Exhibit 10.2

 

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 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: July 7, 2005

Original Conversion Price (subject to adjustment herein): $0.22

 

$                    

 

7% CONVERTIBLE DEBENTURE

DUE July 7, 2006

 

THIS 7% CONVERTIBLE DEBENTURE is one of a series of duly authorized and issued
7% Convertible Debentures of North American Technologies Group, Inc., a Delaware
corporation, having a principal place of business at 14315 West Hardy Road,
Houston, TX 77060 (the “Company”), designated as its 7% Convertible Debenture,
due July 7, 2006 (this debenture, the “Debenture” and collectively with the
other such series of debentures, the “Debentures”).

 

FOR VALUE RECEIVED, the Company promises to pay to
                                         or its registered assigns (the
“Holder”), or shall have paid pursuant to the terms hereunder, the principal sum
of $                     by July 7, 2006, or such earlier date as this Debenture
is required or permitted to be repaid as provided hereunder (the “Maturity
Date”), and to pay interest to the Holder on the aggregate unconverted and then
outstanding principal amount of this Debenture in accordance with the provisions
hereof. This Debenture is subject to the following additional provisions:

 

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

 

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

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

 

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

 

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

 

“Change of Control Transaction” means the occurrence after the date hereof of
any of (i) an acquisition after the date hereof by an individual or legal entity
or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act)
of effective control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 50% of the
voting securities of the Company other than by a Purchaser or its Affiliates, 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 50% of the aggregate voting power of the Company or
the successor entity of such transaction, or (iii) the Company sells or
transfers its assets, as an entirety or substantially as an entirety, to another
Person and the stockholders of the Company immediately prior to such transaction
own less than 50% of the aggregate voting power of the acquiring entity
immediately after the transaction, (iv) a replacement at one time or within a
three year period of more than one-half of the members of the Company’s board of
directors which is not approved by a majority of those individuals who are
members of the board of directors on the date hereof (or by those individuals
who are serving as members of the board of directors on any date whose
nomination to the board of directors was approved by a majority of the members
of the board of directors who are members on the date hereof), or (v) the
execution by the Company of an agreement to which the Company is a party or by
which it is bound, providing for any of the events set forth above in (i) or
(iv).

 

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

 

“Common Stock Equivalents” shall mean any debt, equity or equity equivalent
securities exercisable, convertible, exchangeable or payable in shares of Common
Stock.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“Enforcement Action” shall mean (a) to take from or for the account of the
Company by set-off or in any other manner, the whole or any part of any monies
which may now or hereafter be owing by the Company with respect to the
Debenture, (b) to sue for payment of, or to initiate or participate with others
in any suit, action or proceeding against the Company to (i) enforce payment of
or to collect the whole or any part of the Debenture or (ii) commence judicial
enforcement of any of the rights and remedies under the Debenture or applicable
law with respect to the Debenture, (c) to accelerate the Debenture, (d) to cause
the Company to honor any conversion or mandatory prepayment obligation under the
Debenture or (e) to take any action under the provisions of any state or federal
law, including, without limitation, the Uniform Commercial Code, or under any
contract or agreement to enforce, foreclose upon, take possession of or sell any
property or assets of the Company.

 

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

 

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

 

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

 

“Interest Conversion Rate” means the lesser of (a) the Conversion Price and (b)
the 100% of the lesser of (i) the average of the 20 VWAPs immediately prior to
the applicable Interest Payment Date or (ii) the average of the 20 VWAPs
immediately prior to the date the applicable interest payment shares are issued
and delivered if after the Interest Payment Date.

 

“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(c).

 

“Mandatory Default Amount” shall equal the sum of (i) the greater of: (A) 110%
of the principal amount of this Debenture to be prepaid, plus all accrued and
unpaid interest thereon, or (B) the principal amount of this Debenture to be
prepaid, plus all other accrued and unpaid interest hereon, divided by the
Conversion Price on (x) the date the Mandatory Default Amount is demanded or
otherwise due or (y) the date the Mandatory Default Amount is paid in full,
whichever is less, multiplied by the VWAP on (x) the date the Mandatory Default
Amount is demanded or otherwise due or (y) the date the Mandatory Default Amount
is paid in full, whichever is greater, and (ii) all other amounts, costs,
expenses and liquidated damages due in respect of this Debenture.

