Document:

EXHIBIT
      10.19

     

    INDEMNIFICATION
      AGREEMENT

     

    This
      Indemnification Agreement, dated as of April 28, 2006, is made by and between
      VirtualScopics, Inc., a Delaware corporation (the “Corporation”) and
Robert
      Klimasewski
      (the
“Indemnitee”).

     

    RECITALS

     

    A. The
      Corporation recognizes that competent and experienced persons are increasingly
      reluctant to serve or to continue to serve as directors or officers of
      corporations unless they are protected by comprehensive liability insurance
      or
      indemnification, or both, due to increased exposure to litigation costs and
      risks resulting from their service to such corporations, and due to the fact
      that the exposure frequently bears no reasonable relationship to the
      compensation of such directors and officers;

     

    B. The
      statutes and judicial decisions regarding the duties of directors and officers
      are often difficult to apply, ambiguous, or conflicting, and therefore fail
      to
      provide such directors and officers with adequate, reliable knowledge of legal
      risks to which they are exposed or information regarding the proper course
      of
      action to take;

     

    C. The
      Corporation and Indemnitee recognize that plaintiffs often seek damages in
      such
      large amounts and the costs of litigation may be so enormous (whether or not
      the
      case is meritorious), that the defense and/or settlement of such litigation
      is
      often beyond the personal resources of directors and officers;

     

    D. The
      Corporation believes that it is unfair for its directors and officers to assume
      the risk of huge judgments and other expenses which may occur in cases in which
      the director or officer received no personal profit and in cases where the
      director or officer was not culpable;

     

    E. The
      Corporation, after reasonable investigation, has determined that the liability
      insurance coverage presently available to the Corporation may be inadequate
      in
      certain circumstances to cover all possible exposure for which Indemnitee should
      be protected. The Corporation believes that the interests of the Corporation
      and
      its stockholders would best be served by a combination of such insurance and
      the
      indemnification by the Corporation of the directors and officers of the
      Corporation;

     

    F. The
      Corporation’s Bylaws require the Corporation to indemnify its directors and
      officers to the fullest extent permitted by the Delaware General Corporation
      Law
      (the “DGCL”). The Bylaws expressly provide that the indemnification provisions
      set forth therein are not exclusive, and contemplate that contracts may be
      entered into between the Corporation and its directors and officers with respect
      to indemnification;

     

    G. Section
      145 of the DGCL (“Section 145”), under which the Corporation is organized,
      empowers the Corporation to indemnify its officers, directors, employees and
      agents by agreement and to indemnify persons who serve, at the request of the
      Corporation, as the directors, officers, employees or agents of other
      corporations or enterprises, and expressly provides that the indemnification
      provided by Section 145 is not exclusive;

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    H. Section
      102(b)(7) of the DGCL allows a corporation to include in its certificate of
      incorporation a provision limiting or eliminating the personal liability of
      a
      director for monetary damages in respect of claims by shareholders and
      corporations for breach of certain fiduciary duties, and the Corporation has
      so
      provided in its Certificate of Incorporation that each Director shall be
      exculpated from such liability to the maximum extent permitted by
      law;

     

    I. The
      Board
      of Directors has determined that contractual indemnification as set forth herein
      is not only reasonable and prudent but also promotes the best interests of
      the
      Corporation and its stockholders;

     

    J. The
      Corporation desires and has requested Indemnitee to serve or continue to serve
      as a director or officer of the Corporation free from undue concern for
      unwarranted claims for damages arising out of or related to such services to
      the
      Corporation; and

     

    K. Indemnitee
      is willing to serve, continue to serve or to provide additional service for
      or
      on behalf of the Corporation on the condition that he is furnished the indemnity
      provided for herein.

     

    AGREEMENT

    

    NOW,
      THEREFORE, in consideration of the mutual covenants and agreements set forth
      below, and other good and valuable consideration, the receipt and adequacy
      of
      which are hereby acknowledged, the parties hereto, intending to be legally
      bound, hereby agree as follows:

     

    Section
      1. Generally.
      

     

    To
      the
      fullest extent permitted by the laws of the State of Delaware:

     

    (a)
      The
      Corporation shall indemnify Indemnitee if Indemnitee was or is a party or is
      threatened to be made a party to any threatened, pending or completed action,
      suit or proceeding, whether civil, criminal, administrative or investigative,
      by
      reason of the fact that Indemnitee is or was or has agreed to serve at the
      request of the Corporation as a director, officer, employee or agent of the
      Corporation, or while serving as a director or officer of the Corporation,
      is or
      was serving or has agreed to serve at the request of the Corporation as a
      director, officer, employee or agent (which, for purposes hereof, shall include
      a trustee, partner or manager or similar capacity) of another corporation,
      partnership, joint venture, trust, employee benefit plan or other enterprise,
      or
      by reason of any action alleged to have been taken or omitted in such capacity.
      For the avoidance of doubt, the foregoing indemnification obligation includes,
      without limitation, claims for monetary damages against Indemnitee in respect
      of
      an alleged breach of fiduciary duties, to the fullest extent permitted under
      Section 102(b)(7) of the DGCL as in existence on the date hereof.

     

    (b)
      The
      indemnification provided by this Section 1 shall be from and against expenses
      (including attorneys’ fees), judgments, fines and amounts paid in settlement
      actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in
      connection with such action, suit or proceeding and any appeal therefrom, but
      shall only be provided if Indemnitee acted in good faith and in a manner
      Indemnitee reasonably believed to be in or not opposed to the best interests
      of
      the Corporation, and, with respect to any criminal action, suit or proceeding,
      had no reasonable cause to believe Indemnitee’s conduct was unlawful.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    (c)
      Notwithstanding the foregoing provisions of this Section 1, in the case of
      any
      threatened, pending or completed action or suit by or in the right of the
      Corporation to procure a judgment in its favor by reason of the fact that
      Indemnitee is or was a director, officer, employee or agent of the Corporation,
      or while serving as a director or officer of the Corporation, is or was serving
      or has agreed to serve at the request of the Corporation as a director, officer,
      employee or agent of another corporation, partnership, joint venture, trust,
      employee benefit plan or other enterprise, no indemnification shall be made
      in
      respect of any claim, issue or matter as to which Indemnitee shall have been
      adjudged to be liable to the Corporation unless, and only to the extent that,
      the Delaware Court of Chancery or the court in which such action or suit was
      brought shall determine upon application that, despite the adjudication of
      liability but in view of all the circumstances of the case, Indemnitee is fairly
      and reasonably entitled to indemnity for such expenses which the Delaware Court
      of Chancery or such other court shall deem proper. 

     

    (d)
      The
      termination of any action, suit or proceeding by judgment, order, settlement,
      conviction, or upon a plea of nolo contendere or its equivalent, shall not,
      of
      itself, create a presumption that Indemnitee did not act in good faith and
      in a
      manner which Indemnitee reasonably believed to be in or not opposed to the
      best
      interests of the Corporation, and, with respect to any criminal action or
      proceeding, had reasonable cause to believe that Indemnitee’s conduct was
      unlawful. 

     

    Section
      2. Successful
      Defense; Partial Indemnification.
      To the
      extent that Indemnitee has been successful on the merits or otherwise in defense
      of any action, suit or proceeding referred to in Section 1 hereof or in defense
      of any claim, issue or matter therein, Indemnitee shall be indemnified against
      expenses (including attorneys’ fees) actually and reasonably incurred in
      connection therewith. For purposes of this Agreement and without
      limiting the foregoing, if any action, suit or proceeding is disposed of, on
      the
      merits or otherwise (including a disposition without prejudice), without (i)
      the
      disposition being adverse to Indemnitee, (ii) an adjudication that Indemnitee
      was liable to the Corporation, (iii) a plea of guilty or nolo contendere by
      Indemnitee, (iv) an adjudication that Indemnitee did not act in good faith
      and
      in a manner Indemnitee reasonably believed to be in or not opposed to the best
      interests of the Corporation, and (v) with respect to any criminal proceeding,
      an adjudication that Indemnitee had reasonable cause to believe Indemnitee’s
      conduct was unlawful, Indemnitee shall be considered for the purposes hereof
      to
      have been wholly successful with respect thereto.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    If
      Indemnitee is entitled under any provision of this Agreement to indemnification
      by the Corporation for some or a portion of the expenses (including attorneys’
fees), judgments, fines or amounts paid in settlement actually and reasonably
      incurred by Indemnitee or on Indemnitee’s behalf in connection with any action,
      suit, proceeding or investigation, or in defense of any claim, issue or matter
      therein, and any appeal therefrom but not, however, for the total amount
      thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion
      of such expenses (including attorneys’ fees), judgments, fines or amounts paid
      in settlement to which Indemnitee is entitled.

