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Unassociated Document

    EXHIBIT
      10.3

     

    SECURITIES
      PURCHASE AGREEMENT

    

    THIS SECURITIES
      PURCHASE AGREEMENT
      (this
“Agreement”),
      dated
      as of August 2, 2007, by and among HANDHELD
      ENTERTAINMENT, INC.,
      a
      Delaware corporation (the “Company”),
      and
      the Buyers listed on Schedule I attached hereto (individually, a
“Buyer”
or
      collectively “Buyers”).

     

    WITNESSETH

    

    WHEREAS,
      the
      Company and the Buyer(s) are executing and delivering this Agreement in reliance
      upon an exemption from securities registration pursuant to Section 4(2) and/or
      Rule 506 of Regulation D (“Regulation
      D”)
      as
      promulgated by the U.S. Securities and Exchange Commission (the “SEC”)
      under
      the Securities Act of 1933, as amended (the “Securities
      Act”);

     

    WHEREAS,
      the
      parties desire that, upon the terms and subject to the conditions contained
      herein, at the closing (the “Closing”)
      the
      Company shall issue and sell to the Buyer(s), as provided herein, and the
      Buyer(s) shall purchase (i) Twenty Three Million Dollars ($23,000,000) (the
      “Purchase
      Price”)
      of
      secured convertible debentures in the form attached hereto as “Exhibit
      A”
(the
      “Convertible
      Debentures”),
      which
      shall be convertible into shares of the Company’s common stock, par value
      $0.0001 (the “Common
      Stock”)
      (as
      converted, the “Conversion
      Shares”),
      in
      the respective amounts set forth opposite each Buyer(s) name on Schedule I
      (the
“Subscription
      Amount”);
      and
      (ii) warrants substantially in the form attached hereto as “Exhibit
      B”
(the
      “Warrants”),
      to
      acquire up to that number of additional shares of Common Stock set forth
      opposite such Buyer’s name in column (3) of the Schedule I (as exercised, the
“Warrant
      Shares”),
      and
      Company shall issue to Buyer(s) (iii) shares of Common Stock in the amount
      set
      forth opposite such Buyer’s name in column (4) of the Schedule I (the
“Commitment
      Shares”);
      

     

    WHEREAS,
      contemporaneously with the execution and delivery of this Agreement, the parties
      hereto are executing and delivering a Registration Rights Agreement (the
“Registration
      Rights Agreement”)
      pursuant to which the Company has agreed to provide certain registration rights
      under the Securities Act and the rules and regulations promulgated there under,
      and applicable state securities laws; 

     

    WHEREAS,
      the
      Convertible Debentures are secured by a security interest in all of the assets
      of the Company and of each of the Company's subsidiaries as evidenced by the
      security agreement together with the patent, trademark, and copyright security
      agreement dated as of the Closing Date (the “Security
      Documents”)
      ;

     

    WHEREAS,
      contemporaneously with the execution and delivery of this Agreement, the parties
      hereto are executing and delivering Irrevocable Transfer Agent Instructions
      (the
“Irrevocable
      Transfer Agent Instructions”);
      and

     

    WHEREAS,
      the
      Convertible Debentures, the Conversion Shares, the Warrants, the Warrants
      Shares, and the Commitment Shares collectively are referred to herein as the
      “Securities”).
      

     

    
      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

     

    NOW,
      THEREFORE,
      in
      consideration of the mutual covenants and other agreements contained in this
      Agreement the Company and the Buyer(s) hereby agree as follows:

     

    1. PURCHASE
      AND SALE OF CONVERTIBLE DEBENTURES.

     

    (a) Purchase
      of Convertible Debentures.
      Subject
      to the satisfaction (or waiver) of the terms and conditions of this Agreement,
      each Buyer agrees, severally and not jointly, to purchase at the Closing and
      the
      Company agrees to sell and issue to each Buyer, severally and not jointly,
      at
      the Closing, Convertible Debentures in amounts corresponding with the
      Subscription Amount set forth opposite each Buyer’s name on Schedule I hereto
      and the Warrants to acquire up that number of Warrant Shares as set forth
      opposite such Buyer’s name in column (5) on Schedule I . 

     

    (b) Closing
      Dates.
      The
      Closing of the purchase and sale of the Convertible Debentures and Warrants
      shall take place at 10:00 a.m. Eastern Standard Time on the fifth (5th)
      business day following the date of satisfaction of the all the conditions to
      the
      Closing set forth in Sections 6 and 7 below (or such other date as is mutually
      agreed to by the Company and the Buyer(s)) (the “Closing
      Date”).
      The
      Closings shall occur on the Closing Date at the offices of Yorkville Advisors,
      LLC, 3700 Hudson Street, Suite 3700, Jersey City, New Jersey 07302 (or such
      other place as is mutually agreed to by the Company and the Buyer(s)).

     

    (c) Form
      of Payment.
      Subject
      to the satisfaction of the terms and conditions of this Agreement, on each
      Closing Date, (i) the Buyers shall deliver to the Company such aggregate
      proceeds for the Convertible Debentures and Warrants to be issued and sold
      to
      such Buyer at such Closing, minus the fees to be paid directly from the proceeds
      of such Closing as set forth herein, and (ii) the Company shall deliver to
      each Buyer, Convertible Debentures and Warrants which such Buyer is purchasing
      at such Closing in amounts indicated opposite such Buyer’s name on Schedule I,
      duly executed on behalf of the Company.

     

    (d) Stockholders
      Approval.
      The
      Company shall file a preliminary proxy statement for the purpose of seeking
      Stockholder Approval (as defined below) within eight (8) Business Days of the
      date hereof. Prior to the consummation of the Closing, the Company shall use
      its
      reasonable best efforts to call and hold a special meeting of the shareholders,
      for the purpose of (i) approving the transactions contemplated herein, and
      (ii)
      increasing the authorized Common Stock of the Company to obtain any stockholder
      approval required by the Primary Market (as defined herein) and which approval
      will include at least 30 million shares of Common Stock (such
      affirmative
      approval being referred to herein as the “Stockholder
      Approval”).
      The
      Buyer’s obligations to purchase the Convertible Debentures to be issued in
      accordance with this Agreement shall be contingent on the Company obtaining
      Stockholder Approval. 

     

    2. BUYER’S
      REPRESENTATIONS AND WARRANTIES.

     

    Each
      Buyer represents and warrants, severally and not jointly, that:

     

    (a) Investment
      Purpose.
      Each
      Buyer is acquiring the Securities for its own account for investment only and
      not with a view towards, or for resale in connection with, the public sale
      or
      distribution thereof, except pursuant to sales registered or exempted under
      the
      Securities Act; provided, however, that by making the representations herein,
      such Buyer reserves the right to dispose of the Securities at any time in
      accordance with or pursuant to an effective registration statement covering
      such
      Securities or an available exemption under the Securities Act. Such Buyer does
      not presently have any agreement or understanding, directly or indirectly,
      with
      any Person to distribute any of the Securities. 

    
      
        
        

      

      
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    (b) Accredited
      Investor Status.
      Each
      Buyer is an “Accredited
      Investor”
as
      that
      term is defined in Rule 501(a)(3) of Regulation D.

     

    (c) Reliance
      on Exemptions.
      Each
      Buyer understands that the Securities are being offered and sold to it in
      reliance on specific exemptions from the registration requirements of United
      States federal and state securities laws and that the Company is relying in
      part
      upon the truth and accuracy of, and such Buyer’s compliance with, the
      representations, warranties, agreements, acknowledgments and understandings
      of
      such Buyer set forth herein in order to determine the availability of such
      exemptions and the eligibility of such Buyer to acquire the
      Securities.

     

    (d) Information.
      Each
      Buyer and its advisors (and his or, its counsel), if any, have been furnished
      with all materials relating to the business, finances and operations of the
      Company and information he deemed material to making an informed investment
      decision regarding his purchase of the Securities, which have been requested
      by
      such Buyer. Each Buyer and its advisors, if any, have been afforded the
      opportunity to ask questions of the Company and its management. Neither such
      inquiries nor any other due diligence investigations conducted by such Buyer
      or
      its advisors, if any, or its representatives shall modify, amend or affect
      such
      Buyer’s right to rely on the Company’s representations and warranties contained
      in Section 3 below. Each Buyer understands that its investment in the Securities
      involves a high degree of risk. Each Buyer is in a position regarding the
      Company, which, based upon employment, family relationship or economic
      bargaining power, enabled and enables such Buyer to obtain information from
      the
      Company in order to evaluate the merits and risks of this investment. Each
      Buyer
      has sought such accounting, legal and tax advice, as it has considered necessary
      to make an informed investment decision with respect to its acquisition of
      the
      Securities.

     

    (e) No
      Governmental Review.
      Each
      Buyer understands that no United States federal or state agency or any other
      government or governmental agency has passed on or made any recommendation
      or
      endorsement of the Securities, or the fairness or suitability of the investment
      in the Securities, nor have such authorities passed upon or endorsed the merits
      of the offering of the Securities.

     

    (f) Transfer
      or Resale.
      Each
      Buyer understands that except as provided in the Registration Rights Agreement:
      (i) the Securities have not been and are not being registered under the
      Securities Act or any state securities laws, and may not be offered for sale,
      sold, assigned or transferred unless (A) subsequently registered thereunder,
      (B)
      such Buyer shall have delivered to the Company an opinion of counsel, in a
      generally acceptable form, to the effect that such Securities to be sold,
      assigned or transferred may be sold, assigned or transferred pursuant to an
      exemption from such registration requirements, or (C) such Buyer provides the
      Company with reasonable assurances (in the form of seller and broker
      representation letters) that such Securities can be sold, assigned or
      transferred pursuant to Rule 144, Rule 144(k), or Rule 144A promulgated under
      the Securities Act, as amended (or a successor rule thereto) (collectively,
      “Rule
      144”),
      in
      each case following the applicable holding period set forth therein; (ii) any
      sale of the Securities made in reliance on Rule 144 may be made only in
      accordance with the terms of Rule 144 and further, if Rule 144 is not
      applicable, any resale of the Securities under circumstances in which the
      seller (or the person through whom the sale is made) may be deemed to be an
      underwriter (as that term is defined in the Securities Act) may require
      compliance with some other exemption under the Securities Act or the rules
      and
      regulations of the SEC thereunder; and (iii) neither the Company nor any other
      person is under any obligation to register the Securities under the Securities
      Act or any state securities laws or to comply with the terms and conditions
      of
      any exemption thereunder. 

     

    
      
        
          
          

        

        
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    (g) Legends.
      Each
      Buyer agrees to the imprinting, so long as is required by this Section 2(g),
      of
      a restrictive legend in substantially the following form:

     

    THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
      SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
      SECURITIES HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT PURPOSES AND NOT WITH A
      VIEW
      TOWARD RESALE AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
      IN
      THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
      THE
      SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR
      AN
      OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
      REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS. 

     

    Certificates
      evidencing the Conversion Shares or Warrant Shares shall not contain any legend
      (including the legend set forth above), (i) while a registration statement
      (including the Registration Statement) covering the resale of such security
      is
      effective under the Securities Act, (ii) following any sale of such Conversion
      Shares or Warrant Shares pursuant to Rule 144, (iii) if such Conversion Shares
      or Warrant Shares are eligible for sale under Rule 144(k), or (iv) if such
      legend is not required under applicable requirements of the Securities Act
      (including judicial interpretations and pronouncements issued by the staff
      of
      the SEC). The Company shall cause its counsel to issue a legal opinion to the
      Company’s transfer agent promptly after the effective date (the “Effective
      Date”)
      of a
      Registration Statement if required by the Company’s transfer agent to effect the
      removal of the legend hereunder upon satisfaction of the requirements for a
      resale registration statement under applicable securities laws (prospectus
      delivery and a sellers certification requirements).. If all or any portion
      of
      the Convertible Debentures or Warrants are exercised by a Buyer that is not
      an
      Affiliate of the Company (a “Non-Affiliated
      Buyer”)
      at a
      time when there is an effective registration statement to cover the resale
      of
      the Conversion Shares or the Warrant Shares, such Conversion Shares or Warrant
      Shares shall be issued free of all legends. The Company agrees that following
      the Effective Date or at such time as such legend is no longer required under
      this Section 2(g), it will, no later than three (3) Trading Days following
      the
      delivery by a Non-Affiliated Buyer to the Company or the Company’s transfer
      agent of a certificate representing Conversion Shares or Warrant Shares, as
      the
      case may be, issued with a restrictive legend (such third Trading Day, the
      “Legend
      Removal Date”),
      deliver or cause to be delivered to such Non-Affiliated Buyer a certificate
      representing such shares that is free from all restrictive and other legends.
      The Company may not make any notation on its records or give instructions to
      any
      transfer agent of the Company that enlarge the restrictions on transfer set
      forth in this Section. Each Buyer acknowledges that the Company’s agreement
      hereunder to remove all legends from Conversion Shares or Warrant Shares is
      not
      an affirmative statement or representation that such Conversion Shares or
      Warrant Shares are freely tradable. Each Buyer, severally and not jointly with
      the other Buyers, agrees that the removal of the restrictive legend from
      certificates representing Securities as set forth in this Section 3(g) is
      predicated upon the Company’s reliance that the buyer will sell any Securities
      pursuant to either the registration requirements of the Securities Act,
      including any applicable prospectus delivery requirements, or an exemption
      therefrom, and that if Securities are sold pursuant to a Registration Statement,
      they will be sold in compliance with the plan of distribution set forth
      therein.

     

    
      
        
          
          

        

        
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    (h) Authorization,
      Enforcement.
      This
      Agreement has been duly and validly authorized, executed and delivered on behalf
      of such Buyer and is a valid and binding agreement of such Buyer enforceable
      in
      accordance with its terms, except as such enforceability may be limited by
      general principles of equity or applicable bankruptcy, insolvency,
      reorganization, moratorium, liquidation and other similar laws relating to,
      or
      affecting generally, the enforcement of applicable creditors’ rights and
      remedies.

     

    (i) Receipt
      of Documents.
      Each
      Buyer and his or its counsel has received and read in their entirety: (i) this
      Agreement and each representation, warranty and covenant set forth herein and
      the Transaction Documents (as defined herein); (ii) all due diligence and other
      information necessary to verify the accuracy and completeness of such
      representations, warranties and covenants; (iii) the Company’s Form 10-KSB for
      the fiscal year ended December 31, 2006; (iv) the Company’s Form 10-QSB for the
      fiscal quarter ended June 30, 2007 and (v) answers to all questions each Buyer
      submitted to the Company regarding an investment in the Company; and each Buyer
      has relied on the information contained therein and has not been furnished
      any
      other documents, literature, memorandum or prospectus.

     

    (j) Due
      Formation of Corporate and Other Buyers.
      If the
      Buyer(s) is a corporation, trust, partnership or other entity that is not an
      individual person, it has been formed and validly exists and has not been
      organized for the specific purpose of purchasing the Securities and is not
      prohibited from doing so.

     

    (k) No
      Legal Advice From the Company.
      Each
      Buyer acknowledges, that it had the opportunity to review this Agreement and
      the
      transactions contemplated by this Agreement with his or its own legal counsel
      and investment and tax advisors. Each Buyer is relying solely on such counsel
      and advisors and not on any statements or representations of the Company or
      any
      of its representatives or agents for legal, tax or investment advice with
      respect to this investment, the transactions contemplated by this Agreement
      or
      the securities laws of any jurisdiction.

     

    3. REPRESENTATIONS
      AND WARRANTIES OF THE COMPANY.

    
      
        
          
          

        

        
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    Except
      as
      set forth: (i) under the corresponding section of the Disclosure Schedules;
      (ii)
      in the executed Asset Purchase Agreement dated as of July 31, 2007 by and
      between the Company, EBW Acquisition, Inc. and Ebaum’s World, Inc.(the “Asset
      Purchase”)(including the representations and warranties of “Seller” therein set
      forth in Article II and Article III and elsewhere therein and in any and all
      schedules and exhibits thereto and; or (iii) in the reports and other filings
      of
      the Company made with the Securities and Securities and Exchange Commission
      (SEC) which are publicly available prior to the date hereof (“the “Filings”)
      which shall be deemed a part hereof and qualify any representation or warranty
      otherwise made herein (including any schedule or exhibit hereto) and which
      Disclosure Schedules shall control over any inconsistent information provided
      in
      the Asset Purchase documents or the Filings (such Disclosure Schedules, Filings
      and Asset Purchase disclosures shall be subject to additions, corrections,
      and
      deletions prior to the Closing date, provided such revisions shall be reasonably
      acceptable to Buyer), to the extent of such disclosure, the Company hereby
      makes
      the representations and warranties set forth below to each Buyer: 

     

    (a) Subsidiaries.
      All of
      the direct and indirect subsidiaries of the Company are set forth on
Schedule
      3(a).
      The
      Company owns, directly or indirectly, all of the capital stock or other equity
      interests of each subsidiary free and clear of any liens, and all the issued
      and
      outstanding shares of capital stock of each subsidiary are validly issued and
      are fully paid, non-assessable and free of preemptive and similar rights to
      subscribe for or purchase securities.

