ex10-5.htm


    Exhibit
10.5

     

    SECURITY
AGREEMENT

     

    SECURITY
AGREEMENT (this “Agreement”),
effective as of June 2, 2008, by and among Pediatric Prosthetics, Inc., an Idaho
corporation (“Parent” and
Pediatric Prosthetics, Inc., a Texas corporation (the "Subsidiary") (hereinafter
the Parent and the Subsidiary shall collectively be referred to as
the “Company”)
and the secured parties signatory hereto and their respective endorsees,
transferees and assigns  (collectively, the “Secured
Party”).

     

    W I T N E
S S E T H:

     

    WHEREAS,
pursuant to a Securities Purchase Agreement, dated the date hereof, between
Parent and the Secured Party (the “Purchase
Agreement”), Parent has agreed to issue to the Secured Party and the
Secured Party has agreed to purchase from Parent certain of Parent’s 6% Callable
Secured Convertible Notes, due three years from the date of issue (the “Notes”),
which are convertible into shares of Company’s Common Stock, par value $.001 per
share (the “Common
Stock”).  In connection therewith, Parent shall issue the
Secured Party certain Common Stock purchase warrants (the “Warrants”);
and

     

    WHEREAS,
the Parent has been, and is now, engaged as a national provider of specialized
pediatric prosthetics for both upper and lower limbs; and

     

    WHEREAS, substantially all of the operations of the Parent are
conducted through the Subsidiary; and

     

    WHEREAS, in the past, as now, the Company has provided financing
for the Subsidiary, and the Subsidiary has relied upon the Company to provide
such financing. In addition, it is anticipated that, if the Subsidiary executes
and delivers this Agreement, the Company will continue to provide such financing
to the Subsidiary, and that the proceeds of the Purchase Agreement and Notes
will be used, in part, for the general working capital purposes of the
Subsidiary; and 

     

    WHEREAS,
in order to induce the Secured Party to purchase the Notes, Company has agreed
to execute and deliver to the Secured Party this Agreement for the benefit of
the Secured Party and to grant to it a first priority security interest in
certain property of Company to secure the prompt payment, performance and
discharge in full of all of Company’s obligations under the Notes and exercise
and discharge in full of Company’s obligations under the Warrants;
and

     

    WHEREAS,
in light of the foregoing, the Company expects to derive substantial benefit
from the Purchase Agreement and sale of the Notes and the transactions
contemplated thereby and, in furtherance thereof, has agreed to execute and
deliver this.

     

    NOW,
THEREFORE, in consideration of the agreements herein contained and for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:

     

    1.           Certain
Definitions.  As used in this Agreement, the following terms
shall have the meanings set forth in this Section 1.  Terms used but
not otherwise defined in this Agreement that are defined in Article 9 of the UCC
(such as “general
intangibles” and “proceeds”) shall have
the respective meanings given such terms in Article 9 of the UCC.

     

    (a)           “Collateral” means the
collateral in which the Secured Party is granted a security interest by this
Agreement and which shall include the following, whether presently owned or
existing or hereafter acquired or coming into existence, and all additions and
accessions thereto and all substitutions and replacements thereof, and all
proceeds, products and accounts thereof, including, without limitation, all
proceeds from the sale or transfer of the Collateral and of insurance covering
the same and of any tort claims in connection therewith:

     

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      
        (i)           All
Goods of the Company, including, without limitations, all machinery, equipment,
computers, motor vehicles, trucks, tanks, boats, ships, appliances, furniture,
special and general tools, fixtures, test and quality control devices and other
equipment of every kind and nature and wherever situated, together with all
documents of title and documents representing the same, all additions and
accessions thereto, replacements therefor, all parts therefor, and all
substitutes for any of the foregoing and all other items used and useful in
connection with the Company’s businesses and all improvements thereto
(collectively, the “Equipment”);
and

         

      

    

     

    (ii)          All
Inventory of the Company; and

     

    (iii)         All
of the Company’s contract rights and general intangibles, including, without
limitation, all partnership interests, stock or other securities, licenses,
distribution and other agreements, computer software development rights, leases,
franchises, customer lists, quality control procedures, grants and rights,
goodwill, trademarks, service marks, trade styles, trade names, patents, patent
applications, copyrights, deposit accounts, and income tax refunds
(collectively, the “General
Intangibles”); and

     

    (iv)         All
Receivables of the Company including all insurance proceeds, and rights to
refunds or indemnification whatsoever owing, together with all instruments, all
documents of title representing any of the foregoing, all rights in any
merchandising, goods, equipment, motor vehicles and trucks which any of the same
may represent, and all right, title, security and guaranties with respect to
each Receivable, including any right of stoppage in transit; and

     

    (v)          All
of the Company’s documents, instruments and chattel paper, files, records, books
of account, business papers, computer programs and the products and proceeds of
all of the foregoing Collateral set forth in clauses (i)-(iv)
above.

