Document:

Exhibit 10.3

 

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

 

ADVANCED CELL TECHNOLOGY, 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 close
of business on the five year anniversary of the Initial Exercise Date (the “Termination
Date”) but not thereafter, to subscribe for and purchase from Advanced Cell
Technology, Inc., a Nevada corporation (the “Company”), up to                 
shares (the “Warrant Shares”) of Common Stock, par value $0.001 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).

 

Section 1.                                            Definitions.  Capitalized
terms used and not otherwise defined herein shall have the meanings set forth
in that certain Securities Purchase Agreement (the “Purchase Agreement”),
dated September 15, 2005,
among the Company and the purchasers signatory thereto.

 

Section 2.                                            Exercise.

 

a)                                      Exercise
of Warrant.  Exercise of the purchase
rights represented by this Warrant may be made, in whole or in part, at any
time or times on or after the Initial Exercise Date and on or before the
Termination Date by delivery to the Company of a duly executed facsimile copy
of the Notice of Exercise Form annexed hereto (or such other office or agency
of the Company as it may designate by notice in writing to the registered
Holder at the address of such Holder appearing on the books of the Company); provided,
however, within 5 Trading Days of the date said Notice of Exercise is
delivered to the Company, if this Warrant is exercised in full, the Holder
shall have surrendered

 

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

 

b)                                     Exercise Price.  The exercise price of the Common Stock under
this Warrant shall be $2.53, subject
to adjustment hereunder (the “Initial 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

  
	
   

  	
   

  
	
  (X) =

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

  

 

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

 

d)                                     Exercise
Limitations; Holder’s Restrictions. 
A Holder shall not have the right to exercise any portion of this
Warrant, pursuant to Section 2(c) or otherwise, to the

 

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extent that after giving
effect to such issuance after exercise, such Holder (together with such Holder’s
affiliates, and any other person or entity acting as a group together with such
Holder or any of such Holder’s affiliates), as set forth on the applicable
Notice of Exercise, would beneficially own in excess of 4.99% 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 such 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, nonexercised portion of this Warrant
beneficially owned by such 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 such Holder or any of its
affiliates.  Except as set forth in the preceding sentence, for purposes
of this Section 2(d)(i), beneficial ownership shall be calculated in
accordance with Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder, it being acknowledged by a Holder that the
Company is not representing to such Holder that such calculation is in
compliance with Section 13(d) of the Exchange Act and such 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 such Holder) and of which a portion of this Warrant is exercisable shall be
in the sole discretion of a Holder, and the submission of a Notice of Exercise
shall be deemed to be each Holder’s determination of whether this Warrant is
exercisable (in relation to other securities owned by such 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. 
In addition, a determination as to any group status as contemplated
above shall be determined in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder.  For purposes of this Section 2(d), in
determining the number of outstanding shares of Common Stock, a Holder may rely
on the number of outstanding shares of Common Stock as reflected in (x) the
Company’s most recent Form 10-QSB or Form 10-KSB, as the case may be,
(y) a more recent public announcement by the Company or (z) any other notice by
the Company or the Company’s Transfer Agent setting forth the number of shares
of Common Stock outstanding.  Upon the written or oral request of a
Holder, the Company shall within two Trading Days confirm orally and in writing
to such Holder the number of shares of Common Stock then outstanding.  In
any case, the number of outstanding shares of Common Stock shall be determined
after giving effect to the conversion or exercise of securities of the Company,
including this Warrant, by such 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 such Holder, at the election of such 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 day (or such later date, as
determined by such Holder, as may be specified in such notice of waiver).  The

 

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provisions of this
paragraph shall be implemented in a manner otherwise than in strict conformity
with the terms of this Section 2(d) to correct this paragraph (or any
portion hereof) which may be defective or inconsistent with the intended 4.99%
beneficial ownership limitation herein contained or to make changes or
supplements necessary or desirable to properly give effect to such 4.99%
limitation. The limitations contained in this paragraph shall apply to a
successor holder of this Warrant. The holders of Common Stock of the Company
shall be third party beneficiaries of this Section 2(d) and the
Company may not waive this Section 2(d) without the consent of holders
of a majority of its 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 3 Trading Days from
the delivery to the Company of the Notice of Exercise Form, surrender of this
Warrant (if required) and payment of the aggregate Exercise Price as set forth
above (“Warrant Share Delivery Date”). 
This Warrant shall be deemed to have been exercised on the date the
Exercise Price is received by the Company. 
The Warrant Shares shall be deemed to have been issued, and Holder or
any other person so designated to be named therein shall be deemed to have
become a holder of record of such shares for all purposes, as of the date the
Warrant has been exercised by payment to the Company of the Exercise Price 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, the Company shall, at the
request of a Holder and upon surrender of this Warrant certificate, at the time
of delivery of the certificate or certificates representing Warrant Shares,
deliver to Holder a new Warrant evidencing the rights of Holder to purchase the
unpurchased Warrant Shares called for by this Warrant, which new Warrant shall
in all other respects be identical with this Warrant.

 

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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)(iv) 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 a Holder’s right to pursue any other remedies
available to it hereunder, at law or in equity including, without limitation, a
decree of specific performance and/or injunctive relief with respect to the
Company’s failure to timely deliver certificates representing shares of Common
Stock upon 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 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.

 

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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, at
any time while this Warrant 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 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

 

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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 and the number of Warrant Shares issuable
hereunder shall be increased such that the aggregate Exercise Price payable
hereunder, after taking into account the decrease in the Exercise Price, shall
be equal to the aggregate Exercise Price prior to such adjustment.  Such adjustment shall be made whenever such
Common Stock or Common Stock Equivalents are issued.  Notwithstanding the foregoing, no adjustments
shall be made, paid or issued under this Section 3(b) in respect of
an Exempt Issuance.  The Company shall
notify the Holder in writing, no later than the Trading Day following the
issuance of any Common Stock or Common Stock Equivalents subject to this
section, 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 receive a number of Warrant Shares based upon the
Base Share Price regardless of whether the Holder accurately refers to the Base
Share Price in the Notice of Exercise. 
Notwithstanding the foregoing, if the Company issues shares of Common
Stock or Common Stock Equivalents in connection with the Legal Fee Settlement,
the Exercise Price shall be adjusted to a price equal the lesser of (i) the
price determined pursuant to the first sentence of this Section 3(b) or
(ii) if the effective price per share for such issuances is not
ascertainable, a price determined by multiplying the then effective Exercise
Price by a fraction, the numerator of which shall be the number of shares of
Common Stock and Common Stock Equivalents outstanding immediately prior to such
issuance and the denominator of which shall be the number of shares of Common
Stock and Common Stock Equivalents outstanding immediately following such
issuance.

