Document:

exh104.htm

     

    
      

      

    

    EXHIBIT 10.4

     

     

    
      MALVERN
FEDERAL SAVINGS BANK

      EMPLOYMENT
AGREEMENT

       

       

      This
EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as of the
11th day of
August 2008, by and between Malvern Federal Savings Bank  (the
“Bank”), a federally chartered savings bank which is a wholly owned subsidiary
of Malvern Federal Bancorp, Inc. (the “Corporation”), and William E. Hughes, Jr.
(the “Executive”).  The Corporation is a majority-owned subsidiary of
Malvern Federal Mutual Holding Company, a federally chartered mutual holding
company (the “MHC”).

       

       

      WITNESSETH

       

      WHEREAS,
the Executive is currently employed as the Senior Vice President and Chief
Lending Officer of the Bank (the Bank is referred to herein as the
“Employer”);

       

      WHEREAS,
pursuant to a Plan of Reorganization from Mutual Savings Bank to Mutual Holding
Company and a Plan of Stock Issuance, the Bank has reorganized into the mutual
holding company structure, and the Bank is currently a wholly owned subsidiary
of the Corporation (the “Reorganization”);

       

      WHEREAS,
the Employer desires to assure itself of the continued availability of the
Executive’s services as provided in this Agreement; and

       

      WHEREAS,
the Executive is willing to serve the Employer on the terms and conditions
hereinafter set forth;

       

      NOW
THEREFORE, in consideration of the mutual agreements herein contained, and upon
the other terms and conditions hereinafter provided, the Employer and the
Executive hereby agree as follows:

       

      1.           
Definitions.  The
following words and terms shall have the meanings set forth below for the
purposes of this Agreement:

       

      (a)           Annual
Compensation.  The Executive's “Annual Compensation” for
purposes of determining severance payable under this Agreement shall be deemed
to mean the sum of (i) the annual rate of Base Salary as of the Date of
Termination, and (ii) the cash bonus, if any, earned by the Executive for the
calendar year immediately preceding the year in which the Date of Termination
occurs.

       

      (b)           Base
Salary.  “Base Salary” shall have the meaning set forth in
Section 3(a) hereof.

       

      (c)           Cause.
Termination of the Executive's employment for “Cause” shall mean termination
because of personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      (d)          Change in
Control.  “Change in Control” shall mean a change in the
ownership of the Corporation or the Bank, a change in the effective control of
the Corporation or the Bank or a change in the ownership of a substantial
portion of the assets of the Corporation or the Bank, in each case as provided
under Section 409A of the Code and the regulations thereunder; provided,
however, that neither any second-step conversion and reorganization in which the
MHC ceases to exist nor any increase in the ownership of the Corporation by the
MHC shall be deemed to constitute a Change in Control.

       

      (e)          Code.  “Code”
shall mean the Internal Revenue Code of 1986, as amended.

       

      (f)           Date of
Termination.  “Date of Termination” shall mean (i) if the
Executive's employment is terminated for Cause, the date on which the Notice of
Termination is given, and (ii) if the Executive's employment is terminated for
any other reason, the date specified in such Notice of
Termination.

       

      (g)          Disability.  “Disability”
shall mean the Executive (i) is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
which can be expected to result in death or can be expected to last for a
continuous period of not less than 12 months, or (ii) is, by reason of any
medically determinable physical or mental impairment which can be expected to
result in death or can be expected to last for a continuous period of not less
than 12 months, receiving income replacement benefits for a period of not less
than three months under an accident and health plan covering employees of the
Employer.

       

      (h)          Effective
Date.  “Effective Date” shall mean the date this Agreement is
executed as first written above.

       

      (i)           ERISA.  “ERISA”
means the Employee Retirement Income Security Act of 1974, as
amended.

       

      (j)           Good
Reason.   “Good Reason” means the occurrence of any of the
following conditions:

       

      
              (i)    any
material breach of this Agreement by the Employer, including without limitation
any of the following: (A) a material diminution in the Executive’s base
compensation, (B) a material diminution in the Executive’s authority, duties or
responsibilities, or (C) a material diminution in the authority, duties or
responsibilities of the supervisor to whom the Executive is required to report,
or

      

       

      
                (ii)    any
material change in the geographic location at which the Executive must perform
his services under this Agreement;

      

       

      
        
          
          

        

        
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      provided,
however, that prior to any termination of employment for Good Reason, the
Executive must first provide written notice to the Employer within ninety (90)
days of the initial existence of the condition, describing the existence of such
condition, and the Employer shall thereafter have the right to remedy the
condition within thirty (30) days of the date the Employer received the written
notice from the Executive.  If the Employer remedies the condition
within such thirty (30) cure period, then no Good Reason shall be deemed to
exist with respect to such condition.  If the Employer does not remedy
the condition within such thirty (30) day cure period, then the Executive may
deliver a Notice of Termination for Good Reason at any time within sixty (60)
days following the expiration of such cure period.

       

      (k)          IRS.  IRS
shall mean the Internal Revenue Service.

       

      (l)           Notice of
Termination.  Any purported termination of the Executive's
employment by the Employer for any reason, including without limitation for
Cause, Disability or Retirement, or by the Executive for any reason, including
without limitation for Good Reason, shall be communicated by a written “Notice
of Termination” to the other party hereto.  For purposes of this
Agreement, a “Notice of Termination” shall mean a dated notice which (i)
indicates the specific termination provision in this Agreement relied upon, (ii)
sets forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated, (iii) specifies a Date of Termination, which shall be effective
immediately if the Employer terminates the Executive's employment for Cause, and
(iv) is given in the manner specified in Section 10 hereof.

       

      (m)         Retirement.  “Retirement”
shall means voluntary termination by the Executive which constitutes a
retirement, including early retirement, under the Bank’s 401(k)
plan.

       

      2.           Term
of Employment and Duties.

       

      (a)          The
Employer hereby employs the Executive as the Senior Vice President and Chief
Lending Officer of the Bank, and the Executive hereby accepts said employment
and agrees to render such services to the Employer on the terms and conditions
set forth in this Agreement.  The term of employment under this
Agreement shall be for two years commencing on the Effective
Date.  Upon approval of the Board of Directors of the Employer, the
term of employment shall extend for an additional year on each annual
anniversary of the Effective Date such that at any time the remaining term of
this Agreement shall be from one to two years in the absence of notice to the
contrary.  Prior to each annual anniversary of the Effective Date, the
Board of Directors of the Employer shall consider and review (after taking into
account all relevant factors, including the Executive’s performance hereunder)
an extension of the term of this Agreement, and the term shall continue to
extend on each annual anniversary of the Effective Date if the Board of
Directors approves such extension unless the Executive gives written notice to
the Employer of the Executive’s election not to extend the term, with such
written notice to be given not less than thirty (30) days prior to any such
anniversary date. If the Board of Directors of the Employer elects not to extend
the term, it shall give written notice of such decision to the Executive not
less than thirty (30) days prior to any such anniversary date.  If any
party gives timely notice that the term will not be extended as of any
anniversary date, then this Agreement shall terminate at the conclusion of its
remaining term.  References herein to the term of this Agreement shall
refer both to the initial term and successive terms.

       

      
        
          
          

        

        
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      (b)           Nothing
in this Agreement shall be deemed to prohibit the Employer at any time from
terminating the Executive's employment during the term of this Agreement for any
reason, provided that the relative rights and obligations of the Employer and
the Executive in the event of any such termination shall be determined under
this Agreement.