     

    (b)           “Company” shall mean,
collectively, Company and all of the subsidiaries of Company, a list of which is
contained in Schedule
A, attached hereto.

     

    (c)           “Obligations” means
all of the Company’s obligations under this Agreement and the Notes, in each
case, whether now or hereafter existing, voluntary or involuntary, direct or
indirect, absolute or contingent, liquidated or unliquidated, whether or not
jointly owed with others, and whether or not from time to time decreased or
extinguished and later decreased, created or incurred, and all or any portion of
such obligations or liabilities that are paid, to the extent all or any part of
such payment is avoided or recovered directly or indirectly from the Secured
Party as a preference, fraudulent transfer or otherwise as such obligations may
be amended, supplemented, converted, extended or modified from time to
time.

     

    (d)           “UCC” means the
Uniform Commercial Code, as currently in effect in the State of New
York.

     

     

     

     

     

     

    
      
        
        

      

      
        -2-

        
          

        

      

      
        
        

      

    

     

     

     

    2.           Grant of Security
Interest.  As an inducement for the Secured Party to purchase
the Notes and to secure the complete and timely payment, performance and
discharge in full, as the case
may be, of all of the Obligations, the Company hereby, unconditionally and
irrevocably, pledges, grants and hypothecates to the Secured Party, a continuing
security interest in, a continuing first lien upon, an unqualified right to
possession and disposition of and a right of set-off against, in each case to
the fullest extent permitted by law, all of the Company’s right, title and
interest of whatsoever kind and nature in and to the Collateral (the “Security
Interest”).

     

    3.           Representations, Warranties,
Covenants and Agreements of the Company.  The Company
represents and warrants to, and covenants and agrees with, the Secured Party as
follows:

     

    (a)           The
Company has the requisite corporate power and authority to enter into this
Agreement and otherwise to carry out its obligations thereunder.  The
execution, delivery and performance by the Company of this Agreement and the
filings contemplated therein have been duly authorized by all necessary action
on the part of the Company and no further action is required by the
Company.  This Agreement constitutes a legal, valid and binding
obligation of the Company enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of creditor’s rights
generally.

     

    (b)           The
Company represents and warrants that it has no place of business or offices
where its respective books of account and records are kept (other than
temporarily at the offices of its attorneys or accountants) or places where
Collateral is stored or located, except as set forth on Schedule A attached
hereto;

     

    (c)           The
Company is the sole owner of the Collateral (except for non-exclusive licenses
granted by the Company in the ordinary course of business), free and clear of
any liens, security interests, encumbrances, rights or claims, and is fully
authorized to grant the Security Interest in and to pledge the
Collateral.  There is not on file in any governmental or regulatory
authority, agency or recording office an effective financing statement, security
agreement, license or transfer or any notice of any of the foregoing (other than
those that have been filed in favor of the Secured Party pursuant to this
Agreement) covering or affecting any of the  Collateral.  So
long as this Agreement shall be in effect, the Company shall not execute and
shall not knowingly permit to be on file in any such office or agency any such
financing statement or other document or instrument (except to the extent filed
or recorded in favor of the Secured Party pursuant to the terms of this
Agreement).

     

    (d)           No
part of the Collateral has been judged invalid or unenforceable.  No
written claim has been received that any Collateral or the Company’s use of any
Collateral violates the rights of any third party. There has been no adverse
decision to the Company’s claim of ownership rights in or exclusive rights to
use the Collateral in any jurisdiction or to the Company’s right to keep and
maintain such Collateral in full force and effect, and there is no proceeding
involving said rights pending or, to the best knowledge of the Company,
threatened before any court, judicial body, administrative or regulatory agency,
arbitrator or other governmental authority.