 

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

 

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distribution is made and
shall become effective immediately after the record date mentioned above.

 

d)                                     Fundamental
Transaction. If, at any time while this Warrant is outstanding, (A) the
Company effects any merger or consolidation of the Company with or into another
Person, (B) the Company effects any sale of all or substantially all of
its assets in one or a series of related transactions, (C) any tender
offer or exchange offer (whether by the Company or another Person) is completed
pursuant to which holders of Common Stock are permitted to tender or exchange
their shares for other securities, cash or property, or (D) the Company
effects any reclassification of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property (in any such case, a “Fundamental
Transaction”), then, upon any
subsequent exercise of this Warrant, the Holder
shall have the right to receive, for each Warrant Share that would have
been issuable upon such exercise immediately prior to the occurrence of such
Fundamental Transaction, at the option of the
Holder, (a) upon exercise of this Warrant, the number of shares of Common
Stock of the successor or acquiring corporation or of the Company, if it is the
surviving corporation, and any additional consideration (the “Alternate
Consideration”) receivable upon or as a
result of such reorganization, reclassification, merger, consolidation or
disposition of assets by a Holder of the number of shares of Common Stock for
which this Warrant is exercisable immediately prior to such event or (b) if
the Company is acquired in an all cash transaction, cash equal to the value of
this Warrant as determined in accordance with the Black-Scholes option pricing
formula.  For purposes of any such
exercise, the determination of the Exercise Price shall be appropriately
adjusted to apply to such Alternate Consideration based on the amount of
Alternate Consideration issuable in respect of one share of Common Stock in
such Fundamental Transaction, and the Company shall apportion the Exercise Price
among the Alternate Consideration in a reasonable manner reflecting the
relative value of any different components of the Alternate Consideration.  If holders of Common Stock are given any
choice as to the securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any exercise of this Warrant following such
Fundamental Transaction.  To the extent
necessary to effectuate the foregoing provisions, any successor to the Company
or surviving entity in such Fundamental Transaction shall issue to the Holder a
new warrant consistent with the foregoing provisions and evidencing the Holder’s
right to exercise such warrant into Alternate Consideration. The terms of any
agreement pursuant to which a Fundamental Transaction is effected shall include
terms requiring any such successor or surviving entity to comply with the
provisions of this Section 3(d) and insuring that this Warrant (or
any such replacement security) will be similarly adjusted upon any subsequent
transaction analogous to a Fundamental Transaction.

 

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.

 

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

 

ii.                                       Notice
to Allow 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 voluntary or involuntary dissolution, liquidation
or winding up of the affairs of the Company; then, in each case, the Company
shall cause to be mailed to the Holder at its last address as it shall appear
upon the Warrant Register of the Company, at least 20 calendar days prior to
the applicable record or effective date hereinafter specified, a notice stating
(x) the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be
taken, the date as of which the holders of the Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation, merger,
sale, transfer or share exchange is expected to become effective or close, and
the date as of which it is expected that holders of the Common Stock of record
shall be entitled to exchange their shares of the Common Stock for securities,
cash or other property deliverable upon such reclassification, consolidation,
merger, sale, transfer or share exchange; provided, that the failure to
mail such notice or any defect therein or in the mailing thereof shall not
affect the validity of the corporate action required to be specified in such
notice.  The Holder is

 

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entitled to exercise this
Warrant during the 20-day period commencing on the date of such notice to the
effective date of the event triggering such notice.

 

Section 4.                                            Transfer of Warrant.

 

a)                                      Transferability.  Subject to compliance with any applicable
securities laws and the conditions set forth in 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.

 

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

 

10

 

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 such
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.

 

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.

 

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

 

11

 

of any requirements of
the Trading Market upon which the Common Stock may be listed.

 

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

 

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

 

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.

 

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.  If
the Company willfully and knowingly fails to comply with any provision of this
Warrant, which results in any material damages to the Holder, the Company shall
pay to Holder such amounts as shall be sufficient to cover any costs and
expenses including, but not limited to, reasonable attorneys’ fees, including
those of appellate proceedings, incurred by Holder in collecting any amounts
due pursuant hereto or in otherwise enforcing any of its rights, powers or
remedies hereunder.

 

12

 

i)                                         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.

 

j)                                         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.

 

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

 

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 any such
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.

 

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

 

13

 

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

 

 

Dated:  September     ,
2005

 

 

	
   

  	
  ADVANCED CELL
  TECHNOLOGY, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William M. Caldwell, IV

  
	
   

  	
   

  	
  Name:  William
  M. Caldwell, IV

  
	
   

  	
   

  	
  Title:  Chief
  Executive Officer

  

 

1

 

NOTICE OF EXERCISE

 

TO:                            ADVANCED CELL TECHNOLOGY, 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):

 

o
in lawful money of the United States; or

 

o
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.Exhibit 10.4

 

EXHIBIT A

 

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

 

Original Issue Date: September     , 2005

Original Conversion Price (subject to adjustment herein): $2.30

 

$                              

 

AMORTIZING CONVERTIBLE DEBENTURE

 

THIS AMORTIZING DEBENTURE is one of a series of duly authorized and issued Amortizing Convertible Debentures of Advanced Cell Technology, Inc., a Nevada corporation, having a principal place of business at                                                             (the “Company”), designated as its Amortizing Convertible Debenture (this debenture, the “Debenture” and collectively with the other such series of debentures, the “Debentures”).
 

FOR VALUE RECEIVED, the Company promises to pay to                                                 
or its registered assigns (the “Holder”), or shall have paid pursuant to
the terms hereunder, the principal sum of $                              
by September     ,
2008, or such earlier date as this Debenture is required or permitted to
be repaid as provided hereunder (the “Maturity Date”).  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:

 

1

 

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

 

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

 

“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 banking institutions in the State of New York
are authorized or required by law or other government action to close.

