Document:

Exhibit 4.1

 

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

 

COMMON STOCK PURCHASE WARRANT

 

ETELOS INCORPORATED

 

	
  Warrant
  Shares:
                

  	
  Initial
  Exercise Date: January 31, 2008

  

 

THIS COMMON STOCK
PURCHASE WARRANT (the “Warrant”) certifies that, for value received,                           
(the “Holder”) is entitled, upon the terms and subject to the
limitations on exercise and the conditions hereinafter set forth, at any time
on or after the date hereof (the “Initial Exercise Date”) and on or
prior to the close of business on the 3 year anniversary of the Initial
Exercise Date (the “Termination Date”) but not thereafter, to subscribe
for and purchase from Etelos Incorporated, a Washington corporation (the “Company”),
up to             
shares (the “Warrant Shares”) of Common Stock. The purchase price of one
share of Common Stock under this Warrant shall be equal to the Exercise Price,
as defined in Section 2(b).

 

Section 1.                                            Definitions. Capitalized
terms used and not otherwise defined herein shall have the meanings set forth
in that certain Securities Purchase Agreement (the “Purchase Agreement”),
dated January 31, 2008,
among the Company and the purchasers signatory thereto.

 

Section 2.                                            Exercise.

 

a)                                      Exercise of Warrant. Exercise of the purchase rights
represented by this Warrant may be made, in whole or in part, at any time or
times on or after the Initial Exercise Date and on or before the Termination
Date by delivery to the Company of a duly executed facsimile copy of the Notice
of Exercise Form annexed hereto (or such other office or agency of the
Company as it may designate by notice in writing to the 

 

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registered Holder at the
address of the Holder appearing on the books of the Company); and, within 3
Trading Days of the date said Notice of Exercise is delivered to the Company,
the Company shall have received  payment
of the aggregate Exercise Price of the shares thereby purchased by wire
transfer or cashier’s check drawn on a United States bank. Notwithstanding
anything herein to the contrary, the Holder shall not be required to physically
surrender this Warrant to the Company until the Holder has purchased all of the
Warrant Shares available hereunder and the Warrant has been exercised in full,
in which case, the Holder shall surrender this Warrant to the Company for
cancellation within 3 Trading Days of the date the final Notice of Exercise is
delivered to the Company. Partial exercises of this Warrant resulting in
purchases of a portion of the total number of Warrant Shares available
hereunder shall have the effect of lowering the outstanding number of Warrant Shares
purchasable hereunder in an amount equal to the applicable number of Warrant
Shares purchased. The Holder and the Company shall maintain records showing the
number of Warrant Shares purchased and the date of such purchases. The Company
shall deliver any objection to any Notice of Exercise Form within 1
Business Day of receipt of such notice. In the event of any dispute or
discrepancy, the records of the Holder shall be controlling and determinative
in the absence of manifest error. The Holder and any
assignee, by acceptance of this Warrant, acknowledge and agree that, by reason
of the provisions of this paragraph, following the purchase of a portion of the
Warrant Shares hereunder, the number of Warrant Shares available for purchase
hereunder at any given time may be less than the amount stated on the face
hereof.

 

b)                                     Exercise Price. The exercise price per share of the
Common Stock under this Warrant shall be $0.60, subject
to adjustment hereunder (the “Exercise Price”).

 

c)                                      Cashless Exercise. If at any time after the earlier of (i) the
one year anniversary of the date of the Purchase Agreement and (ii) the
completion of the then-applicable holding period required by Rule 144, or
any successor provision then in effect, there is no effective Registration
Statement registering, or no current prospectus available for, the resale of
the Warrant Shares by the Holder, then this Warrant may also be exercised at
such time by means of a “cashless exercise” in which the Holder shall be
entitled to receive a certificate for the number of Warrant Shares equal to the
quotient obtained by dividing [(A-B) (X)] by (A), where:

 

(A) = the VWAP on
the Trading Day immediately preceding the date of such election;

 

(B) =  the Exercise Price of this Warrant, as
adjusted; and

 

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

 

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

 

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d)                                     Exercise Limitations. The Company shall not effect any
exercise of this Warrant, and a Holder shall not have the right to exercise any
portion of this Warrant, pursuant to Section 2 or otherwise, to the extent
that after giving effect to such issuance after exercise as set forth on the
applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates,
and any other person or entity acting as a group together with the Holder or
any of the Holder’s Affiliates), would beneficially own in excess of the
Beneficial Ownership Limitation (as defined below).  For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned by
the Holder and its Affiliates shall include the number of shares of Common
Stock issuable upon exercise of this Warrant with respect to which such
determination is being made, but shall exclude the number of shares of Common
Stock which would be issuable upon (A) exercise of the remaining,
nonexercised portion of this Warrant beneficially owned by the Holder or any of
its Affiliates and (B) exercise or conversion of the unexercised or
nonconverted portion of any other securities of the Company (including, without
limitation, any other  Common Stock
Equivalents) subject to a limitation on conversion or exercise analogous to the
limitation contained herein beneficially owned by the Holder or any of its affiliates. 
Except as set forth in the preceding sentence, for purposes of this Section 2(d),
beneficial ownership shall be calculated in accordance with Section 13(d) of
the Exchange Act and the rules and regulations promulgated thereunder, it
being acknowledged by the Holder that the Company is not representing to the
Holder that such calculation is in compliance with Section 13(d) of
the Exchange Act and the Holder is solely responsible for any schedules
required to be filed in accordance therewith. To the extent that the limitation
contained in this Section 2(d) applies, the determination of whether
this Warrant is exercisable (in relation to other securities owned by the
Holder together with any Affiliates) and of which portion of this Warrant is
exercisable shall be in the sole discretion of the Holder, and the submission
of a Notice of Exercise shall be deemed to be the Holder’s determination of
whether this Warrant is exercisable (in relation to other securities owned by
the Holder together with any Affiliates) and of which portion of this Warrant
is exercisable, in each case subject to the Beneficial Ownership Limitation,
and the Company shall have no obligation to verify or confirm the accuracy of
such determination. In addition, a determination as to any group status as
contemplated above shall be determined in accordance with Section 13(d) of
the Exchange Act and the rules and regulations promulgated thereunder. For
purposes of this Section 2(d), in determining the number of outstanding
shares of Common Stock, a Holder may rely on the number of outstanding shares
of Common Stock as reflected in (x) the Company’s most recent periodic or
annual report, as the case may be, (y) a more recent public announcement
by the Company or (z) any other notice by the Company or the Company’s
Transfer Agent setting forth the number of shares of Common Stock
outstanding.  Upon the written or oral request of a Holder, the Company
shall within two Trading Days confirm orally and in writing to the Holder the
number of shares of Common Stock then outstanding.  In any case, the
number of outstanding shares of Common Stock shall be determined after giving
effect to the conversion or exercise of securities of the Company, including
this Warrant, by the Holder or its Affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. The “Beneficial
Ownership Limitation” shall be 4.99% of the number of shares of the 

 

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Common Stock outstanding
immediately after giving effect to the issuance of shares of Common Stock
issuable upon exercise of this Warrant. The Holder, upon not less than 61 days’
prior notice to the Company, may increase or decrease the Beneficial Ownership
Limitation provisions of this Section 2(d), provided that the Beneficial
Ownership Limitation in no event exceeds 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 exercise of this Warrant held by the Holder and the
provisions of this Section 2(d) shall continue to apply. Any such
increase or decrease will not be effective until the 61st
day after such notice is delivered to the Company. The provisions of this paragraph shall be construed
and implemented in a manner otherwise than in strict conformity with the terms
of this Section 2(d) to correct this paragraph (or any portion
hereof) which may be defective or inconsistent with the intended 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 Warrant.

 

e)                                      Mechanics of Exercise.