       

      (c)           During
the term of this Agreement, the Executive shall be responsible for the lending
operations of the Bank.  The Executive shall report directly to the
President and Chief Executive Officer of the Employer. In addition, the
Executive shall perform such executive services for the Employer as may be
consistent with his titles and from time to time assigned to him by the
President and Chief Executive Officer of the Employer.

       

      3.           Compensation
and Benefits.

       

      (a)          The
Employer shall compensate and pay the Executive for his services during the term
of this Agreement at a minimum base salary of $128,000 per year (“Base Salary”),
which may be increased from time to time in such amounts as may be mutually
determined by the Board of Directors of the Employer and may not be decreased
without the Executive's express written consent.  In addition to his
Base Salary, the Executive shall be entitled to receive during the term of this
Agreement such bonus payments as may be determined by the Board of Directors of
the Employer.

       

      (b)           During
the term of this Agreement, the Executive shall be entitled to participate in
and receive the benefits of any pension or other retirement benefit plan, profit
sharing, stock option, employee stock ownership, or other plans, benefits and
privileges given to employees and executives of the Employer, to the extent
commensurate with his then duties and responsibilities, as fixed by the Board of
Directors of the Employer.  The Employer shall not make any changes in
such plans, benefits or privileges which would adversely affect the Executive's
rights or benefits thereunder, unless such change occurs pursuant to a program
applicable to all executive officers of the Employer and does not result in a
proportionately greater adverse change in the rights of or benefits to the
Executive as compared with any other executive officer of the
Employer.  Nothing paid to the Executive under any plan or arrangement
presently in effect or made available in the future shall be deemed to be in
lieu of the salary payable to the Executive pursuant to Section 3(a)
hereof.

       

      (c)           During
the term of this Agreement, the Executive shall be entitled to paid annual
vacation in accordance with the policies as established from time to time by the
Board of Directors of the Employer.  The Executive shall not be
entitled to receive any additional compensation from the Employer for failure to
take a vacation, nor shall the Executive be able to accumulate unused vacation
time from one year to the next, except to the extent authorized by the Board of
Directors of the Employer.

       

      4.           Expenses.  The
Employer shall reimburse the Executive or otherwise provide for or pay for all
reasonable expenses incurred by the Executive in furtherance of or in connection
with the business of the Employer, including, but not by way of limitation,
automobile expenses and traveling expenses, and all reasonable entertainment
expenses (whether incurred at the Executive's residence, while traveling or
otherwise), subject to such reasonable documentation and policies as may be
established by the Board of Directors of the Employer.  If such
expenses are paid in the first instance by the Executive, the Employer shall
reimburse the Executive therefor.  Such reimbursement shall be paid
promptly by the Employers and in any event no later than March 15 of the year
immediately following the year in which such expenses were
incurred.

       

      
        
          
          

        

        
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      5.          
 Termination.

       

      (a)           The
Employer shall have the right, at any time upon prior Notice of Termination, to
terminate the Executive's employment hereunder for any reason, including without
limitation termination for Cause, Disability or Retirement, and the Executive
shall have the right, upon prior Notice of Termination, to terminate his
employment hereunder for any reason.

       

      (b)           In
the event that (i) the Executive's employment is terminated by the Employer for
Cause or (ii) the Executive terminates his employment hereunder other than for
Disability, Retirement, death or Good Reason, the Executive shall have no right
pursuant to this Agreement to compensation or other benefits for any period
after the applicable Date of Termination.

       

      (c)           In
the event that the Executive's employment is terminated as a result of
Disability, Retirement or the Executive's death during the term of this
Agreement, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination.

       

      (d)           In
the event that prior to a Change in Control (i) the Executive's employment is
terminated by the Employer for other than Cause, Disability, Retirement or the
Executive's death or (ii) such employment is terminated by the Executive for
Good Reason, then the Employer shall:

       

      (A)           pay
to the Executive, in a lump sum as of the Date of Termination, a cash severance
amount equal to one (1) times his Base Salary, and

       

      (B)           maintain
and provide for a period ending at the earlier of (i) twelve (12) months after
the Date of Termination or (ii) the date of the Executive's full-time employment
by another employer (provided that the Executive is entitled under the terms of
such employment to benefits substantially similar to those described in this
subparagraph (B)), at no cost to the Executive, the continued participation of
the Executive and his dependents in all group insurance, life insurance, health
and accident insurance, and disability insurance offered by the Employer in
which the Executive and his dependents were participating immediately prior to
the Date of Termination, subject to compliance with Section 5(f)
below.

       

      (e)           In
the event that either concurrently with or following a Change in Control (i) the
Executive's employment is terminated by the Employer for other than Cause,
Disability, Retirement or the Executive's death or (ii) such employment is
terminated by the Executive for Good Reason, then the Employer shall, subject to
the provisions of Section 6 hereof, if applicable,

       

      
        
          
          

        

        
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      (A)           pay
to the Executive, in a lump sum as of the Date of Termination, a cash severance
amount equal to two (2) times his Annual Compensation, and

       

      (B)           maintain
and provide for a period ending at the earlier of (i) twenty-four (24) months
after the Date of Termination or (ii) the date of the Executive's full-time
employment by another employer (provided that the Executive is entitled under
the terms of such employment to benefits substantially similar to those
described in this subparagraph (B)), at no cost to the Executive, the continued
participation of the Executive and his dependents in all group insurance, life
insurance, health and accident insurance, and disability insurance offered by
the Employer in which the Executive and his dependents were participating
immediately prior to the Date of Termination, subject to compliance with Section
5(f) below.

       

      (f)           Any
insurance premiums payable by the Employer or any successor pursuant to this
Section 5 shall be payable at such times and in such amounts (except that the
Employer shall also pay any employee portion of the premiums) as if the
Executive was still an employee of the Employer, subject to any increases in
such amounts imposed by the insurance company or COBRA, and the amount of
insurance premiums required to be paid by the Employer in any taxable year shall
not affect the amount of insurance premiums required to be paid by the Employer
in any other taxable year; provided, however, that if the Executive’s
participation in any group insurance plan is barred, the Employer shall either
arrange to provide the Executive with insurance benefits substantially similar
to those which the Executive was entitled to receive under such group insurance
plan or, if such coverage cannot be obtained, pay a lump sum cash equivalency
amount within thirty (30) days following the Date of Termination based on the
annualized rate of premiums being paid by the Employer as of the Date of
Termination.

       

      6.           Limitation of
Benefits under Certain Circumstances.  If the payments and
benefits pursuant to Section 5 hereof, either alone or together with other
payments and benefits which the Executive has the right to receive from the
Employer and the Corporation, would constitute a “parachute payment” under
Section 280G of the Code, then the payments and benefits payable by the Employer
pursuant to Section 5 hereof shall be reduced by the minimum amount necessary to
result in no portion of the payments and benefits payable by the Employer under
Section 5 being non-deductible to the Employer pursuant to Section 280G of the
Code and subject to the excise tax imposed under Section 4999 of the Code. In no
event shall the payments and benefits payable under Section 5 exceed three times
the Executive’s average taxable income from the Employer for the five calendar
years preceding the year in which the Date of Termination occurs, with any
benefits to be provided subsequent to the Date of Termination to be discounted
to present value in accordance with Section 280G of the Code. If the payments
and benefits under Section 5 are required to be reduced, the cash severance
shall be reduced first, followed by a reduction in the fringe
benefits.  The determination of any reduction in the payments and
benefits to be made pursuant to Section 5 shall be based upon the opinion of
independent tax counsel selected by the Employer and paid by the
Employer.  Such counsel shall promptly prepare the foregoing opinion,
but in no event later than thirty (30) days from the Date of Termination, and
may use such actuaries as such counsel deems necessary or advisable for the
purpose.  Nothing contained in this Section 6 shall result in a
reduction of any payments or benefits to which the Executive may be entitled
upon termination of employment under any circumstances other than as specified
in this Section 6, or a reduction in the payments and benefits specified in
Section 5 below zero.