 

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

 

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

 

“Obligations” means any principal, interest, penalties, fees, indemnifications,
reimbursements, damages and other liabilities payable under the documentation
governing any indebtedness.

 

“Opus” means Opus 5949 LLC, a Texas limited liability company, formerly known as
TIE Investors, LLC.

 

“Opus Loan” means that certain loan by Opus to TIETEK LLC, a Delaware limited
liability company, TIETEK Technologies, Inc., a Texas corporation, North
American Technologies Group, Inc., a Delaware corporation, in the original
principal amount of $14,000,000 as evidenced by that certain Construction Loan
Agreement, dated as of February 5, 2004, as amended, supplemented, extended,
refinanced or otherwise modified from time to time, and the Promissory Note and
security agreements executed pursuant thereto, as amended, replaced or restated
from time to time.

 

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

 

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

 

“Purchase Agreement” means the Securities Purchase Agreement, dated as of July
7, 2005, to which the Company and the original Holder are parties, as amended,
modified or supplemented from time to time in accordance with its terms.

 

“Registration Rights Agreement” means the Registration Rights Agreement as
amended and restated as of the date of the Purchase Agreement, among the
Company, the original Holder and certain other investors in the Company, as may
be amended, modified or supplemented from time to time.

 

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

 

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

 

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

 

4

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

 

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

 

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

 

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

 

Section 2. Interest.

 

a) Payment of Interest in 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 7% per annum, payable quarterly on January 1, April 1,
July 1 and October 1, beginning on the first such date after the Original Issue
Date, on each Conversion Date (as to that principal amount then being converted)
and on the Maturity Date (except that, if any such date is not a Business Day,
then such payment shall be due on the next succeeding Business Day) (each such
date, an “Interest Accrual Date”), in shares of Common Stock at the Interest
Conversion Rate (the amount to be paid in shares, the “Interest Share Amount”).
As to such Interest Accrual Date, within 3 Trading Days of such Interest Accrual
Date (each such date, an “Interest Payment Date”), the Company shall have
delivered to the Holder’s account with The Depository Trust Company (if
registered for resale, and otherwise to the Holder) a number of shares of Common
Stock equal to the quotient of (x) the applicable Interest Share Amount divided
by (y) the then Interest Conversion Price.

 

b) Interest Calculations. Interest shall be calculated on the basis of a 360-day
year and shall accrue daily commencing on the Original Issue Date until payment
in full of the principal sum, together with all accrued and unpaid interest and
other amounts

 

5

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which may become due hereunder, has been made. Payment of interest in shares of
Common Stock shall otherwise occur pursuant to Section 4(d)(ii) and the Interest
Payment Date shall be deemed the Conversion Date. Interest shall cease to accrue
with respect to any principal amount converted, provided that the Company in
fact delivers the Conversion Shares within the time period required by Section
4(d)(ii). Interest hereunder will be paid to the Person in whose name this
Debenture is registered on the records of the Company regarding registration and
transfers of Debentures (the “Debenture Register”).

 

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

 

d) Prepayment. Except as otherwise set forth in this Debenture and except
pursuant to a Return Request as set forth in Article III of the Purchase
Agreement, the Company may not prepay any portion of the principal amount of
this Debenture without the prior written consent of the Holder.

 

Section 3. Registration of Transfers and Exchanges.

 

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

 

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

 

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

 

6

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Section 4. Conversion.

 

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

 

b) Conversion Price. The conversion price in effect on any Conversion Date shall
be equal to $0.22 (subject to adjustment herein) (the “Conversion Price”).

 

c) Conversion Limitations.

 

i. RESERVED.

 

ii. Holder’s Restriction on Conversion. The Company shall not effect any
conversion of this Debenture, and the Holder shall not have the right to convert
any portion of this Debenture, pursuant to Section 4(a) or otherwise, to the
extent that after giving effect to such conversion, the Holder (together with
the Holder’s affiliates), as set forth on the applicable Notice of Conversion,
would beneficially own in excess of 4.99% of the number of shares of the Common
Stock outstanding immediately after giving effect to such conversion. For
purposes of the foregoing sentence, the number of shares of Common Stock
beneficially owned by the Holder and its affiliates shall include the number of
shares of Common Stock issuable upon conversion of this Debenture with respect
to which the determination of such sentence is being made, but shall exclude the
number of shares of Common Stock which would be issuable upon (A) conversion of
the remaining, nonconverted portion of this Debenture beneficially owned by the
Holder or any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any other Debentures or the Warrants) subject to
a limitation on conversion or exercise analogous

