose name this Debenture is registered on the records of the Company
regarding registration and transfers of the Debenture (the “Debenture
Register”).

     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 have the meanings given to such terms in the Purchase Agreement,
and (b) the following terms shall have the following meanings:

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

          “Collateral”
shall have the meaning set forth in Section 5(b) hereof.

          “Commission”
means the Securities and Exchange Commission.

          “Common
Stock” means the common stock, no par value per share, of the Company and
stock of any other class into which such shares may hereafter have been
reclassified or changed.

          “Common
Stock Equivalents” means any securities of the Company or its 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
exerciseable or exchangeable for, or otherwise entitles the holder thereof to
receive, Common Stock.

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

          “Exchange
Act” means the Securities Exchange Act of 1934, as
amended.

          “Excluded
Matter” means any one or more of the following: (i) the effect of any change
in the United States or foreign economies or securities or financial markets in
general, except to the extent the Company is affected thereby to a
disproportionately greater extent than other Persons in the Company’s industry;
(ii) the effect of any change that generally affects any industry in which the
Company or any of its Subsidiaries operates, except to the extent the Company is
affected thereby to a disproportionately greater extent than other Persons in
such industry; (iii) the effect of any action taken by Purchaser or its
Affiliates (provided such action was without the participation or consent of the
Company) with respect to the transactions contemplated hereby or with respect to
the Company or its Subsidiaries; (iv) the effect of any changes in applicable
laws or accounting rules to the extent such changes affect and are made
applicable to and imposed upon substantially all Persons operating in the
Company’s industry; (v) any effect resulting from the public announcement of the
transactions contemplated by this

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Agreement, compliance
with the terms of this Agreement or the consummation of the transactions
contemplated by this Agreement; and (vi) the indirect or consequential effect of
any generally applicable change arising in connection with earthquakes or other
natural disasters, hostilities, acts of war, sabotage or terrorism or military
actions or any escalation or material worsening of any such earthquakes or other
natural disasters, hostilities, acts of war, sabotage or terrorism or military
actions existing or underway as of the date hereof, except to the extent the
Company is affected thereby to a disproportionately greater extent than other
Persons in the Company’s industry.

          “Excepted
Issuance” shall have the meaning set forth in Section
4(e)(vi)(C).

          “Indebtedness”
means (i) all obligations for borrowed money, (ii) all obligations evidenced by
bonds, debentures, notes, or other similar instruments and all reimbursement or
other obligations in respect of letters of credit, bankers acceptances, interest
rate swaps, or other financial products, (iii) all obligations as a lessee under
capital leases, (iv) all obligations to pay the deferred purchase price of
assets (other than trade payables incurred in the ordinary course of business),
and (v) any obligation guaranteeing or intended to guarantee (whether directly
or indirectly guaranteed, endorsed, co-made, discounted, or sold with recourse)
any obligation of any other Person that constitutes Indebtedness under any of
clauses (i) through (iv) above.

          “Material
Adverse Effect” means a state of fact, occurrence, change or effect that has
or is reasonably likely to have or result in a material adverse effect on (i)
the legality, validity or enforceability of any Transaction Document, (ii) the
results of operations, assets, business, or financial condition of the Company
and the Subsidiaries, taken as a whole, or (iii) the Company’s ability to
perform its obligations under any Transaction Document; provided, however, that,
in determining whether there has been a Material Adverse Effect, any effect
resulting from an Excluded Matter shall be disregarded.

          “Maturity
Date” shall mean December 31, 2009 at which time the Holder shall elect to
(i) provide the Company with a Conversion Notice for the remaining outstanding
principal amount of the Debenture or (ii) demand that the Company promptly repay
the remaining outstanding principal amount of the Debenture in cash.

          “Optional
Cash Redemption Amount” shall mean the sum of (i) 110% of that portion of
the principal amount of the Debenture being redeemed pursuant to Section 4(h),
(ii) accrued but unpaid interest on such portion and (iii) all liquidated
damages and other amounts due in respect of the Debenture.

          “Optional
Cash Redemption Date” shall have the meaning set forth in Section
4(h).

          “Optional
Cash Redemption Notice” shall have the meaning set forth in Section
4(h).

          “Optional
Cash Redemption Notice Date” shall have the meaning set forth in Section
4(h).

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          “Optional
Common Stock Redemption Amount” shall have the meaning set forth in Section
4(j).

          “Optional
Common Stock Redemption Date” shall have the meaning set forth in Section
4(j).

          “Optional
Common Stock Redemption Notice” shall have the meaning set forth in Section
4(j).

          “Optional
Common Stock Redemption Notice Date” shall have the meaning set forth in
Section 4(j).

          “Original
Issue Date” shall mean the date of the first issuance of the Debenture
regardless of the number of transfers of the Debenture and regardless of the
number of instruments which may be issued to evidence the Debenture.

          “Permitted
Indebtedness” means (i) Indebtedness evidenced by this Debenture and the
other Transaction Documents, (ii) Indebtedness existing as of the date hereof as
disclosed in financial statements provided to Holder or disclosed in the SEC
Reports, (iii) the Senior Debt and refinancings, renewals, or extensions thereof
(and the continuance or renewal of any Permitted Liens associated therewith) on
substantially similar commercial terms (iv) Indebtedness secured by Permitted
Liens, (v) Indebtedness arising from the purchase or lease of equipment,
inventory or other property incurred in the ordinary course of business
consistent with past practice, (vi) Indebtedness arising from the endorsement of
instruments or other payment items for deposit, (vii) Indebtedness to trade and
other creditors incurred in the ordinary course of business consistent with past
practice, (viii) Indebtedness for insurance premium financings, (ix)
indebtedness evidenced by performance or payment bonds or similar items issues
in the ordinary course of business or reimbursement obligations in respect
thereof, (x) Indebtedness evidenced by a letter of credit or other financing
associated with claims for worker-related injuries, (xi) Indebtedness for bank
overdrafts incurred in the ordinary course of business that are promptly repaid,
(xii) Indebtedness to Subsidiaries, (xiii) Indebtedness for capitalized lease
obligations, (xiv) Indebtedness incurred in connection with litigation or
claims, and (xv) Indebtedness under real estate leases; provided, however, that
with regard to items (xiii) through (xiv) above, Permitted Indebtedness shall
not exceed $250,000 for each type of Indebtedness described in each such item
and shall not exceed $500,000 in the aggregate.

          “Permitted
Liens” means (i) statutory liens for taxes, assessments and other
governmental charges which are not yet due and payable or are due but not
delinquent or are being contested in good faith by appropriate proceedings, (ii)
statutory or common law liens to secure landlords, sublandlords, licensors or
sublicensors under leases or rental agreements, (iii) deposits or pledges made
in connection with, or to secure payment of, workers’ compensation, unemployment
insurance, old age pension or other social security programs mandated under
applicable laws, (iv) statutory or common law Liens in favor of carriers,
warehousemen, mechanics, workmen, repairmen and materialmen to secure claims for
labor, materials or supplies and other like liens, (v) restrictions on transfer
of securities imposed by applicable state and federal securities laws, (vi) any
other encumbrance or Lien affecting any asset which does not materially impede
or otherwise affect the ownership or operation of such asset, (vii)
liens

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resulting from a
filing by a lessor as a precautionary filing for a true lease, (viii) deposits
to secure the performance of bids, trade contracts, leases, statutory
obligations, surety and appeal bonds, performance bonds an other obligations of
a like nature incurred in the ordinary course of business, (ix) vendor’s Liens
to secure payment, (x) rights or claims of customers or tenants under licenses
or leases; or (xi) Liens securing Senior Debt, (xii) Liens described in the
financing statements filed as of the date hereof, (xiii) Liens existing on
property at the time of its acquisition and the proceeds of such property, (xiv)
Liens incurred in connection with the extension, renewal or refinancing of the
indebtedness secured by Permitted Liens so long as the terms and conditions of
such refinancings, renewals, or extensions do not result in an increase in the
then extant principal amount of, or interest rate with respect to, the
indebtedness so refinanced, renewed, or extended, excluding any extension,
renewal or refinancing of the Senior Debt (xv) Liens to secure capitalized
expenditures, (xvi) Liens on insurance policies and proceeds to secure the
financing of the premiums thereunder, or (xvii) Liens or rights of setoff of a
customary nature on bank, brokerage or similar accounts or on negotiable
instruments incurred in the ordinary course of business.