       

      
        
          
          

        

        
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      7.           Mitigation;
Exclusivity of Benefits.

       

      (a)          The
Executive shall not be required to mitigate the amount of any benefits hereunder
by seeking other employment or otherwise, nor shall the amount of any such
benefits be reduced by any compensation earned by the Executive as a result of
employment by another employer after the Date of Termination or otherwise,
except as set forth in Sections 5(d)(B)(ii) and 5(e)(B)(ii)
above.

       

      (b)          The
specific arrangements referred to herein are not intended to exclude any other
benefits which may be available to the Executive upon a termination of
employment with the Employer pursuant to employee benefit plans of the Employer
or otherwise.

       

      8.           Withholding.  All
payments required to be made by the Employer hereunder to the Executive shall be
subject to the withholding of such amounts, if any, relating to tax and other
payroll deductions as the Employer shall determine are required to be withheld
pursuant to any applicable law or regulation.

       

      9.           Assignability.  The
Employer  may assign this Agreement and its rights and obligations
hereunder in whole, but not in part, to any corporation, bank or other entity
with or into which the Employer may hereafter merge or consolidate or to which
the Employer may transfer all or substantially all of its assets, if in any such
case said corporation, bank or other entity shall by operation of law or
expressly in writing assume all obligations of the Employer hereunder as fully
as if it had been originally made a party hereto, but may not otherwise assign
this Agreement or its rights and obligations hereunder.  The Executive
may not assign or transfer this Agreement or any rights or obligations
hereunder.

       

      10.         Notice.  For
the purposes of this Agreement, notices and all other communications provided
for in this Agreement shall be in writing and shall be deemed to have been duly
given when delivered or mailed by certified or registered mail, return receipt
requested, postage prepaid, addressed to the respective addresses set forth
below:

       

      To the
Bank:                 Secretary

      Malvern
Federal Savings Bank

      42 East
Lancaster Avenue

      Paoli,
Pennsylvania  19301

       

      To the
Executive:          William E.
Hughes, Jr.

      At the
address last appearing on

      the
personnel records of the Employer

       

      
        
          
          

        

        
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      11.          Amendment;
Waiver.  No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Employer to sign on its
behalf.  No waiver by any party hereto at any time of any breach by
any other party hereto of, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.  In addition, notwithstanding anything in this
Agreement to the contrary, the Employer may amend in good faith any terms of
this Agreement, including retroactively, in order to comply with Section 409A of
the Code.

       

      12.           Governing
Law.  The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the Commonwealth of
Pennsylvania.

       

      13.           Nature of
Obligations.  Nothing contained herein shall create or require
the Employer to create a trust of any kind to fund any benefits which may be
payable hereunder, and to the extent that the Executive acquires a right to
receive benefits from the Employer hereunder, such right shall be no greater
than the right of any unsecured general creditor of the
Employer.

       

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

       

      15.           Validity.  The
invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provisions of this Agreement,
which shall remain in full force and effect.

       

      16.           Changes in Statutes
or Regulations. If any statutory or regulatory provision referenced
herein is subsequently changed or re-numbered, or is replaced by a separate
provision, then the references in this Agreement to such statutory or regulatory
provision shall be deemed to be a reference to such section as amended,
re-numbered or replaced.

       

      17.           Counterparts.  This
Agreement may be executed in one or more counterparts, each of which shall be
deemed to be an original but all of which together will constitute one and the
same instrument.

       

      18.           Regulatory
Actions.  The following provisions shall be applicable to the
parties to the extent that they are required to be included in employment
agreements between a savings bank and its employees pursuant to Section
563.39(b) of the Office of Thrift Supervision (“OTS”) Rules and Regulations, 12
C.F.R. §563.39(b), or any successor thereto, and shall be controlling in the
event of a conflict with any other provision of this Agreement, including
without limitation Section 5 hereof.

       

      (a)           If
the Executive is suspended from office and/or temporarily prohibited from
participating in the conduct of the Bank's affairs pursuant to notice served
under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act
(“FDIA”)(12 U.S.C. §§1818(e)(3) and 1818(g)(1)), the Bank's obligations under
this Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings.  If the charges in the notice are dismissed,
the Bank may, in its discretion:  (i) pay the Executive all or part of
the compensation withheld while its obligations under this Agreement were
suspended, and (ii) reinstate (in whole or in part) any of its obligations which
were suspended.

       

      
        
          
          

        

        
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      (b)           If
the Executive is removed from office and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. §§1818(e)(4) and
(g)(1)), all obligations of the Bank under this Agreement shall terminate as of
the effective date of the order, but vested rights of the Executive and the Bank
as of the date of termination shall not be affected.

       

      (c)           If
the Bank is in default, as defined in Section 3(x)(1) of the FDIA (12 U.S.C.
§1813(x)(1)), all obligations under this Agreement shall terminate as of the
date of default, but vested rights of the Executive and the Bank as of the date
of termination shall not be affected.

       

      (d)           All
obligations under this Agreement shall be terminated pursuant to 12 C.F.R.
§563.39(b)(5), except to the extent that it is determined that continuation of
the Agreement for the continued operation of the Bank is necessary: (i) by the
Director of the OTS, or his/her designee, at the time the Federal Deposit
Insurance Corporation (“FDIC”) enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
FDIA (12 U.S.C. §1823(c)); or (ii) by the Director of the OTS, or his/her
designee, at the time the Director or his/her designee approves a supervisory
merger to resolve problems related to operation of the Bank or when the Bank is
determined by the Director of the OTS to be in an unsafe or unsound condition,
but vested rights of the Executive and the Employers as of the date of
termination shall not be affected.

       

      19.           Regulatory
Prohibition.  Notwithstanding any other provision of this
Agreement to the contrary, any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the FDIA (12 U.S.C. §1828(k)) and 12 C.F.R. Part
359.

       

      20.           Entire
Agreement.  This Agreement embodies the entire agreement
between the Employer and the Executive with respect to the matters agreed to
herein.  All prior agreements between the Employer and the Executive
with respect to the matters agreed to herein are hereby superseded and shall
have no force or effect.

       

      
        
          
          

        

        
          9

          
            

          

        

        
          
          

        

      

      IN
WITNESS WHEREOF, this Agreement has been executed as of the date first written
above.

       

    

    
      
        
          	
                  Attest:

                	
                  
                    MALVERN
      FEDERAL SAVINGS BANK

                  

                
	 
      	 
      
	 
      	 
      
	/s/Shirley Stanke	 	
                  By:

                	/s/F.
      Claire Hughes, Jr.
	
                  Shirley
      Stanke

                	 
      	
                  F.
      Claire Hughes, Jr.

                
	
                  Corporate
      Secretary

                	 
      	
                  Chairman
      of the Board

                
	 
      	 
      
	 	 
	
                   

                	
                   

                
	 
      	
                  EXECUTIVE 
      

                
	 
      	 
      
	 	 
      	
                  By:

                	/s/William E. Hughes, Jr.
	
                   

                	 
      	
                  William
      E. Hughes, Jr.

                
	
                   

                	 
      	
                   

                

        

      

    

     

     

    
      
        
        

      

      
        10WWW.EXFILE.COM, INC. -- 888-775-4789 -- ARKADOS GROUP, INC. -- EXHIBIT 4.1 TO FORM 8-K

    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.

