**Exhibit 10.7**

 

**SECURITIESPURCHASE AGREEMENT**

 

This Securities Purchase Agreement (this “Agreement”) is datedas of October 28, 2004, among Power 3 Medical Products, Inc.,a New York corporation (the “Company”), and each purchaseridentified on the signature pages hereto (each, including its successorsand assigns, a ”Purchaser” and collectively the “Purchasers”).

 

WHEREAS, subject to the terms and conditions set forth in thisAgreement and pursuant to Section 4(2) of the Securities Act of 1933,as amended (the “Securities Act”) and Rule 506 promulgatedthereunder, the Company desires to issue and sell to each Purchaser, and eachPurchaser, severally and not jointly, desires to purchase from the Company,securities of the Company as more fully described in this Agreement.

 

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained inthis Agreement, and for other good and valuable consideration the receipt andadequacy of which are hereby acknowledged, the Company and each Purchaseragrees as follows:

 

# **ARTICLE I.DEFINITIONS**

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1.1                                 Definitions.    In addition to the terms defined elsewherein this Agreement: (a) capitalized terms that are not otherwise definedherein have the meanings given to such terms in the Debentures (as definedherein), and (b) the following terms have the meanings indicated in this Section 1.1:

 

“Action” shallhave the meaning ascribed to such term in Section 3.1(j).

 

“Additional InvestmentRight” means the Additional Investment Rights as described in Section 2.2(a)(iv), in the form of Exhibit E attached hereto.

 

“Additional InvestmentRight Securities” means the Debentures issuable upon exercise of theAdditional Investment Right.

 

“Additional InvestmentRight Shares” means the shares of Common Stock issuable upon conversion ofthe Additional Investment Right Securities.

 

“Affiliate” means,with respect to any Person, any other Person that, directly or indirectlythrough one or more intermediaries, controls or is controlled by or is undercommon control with such first Person, as such terms are used in and construedunder Rule 144 under the Securities Act. With respect to a Purchaser, any investment fund or managed account thatis managed on a discretionary basis by the same investment manager as suchPurchaser will be deemed to be an Affiliate of such Purchaser.

 

“Closing Dates”means, collectively, the dates of the First Closing and Second Closing.

 

“Closing Price”means on any particular date (a) the daily volume weighted average priceper share of Common Stock on such date (or the nearest preceding date) on

 

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the Trading Marketas 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) using the VAP function, or (b) ifthe Common Stock is not then listed or quoted on the Trading Market and ifprices for the Common Stock are then reported in the “pink sheets” published byPink Sheets LLC (or a similar organization or agency succeeding to itsfunctions of reporting prices), the most recent bid price per share of theCommon Stock so reported, or (c) if the shares of Common Stock are notthen publicly traded the fair market value of a share of Common Stock asdetermined by a nationally-recognized independent appraiser selected in goodfaith by the Purchasers of a majority in interest of the principal amount ofDebentures then outstanding and reasonably acceptable to the Company.

 

“Closings” meanscollectively, the closings of the purchase and sale of the Securities pursuantto Section 2.1, and any reference to “Closing” or “Closings” shall beconstrued to include the First Closing and the Second Closing unless only onesuch closing is expressly referred to.

 

“Commission” meansthe Securities and Exchange Commission.

 

“Common Stock” meansthe common stock of the Company, par value $0.001 per share, and any securitiesinto which such common stock shall hereinafter have been reclassified into.

 

“Common StockEquivalents” means any securities of the Company or the Subsidiaries whichwould entitle the holder thereof to acquire at any time Common Stock, includingwithout limitation, any debt, preferred stock, rights, options, warrants orother instrument that is at any time convertible into or exchangeable for, orotherwise entitles the holder thereof to receive, Common Stock.

 

“Company Counsel”means Andrews Kurth LLP.

 

“Conversion Price”shall have the meaning ascribed to such term in the Debentures.

 

“Debentures”means, the Convertible Debentures due, subject to the terms therein, 3 yearsfrom their date of issuance, issued by the Company to the Purchasers hereunder,in the form of Exhibit A.

 

“Disclosure Letter”shall have the meaning ascribed to such term in Section 3.1 hereof.

 

“Effective Date”means the date that the initial Registration Statement filed by the Companypursuant to the Registration Rights Agreement is first declared effective bythe Commission.

 

“Exchange Act”means the Securities Exchange Act of 1934, as amended.