     

    Section
      3. Determination
      That Indemnification Is Proper.
      Any
      indemnification hereunder shall (unless otherwise ordered by a court) be made
      by
      the Corporation unless a determination is made that indemnification of such
      person is not proper in the circumstances because he or she has not met the
      applicable standard of conduct set forth in Section 1(b) hereof. Any such
      determination shall be made (i) by a majority vote of the directors who are
      not
      parties to the action, suit or proceeding in question (“disinterested
      directors”), even if less than a quorum, (ii) by a
      majority vote of a committee of disinterested directors designated by majority
      vote of disinterested directors, even if less than a quorum, (iii) by a majority
      vote of a quorum of the outstanding shares of stock of all classes entitled
      to
      vote on the matter, voting as a single class, which quorum shall consist of
      stockholders who are not at that time parties to the action, suit or proceeding
      in question, (iv) by independent legal counsel, or (v) by a court of competent
      jurisdiction.

     

    Section
      4. Advance
      Payment of Expenses; Notification and Defense of Claim.
      

     

    (a)
      Expenses (including attorneys’ fees) incurred by Indemnitee in defending a
      threatened or pending civil, criminal, administrative or investigative action,
      suit or proceeding, or in connection with an enforcement action pursuant to
      Section 5(b), shall be paid by the Corporation in advance of the final
      disposition of such action, suit or proceeding within thirty (30) days after
      receipt by the Corporation of (i) a statement or statements from Indemnitee
      requesting such advance or advances from time to time, and (ii) an undertaking
      by or on behalf of Indemnitee to repay such amount or amounts, only if, and
      to
      the extent that, it shall ultimately be determined that Indemnitee is not
      entitled to be indemnified by the Corporation as authorized by this Agreement
      or
      otherwise. Such undertaking shall be accepted without reference to the financial
      ability of Indemnitee to make such repayment. Advances shall be unsecured and
      interest-free.

     

    (b)
      Promptly after receipt by Indemnitee of notice of the commencement of any
      action, suit or proceeding, Indemnitee shall, if a claim thereof is to be made
      against the Corporation hereunder, notify the Corporation of the commencement
      thereof. The failure to promptly notify the Corporation of the commencement
      of
      the action, suit or proceeding, or Indemnitee’s request for indemnification,
      will not relieve the Corporation from any liability that it may have to
      Indemnitee hereunder, except to the extent the Corporation is prejudiced in
      its
      defense of such action, suit or proceeding as a result of such
      failure.

     

    (c)
      In
      the event the Corporation shall be obligated to pay the expenses of Indemnitee
      with respect to an action, suit or proceeding, as provided in this Agreement,
      the Corporation, if appropriate, shall be entitled to assume the defense of
      such
      action, suit or proceeding, with counsel reasonably acceptable to Indemnitee,
      upon the delivery to Indemnitee of written notice of its election to do so.
      After delivery of such notice, approval of such counsel by Indemnitee and the
      retention of such counsel by the Corporation, the Corporation will not be liable
      to Indemnitee under this Agreement for any fees of counsel subsequently incurred
      by Indemnitee with respect to the same action, suit or proceeding, provided
      that
      (1) Indemnitee shall have the right to employ Indemnitee’s own counsel in such
      action, suit or proceeding at Indemnitee’s expense and (2) if (i) the employment
      of counsel by Indemnitee has been previously authorized in writing by the
      Corporation, (ii) counsel to the Corporation or Indemnitee shall have reasonably
      concluded that there may be a conflict of interest or position, or reasonably
      believes that a conflict is likely to arise, on any significant issue between
      the Corporation and Indemnitee in the conduct of any such defense or (iii)
      the
      Corporation shall not, in fact, have employed counsel to assume the defense
      of
      such action, suit or proceeding, then the fees and expenses of Indemnitee’s
      counsel shall be at the expense of the Corporation, except as otherwise
      expressly provided by this Agreement. The Corporation shall not be entitled,
      without the consent of Indemnitee, to assume the defense of any claim brought
      by
      or in the right of the Corporation or as to which counsel for the Corporation
      or
      Indemnitee shall have reasonably made the conclusion provided for in clause
      (ii)
      above.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    (d)
      Notwithstanding any other provision of this Agreement to the contrary, to the
      extent that Indemnitee is, by reason of Indemnitee’s corporate status with
      respect to the Corporation or any corporation, partnership, joint venture,
      trust, employee benefit plan or other enterprise which Indemnitee is or was
      serving or has agreed to serve at the request of the Corporation, a witness
      or
      otherwise participates in any action, suit or proceeding at a time when
      Indemnitee is not a party in the action, suit or proceeding, the Corporation
      shall indemnify Indemnitee against all expenses (including attorneys’ fees)
      actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in
      connection therewith.

     

    Section
      5. Procedure
      for Indemnification.

     

    (a)
      To
      obtain indemnification, Indemnitee shall promptly submit to the Corporation
      a
      written request, including therein or therewith such documentation and
      information as is reasonably available to Indemnitee and is reasonably necessary
      to determine whether and to what extent Indemnitee is entitled to
      indemnification. The Corporation shall, promptly upon receipt of such a request
      for indemnification, advise the Board of Directors in writing that Indemnitee
      has requested indemnification.

     

    (b)
      The
      Corporation’s determination whether to grant Indemnitee’s indemnification
      request shall be made promptly, and in any event within 60 days following
      receipt of a request for indemnification pursuant to Section 5(a). The right
      to
      indemnification as granted by Section 1 of this Agreement shall be enforceable
      by Indemnitee in any court of competent jurisdiction if the Corporation denies
      such request, in whole or in part, or fails to respond within such 60-day
      period. It shall be a defense to any such action (other than an action brought
      to enforce a claim for the advance of costs, charges and expenses under Section
      4 hereof where the required undertaking, if any, has been received by the
      Corporation) that Indemnitee has not met the standard of conduct set forth
      in
      Section 1 hereof, but the burden of proving such defense by clear and convincing
      evidence shall be on the Corporation. Neither the failure of the Corporation
      (including its Board of Directors or one of its committees, its independent
      legal counsel, and its stockholders) to have made a determination prior to
      the
      commencement of such action that indemnification of Indemnitee is proper in
      the
      circumstances because Indemnitee has met the applicable standard of conduct
      set
      forth in Section 1 hereof, nor the fact that there has been an actual
      determination by the Corporation (including its Board of Directors or one of
      its
      committees, its independent legal counsel, and its stockholders) that Indemnitee
      has not met such applicable standard of conduct, shall be a defense to the
      action or create a presumption that Indemnitee has or has not met the applicable
      standard of conduct. The Indemnitee’s expenses (including attorneys’ fees)
      incurred in connection with successfully establishing Indemnitee’s right to
      indemnification, in whole or in part, in any such proceeding or otherwise shall
      also be indemnified by the Corporation.

     

    (c)
      The
      Indemnitee shall be presumed to be entitled to indemnification under this
      Agreement upon submission of a request for indemnification pursuant to this
      Section 5, and the Corporation shall have the burden of proof in overcoming
      that
      presumption in reaching a determination contrary to that presumption. Such
      presumption shall be used as a basis for a determination of entitlement to
      indemnification unless the Corporation overcomes such presumption by clear
      and
      convincing evidence.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    Section
      6. Insurance
      and Subrogation.
      

     

    (a)
      The
      Corporation may purchase and maintain insurance on behalf of Indemnitee who
      is
      or was or has agreed to serve at the request of the Corporation as a director
      or
      officer of the Corporation, or is or was serving at the request of the
      Corporation as a director, officer, employee or agent of another corporation,
      partnership, joint venture, trust, employee benefit plan or other enterprise
      against any liability asserted against, and incurred by, Indemnitee or on
      Indemnitee’s behalf in any such capacity, or arising out of Indemnitee’s status
      as such, whether or not the Corporation would have the power to indemnify
      Indemnitee against such liability under the provisions of this Agreement. If
      the
      Corporation has such insurance in effect at the time the Corporation receives
      from Indemnitee any notice of the commencement of a proceeding, the Corporation
      shall give prompt notice of the commencement of such proceeding to the insurers
      in accordance with the procedures set forth in the policy. The Corporation
      shall
      thereafter take all necessary or desirable action to cause such insurers to
      pay,
      on behalf of the Indemnitee, all amounts payable as a result of such proceeding
      in accordance with the terms of such policy.