 

7

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to the limitation contained herein beneficially owned by the Holder or any of
its affiliates. Except as set forth in the preceding sentence, for purposes of
this Section 4(c)(ii), beneficial ownership shall be calculated in accordance
with Section 13(d) of the Exchange Act. To the extent that the limitation
contained in this section applies, the determination of whether this Debenture
is convertible (in relation to other securities owned by the Holder) and of
which a portion of this Debenture is convertible shall be in the sole discretion
of such Holder. To ensure compliance with this restriction, the Holder will be
deemed to represent to the Company each time it delivers a Notice of Conversion
that such Notice of Conversion has not violated the restrictions set forth in
this paragraph and the Company shall have no obligation to verify or confirm the
accuracy of such determination. For purposes of this Section 4(c)(ii), in
determining the number of outstanding shares of Common Stock, the Holder may
rely on the number of outstanding shares of Common Stock as reflected in (x) the
Company’s most recently filed Form 10-QSB or Form 10-KSB, as the case may be,
(y) a more recent public announcement by the Company or (z) any other notice by
the Company or the Company’s Transfer Agent setting forth the number of shares
of Common Stock outstanding. Upon the written or oral request of the Holder, the
Company shall within two Trading Days confirm orally and in writing to the
Holder the number of shares of Common Stock then outstanding. In any case, the
number of outstanding shares of Common Stock shall be determined after giving
effect to the conversion or exercise of securities of the Company, including
this Debenture, by the Holder or its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. The provisions of
this Section 4(c) including the limitation set forth in the first sentence of
subsection (ii) may be waived by the Holder, at the election of the Holder, upon
not less than sixty-one (61) days’ prior notice to the Company, and the
provisions of this Section 4(c) shall continue to apply until such sixty-first
day (or such later date, as determined by the Holder, as may be specified in
such notice of waiver).

 

d) Mechanics of Conversion

 

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

 

ii. Delivery of Certificate Upon Conversion. Not later than ten Trading Days
after any Conversion Date, the Company will deliver or cause to be delivered to
the Holder a certificate or certificates representing the Conversion Shares
which shall be free of restrictive legends and trading restrictions (other than
those required by the Purchase Agreement) representing the number of shares of
Common Stock being acquired upon the conversion of this Debenture (including,
shares of Common Stock representing the payment of accrued interest otherwise
determined pursuant to Section 2(a). The Company shall, if available and if
allowed under applicable securities laws, use its best efforts to deliver any
certificate or certificates required to be delivered by the Company under this
Section electronically through the Depository Trust Corporation or another
established clearing corporation performing similar functions.

 

8

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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 tenth Trading Day after a Conversion Date, the Holder
shall be entitled by written notice to the Company at any time on or before its
receipt of such certificate or certificates thereafter, to rescind such
conversion, in which event the Company shall immediately return the certificates
representing the principal amount of this Debenture tendered for conversion.

 

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

 

v. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon
Conversion. In addition to any other rights available to the Holder, if the
Company fails

 

9

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for any reason to deliver to the Holder such certificate or certificates
pursuant to Section 4(d)(ii) by the tenth Trading Day after the Conversion Date,
and if after such tenth Trading Day the Holder is required by its brokerage firm
to purchase (in an open market transaction or otherwise) Common Stock to deliver
in satisfaction of a sale by such Holder of the Conversion Shares which the
Holder anticipated receiving upon such conversion (a “Buy-In”), then the Company
shall (A) pay in cash to the Holder (in addition to any remedies available to or
elected by the Holder) the amount by which (x) the Holder’s total purchase price
(including brokerage commissions, if any) for the Common Stock so purchased
exceeds (y) the product of (1) the aggregate number of shares of Common Stock
that such Holder anticipated receiving from the conversion at issue multiplied
by (2) the actual sale price of the Common Stock at the time of the sale
(including brokerage commissions, if any) giving rise to such purchase
obligation and (B) at the option of the Holder, either reissue (if surrendered)
this Debenture in a principal amount equal to the principal amount of the
attempted conversion or deliver to the Holder the number of shares of Common
Stock that would have been issued had the Company timely complied with its
delivery requirements under Section 4(d)(ii). For example, if the Holder
purchases Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to an attempted conversion of this Debenture with respect to
which the actual sale price of the Conversion Shares at the time of the sale
(including brokerage commissions, if any) giving rise to such purchase
obligation was a total of $10,000 under clause (A) of the immediately preceding
sentence, the Company shall be required to pay the Holder $1,000. The Holder
shall provide the Company written notice indicating the amounts payable to the
Holder in respect of the Buy-In. Notwithstanding anything contained herein to
the contrary, if a Holder requires the Company to make payment in respect of a
Buy-In for the failure to timely deliver certificates hereunder and the Company
timely pays in full such payment, the Company shall not be required to pay such
Holder liquidated damages under Section 4(d)(iv) in respect of the certificates
resulting in such Buy-In.