 

“Exempt Issuance”means the issuance of (a) shares of Common Stock or options to employees,officers or directors of the Company pursuant to any stock or option plan

 

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duly adopted bythe Board of Directors of the Company or a designated committee thereof, (b) securitiesupon the exercise of or conversion of any securities issued hereunder,convertible securities, options or warrants issued and outstanding on the dateof this Agreement, provided that such securities have not been amended sincethe date of this Agreement to increase the number of such securities (exceptfor adjustments for stock splits, stock dividends or other similartransactions), (c) securities issued pursuant to acquisitions or strategictransactions, provided any such issuance shall only be to a Person which is,itself or through its subsidiaries, an operating company in a businesssynergistic with the business of the Company and in which the Company receivesbenefits in addition to the investment of funds, but shall not include atransaction in which the Company is issuing securities primarily for thepurpose of raising capital or to an entity whose primary business is investingin securities, and (d) securities having an initial issue price of atleast $20 million and which are issued for cash in a firm commitmentunderwritten registered public offering and (e) securities issued in astock dividend or similar transaction, relating to the spin-off and relateddistribution of the securities of the Company’s wholly-owned subsidiary, Power3Medical, Inc. (“Power3 Subsidiary”).

 

“FW” means FeldmanWeinstein LLP with offices at 420 Lexington Avenue, Suite 2620,New York, New York 10170-0002.

 

“First Closing”shall have the meaning ascribed to such term in Section 2.1 hereof.

 

“First Closing Date”means the date of the First Closing.

 

“GAAP” shall havethe meaning ascribed to such term in Section 3.1(h) hereof.

 

“Liens” means alien, charge, security interest, encumbrance, right offirst refusal, preemptive right or other restriction.

 

“Market Price”means the average of the 5 consecutive Closing Prices immediately prior to theFirst Closing Date, subject to adjustment for reverse and forward stock splits,stock dividends, stock combinations and other similar transactions of theCommon Stock that occur after the date hereof and prior to the time as of whichthe Market Price is determined.

 

“Material AdverseEffect” shall have the meaning assigned to such term in Section 3.1(b) hereof.

 

“Material Permits”shall have the meaning ascribed to such term in Section 3.1(m).

 

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

 

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“Proceeding” meansan action, claim, suit, investigation or proceeding (including, withoutlimitation, an investigation or partial proceeding, such as a deposition),whether commenced or threatened.

 

“Registration RightsAgreement” means the Registration Rights Agreement, dated the date hereof,among the Company and the Purchasers, in the form of Exhibit Battached hereto.

 

“RegistrationStatement” means a registration statement meeting the requirements setforth in the Registration Rights Agreement and covering the resale of theUnderlying Shares and the Additional Investment Right Shares **[Note:  Theseare included in Underlying Shares.]** by each Purchaser as providedfor in the Registration Rights Agreement.

 

“Required Approvals”shall have the meaning ascribed to such term in Section 3.1(e).

 

“Required Minimum”means, as of any date, the maximum aggregate number of shares of Common Stockthen issued or potentially issuable in the future pursuant to the TransactionDocuments, including any Underlying Shares issuable upon exercise or conversionin full of all Warrants, Debentures and Additional Investment Right Securities,ignoring any conversion or exercise limits set forth therein, and assuming thatthe Warrant exercise price, Conversion Price and the conversion price of theAdditional Investment Rights Securities is at all times on and after the dateof determination 75% of the then Warrant exercise price, Conversion Price orsuch conversion price, as the case may be, on the Trading Day immediately priorto the date of determination.

 

“Rule 144”means Rule 144 promulgated by the Commission pursuant to the SecuritiesAct, as such Rule may be amended from time to time, or any similar rule orregulation hereafter adopted by the Commission having substantially the sameeffect as such Rule.

 

“SEC Reports”shall have the meaning ascribed to such term in Section 3.1(h) hereof.

 

“Second Closing”shall have the meaning ascribed to such term in Section 2.1 hereof.

 

“Second Closing Date”means the date of the Second Closing.

 

“Securities” meansthe Debentures, the Warrants, the Warrant Shares, the Underlying Shares, theAdditional Investment Right Securities and the Additional Investment RightShares.

 

“Securities Act”means the Securities Act of 1933, as amended.

 

“Subscription Amount”means, as to each Purchaser, the amounts set forth below such Purchaser’ssignature block on the signature pages hereto and next to the headings

 

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“FirstClosing Subscription Amount” and “Second Closing Subscription Amount”, inUnited States Dollars and in immediately available funds.

 

“Subsequent Financing”shall have the meaning ascribed to such term in Section 4.13.

 

“Subsidiary” meansany subsidiary of the Company as set forth on Schedule 3.1(a).

 

“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 orquoted for trading on the date in question: the Nasdaq SmallCap Market, theAmerican Stock Exchange, the New York Stock Exchange, the Nasdaq NationalMarket or the OTC Bulletin Board.

 

“Transaction Documents”means this Agreement, the Debentures, the Warrants, the Registration RightsAgreement, the Additional Investment Rights and any other documents oragreements executed in connection with the transactions contemplated hereunder.

 

“Underlying Shares”means the shares of Common Stock issuable upon conversion of the Debentures,the Warrant Shares and the Additional Investment Right Shares.