     

     

     

     

    
      
        
        

      

      
        -3-

        
          

        

      

      
        
        

      

    

     

     

     

     

    (e)           The
Company shall at all times maintain its books of account and records relating to
the Collateral at its principal place of business and its Collateral at the
locations set forth on
Schedule A
attached hereto and may not relocate such books of account and records or
tangible Collateral unless it delivers to the Secured Party at least 30 days
prior to such relocation (i) written notice of such relocation and the new
location thereof (which must be within the United States) and (ii) evidence
that appropriate financing statements and other necessary documents have been
filed and recorded and other steps have been taken to perfect the Security
Interest to create in favor of the Secured Party valid, perfected and continuing
first priority liens in the Collateral.

     

    (f)           This
Agreement creates in favor of the Secured Party a valid security interest in the
Collateral securing the payment and performance of the Obligations and, upon
making the filings described in the immediately following sentence, a perfected
first priority security interest in such Collateral.  Except for the
filing of financing statements on Form-1 under the UCC with the jurisdictions
indicated on Schedule
B, attached hereto, no authorization or approval of or filing with or
notice to any governmental authority or regulatory body is required either
 for the grant by the Company of, or the effectiveness of, the Security
Interest granted hereby or for the execution, delivery and performance of this
Agreement by the Company or  for the perfection of or exercise by the
Secured Party of its rights and remedies hereunder.

     

    (g)           On
the date of execution of this Agreement, the Company will deliver to the Secured
Party one or more executed UCC financing statements on Form-1 with respect to
the Security Interest for filing with  the jurisdictions indicated on
Schedule B,
attached hereto and in such other jurisdictions as may be requested by the
Secured Party.

     

    (h)           The
execution, delivery and performance of this Agreement does not conflict with or
cause a breach or default, or an event that with or without the passage of time
or notice, shall constitute a breach or default, under any agreement to which
the Company is a party or by which the Company is bound.  No consent
(including, without limitation, from stock holders or creditors of the Company)
is required for the Company to enter into and perform its obligations
hereunder.

     

    (i)           
The Company shall at all times maintain the liens and Security Interest provided
for hereunder as valid and perfected first priority liens and security interests
in the Collateral in favor of the Secured Party until this Agreement and the
Security Interest hereunder shall terminate pursuant to Section
11.  The Company hereby agrees to defend the same against any and all
persons.  The Company shall safeguard and protect all Collateral for
the account of the Secured Party.  At the request of the Secured
Party, the Company will sign and deliver to the Secured Party at any time or
from time to time one or more financing statements pursuant to the UCC (or any
other applicable statute) in form reasonably satisfactory to the Secured Party
and will pay the cost of filing the same in all public offices wherever filing
is, or is deemed by the Secured Party to be, necessary or desirable to effect
the rights and obligations provided for herein. Without limiting the generality
of the foregoing, the Company shall pay all fees, taxes and other amounts
necessary to maintain the Collateral and the Security Interest hereunder, and
the Company shall obtain and furnish to the Secured Party from time to time,
upon demand, such releases and/or subordinations of claims and liens which may
be required to maintain the priority of the Security Interest
hereunder.

     

     

     

     

     

    
      
        
        

      

      
        -4-

        
          

        

      

      
        
        

      

    

     

     

     

    (j)           The
Company will not transfer, pledge, hypothecate, encumber, license (except for
non-exclusive licenses granted by the Company in the ordinary course of
business), sell or otherwise dispose of any of the Collateral without the prior
written consent of the Secured Party.

     

    (k)           The
Company shall keep and preserve its Equipment, Inventory and other tangible
Collateral in good condition, repair and order and shall not operate or locate
any such Collateral (or cause to be operated or located) in any area excluded
from insurance coverage.

     

    (l)           
The Company shall, within ten (10) days of obtaining knowledge thereof, advise
the Secured Party promptly, in sufficient detail, of any substantial change in
the Collateral, and of the occurrence of any event which would have a material
adverse effect on the value of the Collateral or on the Secured Party’s security
interest therein.