     

    (b)
      In
      the event of any payment by the Corporation under this Agreement, the
      Corporation shall be subrogated to the extent of such payment to all of the
      rights of recovery of Indemnitee with respect to any insurance policy, who
      shall
      execute all papers required and take all action necessary to secure such rights,
      including execution of such documents as are necessary to enable the Corporation
      to bring suit to enforce such rights in accordance with the terms of such
      insurance policy. The Corporation shall pay or reimburse all expenses actually
      and reasonably incurred by Indemnitee in connection with such
      subrogation.

     

    (c)
      The
      Corporation shall not be liable under this Agreement to make any payment of
      amounts otherwise indemnifiable hereunder (including, but not limited to,
      judgments, fines, ERISA excise taxes or penalties, and amounts paid in
      settlement) if and to the extent that Indemnitee has otherwise actually received
      such payment under this Agreement or any insurance policy, contract, agreement
      or otherwise. 

     

    Section
      7. Certain
      Definitions.
      For
      purposes of this Agreement, the following definitions shall apply:

     

    (a)
      The
      term “action, suit or proceeding” shall be broadly construed and shall include,
      without limitation, the investigation, preparation, prosecution, defense,
      settlement, arbitration and appeal of, and the giving of testimony in, any
      threatened, pending or completed claim, action, suit or proceeding, whether
      civil, criminal, administrative or investigative.

     

    (b)
      The
      term “by reason of the fact that Indemnitee is or was a director, officer,
      employee or agent of the Corporation, or while serving as a director or officer
      of the Corporation, is or was serving or has agreed to serve at the request
      of
      the Corporation as a director, officer, employee or agent of another
      corporation, partnership, joint venture, trust, employee benefit plan or other
      enterprise” shall be broadly construed and shall include, without limitation,
      any actual or alleged act or omission to act.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    (c)
      The
      term “expenses” shall be broadly and reasonably construed and shall include,
      without limitation, all direct and indirect costs of any type or nature
      whatsoever (including, without limitation, all attorneys’ fees and related
      disbursements, appeal bonds, other out-of-pocket costs and reasonable
      compensation for time spent by Indemnitee for which Indemnitee is not otherwise
      compensated by the Corporation or any third party, provided that the rate of
      compensation and estimated time involved is approved by the Board, which
      approval shall not be unreasonably withheld), actually and reasonably incurred
      by Indemnitee in connection with either the investigation, defense or appeal
      of
      a proceeding or establishing or enforcing a right to indemnification under
      this
      Agreement, Section 145 of the General Corporation Law of the State of Delaware
      or otherwise.

     

    (d)
      The
      term “judgments, fines and amounts paid in settlement” shall be broadly
      construed and shall include, without limitation, all direct and indirect
      payments of any type or nature whatsoever (including, without limitation, all
      penalties and amounts required to be forfeited or reimbursed to the
      Corporation), as well as any penalties or excise taxes assessed on a person
      with
      respect to an employee benefit plan. 

     

    (e)
      The
      term “Corporation” shall include, without limitation and in addition to the
      resulting corporation, any constituent corporation (including any constituent
      of
      a constituent) absorbed in a consolidation or merger which, if its separate
      existence had continued, would have had power and authority to indemnify its
      directors, officers, and employees or agents, so that any person who is or
      was a
      director, officer, employee or agent of such constituent corporation, or is
      or
      was serving at the request of such constituent corporation as a director,
      officer, employee or agent of another corporation, partnership, joint venture,
      trust, employee benefit plan or other enterprise, shall stand in the same
      position under the provisions of this Agreement with respect to the resulting
      or
      surviving corporation as he or she would have with respect to such constituent
      corporation if its separate existence had continued.

     

    (f)
      The
      term “other enterprises” shall include, without limitation, employee benefit
      plans.

     

    (g)
      The
      term “serving at the request of the Corporation” shall include, without
      limitation, any service as a director, officer, employee or agent of the
      Corporation which imposes duties on, or involves services by, such director,
      officer, employee or agent with respect to an employee benefit plan, its
      participants or beneficiaries.

     

    (h)
      A
      person who acted in good faith and in a manner such person reasonably believed
      to be in the interest of the participants and beneficiaries of an employee
      benefit plan shall be deemed to have acted in a manner “not opposed to the best
      interests of the Corporation” as referred to in this Agreement. 

     

    Section
      8. Limitation
      on Indemnification.
      Notwithstanding any other provision herein to the contrary, the Corporation
      shall not be obligated pursuant to this Agreement:

     

    (a)
      Claims
      Initiated by Indemnitee.
      To
      indemnify or advance expenses to Indemnitee with respect to an action, suit
      or
      proceeding (or part thereof) initiated by Indemnitee, except with respect to
      an
      action, suit or proceeding brought to establish or enforce a right to
      indemnification (which shall be governed by the provisions of Section 8(b)
      of
      this Agreement), unless such action, suit or proceeding (or part thereof) was
      authorized or consented to by the Board of Directors of the
      Corporation.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    (b)
      Action
      for Indemnification.
      To
      indemnify Indemnitee for any expenses incurred by Indemnitee with respect to
      any
      action, suit or proceeding instituted by Indemnitee to enforce or interpret
      this
      Agreement, unless Indemnitee is successful in establishing Indemnitee’s right to
      indemnification in such action, suit or proceeding, in whole or in part, or
      unless and to the extent that the court in such action, suit or proceeding
      shall
      determine that, despite Indemnitee’s failure to establish their right to
      indemnification, Indemnitee is entitled to indemnity for such expenses;
      provided, however, that nothing in this Section 8(b) is intended to limit the
      Corporation’s obligation with respect to the advancement of expenses to
      Indemnitee in connection with any such action, suit or proceeding instituted
      by
      Indemnitee to enforce or interpret this Agreement, as provided in Section 4
      hereof.

     

    (c)
      Section
      16 Violations.
      To
      indemnify Indemnitee on account of any proceeding with respect to which final
      judgment is rendered against Indemnitee for payment or an accounting of profits
      arising from the purchase or sale by Indemnitee of securities in violation
      of
      Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar
      successor statute.

     

    (d)
      Non-compete
      and Non-disclosure.
      To
      indemnify Indemnitee in connection with proceedings or claims involving the
      enforcement of non-compete and/or non-disclosure agreements or the non-compete
      and/or non-disclosure provisions of employment, consulting or similar agreements
      the Indemnitee may be a party to with the Corporation, or any subsidiary of
      the
      Corporation or any other applicable foreign or domestic corporation,
      partnership, joint venture, trust or other enterprise, if any.

     

    Section
      9. Certain
      Settlement Provisions.
      The
      Corporation shall have no obligation to indemnify Indemnitee under this
      Agreement for amounts paid in settlement of any action, suit or proceeding
      without the Corporation’s prior written consent, which shall not be unreasonably
      withheld. The Corporation shall not settle any action, suit or proceeding in
      any
      manner that would impose any fine or other obligation on Indemnitee without
      Indemnitee’s prior written consent, which shall not be unreasonably
      withheld.

     

    Section
      10. Savings
      Clause.
      If any
      provision or provisions of this Agreement shall be invalidated on any ground
      by
      any court of competent jurisdiction, then the Corporation shall nevertheless
      indemnify Indemnitee as to costs, charges and expenses (including attorneys’
fees), judgments, fines and amounts paid in settlement with respect to any
      action, suit or proceeding, whether civil, criminal, administrative or
      investigative, including an action by or in the right of the Corporation, to
      the
      full extent permitted by any applicable portion of this Agreement that shall
      not
      have been invalidated and to the full extent permitted by applicable law.

     

    Section
      11. Contribution.
      In
      order to provide for just and equitable contribution in circumstances in which
      the indemnification provided for herein is held by a court of competent
      jurisdiction to be unavailable to Indemnitee in whole or in part, it is agreed
      that, in such event, the Corporation shall, to the fullest extent permitted
      by
      law, contribute to the payment of Indemnitee’s costs, charges and expenses
      (including attorneys’ fees), judgments, fines and amounts paid in settlement
      with respect to any action, suit or proceeding, whether civil, criminal,
      administrative or investigative, in an amount that is just and equitable in
      the
      circumstances, taking into account, among other things, contributions by other
      directors and officers of the Corporation or others pursuant to indemnification
      agreements or otherwise; provided, that, without limiting the generality of
      the
      foregoing, such contribution shall not be required where such holding by the
      court is due to (i) the failure of Indemnitee to meet the standard of conduct
      set forth in Section 1 hereof, or (ii) any limitation on indemnification set
      forth in Section 6(c), 8 or 9 hereof. 