 

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

 

“Capital Restructuring” shall mean
those actions taken in connection with (i) the distribution of
substantially all the assets of ACT Group, Inc. to the shareholders of ACT
Group, Inc. (such distribution hereinafter referred to as the “Group
Liquidation”), and (ii) the reincorporation of the Company in Delaware
effected pursuant to (A) a merger (the “Parent Merger”) by the
Company with and into a newly formed Delaware corporation (the surviving
corporation hereinafter referred to as the “Surviving Corporation”), and
(B) the related merger and consolidation (the “Roll-Up Merger”) of
Advanced Cell, Inc., a Delaware corporation and wholly-owned subsidiary of
the Company, with and into the Surviving Corporation (the Parent Merger and the
Roll-up Merger are hereinafter collectively referred to as the “Reincorporation”).

 

“Change of Control Transaction” means
the occurrence after the date hereof of any of (i) an acquisition after
the date hereof by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated
under the Exchange Act) of effective control (whether through legal or
beneficial ownership of capital stock of the Company, by contract or otherwise)
of in excess of 33% of the voting securities of the Company, or (ii) the
Company merges into or consolidates with any other Person, or any Person merges
into or consolidates with the Company and, after giving effect to such
transaction, the stockholders of the Company immediately prior to such
transaction own less than 66% of the aggregate voting power of the Company or
the successor entity of such transaction, or (iii) the Company sells or
transfers its assets, as an entirety or substantially as an entirety, to
another Person and the stockholders of the Company immediately prior to such
transaction own less than 66% of the aggregate voting power of the acquiring
entity immediately after the transaction, (iv) a replacement at one time
or within a three year period of more than one-half of the members of the
Company’s board of directors which is not approved by a majority of those
individuals who are members of the board of directors on the date hereof (or by
those individuals who are serving as members of the board of directors on any
date whose nomination to the board of directors was approved by a majority of
the members of the board of directors who are members on the date hereof), or (v) the
execution by the Company of an agreement to which the Company is a party or by
which it is bound, providing for any of the events set forth above in (i) or
(iv). Notwithstanding anything herein to the contrary, in no event shall any
action taken directly in connection with the Capital Restructuring be deemed a
Change of Control Transaction provided that such action is necessary to effect
the Capital Restructuring.

 

2

 

“Common Stock” means the common stock,
par value $0.001 per share, of the Company and stock of any other class of
securities into which such securities may hereafter have been reclassified or
changed into.

 

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

 

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

 

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

 

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

 

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

 

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

 

“Effectiveness Period” shall have the
meaning given to such term in the Registration Rights Agreement.

 

“Equity Conditions” shall mean, during
the period in question, (i) the
Company shall have duly honored all conversions and redemptions scheduled to
occur or occurring by virtue of one or more Notice of Conversions of the Holder,
if any, (ii) all liquidated damages and other amounts owing to the Holder in
respect of this Debenture shall have been paid; (iii) there
is an effective Registration Statement pursuant to which the Holder is
permitted to utilize the prospectus thereunder to resell all of the shares
issuable pursuant to the Transaction Documents (and the Company is not aware of
any information that would cause it to believe such use would be interrupted), (iv) the
Common Stock is trading on the Trading Market and all of the shares issuable
pursuant to the Transaction Documents are listed for trading on a Trading
Market (and the Company is not aware of any information that would cause it to
believe trading would be interrupted), (v) there is a sufficient number of
authorized but unissued and otherwise unreserved shares of Common Stock for the
issuance of all of the shares issuable pursuant to the Transaction Documents, (vi) there
is then existing no Event of Default, (vii) the issuance of the shares in
question (or, in the case of a redemption, the shares issuable upon conversion
in full of the redemption amount) to the Holder would not violate the
limitation set forth in Section 4(c) and (viii) no public announcement
of a pending or proposed Fundamental Transaction, Change of Control Transaction
or acquisition transaction has occurred that has not been consummated.

 

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

 

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

 

“Exempt Redemptions” means redemption
of shares by the Company solely as a

 

3

 

result of (a) the Capital Structure Requirements or (b) redemption
of a de minimus number of shares from employees, officers or directors of the
Company pursuant to termination of employment or resolution of employment
disputes with any such Persons, which issuances are approved by the Board of
Directors.

 

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

 

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

 

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

 

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

 

“Group Liquidation” shall have the meaning given such term in the definition of Capital Restructuring.
 

“Mandatory Default Amount”  shall equal the sum of (i) the greater
of: (A) 120% of the principal amount of this Debenture to be prepaid, or (B) the
principal amount of this Debenture to be prepaid, divided by the Conversion
Price on (x) the date the Mandatory Default Amount is demanded or otherwise due
or (y) the date the Mandatory Default Amount is paid in full, whichever is
less, multiplied by the Closing Price on (x) the date the Mandatory Default
Amount is demanded or otherwise due or (y) the date the Mandatory Default
Amount is paid in full, whichever is greater, and (ii) all other amounts,
costs, expenses and liquidated damages due in respect of this Debenture.

 

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

 

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

 

“Monthly Redemption” shall mean the
redemption of this Debenture pursuant to Section 6(b) hereof.

 

“Monthly Redemption Amount” shall
mean, as to a Monthly Redemption, $            (1).

 

“Monthly Redemption Date” means the
1st of each month, commencing on March     , 2006 and
ending upon the full redemption of this Debenture.

 

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

 

(1)           1/30th of the original Principal Amount of this
Debenture.

4

 

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

 

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

 

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

 

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

 

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

 

“Optional Redemption Amount” shall
mean the sum of (i) 100% of the principal amount of the Debenture then
outstanding and (ii) all liquidated damages and other amounts due in
respect of the Debenture.

 

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

 

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

 

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

 

“Parent Merger” shall have the meaning given such term in the definition of Capital Restructuring.
 

“Permitted Indebtedness” means trade
payables, indebtedness consisting of capitalized lease obligations and purchase
money indebtedness incurred in connection with acquisition of capital assets
and obligations under sale-leaseback arrangements with respect to newly
acquired or leased assets; provided, however, that in each case
such obligations are not secured by liens on any assets of the Company or its
Subsidiaries existing as of the date of the Purchase Agreement and may only be
secured by the assets so acquired or leased thereafter.