 

i.                                          Delivery of Certificates Upon Exercise. Certificates for shares purchased
hereunder shall be transmitted by the transfer agent of the Company to the
Holder by crediting the account of the Holder’s prime broker with the
Depository Trust Company through its Deposit Withdrawal Agent Commission (“DWAC”)
system if the Company is a participant in such system and there is an effective
Registration Statement permitting the resale of the Warrant Shares by the
Holder, and otherwise by physical delivery to the address specified by the
Holder in the Notice of Exercise within 3 Trading Days from the delivery to the
Company of the Notice of Exercise Form, surrender of this Warrant (if required)
and payment of the aggregate Exercise Price as set forth above (“Warrant
Share Delivery Date”). This Warrant shall be deemed to have been exercised
on the date the Exercise Price is received by the Company. The Warrant Shares
shall be deemed to have been issued, and Holder or any other person so
designated to be named therein shall be deemed to have become a holder of
record of such shares for all purposes, as of the date the Warrant has been
exercised by payment to the Company of the Exercise Price (or by cashless
exercise, if permitted) and all taxes required to be paid by the Holder, if
any, pursuant to Section 2(e)(vi) prior to the issuance of such
shares, have been paid. If the Company fails for any reason to deliver to the
Holder certificates evidencing the Warrant Shares subject to a Notice of
Exercise by the Warrant Share Delivery Date, the Company shall pay to the
Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of
Warrant Shares subject to such exercise (based on the VWAP of the Common Stock
on the date of the applicable Notice of Exercise), $10 per Trading Day
(increasing to $20 per Trading Day on the fifth Trading Day after such
liquidated damages begin to accrue) for each Trading Day after such Warrant
Share Delivery Date until such certificates are delivered.

 

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ii.                                       Delivery of New Warrants Upon Exercise. If this Warrant shall have been
exercised in part, the Company shall, at the request of a Holder and upon
surrender of this Warrant certificate, at the time of delivery of the
certificate or certificates representing Warrant Shares, deliver to Holder a
new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant
Shares called for by this Warrant, which new Warrant shall in all other
respects be identical with this Warrant.

 

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

 

iv.                                   Compensation for Buy-In on Failure to
Timely Deliver Certificates Upon Exercise. In addition to any other rights available to the
Holder, if the Company fails to cause its transfer agent to transmit to the
Holder a certificate or certificates representing the Warrant Shares pursuant
to an exercise on or before the Warrant Share Delivery Date, and if after such
date the Holder is required by its broker to purchase (in an open market
transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares
of Common Stock to deliver in satisfaction of a sale by the Holder of the
Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”),
then the Company shall (1) pay in cash to the Holder the amount by which (x) the
Holder’s total purchase price (including brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (y) the amount obtained by
multiplying (A) the number of Warrant Shares that the Company was required
to deliver to the Holder in connection with the exercise at issue times (B) the
price at which the sell order giving rise to such purchase obligation was
executed, and (2) at the option of the Holder, either reinstate the
portion of the Warrant and equivalent number of Warrant Shares for which such
exercise was not honored or deliver to the Holder the number of shares of
Common Stock that would have been issued had the Company timely complied with
its exercise and delivery obligations hereunder. For example, if the Holder
purchases Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to an attempted exercise of shares of Common Stock with an
aggregate sale price giving rise to such purchase obligation of $10,000, under
clause (1) of the immediately preceding sentence the Company shall be
required to pay the Holder $1,000. The Holder shall provide the Company written
notice indicating the amounts payable to the Holder in respect of the Buy-In
and, upon request of the Company, evidence of the amount of such loss. Nothing
herein shall limit a Holder’s right to pursue any other remedies available to
it hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief with respect to the Company’s
failure to timely deliver certificates representing shares of Common Stock upon
exercise of the Warrant as required pursuant to the terms hereof.

 

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v.                                      No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. As to any fraction of a share which Holder would otherwise be entitled
to purchase upon such exercise, the Company shall at its election, either pay a
cash adjustment in respect of such final fraction in an amount equal to such
fraction multiplied by the Exercise Price or round up to the next whole share.

 

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

 

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

 

Section 3.                                            Certain Adjustments.

 

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

 

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b)                                     Subsequent Equity Sales. If the Company or any Subsidiary
thereof, as applicable, at any time while this Warrant is outstanding, shall
sell or grant any option to purchase, or sell or grant any right to reprice, or
otherwise dispose of or issue (or announce any offer, sale, grant or any option
to purchase or other disposition) any Common Stock or Common Stock Equivalents
entitling any Person to acquire shares of Common Stock, at an effective price
per share less than the then Exercise Price (such lower price, the “Base
Share Price” and such issuances collectively, a “Dilutive Issuance”)
(if the holder of the Common Stock or Common Stock Equivalents so issued shall
at any time, whether by operation of purchase price adjustments, reset
provisions, floating conversion, exercise or exchange prices or otherwise, or
due to warrants, options or rights per share which are issued in connection
with such issuance, be entitled to receive shares of Common Stock at an
effective price per share which is less than the Exercise Price, such issuance
shall be deemed to have occurred for less than the Exercise Price on such date
of the Dilutive Issuance), then the Exercise Price shall be reduced and only
reduced to equal the Base Share Price and the number of Warrant Shares issuable
hereunder shall be increased such that the aggregate Exercise Price payable
hereunder, after taking into account the decrease in the Exercise Price, shall
be equal to the aggregate Exercise Price prior to such adjustment. Such
adjustment shall be made whenever such Common Stock or Common Stock Equivalents
are issued. Notwithstanding the foregoing, no adjustments shall be made, paid
or issued under this Section 3(b) in respect of an Exempt Issuance. The
Company shall notify the Holder in writing, no later than the Trading Day
following the issuance of any Common Stock or Common Stock Equivalents subject
to this Section 3(b), indicating therein the applicable issuance price, or
applicable reset price, exchange price, conversion price and other pricing
terms (such notice the “Dilutive Issuance Notice”). For purposes of
clarification, whether or not the Company provides a Dilutive Issuance Notice
pursuant to this Section 3(b), upon the occurrence of any Dilutive
Issuance, after the date of such Dilutive Issuance the Holder is entitled to
receive a number of Warrant Shares based upon the Base Share Price regardless
of whether the Holder accurately refers to the Base Share Price in the Notice
of Exercise.

 

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

 

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

 

e)                                      Fundamental Transaction. If, at any time while this Warrant is
outstanding, (A) the Company effects any merger or consolidation of the
Company with or into another Person, (B) the Company effects any sale of
all or substantially all of its assets in one or a series of related
transactions, (C) any tender offer or exchange offer (whether by the
Company or another Person) is completed pursuant to which holders of Common
Stock are permitted to tender or exchange their shares for other securities,
cash or property, or (D) the Company effects any reclassification of the
Common Stock or any compulsory share exchange pursuant to which the Common
Stock is effectively converted into or exchanged for other securities, cash or
property (each “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive,
for each Warrant Share that would have been issuable upon such exercise
immediately prior to the occurrence of such Fundamental Transaction, the number of shares of Common Stock of the successor
or acquiring corporation or of the Company, if it is the surviving corporation,
and any additional consideration (the “Alternate Consideration”) receivable as a result of such merger, consolidation
or disposition of assets by a holder of the number of shares of Common Stock
for which this Warrant is exercisable immediately prior to such event. For
purposes of any such exercise, the determination of the Exercise Price shall be
appropriately adjusted to apply to such Alternate Consideration based on the
amount of Alternate Consideration issuable in respect of one share of Common
Stock in such Fundamental Transaction, and the Company shall apportion the
Exercise Price among the Alternate Consideration in a reasonable manner
reflecting the relative value of any different components of the Alternate
Consideration. If holders of Common Stock are given any choice as to the
securities, cash or property to be received in a Fundamental Transaction, then
the Holder shall be given the same choice as to the Alternate Consideration it
receives upon any exercise of this Warrant following such Fundamental
Transaction. To the extent necessary to effectuate the foregoing provisions,
any successor to the Company or 

 