     

    (b) Organization
      and Qualification.
      The
      Company and its subsidiaries are corporations duly organized and validly
      existing in good standing under the laws of the jurisdiction in which they
      are
      incorporated, and have the requisite corporate power to own their properties
      and
      to carry on their business as now being conducted. Each of the Company and
      its
      subsidiaries is duly qualified as a foreign corporation to do business and
      is in
      good standing in every jurisdiction in which the nature of the business
      conducted by it makes such qualification necessary, except to the extent that
      the failure to be so qualified or be in good standing would not have or
      reasonably be expected to result in (i) a material adverse effect on the
      legality, validity or enforceability of any Transaction Document, (ii) a
      material adverse effect on the results of operations, assets, business or
      condition (financial or otherwise) of the Company and the subsidiaries, taken
      as
      a whole, or (iii) a material adverse effect on the Company’s ability to perform
      in any material respect on a timely basis its obligations under any Transaction
      Document (any of (i), (ii) or (iii), a “Material
      Adverse Effect”)
      and no
      proceeding has been instituted in any such jurisdiction revoking, limiting
      or
      curtailing or seeking to revoke, limit or curtail such power and authority
      or
      qualification..

     

    (c) Authorization,
      Enforcement, Compliance with Other Instruments.
      (i) The Company has the requisite corporate power and authority to enter
      into and perform its obligations under this Agreement, the Convertible
      Debentures, the Warrants, the Security Documents, the Registration Rights
      Agreement, the Irrevocable Transfer Agent Instructions, and each of the other
      agreements entered into by the parties hereto in connection with the
      transactions contemplated by this Agreement (collectively the “Transaction
      Documents”)
      and to
      issue the Securities in accordance with the terms hereof and thereof, (ii)
      the
      execution and delivery of the Transaction Documents by the Company and the
      consummation by it of the transactions contemplated hereby and thereby,
      including, without limitation, the issuance of the Securities, the reservation
      for issuance and the issuance of the Conversion Shares, and the reservation
      for
      issuance and the issuance of the Warrant Shares, have been duly authorized
      by
      the Company’s Board of Directors and no further consent or authorization is
      required by the Company, its Board of Directors or its stockholders, other
      than
      the Stockholder Approval and such approvals and authorizations which will be
      sought by the Company and obtained prior to Closing, (iii) the Transaction
      Documents have been duly executed and delivered by the Company, (iv) the
      Transaction Documents constitute the valid and binding obligations of the
      Company enforceable against the Company in accordance with their terms, except
      as such enforceability may be limited by general principles of equity or
      applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
      or
      similar laws relating to, or affecting generally, the enforcement of creditors’
rights and remedies. The authorized officer of the Company executing the
      Transaction Documents knows of no reason why the Company cannot file the
      Registration Statement as required under the Registration Rights Agreement
      or
      perform any of the Company’s other obligations under the Transaction Documents.

     

    
      
        
          
          

        

        
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    (d) Capitalization.
      The
      authorized capital stock of the Company consists of 50,000,000 shares of Common
      Stock, par value $0.0001 per share, and 1,000,000 shares of Preferred Stock,
      par
      value $0.0001 per share (“Preferred
      Stock”)
      of
      which 17,596,130 shares of Common Stock and zero shares of Preferred Stock
      are
      issued and outstanding. All of the outstanding shares of capital stock of the
      Company are validly issued, fully paid and nonassessable, have been issued
      in
      compliance with all federal and state securities laws, and none of such
      outstanding shares was issued in violation of any preemptive rights or similar
      rights to subscribe for or purchase securities. Except as disclosed in Schedule
      3(d): (i) none of the Company's capital stock is subject to preemptive rights
      or
      any other similar rights or any liens or encumbrances suffered or permitted
      by
      the Company; (ii) there are no outstanding options, warrants, scrip, rights
      to
      subscribe to, calls or commitments of any character whatsoever relating to,
      or
      securities or rights convertible into, or exercisable or exchangeable for,
      any
      capital stock of the Company or any of its subsidiaries, or contracts,
      commitments, understandings or arrangements by which the Company or any of
      its
      subsidiaries is or may become bound to issue additional capital stock of the
      Company or any of its subsidiaries or options, warrants, scrip, rights to
      subscribe to, calls or commitments of any character whatsoever relating to,
      or
      securities or rights convertible into, or exercisable or exchangeable for,
      any
      capital stock of the Company or any of its subsidiaries (other than pursuant
      to
      existing option plans of the Company); (iii) there are no outstanding debt
      securities, notes, credit agreements, credit facilities or other agreements,
      documents or instruments evidencing indebtedness of the Company or any of its
      subsidiaries or by which the Company or any of its subsidiaries is or may become
      bound; (iv) there are no financing statements securing obligations in any
      material amounts, either singly or in the aggregate, filed in connection with
      the Company or any of its subsidiaries; (v) there are no outstanding securities
      or instruments of the Company or any of its subsidiaries which contain any
      redemption or similar provisions, and there are no contracts, commitments,
      understandings or arrangements by which the Company or any of its subsidiaries
      is or may become bound to redeem a security of the Company or any of its
      subsidiaries; (vi) there are no securities or instruments containing
      anti-dilution or similar provisions that will be triggered by the issuance
      of
      the Securities; (vii) the Company does not have any stock appreciation rights
      or
      "phantom stock" plans or agreements or any similar plan or agreement; and (viii)
      the Company and its subsidiaries have no liabilities or obligations required
      to
      be disclosed in the SEC Documents but not so disclosed in the SEC Documents,
      other than those incurred in the ordinary course of the Company's or its
      subsidiaries' respective businesses and which, individually or in the aggregate,
      do not or would not have a Material Adverse Effect. The Company has furnished
      to
      the Buyers true, correct and complete copies of the Company's Certificate of
      Incorporation, as amended and as in effect on the date hereof (the “Certificate
      of Incorporation”),
      and
      the Company's Bylaws, as amended and as in effect on the date hereof (the
“Bylaws”),
      and
      the terms of all securities convertible into, or exercisable or exchangeable
      for, shares of Common Stock and the material rights of the holders thereof
      in
      respect thereto. No further approval or authorization of any stockholder, the
      Board of Directors of the Company or others is required for the issuance and
      sale of the Securities (other than the Stockholder Approval). There are no
      stockholders agreements, voting agreements or other similar agreements with
      respect to the Company’s capital stock to which the Company is a party or, to
      the knowledge of the Company, between or among any of the Company’s
      stockholders. 

     

    
      
        
          
          

        

        
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    (e) Issuance
      of Securities.
      The
      issuance of the Convertible Debentures and the Warrants has been duly authorized
      and upon issuance, the Convertible Debentures will be free from all taxes,
      liens
      and charges relating to their issuance by the Company. Upon conversion in
      accordance with the terms of the Convertible Debentures or exercise in
      accordance with the Warrants, as the case may be, the Conversion Shares and
      Warrant Shares, respectively, when issued will be validly issued, fully paid
      and
      nonassessable, free from all taxes, liens and charges with respect to the issue
      thereof. The Company has reserved from its duly authorized capital stock the
      appropriate number of shares of Common Stock as set forth in this Agreement.
      

     

    (f) No
      Conflicts.
      The
      execution, delivery and performance of the Transaction Documents by the Company
      and the consummation by the Company of the transactions contemplated hereby
      and
      thereby (including, without limitation, the issuance of the Convertible
      Debentures and the Warrants, and reservation for issuance and issuance of the
      Conversion Shares and the Warrant Shares) will not (i) result in a violation
      of
      any certificate of incorporation, certificate of formation, any certificate
      of
      designations or other constituent documents of the Company or any of its
      subsidiaries, any capital stock of the Company or any of its subsidiaries or
      bylaws of the Company or any of its subsidiaries or (ii) conflict with, or
      constitute a default (or an event which with notice or lapse of time or both
      would become a default) in any respect under, or give to others any rights
      of
      termination, amendment, acceleration or cancellation of, any agreement,
      indenture or instrument to which the Company or any of its subsidiaries is
      a
      party which would have a Material Adverse Effect, or (iii) result in a violation
      of any law, rule, regulation, order, judgment or decree (including foreign,
      federal and state securities laws and regulations and the rules and regulations
      of the Primary Market) applicable to the Company or any of its subsidiaries
      or
      by which any property or asset of the Company or any of its subsidiaries is
      bound or affected; except in the case of each of clauses (ii) and (iii), such
      as
could
      not, individually or in the aggregate, have or reasonably be expected to result
      in a Material Adverse Effect.
      To the
      knowledge of the Company, the business of the Company and its subsidiaries
      is
      not being conducted, and shall not be conducted in violation of any material
      law, ordinance, or regulation of any governmental entity. Assuming the accuracy
      of the representations and warranties of Buyer herein, except as specifically
      contemplated by this Agreement and as required under the Securities Act and
      any
      applicable state securities laws, the Company is not required to obtain any
      consent, authorization or order of, or make any filing or registration with,
      any
      court or governmental agency in order for it to execute, deliver or perform
      any
      of its obligations under or contemplated by this Agreement or the Registration
      Rights Agreement in accordance with the terms hereof or thereof. Except for
      the
      Stockholder Approval, all consents, authorizations, orders, filings and
      registrations which the Company is required to obtain pursuant to the preceding
      sentence have been obtained or effected on or prior to the date hereof. The
      Company and its subsidiaries are unaware of any facts or circumstance, which
      might give rise to any of the foregoing.

     

    
      
        
          
          

        

        
          8

          
            

          

        

        
          
          

        

      

    

     

    (g) SEC
      Documents; Financial Statements.
      The
      Company has filed all reports, schedules, forms, statements and other documents
      required to be filed by it with the SEC under the Securities Exchange Act of
      1934, as amended (the “Exchange
      Act”),
      since
      February 11, 2006 (or such shorter period as the Company was required by law
      or
      regulation to file such material) (all of the foregoing filed prior to the
      date
      hereof or amended after the date hereof and all exhibits included therein and
      financial statements and schedules thereto and documents incorporated by
      reference therein, being hereinafter referred to as the “SEC
      Documents”)
      on
      timely basis or has received a valid extension of such time of filing and has
      filed any such SEC Document prior to the expiration of any such extension.
      The
      Company has delivered to the Buyers or their representatives, or made available
      through the SEC’s website at http://www.sec.gov., true and complete copies of
      the SEC Documents. As of their respective dates, the SEC Documents complied
      in
      all material respects with the requirements of the Exchange Act and the rules
      and regulations of the SEC promulgated thereunder applicable to the SEC
      Documents, and none of the SEC Documents, at the time they were filed with
      the
      SEC, contained any untrue statement of a material fact or omitted to state
      a
      material fact required to be stated therein or necessary in order to make the
      statements therein, in the light of the circumstances under which they were
      made, not misleading. As of their respective dates, the financial statements
      of
      the Company included in the SEC Documents complied as to form in all material
      respects with applicable accounting requirements and the published rules and
      regulations of the SEC with respect thereto. Such financial statements have
      been
      prepared in accordance with generally accepted accounting principles,
      consistently applied, during the periods involved (except (i) as may be
      otherwise indicated in such financial statements or the notes thereto, or (ii)
      in the case of unaudited interim statements, to the extent they may exclude
      footnotes or may be condensed or summary statements) and fairly present in
      all
      material respects the financial position of the Company as of the dates thereof
      and the results of its operations and cash flows for the periods then ended
      (subject, in the case of unaudited statements, to normal year-end audit
      adjustments). No other information provided by or on behalf of the Company
      to
      the Buyers which is not included in the SEC Documents, including, without
      limitation, information referred to in Section 2(i) of this Agreement, contains
      any untrue statement of a material fact or omits to state any material fact
      necessary in order to make the statements therein, in the light of the
      circumstance under which they are or were made and not misleading. 

     

    (h) Intentionally
      Omitted.

     

    (i) Absence
      of Litigation.
      There
      is no action, suit, proceeding, inquiry or investigation before or by any court,
      public board, government agency, self-regulatory organization or body pending
      against or affecting the Company, the Common Stock or any of the Company’s
      subsidiaries, wherein an unfavorable decision, ruling or finding would (i)
      have
      a Material Adverse Effect.

     

    
      
        
          
          

        

        
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    (j) Acknowledgment
      Regarding Buyer’s Purchase of the Convertible Debentures.
      The
      Company acknowledges and agrees that each Buyer is acting solely in the capacity
      of an arm’s length purchaser with respect to this Agreement and the transactions
      contemplated hereby. The Company further acknowledges that each Buyer is not
      acting as a financial advisor or fiduciary of the Company (or in any similar
      capacity) with respect to this Agreement and the transactions contemplated
      hereby and any advice given by each Buyer or any of their respective
      representatives or agents in connection with this Agreement and the transactions
      contemplated hereby is merely incidental to such Buyer’s purchase of the
      Securities. The Company further represents to each Buyer that the Company’s
      decision to enter into this Agreement has been based solely on the independent
      evaluation by the Company and its representatives.

     

    (k) No
      General Solicitation.
      Neither
      the Company, nor any of its affiliates, nor any person acting on its or their
      behalf, has engaged in any form of general solicitation or general advertising
      (within the meaning of Regulation D under the Securities Act) in connection
      with
      the offer or sale of the Securities.

     

    (l) No
      Integrated Offering.
      Neither
      the Company, nor any of its affiliates, nor any person acting on its or their
      behalf has, directly or indirectly, made any offers or sales of any security
      or
      solicited any offers to buy any security, under circumstances that would require
      registration of the Securities under the Securities Act or cause this offering
      of the Securities to be integrated with prior offerings by the Company for
      purposes of the Securities Act.

     

    (m) Employee
      Relations.
      Neither
      the Company nor any of its subsidiaries is involved in any labor dispute or,
      to
      the knowledge of the Company or any of its subsidiaries, is any such dispute
      threatened. None of the Company’s or its subsidiaries’ employees is a member of
      a union and the Company and its subsidiaries believe that their relations with
      their employees are good.

     

    (n) Intellectual
      Property Rights.
      To the
      knowledge of Company, the Company and its subsidiaries own or possess adequate
      rights or licenses to use all trademarks, trade names, service marks, service
      mark registrations, service names, patents, patent rights, copyrights,
      inventions, licenses, approvals, governmental authorizations, trade secrets
      and
      rights necessary to conduct their respective businesses as now conducted. The
      Company and its subsidiaries do not have any knowledge of any infringement
      by
      the Company or its subsidiaries of trademark, trade name rights, patents, patent
      rights, copyrights, inventions, licenses, service names, service marks, service
      mark registrations, trade secret or other similar rights of others, and, to
      the
      knowledge of the Company there is no claim, action or proceeding being made
      or
      brought against, or to the Company’s knowledge, being threatened against, the
      Company or its subsidiaries regarding trademark, trade name, patents, patent
      rights, invention, copyright, license, service names, service marks, service
      mark registrations, trade secret or other infringement; and the Company and
      its
      subsidiaries are unaware of any facts or circumstances which might give rise
      to
      any of the foregoing.

     

    (o) Environmental
      Laws.
      To the
      knowledge of Company, the Company and its subsidiaries are (i) in compliance
      with any and all applicable foreign, federal, state and local laws and
      regulations relating to the protection of human health and safety, the
      environment or hazardous or toxic substances or wastes, pollutants or
      contaminants (“Environmental
      Laws”),
      (ii)
      have received all permits, licenses or other approvals required of them under
      applicable Environmental Laws to conduct their respective businesses and (iii)
      are in compliance with all terms and conditions of any such permit, license
      or
      approval.

     

    
      
        
          
          

        

        
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    (p) Title.
      All
      real property and facilities held under lease by the Company and its
      subsidiaries are held by them under valid, subsisting and enforceable leases
      with such exceptions as are not material and do not interfere with the use
      made
      and proposed to be made of such property and buildings by the Company and its
      subsidiaries.

     

    (q) Insurance.
      The
      Company and each of its subsidiaries is insured by insurers of recognized
      financial responsibility against such losses and risks and in such amounts
      as
      management of the Company believes to be prudent and customary in the businesses
      in which the Company and its subsidiaries are engaged. Neither the Company
      nor
      any such subsidiary has been refused any insurance coverage sought or applied
      for and neither the Company nor any such subsidiary has any reason to believe
      that it will not be able to renew its existing insurance coverage as and when
      such coverage expires or to obtain similar coverage from similar insurers as
      may
      be necessary to continue its business at a cost that would not materially and
      adversely affect the condition, financial or otherwise, or the earnings,
      business or operations of the Company and its subsidiaries, taken as a
      whole.

     

    (r) Regulatory
      Permits.
      The
      Company and its subsidiaries possess all material certificates, authorizations
      and permits issued by the appropriate federal, state or foreign regulatory
      authorities necessary to conduct their respective businesses, and neither the
      Company nor any such subsidiary has received any notice of proceedings relating
      to the revocation or modification of any such certificate, authorization or
      permit.

     

    (s) Internal
      Accounting Controls.
      The
      Company and each of its subsidiaries maintains a system of internal accounting
      controls sufficient to provide reasonable assurance that (i) transactions are
      executed in accordance with management’s general or specific authorizations,
      (ii) transactions are recorded as necessary to permit preparation of financial
      statements in conformity with generally accepted accounting principles and
      to
      maintain asset accountability, and (iii) the recorded amounts for assets are
      compared with the existing assets at reasonable intervals and appropriate action
      is taken with respect to any differences.