          “Person”
means a corporation, an association, a partnership, organization, a business, an
individual, a government or political subdivision thereof or a governmental
agency.

          “Purchase
Agreement” means the Securities Purchase Agreement, dated as of June 21,
2007, to which the Company and the original Holder are parties, as amended,
modified or supplemented from time to time in accordance with its
terms.

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

          “Set
Price” shall have the meaning set forth in Section 4(d).

          “Senior
Debt” shall be all of the Indebtedness owed to the CIT Group by the Company
as described in the Intercreditor Agreement, of even date herewith among the
Company, the Holder and the CIT Group/Commercial Services, Inc., together with
interest fees and other charges thereon.

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

          “Trading
Market” means, as applicable, 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 New York Stock Exchange, the Nasdaq Global Select
Market, the Nasdaq Global Market, the Nasdaq Capital Market or the OTC Bulletin
Board.

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

          “Underlying
Shares” means the shares of Common Stock issuable upon conversion of the
Debenture or as payment of interest in accordance with the terms
hereof.

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          “Underlying
Shares Registration Statement” means a registration statement meeting the
requirements set forth in the Purchase Agreement, covering among other things
the resale of the Underlying Shares and naming the Holder as a “selling
stockholder” thereunder.

          “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 4:00 p.m. Eastern Time); (b) if the
Common Stock is not then listed or quoted on a Trading Market and if prices for
the Common Stock are then quoted on the OTC Bulletin Board, 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 the National Quotation Bureau Incorporated (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 Purchaser
and reasonably acceptable to the Company.

     SECTION 2. 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. Prior to due presentment to the Company for transfer 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 3.
EVENTS OF DEFAULT.

     a) “Event
of Default”, wherever used herein, means any one of the following events
(whatever the reason and whether it 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 the principal of, interest on, or liquidated damages
in respect of, the Debenture, as and when the same shall become due and payable
(whether on an Interest Payment Date or the Maturity Date or by acceleration or
otherwise) which default is not cured, if possible to cure, within 3 Business
Days of written notice of such default sent by the Holder to the Company;
provided, that no notice need be given, nor any period allowed for cure, in the
case of the failure to pay principal plus accrued interest on the Maturity
Date;

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     (ii) any representation, warranty or statement made by the Company
or any of its Subsidiaries in the Transaction Documents shall be untrue or
incorrect in any material respect as of the date when made or deemed
made;

     (iii)
the Company or any of its Subsidiaries shall commence a case under any
applicable bankruptcy or insolvency laws as now or hereafter in effect or any
successor thereto, or the Company commences any other proceeding under any
reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction whether now or
hereafter in effect relating to the Company or any Subsidiary thereof; or there
is commenced against the Company or any Subsidiary thereof any such bankruptcy,
insolvency or other above referred to proceeding which remains undismissed or
unstayed for a period of 60 days; or any order of relief or other order
approving any such bankruptcy case or proceeding is entered; or the Company or
any subsidiary thereof suffers any appointment of any custodian or the like for
it or any substantial part of its property which continues undischarged,
unstayed, undismissed or unbonded for a period of 60 days; or the Company or any
subsidiary thereof makes a general assignment for the benefit of creditors; or
the Company shall fail to pay, or shall state that it is unable to pay, or shall
be unable to pay, its debts generally as they become due;

     (iv) the
holder of a Lien in exercise of its creditor remedies upon default takes
possession of all or any part of the Company or any Subsidiary’s property having
a value in excess of $250,000, except where the same is stayed, bonded or
otherwise reasonable reserved for;

     (v) the
Company receives an order ceasing, suspending or prohibiting trading in any
securities of the Company from any stock exchange or securities regulatory
authority having jurisdiction that is not remedied prior to two weeks following
the receipt of such order;

     (vi) the
Company shall fail to observe or perform in any material respect any financial
covenant contained in any of the Transaction Documents;

     (vii)
any event occurs which would have a Material Adverse Effect on the Company and
its Subsidiaries taken as a whole or termination of both the Company’s Chief
Executive Officer and President occurs;

     (viii)
the Company incurs any additional Indebtedness that would (i) rank pari
passu or senior to this Debenture in priority of payment or (ii) that is
secured by any of the Company’s assets (other than Permitted Liens), except in
each case for Permitted Indebtedness; or

     (ix) the Company no
longer maintains a listing on a Trading Market.

     b) If any
Event of Default occurs and is continuing, the Holder may notify the Company at
any time on or after the Event of Default that an Event of Default
has

7

occurred and (i) demand in writing that the Company remedy the Event of
Default within 30 days or (ii) demand in writing that all amounts due under this
Debenture, together with interest and other amounts owing in respect thereof to
the date of acceleration, shall become immediately due and payable in cash if
not paid within such 30 days. Interest shall accrue on the amounts due from the
day of the Event of Default through the date of cure or prepayment in full
thereof in an amount equal to 1.5% per month, to accrue daily from the date of
the Event of Default through and including the date of payment or cure. This
Debenture, if the full prepayment price hereunder shall have been paid or
converted in accordance herewith, shall promptly be surrendered to or as
directed by the Company. The Holder need not provide and the Company hereby
waives any presentment, demand, protest or other notice of any kind (except as
expressly provided herein or in the Transaction Documents). Such declaration may
be rescinded and annulled by Holder at any time prior to payment or cure
hereunder and the Holder shall have all rights as a Debenture holder until such
time, if any, as the full payment under this Section shall have been received by
it or cure occurred. No such rescission or annulment shall affect any subsequent
Event of Default or impair any right consequent thereon. The Company shall pay
within 10 days of demand all reasonable costs and expenses incurred, including,
but not limited to, legal fees, and fees charged to and by the Holder in
connection with obtaining or discharging this Debenture and in exercising any
remedy under this Debenture upon the occurrence of an Event of
Default.