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    Section
      12. Form
      and Delivery of Communications.
      Any
      notice, request or other communication required or permitted to be given to
      the
      parties under this Agreement shall be in writing and either delivered in person
      or sent by telecopy, telex, telegram, overnight mail or courier service, or
      certified or registered mail, return receipt requested, postage prepaid, to
      the
      parties at the following addresses (or at such other addresses for a party
      as
      shall be specified by like notice):

     

    If
      to the
      Corporation:

    

    VirtualScopics,
      Inc.

    350
      Linden Oaks

    Rochester,
      New York 14625

    Attn:
      Molly Henderson, Chief Financial Officer

    Facsimile:
      (585) 218-7350

    

    

    If
      to
      Indemnitee:

    

    Robert
      G.
      Klimasewski 

                                             

                                             

                                             

    Facsimile:
                             

    

    

    Section
      13. Subsequent
      Legislation.
      If the
      General Corporation Law of Delaware is amended after adoption of this Agreement
      to expand further the indemnification permitted to directors or officers, then
      the Corporation shall indemnify Indemnitee to the fullest extent permitted
      by
      the General Corporation Law of Delaware, as so amended.

    

    Section
      14. Nonexclusivity.
      The
      provisions for indemnification and advancement of expenses set forth in this
      Agreement shall not be deemed exclusive of any other rights which Indemnitee
      may
      have under any provision of law, the Corporation’s Certificate of Incorporation
      or Bylaws, in any court in which a proceeding is brought, the vote of the
      Corporation’s stockholders or disinterested directors, other agreements or
      otherwise, and Indemnitee’s rights hereunder shall continue after Indemnitee has
      ceased acting as an agent of the Corporation and shall inure to the benefit
      of
      the heirs, executors and administrators of Indemnitee. However, no amendment
      or
      alteration of the Corporation’s Certificate of Incorporation or Bylaws or any
      other agreement shall adversely affect the rights provided to Indemnitee under
      this Agreement

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    Section
      15. Enforcement.
      The
      Corporation shall be precluded from asserting in any judicial proceeding that
      the procedures and presumptions of this Agreement are not valid, binding and
      enforceable. The Corporation agrees that its execution of this Agreement shall
      constitute a stipulation by which it shall be irrevocably bound in any court
      of
      competent jurisdiction in which a proceeding by Indemnitee for enforcement
      of
      his rights hereunder shall have been commenced, continued or appealed, that
      its
      obligations set forth in this Agreement are unique and special, and that failure
      of the Corporation to comply with the provisions of this Agreement will cause
      irreparable and irremediable injury to Indemnitee, for which a remedy at law
      will be inadequate. As a result, in addition to any other right or remedy
      Indemnitee may have at law or in equity with respect to breach of this
      Agreement, Indemnitee shall be entitled to injunctive or mandatory relief
      directing specific performance by the Corporation of its obligations under
      this
      Agreement.

    

    Section
      16. Interpretation
      of Agreement.
      It is
      understood that the parties hereto intend this Agreement to be interpreted
      and
      enforced so as to provide indemnification to Indemnitee to the fullest extent
      now or hereafter permitted by law.

    

    Section
      17. Entire
      Agreement.
      This
      Agreement and the documents expressly referred to herein constitute the entire
      agreement between the parties hereto with respect to the matters covered hereby,
      and any other prior or contemporaneous oral or written understandings or
      agreements with respect to the matters covered hereby are expressly superceded
      by this Agreement.

    

    Section
      18. Modification
      and Waiver.
      No
      supplement, modification or amendment of this Agreement shall be binding unless
      executed in writing by both of the parties hereto. No waiver of any of the
      provisions of this Agreement shall be deemed or shall constitute a waiver of
      any
      other provision hereof (whether or not similar) nor shall such waiver constitute
      a continuing waiver.

    

    Section
      19. Successor
      and Assigns.
      All of
      the terms and provisions of this Agreement shall be binding upon, shall inure
      to
      the benefit of and shall be enforceable by the parties hereto and their
      respective successors, assigns, heirs, executors, administrators and legal
      representatives. The Corporation shall require and cause any direct or indirect
      successor (whether by purchase, merger, consolidation or otherwise) to all
      or
      substantially all of the business or assets of the Corporation, by written
      agreement in form and substance reasonably satisfactory to Indemnitee, expressly
      to assume and agree to perform this Agreement in the same manner and to the
      same
      extent that the Corporation would be required to perform if no such succession
      had taken place.

    

    Section
      20. Service
      of Process and Venue.
      For
      purposes of any claims or proceedings to enforce this agreement, the Corporation
      consents to the jurisdiction and venue of any federal or state court of
      competent jurisdiction in the states of Delaware and New York, and waives and
      agrees not to raise any defense that any such court is an inconvenient forum
      or
      any similar claim.

    

    Section
      21. Supersedes
      Prior Agreement.
      This
      Agreement supercedes any prior indemnification agreement between Indemnitee
      and
      the Corporation or its predecessors.

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    Section
      22. Governing
      Law.
      This
      Agreement shall be governed exclusively by and construed according to the laws
      of the State of Delaware, as applied to contracts between Delaware residents
      entered into and to be performed entirely within Delaware. If a court of
      competent jurisdiction shall make a final determination that the provisions
      of
      the law of any state other than Delaware govern indemnification by the
      Corporation of its officers and directors, then the indemnification provided
      under this Agreement shall in all instances be enforceable to the fullest extent
      permitted under such law, notwithstanding any provision of this Agreement to
      the
      contrary.

    

    Section
      23. Employment
      Rights.
      Nothing
      in this Agreement is intended to create in Indemnitee any right to employment
      or
      continued employment.

    

    Section
      24. Counterparts.
      This
      Agreement may be executed in two or more counterparts, each of which shall
      be
      deemed to be an original and all of which together shall be deemed to be one
      and
      the same instrument, notwithstanding that both parties are not signatories
      to
      the original or same counterpart.

    

    Section
      25. Headings.
      The
      section and subsection headings contained in this Agreement are for reference
      purposes only and shall not affect in any way the meaning or interpretation
      of
      this Agreement.

    

    IN
      WITNESS WHEREOF, this Agreement has been duly executed and delivered to be
      effective as of the date first above written.

     

    
      	 	 	 
	 	VirtualScopics,
              Inc.
	 
 	 
 	 
 
	 	By:  	/s/ Molly
              Henderson 
	 	
              
Name:
              Molly Henderson 
	 	Title:
              Chief Financial Officer

    

    
      	 	 	 
	 	By:  	/s/ Robert
              G.
              Klimasewski
	 	
              
Name:
Robert
              G. Klimasewski

    

     

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    SCHEDULE
      TO EXHIBIT 10.19 - FORM OF

    APRIL
      28, 2006 INDEMNIFICATION AGREEMENT

    BY
      AND AMONG VIRTUALSCOPICS, INC., AND THE

    DIRECTORS
      AND OFFICERS OF THE COMPANY

    

    

    

    The
      Indemnification Agreement filed as Exhibit 10.19 is substantially identical
      in
      all material respects to the indemnification agreements which have been entered
      into by VirtualScopics, Inc., and the following directors and officers effective
      as of April 28, 2006:

    

    

    Molly
      Henderson

    Warren
      Bagatelle

    Dr.
      Saara
      Totterman, M.D., Ph.D.

    Terence
      A. Walts

    Sidney
      R.
      Knafel

    Colby
      H.
      Chandler

    Charles
      Phelps, Ph.D.EXHIBIT
      4.1

    

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

    

    THIS
      DEBENTURE IS ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR PURPOSES OF SECTIONS 1271,
      1272 AND 1273 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE ISSUE PRICE
      OF THIS DEBENTURE IS $_____ PER PRINCIPAL AMOUNT OF $1,000 AT MATURITY. THE
      ISSUE DATE OF THIS DEBENTURE IS APRIL __, 2006. THE YIELD-TO-MATURITY OF THIS
      DEBENTURE IS _____% PER ANNUM. THE TOTAL AMOUNT OF ORIGINAL ISSUE DISCOUNT
      ON
      THIS DEBENTURE AS OF THE ISSUE DATE IS $____ PER PRINCIPAL AMOUNT OF $1,000
      AT
      MATURITY.

    

    Original
      Issue Date: April ___, 2006

    No.
      1-____

    

    $_______________

    

    CONVERTIBLE
      DEBENTURE

    DUE
      AUGUST 28, 2007

    

    THIS
      DEBENTURE is one of a series of duly authorized and validly issued Convertible
      Debentures of DOBI Medical International, Inc., a Delaware corporation, having
      its principal place of business at 1200 MacArthur Blvd., Mahwah, NJ 07430 (the
      “Company”),
      designated as its Convertible Debenture due August 28, 2007 (this debenture,
      the
“Debenture”
and
      collectively with the other such series of debentures, the “Debentures”).