 

“Permitted Lien” mean (a) Liens with respect to the payment of taxes or governmental charges in all cases which are not yet due or which are subject to a good faith contest; (b) any Liens incurred in connection with Permitted Debt provided that such liens are not secured by assets of the Company or its Subsidiaries other than the assets so acquired or leased; and (c) statutory Liens of landlords or equipment lessors against any property of the Company or its Subsidiaries existing as of the date of the Purchase Agreement in favor of suppliers, mechanics, carriers, materialmen, warehousemen or workmen.

 

5

 

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

 

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

 

“Purchase Agreement” means the
Securities Purchase Agreement, dated as of September 15, 2005, to which the Company and the original
Holder are parties, as amended, modified or supplemented from time to time in
accordance with its terms.

 

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

 

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

 

“Reincorporation” shall have the meaning given such term in the definition of Capital Restructuring.
 
“Roll-Up Merger” shall have the meaning given such term in the definition of Capital Restructuring.
 

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

 

“Subsidiary” shall have the meaning
given to such term in the Purchase Agreement.

 

“Surviving Corporation” shall have the meaning given such term in the definition of Capital Restructuring.
 

“Threshold Period” shall have the
meaning given to such term in Section 6(d).

 

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

 

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

 

6

 

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

 

Section 2.               Interest and Prepayment.  No regularly scheduled interest payments
shall be made on this Debenture. Except as otherwise set forth in this Debenture,
the Company may not prepay any portion
of the principal amount of this Debenture without the prior written consent of
the Holder.

 

Section 3.               Registration of Transfers and Exchanges.

 

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

 

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

 

c)             Reliance on Debenture Register.
Prior to due presentment 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 4.               Conversion.

 

a)             Voluntary Conversion. At any
time after the Original Issue Date until this Debenture is no longer
outstanding, this Debenture shall be convertible 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(c) 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 this 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 provided
hereunder.  To effect conversions
hereunder, the Holder shall not be required to physically surrender this
Debenture to the Company unless the entire principal amount of this Debenture
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 1
Business Day of receipt of such notice. 
In the event of any dispute or discrepancy, the records of the

 

7

 

Holder shall be controlling and determinative in the absence of
manifest error. The Holder and any assignee, by acceptance of this Debenture,
acknowledge and agree that, by reason of the provisions of this paragraph,
following conversion of a portion of this Debenture, the unpaid and unconverted
principal amount of this Debenture may be less than the amount stated on the
face hereof.

 

b)            Conversion Price.  The conversion price in effect on any
Conversion Date shall be equal to $2.30 (subject to adjustment
herein)(the “Conversion Price”).

 

c)             Holder’s Restriction on
Conversion.  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, the
Holder (together with the Holder’s affiliates), as set forth on the applicable
Notice of Conversion, would beneficially own in excess of 4.99% 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, any other Debentures
or the 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 4(c)(ii), beneficial ownership shall be calculated in
accordance with Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder.  To
the extent that the limitation contained in this section 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 sole discretion of such 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.  In addition, a
determination as to any group status as contemplated above shall be determined
in accordance with Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder. For purposes of this Section 4(c)(ii),
in determining the number of outstanding shares of Common Stock, 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

 

8

 

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(c) 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 4(c) 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). 
The provisions of this
paragraph shall be implemented in a manner otherwise than in strict conformity
with the terms of this Section 4(c) to correct this paragraph (or any
portion hereof) which may be defective or inconsistent with the intended 4.99%
beneficial ownership limitation herein contained or to make changes or
supplements necessary or desirable to properly give effect to such 4.99%
limitation. The limitations contained in this paragraph shall apply to a
successor holder of this Debenture. The holders of Common Stock of the Company
shall be third party beneficiaries of this Section 4(c) and the
Company may not waive this Section 4(c) without the consent of
holders of a majority of its Common Stock.

 

d)                                     Mechanics
of Conversion

 

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

 

ii.             Delivery of Certificate Upon
Conversion. Not later than three Trading Days after any Conversion Date,
the Company will deliver or cause to be delivered to the Holder a certificate
or certificates representing the Conversion 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 this Debenture. The Company shall, if available
and if allowed under applicable securities laws, use its best 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.

 

iii.            Failure to Deliver Certificates.  If in the case of any Notice of Conversion
such certificate or certificates are not delivered to or as directed by the
applicable Holder by the third Trading Day after 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 this Debenture tendered for conversion.

 

iv.            Obligation Absolute; Partial
Liquidated Damages.  If the Company
fails for any reason to deliver to the Holder such certificate or certificates 

 

9

 

pursuant to Section 4(d)(ii) by the third Trading Day after
the Conversion Date, the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, for each $1000 of principal amount
being converted, $10 per Trading Day (increasing to $20 per Trading Day after 5
Trading Days after such damages begin to accrue) for each Trading Day after
such third Trading Day until such certificates are delivered.  The Company’s obligations to issue and
deliver the Conversion Shares upon conversion of this Debenture in accordance
with the terms hereof are absolute and unconditional, irrespective of any
action or inaction by the Holder to enforce the same, any waiver or consent
with respect to any provision hereof, the recovery of any judgment against any
Person or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder or any other Person of any obligation to the Company or any violation or
alleged violation of law by the Holder or any other person, and irrespective of
any other circumstance which might otherwise limit such obligation of the
Company to the Holder in connection with the issuance of such Conversion Shares;
provided, however, such delivery shall not operate as a waiver by
the Company of any such action the Company may have against the Holder.  In the event the Holder of this Debenture
shall elect to convert any or all of the outstanding principal amount hereof,
the Company may not refuse conversion based on any claim that the Holder or any
one associated or affiliated with the Holder has been engaged in any violation
of law, agreement or for any other reason, unless, an injunction from a court,
on notice, restraining and or enjoining conversion of all or part of this
Debenture shall have been sought and obtained and the Company posts a surety
bond for the benefit of the Holder in the amount of 150% of the principal
amount of this Debenture outstanding, which is subject to the injunction, which
bond shall remain in effect until the completion of arbitration/litigation of
the dispute and the proceeds of which shall be payable to such Holder to the
extent it obtains judgment.  In the
absence of an injunction precluding the same, the Company shall issue
Conversion Shares or, if applicable, cash, upon a properly noticed
conversion.  Nothing herein shall limit a
Holder’s right to pursue actual damages or declare an Event of Default pursuant
to Section 8 herein for the Company’s failure to deliver Conversion Shares
within the period specified herein and such Holder shall have the right to
pursue all remedies available to it at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief.  The exercise of any such rights shall not
prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof
or under applicable law.