     SECTION 4.
CONVERSION.

     a) Voluntary Conversion. At any time after the Original
Issue Date, this Debenture shall be convertible into shares of Common Stock at
the option of the Holder, in whole or in part at any time and from time to time
(subject to the limitations on conversion set forth in Section 4(b) hereof). The
Holder shall effect conversions by delivering to the Company the form of Notice
of Conversion attached hereto as ANNEX A (a “Notice of Conversion”),
specifying therein the principal amount of the Debenture to be converted and the
date on which such conversion is to 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 received by the Company. To
effect conversions hereunder, the Holder shall not be required to physically
surrender the 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 converted and the date of such conversions. The Company
shall deliver any objection to any Notice of Conversion within three Business
Days of receipt of such notice. The Holder and any assignee, by acceptance of
this Debenture, acknowledge and agree that, by reason of the provisions of this
paragraph, following conversion of a portion of this Debenture, the unpaid and
unconverted principal amount of this Debenture may be less than the amount
stated on the face hereof.

     b)
Conversion Limitation. The Company shall not effect any conversion of
this Debenture, and the Holder shall not have the right to convert any portion
of this Debenture, pursuant to Section 4(a) or otherwise, to the extent that
after giving effect to

8

such conversion, the Holder (together with the Holder’s affiliates), as
set forth on the applicable Notice of Conversion, would beneficially own in
excess of 9.9% of the number of shares of the Common Stock outstanding
immediately after giving effect to such conversion. For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned by
the Holder and its affiliates shall include the number of shares of Common Stock
issuable upon conversion of this Debenture with respect to which the
determination of such sentence is being made, but shall exclude the number of
shares of Common Stock which would be issuable upon (A) conversion of the
remaining, nonconverted portion of this Debenture beneficially owned by the
Holder or any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, the Debenture or the Warrant) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its affiliates. Except as set
forth in the preceding sentence, for purposes of this Section 4(b), beneficial
ownership shall be calculated in accordance with Section 13(d) of the Exchange
Act. To the extent that the limitation contained in this section applies, the
determination of whether this Debenture is convertible (in relation to other
securities owned by the Holder) and of which a portion of this Debenture is
convertible shall be in the reasonable discretion of the Holder. To ensure
compliance with this restriction, the Holder will be deemed to represent to the
Company each time it delivers a Notice of Conversion that such Notice of
Conversion has not violated the restrictions set forth in this paragraph and the
Company shall have no obligation to verify or confirm the accuracy of such
determination. For purposes of this Section 4(b), in determining the number of
outstanding shares of Common Stock, the Holder may rely on the number of
outstanding shares of Common Stock as reflected in (x) the Company’s most recent
Form 10-Q or Form 10-K, as the case may be, (y) a more recent public
announcement by the Company or (z) any other notice by the Company or the
Company’s Transfer Agent setting forth the number of shares of Common Stock
outstanding. Upon the written or oral request of the Holder, the Company shall
within two Trading Days confirm orally and in writing to the Holder the number
of shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to
the conversion or exercise of securities of the Company, including this
Debenture, by the Holder or its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. The provisions of
this Section 4(b) may be waived by the Holder upon, at the election of the
Holder, not less than 61 days’ prior written notice to the Company, and the
provisions of this Section 4(b) shall continue to apply until such 61st day (or
such later date, as determined by the Holder, as may be specified in such notice
of waiver).

     In addition, the
Company shall not effect any conversion of this Debenture, and the Holder shall
not have the right to convert any portion of this Debenture, pursuant to Section
4(a) or otherwise, to the extent that after giving effect to such conversion of
this Debenture, and the exercise of the Warrant issued under the Purchase
Agreement, the Company will have issued in the aggregate a number of shares of
its Common Stock that is 19.9% or more of the number of outstanding shares of
the Common Stock.

     c) Mechanics of Conversion.

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

     (ii)
Delivery of Certificate Upon Conversion. Not later than five Trading Days
after any Conversion Date, the Company will deliver to the Holder a certificate
or certificates representing the Underlying Shares which shall be free of
restrictive legends and trading restrictions (other than those required by the
Purchase Agreement) representing the number of shares of Common Stock being
acquired upon the conversion of the Debenture (including, if so timely elected
by the Company, shares of Common Stock representing the payment of accrued
interest) and (B) a bank check in the amount of accrued and unpaid interest (if
the Company is required to pay accrued interest in cash). The Company shall, if
available and if allowed under applicable securities laws, use its reasonable
commercial efforts to deliver any certificate or certificates required to be
delivered by the Company under this Section electronically through the
Depository Trust Corporation or another established clearing corporation
performing similar functions. 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 fifth Trading Day after a Conversion Date, the Holder
shall be entitled by written notice to the Company at any time on or before its
receipt of such certificate or certificates thereafter, to rescind such
conversion, in which event the Company shall immediately return the certificates
representing the principal amount of the Debenture tendered for
conversion.

     (iii)
Obligation Absolute; Partial Liquidated Damages. If the Company fails for
any reason to deliver to the Holder such certificate or certificates pursuant to
Section 4(c)(ii) by the fifth Trading Day after the Conversion Date, the Company
shall pay to the Holder, in cash, as liquidated damages and not as a penalty,
for each $2,000 of principal amount being converted, $10 per Trading Day
(increasing to $20 per Trading Day after five Trading Days after such damages
begin to accrue) for each Trading Day after such fifth Trading Day until such
certificates are delivered or unless and until the conversion is rescinded. The
Company’s obligations to issue and deliver the Underlying 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 Underlying Shares; provided,
however, such delivery shall not operate as a
waiver by the Company of any such action the Company may have against the
Holder.

10

     (iv)
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 pursuant to Section 4(c)(ii) by the
fifth Trading Day after the Conversion Date, and if after such fifth Trading Day
the Holder is required by its brokerage firm to purchase (in an open market
transaction or otherwise) Common Stock to deliver in satisfaction of a sale by
the Holder of the Underlying Shares which the Holder anticipated receiving upon
such conversion (a “Buy-in”), then the Company
shall (A) pay in cash to the Holder (in addition to any remedies available to or
elected by the Holder) the amount by which (x) the Holder’s total purchase price
(including brokerage commissions, if any) for the Common Stock so purchased
exceeds (y) the product of (1) the aggregate number of shares of Common Stock
that the Holder anticipated receiving from the conversion at issue multiplied by
(2) the actual sale price of the Common Stock at the time of the sale (including
brokerage commissions, if any) giving rise to such purchase obligation and (B)
at the option of the Holder, either reissue the Debenture in 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 had the
Company timely complied with its delivery requirements under Section 4(c)(i).
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 the
Debenture with respect to which the actual sale price of the Underlying Shares
at the time of the sale (including brokerage commissions, if any) 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. Notwithstanding anything
contained herein to the contrary, if a Holder requires the Company to make
payment in respect of a Buy-In for the failure to timely deliver certificates
hereunder and the Company timely pays in full such payment, the Company shall
not be required to pay the Holder liquidated damages under Section 4(c)(iii) in
respect of the certificates resulting in such Buy-In.

     (v)
Reservation of Shares Issuable. The Company covenants that it will at all
times reserve and keep available out of its authorized and unissued shares of
Common Stock solely for the purpose of issuance upon conversion of the Debenture
and payment of interest on the Debenture, each as herein provided, free from
preemptive rights or any other actual contingent purchase rights of persons
other than the Holder, not less than such number of shares of the Common Stock
as shall (subject to any additional requirements of the Company as to
reservation of such shares set forth in the Purchase Agreement) be issuable
(taking into account the adjustments and restrictions of Section 4(b)) upon the
conversion of the outstanding principal amount of the 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 and validly authorized, issued
and fully paid, nonassessable and, if the Underlying Shares Registration
Statement is

11

then effective under the Securities Act, registered for public sale in
accordance with such Underlying Shares Registration Statement.

     (vi)
Fractional Shares. Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of the
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 cash payment, the Holder shall be
entitled to receive, in lieu of the final fraction of a share, one whole share
of Common Stock.

     (vii)
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 certificate, provided that the Company shall
not be required to pay any tax levied by a jurisdiction or taxing authority
outside of the United States or 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.

     d)
Conversion Price. The conversion price in effect on any Conversion Date
shall be equal $4.12 (subject to adjustment herein) (the “Set Price”).

     e) Certain Adjustments.