    

    FOR
      VALUE
      RECEIVED, the Company promises to pay to ________________________ or its
      registered assigns (the “Holder”),
      or
      shall have paid pursuant to the terms hereunder, the principal sum of
      $_______________ by August 28, 2007, or such earlier date as this Debenture
      is
      required or permitted to be repaid as provided hereunder (the “Maturity
      Date”).
      This
      Debenture is subject to the following additional provisions:

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

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

    

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

    

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

    

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

    

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

    

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

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    

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

    

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

    

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

    

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

    

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

    

    “Debenture
      Register”
shall
      have the meaning set forth in Section 3(c).

    

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

    

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

    

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

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    

    “Equity
      Conditions”
shall
      mean, during the period in question, (i)
      the
      Company shall have duly honored all conversions and redemptions scheduled to
      occur or occurring by virtue of one or more Notices of Conversion of the Holder,
      if any, (ii) the Company shall have paid all liquidated damages and other
      amounts owing to the Holder in respect of this Debenture, (iii)
      there is an effective Registration Statement pursuant to which the Holder is
      permitted to utilize the prospectus thereunder to resell all of the shares
      issuable pursuant to the Transaction Documents (and the Company believes, in
      good faith, that such effectiveness will continue uninterrupted for the
      foreseeable future), (iv) the Common Stock is trading on a Trading Market and
      all of the shares issuable pursuant to the Transaction Documents are listed
      for
      trading on such Trading Market (and the Company believes, in good faith, that
      trading of the Common Stock on a Trading Market will continue uninterrupted
      for
      the foreseeable future), (v) there is a sufficient number of authorized but
      unissued and otherwise unreserved shares of Common Stock for the issuance of
      all
      of the shares issuable in full pursuant to the Transaction Documents, (vi)
      there
      is no existing Event of Default or no existing event which, with the passage
      of
      time or the giving of notice, would constitute an Event of Default, (vii) the
      issuance of the shares in question (or, in the case of a Monthly Redemption,
      the
      shares issuable upon conversion in full of the Monthly Redemption
      Amount) to
      the
      Holder would not violate the limitations set forth in Section 4(c) herein,
      (viii)
      there has been no public announcement of a pending or proposed Fundamental
      Transaction or Change of Control Transaction that has not been consummated
      and
      (ix) the Holder is not in possession of any information that constitutes, or
      may
      constitute, material non-public information.

    

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

    

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

    

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

     

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

    

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

    

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

    

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

    

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

     

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

    

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

    

      
        
          
          

        

        
          4

          
            

          

        

        
          
          

        

      

      

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

       

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

       

      “Monthly
        Redemption Amount”
means,
        as to a Monthly Redemption, $____1.

      

      “Monthly
        Redemption Date”
means
        August 28, 2006, and the 1st of each month thereafter and terminating upon
        the
        full redemption or conversion of this Debenture. 

      

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

       

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

       

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

      

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

      

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

      

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

      

      “Permitted
        Indebtedness”
        means (a)
        the
        Indebtedness existing on the Original Issue Date and set forth on Schedule
        3.1(ff)
        attached
        to the Purchase Agreement, (b) lease obligations and purchase money indebtedness
        of up to $1,000,000, in the aggregate, incurred in connection with the
        acquisition of capital assets and lease obligations with respect to newly
        acquired or leased assets and (c) up to $2,000,000 of additional Indebtedness
        incurred by the Company, provided that in the case of (c) above, such
        Indebtedness does not mature or require payments of principal prior to the
        Maturity Date and is made expressly subordinate in right of payment to the
        Indebtedness evidenced by this Debenture, as reflected in a written agreement
        reasonably acceptable to, and approved in writing by, the holders owning
        75% or
        more in principal amount of Debentures then outstanding.

      
        
          

        

      

      1    
        1/12th of the original principal amount of this
        Debenture.

      
        
          
          

        

        
          5

          
            

          

        

        
          
          

        

      

       

    

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

     

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

    “Trading
      Day”
means
      a
      day on which the principal Trading Market is open for business.

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

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

    

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

    

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

    

    Section
      2. Interest
      and Prepayment.

    

    a)
      No
      Payment of Interest in Cash or Kind.
      The
      Company shall not pay interest to the Holder on this Debenture. The Company
      acknowledges and agrees that this Debenture was issued for an original issue
      discount. 

     

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

    

    Section
      3. 
      Registration
      of Transfers and Exchanges.
      

     

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

     

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

    

    
      
        
          
          

        

        
          7

          
            

          

        

        
          
          

        

      

    

    

    

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

    

    Section
      4.  Conversion.

     

    a)
      Voluntary
      Conversion.
      At any
      time after the Original Issue Date until this Debenture is no longer
      outstanding, this Debenture shall be convertible, in whole or in part, into
      shares of Common Stock at the option of the Holder, at any time and from time
      to
      time (subject to the conversion limitations set forth in Section 4(c)
      hereof). The Holder shall effect conversions by delivering to the Company a
      Notice of Conversion, the form of which is attached hereto as Annex A (a “Notice
      of Conversion”), specifying therein the principal amount of this Debenture to be
      converted and the date on which such conversion shall be effected (a “Conversion
      Date”). If no Conversion Date is specified in a Notice of Conversion, the
      Conversion Date shall be the date that such Notice of Conversion is deemed
      delivered hereunder. To effect conversions hereunder, the Holder shall not
      be
      required to physically surrender this Debenture to the Company unless the entire
      principal amount of this Debenture has been so converted. Conversions hereunder
      shall have the effect of lowering the outstanding principal amount of this
      Debenture in an amount equal to the applicable conversion. The Holder and the
      Company shall maintain records showing the principal amount(s) converted and
      the
      date of such conversion(s). The Company may deliver an objection to any Notice
      of Conversion within 2 Business Days of delivery of such Notice of Conversion.
      In the event of any dispute or discrepancy, the records of the Holder shall
      be
      controlling and determinative in the absence of manifest error. The
      Holder, and any assignee by acceptance of this Debenture, acknowledge and agree
      that, by reason of the provisions of this paragraph, following conversion of
      a
      portion of this Debenture, the unpaid and unconverted principal amount of this
      Debenture may be less than the amount stated on the face
      hereof.

     

    b)
      Conversion
      Price.
      The
      conversion price (the “Conversion
      Price”)
      in
      effect on any Conversion Date shall be equal to the lesser of (i) $0.08
      (the
“Set
      Price”,
      which
      all shall be subject to adjustment pursuant to the terms of this Debenture)
      or
      (ii) 80% of the average of the 5 VWAPs prior to the applicable Conversion Date;
      provided,
      however,
      in no
      event shall the price calculated pursuant to the preceding clause be less than
      $0.02 (the “Floor
      Price”)
      (provided,
      further,
      such
      Floor Price shall not be subject to adjustment for forward or reverse stock
      splits, stock dividends, recapitalizations and the like).

     

    
      
        
          
          

        

        
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          c)
            Conversion
            Limitations.
            

        

      

       

      i.
        [as
        to
        Debentures issued at First Closing only] Issuable Maximum.
        Notwithstanding anything herein to the contrary, prior to the date the Charter
        Amendment is effective, the Company has reserved an aggregate of 225,000,000
        shares of Common Stock for issuance (A) in connection with any Debentures
        issued
        pursuant to the Purchase Agreement and (B) in connection with any Warrants
        issued pursuant to the Purchase Agreement (such number of shares, the
“Issuable
        Maximum”).
        Prior
        to the date the Charter Amendment is effective, each Holder shall be entitled
        to
        a portion of the Issuable Maximum equal to the quotient obtained by dividing
        (x)
        the aggregate principal amount of the Debenture(s) issued and sold to such
        Holder on the Original Issue Date by (y) the aggregate principal amount of
        all
        Debentures issued and sold by the Company on the Original Issue Date. If
        any
        Holder shall no longer hold the Debenture(s) and Warrants, then such Holder’s
        remaining portion of the Issuable Maximum, if any, shall be allocated pro-rata
        among the remaining Holders. If, on any Conversion Date, (1) the applicable
        Conversion Price is such that the shares issuable under this Debenture on
        such
        Conversion Date, together with the aggregate number of shares of Common Stock
        that have been issued upon prior conversion or exercise of the Debentures
        and
        Warrants, as applicable, would exceed the Issuable Maximum and (2) the Charter
        Amendment is not effective, then the Company shall issue to the Holder
        requesting a conversion a number of shares of Common Stock equal to such
        Holder’s pro-rata portion (which shall be calculated pursuant to the terms
        hereof) of the Issuable Maximum and, with respect to the remainder of the
        aggregate principal amount of the Debentures then held by such Holder for
        which
        a conversion in accordance with the applicable Conversion Price would result
        in
        an issuance of shares of Common Stock in excess of such Holder’s pro-rata
        portion (which shall be calculated pursuant to the terms hereof) of the Issuable
        Maximum (the “Excess
        Principal”),
        the
        Company shall be prohibited from converting such Excess Principal and shall
        promptly notify the Holder of the reason therefor. This Debenture shall
        thereafter be unconvertible to such extent until and unless the Charter
        Amendment is subsequently approved, but this Debenture shall otherwise remain
        in
        full force and effect. The Holder shall be entitled, in its sole discretion,
        to
        allocate its pro-rata portion of the Issuable Maximum among Debentures and
        Warrants held by it.]