     

    (t) No
      Material Adverse Breaches, etc.
      Neither
      the Company nor any of its subsidiaries is subject to any charter, corporate
      or
      other legal restriction, or any judgment, decree, order, rule or regulation
      which in the judgment of the Company’s officers has or is expected in the future
      to have a Material Adverse Effect on the business, properties, operations,
      financial condition, results of operations or prospects of the Company or its
      subsidiaries. Neither the Company nor any of its subsidiaries is in breach
      of
      any contract or agreement which breach, in the judgment of the Company’s
      officers, has or is expected to have a Material Adverse Effect on the business,
      properties, operations, financial condition, results of operations or prospects
      of the Company or its subsidiaries.

    

      
        
          
          

        

        
          11

          
            

          

        

        
          
          

        

      

    

     

    (u) Tax
      Status.
      The
      Company and each of its subsidiaries has made and filed all federal and state
      income and all other tax returns, reports and declarations required by any
      jurisdiction to which it is subject and (unless and only to the extent that
      the
      Company and each of its subsidiaries has set aside on its books provisions
      reasonably adequate for the payment of all unpaid and unreported taxes) has
      paid
      all taxes and other governmental assessments and charges that are material
      in
      amount, shown or determined to be due on such returns, reports and declarations,
      except those being contested in good faith and has set aside on its books
      provision reasonably adequate for the payment of all taxes for periods
      subsequent to the periods to which such returns, reports or declarations apply.
      There are no unpaid taxes in any material amount claimed to be due by the taxing
      authority of any jurisdiction, and the officers of the Company know of no basis
      for any such claim.

     

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

     

    (w) Fees
      and Rights of First Refusal.
      The
      Company is not obligated to offer the securities offered hereunder on a right
      of
      first refusal basis or otherwise to any third parties including, but not limited
      to, current or former shareholders of the Company, underwriters, brokers, agents
      or other third parties.

     

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

     

    (y) Registration
      Rights.
      Other
      than each of the Buyers, no Person has any right to cause the Company to effect
      the registration under the Securities Act of any securities of the Company.
      There are no outstanding registration statements not yet declared effective
      and
      there are no outstanding comment letters requiring response by the Company
      from
      the SEC or any other regulatory agency.

     

    (z) Private
      Placement.
      Assuming the accuracy of the Buyers’ representations and warranties set forth in
      Section 2, no registration under the Securities Act is required for the offer
      and sale of the Securities by the Company to the Buyers as contemplated hereby.
      Upon the receipt of Stockholder Approval and any waiting period required for
      the
effectiveness of such approval under Section 14 of the Exchange Act the issuance
      and sale of the Securities hereunder does not contravene the rules and
      regulations of the Primary Market.

     

    
      
        
          
          

        

        
          12

          
            

          

        

        
          
          

        

      

    

     

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

     

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

     

    (cc) Dilutive
      Effect.
      The
      Company understands and acknowledges that the number of Conversion Shares
      issuable upon conversion of the Convertible Debentures and the Warrant Shares
      issuable upon exercise of the Warrants will increase in certain circumstances.
      The Company further acknowledges that its obligation to issue Conversion Shares
      upon conversion of the Convertible Debentures in accordance with this Agreement
      and the Convertible Debentures and its obligation to issue the Warrant Shares
      upon exercise of the Warrants in accordance with this Agreement and the
      Warrants, in each case, is absolute and unconditional regardless of the dilutive
      effect that such issuance may have on the ownership interests of other
      stockholders of the Company. 

     

    4. COVENANTS.

     

    (a) Best
      Efforts.
      Each
      party shall use its best efforts to timely satisfy each of the conditions to
      be
      satisfied by it as provided in Sections 6 and 7 of this Agreement.

     

    (b) Form
      D.
      The
      Company agrees to file a Form D with respect to the Securities as required
      under
      Regulation D and to provide a copy thereof to each Buyer promptly after such
      filing. The Company shall, on or before the Closing Date, take such action
      as
      the Company shall reasonably determine is necessary to qualify the Securities,
      or obtain an exemption for the Securities for sale to the Buyers at the Closing
      pursuant to this Agreement under applicable securities or “Blue Sky” laws of the
      states of the United States, and shall provide evidence of any such action
      so
      taken to the Buyers on or prior to the Closing Date.

     

    (c) Reporting
      Status.
      Until
      the earlier of (i) the date as of which the Buyer(s) may sell all of the
      Securities without restriction pursuant to Rule 144(k) promulgated under the
      Securities Act (or successor thereto), or (ii) the date on which (A) the Buyers
      shall have sold all the Securities and (B) none of the Convertible Debentures
      or
      Warrants are outstanding (the “Registration
      Period”),
      the
      Company shall file in a timely manner all reports required to be filed with
      the
      SEC pursuant to the Exchange Act and the regulations of the SEC thereunder,
      and
      the Company shall not terminate its status as an issuer required to file reports
      under the Exchange Act even if the Exchange Act or the rules and regulations
      thereunder would otherwise permit such termination.

    
      
        
          
          

        

        
          13

          
            

          

        

        
          
          

        

      

    

     

    (d) Use
      of
      Proceeds.
      The
      Company will use the proceeds from the sale of the Convertible Debentures for
      acquisitions, fees, costs and expenses of the transactions contemplated and
      general corporate and working capital purposes.

     

    (e) Reservation
      of Shares.
      Prior
      to Closing, the Company shall reserve for issuance to a maximum of 30,000,000
      shares of Common Stock for issuance upon conversions of the Convertible Dentures
      and exercise of the Warrants and exercise of the Commitment Warrants (the
“Share
      Reserve”).
      The
      Company represents that it will have as of the Closing Date sufficient
      authorized and unissued shares of Common Stock available to create the Share
      Reserve after considering all other commitments that may require the issuance
      of
      Common Stock. The Company shall take all action reasonably necessary to at
      all
      times have authorized, and reserved for the purpose of issuance the Share
      Reserve (as adjusted for stock splits, recapitalizations, and similar events)
      and in the event that the number of shares of Common Stock remaining in the
      Share Reserve shall at any time be less than 5,000,000 (as may be
      proportionately adjusted for stock splits, stock dividends, recapitalizations
      and similar events affecting the rights of shareholders generally) the Company
      shall immediately take all action reasonably necessary to at all times have
      authorized, and reserve for the purpose of issuance, not less than the initial
      amount required to be set aside as the Share Reserve as of the date of this
      Agreement, including, without limitation, promptly (within 45 days) seeking
      stockholder approval for such increase in the number of authorized shares so
      that the appropriate number of shares may be set aside in the Share Reserve,
      if
      required.

     

    (f) Listings
      or Quotation.
      The
      Company’s Common Stock shall be listed or quoted for trading on any of (a) the
      American Stock Exchange, (b) New York Stock Exchange, (c) the NASDAQ Global
      Market, (d) the NASDAQ Capital Market, or (e) the NASDAQ OTC Bulletin Board
      (“OTCBB”)
      (each,
      a “Primary
      Market”).
      The
      Company shall promptly secure the listing of all of the Registrable Securities
      (as defined in the Registration Rights Agreement) upon each national securities
      exchange and automated quotation system, if any, upon which the Common Stock
      is
      then listed (subject to official notice of issuance) and shall maintain such
      listing of all Registrable Securities from time to time issuable under the
      terms
      of the Transaction Documents. 

     

    (g) Fees
      and Expenses.
      

     

    (i) Each
      of
      the Company and the Buyer(s) shall pay all costs and expenses incurred by such
      party in connection with the negotiation, investigation, preparation, execution
      and delivery of the Transaction Documents. 

     

    
      
        
          
          

        

        
          14

          
            

          

        

        
          
          

        

      

    

     

    (ii) The
      Company shall set aside $1,150,000 from the proceeds of the Closing which shall
      be used to compensate Yorkville Advisors, LLC (“Yorkville”)
      for
      monitoring and managing the investment. 

     

    (h) Corporate
      Existence.
      So long
      as any of the Convertible Debentures remain outstanding, the Company shall
      not
      directly or indirectly consummate any merger, reorganization, restructuring,
      reverse stock split consolidation, sale of all or substantially all of the
      Company’s assets or any similar transaction or related transactions (each such
      transaction, an “Organizational
      Change”)
      unless, prior to the consummation an Organizational Change, the Company obtains
      the written consent of each Buyer. In any such case, the Company will make
      appropriate provision with respect to such holders’ rights and interests to
      insure that the provisions of this Section 4(h) will thereafter be applicable
      to
      the Convertible Debentures.

     

    (i) Transactions
      With Affiliates.
      So long
      as any Convertible Debentures are outstanding, the Company shall not, and shall
      cause each of its subsidiaries not to, enter into, amend, modify or supplement,
      or permit any subsidiary to enter into, amend, modify or supplement any
      agreement, transaction, commitment, or arrangement with any of its or any
      subsidiary’s officers, directors, person who were officers or directors at any
      time during the previous two (2) years, stockholders who beneficially own five
      percent (5%) or more of the Common Stock, or Affiliates (as defined below)
      or
      with any individual related by blood, marriage, or adoption to any such
      individual or with any entity in which any such entity or individual owns a
      five
      percent (5%) or more beneficial interest (each a “Related
      Party”),
      except for (a) customary employment arrangements and benefit programs on
      reasonable terms, (b) any investment in the Company or an Affiliate of the
      Company, (c) any agreement, transaction, commitment, or arrangement on an
      arms-length basis on terms no less favorable than terms which would have been
      obtainable from a person other than such Related Party, (d) any agreement,
      transaction, commitment, or arrangement which is approved by a majority of
      the
      disinterested directors of the Company; for purposes hereof, any director who
      is
      also an officer of the Company or any subsidiary of the Company shall not be
      a
      disinterested director with respect to any such agreement, transaction,
      commitment, or arrangement or approved by the shareholders of the Company or
      otherwise satisfies the rules and regulations of the Primary Market.
“Affiliate”
for
      purposes hereof means, with respect to any person or entity, another person
      or
      entity that, directly or indirectly, (i) has a ten percent (10%) or more equity
      interest in that person or entity, (ii) has ten percent (10%) or more common
      ownership with that person or entity, (iii) controls that person or entity,
      or
      (iv) shares common control with that person or entity. “Control”
or
      “controls”
for
      purposes hereof means that a person or entity has the power, direct or indirect,
      to conduct or govern the policies of another person or entity.

     

    (j) Transfer
      Agent.
      The
      Company covenants and agrees that, in the event that the Company’s agency
      relationship with the transfer agent should be terminated for any reason prior
      to a date which is two (2) years after the Closing Date, the Company shall
      immediately appoint a new transfer agent and shall require that the new transfer
      agent execute and agree to be bound by the terms of the Irrevocable Transfer
      Agent Instructions (as defined herein).

     

    (k) Neither
      the Buyer(s) nor any of its affiliates have an open short position in the Common
      Stock of the Company, and the Buyer(s) agrees that it shall not, and that it
      will cause its affiliates not to, engage in any short sales of or hedging
      transactions with respect to the Common Stock as long as any Convertible
      Debentures or Warrants shall remain outstanding. 

     

    
      
        
          
          

        

        
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    (l) Rights
      of First Refusal.
      So
      long
      as at least $2,500,000 of original principal amount of Convertible Debentures
      remains outstanding, if the Company intends to raise additional capital by
      the
      issuance or sale of capital stock of the Company, including without limitation
      shares of any class of common stock, any class of preferred stock, options,
      warrants or any other securities convertible or exercisable into shares of
      common stock (whether the offering is conducted by the Company, underwriter,
      placement agent or any third party) the Company shall b offer to the Buyer
      the
      opportunity to purchase at least 25% of such issuance, by providing in writing
      the principal amount of capital it intends to raise and outline of the material
      terms of such capital raise, upon offering such issuance or sale of capital
      stock  to any third parties including. Notwithstanding anything herein to
      the contrary, the right of first refusal shall not be applicable to any
      transaction primarily involving the acquisition of any business or assets which
      involves the issuance of any securities, issuances to any current or former
      officers or directors, current or former shareholders and/or investors of the
      Company..  The Buyer shall have ten (10) business days from receipt of such
      notice of the sale or issuance of capital stock to accept or reject all or
      a
      portion of such capital raising offer. 

     

    (m) Lock
      Up Agreements.
      On the
      date hereof, the Company shall obtain from each person required to file reports
      under Section 16(a) of the Exchange Act a lock up agreement in the form attached
      hereto as Exhibit
      C
      providing for a twelve (12) month restriction on sales by such persons of shares
      of Common Stock in an amount that would exceed the volume that could be sold
      by
      such person individually pursuant to Rule 144 applicable to “control”
persons.

     

    (n) Additional
      Registration Statements.
      Until
      the effective date of the initial Registration Statement, the Company will
      not
      file a registration statement under the Securities Act relating to securities
      that are not the Securities, without the consent of the Holders (other than
      any
      post-effective amendments of existing registration statements, and any
      registration on Form S-8, S-4 or other form nor involving the primary offering
      of securities or resale of securities by existing holders).

     

    (o) Review
      of Public Disclosures.
      All SEC
      filings (including, without limitation, all filings required under the Exchange
      Act, which include Forms 10-Q and 10-QSB, 10-K and 10K-SB, 8-K, etc) and other
      public disclosures made by the Company, including, without limitation, all
      press
      releases, investor relations materials, and scripts of analysts meetings and
      calls, shall be reviewed and approved for release by the Company’s attorneys
      and, if containing financial information, the Company’s independent certified
      public accountants.

     

    (p) Disclosure
      of Transaction.
      Within
      four Business Days following the date of this Agreement, the Company shall
      publicly announce and file a Current Report on Form 8-K describing the terms
      of
      the transactions contemplated by the Transaction Documents in the form required
      by the Exchange Act.

    
      
        
          
          

        

        
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    (q) Deposit
      Accounts.
      In
      connection with the Closing, until the earlier of the time at which either:
      (i)
      the Company, on a consolidated basis for the prior two consecutive quarters
      has
      earned positive EBITDA (earnings before interest, taxes, depreciation and
      amortization but excluding any equity compensation related charges); or (ii)
      the
      outstanding principal amount of the Convertible Debentures shall be less than
      $11,500,000, the Company shall segregate $1,500,000 of the net proceeds received
      at the Closing and deposit such amount in a segregated Deposit Account (as
      defined in the Security Documents) chosen by the Company to be identified by
      the
      Company to the Buyer. The Company, the Buyer, and the bank or other financial
      institution at which such Deposit Account is maintained shall enter into a
      Deposit Account control agreement (the “Segregated
      Deposit Account Agreement”)
      substantially in the form attached as an exhibit to the Security Documents
      or on
      the form utilized by the deposit institution providing the Buyer the right
      to
      withdraw funds from the account to make any payments of principal or interest
      due by the Company under the Convertible Debentures, if such payment is not
      timely made. 

     

    5. TRANSFER
      AGENT INSTRUCTIONS.

     

    (a) The
      Company shall issue the Irrevocable Transfer Agent Instructions to its transfer
      agent, and any subsequent transfer agent, irrevocably appointing David Gonzalez,
      Esq. as the Company’s agent for purpose instructing its transfer agent to issue
      certificates or credit shares to the applicable balance accounts at The Deposity
      Trust Company (“DTC”),
      registered in the name of each Buyer or its respective nominee(s), for the
      Conversion Shares and the Warrant Shares issued upon conversion of the
      Convertible Debentures or exercise of the Warrants as specified from time to
      time by each Buyer to the Company upon conversion of the Convertible Debentures
      or exercise of the Warrants. The Company shall not change its transfer agent
      without the consent of the Buyers, which consent shall not be unreasonably
      withheld. The Company warrants that no instruction other than the Irrevocable
      Transfer Agent Instructions referred to in this Section 5, and stop transfer
      instructions to give effect to Section 2(g) hereof (in the case of the
      Conversion Shares or Warrant Shares prior to registration of such shares under
      the Securities Act) will be given by the Company to its transfer agent, and
      that
      the Securities shall otherwise be freely transferable on the books and records
      of the Company as and to the extent provided in this Agreement and the other
      Transaction Documents. If a Buyer effects a sale, assignment or transfer of
      the
      Securities in accordance with Section 2(f), the Company shall promptly instruct
      its transfer agent to issue one or more certificates or credit shares to the
      applicable balance accounts at DTC in such name and in such denominations as
      specified by such Buyer to effect such sale, transfer or assignment and, with
      respect to any transfer, shall permit the transfer. In the event that such
      sale,
      assignment or transfer involves Conversion Shares or Warrant Shares sold,
      assigned or transferred pursuant to an effective registration statement or
      pursuant to Rule 144, the transfer agent shall issue such Securities to the
      Buyer, assignee or transferee, as the case may be, without any restrictive
      legend. Nothing in this Section 5 shall affect in any way the Buyer’s
      obligations and agreement to comply with all applicable securities laws upon
      resale of Conversion Shares. The Company acknowledges that a breach by it of
      its
      obligations hereunder will cause irreparable harm to the Buyer by vitiating
      the
      intent and purpose of the transaction contemplated hereby. Accordingly, the
      Company acknowledges that the remedy at law for a breach of its obligations
      under this Section 5 will be inadequate and agrees, in the event of a breach
      or
      threatened breach by the Company of the provisions of this Section 5, that
      the Buyer(s) shall be entitled, in addition to all other available remedies,
      to
      an injunction restraining any breach and requiring immediate issuance and
      transfer, without the necessity of showing economic loss and without any bond
      or
      other security being required.