     (i) Stock
Dividends and Stock Splits. If the Company, at any time while the Debenture
is outstanding: (A) shall pay a stock dividend or otherwise make a distribution
or distributions on shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of Common Stock (which, for avoidance of
doubt, shall not include any shares of Common Stock issued by the Company
pursuant to this Debenture, including as interest thereon), (B) subdivide
outstanding shares of Common Stock into a larger number of shares, (C) combine
(including by way of reverse stock split) outstanding shares of Common Stock
into a smaller number of shares, or (D) issue by reclassification of shares of
the Common Stock any shares of capital stock of the Company, then the Set Price
shall be multiplied by a fraction of which the numerator shall be the number of
shares of Common Stock (excluding treasury shares, if any) outstanding before
such event and of which the denominator shall be the number of shares of Common
Stock outstanding after such event. Any adjustment made pursuant to this Section
shall become effective immediately after the record date for the determination
of stockholders entitled to receive such dividend or distribution and shall
become effective immediately after the effective date in the case of a
subdivision, combination or re-classification.

12

     (ii) Subsequent Equity Sales. If the Company or any
Subsidiary thereof, as applicable, at any time while this Debenture is
outstanding, shall offer, sell, grant any option to purchase or offer, sell or
grant any right to reprice its securities, or otherwise dispose of or issue (or
announce any offer, sale, grant or any option to purchase or other disposition)
any Common Stock or Common Stock Equivalents entitling any Person to acquire
shares of Common Stock, at an effective price per share less than the then Set
Price (such lower price, the “Base Share Price”
and such issuances collectively, a “Dilutive Issuance”), as adjusted
hereunder (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 is issued in connection
with such issuance, be entitled to receive shares of Common Stock at an
effective price per share which is less than the Set Price, such issuance shall
be deemed to have occurred for less than the Set Price on such date of the
Dilutive Issuance), then, the Set Price shall be reduced and only reduced to
equal the Base Share Price and the number of Underlying Shares issuable
hereunder shall be increased such that the aggregate Set Price payable
hereunder, after taking into account the decrease in the Set Price, shall be
equal to the aggregate Set Price prior to such adjustment. Such adjustment shall
be made whenever such Common Stock or Common Stock Equivalents are issued.
Notwithstanding the foregoing, no adjustments shall be made, paid or issued
under this Section 4(e)(ii) in respect of an Excepted Issuance. The Company
shall use commercially reasonable efforts to promptly notify the Holder in
writing, following the issuance of any Common Stock or Common Stock Equivalents
subject to this section, indicating therein the applicable issuance price, or of
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 4(e)(ii), upon the occurrence of any Dilutive Issuance,
after the date of such Dilutive Issuance the Holder is entitled to receive a
number of Underlying Shares based upon the Base Share Price regardless of
whether the Holder accurately refers to the Base Share Price in the Notice of
Conversion.

     (iii)
Subsequent Rights Offerings. If the Company, at any time while the
Debenture is outstanding, after failing to deliver notice to Holder in
accordance with Section 4(g)(ii) hereof (Notice to Allow Conversion by Holder),
shall issue rights, options or warrants to all holders of Common Stock (and not
to Holder) entitling them to subscribe for or purchase shares of Common Stock at
a price per share less than the VWAP at the record date mentioned below, then
the Set Price shall be multiplied by a fraction, of which the denominator shall
be the number of shares of the Common Stock outstanding on the date of issuance
of such rights or warrants, plus the number of additional shares of Common Stock
offered for subscription or purchase, and of which the numerator shall be the
number of shares of the Common Stock outstanding on the date of issuance of such
rights or warrants plus the number of shares which the aggregate offering price
of the total number of shares so offered (assuming receipt by the
Company

13

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.

     (iv) Pro
Rata Distributions. If the Company, at any time while this Debenture is
outstanding, after failing to deliver notice to Holder in accordance with
Section 4(g)(ii) hereof (Notice to Allow Conversion by Holder), shall distribute
to all holders of Common Stock (and not to Holder) evidences of its indebtedness
or assets (including cash and cash dividends) or rights or warrants to subscribe
for or purchase any security, then in each such case the Set Price shall be
adjusted by multiplying the Set 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 (if the VWAP shall then be determinable
and otherwise the fair market value per share as determined by the Board of
Directors in good faith), and of which the numerator shall be such VWAP on such
record date less the then per share fair market value at such record date of the
portion of such assets or evidence of indebtedness so distributed applicable to
one outstanding share of the Common Stock as determined by the Board of
Directors in good faith. In either case the adjustments shall be described in a
statement provided to the Holder of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one share
of Common Stock. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date mentioned
above.

     (v)
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 (other than a merger the sole purpose of which is to
change the state of incorporation of the Company), (B) the Company effects any
sale of all or substantially all of its assets in one or a series of related
transactions, (C) any tender offer or exchange offer (whether by the Company or
another Person) is completed pursuant to which holders of Common Stock are
permitted to tender or exchange their shares for other securities, cash or
property, or (D) the Company effects any reclassification of the Common Stock or
any compulsory share exchange pursuant to which the Common Stock is effectively
converted into or exchanged for other securities, cash or property (in any such
case, a “Fundamental Transaction”), then immediately prior to the closing
of such Fundamental Transaction this Debenture shall be canceled and the Holder
shall have the right to receive, for each Underlying 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 one share of Common Stock (the “Alternate
Consideration”). For purposes of any such conversion, the determination of
the Set Price shall be

14

appropriately adjusted to apply to such Alternate Consideration based on
the amount of Alternate Consideration issuable in respect of one share of Common
Stock in such Fundamental Transaction, and the Company shall apportion the Set
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 in connection with such Fundamental
Transaction.

     (vi) For purposes of determining the adjusted Set Price under
Section 4(e)(ii) hereof, the following will be applicable:

     (A)
Change in Option Price or Conversion Rate. If there is a change at any
time in (i) the amount of additional consideration payable to the Company upon
the exercise of any Options; (ii) the amount of additional consideration, if
any, payable to the Company upon the exercise, conversion or exchange of any
Common Stock Equivalent; or (iii) the rate at which any Common Stock Equivalents
are convertible into or exchangeable for Common Stock (in each such case, other
than under or by reason of provisions designed to protect against dilution), the
Set Price in effect at the time of such change will be readjusted to the Set
Price which would have been in effect at such time had such Options or Common
Stock Equivalents still outstanding provided for such changed additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold.

     (B)
Calculation of Consideration Received. If any Common Stock, Options or
Common Stock Equivalents are issued, granted or sold for cash, the consideration
received therefor for purposes of this Debenture will be the amount received by
the Company therefor, before deduction of reasonable commissions, underwriting
discounts or allowances or other reasonable expenses paid or incurred by the
Company in connection with such issuance, grant or sale. In case any Common
Stock, Options or Common Stock Equivalents are issued or sold for a
consideration part or all of which shall be other than cash, the amount of the
consideration other than cash received by the Company will be the fair market
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the Company
will be the fair market value (closing bid price, if traded on any market)
thereof as of the date of receipt. In case any Common Stock, Options or Common
Stock Equivalents are issued in connection with any merger or consolidation in
which the Company is the surviving corporation, the amount of consideration
therefor will be deemed to be the fair market value of such portion of the net
assets and business of the non-surviving corporation as is attributable to such
Common Stock, Options or Common Stock Equivalent, as the case may be. The fair
market value of

15

any consideration other than cash or securities will be determined in
good faith by an investment banker or other appropriate expert of national
reputation selected by the Company and reasonably acceptable to the holder
hereof, with the costs of such appraisal to be borne by the
Company.