     

    (m)          The
Company shall promptly execute and deliver to the Secured Party such further
deeds, mortgages, assignments, security agreements, financing statements or
other instruments, documents, certificates and assurances and take such further
action as the Secured Party may from time to time request and may in its sole
discretion deem necessary to perfect, protect or enforce its security interest
in the Collateral including, without limitation, the execution and delivery of a
separate security agreement with respect to the Company’s intellectual property
(“Intellectual
Property Security Agreement”) in which the Secured Party has been granted
a security interest hereunder, substantially in a form acceptable to the Secured
Party, which Intellectual Property Security Agreement, other than as stated
therein, shall be subject to all of the terms and conditions
hereof.

     

    (n)           The
Company shall permit the Secured Party and its representatives and agents to
inspect the Collateral at any time, and to make copies of records pertaining to
the Collateral as may be requested by the Secured Party from time to
time.

     

    (o)           The
Company will take all steps reasonably necessary to diligently pursue and seek
to preserve, enforce and collect any rights, claims, causes of action and
accounts receivable in respect of the Collateral.

     

    (p)           The
Company shall promptly notify the Secured Party in sufficient detail upon
becoming aware of any attachment, garnishment, execution or other legal process
levied against any Collateral and of any other information received by the
Company that may materially affect the value of the Collateral, the Security
Interest or the rights and remedies of the Secured Party hereunder.

     

    (q)           All
information heretofore, herein or hereafter supplied to the Secured Party by or
on behalf of the Company with respect to the Collateral is accurate and complete
in all material respects as of the date furnished.

     

    (r)           
Schedule A
attached hereto contains a list of all of the subsidiaries of
Company.

     

     

     

     

    
      
        
        

      

      
        -5-

        
          

        

      

      
        
        

      

    

     

     

     

    4.           Defaults.  The
following events shall be “Events of
Default”:

     

    (a)           The
occurrence of an Event of Default (as defined in the Notes) under the
Notes;

     

    (b)           Any
representation or warranty of the Company in this Agreement or in the
Intellectual Property Security Agreement shall prove to have been incorrect in
any material respect when made;

     

    (c)           The
failure by the Company to observe or perform any of its material obligations
hereunder or in the Intellectual Property Security Agreement for ten (10) days
after receipt by the Company of notice of such failure from the Secured Party;
and

     

    (d)           Any
material breach of, or default under, the Warrants.

     

    5.           Duty To Hold In
Trust.  Upon the occurrence of any Event of Default and at any
time thereafter, the Company shall, upon receipt by it of any revenue, income or
other sums subject to the Security Interest, whether payable pursuant to the
Notes or otherwise, or of any check, draft, note, trade acceptance or other
instrument evidencing an obligation to pay any such sum, hold the same in trust
for the Secured Party and shall forthwith endorse and transfer any such sums or
instruments, or both, to the Secured Party for application to the satisfaction
of the Obligations.

     

    6.           Rights and Remedies Upon
Default.  Upon occurrence of any Event of Default and at any
time thereafter, the Secured Party shall have the right to exercise all of the
remedies conferred hereunder and under the Notes, and the Secured Party shall
have all the rights and remedies of a secured party under the UCC and/or any
other applicable law (including the Uniform Commercial Code of any jurisdiction
in which any Collateral is then located).  Without limitation, the
Secured Party shall have the following rights and powers:

     

    (a)           The
Secured Party shall have the right to take possession of the Collateral and, for
that purpose, enter, with the aid and assistance of any person, any premises
where the Collateral, or any part thereof, is or may be placed and remove the
same, and the Company shall assemble the Collateral and make it available to the
Secured Party at places which the Secured Party shall reasonably select, whether
at the Company’s premises or elsewhere, and make available to the Secured Party,
without rent, all of the Company’s respective premises and facilities for the
purpose of the Secured Party taking possession of, removing or putting the
Collateral in saleable or disposable form.

     

    (b)           The
Secured Party shall have the right to operate the business of the Company using
the Collateral and shall have the right to assign, sell, lease or otherwise
dispose of and deliver all or any part of the Collateral, at public or private
sale or otherwise, either with or without special conditions or stipulations,
for cash or on credit or for future delivery, in such parcel or parcels and at
such time or times and at such place or places, and upon such terms and
conditions as the Secured Party may deem commercially reasonable, all without
(except as shall be required by applicable statute and cannot be waived)
advertisement or demand upon or notice to the Company or right of redemption of
the Company, which are hereby expressly waived.  Upon each such sale,
lease, assignment or other transfer of Collateral, the Secured Party may, unless
prohibited by applicable law which cannot be waived, purchase all or any part of
the Collateral
being sold, free from and discharged of all trusts, claims, right of redemption
and equities of the Company, which are hereby waived and released.