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surviving entity in such
Fundamental Transaction shall issue to the Holder a new warrant consistent with
the foregoing provisions and evidencing the Holder’s right to exercise such
warrant into Alternate Consideration. The terms of any agreement pursuant to
which a Fundamental Transaction is effected shall include terms requiring any
such successor or surviving entity to comply with the provisions of this Section 3(e) and
insuring that this Warrant (or any such replacement security) will be similarly
adjusted upon any subsequent transaction analogous to a Fundamental Transaction. Notwithstanding anything to the contrary, in
the event of a Fundamental Transaction that is (1) an all cash
transaction, (2) a “Rule 13e-3 transaction” as defined in Rule 13e-3
under the Securities Exchange Act of 1934, as amended, or (3) a
Fundamental Transaction involving a person or entity not traded on a national
securities exchange, the Nasdaq Global Select Market, the Nasdaq Global Market,
or the Nasdaq Capital Market, the Company or any successor entity shall pay at
the Holder’s option, exercisable at any time concurrently with or within 30
days after the consummation of the Fundamental Transaction, an amount of cash
equal to the value of this Warrant as determined in accordance with the Black
Scholes Option Pricing Model obtained from the “OV” function on Bloomberg L.P.
using (i) a price per share of Common Stock equal to the VWAP of the
Common Stock for the Trading Day immediately preceding the date of consummation
of the applicable  Fundamental
Transaction, (ii) a risk-free interest rate corresponding to the U.S.
Treasury rate for a period equal to the remaining term of this Warrant as of
the date of consummation of the applicable Fundamental Transaction and (iii) an
expected volatility equal to the 100 day volatility obtained from the “HVT”
function on Bloomberg L.P. determined as of the Trading Day immediately
following the public announcement of the applicable Fundamental Transaction.

 

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

 

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

 

h)                                     Notice to Holder.

 

i.                                          Adjustment to Exercise Price. Whenever the Exercise Price is adjusted
pursuant to any provision of this Section 3, the Company shall promptly
mail to the Holder a notice setting forth the Exercise Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment. If the Company enters into a Variable Rate Transaction (as defined
in the Purchase Agreement), 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.

 

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

 

Section 4.                                            Transfer of
Warrant.

 

a)                                      Transferability. Subject to compliance with any
applicable securities laws and the conditions set forth in Section 4(d) hereof
and to the provisions of Section 4.1 of the Purchase Agreement, this
Warrant and all rights hereunder (including, without limitation, any
registration rights) are transferable, in whole or in part, upon surrender of
this Warrant at the principal office of the Company or its designated agent,
together with a written assignment of this Warrant substantially in the form
attached hereto duly executed by the Holder or its agent or attorney and funds
sufficient to pay any transfer taxes payable upon the making of such transfer. Upon
such surrender and, if required, such payment, the Company shall execute and
deliver a new Warrant or Warrants in the name of the assignee or assignees and
in the denomination or denominations specified in such instrument of
assignment, and shall issue to the assignor a new Warrant evidencing 

 

10

 

the portion of this
Warrant not so assigned, and this Warrant shall promptly be cancelled. A
Warrant, if properly assigned, may be exercised by a new holder for the
purchase of Warrant Shares without having a new Warrant issued.

 

b)                                     New Warrants. This Warrant may be divided or combined
with other Warrants upon presentation hereof at the aforesaid office of the
Company, together with a written notice specifying the names and denominations
in which new Warrants are to be issued, signed by the Holder or its agent or
attorney. Subject to compliance with Section 4(a), as to any transfer
which may be involved in such division or combination, the Company shall
execute and deliver a new Warrant or Warrants in exchange for the Warrant or
Warrants to be divided or combined in accordance with such notice. All Warrants
issued on transfers or exchanges shall be dated the Initial Exercise Date and
shall be identical with this Warrant except as to the number of Warrant Shares
issuable pursuant thereto.

 

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

 

d)                                     Transfer Restrictions. If, at the time of the surrender of
this Warrant in connection with any transfer of this Warrant, the transfer of
this Warrant shall not be registered pursuant to an effective registration
statement under the Securities Act and under applicable state securities or
blue sky laws, the Company may require, as a condition of allowing such
transfer, that the Holder or transferee of this Warrant, as the case may be,
comply with the provisions of Section 5.7 of the Purchase Agreement.

 

Section 5.                                            Miscellaneous.

 

a)                                      No Rights as Shareholder Until Exercise. This Warrant does not entitle the
Holder to any voting rights or other rights as a shareholder of the Company
prior to the exercise hereof as set forth in Section 2(e)(i).

 

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

 

11

 

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

 

d)                                     Authorized Shares.

 

The Company covenants that during the period the
Warrant is outstanding, it will reserve from its authorized and unissued Common
Stock a sufficient number of shares to provide for the issuance of the Warrant
Shares upon the exercise of any purchase rights under this Warrant. The Company
further covenants that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the Warrant
Shares upon the exercise of the purchase rights under this Warrant. The Company
will take all such reasonable action as may be necessary to assure that such
Warrant Shares may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of the Trading Market upon
which the Common Stock may be listed. The Company covenants that all Warrant
Shares which may be issued upon the exercise of the purchase rights represented
by this Warrant will, upon exercise of the purchase rights represented by this
Warrant, be duly authorized, validly issued, fully paid and nonassessable and
free from all taxes, liens and charges created by the Company in respect of the
issue thereof (other than taxes in respect of any transfer occurring
contemporaneously with such issue).

 

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

 

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

 

12

 

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

 

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

 

g)                                     Nonwaiver and Expenses. No course of dealing or any delay or
failure to exercise any right hereunder on the part of Holder shall operate as
a waiver of such right or otherwise prejudice Holder’s rights, powers or
remedies, notwithstanding the fact that all rights hereunder terminate on the
Termination Date. If the Company willfully and knowingly fails to comply with
any provision of this Warrant, which results in any material damages to the
Holder, the Company shall pay to Holder such amounts as shall be sufficient to
cover any costs and expenses including, but not limited to, reasonable
attorneys’ fees, including those of appellate proceedings, incurred by Holder
in collecting any amounts due pursuant hereto or in otherwise enforcing any of
its rights, powers or remedies hereunder.

 

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

 

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

 

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

 

k)                                      Successors and Assigns. Subject to applicable securities laws,
this Warrant and the rights and obligations evidenced hereby shall inure to the
benefit of and be binding upon the successors of the Company (including,
without limitation, by merger, “share exchange” or other similar corporate
reorganization or similar transaction) 
and the successors and permitted assigns of Holder. The provisions of
this Warrant are intended to be for the benefit of all Holders from time to
time of this Warrant and shall be enforceable by the Holder or holder of
Warrant Shares.

 

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

 

13

 

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

 

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

 

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

 

14

 

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

 

 

	
   

  	
  ETELOS INCORPORATED

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:  Jeffrey
  L. Garon

  
	
   

  	
   

  	
  Title:  President
  and Chief Executive Officer

  

 

15Exhibit 4.2

 

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 OR RULE 144 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: January 31, 2008

Original Conversion Price (subject to adjustment herein): $0.45

 

	
   

  	
  $                          

  

 

6% SECURED CONVERTIBLE DEBENTURE

DUE JANUARY 31, 2010

 

THIS DEBENTURE is one of a series of duly authorized and validly issued 6% Secured Convertible Debentures of Etelos Incorporated, a Washington corporation, (the “Company”), having its principal place of business at 1900 O’Farrell St., Suite 320, San Mateo, CA 94403, designated as its 6% Secured Convertible Debenture due January 31, 2010 (this debenture, the “Debenture” and, collectively with the other debentures of such series, the “Debentures”).
 

FOR VALUE RECEIVED, the Company promises to pay to                                                 
or its registered assigns (the “Holder”), or shall have paid pursuant to
the terms hereunder, the principal sum of $                              
on January 31, 2010 (the “Maturity
Date”) or such earlier date
as this Debenture is required or permitted 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 shall have the meanings set forth in the
Purchase Agreement and (b) the following terms shall have the following
meanings:

 

1

 

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

 

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

 

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

 

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

 

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

 

“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 (other than by
means of conversion or exercise of the Debentures and the Securities issued
together with the Debentures), or (ii) the Company merges into or
consolidates with any other Person, or any Person merges into or consolidates
with the Company and, after giving effect to such transaction, the stockholders
of the Company immediately prior to such transaction own less than 60% of the
aggregate voting power of the Company or the successor entity of such
transaction, or (iii) the Company sells or transfers all or substantially
all of its assets to another Person and the stockholders of the Company
immediately prior to such transaction own less than 60% of the aggregate voting
power of the acquiring entity immediately after the transaction, or (iv) a

 

2

 

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 in clauses (i) through (iv) above.