     (C)
Excepted Issuances. Notwithstanding the foregoing, no adjustment will be
made under Section 4(e)(ii) in respect of (1) the granting or exercise of
options to employees, officers, consultants and directors of the Company
pursuant to any stock option 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, (2) the
conversion of the Debenture or the conversion or exercise of any other security
issued by the Company in connection with the offer and sale of the Company’s
securities pursuant to the Purchase Agreement, (3) the amendment, exercise,
conversion or redemption of any Common Stock Equivalent or Options issued and
outstanding on the Original Issue Date, (4) the payment of interest on any
Senior Debt in shares of the Company’s Common Stock, (5) the issuance of any
shares or Common Stock Equivalent pursuant to the terms of any convertible
securities issued and outstanding on the Original Issue Date, (6) the issuance
of securities in connection with acquisitions, leasing arrangements,
collaborations, licensing arrangements or strategic investments, the primary
purpose of which is not to raise capital, or (7) securities issued in connection
with any stock split or stock dividend or pursuant to the Company’s shareholder
rights plan (each, an “Excepted Issuance”).

     f)
Calculations. All calculations under this Section 4 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 4, the number of shares of Common Stock outstanding as of a
given date shall be the sum of the number of shares of Common Stock (excluding
treasury shares, if any) outstanding.

     g) Notice to the Holder.

     (i) Adjustment to Set Price. Whenever the Set Price is
adjusted pursuant to Section 4(e), the Company shall promptly mail to the Holder
a notice setting forth the Set 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.

     (ii)
Notice to Allow Conversion by Holder. If (A) the Company shall declare a
dividend (or any other distribution) on the Common Stock; (B) the

16

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

     h)
Optional Cash Redemption at Election of Company. Subject to the
provisions of this Section 4(h), at any time after the Original Issue Date, the
Company may deliver a notice to the Holder (an “Optional Cash Redemption
Notice” and the date such notice is deemed delivered hereunder, the
“Optional Cash Redemption Notice Date”) of its
irrevocable election to redeem the then outstanding Debenture, in whole or in
part, for an amount, in cash, equal to the Optional Cash Redemption Amount on
the tenth Trading Day following the Optional Cash Redemption Notice Date (such
date, the “Optional Cash Redemption Date” and such redemption, the
“Optional Cash Redemption”). The Optional Cash
Redemption Amount is due in full on the Optional Cash Redemption Date. The
Company covenants and agrees that it will honor all Notices of Conversion
tendered from the time of delivery of the Optional Cash Redemption Notice
through the date the Optional Cash Redemption Amount is paid in
full.

     i) Redemption Procedure. The payment of cash pursuant to
an Optional Cash Redemption shall be made on the Optional Cash Redemption Date.
If any portion of the cash payment for an Optional Cash Redemption shall not be
paid by the Company by the respective due date, interest shall accrue thereon at
the rate of 1.5% per month (or the maximum rate permitted by applicable law,
whichever is less) until the payment of the Optional Cash Redemption Amount is
paid in full. The Holder may elect to convert

17

the outstanding principal amount of the Debenture pursuant to Section 4
prior to actual payment in cash for any redemption under this Section 4 by fax
delivery of a Notice of Conversion to the Company.

     j) Optional Common Stock Redemption at Election of
Company. At any time after the Effective Date, the Company may deliver
written notice to the Holder (an “Optional Common Stock Redemption
Notice” and the date such notice is deemed delivered hereunder, the
“Optional Common Stock Redemption Notice Date”) of its irrevocable
election to redeem part of the then outstanding Debenture for an amount in
Common Stock (the “Optional Common Stock Redemption Amount”) on the
twelfth Trading Day following the Optional Common Stock Redemption Notice Date
(such date, the “Optional Common Stock Redemption Date” and such
redemption, the “Optional Common Stock
Redemption”). The amount of Common Stock to be issued will be calculated
based on the amount of the then outstanding Debenture divided by the lesser of
(i) the Set Price or (ii) a 15% discount to the VWAP for the 10 Trading Days
following the Optional Common Stock Redemption Notice Date. The Optional Common
Stock Redemption Amount shall be subject to the following maximum
limits:

	Stock Price on Optional Common Stock 	Maximum Optional Common Stock 
	Redemption Notice Date 	Redemption Amount 
	 	
	Above
      $9 	$1,500,000 
	 	
	$8 - $8.99 	$1,150,000 
	 	
	$7 - $7.99 	$1,000,000 
	 	
	$6 - $6.99 	$850,000 
	 	
	$5 – $5.99 	$700,000 
	 	
	$4 - $4.99 	$550,000 
	 	
	$3 - $3.99 	$400,000 
	 	
	$2 - $2.99 	$250,000 
	 	
	Under
      $2 	Nil 

Two Trading Days following the Optional Common Stock Redemption Date the
Company shall cause the number of shares calculated under this Section 4(j) to
be delivered to the Holder and the Debenture principal shall be reduced by the
Optional Common Stock Redemption Amount.

18

     k)
Limitation on Optional Common Stock Redemption. The Company may not
deliver an Optional Common Stock Redemption Notice for a minimum of ten Trading
Days subsequent to an Optional Common Stock Redemption Date or delivery of a
Notice of Conversion; provided, however, the Holder may waive such
limitation in its sole discretion.

     l)
Mandatory Conversion. At any time after the Effective Date, the Company
shall have the right to require the Holder to convert the outstanding principal
amount of the Debenture and any accrued interest thereon and other amounts owing
to the Holder under the Debenture into Common Stock if the VWAP equals or
exceeds 200% of the then applicable Set Price for a period of 20 consecutive
Trading Days. Such request must be made in writing to the Holder. The
“Conversion Date” for these purposes shall be deemed to occur on the third
Trading Day following the notice.

     l) 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, sent by a nationally recognized
overnight courier service, addressed to the Company, at the address set forth
above, facsimile number (858) 625-0746, ATTN: President or such other address or
facsimile number as the Company may specify for such purposes by notice to the
Holder delivered in accordance with this Section. 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, sent by a nationally recognized
overnight courier service addressed to the Holder at the facsimile telephone
number or address of the Holder appearing on the books of the Company, or if no
such facsimile telephone 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 telephone number specified in this Section prior to 5:30 p.m. (New
York City time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 5:30 p.m. (New York City time) on any date
and earlier than 11:59 p.m. (New York City time) on such 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.

     SECTION 5.
Absolute Obligation; Pledge and Grant of Security
Interest.

     a) This Debenture is a secured direct debt obligation of the
Company, with security subordinate in all respects to the Senior Debt (the
security interest granted in connection with the Senior Debt constituting the
“First Priority Lien”). The Debenture shall be subordinate to and shall rank
junior in all respects, including priority of payment, and security interest, to
all of the Company’s Senior Debt and the First Priority Lien.

     b) The
Company hereby grants to the Holder, its successors and assigns, a security
interest, second in priority to the First Priority Lien, and subject to any
Permitted Liens, in all of the Company’s right, title and interest in and to the
collateral listed on

19

Schedule A hereto, in each case whether now owned or existing or
hereafter acquired or arising or in which the Company now has or at any time in
the future may acquire any right, title or interest (collectively, the
"Collateral").

     c) The
Collateral secures the full and prompt payment, at any time and from time to
time as and when due (whether at the stated maturity, by acceleration or
otherwise), of all liabilities and obligations of the Company in respect of this
Debenture, whether now existing or hereafter incurred, created or arising and
whether direct or indirect, absolute or contingent, due or to become due, all
fees, expenses, indemnities and other amounts payable by the Company under the
Debenture (including interest accruing after the filing of a petition or
commencement of a case by or with respect to the Company seeking relief under
any applicable federal and state laws pertaining to bankruptcy, reorganization,
arrangement, moratorium, readjustment of debts, dissolution, liquidation or
other debtor relief, specifically including, without limitation, the Bankruptcy
Code and any fraudulent transfer and fraudulent conveyance laws, whether or not
the claim for such interest is allowed in such proceeding).

     d) The
Company agrees that it will use commercially reasonable efforts, at its own cost
and expense, to take any and all actions necessary to warrant and defend the
right, title and interest of the Holder in and to the Collateral against the
claims and demands of all other persons, other than any claims or demands made
pursuant to the First Priority Lien or Permitted Liens

     SECTION 6. 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, and
indemnity, if requested, all reasonably satisfactory to the Company.