     

     

     

     

     

    
      
        
        

      

      
        -6-

        
          

        

      

      
        
        

      

    

     

     

     

     

    7.           Applications of
Proceeds.  The proceeds of any such sale, lease or other
disposition of the Collateral hereunder shall be applied first, to the expenses
of retaking, holding, storing, processing and preparing for sale, selling, and
the like (including, without limitation, any taxes, fees and other costs
incurred in connection therewith) of the Collateral, to the reasonable
attorneys’ fees and expenses incurred by the Secured Party in enforcing its
rights hereunder and in connection with collecting, storing and disposing of the
Collateral, and then to satisfaction of the Obligations, and to the payment of
any other amounts required by applicable law, after which the Secured Party
shall pay to the Company any surplus proceeds.  If, upon the sale,
license or other disposition of the Collateral, the proceeds thereof are
insufficient to pay all amounts to which the Secured Party is legally entitled,
the Company will be liable for the deficiency, together with interest thereon,
at the rate of 15% per annum (the “Default Rate”), and
the reasonable fees of any attorneys employed by the Secured Party to collect
such deficiency.  To the extent permitted by applicable law, the
Company waives all claims, damages and demands against the Secured Party arising
out of the repossession, removal, retention or sale of the Collateral, unless
due to the gross negligence or willful misconduct of the Secured
Party.

     

    8.           Costs and Expenses.  The
Company agrees to pay all out-of-pocket fees, costs and expenses incurred in
connection with any filing required hereunder, including without limitation, any
financing statements, continuation statements, partial releases and/or
termination statements related thereto or any expenses of any searches
reasonably required by the Secured Party.  The Company shall also pay
all other claims and charges which in the reasonable opinion of the Secured
Party might prejudice, imperil or otherwise affect the Collateral or the
Security Interest therein.  The Company will also, upon demand, pay to
the Secured Party the amount of any and all reasonable expenses, including the
reasonable fees and expenses of its counsel and of any experts and agents, which
the Secured Party may incur in connection with  the enforcement of this
Agreement,  the custody or preservation of, or the sale of, collection
from, or other realization upon, any of the Collateral, or  the exercise or
enforcement of any of the rights of the Secured Party under the
Notes.  Until so paid, any fees payable hereunder shall be added to
the principal amount of the Notes and shall bear interest at the Default
Rate.

     

    9.           Responsibility for
Collateral.  The Company assumes all liabilities and
responsibility in connection with all Collateral, and the obligations of the
Company hereunder or under the Notes and the Warrants shall in no way be
affected or diminished by reason of the loss, destruction, damage or theft of
any of the Collateral or its unavailability for any reason.

     

    10.         Security Interest
Absolute.  All rights of the Secured Party and all Obligations
of the Company hereunder, shall be absolute and unconditional, irrespective of:
 any lack of validity or enforceability of this Agreement, the Notes, the
Warrants or any agreement entered into in connection with the foregoing, or any
portion hereof or thereof;  any change in the time, manner or place of
payment or performance of, or in any other term of, all or any of the
Obligations, or any other amendment or waiver of or any consent to any departure
from the Notes, the Warrants or any other agreement entered into in connection
with the foregoing;   any exchange, release or nonperfection of any of the
Collateral, or any release or amendment or waiver of or consent to departure
from any other collateral for, or any guaranty, or any other security, for all
or any of the
Obligations;  any action by the Secured Party to 

     

     

     

     

     

    
      
        
        

      

      
        -7-

        
          

        

      

      
        
        

      

    

     

     

     