 

“Warrants” meanscollectively the Common Stock purchase warrants, in the form of Exhibit Cdelivered to the Purchasers at the First Closing in accordance with Section 2.2(a) hereof,which Warrants shall be exercisable immediately and have a term of exerciseequal to 5 years.

 

“WarrantShares” means the shares of Common Stock issuable upon exercise of theWarrants.

 

# **ARTICLE II.**PURCHASE AND SALE

 

2.1                                 Closing.    The Company agrees to sell, and eachPurchaser agrees, severally and not jointly, to purchase the respectiveprincipal amounts of the Debentures set forth below its name on the signature pages hereto.  The Closings shall take place in two stagesas set forth below (respectively, the “First Closing” and the “SecondClosing”).  Upon satisfaction of theconditions set forth in Section 2.2, each Closing shall occur at theoffices of FW, or such other location as the parties shall mutually agree.

 

### (a)                                  FirstClosing.  The First Closing shall befor $1,000,000 aggregate principal amount of Debentures, and shall occur within5 Trading Days of the date hereof.

 

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### (b)                                 SecondClosing.  The Second Closing shall befor $2,000,000 aggregate principal amount of Debentures, and shall occur on orbefore the 5th Trading Day following the Effective Date.

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2.2                                 Deliveries.

 

### (a)                                  Ator prior to each Closing, unless otherwise indicated below, the Company shalldeliver or cause to be delivered to each Purchaser the following:

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#### (i)                                     onthe First Closing Date, this Agreement duly executed by the Company;

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#### (ii)                                  a Debenture with a principal amount equal to such Purchaser’sSubscription Amount as to the applicable Closing, registered in the name ofsuch Purchaser;

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#### (iii)                               onthe First Closing Date, a Warrant registered in the name of such Purchaser topurchase up to a number of shares of Common Stock equal to 100% of suchPurchaser’s Subscription Amounts for the First Closing and the Second Closingdivided by the Market Price, with an exercise price equal to$         (1), subject to adjustmenttherein;

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#### (iv)                              onthe First Closing Date, a copy of an Additional Investment Right, registered inthe name of such Purchaser, pursuant to which such Purchaser shall have theright to purchase up to such Purchaser’s pro rata share (based on the principalamount of Debentures purchased and to be purchased hereunder) of $2,500,000 ofdebentures in the form of the Debentures except that the conversion pricethereof shall be equal to $        (2),subject to adjustment for reverse and forward stock splits, stock dividends,stock combinations and other similar transactions of the Common Stock thatoccur after the date of this Agreement (“AIR Conversion Price”);

#### (v)                                 onthe First Closing Date, the Registration Rights Agreement duly executed by theCompany; and

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#### (vi)                              on the First Closing Date, a legal opinion of CompanyCounsel, substantially in the form of Exhibit D attached hereto.

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### (b)                                 Ator prior to each Closing, unless otherwise indicated below, each Purchasershall deliver or cause to be delivered to the Company the following:

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#### (i)                                     onthe First Closing Date, this Agreement duly executed by such Purchaser;

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#### (ii)                                  suchPurchaser’s Subscription Amount, as to the applicable Closing, by wire transferto the account as specified in writing by the Company; and

 

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(1)          120% of the Market Price.

(2)          90% of the Market Price.

 

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#### (iii)                               on the First Closing Date, the Registration Rights Agreementduly executed by such Purchaser.

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2.3                                 Closing Conditions.

 

### (a)                                  Theobligations of the Company hereunder in connection with each Closing aresubject to the following conditions being met:

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#### (i)                                     the accuracy in all material respects when made and on eachClosing Date of the representations and warranties of the Purchasers containedherein;

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#### (ii)                                  all obligations, covenants and agreements of the Purchasersrequired to be performed at or prior to each Closing Date shall have beenperformed; and

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#### (iii)                               the delivery by the Purchasers of the items set forth in Section 2.2(b) ofthis Agreement.

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### (b)                                 Therespective obligations of the Purchasers hereunder in connection with theClosings are subject to the following conditions being met:

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#### (i)                                     the accuracy in all material respects on each Closing Dateof the representations and warranties of the Company contained herein;

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#### (ii)                                  all obligations, covenants and agreements of the Companyrequired to be performed at or prior to each Closing Date shall have beenperformed;

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#### (iii)                               the delivery by the Company of the items set forth in Section 2.2(a) ofthis Agreement;

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#### (iv)                              thereshall have been no Material Adverse Effect with respect to the Company since,for the First Closing, the date hereof, and as to the Second Closing, since theFirst Closing Date; and

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#### (v)                                 fromthe date hereof to such Closing Date, trading in the Common Stock shall nothave been suspended by the Commission (except for any suspension of trading oflimited duration agreed to by the Company, which suspension shall be terminatedprior to each Closing), and, at any time prior to each Closing Date, trading insecurities generally as reported by Bloomberg Financial Markets shall not havebeen suspended or limited, or minimum prices shall not have been established onsecurities whose trades are reported by such service, or on any Trading Market,nor shall a banking moratorium have been declared either by the United Statesor New York State authorities nor shall there have occurred any material outbreakor escalation of hostilities or other national or international calamity ofsuch magnitude in its effect on, or any material adverse change in, anyfinancial market which, in each case, in the reasonable judgment of eachPurchaser, makes it impracticable or inadvisable to purchase the Debentures ateach Closing.