 

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

 

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

 

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

 

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

 

Section 5. Certain Adjustments.

 

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

 

b) Subsequent Equity Sales. If the Company or any Subsidiary thereof, as
applicable, at any time while this Debenture is outstanding, shall offer, sell,
grant any option to purchase or offer, sell or grant any right to reprice its
securities, or otherwise dispose of or issue (or announce any offer, sale, grant
or any option to purchase or other disposition) any Common Stock or Common Stock
Equivalents entitling any Person to acquire shares of Common Stock, at an
effective price per share less than the then Conversion Price (such lower price,
the “Base Conversion Price” and such issuances collectively, a “Dilutive
Issuance”), as adjusted hereunder, then the Conversion Price shall be reduced in
accordance with the following formula:

 

Base Conversion Price        =    Conversion Price     x    X + Y               
X + Z

 

11

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Where:

 

X  =  those shares of Common Stock outstanding immediately before the Dilutive
Issuance;

Y  =  shares of Common Stock issuable at the Conversion Price for the total
consideration received in the Dilutive Issuance; and

Z  =  those shares issued in the Dilutive Issuance

 

For purposes of the foregoing, 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 Conversion Price, such
issuance shall be deemed to have occurred for less than the Conversion Price on
such date of the Dilutive Issuance.

 

The adjustment required under this Section 5(b) shall be made whenever such
Common Stock or Common Stock Equivalents are issued. Notwithstanding the
foregoing, no adjustment will be made under this Section 5(b) in respect of an
Exempt Issuance. The Company shall notify the Holder in writing, no later than
the Business Day following the issuance of any Common Stock or Common Stock
Equivalents subject to this section, indicating therein the applicable issuance
price, or of applicable reset price, exchange price, conversion price and other
pricing terms (such notice the “Dilutive Issuance Notice”). For purposes of
clarification, whether or not the Company provides a Dilutive Issuance Notice
pursuant to this Section 5 (b), upon the occurrence of any Dilutive Issuance,
after the date of such Dilutive Issuance the Holder is entitled to receive a
number of Conversion Shares based upon the Base Conversion Price regardless of
whether the Holder accurately refers to the Base Conversion Price in the Notice
of Conversion.

 

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

 

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

 

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

 

f) Notice to the Holder.

 

i. Adjustment to Conversion Price. Whenever the Conversion Price is adjusted
pursuant to any of this Section 5, the Company shall promptly mail to each
Holder a notice setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment. If the
Company issues a variable rate security 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.

 

13

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

 

Section 6. The Opus Loan.

 

a) Payment Restrictions. The Company hereby agrees that it may not make, and the
Holder hereby agrees that it will not accept, any payment or distribution with
respect to the Debenture (other than the Interest Share Amount) until the Opus
Loan is indefeasibly paid in full in cash.

 

b) Standstill Provisions. Until the Opus Loan is indefeasibly paid in full in
cash, Holder shall not, without the prior written consent of Opus, take any
Enforcement Action with respect to the Debenture. Notwithstanding the foregoing,
(a) Holder may file proofs of claim against the Company in any bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property and (b) Holder may accelerate the Debenture to the
extent the Opus Loan has been accelerated; provided, that if the acceleration of
the Opus Loan has been rescinded, Holder shall be deemed to have automatically
rescinded its acceleration of the Debenture. Any payments or

 

14

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distributions or other proceeds of any Enforcement Action obtained by Holder in
violation of the foregoing prohibition shall in any event be held in trust by
Holder for the benefit of Opus and promptly paid or delivered to Opus in the
form received until the Opus Loan is indefeasibly paid in full in cash.