     

    obtain,
adjust, settle and cancel in its sole discretion any insurance claims or matters
made or arising in connection with the Collateral; or  any other
circumstance which might otherwise constitute any legal or equitable defense
available to the Company, or a discharge of all or any part of the Security
Interest granted hereby.  Until the Obligations shall have been paid
and performed in full, the rights of the Secured Party shall continue even if
the Obligations are barred for any reason, including, without limitation, the
running of the statute of limitations or bankruptcy.  The Company
expressly waives presentment, protest, notice of protest, demand, notice of
nonpayment and demand for performance.  In the event that at any time
any transfer of any Collateral or any payment received by the Secured Party
hereunder shall be deemed by final order of a court of competent jurisdiction to
have been a voidable preference or fraudulent conveyance under the bankruptcy or
insolvency laws of the United States, or shall be deemed to be otherwise due to
any party other than the Secured Party, then, in any such event, the Company’s
obligations hereunder shall survive cancellation of this Agreement, and shall
not be discharged or satisfied by any prior payment thereof and/or cancellation
of this Agreement, but shall remain a valid and binding obligation enforceable
in accordance with the terms and provisions hereof.  The Company
waives all right to require the Secured Party to proceed against any other
person or to apply any Collateral which the Secured Party may hold at any time,
or to marshal assets, or to pursue any other remedy.  The Company
waives any defense arising by reason of the application of the statute of
limitations to any obligation secured hereby.

     

    11.         Term of
Agreement.  This Agreement and the Security Interest shall
terminate on the date on which all payments under the Notes have been made in
full and all other Obligations have been paid or discharged.  Upon
such termination, the Secured Party, at the request and at the expense of the
Company, will join in executing any termination statement with respect to any
financing statement executed and filed pursuant to this Agreement.

     

    12.         Power of Attorney; Further
Assurances.

     

    (a)           The
Company authorizes the Secured Party, and does hereby make, constitute and
appoint it, and its respective officers, agents, successors or assigns with full
power of substitution, as the Company’s true and lawful attorney-in-fact, with
power, in its own name or in the name of the Company, to, after the occurrence
and during the continuance of an Event of Default,  endorse any notes,
checks, drafts, money orders, or other instruments of payment (including
payments payable under or in respect of any policy of insurance) in respect of
the Collateral that may come into possession of the Secured Party;  to sign
and endorse any UCC financing statement or any invoice, freight or express bill,
bill of lading, storage or warehouse receipts, drafts against debtors,
assignments, verifications and notices in connection with accounts, and other
documents relating to the Collateral;  to pay or discharge taxes, liens,
security interests or other encumbrances at any time levied or placed on or
threatened against the Collateral;  to demand, collect, receipt for,
compromise, settle and sue for monies due in respect of the Collateral; and
 generally, to do, at the option of the Secured Party, and at the Company’s
expense, at any time, or from time to time, all acts and things which the
Secured Party deems necessary to protect, preserve and realize upon the
Collateral and the Security Interest granted therein in order to effect the
intent of this Agreement, the Notes and the Warrants, all as fully and
effectually as the Company might or could do; and the Company hereby ratifies
all that said attorney shall lawfully do or cause to be done by virtue
hereof.  This power of attorney is coupled
with an interest and shall be irrevocable for the term of this Agreement and
thereafter as long as any of the Obligations shall be outstanding.

     

     

     

     

     

     

    
      
        
        

      

      
        -8-

        
          

        

      

      
        
        

      

    

     

     

     

    (b)           On
a continuing basis, the Company will make, execute, acknowledge, deliver, file
and record, as the case may be, in the proper filing and recording places in any
jurisdiction, including, without limitation, the jurisdictions indicated on
Schedule B,
attached hereto, all such instruments, and take all such action as may
reasonably be deemed necessary or advisable, or as reasonably requested by the
Secured Party, to perfect the Security Interest granted hereunder and otherwise
to carry out the intent and purposes of this Agreement, or for assuring and
confirming to the Secured Party the grant or perfection of a security interest
in all the Collateral.

     

    (c)           The
Company hereby irrevocably appoints the Secured Party as the Company’s
attorney-in-fact, with full authority in the place and stead of the Company and
in the name of the Company, from time to time in the Secured Party’s discretion,
to take any action and to execute any instrument which the Secured Party may
deem necessary or advisable to accomplish the purposes of this Agreement,
including the filing, in its sole discretion, of one or more financing or
continuation statements and amendments thereto, relative to any of the
Collateral without the signature of the Company where permitted by
law.