 

v.             Compensation for Buy-In on Failure
to Timely Deliver Certificates Upon Conversion. In addition to any other
rights available to the Holder, if the Company fails for any reason to deliver
to the Holder such certificate or certificates pursuant to Section 4(d)(ii) by
the third Trading Day after the Conversion Date, and if after such third
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 such Holder of the Conversion Shares

 

10

 

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
such 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 (if surrendered) this Debenture in a principal
amount equal to the principal amount of the attempted conversion or deliver to
the Holder the number of shares of Common Stock that would have been issued had
the Company timely complied with its delivery requirements under Section 4(d)(ii).  For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect
to an attempted conversion of this Debenture with respect to which the actual
sale price of the Conversion Shares 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 such Holder liquidated damages under Section 4(d)(iv) in
respect of the certificates resulting in such Buy-In.

 

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

 

vii.           Fractional Shares. Upon a
conversion hereunder the Company shall not be required to issue stock
certificates representing fractions of shares of the Common Stock, but may if
otherwise permitted, make a cash payment in

 

11

 

respect of any final fraction of a share
based on the Closing Price at such time. 
If the Company elects not, or is unable, to make such a cash payment,
the Holder shall be entitled to receive, in lieu of the final fraction of a
share, one whole share of Common Stock.

 

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

 

Section 5.               Certain Adjustments.

 

a)             Stock Dividends and Stock Splits.  If the Company, at any time while this
Debenture is outstanding: (A) pays a stock dividend or otherwise makes a
distribution or distributions 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), (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 the Conversion
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.  Any adjustment made pursuant to
this Section shall become effective immediately after the record date for
the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or re-classification.

 

b)            Subsequent
Equity Sales.  If the Company or any Subsidiary
thereof, as applicable, at any time while this Debenture is outstanding, 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 Conversion
Price (such lower price, the “Base Conversion Price” and such issuances
collectively, a “Dilutive Issuance”), as adjusted hereunder (if the
holder of the Common

 

12

 

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 Conversion Price, such issuance shall be deemed to have
occurred for less than the Conversion Price on such date of the Dilutive
Issuance), then the Conversion Price shall be reduced to equal the Base
Conversion Price.  Such adjustment shall
be made whenever such Common Stock or Common Stock Equivalents are issued.  Notwithstanding the foregoing, no adjustment
will be made under this Section 5(b) in respect of an Exempt
Issuance.  The Company shall notify the
Holder in writing, no later than the Business Day following the issuance of any
Common Stock or Common Stock Equivalents subject to this section, 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 5(b), upon the occurrence of any Dilutive
Issuance, after the date of such Dilutive Issuance the Holder is entitled to
receive a number of Conversion Shares based upon the Base Conversion Price
regardless of whether the Holder accurately refers to the Base Conversion Price
in the Notice of Conversion.  Notwithstanding
anything contained herein to the contrary, in no event shall any offer, sale,
issuance, or grant of Common Stock or Common Stock Equivalents directly as a
result of the Capital Structure Requirements be deemed a Dilutive Issuance.
Notwithstanding the foregoing, if the Company issues shares of Common Stock or
Common Stock Equivalents in connection with the Legal Fee Settlement, the
Conversion Price shall be adjusted to a price equal the lesser of (i) the
price determined pursuant to the first sentence of this Section 5(b) or
(ii) if the effective price per share for such issuances is not
ascertainable, a price determined by multiplying the then effective Conversion
Price by a fraction, the numerator of which shall be the number of shares of
Common Stock and Common Stock Equivalents outstanding immediately prior to such
issuance and the denominator of which shall be the number of shares of Common
Stock and Common Stock Equivalents outstanding immediately following such
issuance.

 

c)             Pro Rata Distributions. If
the Company, at any time while this Debenture is outstanding, shall distribute
to all holders of Common Stock (and not to the holders of the Debenture)
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 Conversion Price shall be adjusted by multiplying such Conversion
Price in effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the Closing Price determined as of the record date
mentioned above, and of which the numerator shall be such Closing Price on such
record date less the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed applicable to 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

 

13

 

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.

 

d)            Fundamental Transaction. If,
at any time while this Debenture is outstanding, (A) the Company effects
any merger or consolidation of the Company with or into another Person, (B) the
Company effects any sale of all or substantially all of its assets in one or a
series of related transactions, (C) any tender offer or exchange offer
(whether by the Company or another Person) is completed pursuant to which
holders of Common Stock are permitted to tender or exchange their shares for
other securities, cash or property, or (D) the Company effects any
reclassification of the Common Stock or any compulsory share exchange pursuant
to which the Common Stock is effectively converted into or exchanged for other
securities, cash or property (in any such case, a “Fundamental Transaction”),
then upon any subsequent conversion of this Debenture, the Holder shall have
the right to receive, for each Conversion Share that would have been issuable
upon such conversion immediately prior to the occurrence of such Fundamental
Transaction, the same kind and amount of securities, cash or property as it
would have been entitled to receive upon the occurrence of such Fundamental
Transaction if it had been, immediately prior to such Fundamental Transaction,
the holder of one share of Common Stock (the “Alternate Consideration”).  For purposes of any such conversion, the
determination of the Conversion Price shall be appropriately adjusted to apply
to such Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of one share of Common Stock in such Fundamental
Transaction, and the Company shall apportion the Conversion Price among the
Alternate Consideration in a reasonable manner reflecting the relative value of
any different components of the Alternate Consideration.  If holders of Common Stock are given any
choice as to the securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any conversion of this Debenture following such
Fundamental Transaction.  To the extent
necessary to effectuate the foregoing provisions, any successor to the Company
or surviving entity in such Fundamental Transaction shall issue to the Holder a
new debenture consistent with the foregoing provisions and evidencing the
Holder’s right to convert such debenture into Alternate Consideration. The
terms of any agreement pursuant to which a Fundamental Transaction is effected
shall include terms requiring any such successor or surviving entity to comply
with the provisions of this paragraph (d) and insuring that this Debenture
(or any such replacement security) will be similarly adjusted upon any
subsequent transaction analogous to a Fundamental Transaction. Notwithstanding
anything herein to the contrary, in no event shall the Capital Restructuring be
deemed a Fundamental Transaction.