      
        
          
          

        

        
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      ii.
        Conversion
        Limitations.
        The
        Company shall not effect any conversion of this Debenture, and a Holder shall
        not have the right to convert any portion of this Debenture, to the extent
        that
        after giving effect to the conversion set forth on the applicable Notice
        of
        Conversion, such Holder (together with such Holder’s Affiliates, and any other
        person or entity acting as a group together with such Holder or any of such
        Holder’s Affiliates) would beneficially own in excess of the Beneficial
        Ownership Limitation (as defined below).  For purposes of the foregoing
        sentence, the number of shares of Common Stock beneficially owned by such
        Holder
        and its Affiliates shall include the number of shares of Common Stock issuable
        upon conversion of this Debenture with respect to which such determination
        is
        being made, but shall exclude the number of shares of Common Stock which
        are
        issuable upon (A) conversion of the remaining, unconverted principal amount
        of
        this Debenture beneficially owned by such Holder or any of its Affiliates
        and
        (B) exercise or conversion of the unexercised or unconverted portion of any
        other securities of the Company subject to a limitation on conversion or
        exercise analogous to the limitation contained herein (including, without
        limitation, any other Debentures or the Warrants) beneficially owned by such
        Holder or any of its Affiliates.  Except as set forth in the preceding
        sentence, for purposes of this Section 4(c), beneficial ownership shall be
        calculated in accordance with Section 13(d) of the Exchange Act and the rules
        and regulations promulgated thereunder. To the extent that the limitation
        contained in this Section 4(c)(ii) applies, the determination of whether
        this
        Debenture is convertible (in relation to other securities owned by such Holder
        together with any Affiliates) and of which principal amount of this Debenture
        is
        convertible shall be in the sole discretion of such Holder, and the submission
        of a Notice of Conversion shall be deemed to be such Holder’s determination of
        whether this Debenture may be converted (in relation to other securities
        owned
        by such Holder together with any Affiliates) and which principal amount of
        this
        Debenture is convertible, in each case subject to such aggregate percentage
        limitations. To ensure compliance with this restriction, each Holder will
        be
        deemed to represent to the Company each time it delivers a Notice of Conversion
        that such Notice of Conversion has not violated the restrictions set forth
        in
        this paragraph and the Company shall have no obligation to verify or confirm
        the
        accuracy of such determination. In
        addition, a determination as to any group status as contemplated above shall
        be
        determined in accordance with Section 13(d) of the Exchange Act and
        the
        rules and regulations promulgated thereunder. For
        purposes of this Section 4(c)(ii), in determining the number of outstanding
        shares of Common Stock, a Holder may rely on the number of outstanding shares
        of
        Common Stock as stated in the most recent of the following: (A) the Company’s
        most recent Form 10-QSB or Form 10-KSB, as the case may be; (B) a more recent
        public announcement by the Company; or (C) a more recent notice by the Company
        or the Company’s transfer agent setting forth the number of shares of Common
        Stock outstanding.  Upon the written or oral request of a Holder, the
        Company shall within two Trading Days confirm orally and in writing to such
        Holder the number of shares of Common Stock then outstanding.  In any case,
        the number of outstanding shares of Common Stock shall be determined after
        giving effect to the conversion or exercise of securities of the Company,
        including this Debenture, by such Holder or its Affiliates since the date
        as of
        which such number of outstanding shares of Common Stock was reported. [The
        “Beneficial
        Ownership Limitation”
shall
        be 4.99% of the number of shares of the Common Stock outstanding immediately
        after giving effect to the issuance of shares of Common Stock issuable upon
        conversion of this Debenture held by the Holder. The Beneficial Ownership
        Limitation provisions of this Section 4(c)(ii) may be waived by such Holder,
        at
        the election of such Holder, upon not less than 61 days’ prior notice to the
        Company, to change the Beneficial Ownership Limitation to 9.99% of the number
        of
        shares of the Common Stock outstanding immediately after giving effect to
        the
        issuance of shares of Common Stock upon conversion of this Debenture held
        by the
        Holder and the provisions of this Section 4(c)(ii) shall continue to apply.
        Upon
        such a change by a Holder of the Beneficial Ownership Limitation from such
        4.99%
        limitation to such 9.99% limitation, the Beneficial Ownership Limitation
        may not
        be further waived by such Holder.] [The “Beneficial
        Ownership Limitation”
shall
        be 9.99% of the number of shares of the Common Stock outstanding immediately
        after giving effect to the issuance of shares of Common Stock issuable upon
        conversion of this Debenture held by the Holder.] The provisions of this
        paragraph shall be construed and implemented in a manner otherwise than in
        strict conformity with the terms of this Section 4(c)(ii) to correct this
        paragraph (or any portion hereof) which may be defective or inconsistent
        with
        the intended Beneficial Ownership Limitation herein contained or to make
        changes
        or supplements necessary or desirable to properly give effect to such
        limitation.
        The
        limitations contained in this paragraph shall apply to a successor holder
        of
this
        Debenture.

       

    

    
      
        
          
          

        

        
          10

          
            

          

        

        
          
          

        

      

    

    

      d)
        Mechanics
        of
        Conversion.

       

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

      

      ii.
        Delivery
        of Certificate Upon Conversion.
        Not
        later than three Trading Days after each Conversion Date (the “Share
        Delivery Date”),
        the
        Company shall deliver, or cause to be delivered, to the Holder a certificate
        or
        certificates representing the Conversion Shares which, on or after the Effective
        Date of the Registration Statement registering such Conversion Shares, shall
        be
        free of restrictive legends and trading restrictions (other than those which
        may
        then be required by the Purchase Agreement) representing the number of shares
        of
        Common Stock being acquired upon the conversion of this Debenture. On or
        after
        the Effective Date of the Registration Statement registering the Conversion
        Shares, the Company shall use its commercially reasonable efforts to deliver
        any
        certificate or certificates required to be delivered by the Company under
        this
        Section 4 electronically through the Depository Trust Company or another
        established clearing corporation performing similar functions. 

       

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

      
        
          
          

        

        
          11

          
            

          

        

        
          
          

        

      

      

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

      
        
          
          

        

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

       

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

      
        
          
          

        

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

      

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

      

      Section
        5. Certain
        Adjustments.

       

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

      
        
          
          

        

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

      

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

      
        
          
          

        

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

       

      e)
        Fundamental
        Transaction.
        If, at
        any time while this Debenture is outstanding, (A) the Company effects any
        merger
        or consolidation of the Company with or into another Person, (B) the Company
        effects any sale of all or substantially all of its assets in one transaction
        or
        a series of related transactions, (C) any tender offer or exchange offer
        (whether by the Company or another Person) is completed pursuant to which
        holders of Common Stock are permitted to tender or exchange their shares
        for
        other securities, cash or property, or (D) the Company effects any
        reclassification of the Common Stock or any compulsory share exchange pursuant
        to which the Common Stock is effectively converted into or exchanged for
        other
        securities, cash or property (in any such case, a “Fundamental
        Transaction”),
        then,
        upon any subsequent conversion of this Debenture, the Holder shall have the
        right to receive, for each Conversion Share that would have been issuable
        upon
        such conversion immediately prior to the occurrence of such Fundamental
        Transaction, the same kind and amount of securities, cash or property as
        it
        would have been entitled to receive upon the occurrence of such Fundamental
        Transaction if it had been, immediately prior to such Fundamental Transaction,
        the holder of 1 share of Common Stock (the “Alternate
        Consideration”).
        For
        purposes of any such conversion, the determination of the Set Price shall
        be
        appropriately adjusted to apply to such Alternate Consideration based on
        the
        amount of Alternate Consideration issuable in respect of 1 share of Common
        Stock
        in such Fundamental Transaction, and the Company shall apportion the Set
        Price
        among the Alternate Consideration in a reasonable manner reflecting the relative
        value of any different components of the Alternate Consideration. If holders
        of
        Common Stock are given any choice as to the securities, cash or property
        to be
        received in a Fundamental Transaction, then the Holder shall be given the
        same
        choice as to the Alternate Consideration it receives upon any conversion
        of this
        Debenture following such Fundamental Transaction. To the extent necessary
        to
        effectuate the foregoing provisions, any successor to the Company or surviving
        entity in such Fundamental Transaction shall issue to the Holder a new debenture
        consistent with the foregoing provisions and evidencing the Holder’s right to
        convert such debenture into Alternate Consideration. The terms of any agreement
        pursuant to which a Fundamental Transaction is effected shall include terms
        requiring any such successor or surviving entity to comply with the provisions
        of this Section 5(e) and insuring that this Debenture (or any such replacement
        security) will be similarly adjusted upon any subsequent transaction analogous
        to a Fundamental Transaction.