    

    Original
Issue Date: See schedule of original principal set forth on the signature page
hereof

    Original
Conversion Price (subject to adjustment herein): $0.25

    $
_______

    

    

    6%
SECURED CONVERTIBLE DEBENTURE

    DUE
DECEMBER 28, 2008

    

    THIS
SECURED DEBENTURE is one of a series of duly authorized and issued 6% Secured
Convertible Debentures of Arkados Group, Inc. (formerly CDKNet.com, Inc.), a
Delaware corporation, having a principal place of business at 220 Old New
Brunswick Road, 2nd Floor, Piscataway, NJ  08854 (the “Company”), designated
as its 6% Secured Convertible Debenture, due December 28, 2008 (this debenture,
the “Debenture”
and collectively with the other such series of debentures, the “Debentures”).  The
obligations represented by this Debenture are secured by and the holder hereof
is entitled to the benefits of a security interest in the assets of the Company
contained in the Security Agreement..

    

    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 December 28, 2008 (the “Maturity Date”), or
such earlier date as this Debenture is required to be repaid as provided
hereunder, and to pay interest to the Holder on the aggregate unconverted and
then outstanding principal amount of this Debenture in accordance with the
provisions hereof.  This Debenture is subject to the following
additional provisions:

    

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

     

    
 

    
      
        
        

      

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

     

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

    

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

     

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

    

    “Change of Control
Transaction” means the occurrence after the date hereof of any of (i) an
acquisition after the date hereof by an individual or legal entity or “group”
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
effective control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 40% of the
voting securities of the Company, or (ii) the Company merges into or
consolidates with any other Person, or any Person merges into or consolidates
with the Company and, after giving effect to such transaction, the stockholders
of the Company immediately prior to such transaction own less than 60% of the
aggregate voting power of the Company or the successor entity of such
transaction, or (iii) the Company sells or transfers its assets, as an entirety
or substantially as an entirety, to another Person and the stockholders of the
Company immediately prior to such transaction own less than 60% of the aggregate
voting power of the acquiring entity immediately after the transaction, (iv) a
replacement at one time or within a two year period of more than one-half of the
members of the Company’s board of directors which is not approved by a majority
of those individuals who are members of the board of directors on the date
hereof (or by those individuals who are serving as members of the board of
directors on any date whose nomination to the board of directors was approved by
a majority of the members of the board of directors who are members on the date
hereof), or (v) the execution by the Company of an agreement to which the
Company  is a party or by which it is bound, providing for any of the
events set forth above in (i) through (iv).

    

    “Cash Sale Redemption
Amount” shall equal the sum of (i) 100% of the principal amount of this
Debenture to be prepaid, plus all accrued and unpaid interest thereon, (ii) the
principal amount of this Debenture to be prepaid, plus all other accrued and
unpaid interest hereon, divided by the Conversion Price on the closing date of
the applicable event multiplied by the “Effective Price” (defined below), and
(iii) all other amounts, costs, expenses and liquidated damages due in respect
of this Debenture.  The “Effective Price” shall be the cash
consideration paid by the acquirer in such event (less the amount set forth in
clause (i) above) divided by the sum of; (x) the issued and outstanding shares
of Common Stock of the Company then outstanding and (y) the shares of Common
Stock into which the outstanding Debentures may be converted on the day
immediately preceding the record date fixed for determining the holders of
shares of Common Stock eligible to receive a distribution (or if no such date
has been fixed, the date of the day

     

    
      
        
        

      

      
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    immediately
preceding the closing of the transaction) and (z) the number of shares deemed
issuable to the Warrant holders pursuant to the mandatory redemption provisions
in the Warrants which take effect upon sale of assets for cash consideration
whether or not any Warrant holder shall have elected to have their Warrants
Redeemed; provided, however, that the number of shares of
Common Stock issuable on conversion of the Debentures and issuable upon exercise
of the Warrants for this purpose shall be determined on a fully converted or
exercised basis and ignoring any conversion or exercise limitations
therein).

    

    “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 have been
reclassified or changed into.

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

    “Equity Conditions”
shall mean, during the period in question, (i) the Company shall have duly
honored all conversions and redemptions scheduled to occur or occurring by
virtue of one or more Notice of Conversions of the Holder, if any, (ii) all
liquidated damages and other amounts owing to the Holder in respect of this
Debenture shall have been paid, (iii) there is an effective Registration
Statement pursuant to which the Holder is permitted to utilize the prospectus
thereunder to resell all of the shares issuable pursuant to the Transaction
Documents (and the Company believes, in good faith, that such effectiveness will
continue uninterrupted for the foreseeable future), (iv) the Common Stock is
trading on the Trading Market and all of the shares issuable pursuant to the
Transaction Documents are listed for trading on a Trading Market (and the
Company 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 pursuant to the
Transaction Documents, (vi) there is then existing no Event of Default or 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  to
the Holder would not violate the limitations set forth in Section 4(c), (viii)

     

     

    
      
        
        

      

      
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    no public
announcement of a pending or proposed Fundamental Transaction, Change of Control
Transaction or acquisition transaction has occurred that has not been
consummated and (ix) for a period of 20 consecutive Trading Days prior to
the applicable date in question, the daily trading volume for the Common Stock
on the Trading Market exceeds 200,000 shares per Trading Day (subject to
adjustment for forward and reverse stock splits and the like) in the case of a
Forced Conversion pursuant to Section 6.

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

    “Interest Conversion
Rate” means 85% of the lesser of (i) the average of the VWAPs for the 10
consecutive Trading Days ending on the Trading Day that is immediately prior to
the applicable Interest Payment Date or (ii) the average of the VWAPs for the 10
consecutive Trading Days ending on the Trading Day that is immediately prior to
the date the applicable interest payment shares are issued and delivered if
after the Interest Payment Date.

    

    “Interest Notice
Period” shall have the meaning set forth in Section 2(a).

    

    “Interest Payment
Date” shall have the meaning set forth in Section 2(a).

    

    “Interest Share
Amount” shall have the meaning set forth in Section 2(a).

    

    “Late Fees” shall have
the meaning set forth in Section 2(d).

    

    “Mandatory Default
Amount”  shall equal the sum of (i) the greater of: (A) 130% of
the principal amount of this Debenture to be prepaid, plus all accrued and
unpaid interest thereon, or (B) the principal amount of this Debenture to be
prepaid, plus all other accrued and unpaid interest hereon, divided by the
Conversion Price on (x) the date the Mandatory Default Amount is demanded or
otherwise due or (y) the date the Mandatory Default Amount is paid in full,
whichever is less, multiplied by the average of the 15 VWAPs immediately prior
to (x) the date the Mandatory Default Amount is demanded or otherwise due or (y)
the date the Mandatory Default Amount is paid in full, whichever is greater, and
(ii) all other amounts, costs, expenses and liquidated damages due in respect of
this Debenture.

    

    
      
        
        

      

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

    

    “Permitted
Indebtedness” shall mean (a) the Indebtedness existing on the Original
Issue Date and set forth on Schedule 3.1(aa)
attached to the Purchase Agreement, (b) lease obligations and purchase money
Indebtedness of up to $100,000, in the aggregate, incurred in connection with
the acquisition of capital assets and lease obligations with respect to newly
acquired or leased assets, (c) Indebtedness incurred pursuant to the Transaction
Documents, (d) unsecured accounts payable incurred in the ordinary course of
business, (e) indebtedness with respect to taxes, governmental changes or levies
which are being contested in good faith, provided that adequate reserves are
maintained on the books of the Company or Subsidiaries, as the case may be, in
accordance with GAAP and (f) additional Indebtedness incurred by the Company in
connection with raising capital for the financing of its operations, acquisition
of another entity (by merger, consolidation, the acquisition of all or
substantially of the assets of such entity or similar transaction), provided
that such Indebtedness does not mature or require payments of principal
prior to the Maturity Date and is subordinate in right of payment to the
Indebtedness evidenced by this Debenture.