 

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

 

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

 

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

 

“Debenture Register” shall have the
meaning set forth in Section 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 set forth in the Registration Rights Agreement.

 

“Equity Conditions” means, during the
period in question, (i) the Company shall have duly honored all
conversions and redemptions scheduled to occur or occurring by virtue of one or
more Notices of Conversion of the Holder, if any, (ii) the Company shall
have paid all liquidated damages and other amounts owing to the Holder in
respect of this Debenture, (iii)(a) there is an effective Registration
Statement pursuant to which the Holder is permitted to utilize the prospectus
thereunder to resell all of the shares of Common Stock issuable pursuant to the
Transaction Documents (and the Company believes, in good faith, that such
effectiveness will continue uninterrupted for the foreseeable future) or (b) all
of the Conversion Shares issuable pursuant to the Transaction Documents may be
resold pursuant to Rule 144 without volume or manner-of-sale restrictions
as determined by the counsel to the Company pursuant to a written opinion
letter to such effect, addressed and acceptable to the Transfer Agent and the
Holder, (iv) the Common Stock is trading on a Trading Market and all of
the shares issuable pursuant to the Transaction Documents are listed or quoted
for trading on such Trading Market (and the Company believes, in good faith,
that trading of the Common Stock on a Trading Market will continue uninterrupted
for the foreseeable future), (v) there is a sufficient number of
authorized but unissued and otherwise unreserved shares of Common Stock for the
issuance of all of the shares issuable pursuant to the Transaction Documents, (vi) there
is no existing Event of Default or no existing event which, with the passage of
time or the giving of notice, would constitute an Event of Default, (vii) the
issuance of the shares in question (or, in the case of an Optional or 

 

3

 

Monthly Redemption, the shares issuable upon conversion in full of the
Optional or Monthly Redemption Amount) to the Holder would not violate the
limitations set forth in Section 4(c) herein, (viii) there has
been no public announcement of a pending or proposed Fundamental Transaction or
Change of Control Transaction that has not been consummated, (ix) the
Holder is not in possession of any information provided by the Company that
constitutes, or may constitute, material non-public information and (x) for
each Trading Day in a period of 20 consecutive Trading Days prior to the
applicable date in question, the daily dollar trading volume for the Common
Stock on the principal Trading Market exceeds $250,000 per Trading Day.

 

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

 

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

 

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

 

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

 

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

 

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

 

“Interest Conversion Rate” means the
lesser of (a) the Conversion Price or (b) 90% 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 Conversion
Shares are issued and delivered if such delivery is after the Interest Payment
Date.

 

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

 

“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”  means the sum of (i) the greater of (A) the
outstanding principal amount of this Debenture, plus all accrued and unpaid
interest hereon, divided by the Conversion Price on the date the Mandatory
Default Amount is either (1) demanded (if demand or notice is required to
create an Event of Default) or otherwise due or (2) paid in full,
whichever has a lower Conversion Price, multiplied by the VWAP on the date the
Mandatory Default Amount is either (x) demanded or 

 

4

 

otherwise due or (y) paid in full, whichever has a higher VWAP and
(B) 130% of the outstanding principal amount of this Debenture, plus 100%
of accrued and unpaid interest hereon, and (ii) all other amounts, costs,
expenses and liquidated damages due in respect of this Debenture.

 

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

 

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

 

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

 

“Monthly Redemption Amount” means, as
to a Monthly Redemption, $[          (1),
plus accrued but unpaid interest,
liquidated damages and any other amounts then owing to the Holder in respect of
this Debenture.

 

“Monthly Redemption Date” means the
1st of each month, commencing immediately upon the earlier of (a) the
Effective Date, (b) the six month anniversary of the consummation of a
reverse merger transaction by the Company and (c) November 1, 2008,
and terminating upon the full redemption of this Debenture.

 

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

 

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

 

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

 

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

 

“Optional Redemption Amount” means the
sum of (i) 120% of the then outstanding principal amount of the Debenture,
(ii) accrued but unpaid interest and (iii) all liquidated damages and
other amounts due in respect of the Debenture.

 

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

 

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

 

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

 

(1)                                  1/18th of the original principal amount of this
debenture.

 

5

 

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

 

“Permitted Indebtedness” means (a) the
Indebtedness existing on the Original Issue Date and set forth on Schedule
3.1(aa) attached to the Purchase Agreement, (b) Indebtedness under the
existing working capital line of credit with Bridge Bank, National Association
or extension, modification or renewal thereof in an amount up to $500,000, (c) lease
obligations and purchase money indebtedness of up to $250,000, in the
aggregate, incurred in connection with the acquisition of capital assets and
lease obligations with respect to newly acquired or leased assets, (d) indebtedness
to a national or state chartered bank under a credit facility, provided that
such credit facility (i) may only be collateralized by accounts receivable
and inventory and (ii) must be principally applied by the Company to
acquiring or paying for inventory in connection with a purchase order, (e) indebtedness
that (i) is expressly subordinate to the Debentures pursuant to a written
subordination agreement with the Purchasers that is acceptable to each
Purchaser in its sole and absolute discretion and (ii) matures at a date
later than the Maturity Date and (f) indebtedness resulting from the sale
of additional debentures, on the same terms and conditions as this Debenture,
up to an aggregate principal amount equal to $5 million.

 

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

 

“Purchase Agreement” means the
Securities Purchase Agreement, dated as of January 31, 2008, among the Company and the original
Holders, 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, among the Company and the original Holders, as amended, modified or
supplemented from time to time in accordance with its terms.

 

6

 

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

 

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

 

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

 

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

 

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

 

“Trading Day” means a day on which the
New York Stock Exchange is open for business.

 

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

 

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

 

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

 

7

 

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 the first such date after the Original Issue
Date, on each Monthly Redemption Date (as to that principal amount then being
redeemed), on each Conversion Date (as to that principal amount then being
converted), on each Optional Redemption Date (as to that principal amount then
being redeemed) and on the Maturity Date (each such date, an “Interest
Payment Date”) (if any Interest Payment Date is not a Business Day, then
the applicable payment shall be due on the next succeeding Business Day), in
cash or, at the Company’s option, in duly authorized, validly issued, fully
paid and non-assessable shares of Common Stock at the Interest Conversion Rate
(the dollar amount to be paid in shares, the “Interest Share Amount”) or
a combination thereof; provided, however, that payment in shares
of Common Stock may only occur if (i) all of the Equity Conditions have
been met (unless waived by the Holder in writing) 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 actually issued to the Holder, (ii) the Company shall have given
the Holder notice in accordance with the notice requirements set forth below
and (iii) as to such Interest Payment Date, prior to such Interest Notice
Period (but not more than five (5) Trading Days prior to the commencement
of such Interest Notice Period), the Company shall have delivered to the Holder’s
account with The Depository Trust Company a number of shares of Common Stock to
be applied against such Interest Share Amount equal to the quotient of (x) the
applicable Interest Share Amount divided by (y) the then Conversion Price
(the “Interest Conversion Shares”).

 

b)                                     Company’s
Election to Pay Interest in Kind. Subject to the terms and conditions herein,
the decision whether to pay interest hereunder in cash, shares of Common Stock
or a combination thereof shall be at the sole discretion of the Company. Prior
to the commencement of any Interest Notice Period, the Company shall deliver to
the Holder a 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 and the Interest Share Amount as to the applicable Interest
Payment Date, provided that the Company may indicate in such notice that the
election contained in such notice shall apply to future Interest Payment Dates
until revised by a subsequent notice. 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 deliver such written notice to the
Holder 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 timely file a prospectus supplement pursuant to Rule 424
disclosing such election. The aggregate number of shares of Common Stock
otherwise issuable to the Holder on an Interest Payment Date shall be reduced
by the number of Interest Conversion Shares previously issued to the Holder in
connection with such Interest Payment Date.