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### (c)                                  Asto the Second Closing only, the Company shall have filed with the Commissionthe Registration Statement registering the resale of all of the UnderlyingShares

 

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### and,on or before the 4-month anniversary of the date hereof, such RegistrationStatement shall have been declared effective by the Commission as to all suchsecurities and been maintained effective since such date.

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# **ARTICLE III.**REPRESENTATIONS AND WARRANTIES

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3.1                                 Representationsand Warranties of the Company.   Except as set forth in the disclosure letter delivered to the Purchasersconcurrently herewith (the “Disclosure Letter”), which may or may not beexpressly referred to in the following representations and warranties, the Companyhereby makes the representations and warranties set forth below to eachPurchaser.  All references to Schedulesherein shall refer to the corresponding section of the Disclosure Letter.

 

### (a)                                  Subsidiaries.  All of the direct and indirect subsidiariesof the Company are set forth on Schedule 3.1(a).  The Company owns, directly or indirectly, allof the capital stock or other equity interests of each Subsidiary free andclear of any Liens, and all the issued and outstanding shares of capital stockof each Subsidiary are validly issued and are fully paid, non-assessable andfree of preemptive and similar rights to subscribe for or purchasesecurities.  If the Company has nosubsidiaries, then references in the Transaction Documents to the Subsidiarieswill be disregarded.

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### (b)                                 Organizationand Qualification.  Each of theCompany and the Subsidiaries is an entity duly incorporated or otherwiseorganized, validly existing and in good standing under the laws of thejurisdiction of its incorporation or organization (as applicable), with therequisite power and authority to own and use its properties and assets and tocarry on its business as currently conducted. Neither the Company nor any Subsidiary is in violation or default of anyof the provisions of its respective certificate or articles of incorporation,bylaws or other organizational or charter documents.  Each of the Company and the Subsidiaries isduly qualified to conduct business and is in good standing as a foreigncorporation or other entity in each jurisdiction in which the nature of thebusiness conducted or property owned by it makes such qualification necessary,except where the failure to be so qualified or in good standing, as the casemay be, could not have or reasonably be expected to result in (i) amaterial adverse effect on the legality, validity or enforceability of anyTransaction Document, (ii) a material adverse effect on the results ofoperations, assets, business, prospects or financial condition of the Companyand the Subsidiaries, taken as a whole, or (iii) a material adverse effecton the Company’s ability to perform in any material respect on a timely basisits obligations under any Transaction Document (any of (i), (ii) or (iii),a “Material Adverse Effect”) and no Proceeding has been instituted inany such jurisdiction revoking, limiting or curtailing or seeking to revoke,limit or curtail such power and authority or qualification.

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### (c)                                  Authorization;Enforcement.  The Company has therequisite corporate power and authority to enter into and to consummate thetransactions contemplated by each of the Transaction Documents and otherwise tocarry out its obligations thereunder. The execution and delivery of each of the Transaction Documents by theCompany and the consummation by it of the transactions contemplated therebyhave been duly authorized by all necessary corporate action on the part of theCompany and no further action is required by the Company in

 

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### connectiontherewith other than in connection with the Required Approvals.  Each Transaction Document has been (or upondelivery will have been) duly executed by the Company and, when delivered inaccordance with the terms hereof, will constitute the valid and bindingobligation of the Company enforceable against the Company in accordance withits terms except (i) as limited by applicable bankruptcy, insolvency,reorganization, moratorium and other laws of general application affectingenforcement of creditors’ rights generally, (ii) as limited by lawsrelating to the availability of specific performance, injunctive relief orother equitable remedies, and (iii) insofar as indemnification andcontribution provisions may be limited by applicable law.

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### (d)                                 NoConflicts.  The execution, deliveryand performance of the Transaction Documents by the Company and theconsummation by the Company of the other transactions contemplated thereby donot and will not: (i) conflict with or violate any provision of theCompany’s or any Subsidiary’s certificate or articles of incorporation, bylaws orother organizational or charter documents, or (ii) conflict with, orconstitute a default (or an event that with notice or lapse of time or bothwould become a default) under, result in the creation of any Lien upon any ofthe properties or assets of the Company or any Subsidiary, or give to othersany rights of termination, amendment, acceleration or cancellation (with orwithout notice, lapse of time or both) of, any agreement, credit facility, debtor other instrument (evidencing a Company or Subsidiary debt or otherwise) orother understanding to which the Company or any Subsidiary is a party or bywhich any property or asset of the Company or any Subsidiary is bound oraffected, or (iii) subject to the Required Approvals, conflict with orresult in a violation of any law, rule, regulation, order, judgment,injunction, decree or other restriction of any court or governmental authorityto which the Company or a Subsidiary is subject (including federal and statesecurities laws and regulations), or by which any property or asset of theCompany or a Subsidiary is bound or affected; except in the case of each ofclauses (ii) and (iii), such as could not have or reasonably be expectedto result in a Material Adverse Effect.