     SECTION 7. 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 conflicts of law
thereof. 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 manner
permitted by 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 with the investigation,
preparation and prosecution of such action or proceeding.

20

     SECTION 8. 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 must be in writing.

     SECTION 9. 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 any applicable laws governing usury, the applicable rate of
interest due hereunder shall automatically be lowered to equal the maximum
permitted rate of interest. 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 the 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.

     SECTION 10. 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.

     SECTION 11. Force Majeure. In no event shall a Holder have
any claim or right against the Company for any failure of performance in
accordance with this Debenture due to causes beyond its reasonable control,
including, but not limited to: such delays arising directly out of an act of
God, fire, flood or other natural catastrophe; laws, orders, rules, regulations,
directions or action of governmental authorities having jurisdiction or any
civil military authority; or national emergency, riot, act of terrorism or war
or labor dispute.

     SECTION 12. Headings. The headings used in this Debenture are
for the convenience of reference only and shall not, for any purpose, be deemed
a part of this Debenture.

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

21

     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.

		NITCHES, INC. 
		 
	 	 
		By: 	 	 
			Name: Steven P. Wyandt 
			Title:   Chief Executive
    Officer 

ANNEX
A

NOTICE OF
CONVERSION

     The undersigned hereby elects to
convert principal under the 12.0% Subordinated Convertible Debenture of Nitches,
Inc. (the “Company”), due on December 31, 2009, into shares of common
stock, no par value 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 Company’s 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: 
 
Number
      of shares of Common Stock to be issued: 
 
Signature:
      
  
Name: 
 
Delivery address for physical
      delivery:
 
DTC DWAC Account for electronic
      delivery:

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

COMMON STOCK PURCHASE
WARRANT

To Purchase _________ Shares of
Common Stock of

NITCHES, INC.

     THIS
COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value
received, ___________________ (the “Holder”), is entitled, upon the
terms and subject to the limitations on exercise and the conditions hereinafter
set forth, at any time on or after the date hereof (the “Initial Exercise
Date”) and on or prior to the Termination Date (as hereinafter defined) but
not thereafter, to subscribe for and purchase from Nitches, Inc., a California
corporation (the “Company”), up to _________ shares (the “Warrant
Shares”) of Common Stock, no par value per share, of the Company (the
“Common Stock”). The purchase price of one share of Common Stock under
this Warrant shall be equal to the Exercise Price, as defined in Section
2(b).

     Subject
to the last sentence of Section 2(c) hereof, this Warrant shall terminate (the
“Termination Date”) at 5:00 p.m. Eastern Time on the earlier of (i) the five year
anniversary of the Initial Exercise Date; and (ii) the day prior to the
effective date of a transaction in which (A) the Company effects any merger or
consolidation of the Company with or into another Person (other than a merger or
reorganization involving only a change in the state of incorporation of the
Company or the acquisition by the Company of other businesses where the Company
survives as a going concern), (B) the Company effects any sale of all or
substantially all of its assets in one or a series of related transactions, (C)
any tender offer or exchange offer (whether by the Company or another Person) is
completed pursuant to which holders of Common Stock are permitted to tender or
exchange their shares for other securities, cash or property, or (D) the Company
effects any reclassification of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property.

     Section
1. Definitions. Capitalized
terms used and not otherwise defined herein shall have the meanings set forth in
that certain Securities Purchase Agreement, dated June 21, 2007 (the
“Purchase Agreement”), between the Company and the purchaser signatory thereto.

     Section 2.
Exercise.

     a) Exercise of
Warrant. Exercise of the purchase rights
represented by this Warrant may be made, in whole or in part, at any time or
times on or after the Initial Exercise Date and on or before the Termination
Date by delivery to the Company of (i) a duly executed facsimile copy of the
Notice of Exercise Form annexed hereto (or such other office or agency of the
Company as it may designate by notice in writing to the registered Holder at the
address of the Holder appearing on the books of the Company); specifying therein
the amount of Warrant Shares to be exercised, (ii) payment of the aggregate
Exercise Price of the shares thereby purchased by wire transfer or cashier’s
check drawn on a United States bank, and (iii) if this Warrant is exercised in
full, surrender of this Warrant to the Company. Notwithstanding anything herein
to the contrary, the Holder shall not be required to physically surrender this
Warrant to the Company until the Holder has purchased all of the Warrant Shares
available hereunder and the Warrant has been exercised in full. Partial
exercises of this Warrant resulting in purchases of a portion of the total
number of Warrant Shares available hereunder shall have the effect of lowering
the outstanding number of Warrant Shares purchasable hereunder in an amount
equal to the applicable number of Warrant Shares purchased. The Holder and the
Company shall maintain records showing the number of Warrant Shares purchased
and the date of such purchases. The Company shall deliver any objection to any
Notice of Exercise Form within three Trading Days of receipt of such notice. The
Holder and any assignee, by acceptance of this Warrant, acknowledge and agree
that, by reason of the provisions of this paragraph, following the purchase of a
portion of the Warrant Shares hereunder, the number of Warrant Shares available
for purchase hereunder at any given time may be less than the amount stated on
the face hereof.

     b) Exercise
Price. The exercise price of the Common Stock
under this Warrant shall be $4.12,
subject to adjustment hereunder (the
“Exercise Price”).

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

	(A)  = 	  
	the VWAP on the Trading Day
      immediately preceding the date of such election;
	 		
	(B)  =	  	the Exercise Price of this
      Warrant, as adjusted; and

2

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

     d) Exercise Limitations; Holder’s Restrictions. At any time after the Common Stock is registered under Section 12 of
the Exchange Act, the Holder shall not have the right to exercise any portion of
this Warrant, pursuant to Section 2(c) or otherwise, to the extent that after
giving effect to such issuance after exercise, the Holder (together with the
Holder’s affiliates), as set forth on the applicable Notice of Exercise, would
beneficially own in excess of 9.9% of the number of shares of the Common Stock
outstanding immediately after giving effect to such issuance. For purposes of
the foregoing sentence, the number of shares of Common Stock beneficially owned
by the Holder and its affiliates shall include the number of shares of Common
Stock issuable upon exercise of this Warrant with respect to which the
determination of such sentence is being made, but shall exclude the number of
shares of Common Stock which would be issuable upon (A) exercise of the
remaining, unexercised portion of this Warrant beneficially owned by the Holder
or any of its affiliates and (B) exercise or conversion of the unexercised or
nonconverted portion of any other securities of the Company (including, without
limitation, any other Debentures or Warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein beneficially
owned by the Holder or any of its affiliates. Except as set forth in the
preceding sentence, for purposes of this Section 2(d), beneficial ownership
shall be calculated in accordance with Section 13(d) of the Exchange Act, it
being acknowledged by the Holder that the Company is not representing to the
Holder that such calculation is in compliance with Section 13(d) of the Exchange
Act and the Holder is solely responsible for any schedules required to be filed
in accordance therewith. To the extent that the limitation contained in this
Section 2(d) applies, the determination of whether this Warrant is exercisable
(in relation to other securities owned by the Holder) and of which a portion of
this Warrant is exercisable shall be in the sole discretion of the Holder, and
the submission of a Notice of Exercise shall be deemed to be the Holder’s
determination of whether this Warrant is exercisable (in relation to other
securities owned by the Holder) and of which portion of this Warrant is
exercisable, in each case subject to such aggregate percentage limitation, and
the Company shall have no obligation to verify or confirm the accuracy of such
determination. For purposes of this Section 2(d), in determining the number of
outstanding shares of Common Stock, the Holder may rely on the number of
outstanding shares of Common Stock as reflected in (x) the Company’s most recent
Form 10-Q or 10-K, as the case may be, (y) a more recent public announcement by
the Company or (z) any other notice by the Company or the Company’s Transfer
Agent setting forth the number of shares of Common Stock outstanding. Upon the
written or oral request of the Holder, the Company shall within two Trading Days
confirm orally and in writing to the Holder the number of shares of Common Stock
then outstanding. In any case, the number of outstanding shares of Common Stock
shall be determined after giving effect to the conversion or exercise of
securities of the Company, including this Warrant, by the Holder or its
affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. The provisions of this Section 2(d) may be waived by
the Holder, at the election of the Holder, upon not less than 61 days’ prior
notice to the Company, and the provisions of this Section 2(d) shall continue to
apply until such 61st