     

    
      
        
          
          

        

        
          17

          
            

          

        

        
          
          

        

      

    

     

    6. CONDITIONS
      TO THE COMPANY’S OBLIGATION TO SELL.

     

    The
      obligation of the Company hereunder to issue and sell the Convertible Debentures
      to the Buyer(s) at the Closing is subject to the satisfaction, at or before
      the
      Closing Dates, of each of the following conditions, provided that these
      conditions are for the Company’s sole benefit and may be waived by the Company
      at any time in its sole discretion:

     

    (a) Each
      Buyer shall have executed the Transaction Documents and delivered them to the
      Company.

     

    (b) The
      Buyer(s) shall have delivered to the Company the Purchase Price for the
      Convertible Debentures in the respective amounts as set forth next to each
      Buyer
      as set forth on Schedule I attached hereto, minus any fees to be paid directly
      from the proceeds the Closings as set forth herein, by wire transfer of
      immediately available U.S. funds pursuant to the wire instructions provided
      by
      the Company.

     

    (c) The
      representations and warranties of the Buyer(s) shall be true and correct in
      all
      material respects as of the date when made and as of the Closing Dates as though
      made at that time (except for representations and warranties that speak as
      of a
      specific date), and the Buyer(s) shall have performed, satisfied and complied
      in
      all material respects with the covenants, agreements and conditions required
      by
      this Agreement to be performed, satisfied or complied with by the Buyer(s)
      at or
      prior to the Closing Dates. 

     

    (d) The
      Company shall have obtained Stockholder Approval and all conditions for the
      closing of the Asset Purchase shall have been met and the closing of the Asset
      Purchase shall occur simultaneously with the Closing.

     

    7. CONDITIONS
      TO THE BUYER’S OBLIGATION TO PURCHASE.

     

    (a) The
      obligation of the Buyer(s) hereunder to purchase the Convertible Debentures
      at
      the Closing is subject to the satisfaction, at or before the Closing Date,
      of
      each of the following conditions:

     

    (i) The
      Company shall have executed the Transaction Documents and delivered the same
      to
      the Buyers.

     

    (ii) The
      Common Stock shall be authorized for quotation or trading on the Primary Market,
      trading in the Common Stock shall not have been suspended for any reason, and
      all the Conversion Shares issuable upon the conversion of the Convertible
      Debentures shall be approved for listing or trading on the Primary Market.
      

     

    (iii) The
      representations and warranties of the Company shall be true and correct in
      all
      material respects (except to the extent that any of such representations and
      warranties is already qualified as to materiality in Section 3 above, in which
      case, such representations and warranties shall be true and correct without
      further qualification) as of the date when made and as of the Closing Date
      as
      though made at that time (except for representations and warranties that speak
      as of a specific date) and the Company shall have performed, satisfied and
      complied in all material respects with the covenants, agreements and conditions
      required by this Agreement to be performed, satisfied or complied with by the
      Company at or prior to the Closing Date

    
      
        
          
          

        

        
          18

          
            

          

        

        
          
          

        

      

    

     

    (iv) The
      Company shall have executed and delivered to the Buyer the Convertible
      Debentures, Warrants, and Commitment Shares in the respective amounts set forth
      opposite each Buyer’s name on Schedule I attached hereto.

     

    (v) The
      Buyers shall have received an opinion of counsel from counsel to the Company
      in
      a form satisfactory to the Buyers.

     

    (vi) The
      Company shall have provided to the Buyers a true copy of a certificate of good
      standing evidencing the formation and good standing of the Company from the
      secretary of state (or comparable office) from the jurisdiction in which the
      Company is incorporated, as of a date within 10 days of the Closing
      Date.

     

    (vii) The
      Company shall have delivered to the Buyers a certificate, executed by the
      Secretary of the Company and dated as of the Closing Date, as to (i) the
      resolutions consistent with Section 3(c) as adopted by the Company's Board
      of
      Directors in a form reasonably acceptable to such Buyer, (ii) the Certificate
      of
      Incorporation and (iii) the Bylaws, each as in effect at the
      Closing.

     

    (viii) The
      Buyer, the Company, and all of the Company’s subsidiaries shall have executed
      and delivered the Security Documents in a form reasonably satisfactory to the
      Buyer providing the Buyer with a first position security interest in all the
      assets of the Company and its subsidiaries (including all assets purchased
      pursuant to the Asset Purchase), including, without limitation, all registered
      domain names, intellectual property, patents, and trademarks and all filings
      required to perfect the Buyer’s security interest shall have been properly
      filed. The Company shall have provided the Buyer with proof of termination
      of
      the lien held by Eastech Electronics Inc. 

     

    (ix) The
      Company shall have obtained Stockholder Approval. 

     

    (x) The
      Company shall have provided to the Buyer an acknowledgement, to the satisfaction
      of the Buyer, from the Company’s independent certified public accountants as to
      its ability to provide all consents required in order to file a registration
      statement in connection with this transaction.

     

    (xi) The
      Company shall have created the Share Reserve. 

     

    (xii) The
      Irrevocable Transfer Agent Instructions, in form and substance satisfactory
      to
      the Buyer, shall have been delivered to and acknowledged in writing by the
      Company’s transfer agent.

     

    
      
        
          
          

        

        
          19

          
            

          

        

        
          
          

        

      

    

     

    (xiii) The
      Company shall have established a segregated Deposit Account and the Segregated
      Deposit Account Agreement shall have been fully executed by the Company and
      the
      bank. 

     

    (xiv) The
      Company shall have granted the Buyer a security interest in all intellectual
      property (subject to the terms of the Asset Purchase) satisfactory in form
      and
      substance to Buyer.

     

    (xv) The
      Company and the owners of Ebaum’s World, Inc. shall have entered into the Asset
      Purchase and related agreements substantially in the form previously distributed
      to Buyer.

     

    (xvi) There
      shall not have been a Material Adverse Change to the Company, to any of its
      subsidiaries, or to Ebaum’s World, Inc.

     

    (xvii) The
      Buyer
      shall have completed its ongoing and continuing due diligence investigation
      of
      the Company (including all of its subsidiaries) and of Ebaum’s World, Inc., to
      its satisfaction.

     

    (xviii) The
      Company, the Buyer, and Eric Bauman shall have entered into the “Third Party
      Reliance Agreement” substantially in the form annexed as Exhibit
      B
      hereto
      (the “Subordination
      Agreement”).

     

    8. INDEMNIFICATION.

     

    (a) In
      consideration of the Buyer’s execution and delivery of this Agreement and
      acquiring the Convertible Debentures and the Conversion Shares hereunder, and
      in
      addition to all of the Company’s other obligations under this Agreement, the
      Company shall defend, protect, indemnify and hold harmless the Buyer(s) and
      each
      other holder of the Convertible Debentures and the Conversion Shares, and all
      of
      their officers, directors, employees and agents (including, without
      limitation, those retained in connection with the transactions contemplated
      by
      this Agreement) (collectively, the “Buyer
      Indemnitees”)
      from
      and against any and all actions, causes of action, suits, claims, losses, costs,
      penalties, fees, liabilities and damages, and expenses in connection therewith
      (irrespective of whether any such Buyer Indemnitee is a party to the action
      for
      which indemnification hereunder is sought), and including reasonable attorneys’
fees and disbursements (the “Indemnified
      Liabilities”),
      incurred by the Buyer Indemnitees or any of them solely as a result of (a)
      any
      misrepresentation or breach of any representation or warranty made by the
      Company in this Agreement, the Convertible Debentures or the other Transaction
      Documents or any other certificate, instrument or document contemplated hereby
      or thereby, or (b) any breach of any covenant, agreement or obligation of the
      Company contained in this Agreement, or the other Transaction Documents or
      any
      other certificate, instrument or document contemplated hereby or thereby. To
      the
      extent that the foregoing undertaking by the Company may be unenforceable for
      any reason, the Company shall make the maximum contribution to the payment
      and
      satisfaction of each of the Indemnified Liabilities, which is permissible under
      applicable law.

     

    
      
        
          
          

        

        
          20

          
            

          

        

        
          
          

        

      

    

     

    (b) In
      consideration of the Company’s execution and delivery of this Agreement, and in
      addition to all of the Buyer’s other obligations under this Agreement, the Buyer
      shall defend, protect, indemnify and hold harmless the Company and all of its
      officers, directors, employees and agents (including, without limitation, those
      retained in connection with the transactions contemplated by this Agreement)
      (collectively, the “Company
      Indemnitees”)
      from
      and against any and all Indemnified Liabilities incurred by the Indemnitees
      or
      any of them as a result of (a) any misrepresentation or breach of any
      representation or warranty made by the Buyer(s) in this Agreement, instrument
      or
      document contemplated hereby or thereby executed by the Buyer or (b) any breach
      of any covenant, agreement or obligation of the Buyer(s) contained in this
      Agreement, the Transaction Documents or any other certificate, instrument or
      document contemplated hereby or thereby executed by the Buyer. To the extent
      that the foregoing undertaking by each Buyer may be unenforceable for any
      reason, each Buyer shall make the maximum contribution to the payment and
      satisfaction of each of the Indemnified Liabilities, which is permissible under
      applicable law.

     

    9. GOVERNING
      LAW: MISCELLANEOUS.

     

    (a) Governing
      Law.
      This
      Agreement shall be governed by and interpreted in accordance with the internal
      laws of the State of New York without regard to the principles of conflict
      of
      laws. The parties further agree that any action between them shall be heard
      in
      Hudson County, New Jersey, and expressly consent to the jurisdiction and venue
      of the Superior Court of New Jersey, sitting in Hudson County and the United
      States District Court for the District of New Jersey sitting in Newark, New
      Jersey for the adjudication of any civil action asserted pursuant to this
      Paragraph.

     

    (b) Counterparts.
      This
      Agreement may be executed in two or more identical counterparts, all of which
      shall be considered one and the same agreement and shall become effective when
      counterparts have been signed by each party and delivered to the other party.
      In
      the event any signature page is delivered by facsimile transmission, the party
      using such means of delivery shall cause four (4) additional original executed
      signature pages to be physically delivered to the other party within five (5)
      days of the execution and delivery hereof.

     

    (c) Headings.
      The
      headings of this Agreement are for convenience of reference and shall not form
      part of, or affect the interpretation of, this Agreement.

     

    (d) Severability.
      If any
      provision of this Agreement shall be invalid or unenforceable in any
      jurisdiction, such invalidity or unenforceability shall not affect the validity
      or enforceability of the remainder of this Agreement in that jurisdiction or
      the
      validity or enforceability of any provision of this Agreement in any other
      jurisdiction.

     

    (e) Entire
      Agreement, Amendments.
      This
      Agreement supersedes all other prior oral or written agreements between the
      Buyer(s), the Company, their affiliates and persons acting on their behalf
      with
      respect to the matters discussed herein, and this Agreement and the instruments
      referenced herein contain the entire understanding of the parties with respect
      to the matters covered herein and therein and, except as specifically set forth
      herein or therein, neither the Company nor any Buyer makes any representation,
      warranty, covenant or undertaking with respect to such matters. No provision
      of
      this Agreement or any of the other Transaction Documents may be waived or
      amended other than by an instrument in writing signed by the Company and the
      Required Percentage, which waiver or amendment shall upon approval by the
      Required Percentage be binding upon all Debenture holders regardless of whether
      they have consented. For the purposes hereof, the Required Percentage shall
      mean
      at the time of such amendment or waiver not less than fifty-one (51%) percent
      of
      the outstanding principal amount of Debentures including for any amendment
      or
      waiver under any of the Transaction Documents.

     

    
      
        
          
          

        

        
          21

          
            

          

        

        
          
          

        

      

    

     

    (f) Notices.
      Any
      notices, consents, waivers, or other communications required or permitted to
      be
      given under the terms of this Agreement must be in writing and will be deemed
      to
      have been delivered (i) upon receipt, when delivered personally; (ii) upon
      confirmation of receipt, when sent by facsimile; (iii) three (3) days after
      being sent by U.S. certified mail, return receipt requested, or (iv) one (1)
      day
      after deposit with a nationally recognized overnight delivery service, in each
      case properly addressed to the party to receive the same. The addresses and
      facsimile numbers for such communications shall be:

     

    
      	
              If
                to the Company, to:

            	
              Handheld
                Entertainment, Inc.

            
	 	
              539
                Bryant Street, Suite 403

            
	 	
              San
                Francisco, CA 94107

            
	 	
              Attention:
                Jeffery Oscodar

            
	 	
              Telephone: (415)
                495-6470

            
	 	
              Facsimile: (415)
                495-7708

            
	 	 
	
              With
                a copy to:

            	
              Haynes
                and Boone, LLP

            
	 	
              153
                East 53rd
                Street

            
	 	
              New
                York, NY 10022

            
	 	
              Attention:
                Harvey J. Kesner, Esq.

            
	 	
              Telephone: (212)
                659-7300

            
	 	
              Facsimile: (212)
                918-8989

            
	 	 
	
              With
                a copy to:

            	
              David
                Clar, Esq.

              Harris
                Beach PLLC

              99
                Garnsey Road

              Pittsford,
                NY  14534

              Tel.
                No. (585) 419-8712

              Fax
                No. (585) 419-8818

              dclar@harrisbeach.com

            
	 	 
	 	 
	
              With
                a copy to:

            	
              Culley,
                Marks, Tanenbaum & Pezzulo, LLP

            
	 	 

    

    

      
        
          
          

        

        
          22

          
            

          

        

        
          
          

        

      

    

     

    If
      to the
      Buyer(s), to its address and facsimile number on Schedule I, with copies to
      the
      Buyer’s counsel as set forth on Schedule I. Each party shall provide five (5)
      days’ prior written notice to the other party of any change in address or
      facsimile number.

     

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

     

    (g) Successors
      and Assigns.
      This
      Agreement shall be binding upon and inure to the benefit of the parties and
      their respective successors and assigns. Neither the Company nor any Buyer
      shall
      assign this Agreement or any rights or obligations hereunder without the prior
      written consent of the other party hereto.

     

    (h) No
      Third Party Beneficiaries.
      This
      Agreement is intended for the benefit of the parties hereto and their respective
      permitted successors and assigns, and is not for the benefit of, nor may any
      provision hereof be enforced by, any other person.

     

    (i) Survival.
      Unless
      this Agreement is terminated under Section 9(l), the representations and
      warranties of the Company and the Buyer(s) contained in Sections 2 and 3, the
      agreements and covenants set forth in Sections 4, 5 and 9, and the
      indemnification provisions set forth in Section 8, shall survive the Closing
      for
      a period of two (2) years following the date hereof. The Buyer(s) shall be
      responsible only for its own representations, warranties, agreements and
      covenants hereunder.

     

    (j) Publicity.
      The
      Company and the Buyer(s) shall have the right to approve, before issuance any
      press release or any other public statement with respect to the transactions
      contemplated hereby made by any party; provided, however, that the Company
      shall
      be entitled, without the prior approval of the Buyer(s), to issue any press
      release or other public disclosure with respect to such transactions required
      under applicable securities or other laws or regulations (the Company shall
      use
      its best efforts to consult the Buyer(s) in connection with any such press
      release or other public disclosure prior to its release and Buyer(s) shall
      be
      provided with a copy thereof upon release thereof).

     

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

     

    (l) Termination.
      In the
      event that the Closing shall not have occurred with respect to the Buyers on
      or
      before October 19, 2007, unless extended by the parties, due to the Company’s or
      the Buyer’s failure to satisfy the conditions set forth in Sections 6 and 7
      above (and the non-breaching party’s failure to waive such unsatisfied
      condition(s)), the non-breaching party shall have the option to terminate this
      Agreement with respect to such breaching party at the close of business on
      such
      date without liability of any party to any other party, provided that if the
      transaction has not closed by December 7, 2007 through no fault of Buyer, the
      Company shall issue to Buyer five-year warrants to purchase substantially in
      the
      form of the Warrants 100,000 shares of Common Stock at the closing price on
      such
      date.

     

    (m) Brokerage.
      The
      Company represents that no broker, agent, finder or other party has been
      retained by it in connection with the transactions contemplated hereby and
      that
      no other fee or commission has been agreed by the Company to be paid by Buyer
      for or on account of the transactions contemplated hereby. 

     

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

     

    (n) No
      Strict Construction.
      The
      language used in this Agreement will be deemed to be the language chosen by
      the
      parties to express their mutual intent, and no rules of strict construction
      will
      be applied against any party.

     

    

    [REMAINDER
      PAGE INTENTIONALLY LEFT BLANK]

    
      
        
        

      

      
        25

        
          

        

      

      
        
        

      

    

     

    IN
      WITNESS WHEREOF,
      each
      Buyer and the Company have caused their respective signature page to this
      Securities Purchase Agreement to be duly executed as of the date first written
      above.

     

    

    
      	 	
              COMPANY:

            
	 	
              HANDHELD
                ENTERTAINMENT, INC. 

            
	 	 	 
	 	
              By:

            	/s/
              William J. Bush
	 	
              Name:

            	William
              J. Bush
	 	
              Title:

            	CFO
	 	 	 

    

    

    

    

    

    

    
      
        
        

      

      
        26

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF,
      each
      Buyer and the Company have caused their respective signature page to this
      Securities Purchase Agreement to be duly executed as of the date first written
      above.

     

    

    
      	 	
              BUYERS:

            
	 	
              YA
                Global Investments, L. P.