 

c)                                      Interest
Calculations. Interest shall be calculated on the basis of a 360-day year,
consisting of twelve 30 calendar day periods, and shall accrue daily commencing
on the Original Issue Date until payment in full of the outstanding principal,
together with 

 

8

 

all accrued and unpaid interest, liquidated damages and other amounts
which may become due hereunder, has been made. Payment of interest in shares of
Common Stock (other than the Interest Conversion Shares issued prior to an
Interest Notice Period) shall otherwise occur pursuant to Section 4(d)(ii) herein
and, solely 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 actually delivers the Conversion Shares within the time period required
by Section 4(d)(ii) herein. 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 of cash shall be distributed
ratably among the holders of the then-outstanding 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 an interest rate equal to the lesser of 18% per annum or the maximum
rate permitted by applicable law (“Late Fees”) which shall accrue daily
from the date such interest is due hereunder through and including the date of
actual payment in full. Notwithstanding anything to the contrary contained
herein, if, on any Interest Payment Date the Company has elected to pay accrued
interest in the form of Common Stock but the Company is not permitted to pay
accrued interest in Common Stock because it fails to satisfy the conditions for
payment in Common Stock set forth in Section 2(a) herein, then, at
the option of the Holder, the Company, in lieu of delivering either shares of
Common Stock pursuant to this Section 2 or paying the regularly scheduled
interest payment in cash, shall deliver, within three (3) Trading Days of
each applicable Interest Payment Date, an amount in cash equal to the product
of (x) 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 multiplied by (y) 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 actually made. If any Interest Conversion Shares are issued to the
Holder in connection with an Interest Payment Date and are not applied against
an Interest Share Amount, then the Holder shall promptly return such excess
shares to the Company.

 

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
payable for such registration of exchange.

 

9

 

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

 

Section 4.                                            Conversion.

 

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

 

b)                                     Conversion
Price. The conversion price in effect on any Conversion Date shall be equal
to $0.45, subject to adjustment herein (the “Conversion Price”).

 

c)                                      Conversion
Limitations. If the Company is subject to the reporting
requirements of the Exchange Act, then the Company shall not effect any
conversion of this Debenture, and a Holder shall not have the right to convert
any portion of this Debenture, to the extent that after giving effect to the
conversion set forth on the 

 

10

 

applicable
Notice of Conversion, the Holder (together with the Holder’s Affiliates, and
any other person or entity acting as a group together with the Holder or any of
the Holder’s Affiliates) would beneficially own in excess of the Beneficial
Ownership Limitation (as defined below).  For purposes of the foregoing
sentence, the number of shares of Common Stock beneficially owned by the Holder
and its Affiliates shall include the number of shares of Common Stock issuable
upon conversion of this Debenture with respect to which such determination is
being made, but shall exclude the number of shares of Common Stock which are
issuable upon (A) conversion of the remaining, unconverted principal
amount of this Debenture beneficially owned by the Holder or any of its
Affiliates, and (B) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company subject to a
limitation on conversion or exercise analogous to the limitation contained
herein (including, without limitation, any other Debentures or the Warrants)
beneficially owned by the 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 the Holder together with any Affiliates) and of which
principal amount of this Debenture is convertible shall be in the sole
discretion of the Holder, and the submission of a Notice of Conversion shall be
deemed to be the Holder’s determination of whether this Debenture may be
converted (in relation to other securities owned by the Holder together with
any Affiliates) and which principal amount of this Debenture is convertible, in
each case subject to the Beneficial Ownership Limitation. To ensure compliance
with this restriction, the Holder will be deemed to represent to the Company
each time it delivers a Notice of Conversion that such Notice of Conversion has
not violated the restrictions set forth in this paragraph and the Company shall
have no obligation to verify or confirm the accuracy of such determination. In
addition, a determination as to any group status as contemplated above shall be
determined in accordance with Section 13(d) of the Exchange Act and
the rules and regulations promulgated thereunder. For purposes of this Section 4(c),
in determining the number of outstanding shares of Common Stock, the Holder may
rely on the number of outstanding shares of Common Stock as stated in the most
recent of the following: (A) the Company’s most recent periodic or annual
report, as the case may be; (B) a more recent public announcement by the
Company; or (C) a more recent notice by the Company or the Company’s
transfer agent setting forth the number of shares of Common Stock
outstanding.  Upon the written or oral request of a Holder, the Company shall
within two Trading Days confirm orally and in writing to the Holder the number
of shares of Common Stock then outstanding.  In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to
the conversion or exercise of securities of the Company, including this
Debenture, by the Holder or its Affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. The “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
Holder, upon not less than 61 days’ prior notice to the Company, may increase or
decrease the Beneficial Ownership Limitation provisions of this Section 4(c),
provided 

 

11

 

that
the Beneficial Ownership Limitation in no event exceeds 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
apply. Any such increase or decrease will not be effective until the 61st
day after such notice is delivered to the Company. The provisions of this
paragraph shall be construed and implemented in a manner otherwise than in
strict conformity with the terms of this Section 4(c) 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
Conversion Shares issuable upon a conversion hereunder shall be determined by
the quotient obtained by dividing (x) the outstanding principal amount of
this Debenture to be converted by (y) the Conversion Price.

 

ii.                                       Delivery of Certificate Upon
Conversion. Not later than three Trading Days after each
Conversion Date (the “Share Delivery Date”), the Company shall deliver,
or cause to be delivered, to the Holder (A) a certificate or certificates
representing the Conversion Shares which, on or after the Effective Date, shall
be free of restrictive legends and trading restrictions (other than those which
may then be required by the Purchase Agreement) representing the number of
Conversion Shares 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 Notice Period
is the 20 Trading Days period immediately prior to the date on which the
Conversion Notice is delivered to the Company and excluding for such issuance
the condition that the Company deliver Interest Conversion Shares as to such
interest payment) and (B) a bank check in the amount of accrued and unpaid
interest (if the Company has elected or is required to pay accrued interest in
cash). On or after the Effective Date, the Company shall use its best efforts
to deliver any certificate or certificates required to be delivered by the
Company under this Section 4 electronically through the Depository Trust
Company or another established clearing corporation performing similar
functions.

 

iii.                                    Failure to Deliver
Certificates. If in the case of any Notice of Conversion such
certificate or certificates are not delivered to or as directed by the
applicable Holder by the third Trading Day after the Conversion Date, the Holder
shall be entitled to elect by written notice to the Company at any time on 

 

12

 

or
before its receipt of such certificate or certificates, to rescind such
Conversion, in which event the Company shall promptly return to the Holder any
original Debenture delivered to the Company and the Holder shall promptly
return to the Company the Common Stock certificates representing the principal
amount of this Debenture unsuccessfully tendered for conversion to the Company.

 

iv.                                   Obligation Absolute; Partial
Liquidated Damages. The Company’s obligations to issue and deliver the
Conversion Shares upon conversion of this Debenture in accordance with the
terms hereof are absolute and unconditional, irrespective of any action or
inaction by the Holder to enforce the same, any waiver or consent with respect
to any provision hereof, the recovery of any judgment against any Person or any
action to enforce the same, or any setoff, counterclaim, recoupment, limitation
or termination, or any breach or alleged breach by the Holder or any other
Person of any obligation to the Company or any violation or alleged violation
of law by the Holder or any other Person, and irrespective of any other
circumstance which might otherwise limit such obligation of the Company to the
Holder in connection with the issuance of such Conversion Shares; provided,
however, that such delivery shall not operate as a waiver by the Company
of any such action the Company may have against the Holder. In the event the
Holder of this Debenture shall elect to convert any or all of the outstanding
principal amount hereof, the Company may not refuse conversion based on any
claim that the Holder or anyone associated or affiliated with the Holder has
been engaged in any violation of law, agreement or for any other reason, unless
an injunction from a court, on notice to Holder, restraining and or enjoining
conversion of all or part of this Debenture shall have been sought and obtained.
In the absence of such injunction, the Company shall issue Conversion Shares
or, if applicable, cash, upon a properly noticed conversion. If the Company
fails for any reason to deliver to the Holder such certificate or certificates
pursuant to Section 4(d)(ii) by the third Trading Day after the
Conversion Date, the Company shall pay to the Holder, in cash, as liquidated
damages and not as a penalty, for each $1,000 of principal amount being
converted, $10 per Trading Day (increasing to $20 per Trading Day on the fifth
(5th) Trading Day after such liquidated damages begin to accrue) for each
Trading Day after such third (3rd) Trading Day until such certificates are
delivered. Nothing herein shall limit a Holder’s right to pursue actual damages
or declare an Event of Default pursuant to Section 8 hereof for the
Company’s failure to deliver Conversion Shares within the period specified
herein and the Holder shall have the right to pursue all remedies available to
it hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief. The exercise of any such rights
shall not prohibit the Holder from seeking to enforce damages pursuant to any
other Section hereof or under applicable law.