      
        
          
          

        

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

      

      g)
        Notice
        to the Holder.

      

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

       

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

      
        
          
          

        

        
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      Section
        6. Redemption
        and Forced Conversion.

      

      a)
        Monthly
        Redemption.
        On each
        Monthly Redemption Date, the Company shall redeem the Monthly Redemption
        Amount
        plus liquidated damages and any other amounts then owing to such Holder in
        respect of this Debenture (the “Monthly
        Redemption”).
        The
        Monthly Redemption Amount payable on each Monthly Redemption Date shall be
        paid
        in cash; provided,
        however,
        as to
        any Monthly Redemption and upon 20 Trading Days’ prior written irrevocable
        notice (the “Monthly
        Redemption Notice”
and
        the
        20 Trading Day period immediately following the Monthly Redemption Notice,
        the
“Monthly
        Redemption Period”),
        in
        lieu of a cash redemption payment the Company may elect to pay all or part
        of a
        Monthly Redemption Amount in Conversion Shares (such dollar amount to be
        paid on
        a Monthly Redemption Date in Conversion Shares, the “Monthly
        Redemption Share Amount”)
        based
        on a conversion price equal to the lesser of (i) the then Conversion Price
        and
        (ii) 85% of the average of the VWAPs for the 10 consecutive Trading Days
        ending
        on the Trading Day that is immediately prior to the applicable Monthly
        Redemption Date (subject to adjustment for any stock dividend, stock split,
        stock combination or other similar event affecting the Common Stock during
        such
        10 Trading Day period) (the price calculated during the 10 Trading Day period
        immediately prior to the Monthly Redemption Date, the “Monthly
        Conversion Price”
and
        such 10 Trading Day period, the “Monthly
        Conversion Period”);
        provided,
        further,
        that
        the Company may not pay the Monthly Redemption Amount in Conversion Shares
        unless (y) from the date the Holder receives the duly delivered Monthly
        Redemption Notice through and until the date such Monthly Redemption is paid
        in
        full, the Equity Conditions have been satisfied, unless waived in writing
        by the
        Holder, and (z) as to such Monthly Redemption, prior to such Monthly Redemption
        Period (but not more than 5 Trading Days prior to the commencement of the
        Monthly Redemption Period), the Company shall have delivered to the Holder’s
        account with The Depository Trust Company a number of shares of Common Stock
        to
        be applied against such Monthly Redemption Share Amount equal to the quotient
        of
        (x) the applicable Monthly Redemption Share Amount divided by (y) the then
        Conversion Price (the “Pre-Redemption
        Conversion Shares”).
        The
        Holder may convert, pursuant to Section 4(a), any principal amount of this
        Debenture subject to a Monthly Redemption at any time prior to the date that
        the
        Monthly Redemption Amount, plus accrued liquidated damages and any other
        amounts
        then owing to the Holder are due and paid in full. Unless otherwise indicated
        by
        the Holder in the applicable Notice of Conversion, any principal amount of
        this
        Debenture converted during the applicable Monthly Redemption Period until
        the
        date the Monthly Redemption Amount is paid in full shall be first applied
        to the
        principal amount subject to the Monthly Redemption Amount payable in cash
        and
        then to the Monthly Redemption Share Amount. Any principal amount of this
        Debenture converted during the applicable Monthly Redemption Period in excess
        of
        the Monthly Redemption Amount shall be applied against the last principal
        amount
        of this Debenture scheduled to be redeemed hereunder, in reverse time order
        from
        the Maturity Date; provided,
        however,
        if any
        such conversion is applied against such Monthly Redemption Amount, the
        Pre-Redemption Conversion Shares, if any were issued in connection with such
        Monthly Redemption or were not already applied to such conversions, shall
        be
        first applied against such conversion. The Company covenants and agrees that
        it
        will honor all Notice of Conversions tendered up until such amounts are paid
        in
        full. The Company’s determination to pay a Monthly Redemption in cash, shares of
        Common Stock or a combination thereof shall be applied ratably to all of
        the
        holders of the then outstanding Debentures based on their (or their
        predecessor’s) initial purchases of Debentures pursuant to the Purchase
        Agreement. At any time the Company delivers a notice to the Holder of its
        election to pay the Monthly Redemption Amount in shares of Common Stock,
        the
        Company shall file a prospectus supplement pursuant to Rule 424 disclosing
        such
        election.

      
        
          
          

        

        
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      b)
        Redemption
        Procedure.
        The
        payment of cash or issuance of Common Stock, as applicable, pursuant to a
        Monthly Redemption shall be made on the Monthly Redemption Date. If any portion
        of the payment pursuant to a Monthly Redemption shall not be paid by the
        Company
        by the applicable due date, interest shall accrue thereon until such amount
        is
        paid in full at an interest rate equal to the lesser of 18% per annum or
        the
        maximum rate permitted by applicable law. Notwithstanding anything herein
        contained to the contrary, if any portion of the Monthly Redemption Amount
        remains unpaid after such date, the Holder may elect, by written notice to
        the
        Company given at any time thereafter, to invalidate ab initio
        such
        redemption. Notwithstanding anything to the contrary in this Section 6, the
        Company’s determination to redeem in cash or its elections under Section 6(b)
        shall be applied ratably among the Holders of Debentures.
        The
        Holder may elect to convert the outstanding principal amount of the Debenture
        pursuant to Section 4 prior to actual payment in cash for any redemption
        under
        this Section 6 by the delivery of a Notice of Conversion to the
        Company.

       

      c)
        Forced
        Conversion.
        Notwithstanding anything herein to the contrary, if after the Effective Date
        of
        the Registration Statement covering the Conversion Shares and after the date
        the
        Charter Amendment is effective, (i) the VWAPs for each of any 20 consecutive
        Trading Days, which period shall have commenced only after such Effective
        Date,
        such period the “Threshold
        Period”))
        exceeds $0.20 (subject to adjustment for forward and reverse stock splits,
        recapitalizations, stock dividends and the like after the Original Issue
        Date)
        and (ii) the average daily trading volume for such Threshold Period exceeds
        600,000 shares of Common Stock per Trading Day (subject to adjustment for
        forward and reverse stock splits, recapitalizations, stock dividends and
        the
        like after the Original Issue Date), the Company may, within 1 Trading Day
        after
        the end of any such Threshold Period, deliver a written notice to the Holder
        (a
“Forced
        Conversion Notice”
and
        the
        date such notice is received by the Holder, the “Forced
        Conversion Notice Date”)
        to
        cause the Holder to convert all or part of the then outstanding principal
        amount
        of Debentures plus, if so specified in the Forced Conversion Notice, liquidated
        damages and other amounts owing to the Holder pursuant to Section 4, it being
        agreed that the “Conversion Date” for purposes of Section 4 shall be deemed to
        occur on the third Trading Day following the Forced Conversion Notice Date
        (such
        third Trading Day, the “Forced
        Conversion Date”).
        The
        Company may not deliver a Forced Conversion Notice, and any Forced Conversion
        Notice delivered by the Company shall not be effective, unless all of the
        Equity
        Conditions are met on each Trading Day occurring during the applicable Threshold
        Period through and including the later of the Forced Conversion Date and
        the
        Trading Day after the date such Conversion Shares pursuant to such conversion
        are delivered to the Holder. Any Forced Conversion shall be applied ratably
        to
        all Holders based on their initial purchases of Debentures pursuant to the
        Purchase Agreement, provided that any voluntary conversions by a Holder shall
        be
        applied against such Holder’s pro-rata allocation, thereby decreasing the
        aggregate amount forcibly converted hereunder if only a portion of this
        Debenture is forcibly converted. For purposes of clarification, a Forced
        Conversion shall be subject to all of the provisions of Section 4, including,
        without limitation, the provision requiring payment of liquidated damages
        and
        limitations on conversions.