 

c) When Distribution Must Be Paid Over. In the event that the Holder receives
any payment of any Obligations not permitted to be made by the Company or
accepted by the Holder with respect to this Debenture, such payment shall not be
commingled with any of the assets of the Holder, shall be held in trust by such
Holder for the benefit of Opus and shall be paid forthwith over and delivered to
Opus as their interests may appear or any representative of Opus for application
to the payment of all Obligations with respect to the Opus Loan remaining unpaid
to the extent necessary to pay such Obligations in full in accordance with their
terms, after giving effect to any concurrent payment or distribution to or for
Opus.

 

d) Relative Rights. This Section 6 defines the relative rights of the Holder and
Opus. Nothing in this Debenture will:

 

i. impair, as between the Company and the Holder, the obligation of the Company,
which is absolute and unconditional, to pay principal of and interest on this
Debenture in accordance with its terms; or

 

ii. affect the relative rights of the Holder and creditors of the Company other
than their rights in relation to Opus.

 

e) Modification, Renewal, Sale or Release of the Opus Loan. Opus may, at any
time and from time to time, without the consent of or notice to the Holder,
without incurring responsibility to the Holder and without impairing or
releasing the Obligations hereunder of the Holder, do any one or more of the
following: (a) change the manner, place or terms of payment or extend the time
or payment of, or renew or alter, the Opus Loan or any instrument evidencing the
same or any agreement under which the Opus Loan is outstanding; (b) sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing the Opus Loan; (c) release any Person in any manner for the
collection of the Opus Loan; and (d) exercise or refrain from exercising any
rights against the Company or any other Person.

 

f) Benefit. The provisions of this Section 6 are for the benefit of Opus.

 

g) Amendments. The provisions of this Section 6 may not be amended or modified
without the written consent of Opus.

 

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

 

a) 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;
provided, however, the Holder acknowledges that the Opus Loan is senior to this
Debenture in right of repayment;

 

15

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b) 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 other than
Permitted Liens;

 

c) amend its certificate of incorporation, bylaws or other charter documents so
as to materially and adversely affect any rights of the Holder, but in no event
shall an amendment of the Company’s certificate of incorporation to increase the
number of authorized shares of Common Stock be prohibited by the terms of this
Debenture;

 

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 the Conversion Shares to the extent permitted or
required under the Transaction Documents or as otherwise permitted by the
Transaction Documents;

 

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

 

f) pay cash dividends or distributions on any equity securities of the Company
other than as required by the Company’s Series AA Preferred Stock.

 

Section 8. Events of Default.

 

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

 

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

 

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

 

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

 

16

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

 

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

 

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

 

vii. the Company shall be a party to any Change of Control Transaction or
Fundamental Transaction, shall agree to sell or dispose of all or in excess of
33% of its assets in one or more transactions (whether or not such sale would
constitute a Change of Control Transaction) or shall redeem or repurchase more
than a de minimis number of its outstanding shares of Common Stock or other
equity securities of the Company (other than redemptions of Conversion Shares
and repurchases of shares of Common Stock or other equity securities of
departing officers and directors of the Company; provided such repurchases shall
not exceed $100,000, in the aggregate, for all officers and directors during the
term of this Debenture) except that the foregoing in this subsection (vii) shall
not constitute an Event of Default if consented to by each Holder; or

 

17

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viii. after September 1, 2005, the Company shall fail for any reason to deliver
certificates to a Holder prior to the third Trading Day after a Conversion Date
pursuant to and in accordance with Section 4(d) or the Company shall provide
notice to the Holder, including by way of public announcement, at any time, of
its intention not to comply with requests for conversions of any Debentures in
accordance with the terms hereof.

 

ix. the Company shall fail to comply with its obligation to hold a meeting of
its shareholders for the purpose of approving an amendment to the Company’s
certificate of incorporation which will increase the number of authorized shares
of Common Stock to a number that is sufficient for the Company to issue
authorized shares of Common Stock to each holder of Common Stock Equivalents
upon the exercise or Conversion thereof plus the Required Minimum, as set forth
in Section 5.12(b) of the Purchase Agreement.