            
	 	 	 
	 	
              By:
                

            	
              Yorkville
                Advisors, LLC 

            
	 	
              Its:

            	
              Investment
                Manager

            
	 	 	 
	 	 	 
	 	
              By:

            	
              /s/
                Troy Rillo

            
	 	
              Name:

            	
              
                Troy
                  Rillo

              

            
	 	
              Its:

            	
              Senior
                Managing Director

            

    

    
      
        
        

      

      
        27NEITHER
      THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS CONVERTIBLE
      HAVE
      BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
      COMMISSION OF ANY STATE. THESE SECURITIES HAVE BEEN SOLD 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.

     

    HANDHELD
      ENTERTAINMENT, INC.

     

    
      SECURED
        CONVERTIBLE
        DEBENTURE

    

     

    
      	
              Issuance
                Date: October 31, 2007

            	
              Original
                Principal Amount: $23,000,000.00

            
	
              No.
                ZVUE-1-1

            	 

    

    

    FOR
      VALUE RECEIVED,
      HANDHELD
      ENTERTAINMENT, INC., a Delaware corporation (the "Company"),
      hereby promises to pay to the order of YA GLOBAL INVESTMENTS, L.P. or registered
      assigns (the "Holder")
      the
      amount set out above as the Original Principal Amount (as reduced pursuant
      to
      the terms hereof pursuant to redemption, conversion or otherwise, the
      "Principal")
      when
      due, whether upon the Maturity Date (as defined below), on any Installment
      Date
      with respect to the Installment Amount due on such Installment Date (each,
      as
      defined herein), acceleration, redemption or otherwise (in each case in
      accordance with the terms hereof) and to pay interest ("Interest")
      on any
      outstanding Principal at the applicable Interest Rate from the date set out
      above as the Issuance Date (the "Issuance
      Date")
      until
      the same becomes due and payable, whether upon an Interest Date (as defined
      below), any Installment Date or the Maturity Date or acceleration, conversion,
      redemption or otherwise (in each case in accordance with the terms hereof).
      This
      Secured Convertible Debenture (including all Secured Convertible Debentures
      issued in exchange, transfer or replacement hereof, this "Debenture")
      is one
      of an issue of Secured Convertible Debentures issued pursuant to the Securities
      Purchase Agreement (collectively, the "Debentures"
      and
      such other Senior Convertible Debentures, the "Other
      Debentures").
      Certain capitalized terms used herein are defined in Section 18.

     

    (1) GENERAL
      TERMS

     

    (a) Payment
      of Principal.
      On each
      Installment Date, the Company shall pay to the Holder an amount equal to the
      Installment Amount due on such Installment Date in accordance with Section
      3.
On
      the
      Maturity Date, the Company shall pay to the Holder an amount in cash or stock,
      at the Company’s option (provided that the Equity Conditions are then satisfied
      and the Installment Volume Limitation is not exceeded), representing all
      outstanding Principal and accrued and unpaid Interest. The
      "Maturity
      Date"
      shall
      be October 31, 2010, as may be extended at the option of the Holder (i) in
      the
      event that, and for so long as, an Event of Default (as defined below) shall
      have occurred and be continuing on the Maturity Date (as may be extended
      pursuant to this Section 1) or any event shall have occurred and be continuing
      on the Maturity Date (as may be extended pursuant to this Section 1) that with
      the passage of time and the failure to cure would result in an Event of Default.
      Other than as specifically permitted by this Debenture, the Company may not
      prepay or redeem any portion of the outstanding Principal without the prior
      written consent of the Holder.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (b) Interest.
      Interest shall accrue on the outstanding principal balance hereof at an annual
      rate equal to seven and one half percent (7.50%) (“Interest
      Rate”).
      Interest shall be calculated on the basis of a 365-day year and the actual
      number of days elapsed, to the extent permitted by applicable law. Accrued
      and
      unpaid Interest hereunder shall be paid on each Installment Date and on the
      Maturity Date (or sooner as provided herein) to the Holder or its assignee
      in
      whose name this Debenture is registered on the records of the Company regarding
      registration and transfers of Debentures at the option of the Company in cash,
      or, provided that the Equity Conditions are then satisfied converted into Common
      Stock at the Company Conversion Price as of the Trading Day immediately prior
      to
      the date paid.

     

    (c) Security.
      The
      Debenture is
      secured by a security interest in all of the assets of the Company and of each
      of the Company's subsidiaries as evidenced by the security agreement and the
      patent security agreement, each of even date herewith (collectively, the
“Security
      Documents”).

     

    (2) EVENTS
      OF DEFAULT. 

     

    (a) An
      “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) the
      Company's failure to pay to the Holder any amount of Principal, Interest, or
      other amounts when and as due under this Debenture (including, without
      limitation, the Company's failure to pay any Installment Amount or amounts
      hereunder) or any other Transaction Document;

     

    (ii) The
      Company or any subsidiary of the Company shall commence, or there shall be
      commenced against the Company or any subsidiary of the Company under any
      applicable bankruptcy or insolvency laws as now or hereafter in effect or any
      successor thereto, or the Company or any subsidiary of the Company commences
      any
      other proceeding under any reorganization, arrangement, adjustment of debt,
      relief of debtors, dissolution, insolvency or liquidation or similar law of
      any
      jurisdiction whether now or hereafter in effect relating to the Company or
      any
      subsidiary of the Company or there is commenced against the Company or any
      subsidiary of the Company any such bankruptcy, insolvency or other proceeding
      which remains undismissed for a period of 61 days; or the Company or any
      subsidiary of the Company is adjudicated insolvent or bankrupt; or any order
      of
      relief or other order approving any such case or proceeding is entered; or
      the
      Company or any subsidiary of the Company suffers any appointment of any
      custodian, private or court appointed receiver or the like for it or any
      substantial part of its property which continues undischarged or unstayed for
      a
      period of sixty one (61) days; or the Company or any subsidiary of the Company
      makes a general assignment for the benefit of creditors; or the Company or
      any
      subsidiary of 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
      the
      Company or any subsidiary of the Company shall call a meeting of its creditors
      with a view to arranging a composition, adjustment or restructuring of its
      debts; or the Company or any subsidiary of the Company shall by any act or
      failure to act expressly indicate its consent to, approval of or acquiescence
      in
      any of the foregoing; or any corporate or other action is taken by the Company
      or any subsidiary of the Company for the purpose of effecting any of the
      foregoing;

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    (iii) The
      Company or any subsidiary of the Company shall default in any of its obligations
      under any other debenture or 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 or any subsidiary of the Company in an amount
      exceeding $250,000 (other than the Company’s agreements with Eastech
      Manufacturing), 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;

     

    (iv) If
      the
      Common Stock is quoted or listed for trading on any of the following and it
      ceases to be so quoted or listed for trading and shall not again be quoted
      or
      listed for trading on any Primary Market within five (5) Trading Days of such
      delisting: (a) the American Stock Exchange, (b) New York Stock Exchange, (c)
      the
      NASDAQ Global Market, (d) the NASDAQ Capital Market, or (e) the NASDAQ OTC
      Bulletin Board (“OTCBB”) (each, a “Primary Market”);

     

    (v) The
      Company or any subsidiary of the Company shall be a party to any Change of
      Control Transaction (as defined herein) unless in connection with such Change
      of
      Control Transaction this Debenture is retired; 

     

    (vi) The
      Company shall fail to file the Underlying Shares Registration Statement with
      the
      Commission, or the Underlying Shares Registration Statement shall not have
      been
      declared effective by the Commission, in each case in accordance with the terms
      of the Registration Rights Agreement (“Registration
      Rights Agreement”)
      dated
      as of the date hereof among the Company and YA Global Investments, LP, or,
      while
      the Underlying Shares Registration Statement is required to be maintained
      effective pursuant to the terms of the Registration Rights Agreement, the
      effectiveness of the Underlying Shares Registration Statement lapses for any
      reason (including, without limitation, the issuance of a stop order) or is
      unavailable to the Holder for sale of the Holder’s Registrable Securities (as
      defined in the Registration Rights Agreement) which, as of any applicable date,
      shall then have been required to be registered in accordance with the terms
      of
      the Registration Rights Agreement, and such lapse or unavailability continues
      for a period of more than ten (10) consecutive Trading Days or for more than
      an
      aggregate of twenty (20) Trading Days (which need not be consecutive) in any
      365-calendar-day period;

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    (vii) the
      Company's (A) failure to cure a Conversion Failure by delivery of the required
      number of shares of Common Stock within seven (7) Business Days after the
      applicable Conversion Failure or (B) notice, written or oral, to any holder
      of
      the Debentures, including by way of public announcement, at any time, of its
      intention not to comply with a request for conversion of any Debentures into
      shares of Common Stock that is tendered in accordance with the provisions of
      the
      Debentures, other than pursuant to Section 4(c);

     

    (viii) The
      Company shall fail for any reason to deliver the payment in cash pursuant to
      a
      Buy-In (as defined herein) within seven (7) Business Days after such payment
      is
      due; 

     

    (ix) The
      Company shall fail to observe or perform any other covenant, agreement or
      warranty contained in, or otherwise commit any breach or default of any
      provision of this Debenture (except as may be covered by Section 2(a)(i) through
      2(a)(vii) hereof) or any Transaction Document (as defined in Section 18),
      including, without limitation, Section 4 of the Securities Purchase Agreement,
      which is not cured within the time prescribed, provided that, if no time is
      prescribed, then such failure, breach or default, if not involving a payment
      or
      conversion of Debentures, shall not constitute an Event of Default if cured
      within seven (7) Business Days of notice delivered by Holder to the Company
      of
      the existence of such failure, breach or default;

     

    (x) The
      Company or any of its current senior executive officers or directors shall
      be indicted, convicted or have a judgment entered against it (including in
      a
      settled action) for any intentional or willful violation of
      federal securities laws, including without limitation, in any
      administrative proceeding or Federal District Court action brought by the
      Commission or applicable criminal authorities; or

     

    (xi) any
      Event
      of Default (as defined in the Other Debentures) occurs with respect to any
      Other
      Debentures.

     

    (b) During
      the time that any portion of this Debenture is outstanding, if any Event of
      Default has occurred and is continuing (a “Default”), then the Holder, at its
      option, may accelerate the Debenture by providing five (5) Business days
      advanced written Notice to the Company, after which the full unpaid Principal
      amount of this Debenture, together with interest and other amounts owing in
      respect thereof, to the date of acceleration shall become due and payable;
      provided however, the Holder may request (but shall have no obligation to
      request) payment of such amounts in Common Stock of the Company. Furthermore,
      in
      addition to any other remedies, the Holder shall have the right (but not the
      obligation) to convert this Debenture at any time after (x) a Default or (y)
      the
      Maturity Date at the Default Conversion Price. Except as otherwise set forth
      in
      this Debenture, the Holder need not provide and the Company hereby waives any
      presentment, demand, protest or other notice of any kind, (other than required
      notice of conversion) 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 or following payment
      hereunder. No such rescission or annulment shall affect any subsequent Event
      of
      Default or impair any right consequent thereon. 

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    (3) COMPANY
      INSTALLMENT CONVERSION OR REDEMPTION.
      

     

    (a) General.
      On each
      applicable Installment Date or Additional Installment Date, the Company shall
      pay to the Holder of this Debenture the Installment Amount or Additional
      Installment Amount due on such date by converting such Installment Amount or
      Additional Installment Amount into shares of Common Stock of the Company,
      provided that there is not then an Equity Conditions Failure, in accordance
      with
      this Section 3 (a "Company
      Conversion");
      provided, however, that the Company may, at its option following notice to
      the
      Holder, redeem such Installment Amount or Additional Installment Amount in
      whole
      or in part (a "Company
      Redemption")
      or by
      any combination of a Company Conversion and a Company Redemption so long as
      all
      of the outstanding applicable Installment Amount or Additional Installment
      Amount shall be converted and/or redeemed by the Company on the applicable
      Installment Date or Additional Installment Date, subject to the provisions
      of
      this Section 3. On or prior to the date which is the third (3rd) Trading Day
      prior to each Installment Date or Additional Installment Date (each, an
      "Installment
      Notice Due Date"),
      the
      Company shall deliver written notice (each, a "Company
      Installment Notice"),
      to
      the Holder which Company Installment Notice shall (i) either (A) confirm that
      the applicable Installment Amount or Additional Installment Amount of the
      Holder’s Debenture shall be converted in whole pursuant to a Company Conversion
      or (B) (1) state that the Company elects to redeem, or is required to redeem
      in
      accordance with the provisions of the Debenture, in whole or in part, the
      applicable Installment Amount or Additional Installment Amount pursuant to
      a
      Company Redemption and (2) specify the portion (including Interest) which the
      Company elects or is required to redeem pursuant to a Company Redemption (such
      amount to be redeemed, the "Company
      Redemption Amount")
      and
      the portion (including Interest), if any, that the Company elects to convert
      pursuant to a Company Conversion (such amount a "Company
      Conversion Amount")
      which
      amounts when added together, must equal the applicable Installment Amount or
      Additional Installment Amount and (ii) if the Installment Amount or Additional
      Installment Amount is to be paid, in whole or in part, pursuant to a Company
      Conversion, certify that there is not then an Equity Conditions Failure as
      of
      the date of the Company Installment Notice. Each Company Installment Notice
      shall be irrevocable. If the Company does not timely deliver a Company
      Installment Notice in accordance with this Section 3, then the Company shall
      be
      deemed to have delivered an irrevocable Company Installment Notice confirming
      a
      Company Conversion and shall be deemed to have certified that there is not
      then
      an Equity Conditions Failure in connection with any such conversion. The Company
      Conversion Amount (whether set forth in the Company Installment Notice or by
      operation of this Section 3) shall be converted in accordance with Section
      3(b)
      and 3(d) and the Company Redemption Amount shall be paid in accordance with
      Section 3(c).

     

    (b) Mechanics
      of Company Conversion.
      Subject
      to Section 3(d), if the Company delivers a Company Installment Notice and
      elects, or is deemed to have elected, in whole or in part, a Company Conversion
      in accordance with Section 3(a), then the applicable Company Conversion Amount,
      if any, which remains outstanding as of the applicable Installment Date shall
      be
      converted as of the applicable Installment Date by converting on such
      Installment Date such Company Conversion Amount at the Company Conversion Price;
      provided that the Equity Conditions are then satisfied (or waived in writing
      by
      the Holder) on such Installment Date and the Installment Volume Limitation
      is
      not exceeded (unless waived in writing by the Holder). The Company shall deliver
      the shares of Common stock pursuant to such Company Conversion in accordance
      with the mechanics of conversion set forth in Section 4(b)(1) and the net share
      settlement mechanics set forth in Section 3(d). If the Equity Conditions are
      not
      satisfied (unless waived in writing by the Holder) on such Installment Date
      or
      the Installment Volume Limitation is exceeded, then at the option of the Holder
      designated in writing to the Company, the Holder may require the Company to
      do
      any one or more of the following (and upon taking any such action any Company
      Event of Default shall be deemed cured): (i) the Company shall redeem all or
      any
      part of the unconverted Company Conversion Amount designated by the Holder
      (such
      designated amount is referred to as the "Unconverted
      Redemption Amount")
      and
      the Company shall pay to the Holder within three (3) Business Days of such
      Installment Date, by wire transfer of immediately available funds, an amount
      in
      cash equal to such Unconverted Redemption Amount, and/or (ii) the Company
      Conversion shall be null and void with respect to all or any part of the
      unconverted Company Conversion Amount designated by the Holder and the Holder
      shall be entitled to all the rights of a holder of this Debenture with respect
      to such designated amount of the Company Conversion Amount; provided, however,
      that the Conversion Price for such unconverted Company Conversion Amount shall
      thereafter be adjusted to equal the lesser of (A) the Company Conversion Price
      as in effect on the date on which the Holder voided the Company Conversion
      and
      (B) the Company Conversion Price as in effect on the date on which the Holder
      delivers a Conversion Notice relating thereto. If the Company fails to redeem
      any Unconverted Redemption Amount by the third (3rd)
      Business Day following the applicable Installment Date, then the Holder shall
      have all rights under this Debenture (including, without limitation, such
      failure constituting an Event of Default). Notwithstanding anything to the
      contrary in this Section 3(b), but subject to Section 4(c)(i), until the Company
      delivers Common Stock representing the Company Conversion Amount to the Holder,
      the Company Conversion Amount may be converted by the Holder into Common Stock
      pursuant to Section 4. In the event that the Holder elects to convert the
      Company Conversion Amount prior to the applicable Installment Date as set forth
      in the immediately preceding sentence, the Company Conversion Amount so
      converted shall be deducted from the Installment Amount relating to the
      applicable Installment Date to the extent provided in Section 18.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    (c) Mechanics
      of Company Redemption.
      If the
      Company elects a Company Redemption, in whole or in part, in accordance with
      Section 3(a), then the Company Redemption Amount, if any, which is to be paid
      to
      the Holder on the applicable Installment Date shall be redeemed by the Company
      on such Installment Date, and the Company shall pay to the Holder on such
      Installment Date, by wire transfer of immediately available funds, in an amount
      in cash (the "Company
      Installment Redemption Price")
      equal
      to the Principal portion of the Company Redemption Amount, plus the Redemption
      Premium associated with such Principal portion, plus accrued and unpaid
      Interest, which the Company has elected to redeem in cash. If the Company fails
      to redeem the Company Redemption Amount on the applicable Installment Date
      by
      payment of the Company Installment Redemption Price on such date, then at the
      option of the Holder designated in writing to the Company (any such designation,
      "Conversion
      Notice"
      for
      purposes of this Debenture), the Holder may require the Company to convert
      all
      or any part of the Company Redemption Amount into shares of Common Stock of
      the
      Company at the Company Conversion Price. Conversions required by this Section
      3(c) shall be made in accordance with the provisions of Section 4(b).
      Notwithstanding anything to the contrary in this Section 3(c), but subject
      to
      Section 4(c)(i), until the Company Installment Redemption Price (together with
      any interest thereon) is paid in full, the Company Redemption Amount unpaid
      (together with any interest thereon) may be converted, in whole or in part,
      by
      the Holder into Common Stock pursuant to Section 4. In the event the Holder
      elects to convert all or any portion of the Company Redemption Amount prior
      to
      the applicable Installment Date as set forth in the immediately preceding
      sentence, the Company Redemption Amount so converted shall be deducted from
      the
      Installment Amount relating to the applicable Installment Date to the extent
      provided in Section 18.