    

    “Permitted Lien” shall
mean 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 prior to the Original Issue Date as set forth on
the Disclosure Schedules, (c) Liens granted in connection with clauses (b) and
(c) under Permitted Indebtedness (provided, in the case of clause (b) such Liens
are not secured by assets of the Company or its Subsidiaries other than the
assets so leased or acquired), and (d) Liens imposed by law which were incurred
in the ordinary course of business, such as carriers’, warehousemen’s and
mechanics’ Liens, statutory landlords’ Liens, and other similar Liens arising in
the ordinary course of business, and (x) which 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) which are being contested in
good faith by appropriate proceedings, which proceedings have the effect of
preventing the forfeiture or sale of the property or asset subject to such
Lien.

     

     

    
      
        
        

      

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

    

    “Purchase Agreement”
means the Securities Purchase Agreement, dated as of June 30, 2006 to which the
Company and the original Holder are parties, as amended, modified or
supplemented from time to time in accordance with its terms.

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

    “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 as reported by Bloomberg Financial L.P. (based on a Trading Day from
9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b)  if the Common Stock
is not then listed or quoted on a Trading Market and if prices for the Common
Stock are then reported in the “Pink Sheets” published by the 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
(c) in all other cases, the fair

     

     

    
      
        
        

      

      
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    market
value of a share of Common Stock as determined by an independent appraiser
selected in good faith by the Holder and reasonably acceptable to the
Company.

    

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

    

    Section
2.    
          Interest.

    

    a) Payment of Interest in Cash
or Kind. The Company shall pay interest to the Holder on the aggregate
unconverted and then outstanding principal amount of this Debenture at the rate
of 6% per annum, payable semiannually  on January 1 and July 1,
beginning on January 1, 2007 (provided that interest due on January 1, 2007,
July 1, 2007, January 1, 2008, July 1, 2008 and each date on which an interest
payment upon principal outstanding is due hereunder shall be added to the
principal outstanding and shall thereafter bear interest at the rate set forth
herein), upon a redemption event pursuant to Section 6(a) and on the Maturity
Date (except that, if any such date is not a Business Day, then such payment
shall be due on the next succeeding Business Day) (each such date, an “Interest Payment
Date”), in cash or duly authorized, fully paid and non-assessable shares
of Common Stock at the Interest Conversion Rate, or a combination
thereof  (the amount to be paid in shares, the “Interest Share
Amount”); provided, however, payment in
shares of Common Stock may only occur if during the 20 Trading Days immediately
prior to the applicable Interest Payment Date  (the “Interest Notice
Period”) and through and including the date such shares of Common Stock
are issued to the Holder all of the Equity Conditions, unless waived by the
Holder in writing, have been met and the Company shall have given the Holder
notice in accordance with the notice requirements set forth below.

    

    b) Company’s Election to Pay
Interest in Kind.  Subject to the terms and conditions herein,
the decision whether to pay interest hereunder in shares of Common Stock or cash
shall be at the sole discretion of the Company.  Prior to the
commencement of an Interest Notice Period, the Company shall provide the Holder
with written notice of its election to pay interest hereunder on the applicable
Interest Payment Date either in cash, shares of Common Stock or a combination
thereof (the Company may indicate in such notice that the election contained in
such notice shall continue for later periods until revised) and the Interest
Share Amount as to the applicable Interest Payment Date.  During any
Interest Notice Period, the Company’s election (whether specific to an Interest
Payment Date or continuous) shall be irrevocable as to such Interest Payment
Date.  Subject to the aforementioned conditions, failure to timely
provide such written notice shall be deemed an election by the Company to pay
the interest on such Interest Payment Date in cash.  At any time the
Company delivers a notice to the Holder of its election to pay the interest in
shares of Common Stock, the Company shall file a prospectus supplement pursuant
to Rule 424 disclosing such election.

    

    c) Interest
Calculations. Interest shall be calculated on the basis of a 360-day year
and shall accrue daily commencing on the Original Issue Date until payment in
full of the principal sum, together with all accrued and unpaid interest and
other amounts which may become due hereunder, has been made.  Payment
of interest in shares of 

     

    
      
        
        

      

      
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    Common
Stock shall otherwise occur pursuant to Section 4(d)(ii) and only for purposes
of the payment of interest in shares, the Interest Payment Date shall be deemed
the Conversion Date.  Interest shall cease to accrue with respect to
any principal amount converted, provided that the Company in fact delivers the
Conversion Shares within the time period required by Section
4(d)(ii).  Interest hereunder will be paid to the Person in whose name
this Debenture is registered on the records of the Company regarding
registration and transfers of this Debenture (the “Debenture Register”).
Except as otherwise provided herein, if at any time the Company pays interest
partially in cash and partially in shares of Common Stock to the holders of the
Debentures, then such payment shall be distributed ratably among the holders of
the Debentures based on their (or their predecessor’s initial purchases of
Debentures pursuant to the Purchase Agreement.

    

    d) Late
Fee.  All overdue accrued and unpaid interest to be paid
hereunder shall entail a late fee at the rate of 18% per annum (or such lower
maximum amount of interest permitted to be charged under applicable law) (“Late Fees”) which
will accrue daily, from the date such interest is due hereunder through and
including the date of payment. Notwithstanding anything to the contrary
contained herein, if on any Interest Payment Date the Company has elected to pay
interest in Common Stock and is not able to pay accrued interest in the form of
Common Stock because it does not then satisfy the conditions for payment in the
form of Common Stock set forth above, then, at the option of the Holder, the
Company, in lieu of (and in full satisfaction of) delivering either shares of
Common Stock pursuant to this Section 2 or paying the regularly scheduled cash
interest payment, shall deliver, within three Trading Days of each applicable
Interest Payment Date, an amount in cash equal to the product of the number of
shares of Common Stock otherwise deliverable to the Holder in connection with
the payment of interest due on such Interest Payment Date and the highest VWAP
during the period commencing on the Interest Payment Date and ending on the
Trading Day prior to the date such payment is made.

    

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

    

    Section
3.              
Registration of
Transfers and Exchanges.

    

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

    

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

    

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

    

    
      
        
        

      

      
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    Section
4.               Conversion.

    

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

    

    b) Conversion
Price.  The conversion price in effect on any Conversion Date
shall be equal to $0.25
(subject to adjustment herein)(the “Conversion
Price”).