 

13

 

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

 

vi.                                   Reservation of Shares
Issuable Upon Conversion. The Company covenants that it will at all
times reserve and keep available out of its authorized and unissued shares of
Common Stock for the sole purpose of issuance upon conversion of this Debenture
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 aggregate number of shares of the Common Stock as shall (subject to the
terms and conditions set forth in the Purchase Agreement) be issuable (taking
into account the adjustments 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 authorized, validly issued, fully paid and

 

14

 

nonassessable
and, if the Registration Statement is then effective under the Securities Act,
shall be registered for public sale in accordance with such Registration
Statement.

 

vii.                                Fractional Shares. No fractional
shares or scrip representing fractional shares shall be issued upon the
conversion of this Debenture. As to any fraction of a share which Holder would
otherwise be entitled to receive upon such conversion, the Company shall at its
election, either pay a cash adjustment in respect of such final fraction in an
amount equal to such fraction multiplied by the Conversion Price or round up to
the next whole share.

 

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

 

Section 5.                                            Certain
Adjustments.

 

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

 

15

 

b)                                     Subsequent
Equity Sales. If, at any time while this Debenture is
outstanding,  the Company or any
Subsidiary, as applicable, sells or grants any option to purchase or sells or
grants any right to reprice, or otherwise disposes of or issues (or announces
any sale, grant or any option to purchase or other disposition), any Common
Stock or Common Stock Equivalents entitling any Person to acquire shares of
Common Stock at an effective price per share that is lower than the then
Conversion Price (such lower price, the “Base Conversion Price” and such
issuances, collectively, a “Dilutive Issuance”) (if the holder of the
Common Stock or Common Stock Equivalents so issued shall at any time, whether
by operation of purchase price adjustments, reset provisions, floating
conversion, exercise or exchange prices or otherwise, or due to warrants,
options or rights per share which are issued in connection with such issuance,
be entitled to receive shares of Common Stock at an effective price per share
that is lower than the Conversion Price, such issuance shall be deemed to have
occurred for less than the Conversion Price on such date of the Dilutive Issuance),
then the Conversion Price shall be reduced to equal the Base Conversion Price. Such
adjustment shall be made whenever such Common Stock or Common Stock Equivalents
are issued. Notwithstanding the foregoing, no adjustment will be made under
this Section 5(b) in respect of an Exempt Issuance. If the Company
enters into a Variable Rate Transaction, despite the prohibition set forth in
the Purchase Agreement, the Company shall be deemed to have issued Common Stock
or Common Stock Equivalents at the lowest possible conversion price at which
such securities may be converted or exercised. The Company shall notify the
Holder in writing, no later than 1 Business Day following the issuance of any
Common Stock or Common Stock Equivalents subject to this Section 5(b),
indicating therein the applicable issuance price, or applicable reset price,
exchange price, conversion price and other pricing terms (such notice, the “Dilutive
Issuance Notice”). For purposes of clarification, whether or not the
Company provides a Dilutive Issuance Notice pursuant to this Section 5(b),
upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive
a number of Conversion Shares based upon the Base Conversion Price on or after
the date of such Dilutive Issuance, regardless of whether the Holder accurately
refers to the Base Conversion Price in the Notice of Conversion.

 

c)                                      Subsequent
Rights Offerings. If the Company, at any time while the Debenture is
outstanding, shall issue rights, options or warrants to all holders of Common
Stock (such rights, options or warrants, without regard to exercise price, the “Purchase
Rights”) (and not to Holders) entitling them to subscribe for or purchase
shares of Common Stock at a price per share that is lower than the VWAP on the
record date referenced below, then the Conversion Price shall be multiplied by
a fraction of which the denominator shall be the number of shares of the Common
Stock outstanding on the date of issuance of such rights or warrants plus the
number of additional shares of Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of shares of the
Common Stock outstanding on the date of issuance of such rights or warrants
plus the number of shares which the aggregate offering price of the total
number of shares so offered (assuming delivery to the Company in full of all
consideration payable upon exercise of such rights, options or warrants) would
purchase at such VWAP. Such adjustment shall be made whenever such rights or
warrants are issued, and shall become effective immediately after the record
date for the determination of stockholders entitled to receive such rights,
options or warrants.

 

16

 

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

 

e)                                      Fundamental
Transaction. If, at any time while this Debenture is
outstanding, (A) the Company effects any merger or consolidation of the
Company with or into another Person, (B) the Company effects any sale of
all or substantially all of its assets in one transaction or a series of
related transactions, (C) any tender offer or exchange offer (whether by
the Company or another Person) is completed pursuant to which holders of Common
Stock are permitted to tender or exchange their shares for other securities,
cash or property, or (D) the Company effects any reclassification of the
Common Stock or any compulsory share exchange pursuant to which the Common
Stock is effectively converted into or exchanged for other securities, cash or
property (in any such case, a “Fundamental Transaction”), then, upon any
subsequent conversion of this Debenture, the Holder shall have the right to
receive, for each Conversion Share that would have been issuable upon such
conversion immediately prior to the occurrence of such Fundamental Transaction,
the same kind and amount of securities, cash or property as it would have been
entitled to receive upon the occurrence of such Fundamental Transaction if it
had been, immediately prior to such Fundamental Transaction, the holder of 1
share of Common Stock (the “Alternate Consideration”). For purposes of
any such conversion, the determination of the Conversion Price shall be
appropriately adjusted to apply to such Alternate Consideration based on the
amount of Alternate Consideration issuable in respect of 1 share of Common
Stock in such Fundamental Transaction, and the Company shall apportion the
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

 

17

 

surviving
entity in such Fundamental Transaction shall issue to the Holder a new
debenture consistent with the foregoing provisions and evidencing the Holder’s
right to convert such debenture into Alternate Consideration. The terms of any
agreement pursuant to which a Fundamental Transaction is effected shall include
terms requiring any such successor or surviving entity to comply with the
provisions of this Section 5(e) and insuring that this Debenture (or
any such replacement security) will be similarly adjusted upon any subsequent
transaction analogous to a Fundamental Transaction.

 

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

 

g)                                     Notice to the
Holder.

 

i.                                          Adjustment to
Conversion Price. Whenever the Conversion Price is adjusted pursuant
to any provision of this Section 5, the Company shall promptly deliver 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.

 

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

 

18

 

it
is expected that holders of the Common Stock of record shall be entitled to
exchange their shares of the Common Stock for securities, cash or other
property deliverable upon such reclassification, consolidation, merger, sale,
transfer or share exchange, provided that the failure to deliver such notice or
any defect therein or in the delivery thereof shall not affect the validity of
the corporate action required to be specified in such notice. The Holder is
entitled to convert this Debenture during the 20-day period commencing on the
date of such notice through the effective date of the event triggering such
notice.

 

h)                                     Other
Adjustment. In the event that the Common Stock is not listed or
quoted for trading on a Trading Market on or before the nine month anniversary
of the Original Issue Date, the Conversion Price shall be reduced to equal the
lesser of (i) the then Conversion Price and (ii) $0.25. For clarity,
the Conversion Price can only be adjusted downward pursuant to this Section 5(h).