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### (e)                                  Filings,Consents and Approvals.  The Companyis not required to obtain any consent, waiver, authorization or order of, giveany notice to, or make any filing or registration with, any court or otherfederal, state, local or other governmental authority or other Person inconnection with the execution, delivery and performance by the Company of theTransaction Documents, other than (i) filings required pursuant to Section 4.6,(ii) the filing with the Commission of the Registration Statement, (iii) thenotice and/or application(s) to each applicable Trading Market for the issuanceand sale of the Debentures and Warrants, the Additional Investment Rights, theAdditional Investment Right Securities and the listing of the Underlying Sharesfor trading thereon in the time and manner required thereby and (iv) thefiling of Form D with the Commission and such filings as are required tobe made under applicable state securities laws (collectively, the “RequiredApprovals”), except for any consent, approval or authorization the failureof which to obtain and for any filing or registration the failure of which tomake would not have or reasonably be expected to have, individually or in theaggregate, a Material Adverse Effect.

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### (f)                                    Issuanceof the Securities.  The Securitiesare duly authorized and, when issued and paid for in accordance with theapplicable Transaction Documents, will be duly and validly issued, fully paidand nonassessable, free and clear of all Liens imposed by the Company otherthan restrictions on transfer provided for in the Transaction Documents orapplicable law.  The Underlying Shares,when issued in accordance with the terms of the Transaction

 

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### Documents,will be validly issued, fully paid and nonassessable, free and clear of allLiens imposed by the Company other than restrictions on transfer provided forin the Transaction Documents or applicable law. The Company has reserved from its duly authorized capital stock a numberof shares of Common Stock for issuance of the Underlying Shares at least equalto the Required Minimum on the date hereof. The Company has not, and to the knowledge of the Company, no Affiliateof the Company has sold, offered for sale or solicited offers to buy orotherwise negotiated in respect of any security (as defined in Section 2of the Securities Act) that would be integrated with the offer or sale of theSecurities in a manner that would require the registration under the SecuritiesAct of the sale of the Securities to the Purchasers, or that would beintegrated with the offer or sale of the Securities for purposes of the rules andregulations of any Trading Market.

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### (g)                                 Capitalization.  The capitalization of the Company is asdescribed in Schedule 3.1(g). The Company has not issued any capital stock since June 30, 2004other than pursuant to the exercise of employee stock options under the Company’sstock option plans, the issuance of shares of Common Stock to employeespursuant to the Company’s employee stock purchase plan and pursuant to theconversion or exercise of outstanding Common Stock Equivalents.  No Person has any right of first refusal,preemptive right, right of participation, or any similar right to participatein the transactions contemplated by the Transaction Documents.  Except as a result of the purchase and saleof the Securities, there are no outstanding options, warrants, scrip rights tosubscribe to, calls or commitments of any character whatsoever relating to, orsecurities, rights or obligations convertible into or exchangeable for, orgiving any Person any right to subscribe for or acquire, any shares of CommonStock, or contracts, commitments, understandings or arrangements by which theCompany or any Subsidiary is or may become bound to issue additional shares ofCommon Stock, or securities or rights convertible or exchangeable into sharesof Common Stock.  The issuance and saleof the Securities will not obligate the Company to issue shares of Common Stockor other securities to any Person (other than the Purchasers) and will notresult in a right of any holder of Company securities to adjust the exercise,conversion, exchange or reset price under such securities.  All of the outstanding shares of capitalstock of the Company are validly issued, fully paid and nonassessable, have beenissued in compliance with all federal and state securities laws, and none ofsuch outstanding shares was issued in violation of any preemptive rights orsimilar rights to subscribe for or purchase securities.  No further approval or authorization of anystockholder or the Board of Directors of the Company is required for theissuance and sale of the Securities. Except as disclosed in the SEC Reports, there are no stockholdersagreements, voting agreements or other similar agreements with respect to theCompany’s capital stock to which the Company is a party or, to the knowledge ofthe Company, between or among any of the Company’s stockholders.