    

    c) 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 such 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), as set
forth on the applicable Notice of Conversion, 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
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    respect
to which the determination of such sentence is being made, but shall exclude the
number of shares of Common Stock which would be issuable upon (A) conversion of
the remaining, nonconverted principal amount of this Debenture beneficially
owned by such Holder or any of its affiliates and (B) exercise or conversion of
the unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any other Debentures or the Warrants) subject to
a limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by such Holder or any of its affiliates.  Except
as set forth in the preceding sentence, for purposes of this Section 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) 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
amounts of this Debenture are 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) and which amounts of this
Debenture are 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), in determining
the number of outstanding shares of Common Stock, a Holder may rely on the
number of outstanding shares of Common Stock as reflected in 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) any
other notice by the Company or the Company’s transfer agent setting forth the
number of shares of Common Stock outstanding.  Upon the written request of
a Holder, the Company shall within two Trading Days confirm 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
Company, in refraining from or taking actions under this Section 4(c), may rely
solely upon filings made by the Holder under Section 13(d) of the Exchange Act
or written representation of the Holder as to its beneficial
ownership.  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) 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) shall continue to 

     

    
      
        
        

      

      
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    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 waived by such Holder.  The provisions of this paragraph shall be
implemented in a manner otherwise than in strict conformity with the terms of
this Section 4(c) to correct this paragraph (or any portion hereof) which may be
defective or inconsistent with the intended Beneficial Ownership Limitation
herein contained or to make changes or supplements necessary or desirable to
properly give effect to such limitation. The limitations contained in this
paragraph shall apply to a successor holder of this Debenture.

    

    
      d)  Mechanics of
Conversion

    

    

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

    

    ii. Delivery of Certificate Upon
Conversion. Not later than three Trading Days after any Conversion Date,
the Company will deliver or cause to be delivered to the Holder (A) a
certificate or certificates representing the Conversion Shares which shall be
free of restrictive legends and trading restrictions (other than those required
by the Purchase Agreement) representing the number of shares of Common Stock
being acquired upon the conversion of this Debenture (including, if the Company
has given continuous notice pursuant to Section 2(b) for payment of interest in
shares of Common Stock at least 20 Trading Days prior to the date on which the
Conversion Notice is delivered to the Company, shares of Common Stock
representing the payment of accrued interest otherwise determined pursuant to
Section 2(a) but assuming that the Interest Payment Period is the 20 Trading
Days period immediately prior to the date on which the Conversion Notice is
delivered to the Company and (B) a bank check in the amount of accrued and
unpaid interest (to the extent the Company is paying to pay accrued interest in
cash). The Company shall, if available and if allowed under applicable
securities laws, use its reasonable best efforts to deliver any certificate or
certificates required to be delivered by the Company under this Section
electronically through the Depository Trust Corporation or another established
clearing corporation performing similar functions.

    

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

    

    
      
        
        

      

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

    

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

     

    
      
        
        

      

      
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    brokerage
firm to purchase (in an open market transaction or otherwise) Common Stock to
deliver in satisfaction of a sale by such Holder of the Conversion Shares which
the Holder anticipated receiving upon such conversion (a “Buy-In”), then the
Company shall (A) pay in cash to the Holder (in addition to any remedies
available to or elected by the Holder) the amount by which (x) the Holder’s
total purchase price (including brokerage commissions, if any) for the Common
Stock so purchased exceeds (y) the product of (1) the aggregate number of shares
of Common Stock that such Holder anticipated receiving from the conversion at
issue multiplied by (2) the actual sale price of the Common Stock at the time of
the sale (including brokerage commissions, if any) giving rise to such purchase
obligation and (B) at the option of the Holder, either reissue (if surrendered)
this Debenture in a principal amount equal to the principal amount of the
attempted conversion or deliver to the Holder the number of shares of Common
Stock that would have been issued had the Company timely complied with its
delivery requirements under Section 4(d)(ii).  For example, if the
Holder purchases Common Stock having a total purchase price of $11,000 to cover
a Buy-In with respect to an attempted conversion of this Debenture with respect
to which the actual sale price of the Conversion Shares at the time of the sale
(including brokerage commissions, if any) giving rise to such purchase
obligation was a total of $10,000 under clause (A) of the immediately preceding
sentence, the Company shall be required to pay the Holder $1,000.  The
Holder shall provide the Company written proof indicating the amounts payable to
the Holder in respect of the Buy-In.

    

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

    

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

    

    
      
        
        

      

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

    

    Section
5.              
Certain
Adjustments.

    

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

    

    b) Subsequent Equity
Sales.

    

    i. If the
Company or any Subsidiary thereof, as applicable, at any time while this
Debenture is outstanding, shall sell, grant any option to purchase, sell or
grant any right to reprice its securities, or otherwise dispose of or issue any
Common Stock or Common Stock Equivalents entitling any Person to acquire shares
of Common Stock, at an effective price per share less than the then Conversion
Price (such lower price, the “Base Conversion
Price” and such issuances collectively, a “Dilutive Issuance”),
as adjusted hereunder (if the holder of the Common 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

     

     

    
      
        
        

      

      
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    or rights
per share which is issued in connection with such issuance, be entitled to
receive shares of Common Stock at an effective price per share which is less
than the Conversion Price, such issuance shall be deemed to have occurred for
less than the Conversion Price on such date of the Dilutive Issuance), then the
Conversion Price shall be reduced to equal the Base Conversion
Price.

    

    ii. The
Company or any Subsidiary there, as applicable, at any time while this Debenture
is outstanding, shall offer, sell, grant any option to purchase or offer, sell
or grant any right to reprice its securities, or otherwise dispose of or issue
(or announce any offer, sale, grant or any option to purchase or other
disposition) any Common Stock or Common Stock Equivalents entitling any Person
to acquire shares of Common Stock, at an effective price per share less than the
VWAP on either the Trading Day immediately prior to the date agreements for such
issuance are entered into or the date such issuance is consummated, whichever
results in a higher VWAP, but more than the then effective Conversion Price
(which is addressed in 5(b)(i) above) (such lower price, the “Market Base Conversion
Price” and such issuances collectively, a “Market Dilutive
Issuance”), as adjusted hereunder (if the holder of the Common Stock or
Common Stock Equivalents so issued shall at any time, whether by operation of
purchase price adjustments, reset provisions, floating conversion, exercise or
exchange prices or otherwise, or due to warrants, options or rights per share
which is issued in connection with such issuance, be entitled to receive shares
of Common Stock at an effective price per share which is less than the
Conversion Price, such issuance shall be deemed to have occurred for less than
the Conversion Price on such date of the Market Dilutive Issuance) then the
Conversion Price shall be reduced to a price determined by multiplying the then
effective Conversion Price by a fraction, the numerator of which is the number
of shares of Common Stock issued and outstanding immediately prior to the Market
Dilutive Issuance plus the number of shares of Common Stock which the aggregate
offering price for such Market Dilutive Issuance would purchase at the then
Market Base Conversion Price, and the denominator of which shall be the sum of
the number of shares of Common Stock issued and outstanding immediately prior to
the Market Dilutive Issuance plus the number of shares of Common Stock so issued
or issuable in connection with the Market Dilutive Issuance

    

    iii. Such
adjustments under this Section 5(b) shall be made whenever such Common Stock or
Common Stock Equivalents are issued.  Notwithstanding the foregoing,
no adjustment will be made under this Section 5(b) in respect of an Exempt
Issuance.  The Company shall notify the Holder in writing, no later
than the Business Day following the issuance of any Common Stock or Common Stock
Equivalents subject to this section, indicating therein the applicable issuance
price, or of applicable reset price, exchange price, conversion price and other
pricing terms (such notice the “Dilutive Issuance
Notice”).  For purposes of clarification, whether or not the
Company provides a Dilutive Issuance Notice 

     

    
      
        
        

      

      
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    pursuant
to this Section 5(b), immediately after the occurrence of any Dilutive Issuance
or Market Dilutive Issuance, after the date of such Dilutive Issuance or Market
Dilutive Issuance the Holder is entitled to receive a number of Conversion
Shares based upon the Base Conversion Price or the price determined pursuant to
5(b)(ii), as applicable, regardless of whether the Holder accurately refers to
the Base Conversion Price or the price determined pursuant to 5(b)(ii) in the
Notice of Conversion.