 

(i)                                     Participation. The Holder,
as the holder of this Debenture, shall be entitled to receive (i) any
Purchase Rights and (ii) any dividends paid and distributions made to the
holders of Common Stock to the same extent as if the Holder had converted this
Debenture into Common Stock (without regard to any limitations on conversion
herein or elsewhere) and had held such shares of Common Stock on the record
date for such Purchase Rights, dividends or distributions. Issuances or
payments under the preceding sentence shall be made concurrently with the
issuance of the Purchase Rights or the making of such dividend or distribution
to the holders of Common Stock.

 

Section 6.                                            Redemption.

 

a)                                      Monthly
Redemption. On each Monthly Redemption Date, the Company shall
redeem the Monthly Redemption Amount (the “Monthly Redemption”). The
Monthly Redemption Amount payable on each Monthly Redemption Date shall be paid
in cash; provided, however, as to any Monthly Redemption and upon
10 Trading Days’ prior written irrevocable notice (the “Monthly Redemption
Notice”), in lieu of a cash redemption payment the Company may elect to pay
all or part of a Monthly Redemption Amount in Conversion Shares based on a
conversion price equal to the lesser of (i) the then Conversion Price and (ii) 85%
of the average of the VWAPs for the 10 consecutive Trading Days ending on the
Trading Day that is immediately prior to the applicable Monthly Redemption Date
(subject to adjustment for any stock dividend, stock split, stock combination
or other similar event affecting the Common Stock during such 10 Trading Day
period) (the price calculated during the 10 Trading Day period immediately
prior to the Monthly Redemption Date, the “Monthly Conversion Price” and
such 10 Trading Day period, the “Monthly Conversion Period”); provided,
further, that the Company may not pay the Monthly Redemption Amount in
Conversion Shares unless (y) from the date the Holder receives the duly
delivered Monthly Redemption Notice through and until the date such Monthly
Redemption is paid in full, the Equity Conditions have been satisfied, unless
waived in writing by the Holder, and (z) as to such Monthly Redemption,
prior to such Monthly Conversion Period (but not more than 5 Trading Days

 

19

 

prior to the commencement of the Monthly Conversion Period), the
Company shall have delivered to the Holder’s account with The Depository Trust
Company a number of shares of Common Stock to be applied against such Monthly
Redemption Amount equal to the quotient of (x) the applicable Monthly
Redemption Amount divided by (y) the lesser of (A) the Conversion
Price and (B) 85% of the average of the 10 VWAPs during the period ending
on the 3rd Trading Day immediately prior to the date of the Monthly
Redemption Notice (the “Pre-Redemption
Conversion Shares”). The Holder may convert, pursuant to Section 4(a),
any principal amount of this Debenture subject to a Monthly Redemption at any
time prior to the date that the Monthly Redemption Amount, plus accrued but
unpaid interest, liquidated damages and any other amounts then owing to the
Holder are due and paid in full. Unless otherwise indicated by the Holder in
the applicable Notice of Conversion, any principal amount of this Debenture
converted during the applicable Monthly Conversion Period until the date the
Monthly Redemption Amount is paid in full shall be first applied to the
principal amount subject to the Monthly Redemption Amount payable in cash and
then to the Monthly Redemption Amount payable in Conversion Shares. Any
principal amount of this Debenture converted during the applicable Monthly
Conversion Period in excess of the Monthly Redemption Amount shall be applied
against the last principal amount of this Debenture scheduled to be redeemed
hereunder, in reverse time order from the Maturity Date; provided, however,
if any such conversion is applied against such Monthly Redemption Amount, the
Pre-Redemption Conversion Shares, if any were issued in connection with such
Monthly Redemption or were not already applied to such conversions, shall be
first applied against such conversion. The Company covenants and agrees that it
will honor all Notice of Conversions tendered up until such amounts are paid in
full. The Company’s determination to pay a Monthly Redemption in cash, shares of
Common Stock or a combination thereof shall be applied ratably to all of the
holders of the then outstanding Debentures based on their (or their predecessor’s)
initial purchases of Debentures pursuant to the Purchase Agreement. At any time
the Company delivers a notice to the Holder of its election to pay the Monthly
Redemption Amount in shares of Common Stock, the Company shall file a
prospectus supplement pursuant to Rule 424 disclosing such election.

 

b)                                     Optional
Redemption at Election of Company. Subject to the provisions
of this Section 6, at any time after the Effective Date, the Company may
deliver a notice to the Holder (an “Optional Redemption Notice” and the date
such notice is deemed delivered hereunder, the “Optional Redemption Notice Date”)
of its irrevocable election to redeem some or all of the then outstanding
principal amount of this Debenture for cash in an amount equal to the Optional
Redemption Amount on the 10th Trading Day following the Optional
Redemption Notice Date (such date, the “Optional Redemption Date” and such
redemption, the “Optional Redemption”). The Optional Redemption Amount is
payable in full on the Optional Redemption Date. The Company may only effect an
Optional Redemption if each of the Equity Conditions shall have been met
(unless waived in writing by the Holder) on each Trading Day during the period commencing
on the Optional Redemption Notice Date through to the Optional Redemption Date
and through and including the date payment of the Optional

 

20

 

Redemption Amount is actually made in full. If any of the Equity
Conditions shall cease to be satisfied at any time during the 10 Trading Day
period, then the Holder may elect to nullify the Optional Redemption Notice by
notice to the Company within 3 Trading Days after the first day on which any
such Equity Condition has not been met (provided that if, by a provision of the
Transaction Documents, the Company is obligated to notify the Holder of the
non-existence of an Equity Condition, such notice period shall be extended to
the third Trading Day after proper notice from the Company) in which case the
Optional Redemption Notice shall be null and void, ab initio. The Company
covenants and agrees that it will honor all Notices of Conversion tendered from
the time of delivery of the Optional Redemption Notice through the date all
amounts owing thereon are due and paid in full. Any Optional Redemption shall
be applied ratably to all Holders based on their initial purchases of Debentures
pursuant to the Purchase Agreement.

 

c)                                      Redemption Procedure. The payment of cash or
issuance of Common Stock, as applicable, pursuant to an Optional Redemption or
Monthly Redemption shall be payable on the Optional Redemption Date or Monthly
Redemption Date. If any portion of the payment pursuant to an Optional
Redemption or Monthly Redemption shall not be paid by the Company by the
applicable due date, interest shall accrue thereon at an interest rate equal to
the lesser of 18% per annum or the maximum rate permitted by applicable law
until such amount is paid in full. Notwithstanding anything herein contained to
the contrary, if any portion of the Optional Redemption Amount or Monthly
Redemption Amount remains unpaid after such date, the Holder may elect, by
written notice to the Company given at any time thereafter, to invalidate
such Optional Redemption or Monthly Redemption, ab  initio, and,
with respect to the Company’s failure to honor the Optional Redemption, the
Company shall have no further right to exercise such Optional Redemption. Notwithstanding
anything to the contrary in this Section 6, the Company’s determination to
redeem in cash or its elections under Section 6(a) shall be applied
ratably among the Holders of Debentures. The Holder may elect to convert the
outstanding principal amount of the Debenture pursuant to Section 4 prior
to actual payment in cash for any redemption under this Section 6 by the
delivery of a Notice of Conversion to the Company.