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### (h)                                 SECReports; Financial Statements.  TheCompany has filed all reports required to be filed by it under the SecuritiesAct and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof,for the two years preceding the date hereof (or such shorter period as theCompany was required by law to file such material) (the foregoing materials,including the exhibits thereto, being collectively referred to herein as the “SECReports”) on a timely basis or has received a valid extension of such timeof filing and has filed any such SEC Reports prior to the expiration of anysuch extension.  As of their respectivedates, the SEC Reports complied in all material respects with the requirementsof the Securities Act and the Exchange Act and the rules and regulationsof the Commission promulgated thereunder, and none of the SEC Reports,

 

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### when filed, contained any untrue statement of amaterial fact or omitted to state a material fact required to be stated thereinor necessary in order to make the statements therein, in light of thecircumstances under which they were made, not misleading except for suchstatements, if any, as have been modified or superseded by subsequent filingswith the Commission prior to the date hereof. The financial statements of the Company included in the SEC Reportscomply in all material respects with applicable accounting requirements and therules and regulations of the Commission with respect thereto as in effectat the time of filing.  Such financialstatements have been prepared in accordance with United States generallyaccepted accounting principles applied on a consistent basis during the periodsinvolved (“GAAP”), except as may be otherwise specified in suchfinancial statements or the notes thereto and except that unaudited financialstatements may not contain all footnotes required by GAAP, and fairly presentin all material respects the financial position of the Company and itsconsolidated subsidiaries as of and for the dates thereof and the results ofoperations and cash flows for the periods then ended, subject, in the case ofunaudited statements, to normal, immaterial, year-end audit adjustments.

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### (i)                                     MaterialChanges.  Since the date of thelatest audited financial statements included within the SEC Reports, except asspecifically disclosed in the SEC Reports, (i) there has been no event,occurrence or development that has had or that could reasonably be expected toresult in a Material Adverse Effect, (ii) the Company has not incurred anyliabilities (contingent or otherwise) other than (A) trade payables andaccrued expenses incurred in the ordinary course of business consistent withpast practice and (B) liabilities not required to be reflected in theCompany’s financial statements pursuant to GAAP or required to be disclosed infilings made with the Commission, (iii) the Company has not altered itsmethod of accounting, (iv) the Company has not declared or made anydividend or distribution of cash or other property to its stockholders orpurchased, redeemed or made any agreements to purchase or redeem any shares ofits capital stock and (v) the Company has not issued any equity securitiesto any officer, director or Affiliate, except pursuant to existing Companystock option plans.  The Company does nothave pending before the Commission any request for confidential treatment ofinformation.

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### (j)                                     Litigation.  There is no action, suit, inquiry, notice ofviolation, proceeding or investigation pending or, to the knowledge of theCompany, threatened against or affecting the Company or any of its propertiesbefore or by any court, arbitrator, governmental or administrative agency orregulatory authority (federal, state, county, local or foreign) (collectively,an “Action”) which (i) adversely affects or challenges thelegality, validity or enforceability of any of the Transaction Documents or theSecurities or (ii) could, if there were an unfavorable decision, have orreasonably be expected to result in a Material Adverse Effect.  Neither the Company nor any director orofficer thereof (in his capacity as such), is or has been the subject of anyAction involving a claim of violation of or liability under federal or statesecurities laws or a claim of breach of fiduciary duty.  There has not been, and to the knowledge ofthe Company, there is not pending or contemplated, any investigation by theCommission involving the Company or any current or former director or officer(in his capacity as such) of the Company. The Commission has not issued any stop order or other order suspendingthe effectiveness of any registration statement filed by the Company or anySubsidiary under the Exchange Act or the Securities Act.

 

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### (k)                                  LaborRelations.  No material labor disputeexists or, to the knowledge of the Company, is imminent with respect to any ofthe employees of the Company which could reasonably be expected to result in aMaterial Adverse Effect.

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### (l)                                     Compliance.  The Company (i) is not in default underor in violation of (and no event has occurred that has not been waived that,with notice or lapse of time or both, would result in a default by the Companyor any Subsidiary under), nor has the Company or any Subsidiary received noticeof a claim that it is in default under or that it is in violation of, anyindenture, loan or credit agreement or any other agreement or instrument towhich it is a party or by which it or any of its properties is bound (whetheror not such default or violation has been waived), (ii) is not inviolation of any order of any court, arbitrator or governmental body, or (iii) isnot nor has been in violation of any statute, rule or regulation of anygovernmental authority, including without limitation all foreign, federal,state and local laws applicable to its business except in each case as couldnot have a Material Adverse Effect.

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### (m)                               RegulatoryPermits.  The Company possesses allcertificates, authorizations and permits issued by the appropriate federal,state, local or foreign regulatory authorities necessary to conduct itsbusiness as described in the SEC Reports, except where the failure to possesssuch permits could not have or reasonably be expected to result in a MaterialAdverse Effect (“Material Permits”), and the Company has not receivedany notice of proceedings relating to the revocation or modification of anyMaterial Permit.