 

e)             Calculations.  All calculations under this Section 5
shall be made to the nearest cent or the nearest 1/100th of a share, as the
case may be.  For purposes of this Section 5,
the number of shares of Common Stock deemed to be issued and outstanding

 

14

 

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)             Notice to the Holder.

 

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

 

ii.             Notice to Allow Conversion by
Holder.  If (A) the Company
shall declare a dividend (or any other distribution) on the Common Stock; (B) the
Company shall declare a special nonrecurring cash dividend on or a redemption
of the Common Stock; (C) the Company shall authorize the granting to all
holders of the Common Stock rights or warrants to subscribe for or purchase any
shares of capital stock of any class or of any rights; (D) the approval of
any stockholders of the Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, of any compulsory share exchange whereby the Common
Stock is converted into other securities, cash or property; (E) the
Company shall authorize the voluntary or involuntary dissolution, liquidation
or winding up of the affairs of the Company; then, in each case, the Company
shall cause to be filed at each office or agency maintained for the purpose of
conversion of this Debenture, and shall cause to be mailed to the Holder at its
last addresses 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 this
Debenture during the 20-day period

 

15

 

commencing the date of such notice to the
effective date of the event triggering such notice.

 

Section 6.               Redemption and Forced Conversion.

 

a)             Optional
Redemption at Election of Company.  Subject to the provisions of this Section 6 the Company may deliver
a notice to the Holder (an “Optional Redemption Notice” and the date such notice is
deemed delivered hereunder, the “Optional Redemption Notice Date”) of its irrevocable
election to redeem some or all of the then outstanding Debentures, for an
amount, in cash, equal to the Optional Redemption Amount on the 10th
Trading Day following the Optional Redemption Notice Date (such date, the “Optional Redemption Date”
and such redemption, the “Optional Redemption”). 
The Optional Redemption Amount is due in full on the Optional Redemption
Date.  The Company may only effect an
Optional Redemption if during the period commencing on the Optional Redemption
Notice Date through to the Optional Redemption Date and through and
including the date such Optional Redemption Amount is paid to the Holder, each of the Equity Conditions shall
have been met.  If any of the Equity
Conditions shall cease to be satisfied at any time during the required period,
then the Holder may elect to nullify the Optional Redemption Notice by notice
to the Company within 3 Trading Days after the first day on which any such
Equity Condition has not been met (provided that if, by a provision of the
Transaction Documents the Company is obligated to notify the Holder of the
non-existence of an Equity Condition, such notice period shall be extended to
the third Trading Day after proper notice from the Company) in which case the
Optional Redemption Notice shall be null and void, ab  initio.  The Company covenants and agrees that it will
honor all Notice of Conversions tendered from the time of delivery of the
Optional Redemption Notice through the date all amounts owing thereon are due
and paid in full.

 

b)            Monthly
Redemption.  On each Monthly
Redemption Date, the Company shall redeem the Monthly Redemption Amount, the
sum of all liquidated damages and any other amounts then owing to such Holder
in respect of this Debenture (the “Monthly Redemption”). The Monthly
Redemption Amount due on each Monthly Redemption Date shall be paid in cash; provided,
however, as to any Monthly Redemption and upon 20 Trading Days’ prior
written irrevocable notice (the “Monthly Redemption Notice” and the 20
Trading Day period immediately following the Monthly Redemption Notice, the “Monthly
Redemption Period”), in lieu of a cash redemption payment the Company may
elect to pay all or part of a Monthly Redemption Amount in Conversion Shares
(such dollar amount to be paid on a Monthly Redemption Date in Conversion
Shares, the “Monthly Redemption Share Amount”) based on a conversion
price equal to the lesser of (i) the then Conversion Price and (ii) 85%
of the average of the 10 Closing Prices immediately prior to the applicable
Monthly Redemption Date (subject to adjustment for any stock dividend, stock
split, stock combination or other similar event affecting the Common Stock
during such 10 Trading Day period) (the price calculated during the 10 Trading
Day period immediately prior to the Monthly Redemption Date, the “Monthly
Conversion Price” and such period, the “Monthly Conversion Period”);
provided, further,

 

16

 

that the Company may not pay the Monthly
Redemption Amount in Conversion Shares unless, (y) from the date the Holder
receives the duly delivered Monthly Redemption Notice through and until the
date such Monthly Redemption is paid in full, the Equity Conditions and
Corporate Milestones, unless waived in writing by the Holder, have been
satisfied and (z) as to such Monthly Redemption, prior to such Monthly
Redemption Period (but not more than 5 Trading Days prior to the commencement
of the Monthly Redemption Period), the Company shall have delivered to the
Holder’s account with The Depository Trust Company a number of shares of Common
Stock to be applied against such Monthly Redemption Share Amount equal to the
quotient of (x) the applicable Monthly Redemption Share Amount divided by (y)
the then Conversion Price (the “Pre-Redemption Conversion Shares”).  The Holder may convert, pursuant to Section 4(a),
any principal amount of this Debenture subject to a Monthly Redemption at any
time prior to the date that the Monthly Redemption Amount and all amounts owing
thereon are due and paid in full.  Unless
otherwise indicated by the Holder in the applicable Notice of Conversion, any
principal amount of this Debenture converted during the applicable Monthly
Redemption Period until the date the Monthly Redemption Amount is paid in full shall
be first applied to the principal amount subject to the Monthly Redemption Amount
payable in cash and then to the Monthly Redemption Share Amount.  Any principal amount of this Debenture
converted during the applicable Monthly Redemption Period in excess of the
Monthly Redemption Amount shall be applied against the last principal amount of
this Debenture scheduled to be redeemed hereunder, in reverse time order from
the Maturity Date; provided, however, if any such conversion is
applied to such Monthly Redemption Amount, the Pre-Redemption Conversion
Shares, if any were issued in connection with such Monthly Redemption or were
not already applied to such conversions, shall be first applied against such
conversion.  The Company covenants and
agrees that it will honor all Notice of Conversions tendered up until such
amounts are paid in full.  The Company’s
determination to pay a Monthly Redemption in cash, shares of Common Stock or a
combination thereof shall be applied ratably to all of the holders of the
Debentures based on their (or their predecessor’s) initial purchases of
Debentures pursuant to the Purchase Agreement. 
At any time the Company delivers a notice to the Holder of its election
to pay the Monthly Redemption Amount in shares of Common Stock, the Company
shall file a prospectus supplement pursuant to Rule 424 disclosing such
election.