     

    iv. Notwithstanding
the foregoing, no adjustment shall be made pursuant to this Section 5(b) for an
Exempt Issuance (defined in the Purchase Agreement.

    

    c) Pro Rata
Distributions. If the Company, at any time while this Debenture is
outstanding, shall distribute to all holders of Common Stock (and not to the
holders of the Debenture) evidences of its indebtedness or assets (including
cash and cash dividends) or rights or warrants to subscribe for or purchase any
security, then in each such case the Conversion Price shall be adjusted by
multiplying such Conversion Price in effect immediately prior to the record date
fixed for determination of stockholders entitled to receive such distribution by
a fraction of which the denominator shall be the 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
one outstanding share of the Common Stock as determined by the Board of
Directors in good faith.  In either case the adjustments shall be
described in a statement provided to the Holder of the portion of assets or
evidences of indebtedness so distributed or such subscription rights applicable
to one share of Common Stock.  Such adjustment shall be made whenever
any such distribution is made and shall become effective immediately after the
record date mentioned above.

    

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

     

     

    
      
        
        

      

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

    

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

    

    f) Notice to the
Holder.

    

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

    

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

     

    
      
        
        

      

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

    

    Section
6.               Redemption and Forced
Conversion.

    

    a)       
    Redemption at Election of
Holder.  If the Company shall agree to sell substantially all
of its assets in one or more transactions in which the consideration consists
solely of cash, cash equivalents, assumption of indebtedness, or any combination
thereof, the Holder shall have the right to require the Company, by written
notice to the Company, to redeem this Debentures, in full and in cash, at the
closing of such Change of Control Transaction, Fundamental Transaction or sale
of assets.   The aggregate amount payable upon such Change of
Control Transaction, Fundamental Transaction or sale of assets shall be equal to
the Cash Sale Redemption Amount.  In the event that the Company fails
to pay the Cash Sale Redemption Amount on or prior to the applicable closing
date, the interest rate on this Debenture shall accrue at the rate of 18% per
annum, or such lower maximum amount of interest permitted to be charged under
applicable law, until the Cash Sale Redemption Amount is paid in
full.  Concurrently with the payment in full of the Cash Sale
Redemption Amount, the Holder shall surrender this Debenture to or as directed
by the Company (or the successor company).    The Holder may
elect to convert the outstanding principal amount of the Debenture pursuant to
Section 4 prior to actual payment in cash for the redemption under this Section
6 by fax delivery of a Notice of Conversion to the Company.

    

    b).           
Forced
Conversion.  Notwithstanding anything herein to the contrary,
if after the Effective Date, each of the VWAPs for any 20 consecutive Trading
Days (such 

     

    
      
        
        

      

      
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    period
commencing only after the Effective Date, such period the “Threshold Period”)
exceeds 400% of the then effective Conversion Price, the Company may, within 1
Trading Day of the end of any such period, deliver a notice to the Holder (a
“Forced Conversion
Notice” and the date such notice is received by the Holder, the “Forced Conversion Notice
Date”) to cause the Holder to convert, at the Company’s sole discretion,
all or part of the then outstanding principal amount of Debentures pursuant to
Section 4, it being understood that the “Conversion Date” for purposes of
Section 4 shall be deemed to occur on the thirtieth Trading Day following the
Forced Conversion Notice Date (such thirtieth Trading Day being referred to as
the “Forced Conversion
Date”).  The Company may not deliver a Forced Conversion
Notice, and any Forced Conversion Notice delivered by the Corporation shall not
be effective, unless all of the Equity Conditions are met on each Trading Day
occurring during the 10 Trading Days immediately prior to the applicable
Threshold Period, during the applicable Threshold Period and from the end of the
Threshold Period through and including the later of the Forced Conversion Date
and 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.  For purposes of clarification, a Forced Conversion shall
be subject to all of the provisions of Section 4, including, without limitation,
the provision requiring payment of liquidated damages and limitations on
conversions.

    

    Section
7.             
 Negative
Covenants. So long as any portion of this Debenture is outstanding, the
Company will not and will not permit any of its Subsidiaries to directly or
indirectly without the prior written consent of the holders of at least 60% of
the principal amount of Debentures and Prior Debentures then
outstanding:

    

    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
certificate of incorporation, bylaws or other charter documents so as to
materially and adversely affect any rights of the Holder;

    

    d) repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of
shares of Common Stock or Common Stock Equivalents other than (i) as to the
Conversion Shares to the extent permitted or required under the Transaction
Documents, (ii) as otherwise permitted by the Transaction Documents or (iii)
shares of Common Stock held by former employees of the Company which the Company
is entitled to repurchased from such employees pursuant to the contractual
rights relating to their termination of employment but not to exceed $50,000 in
any 12 month period;

    

    
      
        
        

      

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

    

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

    

    g) enter
into any Fundamental Transaction or Change of Control Transaction without the
consent of the Holders of 60% of the outstanding principal amount of the
Debentures, Except with respect to a sale of assets of the Company pursuant to
which the Company is required to (i) redeem all outstanding Debentures under
Section 6(a) hereof and (ii) redeem all the Warrants pursuant to Section 1(f)
therof.

    

    Section
8.               Events of
Default.

    

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

    

    i. any
default in the payment of (A) the principal amount of any Debenture, or (B)
interest (including Late Fees) on, or liquidated damages in respect of, any
Debenture, as and when the same shall become due and payable (whether on a
Conversion Date or the Maturity Date or by acceleration or otherwise) which
default is not cured within 3 Trading Days after written notice from the
Holder;

    

    ii. the
Company shall materially fail to observe or perform any other covenant or
agreement contained in this Debenture or any other Debenture (other than a
breach by the Company of its obligations to deliver shares of Common Stock to
the Holder upon conversion which breach is addressed in clause (xi) below) which
failure is not cured, if possible to cure, within the earlier to occur of (A) 10
Trading Days after notice of such default sent by the Holder or by any other
Holder and (B)15 Trading Days after the Company shall become or should have
become aware of such failure;

    

    iii. a default
or event of default (subject to any grace or cure period provided for in the
applicable agreement, document or instrument) shall occur under (A) any of the
Transaction Documents, or (B) any other material agreement, lease, document or
instrument to which the Company or any Subsidiary is bound;

    

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

    

    
      
        
        

      

      
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    v. (i) the
Company or any of its Subsidiaries shall commence a case, as debtor, a case
under any applicable bankruptcy or insolvency laws as now or hereafter in effect
or any successor thereto, or the Company or any Subsidiary commences any other
proceeding under any reorganization, arrangement, adjustment of debt, relief of
debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Company or any
Subsidiary thereof or (ii) there is commenced a case against the Company or any
Subsidiary thereof, in a court of competent jurisdiction, under any applicable
bankruptcy or insolvency laws, as now or hereafter in effect or any successor
thereto which remains undismissed for a period of 60 days; or (iii) the Company
or any Subsidiary thereof is adjudicated by a court of competent jurisdiction
insolvent or bankrupt; or any order of relief or other order approving any such
case or proceeding is entered; or (iv) the Company or any Subsidiary thereof
suffers any appointment of any custodian or the like for it or any substantial
part of its property which continues undischarged or unstayed for a period of 60
days; or (v) the Company or any Subsidiary thereof makes a general assignment
for the benefit of creditors; or (vi) the Company shall fail to pay, or shall
state in writing that it is unable to pay, or shall be unable to pay, its debts
generally as they become due; or (vii) the Company or any Subsidiary thereof
shall call a meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or (viii) the Company or any
Subsidiary thereof shall by any act or failure to act expressly indicate its
consent to, approval of or acquiescence in any of the foregoing; or (ix) any
corporate or other action is taken by the Company or any Subsidiary thereof for
the purpose of effecting any of the foregoing;