     

    13.           Notices.  All
notices, requests, demands and other communications hereunder shall be in
writing, with copies to all the other parties hereto, and shall be deemed to
have been duly given when  if delivered by hand, upon receipt,  if
sent by facsimile, upon receipt of proof of sending thereof,  if sent by
nationally recognized overnight delivery service (receipt requested), the next
business day or  if mailed by first-class registered or certified mail,
return receipt requested, postage prepaid, four days after posting in the U.S.
mails, in each case if delivered to the following addresses:

     

    
      
        	
                If
      to the Company:

              	
                Pediatric
      Prosthetics, Inc.

              	 
	 
      	
                12926
      Willowchase Drive

              	 
      
	 
      	
                Houston,
      TX 77070

              	 
      
	 
      	
                Attention:  Chief
      Executive Officer

              	 
      
	 	      
                Telephone:  (281)
      897-1108

              	 
	 
      	
                Facsimile:   (281)
      897-8462

              	 
      
	 	 	 
	
                With
      copies to:

              	
                David
      M. Loev, Esq.

              	 
      
	 
      	
                6300
      West Loop South, Suite 280

              	 
      
	 
      	
                Bellaire,
      TX 77401

              	 
      
	 
      	
                Attention:   David
      M. Loev, Esq.

              	 
      
	 
      	
                Telephone:  (713)
      524-4110

              	 
      
	 
      	
                Facsimile:   (713)
      524-4122

              	 
      


      

       

    

    
      
        
        

      

      
        -9-

        
          

        

      

      
        
        

      

    

     

    
      
        	
                If
      to the Secured Party:

              	
                New
      Millennium Capital Partners II, LLC

              	 
      
	 
      	
                1044
      Northern Boulevard

              	 
      
	 
      	
                Suite
      302

              	 
      
	 
      	
                Roslyn,
      New York 11576

              	 
      
	 
      	
                Attention:  Corey
      Ribotsky

              	 
      
	 
      	
                Facsimile:  516-739-7115

              	 
      
	 
      	 
      	 
      
	
                With
      copies to:

              	
                Ballard
      Spahr Andrews & Ingersoll, LLP

              	 
      
	 
      	
                1735
      Market Street, 51st
      Floor

              	
                 

              
	 
      	
                Philadelphia,
      Pennsylvania  19103

              	
                 

              
	 
      	
                Attention:  Gerald
      J. Guarcini,
      Esquire

              	
                 

              
	 
      	
                Facsimile:  215-864-8999

              	
                 

              


      

    

     

     

     

     

    


     

    14.           Other
Security.  To the extent that the Obligations are now or
hereafter secured by property other than the Collateral or by the guarantee,
endorsement or property of any other person, firm, corporation or other entity,
then the Secured Party shall have the right, in its sole discretion, to pursue,
relinquish, subordinate, modify or take any other action with respect thereto,
without in any way modifying or affecting any of the Secured Party’s rights and
remedies hereunder.

     

    15.           Miscellaneous.

     

    (a)           No
course of dealing between the Company and the Secured Party, nor any failure to
exercise, nor any delay in exercising, on the part of the Secured Party, any
right, power or privilege hereunder or under the Notes shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder or thereunder preclude any other or further exercise thereof
or the exercise of any other right, power or privilege.

     

    (b)           All
of the rights and remedies of the Secured Party with respect to the Collateral,
whether established hereby or by the Notes or by any other agreements,
instruments or documents or by law shall be cumulative and may be exercised
singly or concurrently.

     

    (c)           This
Agreement constitutes the entire agreement of the parties with respect to the
subject matter hereof and is intended to supersede all prior negotiations,
understandings and agreements with respect thereto.  Except as
specifically set forth in this Agreement, no provision of this Agreement may be
modified or amended except by a written agreement specifically referring to this
Agreement and signed by the parties hereto.

     

    (d)           In
the event that any provision of this Agreement is held to be invalid, prohibited
or unenforceable in any jurisdiction for any reason, unless such provision is
narrowed by judicial construction, this Agreement shall, as to such
jurisdiction, be construed as if such invalid, prohibited or unenforceable
provision had been more narrowly drawn so as not to be invalid, prohibited or
unenforceable.  If, notwithstanding the foregoing, any provision of
this Agreement is held to be invalid, prohibited or unenforceable in any
jurisdiction, such provision, as to
such jurisdiction, shall be ineffective to the extent of such invalidity,
prohibition or unenforceability without invalidating the remaining portion of
such provision or the other provisions of this Agreement and without affecting
the validity or enforceability of such provision or the other provisions of this
Agreement in any other jurisdiction.