 

c)             Redemption Procedure.  The payment of cash pursuant to the Monthly
Redemption or an Optional Redemption shall be made on the Monthly Redemption
Date or the Optional Redemption Date, as applicable.  If any portion of the cash payment for a Monthly
Redemption or an Optional Redemption, as applicable shall not be paid by the
Company by the respective due date, interest shall accrue thereon at the rate
of 18% per annum (or the maximum rate permitted by applicable law, whichever is
less) until the payment of the Monthly Redemption Amount or the Optional
Redemption Amount, as applicable, plus all amounts owing thereon is paid in
full.  Alternatively, if any portion of
the Monthly Redemption Amount or the Optional Redemption Amount, as applicable,
remains unpaid after such date, the Holders subject to such redemption may
elect, by written notice to the Company given at any time thereafter,
to invalidate ab  initio such

 

17

 

redemption, notwithstanding anything herein contained to the contrary,
and, with respect the failure to honor the Optional Redemption as applicable,
the Company shall have no further right to exercise such Optional
Redemption.  Notwithstanding anything to
the contrary in this Section 6, the Company’s determination to redeem in
cash or its elections under Section 6(b) shall be applied among the
Holders of Debentures ratably.
The Holder may elect to convert the outstanding principal amount of the
Debenture pursuant to Section 4 prior to actual payment in cash for any
redemption under this Section 6 by fax delivery of a Notice of Conversion
to the Company.

 

d)            Forced Conversion. Notwithstanding
anything herein to the contrary, if after the Effective Date, (i) each of
the Closing Prices for any 20 consecutive Trading Days (such period commencing
only after the Effective Date, such period the “Threshold Period”))
exceeds the then Conversion Price by 200% (subject to adjustment for reverse
and forward stock splits, stock dividends, stock combinations and other similar
transactions of the Common Stock that occur after the Original Issue Date) or (ii) the
Company consummates a bona fide firm commitment public underwritten offering of
the Common Stock by a nationally recognized investment bank of its Common Stock
for an offering price that is equal to or exceeds the then Conversion Price by
200%, the Company may, within 1 Trading Day of the end of any such period or
offering, deliver a notice to the Holder (a “Forced Conversion Notice”
and the date such notice is received by the Holder, the “Forced Conversion
Notice Date”) to cause the Holder to immediately convert all or part of the
then outstanding principal amount of Debentures pursuant to Section 4.  The Company may only effect a Forced
Conversion Notice if all of the Equity Conditions and Corporate Milestones are
met through the applicable Threshold Period (or public offering period) until
the date of the applicable Forced Conversion and through and including the date
such shares of Common Stock are issued to the Holder.  Any Forced Conversion shall be applied
ratably to all Holders based on their initial purchases of Debentures pursuant
to the Purchase Agreement.  For purposes
of clarification, a Forced Conversion shall be subject to all of the provisions
of Section 4, including, without limitation, the provision requiring
payment of liquidated damages and limitations on conversions.

 

Section 7.               Negative Covenants. So long as any portion of
this Debenture is outstanding, the Company will not and will not permit any of
its Subsidiaries to directly or indirectly:

 

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

 

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

 

18

 

c)             amend
its articles of incorporation, bylaws or other charter documents so as to materially
and adversely affect any rights of the Holder, provided that, for purposes of
this Section 7(c), any amendments to the Company’s organizational
documents necessary to satisfy the Capital Restructuring shall not be deemed to
adversely affect any rights of the Holder;

 

d)            repay, repurchase or offer to repay,
repurchase or otherwise acquire more than a de minimis number of shares
of its Common Stock or Common Stock Equivalents other than (i) in
connection with the Capital Restructuring and/or the Aronson Settlement or (ii) as
to the Conversion Shares to the extent permitted or required under the
Transaction Documents or as otherwise permitted by the Transaction Documents;

 

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

 

f)             pay
cash dividends or distributions on any equity securities of the Company other
than as is necessary to satisfy the Capital Restructuring or in connection with
the Aronson Settlement.

 

Section 8.               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 (A) the principal amount of any Debenture, or (B) other
fees owing on any Debenture, or liquidated damages in respect of, any
Debenture, as and when the same shall become due and payable (whether on a
Conversion Date or the Maturity Date or by acceleration or otherwise) which
default, solely in the case of defaults under clause (B) above, is not
cured, within 3 Trading Days;

 

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

 

iii.            a default or event of default
(subject to any grace or cure period provided for in the applicable agreement,
document or instrument) shall occur under (A) any of the Transaction
Documents, including but not limited to, the failure by the Company to satisfy
the Capital Structure Requirements on or before

 

19

 

November 18,
2005, or (B) any other material agreement, lease, document or instrument
to which the Company or any Subsidiary is bound;

 

iv.            any representation or warranty made
herein, in any other Transaction Documents, in any written statement pursuant
hereto or thereto, or in any other report, financial statement or certificate
made or delivered to the Holder or any other holder of Debentures shall be
untrue or incorrect in any material respect as of the date when made or deemed
made;