 

d)                                     Forced
Conversion. Notwithstanding anything herein to the contrary,
if after the Effective Date, the VWAP for each of any 20 Trading Days in any 30
consecutive Trading Day period, which 30 day period shall have commenced only
after the Effective Date (such 30 day period, the “Threshold Period”),
exceeds $1.13 (subject to adjustment for reverse and forward stock splits,
stock dividends, stock combinations and other similar transactions of the
Common Stock that occur after the Original Issue Date), the Company may, within
1 Trading Day after the end of any such Threshold Period, deliver a written
notice to the Holder (a “Forced Conversion Notice” and the date such
notice is delivered to the Holder, the “Forced Conversion Notice Date”)
to cause the Holder to convert all or part of the then outstanding principal
amount of this Debenture plus, if so specified in the Forced Conversion Notice,
accrued but unpaid interest, liquidated damages and other amounts owing to the
Holder under this Debenture, it being agreed that the “Conversion Date” for purposes
of Section 4 shall be deemed to occur on

 

21

 

the third Trading Day following the Forced Conversion Notice Date (such
third Trading Day, the “Forced Conversion Date”). The Company may not
deliver a Forced Conversion Notice, and any Forced Conversion Notice delivered
by the Company shall not be effective, unless all of the Equity Conditions are
met (unless waived in writing by the Holder) on each Trading Day occurring
during the applicable Threshold Period through and including the later of the
Forced Conversion Date and the Trading Day after the date such Conversion
Shares pursuant to such conversion are delivered to the Holder. Any Forced
Conversion shall be applied ratably to all Holders based on their initial
purchases of Debentures pursuant to the Purchase Agreement, provided that any
voluntary conversions by a Holder shall be applied against the Holder’s pro
rata allocation, thereby decreasing the aggregate amount forcibly converted
hereunder if only a portion of this Debenture is forcibly converted. For
purposes of clarification, a Forced Conversion shall be subject to all of the
provisions of Section 4, including, without limitation, the provision
requiring payment of liquidated damages and limitations on conversions.

 

Section 7.                                            Negative
Covenants. As long as any portion of this Debenture remains
outstanding, unless the holders of at least 67% in principal amount of the then
outstanding Debentures shall have otherwise given prior written consent, the
Company shall not, and shall not permit any of its subsidiaries (whether or not
a Subsidiary on the Original Issue Date) to, directly or indirectly:

 

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

 

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

 

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

 

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

 

22

 

e)                                      repay, repurchase
or offer to repay, repurchase or otherwise acquire any Indebtedness, other than
the Debentures if on a pro-rata basis, other than regularly scheduled principal
and interest payments as such terms are in effect as of the Original Issue
Date; provided, however, that no regularly scheduled principal and interest
payments may be made if, at the time such payment is due or is otherwise made
or after giving effect to such payment, an event constituting, or that with the
passage of time and without being cured would constitute, an Event of Default
has occurred and is continuing under Section 8(a)(i);

 

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

 

g)                                     enter into any
transaction with any Affiliate of the Company which would be required to be
disclosed in any public filing with the Commission, unless such transaction is
made on an arm’s-length basis and expressly approved by a majority of the
disinterested directors of the Company (even if less than a quorum otherwise
required for board approval); or

 

h)                                     enter into any
agreement with respect to any of the foregoing.

 

Section 8.                                            Events of
Default.

 

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

 

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

 

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

 

iii.                                    a default or
event of default (subject to any grace or cure period provided in the applicable
agreement, document or instrument) shall occur under (A) any of the
Transaction Documents or (B) any other material agreement, lease, document
or instrument to which the Company or any Subsidiary is obligated (and not
covered by clause (vi) below);

 

23

 

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

 

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

 

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

 

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

 

viii.                             the Company
shall be a party to any Change of Control Transaction or Fundamental
Transaction or shall agree to sell or dispose of all or in excess of 40% of its
assets in one transaction or a series of related transactions (whether or not
such sale would constitute a Change of Control Transaction);

 

ix.                                     RESERVED;

 

x.                                        if, during the
Effectiveness Period (as defined in the Registration Rights Agreement), either (a) the
effectiveness of the Registration Statement lapses for any reason or (b) the
Holder shall not be permitted to resell Registrable Securities (as defined in
the Registration Rights Agreement) under the Registration Statement for a
period of more than 30 consecutive Trading Days or 60 non-consecutive Trading
Days (or, in the event the Company suspends effectiveness of the Registration
Statement in connection with a corporate development that, in the good faith
judgment of the board of directors of the Company, requires suspension under
the Securities Act, 75 non consecutive Trading Days) during any 12 month
period; provided, however, that if the Company is negotiating a
merger, consolidation, acquisition or sale of all or

 

24

 

substantially
all of its assets or a similar transaction and, in the written opinion of
counsel to the Company, the Registration Statement would be required to be
amended to include information concerning such pending transaction(s) or
the parties thereto which information is not available or may not be publicly
disclosed at the time, the Company shall be permitted an additional 10
consecutive Trading Days during any 12 month period pursuant to this Section 8(a)(x);
provided, further, in the event that the Commission elects to
review any post effective amendment to a Registration Statement, the Company
shall be permitted 45 Trading Days during any 12 month period pursuant to this Section 8(a)(x);

 

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

 

xii.                                  any monetary
judgment, writ or similar final process shall be entered or filed against the
Company, any subsidiary or any of their respective property or other assets for
more than $150,000, and such judgment, writ or similar final process shall
remain unvacated, unbonded or unstayed for a period of 45 calendar days.

 

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

 

25

 

Section 9.                                            Miscellaneous. 

 

a)                                      Notices. Any and all
notices or other communications or deliveries to be provided by the Holder
hereunder, including, without limitation, any Notice of Conversion, shall be in
writing and delivered personally, by facsimile, or sent by a nationally recognized
overnight courier service, addressed to the Company, at the address set forth
above, facsimile number (408) 516-8425, Attention: Jeff Garon or such other
facsimile number or address as the Company may specify for such purpose by
notice to the Holder delivered in accordance with this Section 9. Any and
all notices or other communications or deliveries to be provided by the Company
hereunder shall be in writing and delivered personally, by facsimile, or sent
by a nationally recognized overnight courier service addressed to each Holder
at the facsimile number or address of the Holder appearing on the books of the
Company, or if no such facsimile number or address appears, at the principal
place of business of the Holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i) the
date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number specified in this Section 9 prior to
5:30 p.m. (New York City time), (ii) the date immediately following
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number specified in this Section 9 between 5:30 p.m.
(New York City time) and 11:59 p.m. (New York City time) on any date, (iii) the
second Business Day following the date of mailing, if sent by nationally
recognized overnight courier service, or (iv) upon actual receipt by the
party to whom such notice is required to be given.

 

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

 

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

 

d)                                     Governing Law. All questions
concerning the construction, validity, enforcement and interpretation of this
Debenture shall be governed by and construed and enforced in accordance with
the internal laws of the State of New York, without regard to the principles of
conflict of laws thereof. Each party agrees that all legal proceedings
concerning the interpretation, enforcement and defense of the transactions
contemplated by any of the Transaction Documents (whether brought against a
party hereto or its respective Affiliates, directors, officers, shareholders,
employees or agents) shall be 

 

26

 

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

 

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

 

f)                                        Severability. If any
provision of this Debenture is invalid, illegal or unenforceable, the balance
of this Debenture shall remain in effect, and if any provision is inapplicable
to any Person or circumstance, it shall nevertheless remain applicable to all
other Persons and circumstances. If it shall be found that any interest or
other amount deemed interest due hereunder violates the applicable law
governing usury, the applicable rate of interest due hereunder shall
automatically be lowered to equal the maximum rate of interest permitted under
applicable law. The Company covenants (to the extent that it may lawfully do
so) that it shall not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay, extension or
usury law or other law which would prohibit or forgive the Company from paying
all or any portion of the principal of or interest on this Debenture as
contemplated herein, wherever enacted, now or at any time hereafter in force,
or which may affect the covenants or the performance of this indenture, and the
Company (to the extent it may lawfully do so) hereby expressly waives all
benefits or advantage of any such law, and covenants that it will not, by
resort to any such law, hinder, delay or impede 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.

 

27

 

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

 

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

 

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

 

j)                                         Secured
Obligation. The obligations of the Company under this
Debenture are secured by all assets of the Company and each Subsidiary pursuant
to the Security Agreement, dated as of January 31, 2008, between the
Company, the Subsidiaries of the Company and the Secured Parties (as defined
therein).

 

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

 

28

 

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.

 

 

	
   

  	
  ETELOS INCORPORATED

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:  Jeffrey
  L. Garon

  
	
   

  	
   

  	
  Title:  President
  and Chief Executive Officer

  
	
   

  	
  Facsimile No. for
  delivery of Notices: (408) 516-8425

  

 

29

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