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    (d) Intentionally
      omitted.

     

    (e) Deferred
      Installment Amount.
      Notwithstanding any provision of this Section 3 to the contrary, the Holder
      may,
      at its option and in its sole discretion, deliver a written notice to the
      Company at least two (2) Trading Days prior to any Installment Notice Due Date
      electing to have the payment of all or any portion of an Installment Amount
      payable on the next Installment Date deferred to the Maturity Date. Any amount
      deferred to the Maturity Date pursuant to this Section 3(d) shall continue
      to
      accrue Interest through the Maturity Date, unless the Company exercises an
      Optional Redemption with respect to all or any portion of such
      amount.

     

    (f) Company’s
      Additional Cash Redemption Right.
      The
      Company at its option shall have the right to redeem (“Optional
      Redemption”)
      a
      portion or all amounts outstanding under this Debenture in addition to any
      Installment Amount prior to the Maturity Date provided that
      there
      has been no Equity Conditions Failure on the Optional Redemption Notice Date
      (as
      defined below).
      Pursuant to any Optional Redemption, the Company shall pay an amount equal
      to
      the amount being redeemed plus the Redemption Premium, and accrued Interest,
      (collectively referred to as the “Company
      Additional Redemption Amount”)
      subject to the provisions of this Section 3(f). 

     

    The
      Company may exercise its Optional Redemption right under this Section 3(f)
      by
      delivering a written notice thereof by facsimile and overnight courier to Holder
      (the “Redemption
      Notice”
and
      the
      date the Holder received such notice is referred to as the “Optional
      Redemption Notice Date”).
      The
      Redemption Notice shall be irrevocable. The Redemption Notice shall state (i)
      the Trading Day selected for the Optional Redemption in accordance with this
      Section 3(f), which Trading Day shall be at least thirty (30) Trading Days
      following the Optional Redemption Notice Date (the “Redemption
      Date”),
      (ii)
      the Company Additional Redemption Amount, and (iii) that there has been no
      Equity Conditions Failure; provided, however, that the Company may not effect
      an
      Optional Redemption under this Section in excess of the Installment Volume
      Limitation (unless waived by the Holder). Notwithstanding the foregoing, the
      Company may effect only one (1) Optional Redemption during any twenty (20)
      consecutive Trading Days.

     

    Notwithstanding
      anything to the contrary in this Section 3(f), but subject to Section 4(c),
      until the Company Additional Redemption Amount is paid in full (which shall
      be
      on, but not before the Redemption Date) the Company Additional Redemption Amount
      (not including the associated Redemption Premium) may be converted, in whole
      or
      in part, by the Holder into Common Stock pursuant to Section 4. In the event
      the
      Holder elects to convert all or any portion of the Company Additional Redemption
      Amount prior to the applicable Redemption Date as set forth in the immediately
      preceding sentence, the Company Additional Redemption Amount so converted shall
      be deducted from Company Additional Redemption Amount to be paid by the Company
      on the Redemption Date.

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

    (g) Restriction
      on Protected Payments and Redemption Upon Protected Payments. At
      any
      time when the outstanding Principal amount of this Debenture exceeds eight
      million dollars ($8,000,000), the Company shall not make any Protected Payments
      (as defined in the subordination agreement between the Holder, the Company,
      and
      eBaum’s World, Inc. dated October 31, 2007 (the “Subordination
      Agreement”))
      consisting of cash unless (i) the Company has met the Cash Flow Test as of
      the
      date of determination for payment of such Protected Payment and (ii) the Company
      first makes an additional installment payment (“Additional
      Installment Payment”)
      under
      this Debenture to the Holder in an amount equal to the cash portion of the
      Protected Payment (“Additional
      Installment Amount”)
      on or
      before the due date of such Protected Payment (the “Additional
      Installment Date”),
      unless either condition, or both are waived in writing by the Holder. For the
      purposes hereof, any Additional Installment Payment shall be governed by the
      same procedures and requirements as an Installment Amount payment pursuant
      to
      Section 3(a) though 3(e) of this section with the Company providing notice
      on or
      prior to the date which is at least Three (3) Trading Days prior to each
      Additional Installment Date, which notice shall (i) certify that the Cash Flow
      Test has been satisfied, (ii) indicate the Additional Installment Amount, (iii)
      specify the portion of the Additional Installment Amount which the Company
      elects or is required to redeem in cash pursuant to a Company Redemption, and
      the portion, if any, of the Additional Installment Amount that the Company
      elects to convert pursuant to a Company Conversion, which amounts when added
      together, must equal the applicable Additional Installment Amount, and (iv)
      if
      the Additional Installment Amount is to be paid, in whole or in part, in stock
      pursuant to a Company Conversion, certify that there is not then an Equity
      Conditions Failure as of the date of the Company Installment Notice. The
      applicable Company Redemption Amount shall be paid on the applicable Additional
      Installment Date in cash, and the applicable Company Conversion Amount, shall
      be
      converted as of the applicable Additional Installment Date by converting on
      such
      date such Company Conversion Amount at the Company Conversion Price; provided
      that the Equity Conditions are then satisfied (unless waived in writing by
      the
      Holder) on such date and the Installment Volume Limitation is not exceeded
      (unless waived in writing by the Holder). Upon receiving notice and prior to
      the
      payment of the Additional Installment Amount, the Holder shall have the right
      to
      waive any part, or all of such Additional Installment Amount. Any Additional
      Installment Payments shall be in addition to any Installment Amount that may
      otherwise be due. 

     

    (h) Volume
      Limitation.
      Notwithstanding anything herein or in any of the Transaction Documents to the
      contrary, the maximum number of shares of Common Stock issuable upon conversion
      of this Debenture, including and all other shares underlying all issuances
      under
      any of the Transaction Documents, shall be determined as defined under the
      term
“Underlying Shares Volume Limitation.”

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

    (4) CONVERSION
      OF DEBENTURE. This
      Debenture shall be convertible into shares of the Company's Common Stock, on
      the
      terms and conditions set forth in this Section 4.

     

    (a) Conversion
      Right.
      Subject
      to the provisions of Section 4(c), at any time or times on or after the Issuance
      Date, the Holder shall be entitled to convert any portion of the outstanding
      and
      unpaid Conversion Amount (as defined below) into fully paid and nonassessable
      shares of Common Stock in accordance with Section 4(b), at the Conversion Rate
      (as defined below). The number of shares of Common Stock issuable upon
      conversion of any Conversion Amount pursuant to this Section 4(a) shall be
      determined by dividing (x) such Conversion Amount by (y) the Conversion Price
      (the "Conversion
      Rate").
      The
      Company shall not issue any fraction of a share of Common Stock upon any
      conversion. If the issuance would result in the issuance of a fraction of a
      share of Common Stock, the Company shall round such fraction of a share of
      Common Stock up to the nearest whole share. The Company shall pay any and all
      transfer, stamp and similar taxes that may be payable with respect to the
      issuance and delivery of Common Stock upon conversion of any Conversion Amount.
      

     

    (i) "Conversion
      Amount"
      means
      the portion of the Principal and accrued Interest to be converted, redeemed
      or
      otherwise with respect to which this determination is being made.

     

    (ii) "Conversion
      Price"
      means,
      as of any Conversion Date (as defined below) or other date of determination,
      $1.90, subject to adjustment as provided herein. 

     

    (b) Mechanics
      of Conversion.

     

    (i) Optional
      Conversion.
      To
      convert any Conversion Amount into shares of Common Stock on any date (a
      "Conversion
      Date"),
      the
      Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt
      on or
      prior to 11:59 p.m., New York Time, on such date, a copy of an executed notice
      of conversion in the form attached hereto as Exhibit
      I
      (the
      "Conversion
      Notice")
      to the
      Company and (B) if required by Section 4(b)(iv), surrender this Debenture to
      a
      nationally recognized overnight delivery service for delivery to the Company
      (or
      an indemnification undertaking reasonably satisfactory to the Company with
      respect to this Debenture in the case of its loss, theft or destruction). On
      or
      before the third Business Day following the date of receipt of a Conversion
      Notice (the "Share
      Delivery Date"),
      the
      Company shall (X) if legends are not required to be placed on certificates
      of
      Common Stock pursuant to the Securities Purchase Agreement and provided that
      the
      Transfer Agent is participating in the Depository Trust Company's ("DTC")
      Fast
      Automated Securities Transfer Program, credit such aggregate number of shares
      of
      Common Stock to which the Holder shall be entitled to the Holder's or its
      designee's balance account with DTC through its Deposit Withdrawal Agent
      Commission system or (Y) if the Transfer Agent is not participating in the
      DTC
      Fast Automated Securities Transfer Program, issue and deliver to the address
      as
      specified in the Conversion Notice, a certificate, registered in the name of
      the
      Holder or its designee, for the number of shares of Common Stock to which the
      Holder shall be entitled which certificates shall not bear any restrictive
      legends unless required pursuant to Section 2(g) of the Securities Purchase
      Agreement. If this Debenture is physically surrendered for conversion and the
      outstanding Principal of this Debenture is greater than the Principal portion
      of
      the Conversion Amount being converted, then the Company shall as soon as
      practicable and in no event later than five (5) Business Days after receipt
      of
      this Debenture and at its own expense, issue and deliver to the holder a new
      Debenture representing the outstanding Principal not converted. The Person
      or
      Persons entitled to receive the shares of Common Stock issuable upon a
      conversion of this Debenture shall be treated for all purposes as the record
      holder or holders of such shares of Common Stock upon the transmission of a
      Conversion Notice. In the event of a partial conversion of this Debenture
      pursuant hereto, the principal amount converted shall be deducted from the
      Installment Amounts due on subsequent Installment Dates.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    (ii) Company's
      Failure to Timely Convert.
      If
      within three (3) Trading Days after the Company's receipt of the facsimile
      copy
      of a Conversion Notice the Company shall fail to issue and deliver a certificate
      to the Holder or credit the Holder's balance account with DTC for the number
      of
      shares of Common Stock to which the Holder is entitled upon such holder's
      conversion of any Conversion Amount (a "Conversion
      Failure"),
      and
      if on or after such Trading Day the Holder purchases (in an open market
      transaction or otherwise) Common Stock to deliver in satisfaction of a sale
      by
      the Holder of Common Stock issuable upon such conversion that the Holder
      anticipated receiving from the Company (a "Buy-In"),
      then
      the Company shall, within three (3) Business Days after the Holder's request
      and
      in the Holder's discretion, either (i) pay cash to the Holder in an amount
      equal
      to the Holder's total purchase price (including brokerage commissions and other
      out of pocket expenses, if any) for the shares of Common Stock so purchased
      (the
"Buy-In
      Price"),
      at
      which point the Company's obligation to deliver such certificate (and to issue
      such Common Stock) shall terminate, or (ii) promptly honor its obligation to
      deliver to the Holder a certificate or certificates representing such Common
      Stock and pay cash to the Holder in an amount equal to the excess (if any)
      of
      the Buy-In Price over the product of (A) such number of shares of Common Stock,
      times (B) the Closing Bid Price on the Conversion Date. Notwithstanding the
      foregoing, Holder shall not undertake any Buy-In and Company shall not be
      responsible for any Buy-In Price make whole as provided in (i), above, unless
      Holder has given prior written notice to Company of its intention to exercise
      its Buy-In and Company has refused to take appropriate action to cure the
      Conversion Failure, provided further, that no Buy-In make whole payment from
      Company shall become due from Company unless the Holder’s Buy-In is required by
      the purchaser following exhaustion of all alternative means to cure or delay
      any
      Holder failure to deliver, and evidence thereof is provided to Company. Any
      profit on a Holder’s Buy-In shall be credited to the next due Installment
      Amount.

     

    (iii) Book-Entry.
      Notwithstanding anything to the contrary set forth herein, upon conversion
      of
      any portion of this Debenture in accordance with the terms hereof, the Holder
      shall not be required to physically surrender this Debenture to the Company
      unless (A) the full Conversion Amount represented by this Debenture is being
      converted or (B) the Holder has provided the Company with prior written notice
      (which notice may be included in a Conversion Notice) requesting reissuance
      of
      this Debenture upon physical surrender of this Debenture. The Holder and the
      Company shall maintain records showing the Principal and Interest converted
      and
      the dates of such conversions or shall use such other method, reasonably
      satisfactory to the Holder and the Company, so as not to require physical
      surrender of this Debenture upon conversion.

     

    (c) Limitations
      on Conversions.

     

    (i) Beneficial
      Ownership.
      The
      Holder shall not have the right to convert any portion of this Debenture or
      receive shares of Common Stock as payment of interest hereunder to the extent
      that after giving effect to such conversion or receipt of such interest payment,
      the Holder, together with any affiliate thereof, would beneficially own (as
      determined in accordance with Section 13(d) of the Exchange Act and the rules
      promulgated thereunder) in excess of 9.99% of the number of shares of Common
      Stock outstanding immediately after giving effect to such conversion or receipt
      of shares as payment of interest. Since the Holder will not be obligated to
      report to the Company the number of shares of Common Stock it may hold at the
      time of a conversion hereunder, unless the conversion at issue would result
      in
      the issuance of shares of Common Stock in excess of 9.99% of the then
      outstanding shares of Common Stock without regard to any other shares which
      may
      be beneficially owned by the Holder or an affiliate thereof, the Holder shall
      have the authority and obligation to determine whether the restriction contained
      in this Section will limit any particular conversion hereunder and to the extent
      that the Holder determines that the limitation contained in this Section
      applies, the determination of which portion of the principal amount of this
      Debenture is convertible shall be the sole responsibility and obligation of
      the
      Holder. The provisions of this Section may be waived by a Holder (but only
      as to
      itself and not to any other Holder) upon not less than sixty five (65) days
      prior notice to the Company. Other Holders shall be unaffected by any such
      waiver.

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    (ii) Unless
      a
      Default shall have occurred and be continuing, the Holder shall not convert
      in
      any forty (40) consecutive day period more than the greater of: (i) the Holder
      Pro Rata Amount of $1,916,667 or (ii) the Installment Volume Limitation, unless
      waived by the Company.

     

    (d) Other
      Provisions.

     

    (i) The
      Company shall at all times reserve and keep available out of its authorized
      Common Stock the full number of shares of Common Stock issuable upon conversion
      of all outstanding amounts under this Debenture; and within three (3) Business
      Days following the receipt by the Company of a Holder's notice that such minimum
      number of Underlying Shares is not so reserved, the Company shall promptly
      reserve a sufficient number of shares of Common Stock to comply with such
      requirement.

     

    (ii) All
      calculations under this Section 4 shall be rounded to the nearest $0.0001 or
      whole share.

     

    (iii) 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 and payment of interest on this
      Debenture, each as herein provided, free from preemptive rights or any other
      actual contingent purchase rights of persons other than the Holder, not less
      than such number of shares of the Common Stock as shall (subject to any
      additional requirements of the Company as to reservation of such shares set
      forth in this Debenture or in the Transaction Documents) be issuable (taking
      into account the adjustments and restrictions set forth herein) upon the
      conversion of the outstanding principal amount of this Debenture and payment
      of
      interest hereunder. The Company covenants that all shares of Common Stock that
      shall be so issuable shall, upon issue, be duly and validly authorized, issued
      and fully paid, nonassessable and, if the Underlying Shares Registration
      Statement has been declared effective under the Securities Act, registered
      for
      public sale in accordance with such Underlying Shares Registration
      Statement.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    (iv) Nothing
      herein shall limit a Holder's right to pursue actual damages or declare a
      default following the occurrence of an Event of Default pursuant to Section
      2
      herein for the Company 's failure to deliver certificates representing shares
      of
      Common Stock upon conversion 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, in each case without the need to post a bond or provide
      other
      security. 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. 