3

day (or such later date, as determined
by the Holder, as may be specified in such notice of waiver).

     In
addition, the Company shall not effect any conversion of this Warrant, and the
Holder shall not have the right to exercise any portion of this Warrant,
pursuant to Section 2(a) or otherwise, to the extent that after giving effect to
such exercise of this Warrant, and the exercise of the Debenture issued under
the Purchase Agreement, the Company will have issued in the aggregate a number
of shares of its Common Stock that is 19.9% or more of the number of outstanding
shares of the Common Stock. 

     e) Mechanics of
Exercise.

     i. Authorization of Warrant Shares. The
Company covenants that all Warrant Shares which may be issued upon the exercise
of the purchase rights represented by this Warrant will, upon exercise of the
purchase rights represented by this Warrant, be duly authorized, validly issued,
fully paid and nonassessable and free from all taxes, liens and charges in
respect of the issue thereof (other than taxes in respect of any transfer
occurring contemporaneously with such issue).

     ii.
Delivery of Certificates Upon Exercise. Certificates for shares purchased
hereunder shall be transmitted by the transfer agent of the Company to the
Holder by crediting the account of the Holder’s prime broker with the Depository
Trust Company through its Deposit Withdrawal Agent Commission (“DWAC”)
system if the Company is a participant in such system, and otherwise by physical
delivery to the address specified by the Holder in the Notice of Exercise within
five Trading Days following the last to be received by the Company of (x) the
Notice of Exercise Form, (y) surrender of this Warrant (if required) and (z)
payment of the aggregate Exercise Price as set forth above (“Warrant Share
Delivery Date”). This Warrant shall be deemed to have been exercised on the
date the Exercise Price is received by the Company. The Warrant Shares shall be
deemed to have been issued, and Holder or any other person so designated to be
named therein shall be deemed to have become a holder of record of such shares
for all purposes, as of the date the Warrant has been exercised by payment to
the Company of the Exercise Price and all taxes required to be paid by the
Holder, if any, pursuant to Section 2(e)(vii) prior to the issuance of such
shares, have been paid.

     iii. Delivery
of New Warrants Upon Exercise. If this
Warrant shall have been exercised in part, and the Holder shall have surrendered
this Warrant in connection with such exercise, the Company shall, at the time of
delivery of the certificate or certificates representing Warrant Shares, deliver
to Holder a new Warrant evidencing the rights of Holder to purchase the
unpurchased Warrant Shares called for by this Warrant,

4

which new Warrant shall in all other
respects be identical with this Warrant. 

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

     v.
Compensation for Buy-In on Failure to Timely Deliver Certificates Upon
Exercise. In addition to any other rights available to the Holder, if the
Company fails to cause its transfer agent to transmit to the Holder a
certificate or certificates representing the Warrant Shares pursuant to an
exercise on or before the Warrant Share Delivery Date, and if after such date
the Holder is required by its broker to purchase (in an open market transaction
or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the
Holder of the Warrant Shares which the Holder anticipated receiving upon such
exercise (a “Buy-In”), then the Company shall (1) pay in cash to the Holder the amount by
which (x) the Holder’s total purchase price (including brokerage commissions, if
any) for the shares of Common Stock so purchased exceeds (y) the amount obtained
by multiplying (A) the number of Warrant Shares that the Company was required to
deliver to the Holder in connection with the exercise at issue times (B) the
price at which the sell order giving rise to such purchase obligation was
executed, and (2) at the option of the Holder, either reinstate the portion of
the Warrant and equivalent number of Warrant Shares for which such exercise was
not honored or deliver to the Holder the number of shares of Common Stock that
would have been issued had the Company timely complied with its exercise and
delivery obligations hereunder. For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect to
an attempted exercise of shares of Common Stock with an aggregate sale price
giving rise to such purchase obligation of $10,000, under clause (1) of the
immediately preceding sentence the Company shall be required to pay the Holder
$1,000. The Holder shall provide the Company written notice indicating the
amounts payable to the Holder in respect of the Buy-In, together with applicable
confirmations and other evidence reasonably requested by the Company. Nothing
herein shall limit the 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
exercise of the Warrant as required pursuant to the terms hereof. 

     vi. No
Fractional Shares or Scrip. No fractional
shares or scrip representing fractional shares shall be issued upon the exercise
of this

5

Warrant. As to any fraction of a share
which Holder would otherwise be entitled to purchase upon such exercise, the
Company shall pay a cash adjustment in respect of such final fraction in an
amount equal to such fraction multiplied by the Exercise Price.

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

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

     Section 3. Certain Adjustments.

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

     b) Subsequent Equity Sales. If the
Company or any Subsidiary thereof, as applicable, prior to the later of (A) one
year from the date of this Warrant and (B) the date on which the Debenture is
repaid or converted in full, shall offer, sell, grant any option to purchase or
offer, sell or grant any right to reprice its securities, or
otherwise

6

dispose of or issue (or announce any
offer, sale, grant or any option to purchase or other disposition) any Common
Stock or Common Stock Equivalents entitling any Person to acquire shares of
Common Stock, at an effective price per share less than the then Exercise Price
(such lower price, the “Base Share Price” and such issuances collectively, a
“Dilutive Issuance”), as adjusted hereunder (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 is issued in connection with such issuance, be entitled to receive shares
of Common Stock at an effective price per share which is less than the Exercise
Price, such issuance shall be deemed to have occurred for less than the Exercise
Price on such date of the Dilutive Issuance), then, the Exercise Price shall be
reduced and only reduced to equal the Base Share Price. Such adjustment shall be
made whenever such Common Stock or Common Stock Equivalents are issued.
Notwithstanding the foregoing, no adjustments shall be made, paid or issued
under this Section 3(b) in respect of an Exempt Issuance. The Company shall use
commercially reasonable efforts to promptly notify the Holder in writing,
following the issuance of any Common Stock or Common Stock Equivalents subject
to this section, indicating therein the applicable issuance price, or of
applicable reset price, exchange price, conversion price and other pricing terms
(such notice the “Dilutive Issuance Notice”). For purposes of clarification,
whether or not the Company provides a Dilutive Issuance Notice pursuant to this
Section 3(b), upon the occurrence of any Dilutive Issuance, after the date of
such Dilutive Issuance the Holder is entitled to exercise this Warrant at an
exercise price based upon the Base Share Price regardless of whether the Holder
accurately refers to the Base Share Price in the Notice of
Conversion.