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### (n)                                 Titleto Assets.  The Company has good andmarketable title in fee simple to all real property owned by it that ismaterial to the business of the Company and good and valid title in allpersonal property owned by it that is material to the business of the Company,in each case free and clear of all Liens, except for Liens as do not materiallyaffect the value of such property and do not materially interfere with the usemade and proposed to be made of such property by the Company and Liens for thepayment of federal, state or other taxes, the payment of which is neitherdelinquent nor subject to penalties.  Anyreal property and facilities held under lease by the Company are held by itunder valid, subsisting and enforceable leases of which the Company is incompliance, except as could not, individually or in the aggregate, have orreasonably be expected to result in a Material Adverse Effect.

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### (o)                                 Patentsand Trademarks.  The Company has, orhas rights to use, all patents, patent applications, trademarks, trademarkapplications, service marks, trade names, copyrights, licenses and othersimilar rights necessary or material for use in connection with its business asdescribed in the SEC Reports and which the failure to so have could have aMaterial Adverse Effect (collectively, the “Intellectual Property Rights”).  The Company has not received a written noticethat the Intellectual Property Rights used by the Company violates or infringesupon the rights of any Person.  To theknowledge of the Company, all such Intellectual Property Rights are enforceableand there is no existing infringement by another Person of any of theIntellectual Property Rights of others.

###  

### (p)                                 Insurance.  The Company is insured by insurers ofrecognized financial responsibility against such losses and risks and in suchamounts as are prudent and customary in the businesses in which the Company andthe Subsidiaries are engaged.  To thebest of Company’s knowledge, such insurance contracts and policies are accurateand complete.  The

 

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### Company has no reason to believe that it will not beable to renew its existing insurance coverage as and when such coverage expiresor to obtain similar coverage from similar insurers as may be necessary tocontinue its business without a significant increase in cost.

###  

### (q)                                 TransactionsWith Affiliates and Employees.  Except as set forth in the SEC Reports, none ofthe officers or directors of the Company and, to the knowledge of the Company,none of the employees of the Company is presently a party to any transactionwith the Company or any Subsidiary (other than for services as employees,officers and directors), including any contract, agreement or other arrangementproviding for the furnishing of services to or by, providing for rental of realor personal property to or from, or otherwise requiring payments to or from anyofficer, director or such employee or, to the knowledge of the Company, anyentity in which any officer, director, or any such employee has a substantialinterest or is an officer, director, trustee or partner, in each case in excessof $60,000 other than (i) for payment of salary, consulting fees ordirector fees for services rendered, (ii) reimbursement for expensesincurred on behalf of the Company and (iii) for other employee benefits,including stock option agreements under any stock option plan of the Company.

###  

### (r)                                    Sarbanes-Oxley;Internal Accounting Controls.  TheCompany is in material compliance with all provisions of the Sarbanes-Oxley Actof 2002 which are currently applicable to it. The Company and the Subsidiaries maintain a system of internalaccounting controls sufficient to provide reasonable assurance that (i) transactionsare executed in accordance with management’s general or specificauthorizations, (ii) transactions are recorded as necessary to permitpreparation of financial statements in conformity with GAAP and to maintainasset accountability, (iii) access to assets is permitted only inaccordance with management’s general or specific authorization, and (iv) therecorded accountability for assets is compared with the existing assets atreasonable intervals and appropriate action is taken with respect to anydifferences.  The Company has establisheddisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) for the Company and designed such disclosure controls and proceduresto ensure that material information relating to the Company, including itsSubsidiaries, is made known to the certifying officers by others within thoseentities, particularly during the period in which the Company’s most recentlyfiled periodic report under the Exchange Act, as the case may be, is beingprepared.  The Company’s certifyingofficers have evaluated the effectiveness of the Company’s controls andprocedures as of the date prior to the filing date of the most recently filedperiodic report under the Exchange Act (such date, the “Evaluation Date”).  The Company presented in its most recentlyfiled periodic report under the Exchange Act the conclusions of the certifyingofficers about the effectiveness of the disclosure controls and proceduresbased on their evaluations as of the Evaluation Date.  Since the Evaluation Date, there have been nosignificant changes in the Company’s internal controls or, to the Company’sknowledge, in other factors that could significantly affect the Company’sinternal controls.

###  

### (s)                                  CertainFees.  No brokerage or finder’s feesor commissions are or will be payable by the Company to any broker, financialadvisor or consultant, finder, placement agent, investment banker, bank orother Person with respect to the transactions contemplated by thisAgreement.  The Purchasers shall have noobligation with respect to any fees or with respect to any claims (other thanpursuant to an agreement entered by such Purchaser for which such fees orclaims shall be the sole responsibility of the Purchaser) made by or on behalfof other Persons

 

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### forfees of a type contemplated in this Section that may be due in connectionwith the transactions contemplated by this Agreement.

###  

### (t)                                    PrivatePlacement.  Assuming the accuracy ofthe Purchasers’ representations and warranties set forth in Section 3.2,no registration under the Securities Act is required for the offer and sale ofthe Securities by the Company to the Purchasers as contemplated hereby.  The issuance and sale of the Securitieshereunder does not contravene the rules and regulations of the TradingMarket.