     

    (5) Adjustments
      to Conversion Price

     

    (a) Adjustment
      of Conversion Price upon Issuance of Common Stock.
      If the
      Company, at any time while this Debenture is outstanding, issues or sells,
      or in
      accordance with this Section 5(a) is deemed to have issued or sold, any shares
      of Common Stock, excluding shares of Common Stock deemed to have been issued
      or
      sold by the Company in connection with any Excluded Securities, for a
      consideration per share (the “New
      Issuance Price”)
      less
      than a price equal to the Conversion Price in effect immediately prior to such
      issue or sale (such price the "Applicable
      Price")
      (the
      foregoing a "Dilutive
      Issuance"),
      then
      immediately after such Dilutive Issuance the Conversion Price then in effect
      for
      any unconverted Debentures then outstanding shall be reduced to an amount equal
      to the New Issuance Price. For purposes of determining the adjusted Conversion
      Price under this Section 5(a), the following shall be applicable:

     

    (i) Issuance
      of Options.
      If the
      Company, at any time while this Debenture is outstanding, in any manner grants
      or sells any Options other than any Excluded Securities, and the lowest price
      per share for which one share of Common Stock is issuable upon the exercise
      of
      any such Option or upon conversion or exchange or exercise of any Convertible
      Securities issuable upon exercise of such Option is less than the Applicable
      Price, then such share of Common Stock shall be deemed to be outstanding and
      to
      have been issued and sold by the Company at the time of the granting or sale
      of
      such Option for such price per share. For purposes of this Section, the "lowest
      price per share for which one share of Common Stock is issuable upon the
      exercise of any such Option or upon conversion or exchange or exercise of any
      Convertible Securities issuable upon exercise of such Option" shall be equal
      to
      the sum of the lowest amounts of consideration (if any) received or receivable
      by the Company with respect to any one share of Common Stock upon granting
      or
      sale of the Option, upon exercise of the Option and upon conversion or exchange
      or exercise of any Convertible Security issuable upon exercise of such Option.
      No further adjustment of the Conversion Price shall be made upon the actual
      issuance of such share of Common Stock or of such Convertible Securities upon
      the exercise of such Options or upon the actual issuance of such Common Stock
      upon conversion or exchange or exercise of such Convertible
      Securities.

     

    (ii) Issuance
      of Convertible Securities.
      If the
      Company, at any time while this Debenture is outstanding, in any manner issues
      or sells any Convertible Securities, other than any Excluded Securities, and
      the
      lowest price per share for which one share of Common Stock is issuable upon
      such
      conversion or exchange or exercise thereof is less than the Applicable Price,
      then such share of Common Stock shall be deemed to be outstanding and to have
      been issued and sold by the Company at the time of the issuance or sale of
      such
      Convertible Securities for such price per share. For the purposes of this
      Section, the "lowest price per share for which one share of Common Stock is
      issuable upon such conversion or exchange or exercise" shall be equal to the
      sum
      of the lowest amounts of consideration (if any) received or receivable by the
      Company with respect to any one share of Common Stock upon the issuance or
      sale
      of the Convertible Security and upon the conversion or exchange or exercise
      of
      such Convertible Security. No further adjustment of the Conversion Price shall
      be made upon the actual issuance of such share of Common Stock upon conversion
      or exchange or exercise of such Convertible Securities, and if any such issue
      or
      sale of such Convertible Securities is made upon exercise of any Options for
      which adjustment of the Conversion Price had been or are to be made pursuant
      to
      other provisions of this Section, no further adjustment of the Conversion Price
      shall be made by reason of such issue or sale.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    (iii) Change
      in Option Price or Rate of Conversion.
      If the
      purchase price provided for in any Options, other than any Excluded Securities,
      the additional consideration, if any, payable upon the issue, conversion,
      exchange or exercise of any Convertible Securities other than any Excluded
      Securities, or the rate at which any Convertible Securities are convertible
      into
      or exchangeable or exercisable for Common Stock, other than any Excluded
      Securities, at any time while this Debenture is outstanding, changes at any
      time, the Conversion Price in effect at the time of such change shall be
      adjusted for any then unconverted Debentures to the Conversion Price which
      would
      have been in effect at such time had such Options or Convertible Securities
      provided for such changed purchase price, additional consideration or changed
      conversion rate, as the case may be, at the time initially granted, issued
      or
      sold. For purposes of this Section, if the terms of any Option or Convertible
      Security that was outstanding as of the Issuance Date are changed in the manner
      described in the immediately preceding sentence, then such Option or Convertible
      Security and the Common Stock deemed issuable upon exercise, conversion or
      exchange thereof shall be deemed to have been issued as of the date of such
      change. No adjustment shall be made if such adjustment would result in an
      increase of the Conversion Price then in effect.

     

    (iv) Calculation
      of Consideration Received.
      In
      case, at any time while this Debenture is outstanding, any Option is issued
      in
      connection with the issue or sale of other securities of the Company, other
      than
      any Excluded Securities, together comprising one integrated transaction in
      which
      no specific consideration is allocated to such Options by the parties thereto,
      the Options will be deemed to have been issued for the difference of (x) the
      aggregate fair market value of such Options and other securities issued or
      sold
      in such integrated transaction, less (y) the fair market value of the securities
      other than such Option, issued or sold in such transaction and the other
      securities issued or sold in such integrated transaction will be deemed to
      have
      been issued or sold for the balance of the consideration received by the
      Company. If any Common Stock, Options or Convertible Securities, other than
      any
      Excluded Securities, are issued or sold or deemed to have been issued or sold
      for cash, the consideration received therefore will be deemed to be the gross
      amount raised by the Company; provided, however, that such gross amount is
      not
      greater than 110% of the net amount received by the Company therefore. If any
      Common Stock, Options or Convertible Securities are issued or sold for a
      consideration other than cash, other than any Excluded Securities, the amount
      of
      the consideration other than cash received by the Company will be the fair
      value
      of such consideration, except where such consideration consists of securities,
      in which case the amount of consideration received by the Company will be the
      Closing Bid Price of such securities on the date of receipt. If any Common
      Stock, Options or Convertible Securities are issued to the owners of the
      non-surviving entity in connection with any merger in which the Company is
      the
      surviving entity, other than any Excluded Securities, the amount of
      consideration therefore will be deemed to be the fair value of such portion
      of
      the net assets and business of the non-surviving entity as is attributable
      to
      such Common Stock, Options or Convertible Securities, as the case may be. The
      fair value of any consideration other than cash or securities will be determined
      jointly by the Company and the Holder. If such parties are unable to reach
      agreement within ten (10) days after the occurrence of an event requiring
      valuation (the "Valuation
      Event"),
      the
      fair value of such consideration will be determined within five (5) Business
      Days after the tenth (10th)
      day
      following the Valuation Event by an independent, reputable appraiser jointly
      selected by the Company and the Holder. The determination of such appraiser
      shall be deemed binding upon all parties absent manifest error and the fees
      and
      expenses of such appraiser shall be borne by the Company.

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    (v) Record
      Date.
      If the
      Company takes a record of the holders of Common Stock for the purpose of
      entitling them (A) to receive a dividend or other distribution payable in Common
      Stock, Options or in Convertible Securities or (B) to subscribe for or purchase
      Common Stock, Options or Convertible Securities, then such record date will
      be
      deemed to be the date of the issue or sale of the Common Stock deemed to have
      been issued or sold upon the declaration of such dividend or the making of
      such
      other distribution or the date of the granting of such right of subscription
      or
      purchase, as the case may be.

     

    (b) Adjustment
      of Conversion Price upon Subdivision or Combination of Common
      Stock.
      If the
      Company, at any time while this Debenture is outstanding, shall (a) pay a
      stock dividend or otherwise make a distribution or distributions on shares
      of
      its Common Stock or any other equity or equity equivalent securities payable
      in
      shares of Common Stock, (b) subdivide outstanding shares of Common Stock into
      a
      larger number of shares, (c) combine (including by way of reverse stock split)
      outstanding shares of Common Stock into a smaller number of shares, or (d)
      issue
      by reclassification of shares of the Common Stock any shares of capital stock
      of
      the Company, then the 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 before such event and of which the
      denominator shall be the number of shares of Common Stock outstanding after
      such
      event. Any adjustment made pursuant to this Section shall become effective
      immediately after the record date for the determination of stockholders entitled
      to receive such dividend or distribution and shall become effective immediately
      after the effective date in the case of a subdivision, combination or
      re-classification.

     

    (c) Purchase
      Rights.
      If at
      any time the Company grants, issues or sells any Options, Convertible Securities
      or rights to purchase stock, warrants, securities or other property pro rata
      to
      the record holders of any class of Common Stock (the "Purchase
      Rights"),
      then
      the Holder will be entitled to acquire, upon the terms applicable to such
      Purchase Rights, the aggregate Purchase Rights which the Holder could have
      acquired if the Holder had held the number of shares of Common Stock acquirable
      upon complete conversion of this Debenture (without taking into account any
      limitations or restrictions on the convertibility of this Debenture) immediately
      before the date on which a record is taken for the grant, issuance or sale
      of
      such Purchase Rights, or, if no such record is taken, the date as of which
      the
      record holders of Common Stock are to be determined for the grant, issue or
      sale
      of such Purchase Rights.

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    (d) Other
      Events.
      If any
      event occurs of the type contemplated by the provisions of this Section 4 but
      not expressly provided for by such provisions (including, without limitation,
      the granting of stock appreciation rights, phantom stock rights or other rights
      with equity features), then the Company's Board of Directors will make an
      appropriate adjustment in the Conversion Price so as to protect the rights
      of
      the Holder under this Debenture; provided that no such adjustment will increase
      the Conversion Price as otherwise determined pursuant to this Section
      5.

     

    (e) Other
      Corporate Events.
      In
      addition to and not in substitution for any other rights hereunder, prior to
      the
      consummation of any Fundamental Transaction pursuant to which holders of shares
      of Common Stock are entitled to receive securities or other assets with respect
      to or in exchange for shares of Common Stock (a "Corporate
      Event"),
      the
      Company shall make appropriate provision to insure that the Holder will
      thereafter have the right to receive upon a conversion of this Debenture, at
      the
      Holder's option, (i) in addition to the shares of Common Stock receivable upon
      such conversion, such securities or other assets to which the Holder would
      have
      been entitled with respect to such shares of Common Stock had such shares of
      Common Stock been held by the Holder upon the consummation of such Corporate
      Event (without taking into account any limitations or restrictions on the
      convertibility of this Debenture) or (ii) in lieu of the shares of Common Stock
      otherwise receivable upon such conversion, such securities or other assets
      received by the holders of shares of Common Stock in connection with the
      consummation of such Corporate Event in such amounts as the Holder would have
      been entitled to receive had this Debenture initially been issued with
      conversion rights for the form of such consideration (as opposed to shares
      of
      Common Stock) at a conversion rate for such consideration commensurate with
      the
      Conversion Rate. Provision made pursuant to the preceding sentence shall be
      in a
      form and substance satisfactory to the Required Holders. The provisions of
      this
      Section shall apply similarly and equally to successive Corporate Events and
      shall be applied without regard to any limitations on the conversion or
      redemption of this Debenture.

     

    (f) Whenever
      the Conversion Price is adjusted pursuant to Section 5 hereof, the Company
      shall
      promptly mail to the Holder a notice setting forth the Conversion Price after
      such adjustment and setting forth a brief statement of the facts requiring
      such
      adjustment.

     

    (g) In
      case
      of any (1) merger or consolidation of the Company or any subsidiary of the
      Company with or into another Person, or (2) sale by the Company or any
      subsidiary of the Company of all or substantially all the assets of the Company
      in one or a series of related transactions, a Holder shall have the right to
      (A)
      exercise any rights under Section 2(b), (B) convert the aggregate amount of
      this
      Debenture then outstanding into the shares of stock and other securities, cash
      and property receivable upon or deemed to be held by holders of Common Stock
      following such merger, consolidation or sale, and such Holder shall be entitled
      upon such event or series of related events to receive such amount of
      securities, cash and property as the shares of Common Stock into which such
      aggregate principal amount of this Debenture could have been converted
      immediately prior to such merger, consolidation or sales would have been
      entitled, or (C) in the case of a merger or consolidation, require the surviving
      entity to issue to the Holder a convertible Debenture with a principal amount
      equal to the aggregate principal amount of this Debenture then held by such
      Holder, plus all accrued and unpaid interest and other amounts owing thereon,
      which such newly issued convertible Debenture shall have terms identical
      (including with respect to conversion) to the terms of this Debenture, and
      shall
      be entitled to all of the rights and privileges of the Holder of this Debenture
      set forth herein and the agreements pursuant to which this Debentures were
      issued. In the case of clause (C), the conversion price applicable for the
      newly
      issued shares of convertible preferred stock or convertible Debentures shall
      be
      based upon the amount of securities, cash and property that each share of Common
      Stock would receive in such transaction and the Conversion Price in effect
      immediately prior to the effectiveness or closing date for such transaction.
      The
      terms of any such merger, sale or consolidation shall include such terms so
      as
      to continue to give the Holder the right to receive the securities, cash and
      property set forth in this Section upon any conversion or redemption following
      such event. This provision shall similarly apply to successive such
      events.

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    (6) REISSUANCE
      OF THIS DEBENTURE.

     

    (a) Transfer.
      If this
      Debenture is to be transferred, the Holder shall surrender this Debenture to
      the
      Company, whereupon the Company will, subject to the satisfaction of the transfer
      provisions of the Securities Purchase Agreement, forthwith issue and deliver
      upon the order of the Holder a new Debenture (in accordance with Section 6(d)),
      registered in the name of the registered transferee or assignee, representing
      the outstanding Principal being transferred by the Holder and, if less then
      the
      entire outstanding Principal is being transferred, a new Debenture (in
      accordance with Section 6(d)) to the Holder representing the outstanding
      Principal not being transferred. The Holder and any assignee, by acceptance
      of
      this Debenture, acknowledge and agree that, by reason of the provisions of
      Section 4(b)(iii) following conversion or redemption of any portion of this
      Debenture, the outstanding Principal represented by this Debenture may be less
      than the Principal stated on the face of this Debenture.

     

    (b) Lost,
      Stolen or Mutilated Debenture.
      Upon
      receipt by the Company of evidence reasonably satisfactory to the Company of
      the
      loss, theft, destruction or mutilation of this Debenture, and, in the case
      of
      loss, theft or destruction, of any indemnification undertaking by the Holder
      to
      the Company in customary form and, in the case of mutilation, upon surrender
      and
      cancellation of this Debenture, the Company shall execute and deliver to the
      Holder a new Debenture (in accordance with Section 6(d)) representing the
      outstanding Principal.

     

    (c) Debenture
      Exchangeable for Different Denominations.
      This
      Debenture is exchangeable, upon the surrender hereof by the Holder at the
      principal office of the Company, for a new Debenture or Debentures (in
      accordance with Section 6(d)) representing in the aggregate the outstanding
      Principal of this Debenture, and each such new Debenture will represent such
      portion of such outstanding Principal as is designated by the Holder at the
      time
      of such surrender.

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

     

    (d) Issuance
      of New Debentures.
      Whenever the Company is required to issue a new Debenture pursuant to the terms
      of this Debenture, such new Debenture (i) shall be of like tenor with this
      Debenture, (ii) shall represent, as indicated on the face of such new Debenture,
      the Principal remaining outstanding (or in the case of a new Debenture being
      issued pursuant to Section 6(a) or Section 6(c), the Principal designated by
      the
      Holder which, when added to the principal represented by the other new
      Debentures issued in connection with such issuance, does not exceed the
      Principal remaining outstanding under this Debenture immediately prior to such
      issuance of new Debentures), (iii) shall have an issuance date, as indicated
      on
      the face of such new Debenture, which is the same as the Issuance Date of this
      Debenture, (iv) shall have the same rights and conditions as this Debenture,
      and
      (v) shall represent accrued and unpaid Interest from the Issuance
      Date.

     

    (7) NOTICES. Any
      notices, consents, waivers or other communications required or permitted to
      be
      given under the terms hereof must be in writing and will be deemed to have
      been
      delivered: (i) upon receipt, when delivered personally; (ii) upon receipt,
      when
      sent by facsimile (provided confirmation of transmission is mechanically or
      electronically generated and kept on file by the sending party); or (iii) one
      (1) Trading Day after deposit with a nationally recognized overnight delivery
      service, in each case properly addressed to the party to receive the same.
      The
      addresses and facsimile numbers for such communications shall be:

    

    
      	
              If
                to the Company, to:

            	
              Handheld
                Entertainment, Inc.

            
	 	
              539
                Bryant Street, Suite 403

            
	 	
              San
                Francisco, CA 94107

            
	 	
              Attention:
                Jeffery Oscodar

            
	 	
              Telephone:
                 (415)
                495-6470

            
	 	
              Facsimile:  
                 (415)
                495-7708

            
	 	 
	
              With
                a copy to: 

            	
              Haynes
                and Boone, LLP

            
	 	
              153
                East 53rd
                Street

            
	 	
              New
                York, NY 10022

            
	 	
              Attention:
                Harvey J. Kesner, Esq.

            
	 	
              Telephone:
                 (212)
                659-7300

            
	 	
              Facsimile:   
                (212)
                918-8989

            

    

    

    
      	
              If
                to the Holder:

            	
              YA
                Global Investments, LP

            
	 	
              101
                Hudson Street, Suite 3700

            
	 	
              Jersey
                City, NJ 07303

            
	 	
              Attention: Mark
                Angelo

            
	 	
              Telephone: (201)
                985-8300

            
	 	 
	
              With
                a copy to:

            	
              David
                Gonzalez, Esq. 