      
        
          
          

        

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

       

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

       

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

      

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

      
        
          
          

        

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

      

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

      

      f)
        pay
        cash dividends or distributions on any equity securities of the Company
        (other
        than
        regularly scheduled dividends pursuant to the terms of the Company’s Series A
        Convertible Preferred Stock which preferred stock shall not be amended after
        the
        date hereof to increase the dividend rate or number of shares of such
        securities).

       

      Section
        8. Events
        of Default.
        

      

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

      

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

      

      ii.
        the
        Company
        shall fail to observe or perform any other covenant or agreement contained
        in
        the Debentures (other than a breach by the Company of its obligations to
        deliver
        shares of Common Stock to the Holder upon conversion, which breach is addressed
        in clause (xi) below) which failure is not cured, if possible to cure, within
        the earlier to occur
        of
(A)
        7
Trading
        Days after notice of such failure sent by the Holder or by any other
        Holder
        and (B)
        15 Trading Days after the Company has become or should have become aware
        of such
        failure;

      

      iii.
        a
        default, breach or event of default (subject to any grace or cure period
        provided in the applicable agreement, document or instrument) shall occur
        under
        (A) any of the Transaction Documents within the earlier to occur of (i) 5
        Trading Days after notice of such default sent by the Holder or by any other
        Holder and (ii) 10 Trading Days after the Company shall become or, should
        reasonably have become, aware of such failure or (B) any other material
        agreement, lease, document or instrument to which the Company or any Subsidiary
        is obligated (and not covered by clause (vi) below);

      
        
          
          

        

        
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      iv.
        any
        representation
        or warranty made in this Debenture, any other Transaction Documents shall
        be
        untrue or incorrect in any material respect as of the date when made or deemed
        made;

      

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

       

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

      

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

      

      viii.
        the
        Company shall be a party to any Change of Control Transaction or Fundamental
        Transaction or shall agree to sell or dispose of all or in excess of 33%
        of its
        assets in one transaction or a series of related transactions (whether or
        not
        such sale would constitute a Change of Control Transaction);

      

      ix.
        any
        Registration Statement shall not have been declared effective by the Commission
        on or prior to the 135th calendar
        day following its Filing Date (as defined in the Registration Rights Agreement);
        

      

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

      
        
          
          

        

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

      

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

      

      xiii.
        any
        monetary judgment, writ or similar final process shall be entered or filed
        against the Company, any Subsidiary or any of their respective property or
        other
        assets for more than $75,000, and such judgment, writ or similar final process
        shall remain unvacated, unbonded or unstayed for a period of 45 calendar
        days.

      

      b)
        Remedies
        Upon Event of Default.
        If any
        Event of Default occurs, the outstanding principal amount of this Debenture,
        plus liquidated damages and other amounts owing in respect thereof through
        the
        date of acceleration, shall become, at the Holder’s election, immediately due
        and payable in cash at the Mandatory Default Amount. Commencing 10 days after
        the occurrence of any Event of Default that results in the eventual acceleration
        of this Debenture, interest on this Debenture shall accrue at an interest
        rate
        equal to the lesser of 18% per annum or the maximum rate permitted under
        applicable law. Upon the payment in full of the Mandatory Default Amount,
        the
        Holder shall promptly surrender this Debenture to or as directed by the Company.
        In connection with such acceleration described herein, the Holder need not
        provide, and the Company hereby waives, any presentment, demand, protest
        or
        other notice of any kind, and the Holder may immediately and without expiration
        of any grace period enforce any and all of its rights and remedies hereunder
        and
        all other remedies available to it under applicable law. Such acceleration
        may
        be rescinded and annulled by Holder at any time prior to payment hereunder
        and
        the Holder shall have all rights as a holder of the Debenture until such
        time,
        if any, as the Holder receives full payment pursuant to this Section 8(b).
        No
        such rescission or annulment shall affect any subsequent Event of Default
        or
        impair any right consequent thereon.

      
        
          
          

        

        
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       Section
        9. Miscellaneous.
        

       

      a)
        Notices.
        Any and
        all notices or other communications or deliveries to be provided by the Holder
        hereunder, including, without limitation, any Notice of Conversion, shall
        be in
        writing and delivered personally, by facsimile, or sent by a nationally
        recognized overnight courier service, addressed to the Company, at the address
        set forth above, facsimile number 201.760.8860,
        Attn: Frank Puthoff, Esq., General Counsel and Secretary or
        such
        other facsimile number or address as the Company may specify for such purpose
        by
        notice to the Holder delivered in accordance with this Section 9. Any and
        all
        notices or other communications or deliveries to be provided by the Company
        hereunder shall be in writing and delivered personally, by facsimile, or
        sent by
        a nationally recognized overnight courier service addressed to each Holder
        at
        the facsimile number or address of such Holder appearing on the books of
        the
        Company, or if no such facsimile number or address appears, at the principal
        place of business of the Holder. Any notice or other communication or deliveries
        hereunder shall be deemed given and effective on the earliest of (i) the
        date of
        transmission, if such notice or communication is delivered via facsimile
        at the
        facsimile number specified in this Section 9 prior to 5:30 p.m. (New York
        City
        time), (ii) the date immediately following the date of transmission, if such
        notice or communication is delivered via facsimile at the facsimile number
        specified in this Section 9 between 5:30 p.m. (New York City time) and 11:59
        p.m. (New York City time) on any date, (iii) the second Business Day following
        the date of mailing, if sent by nationally recognized overnight courier service,
        or (iv) upon actual receipt by the party to whom such notice is required
        to be
        given.

       

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

       

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

      
        
          
          

        

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

       

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

      
        
          
          

        

        
          25

          
            

          

        

        
          
          

        

      

      

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

       

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

      

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

      

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

      

      j)
        Security
        Agreement.
        The
        obligations of the Company hereunder (i) are secured by a lien on assets
        of the
        Company and its Subsidiaries pursuant to that certain Security Agreement,
        dated
        as of the date hereof, by and between the Company, its Subsidiaries and the
        holders signatory thereto and (ii) have been guaranteed by each Subsidiary
        of
        the Company pursuant to Guarantee Agreements, dated as of the date
        hereof.

      

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

      
        
          
          

        

        
          26

          
            

          

        

        
          
          

        

      

      

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

      

      
        	 	 	 
	 	DOBI
                MEDICAL INTERNATIONAL, INC.
	 
 	 
 	 
 
	 	By:  	 
	 	
                
Name:
	 	Title 

      

      

        
          
            
            

          

          
            27

            
              

            

          

          
            
            

          

        

        
          ANNEX
            A

          

          NOTICE
            OF CONVERSION

        

        

        The
          undersigned hereby elects to convert principal under the Convertible Debenture
          of DOBI Medical International, Inc., a Delaware corporation (the “Company”),
          due
          on August 28, 2007 into shares of common stock, par value $.0001 per share
          (the
“Common
          Stock”),
          of
          the Company according to the conditions hereof, as of the date written
          below. If
          shares are to be issued in the name of a person other than the undersigned,
          the
          undersigned will pay all transfer taxes payable with respect thereto and
          is
          delivering herewith such certificates and opinions as reasonably requested
          by
          the Company in accordance therewith. No fee will be charged to the holder
          for
          any conversion, except for such transfer taxes, if any.

        

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

        

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

        

        Conversion
          calculations:

        Date
          to
          Effect Conversion:

        

        Principal
          Amount of Debenture to be Converted:

        

        Number
          of
          shares of Common Stock to be issued:

         

        Signature:

         

        Name:

         

        Address:

        
          
            
            

          

          
            28

            
              

            

          

          
            
            

          

        

        Schedule
          1

        

        CONVERSION
          SCHEDULE

        

        The
          Convertible Debentures due on August 28, 2007 in the aggregate principal
          amount
          of $____________ issued by DOBI Medical International, Inc. This Conversion
          Schedule reflects conversions made under Section 4 of the above referenced
          Debenture.

        

        Dated:
          

        
          

            
              	
                       

                      Date
                        of Conversion

                      (or
                        for first entry, Original Issue Date)

                    	
                       

                      Amount
                        of Conversion

                    	
                       

                      Aggregate
                        Principal Amount Remaining Subsequent to Conversion

                      (or
                        original Principal Amount)

                    	
                       

                      Company
                        Attest

                    
	 	 	 	 
	 	 	 	 
	
                       

                       

                       

                    	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 

            

          

        

        

        
          
            
            

          

          
            29

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