    

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

    

    vii. the
Common Stock shall not be eligible for quotation on or quoted for trading on a
Trading Market for at least five consecutive Trading Days (other than as a
result of events that affect the Trading Market in general);

    

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

    viii. the
Company shall redeem or repurchase more than a de minimis number of its
outstanding shares of Common Stock or other equity securities of the Company
(other than redemptions of Conversion Shares and repurchases of shares of Common
Stock or other equity securities of departing officers and directors of the
Company, provided that such repurchases shall not exceed $200,000, in the
aggregate, for all officers, directors and employees during any 12 month
period);

    

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

    

    x. 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 than $100,000, and 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 full principal amount of
this Debenture, together with interest and other amounts owing in respect
thereof, to the date of acceleration shall become, at the Holder’s election,
immediately due and payable in cash.   The aggregate amount
payable upon an Event of Default shall be equal to the Mandatory Default
Amount.  Commencing 5 days after the occurrence of any Event of
Default that results in the eventual acceleration of this Debenture, the
interest rate on this Debenture shall accrue at the rate of 18% per annum, or
such lower maximum amount of interest permitted to be charged under applicable
law.  Concurrently with the payment in full of the Mandatory Default
Amount the Holder shall surrender this Debenture to or as directed by the
Company.  The Holder need not provide and the Company hereby waives
any presentment, demand, protest or other notice of any kind, and the Holder may
immediately and without expiration of any grace period enforce any and all of
its rights and remedies hereunder and all other remedies available to it under
applicable law.  Such election may be rescinded and annulled by Holder
at any time prior to payment hereunder and the Holder shall have all rights as a
Debenture holder until such time, if any, as the full payment under this Section
shall have been received by it.  No such rescission or annulment shall
affect any subsequent Event of Default or impair any right consequent
thereon.

     

    Section
9.              
Miscellaneous.

    

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

     

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

    set forth
above, facsimile number (732) 465-9600, Attn: CEO or such other address or
facsimile number as the Company may specify for such purposes by notice to the
Holder delivered in accordance with this Section.  Any and all notices
or other communications or deliveries to be provided by the Company hereunder
shall be in writing and delivered personally, by facsimile, sent by a nationally
recognized overnight courier service addressed to each Holder at the facsimile
telephone number or address of such Holder appearing on the books of the
Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the Holder.  Any notice or other
communication or deliveries hereunder shall be deemed given and effective on the
earliest of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section prior to 5:30 p.m. (New York City time), (ii) the date after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section later than 5:30 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City time) on
such date, (iii) the second Business Day following the date of mailing, if sent
by nationally recognized overnight courier service, or (iv) upon actual receipt
by the party to whom such notice is required to be given.

    

    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, interest and liquidated damages (if any) on, this
Debenture at the time, place, and rate, and in the coin or currency, herein
prescribed.  This Debenture is a direct debt obligation of the
Company.  This Debenture ranks pari passu with all other
Debentures now or hereafter issued under the terms set forth
herein.

    

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

    

    d) Governing
Law.  All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law
thereof.  Each party agrees that all legal proceedings concerning the
interpretations, enforcement and defense of the transactions contemplated by any
of the Transaction Documents (whether brought against a party hereto or its
respective affiliates, directors, officers, shareholders, employees or agents)
shall be commenced in the state and federal courts sitting in the City of New
York, Borough of Manhattan (the “New York
Courts”).  Each party hereto hereby irrevocably submits to the
exclusive jurisdiction of the New York Courts for the adjudication of any
dispute hereunder or in connection herewith or with any transaction contemplated
hereby or discussed herein (including with respect to the enforcement of any of
the Transaction 

     

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

    Documents),
and hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, or such New York Courts are improper or inconvenient venue for
such proceeding.  Each party hereby irrevocably waives personal
service of process and consents to process being served in any such suit, action
or proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address in
effect for notices to it under this Debenture and agrees that such service shall
constitute good and sufficient service of process and notice
thereof.  Nothing contained herein shall be deemed to limit in any way
any right to serve process in any manner permitted by law. Each party hereto
hereby irrevocably waives, to the fullest extent permitted by applicable law,
any and all right to trial by jury in any legal proceeding arising out of or
relating to this Debenture or the transactions contemplated hereby. If either
party shall commence an action or proceeding to enforce any provisions of this
Debenture, then the prevailing party in such action or proceeding shall be
reimbursed by the other party for its attorneys fees and other costs and
expenses incurred with the investigation, preparation and prosecution of such
action or proceeding.

    

    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 must be in writing.

    

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

    

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

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

    

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

    

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

    

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

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    
      
        
        

      

      
        25

        
          

        

      

      
        
        

      

    

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

    

    

    
      	 	
              ARKADOS
      GROUP, INC.

               

               

            
	 	
              By:
      __________________________________________

                   
       Name:   Barbara Kane-Burke

                    
      Title:    Chief Financial Officer

               

            
	 	 
      

    

    Dated:
August 1,
2008

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    
 

    
      
        
        

      

      
        26

        
          

        

      

      
        
        

      

    

    ANNEX
A

    

    NOTICE
OF CONVERSION

    

    

    The undersigned hereby elects to
convert principal under the 6% Secured Convertible Debenture of Arkados Group,
Inc. (formerly CDKNet.Com, Inc.), a Delaware corporation (the “Company”), due on
December 28 , 2008 into shares of common stock, par value $.0001 per share (the
“Common
Stock”), of the Company according to the conditions hereof, as of the
date written below.  If shares are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates and
opinions as reasonably requested by the Company in accordance
therewith.  No fee will be charged to the holder for any conversion,
except for such transfer taxes, if any.

    

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

    

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

    

    Conversion
calculations:

    Date to
Effect Conversion:

    

    Principal
Amount of Debenture to be Converted:

    

    Payment
of Interest in Common Stock __ yes  __ no

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

    

    Number of
shares of Common Stock to be issued:

    

    

    Signature:

    

    Name:

    

    Address:

    

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    
 

    
      
        
        

      

      
        27

        
          

        

      

      
        
        

      

    

    Schedule
1

    

    CONVERSION
SCHEDULE

    

    The 6%
Secured Convertible Debentures due on December 28, 2008 in the aggregate
principal amount of $________ issued by Arkados Group, Inc. (formerly
CDKNet.com, Inc.)  This Conversion Schedule reflects conversions made
under Section 4 of the above referenced Debenture.

    

    Dated:

     

    
      	
               

              Date
      of Conversion

              (or
      for first entry, Original Issue Date)

            	
               

              Amount
      of Conversion

            	
               

              Aggregate
      Principal Amount Remaining Subsequent to Conversion

              (or
      original Principal Amount)

            	
               

              Company
      Attest

            
	 
      	
               
      

               

            	 
      	 
      
	 
      	
               

               
      

            	 
      	 
      
	 
      	
               

               
      

            	 
      	 
      
	 
      	
               

               
      

            	 
      	 
      
	 
      	
               

               
      

            	 
      	 
      
	 
      	
               

               
      

            	 
      	 
      
	 
      	
               

               
      

            	 
      	 
      
	 
      	
               

               
      

            	 
      	 
      
	 
      	
               

               
      

            	 
      	 
      

    

    

    

     

     

     

    
      
        
        

      

      
        28

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