 

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

 

Section 9. Miscellaneous.

 

a) Notices. Any and all notices or other communications or deliveries to be
provided by the Holder hereunder, including, without limitation, any Notice of
Conversion, shall be in writing and delivered personally, by facsimile, sent by
a nationally recognized overnight courier service, addressed to the Company, at
the address set forth above, facsimile number (281) 847-1791, Attn: President,
or such other address or facsimile number as the Company may specify for such
purposes by notice to the Holder delivered in accordance with this Section. Any
and all notices or other communications or deliveries to be provided by the
Company hereunder shall be in writing and delivered personally, by facsimile,
sent by a nationally recognized overnight

 

18

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courier service addressed to each Holder at the facsimile telephone number or
address of such Holder appearing on the books of the Company, or if no such
facsimile telephone number or address appears, at the principal place of
business of the Holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 5:30 p.m. (New
York City time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 5:30 p.m. (New York City time) on any date
and earlier than 11:59 p.m. (New York City time) on such date, (iii) the second
Business Day following the date of mailing, if sent by nationally recognized
overnight courier service, or (iv) upon actual receipt by the party to whom such
notice is required to be given.

 

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

 

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

 

d) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
agrees that all legal proceedings concerning the interpretations, enforcement
and defense of the transactions contemplated by any of the Transaction Documents
(whether brought against a party hereto or its respective affiliates, directors,
officers, shareholders, employees or agents) shall be commenced in the state and
federal courts sitting in the City of New York, Borough of Manhattan (the “New
York Courts”). Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein (including with respect to the enforcement of any of the
Transaction Documents), and hereby irrevocably waives, and agrees not to assert
in any suit, action or proceeding, any claim that it is not personally subject
to the jurisdiction of any such court, or such New York Courts are improper or
inconvenient venue for such proceeding. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof via registered or certified
mail or overnight delivery (with evidence of delivery) to such party at the
address in effect for notices to it under this Debenture and agrees that such
service

 

19

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shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law. Each party hereto hereby irrevocably
waives, to the fullest extent permitted by applicable law, any and all right to
trial by jury in any legal proceeding arising out of or relating to this
Debenture or the transactions contemplated hereby. If either party shall
commence an action or proceeding to enforce any provisions of this Debenture,
then the prevailing party in such action or proceeding shall be reimbursed by
the other party for its attorneys fees and other costs and expenses incurred
with the investigation, preparation and prosecution of such action or
proceeding.

 

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

 

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

 

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

 

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

 

i) Assumption. Any successor to the Company or surviving entity in a Fundamental
Transaction shall (i) assume in writing all of the obligations of the Company
under this Debenture and the other Transaction Documents pursuant to written

 

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

 

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

 

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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.

 

NORTH AMERICAN TECHNOLOGIES GROUP, INC. By:  

 

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Name:     Title:    

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ANNEX A

 

NOTICE OF CONVERSION

 

The undersigned hereby elects to convert principal under the 7% Convertible
Debenture of North American Technologies Group, Inc., a Delaware corporation
(the “Company”), due on July 7, 2006, into shares of common stock, par value
$0.001 per share (the “Common Stock”), of the Company according to the
conditions hereof, as of the date written below. If shares are to be issued in
the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering herewith such
certificates and opinions as reasonably requested by the Company in accordance
therewith. No fee will be charged to the holder for any conversion, except for
such transfer taxes, if any.

 

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

 

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

 

Conversion calculations:

 

Date to Effect Conversion:

Principal Amount of Debenture to be Converted:

$             of Interest Accrued on Account of Conversion at Issue.

Number of shares of Common Stock to be issued:

Signature:

Name:

Address:

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Schedule 1

 

CONVERSION SCHEDULE

 

The 7% Convertible Debentures due on July 7, 2006, in the aggregate principal
amount of $                     issued by North American Technologies Group,
Inc., a Delaware corporation. This Conversion Schedule reflects conversions made
under Section 4 of the above referenced Debenture.

 

Dated:

 

Date of Conversion

(or for first entry,

Original Issue Date)

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Amount of

Conversion

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Aggregate Principal

Amount Remaining

Subsequent to Conversion

(or original Principal Amount)

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   Company Attest

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