     

     

     

     

    
      
        
        

      

      
        -10-

        
          

        

      

      
        
        

      

    

     

     

     

     

     

    (e)           No
waiver of any breach or default or any right under this Agreement shall be
considered valid unless in writing and signed by the party giving such waiver,
and no such waiver shall be deemed a waiver of any subsequent breach or default
or right, whether of the same or similar nature or otherwise.

     

    (f)           This
Agreement shall be binding upon and inure to the benefit of each party hereto
and its successors and assigns.

     

    (g)           Each
party shall take such further action and execute and deliver such further
documents as may be necessary or appropriate in order to carry out the
provisions and purposes of this Agreement.

     

    (h)           This
Agreement shall be construed in accordance with the laws of the State of New
York, except to the extent the validity, perfection or enforcement of a security
interest hereunder in respect of any particular Collateral which are governed by
a jurisdiction other than the State of New York in which case such law shall
govern.  Each of the parties hereto irrevocably submit to the
exclusive jurisdiction of any New York State or United States Federal court
sitting in Manhattan county over any action or proceeding arising out of or
relating to this Agreement, and the parties hereto hereby irrevocably agree that
all claims in respect of such action or proceeding may be heard and determined
in such New York State or Federal court.  The parties hereto agree
that a final judgment in any such action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law.  The parties hereto further waive any
objection to venue in the State of New York and any objection to an action or
proceeding in the State of New York on the basis of forum non
conveniens.

     

    (i)           EACH
PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT.  THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL
ENCOMPASSING OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO
THE SUBJECT MATER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND
STATUTORY CLAIMS.  EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS
A MATERIAL INDUCEMENT FOR EACH PARTY TO ENTER INTO A BUSINESS RELATIONSHIP, THAT
EACH PARTY HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND
THAT EACH PARTY WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE
DEALINGS. EACH PARTY FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS
WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY HAS KNOWINGLY AND VOLUNTARILY
WAIVES ITS RIGHTS TO A JURY TRIAL FOLLOWING SUCH CONSULTATION.  THIS
WAIVER IS IRREVOCABLE, MEANING THAT,
NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, IT MAY NOT BE 

     

     

     

     

     

     

     

     

    
      
        
        

      

      
        -11-

        
          

        

      

      
        
        

      

    

     

     

     

     

    MODIFIED
EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS AND SUPPLEMENTS OR MODIFICATIONS TO THIS
AGREEMENT.  IN THE EVENT OF A LITIGATION, THIS AGREEMENT MAY BE FILED
AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

     

    (j)           This
Agreement may be executed in any number of counterparts, each of which when so
executed shall be deemed to be an original and, all of which taken together
shall constitute one and the same Agreement.  In the event that any
signature is delivered by facsimile transmission, such signature shall create a
valid binding obligation of the party executing (or on whose behalf such
signature is executed) the same with the same force and effect as if such
facsimile signature were the original thereof.

     

    


     

    [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]

     

     

     

     

     

    
      
        
        

      

      
        -12-

        
          

        

      

      
        
        

      

    

     

     

     

     

    IN
WITNESS WHEREOF, the parties hereto have caused this to be duly executed on the
day and year first above written.

     

    COMPANY

    


    PEDIATRIC
PROSTHETICS, INC.

     

    /s/
Linda Putback-Bean

    Linda
Putback-Bean

    Chief
Executive Officer

     

     

    
      PEDIATRIC
PROSTHETICS, INC.

       

      /s/
Linda Putback-Bean

      Linda
Putback-Bean

      Chief
Executive Officer

    

     

     

     

     

    
      
        
        

      

      
        -13-

        
          

        

      

      
        
        

      

    

    


    


    


    
      	
               
      

            	
              SECURED
      PARTY:

            


    

    


    


    
      	
               
      

            	
              NEW
      MILLENNIUM CAPITAL PARTNERS II, LLC

            


    

    
      	
               
      

            	
              By:  First
      Street Manager II, LLC

            


    

     

    By:  /s/ Corey S. Ribotsky

    Corey S.
Ribotsky

    Manager

     

     

     

     

     

     

     

     

    
      
        
        

      

      
        -14-