            
	 	
              101
                Hudson Street - Suite 3700

            
	 	
              Jersey
                City, NJ 07302

            
	 	
              Telephone:
                 (201)
                985-8300

            
	 	
              Facsimile:   
                (201)
                985-8266

            

    

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

     

    or
      at
      such other address and/or facsimile number and/or to the attention of such
      other
      person as the recipient party has specified by written notice given to each
      other party three (3) Business Days prior to the effectiveness of such change.
      Written confirmation of receipt (i) given by the recipient of such notice,
      consent, waiver or other communication, (ii) mechanically or electronically
      generated by the sender's facsimile machine containing the time, date, recipient
      facsimile number and an image of the first page of such transmission or (iii)
      provided by a nationally recognized overnight delivery service, shall be
      rebuttable evidence of personal service, receipt by facsimile or receipt from
      a
      nationally recognized overnight delivery service in accordance with clause
      (i),
      (ii) or (iii) above, respectively.

     

    (8) Except
      as
      expressly provided herein, no provision of this Debenture shall alter or impair
      the obligations of the Company, which are absolute and unconditional, to pay
      the
      principal of, interest and other charges (if any) on, this Debenture at the
      time, place, and rate, and in the coin or currency, herein prescribed. This
      Debenture is a direct obligation of the Company. As long as this Debenture
      is
      outstanding, the Company shall not and shall cause their subsidiaries not to,
      without the consent of the Holder, (i) amend its certificate of incorporation,
      bylaws or other charter documents so as to directly adversely affect any rights
      of the Holder to convert the Debenture into the number of shares of Common
      Stock
      entitled under this Debenture at the Applicable Price; (ii) repay, repurchase
      or
      offer to repay, repurchase or otherwise acquire more than 1,500,000 shares
      of
      its Common Stock or other equity securities other than as to the Underlying
      Shares to the extent permitted or required under the Transaction Documents;
      or
      (iii) enter into any agreement with respect to any of the foregoing.

     

    (9) This
      Debenture shall not entitle the Holder to any of the rights of a stockholder
      of
      the Company, including without limitation, the right to vote, to receive
      dividends and other distributions, or to receive any notice of, or to attend,
      meetings of stockholders or any other proceedings of the Company, unless and
      to
      the extent converted into shares of Common Stock in accordance with the terms
      hereof.

     

    (10) No
      indebtedness of the Company is senior to this Debenture in right of payment,
      whether with respect to interest, damages or upon liquidation or dissolution
      or
      otherwise (other than liens which arise as a matter of law and for equipment
      and
      similar leases and financing arrangements with respect to specific property,
      plant or equipment financed or leased (the “Permitted
      Liens”)).
      Without the Holder’s consent, the Company will not and will not permit any of
      their subsidiaries to, directly or indirectly, enter into, create, incur, assume
      or suffer to exist any indebtedness 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 there from that is senior in any respect to the
      obligations of the Company under this Debenture other than Permitted
      Liens.

     

    (11) This
      Debenture shall be governed by and construed in accordance with the laws of
      the
      State of New York without giving effect to conflicts of laws thereof. Each
      of
      the parties consents to the jurisdiction of the Superior Courts of the State
      of
      New Jersey sitting in Hudson County, New Jersey and the U.S. District Court
      for the District of New Jersey sitting in Newark, New Jersey in connection
      with
      any dispute arising under this Debenture and hereby waives, to the maximum
      extent permitted by law, any objection, including any objection based on forum
      non conveniens to the bringing of any such proceeding in such jurisdictions.
      

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

     

    (12) If
      the
      Company fails to strictly comply with the terms of this Debenture, then the
      Company shall reimburse the Holder promptly for all fees, costs and expenses,
      including, without limitation, reasonable attorneys’ fees and expenses incurred
      by the Holder in any action in connection with this Debenture, including,
      without limitation, those incurred: (i) during any workout, attempted workout,
      and/or in connection with the rendering of legal advice as to the Holder’s
      rights, remedies and obligations, (ii) collecting any sums which become due
      to
      the Holder, (iii) defending or prosecuting any proceeding or any counterclaim
      to
      any proceeding or appeal; or (iv) the protection, preservation or enforcement
      of
      any rights or remedies of the Holder.

     

    (13) Any
      waiver by 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
      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. 

     

    (14) No
      provision of this Agreement may be waived or amended except in a written
      instrument signed by the Company and the Required Percentage. 

     

    (15) 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 shall violate 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.

     

    (16) 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.

     

    (17) THE
      PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT ANY
      OF
      THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON
      OR
      ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION
      DOCUMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL
      OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT
      FOR
      THE PARTIES’ ACCEPTANCE OF THIS AGREEMENT.

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    (18) CERTAIN
      DEFINITIONS  For
      purposes of this Debenture, the following terms shall have the following
      meanings:

     

    (a) “Approved
      Stock Plan”
means
      a
      stock option plan that has been approved by the Board of Directors of the
      Company, pursuant to which the Company’s securities may be issued only to any
      person eligible for award under such plan.

     

    (b) "Bloomberg"
      means
      Bloomberg Financial Markets.

     

    (c) “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 are
      authorized or required by law or other government action to close.

     

    (d) The
“Cash
      Flow Test” shall be satisfied as of any applicable date of determination if the
      Company and its subsidiaries, on a consolidated basis, shall have generated
      cash
      flow from operations for the most recent rolling 12-month period for which
      financial statements are available, equal to or greater than 1.1 times the
      anticipated benchmarks for cash flow from operations for such period, as
      reflected in Exhibit
      II.

     

    (e) “Change
      of Control Transaction”
means
      the occurrence of (a) 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 fifty percent (50%) of the voting securities of the Company (except
      that the acquisition of voting securities by the Holder or any other current
      holder of convertible securities of the Company shall not constitute a Change
      of
      Control Transaction for purposes hereof) by a person not an owner of the capital
      stock of the Company prior to the date of issuance of this Debenture, or their
      affiliates or immediate family members, or any trust for the benefit of such
      persons, (b) a replacement at one time or over time of more than one-half of
      the
      members of the board of directors of the Company 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), (c) the merger, consolidation or sale of fifty percent (50%) or more
      of
      the assets of the Company or any subsidiary of the Company in one or a series
      of
      related transactions with or into another entity, or (d) 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 (a), (b) or (c).

     

    (f) “Closing
      Bid Price”
means
      the price per share in the last reported trade of the Common Stock on a Primary
      Market or on the exchange which the Common Stock is then listed as quoted by
      Bloomberg.

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

     

    (g) “Commission”
means
      the Securities and Exchange Commission.

     

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

     

    (i) "Company
      Conversion Price"
      means,
      the lower of (i) the applicable Conversion Price and (ii) that price which
      shall
      be computed as ninety percent (90%) of the lowest Volume Weighted Average Price
      of the Common Stock during the ten (10) consecutive Trading Days immediately
      preceding the applicable Installment Date. All such determinations to be
      appropriately adjusted for any stock split, stock dividend, stock combination
      or
      other similar transaction.

     

    (j) “Convertible
      Securities”
means
      any
      stock
      or securities (other than Options) directly or indirectly convertible into
      or
      exercisable or exchangeable for Common Stock.

     

    (k) “Default
      Conversion Price”
means
      the lesser of (a) Conversion Price, subject to adjustment as provided herein,
      or
      (b) seventy five percent (75%) of the lowest Volume Weighted Average Price
      during the ten (10) Trading Days immediately preceding the Conversion Date.
      All
      such determinations to be appropriately adjusted for any stock split, stock
      dividend, stock combination or other similar transaction.

     

    (l) "Equity
      Conditions"
      means
      that each of the following conditions is satisfied: (i) on each day during
      the
      period beginning two (2) weeks prior to the applicable date of determination
      and
      ending on and including the applicable date of determination (the "Equity
      Conditions Measuring Period"), either (x) the Underlying Shares Registration
      Statement filed pursuant to the Registration Rights Agreement shall be effective
      and available for the resale of all applicable shares of Common Stock to be
      issued in connection with the event requiring determination or (y) all
      applicable shares of Common Stock to be issued in connection with the event
      requiring determination shall be eligible for sale without restriction and
      without the need for registration under any applicable federal or state
      securities laws; (ii) on each day during the Equity Conditions Measuring Period,
      the Common Stock is designated for quotation on the PrimaryMarket and shall
      not
      have been suspended from trading on such exchange or market nor shall delisting
      or suspension by such exchange or market been threatened or pending in writing
      by such exchange or market; (iii) during the Equity Conditions Measuring Period,
      the Company shall have delivered all shares of Common Stock due upon conversion
      of the Debentures to the Holder on a timely basis as set forth in Section
      4(b)(ii) hereof; (iv) any applicable shares of Common Stock to be issued in
      connection with the event requiring determination may be issued in full without
      violating Section 4(c) hereof and the rules or regulations of the Primary
      Market; (v) during the Equity Conditions Measuring Period, there shall not
      have
      occurred and be continuing, unless waived by Holder, either (A) an Event of
      Default or (B) an event that with the passage of time or giving of notice would
      constitute an Event of Default; and (vii) the Company shall have no knowledge
      of
      any fact that would cause (x) the Registration Statements required pursuant
      to
      the Registration Rights Agreement not to be effective and available for the
      resale of all applicable shares of Common Stock to be issued in connection
      with
      the event requiring determination or (y) any applicable shares of Common Stock
      to be issued in connection with the event requiring determination not to be
      eligible for sale without restriction and without the need for registration
      under any applicable federal or state securities laws.

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

     

    (m) "Equity
      Conditions Failure"
      means
      that on any applicable date the Equity Conditions have not been satisfied (or
      waived in writing by the Holder).

     

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

     

    (o) “Excluded
      Securities”
means,
      (a) shares issued or deemed to have been issued by the Company pursuant to
      an
      Approved Stock Plan (b) shares of Common Stock issued or deemed to be issued
      by
      the Company upon the conversion, exchange or exercise of any right, option,
      obligation or security outstanding on the date prior to date of the Securities
      Purchase Agreement, provided that the maturity date, price or duration of such
      right, option, obligation or security is not amended or otherwise modified
      on or
      after the date of the Securities Purchase Agreement, and provided that the
      conversion price, exchange price, exercise price or other purchase price is
      not
      reduced, adjusted or otherwise modified and the number of shares of Common
      Stock
      issued or issuable is not increased (other than by operation of, or in
      accordance with, the relevant governing documents) on or after the date of
      the
      Securities Purchase Agreement, (c) shares of Common Stock issued or deemed
      to be
      issued in connection with any acquisition by the Company, whether through an
      acquisition of stock or a merger of any business, assets or technologies,
      leasing arrangement or any other transaction the primary purpose of which is
      not
      to raise equity capital, including, without limitation, pursuant to that certain
      Asset Purchase Agreement, dated August 1, 2007, by and among the Company, EBW
      Acquisition, Inc. and eBaum’s World, Inc. or any related agreement, (d) the
      shares of Common Stock issued or deemed to be issued by the Company upon
      issuance, conversion or exercise of this Debenture, the Warrants or any
      Securities issued in connection therewith, (e) shares of Common Stock issued
      or
      deemed issued upon exercise of warrants issued in connection with the Company’s
      issuance of $1.425 million aggregate principal amount of 8% notes due 2008,
      and
      (f) shares of Common Stock issued or deemed issued by the Company upon the
      conversion, exchange, or exercise of the convertible debentures and warrants
      of
      the Company issued for an aggregate purchase price of up to $7.425 million
      pursuant to an Additional Securities Purchase Agreement dated as of October
      31,
      2007, among the Company and the Buyers identified therein, provided that such
      convertible debentures and warrants have conversion and exercise rights no
      more
      favorable to such holder than the Convertible Debentures and the Warrants and
      that the conversion price, exchange price, exercise price or other purchase
      price is not reduced, adjusted or otherwise modified and the number of shares
      of
      Common Stock issued or issuable is not increased (other than by operation of,
      or
      in accordance with, the relevant governing documents) at any time after the
      date
      the security is originally issued.

     

    (p) "Holder
      Pro Rata Amount"
      means a
      fraction (i) the numerator of which is the Original Principal Amount of this
      Debenture on the Issuance Date and (ii) the denominator of which is
      $23,000,000.

     

    (q) "Installment
      Amount"
      means
      with respect to any Installment Date, the lesser of (A) the product of (i)
      $638,889, multiplied by (ii) Holder Pro Rata Amount and (B) the Principal amount
      under this Debenture as of such Installment Date, as any such Installment Amount
      may be reduced pursuant to the terms of this Debenture, whether upon conversion,
      redemption or otherwise, together with, in each case the sum of any accrued
      and
      unpaid Interest with respect to such Principal amount. The Installment Amount
      on
      any Installment Date shall be reduced (but not to less than zero) by the
      Principal Amount of any conversions made by the Holder of this Debenture prior
      to such Installment Date and after the immediately preceding Installment Date,
      unless the Company elects not to make such reduction. In the event the Holder
      shall sell or otherwise transfer any portion of this Debenture, the transferee
      shall be allocated a pro rata portion of the each unpaid Installment Amount
      hereunder.

     

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

     

    (r) "Installment
      Date"
      means
      March 3, 2008, and the first Business Day of each successive calendar month
      thereafter. 

     

    (s) "Installment
      Volume Limitation"
      means
      25% of the aggregate dollar trading volume of the Common Stock on the Primary
      Market over the forty (40) consecutive Trading Day period ending on the Trading
      Day immediately preceding the applicable date of determination. For the purposes
      of this section the term “dollar trading volume” for any Trading Day shall be
      determined by multiplying the VWAP by the volume as reported on Bloomberg for
      such Trading Day.

     

    (t) Options”
      means
      any
      rights, warrants or options to subscribe for or purchase shares of Common Stock
      or Convertible Securities.

     

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

     

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

     

    (w) “Redemption
      Premium”
means
      with respect to any payments of Principal to be made hereunder (whether on
      an
      Installment Date, Maturity Date, or otherwise), an amount equal to ten percent
      (10%) of the Principal amount due. 

     

    (x) “Required
      Percentage”
means
      fifty-one (51%) percent of the outstanding principal amount of Debentures at
      the
      time of taking any action.

     

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

     

    (z) “Securities
      Purchase Agreement”
means
      the Securities Purchase Agreement dated August 2, 2007 by and among the Company
      and YA Global Investments, L.P. 

     

    (aa) “Trading
      Day”
means
      a
      day on which the shares of Common Stock are quoted on the OTCBB or quoted or
      traded on such Primary Market on which the shares of Common Stock are then
      quoted or listed; provided, that in the event that the shares of Common Stock
      are not listed or quoted, then Trading Day shall mean a Business
      Day.

     

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

     

    (bb) “Transaction
      Documents”
means
      the Securities Purchase Agreement or any other agreement delivered in connection
      with the Securities Purchase Agreement, including, without limitation, the
      Security Documents, the Irrevocable Transfer Agent Instructions, and the
      Registration Rights Agreement.

     

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

     

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

     

    (ee) “Underlying
      Shares Volume Limitation”
shall
      be determined in the manner set forth under “Reservation of Shares” and shall
      mean the “Share Reserve,” as set forth in Section 4(e) of the Securities
      Purchase Agreement.

     

    (ff) "Volume
      Weighted Average Price"
      means,
      for any security as of any date, the daily dollar volume-weighted average price
      for such security on the Primary Market as reported by Bloomberg through its
      “Historical Prices - Px Table with Average Daily Volume” functions, or, if no
      dollar volume-weighted average price is reported for such security by Bloomberg,
      the average of the highest closing bid price and the lowest closing ask price
      of
      any of the market makers for such security as reported in the "pink sheets"
      by
      Pink Sheets LLC. 

     

    (gg) "Warrants"
      has the
      meaning ascribed to such term in the Securities Purchase Agreement, and shall
      include all warrants issued in exchange therefore or replacement
      thereof.

     

    [Signature
      Page Follows]

     

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

     

    IN
      WITNESS WHEREOF,
      the
      Company has caused this Secured Convertible Debenture to be duly executed by
      a
      duly authorized officer as of the date set forth above.

    
      	 	 	 
	 	
              COMPANY:
                
                HANDHELD
                  ENTERTAINMENT, INC.

              

            
	 
 	 
 	 
 
	
            	By:  	/s/
              William J. Bush
	 	
              

              Name: William
                J. Bush 
                Title: Chief
                  Financial Officer

              

            

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    EXHIBIT
      I

    CONVERSION
      NOTICE

     

    (To
      be executed by the Holder in order to Convert the
      Debenture)

     

    
      	
              TO:
                

            

    

    

    The
      undersigned hereby irrevocably elects to convert
      $____________________________
      of the
      principal amount of Debenture No. ZVUE-1-1 into Shares of Common Stock of
HANDHELD
      ENTERTAINMENT, INC.,
      according to the conditions stated therein, as of the Conversion Date written
      below.

     

    
      	
              Conversion
                Date:

            	 	_______________________________________ 
	
              Conversion
                Amount to be converted:

            	 	
              $______________________________________

            
	
              Conversion
                Price:

            	 	
              $______________________________________

            
	
              Number
                of shares of Common Stock to be issued:

            	 	_______________________________________
	
              Amount
                of Debenture Unconverted:

            	 	
              $______________________________________

            
	 	 	 
	
              Please
                issue the shares of Common Stock in the following name and to the
                following address:

            
	
              Issue
                to:

            	 	 
	 	 	 
	
              Authorized
                Signature:

            	 	_______________________________________
	
              Name:

            	 	_______________________________________
	
              Title:

            	 	_______________________________________
	
              Broker
                DTC Participant Code:

            	 	 
	
              Account
                Number:

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