     c) Subsequent Rights Offerings. If the
Company, at any time prior to the later of (A) one year from the date of this
Warrant and (B) the date on which the Debenture is repaid or converted in full,
after failing to deliver notice to Holder in accordance with Section 3(g)(ii)
hereof (Notice to Allow Exercise by Holder), shall issue rights, options or
warrants to all holders of Common Stock (and not to Holder) entitling them to
subscribe for or purchase shares of Common Stock at a price per share less than
the VWAP at the record date mentioned below, then the Exercise Price shall be
multiplied by a fraction, of which the denominator shall be the number of shares
of the Common Stock outstanding on the date of issuance of such rights or
warrants, plus the number of additional shares of Common Stock offered for
subscription or purchase, and of which the numerator shall be the number of
shares of the Common Stock outstanding on the date of issuance of such rights or
warrants plus the number of shares which the aggregate offering price of the
total number of shares so offered (assuming receipt by the Company in full of
all consideration payable upon exercise of such rights, options or warrants)
would purchase at such VWAP. Such adjustment shall be made whenever such rights
or warrants are issued, and shall become 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 prior to the later of (A) one year from the date of this Warrant and (B)
the date on which the Debenture is repaid or converted in full, after failing to
deliver notice to Holder in accordance with Section 3(g)(ii) hereof (Notice to
Allow Exercise by Holder), shall distribute to all 

7

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

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

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

     g) Notice
to Holders.

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

     ii.
Notice to Allow Exercise by
Holder. If (A) the Company shall declare a
dividend (or any other distribution) on the Common Stock; (B) the Company shall
declare a special nonrecurring cash dividend on or a redemption of the Common
Stock; (C) the Company shall authorize the granting to all holders of the Common
Stock rights or warrants to subscribe for or purchase any shares of capital
stock of any class or of any rights; (D) the approval of any stockholders of the
Company shall be required in connection with any reclassification of the Common
Stock, any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; (E) the Company shall authorize
the

8

voluntary or
involuntary dissolution, liquidation or winding up of the affairs of the
Company; then, in each case, the Company shall cause to be mailed to the Holder
at its last address as it shall appear upon the Warrant Register of the Company,
at least 10 calendar days prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which a record is to be
taken for the purpose of such dividend, distribution, redemption, rights or
warrants, or if a record is not to be taken, the date as of which the holders of
the Common Stock of record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the date on which
such reclassification, consolidation, merger, sale, transfer or share exchange
is expected to become effective or close, and the date as of which it is
expected that holders of the Common Stock of record shall be entitled to
exchange their shares of the Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale, transfer or
share exchange; provided, that the failure to mail such notice or any defect
therein or in the mailing thereof shall not affect the validity of the corporate
action required to be specified in such notice. The Holder is entitled to
exercise this Warrant during the 10-day period commencing on the date of such
notice to the effective date or the termination date of the event triggering
such notice. 

     Section 4. Transfer of
Warrant. 

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

     b) New
Warrants. This Warrant may be divided or
combined with other Warrants upon presentation hereof at the aforesaid office of
the Company, together with a written notice specifying the names and
denominations in which new Warrants are to be issued, signed by the Holder or
its agent or attorney. Subject to compliance with Section 4(a), as to any
transfer which may be involved in such division or combination, the Company
shall execute and deliver a new Warrant or Warrants in exchange for the Warrant
or Warrants to be divided or combined in accordance with such
notice.

9

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

     d) Transfer Restrictions. If, at the time
of the surrender of this Warrant in connection with any transfer of this
Warrant, the transfer of this Warrant shall not be registered pursuant to an
effective registration statement under the Securities Act and under applicable
state securities or blue sky laws, the Company may require, as a condition of
allowing such transfer (i) that the Holder or transferee of this Warrant, as the
case may be, furnish to the Company a written opinion of counsel (which opinion
shall be in form, substance and scope customary for opinions of counsel in
comparable transactions) to the effect that such transfer may be made without
registration under the Securities Act and under applicable state securities or
blue sky laws, (ii) that the holder or transferee execute and deliver to the
Company an investment letter in form and substance acceptable to the Company and
(iii) that the transferee be an “accredited investor” as defined in Rule
501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8) promulgated under the Securities
Act or a qualified institutional buyer as defined in Rule 144A(a) under the
Securities Act.

     Section 5. Miscellaneous. 

     a) Title
to Warrant. Prior to the Termination Date and
subject to compliance with applicable laws and Section 4 of this Warrant, this
Warrant and all rights hereunder are transferable, in whole or in part, at the
office or agency of the Company by the Holder in person or by duly authorized
attorney, upon surrender of this Warrant together with the Assignment Form
annexed hereto properly endorsed. The transferee shall sign an investment letter
in form and substance reasonably satisfactory to the Company. 

     b) No
Rights as Shareholder Until Exercise. This
Warrant does not entitle the Holder to any voting rights or other rights as a
shareholder of the Company prior to the exercise hereof. Upon the surrender of
this Warrant and the payment of the aggregate Exercise Price (or by means of a
cashless exercise), the Warrant Shares so purchased shall be and be deemed to be
issued to the Holder as the record owner of such shares as of the close of
business on the later of the date of such surrender or payment. 

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

10

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

     e) Authorized
Shares.

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

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

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

11

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

     h) Nonwaiver and Expenses. No course of
dealing or any delay or failure to exercise any right hereunder on the part of
Holder shall operate as a waiver of such right or otherwise prejudice Holder’s
rights, powers or remedies, notwithstanding the fact that all rights hereunder
terminate on the Termination Date.

     i) Attorneys’ Fees. In the event that any
legal proceeding with respect to the interpretation or enforcement of this
Warrant is initiated, the prevailing party shall be awarded their costs and
expenses including, but not limited to, reasonable attorneys’ fees.

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

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

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

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

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

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

     p) Force
Majeure. In no event shall a Holder have any
claim or right against the Company for any failure of performance in accordance
with this Warrant due to causes beyond its reasonable control, including, but
not limited to: such delays arising directly out of an act of God, fire, flood
or other natural catastrophe; laws, orders, rules, regulations, directions or
action of governmental authorities having jurisdiction or any

12

civil
military authority; or national emergency, riot, act of terrorism or war or
labor dispute.

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

13

     IN
WITNESS WHEREOF, the Company has caused this Warrant to be executed by its
officer thereunto duly authorized.

Dated: June 21, 2007

		NITCHES, INC.
		 
		By:	 
		Name:  Steven P.
    Wyandt
		
      Title:    Chief
      Executive Officer

 

 

NOTICE OF EXERCISE

To:     
NITCHES, INC.

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

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

[ ] in lawful money of the United
States; or

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

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

_______________________________

The Warrant Shares shall be delivered
to the following:

_______________________________

_______________________________

_______________________________

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

[SIGNATURE OF HOLDER]

	Name of
      Investing Entity:	 

	Signature of
      Authorized Signatory of Investing Entity :	 

	Name of
      Authorized Signatory:	 

	Title of
      Authorized Signatory:	 

	Date:	 

ASSIGNMENT FORM

(To assign the foregoing warrant,
execute
this form and supply required information.
Do not use this form to exercise the warrant.)

     FOR VALUE
RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby
assigned to

	 	whose address
is

	 	.  

	 

	Dated:	 	, 	 	 

	 	Holder’s Signature:	  	 
	 	 	 	 
		Holder’s Address:	 	
	 			
			 	

 

	Signature Guaranteed:	 

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

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