 

v.             (i) the Company or any of its
Subsidiaries shall commence a case, as debtor, a case under any applicable
bankruptcy or insolvency laws as now or hereafter in effect or any successor
thereto, or the Company or any Subsidiary 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 (ii) there is commenced a case against the Company or any Subsidiary
thereof, under any applicable bankruptcy or insolvency laws, as now or
hereafter in effect or any successor thereto which remains undismissed for a
period of 60 days; or (iii) the Company or any Subsidiary thereof is
adjudicated by a court of competent jurisdiction insolvent or bankrupt; or any
order of relief or other order approving any such case or proceeding is
entered; or (iv) 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 or unstayed for a period of 60 days; or (v) the
Company or any Subsidiary thereof makes a general assignment for the benefit of
creditors; or (vi) 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; or (vii) the Company or any Subsidiary thereof shall call a meeting
of its creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (viii) the Company or any Subsidiary
thereof shall by any act or failure to act expressly indicate its consent to,
approval of or acquiescence in any of the foregoing; or (ix) any corporate
or other action is taken by the Company or any Subsidiary thereof for the
purpose of effecting any of the foregoing; provided, however, in
the event the Company calls a meeting with the Holders to discuss any of the
foregoing, such event shall not be deemed a “Bankruptcy Event”;

 

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

 

20

 

vii.           the Common Stock shall not be
eligible for quotation on or quoted for trading on a Trading Market and shall
not again be eligible for and quoted or listed for trading thereon within five
Trading Days;

 

viii.          the Company shall be a party to any
Change of Control Transaction or Fundamental Transaction (other than in
connection with the Capital Restructuring), shall agree to sell or dispose of
all or in excess of 33% of its assets in one or more transactions (whether or
not such sale would constitute a Change of Control Transaction) or shall, other
than an Exempt Redemption, redeem or repurchase more than a de minimis number
of its outstanding shares of Common Stock or other equity securities of the
Company (other than redemptions of Conversion Shares and repurchases of shares
of Common Stock or other equity securities of departing officers and directors
of the Company; provided such repurchases shall not exceed $100,000, in the
aggregate, for all officers and directors during the term of this Debenture);

 

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

 

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

 

xi.            the Company shall not be compliant
with the Sarbanes-Oxley Act of 2002 on or before March 31, 2006; or

 

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

 

21

 

b)            Remedies Upon Event of Default.
If any Event of Default occurs, the full principal amount of this Debenture,
together with other amounts owing in respect thereof, to the date of
acceleration shall become, at the Holder’s election, immediately due and
payable in cash.   The aggregate amount
payable upon an Event of Default shall be equal to the Mandatory Default
Amount.  Commencing 5 days after the
occurrence of any Event of Default that results in the eventual acceleration of
this Debenture, the interest rate on this Debenture shall accrue at the rate of
18% per annum, or such lower maximum amount of interest permitted to be charged
under applicable law.  Upon the payment
in full of the Mandatory Default Amount on this entire Debenture the Holder
shall promptly surrender this Debenture 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, and
the Holder may immediately and without expiration of any grace period enforce
any and all of its rights and remedies hereunder and all other remedies
available to it under applicable law. 
Such declaration may be rescinded and annulled by Holder at any time
prior to payment 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.  No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon.

 

Section 9.               Miscellaneous.

 

a)             Notices.  Any and all notices or other communications
or deliveries to be provided by the Holder hereunder, including, without
limitation, any Notice of Conversion, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service, addressed to the Company, at the address set forth above, facsimile
number                              , Attn:                                                                             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 each Holder at the facsimile telephone number or
address of such 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.

 

22

 

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

 

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

 

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

 

23

 

e)             Waiver.  Other than Section 7, 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.

 

f)             Severability.  If any provision of this Debenture is
invalid, illegal or unenforceable, the balance of this Debenture shall remain
in effect, and if any provision is inapplicable to any person or circumstance,
it shall nevertheless remain applicable to all other persons and
circumstances.  If it shall be found that
any interest or other amount deemed interest due hereunder violates 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 this Debenture as contemplated herein, wherever enacted, now
or at any time hereafter in force, or which may affect the covenants or the
performance of this indenture, and the Company (to the extent it may lawfully
do so) hereby expressly waives all benefits or advantage of any such law, and
covenants that it will not, by resort to any such law, hinder, delay or impeded
the execution of any power herein granted to the Holder, but will suffer and
permit the execution of every such as though no such law has been enacted.

 

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

 

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

 

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

 

24

 

similarly and equally to successive Fundamental Transactions and shall
be applied without regard to any limitations of this Debenture.

 

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

 

25

 

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.

 

 

	
   

  	
  ADVANCED CELL TECHNOLOGY, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William M. Caldwell, IV

  	
   

  
	
   

  	
   

  	
  Name:  William
  M. Caldwell, IV

  
	
   

  	
   

  	
  Title:  Chief
  Executive Officer

  

 

26

 

ANNEX A

 

NOTICE OF CONVERSION

 

The undersigned hereby elects to convert principal under the Amortizing Convertible Debenture of Advanced Cell Technology, Inc., a
Nevada corporation (the “Company”) into shares of common stock, par
value $0.001 per share (the “Common
Stock”), of the Company according to the conditions hereof, as of the date
written below.  If shares are to be
issued in the name of a person other than the undersigned, the undersigned will
pay all transfer taxes payable with respect thereto and is delivering herewith
such certificates and opinions as reasonably requested by the Company in
accordance therewith.  No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.

 

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

 

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

 

Conversion calculations:

	
   

  	
  Date to Effect Conversion:

  
	
   

  	
   

  
	
   

  	
  Principal Amount of Debenture to be Converted:

  
	
   

  	
   

  
	
   

  	
  Number of shares of Common Stock to be issued:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Signature:

  
	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
   

  
	
   

  	
  Address:

  

 

27

 

Schedule 1

 

CONVERSION SCHEDULE

 

The Amortizing Convertible
Debentures in the aggregate principal amount of $                        
issued by Advanced Cell Technology, Inc.  This Conversion Schedule reflects
conversions made under Section 4 of the above referenced Debenture.

 

Dated:

 

	
  Date
  of Conversion

  (or for first entry,

  Original Issue Date)

  	
   

  	
  Amount of

  Conversion

  	
   

  	
  Aggregate

  Principal

  Amount

  Remaining

  Subsequent to

  Conversion

  (or original

  Principal

  Amount)

  	
   

  	
  Company Attest

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

28

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