###  

### (u)                                 InvestmentCompany.  The Company is not, and isnot an Affiliate of, and immediately after receipt of payment for theSecurities, will not be or be an Affiliate of, an “investment company” withinthe meaning of the Investment Company Act of 1940, as amended.  The Company shall conduct its business in amanner so that it will not become subject to the Investment Company Act.

###  

### (v)                                 RegistrationRights.  No Person has any right tocause the Company to effect the registration under the Securities Act of anysecurities of the Company.

###  

### (w)                               Listingand Maintenance Requirements.  TheCompany’s Common Stock is registered pursuant to Section 12(g) of theExchange Act, and the Company has taken no action designed to, or which to itsknowledge is likely to have the effect of, terminating the registration of theCommon Stock under the Exchange Act nor has the Company received anynotification that the Commission is contemplating terminating such registration.  The Company has not, in the 12 monthspreceding the date hereof, received notice from any Trading Market on which theCommon Stock is or has been listed or quoted to the effect that the Company isnot in compliance with the listing or maintenance requirements of such TradingMarket.  The Company is, and has noreason to believe that it will not in the foreseeable future continue to be, incompliance with all such listing and maintenance requirements.

###  

### (x)                                   Applicationof Takeover Protections.  The Companyand its Board of Directors have taken all necessary action, if any, in order torender inapplicable any control share acquisition, business combination, poisonpill (including any distribution under a rights agreement) or other similaranti-takeover provision under the Company’s Certificate of Incorporation (orsimilar charter documents) or the laws of its state of incorporation that is orcould become applicable to the Purchasers as a result of the Purchasers and theCompany fulfilling their obligations or exercising their rights under theTransaction Documents, including without limitation as a result of the Company’sissuance of the Securities and the Purchasers’ ownership of the Securities.

###  

### (y)                                 Disclosure.  The Company confirms that except for the DisclosureLetter provided to the Purchasers, neither it nor any other Person acting onits behalf has provided any of the Purchasers or their agents or counsel withany information that constitutes or might constitute material, nonpublicinformation.  The Company understands andconfirms that the Purchasers will rely on the foregoing representations andcovenants in effecting transactions in securities of the Company.  All written materials provided to thePurchasers regarding the Company, its business and the transactionscontemplated hereby, including the Disclosure Letter, furnished by or on behalfof the Company with respect to the representations and warranties

 

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### madeherein are true and correct with respect to such representations and warrantiesand do not contain any untrue statement of a material fact or omit to state anymaterial fact necessary in order to make the statements made therein, in lightof the circumstances under which they were made, not misleading.  The Company acknowledges and agrees that noPurchaser makes or has made any representations or warranties with respect tothe transactions contemplated hereby other than those specifically set forth inSection 3.2 hereof.

###  

### (z)                                   NoIntegrated Offering.  Neither theCompany, nor, to the Company’s knowledge, any of its affiliates nor otherPerson acting on its behalf has, directly or indirectly, made any offers orsales of any security or solicited any offers to buy any security, undercircumstances that would cause this offering of the Securities to be integratedwith prior offerings by the Company for purposes of the Securities Act or anyapplicable shareholder approval provisions, including, without limitation,under the rules and regulations of any exchange or automated quotationsystem on which any of the securities of the Company are listed or designated.

###  

### (aa)                            Solvency. Based on the financial condition of the Company as of each Closing Dateafter giving effect to the receipt by the Company of the proceeds from the saleof the Securities hereunder, (i) the Company’s fair saleable value of itsassets exceeds the amount that will be required to be paid on or in respect ofthe Company’s existing debts and other liabilities (including known contingentliabilities) as they mature; (ii) the Company’s assets do not constituteunreasonably small capital to carry on its business for the current fiscal yearas now conducted and as proposed to be conducted including its capital needstaking into account the particular capital requirements of the business conductedby the Company, and projected capital requirements and capital availabilitythereof; and (iii) the current cash flow of the Company, together with theproceeds the Company would receive, were it to liquidate all of its assets,after taking into account all anticipated uses of the cash, would be sufficientto pay all amounts on or in respect of its debt when such amounts are requiredto be paid.  The Company does not intendto incur debts beyond its ability to pay such debts as they mature (taking intoaccount the timing and amounts of cash to be payable on or in respect of itsdebt).

###  

### (bb)                          [Intentionally Deleted.]

###  

### (cc)                            TaxStatus.  Except for matters thatwould not, individually or in the aggregate, have or reasonably be expected toresult in a Material Adverse Effect, the Company and each Subsidiary has filedall necessary federal, state and foreign income and franchise tax returns andhas paid or accrued all taxes shown as due thereon, and the Company has noknowledge of a tax deficiency which has been asserted or threatened against theCompany or any Subsidiary.

###  

### (dd)                          NoGeneral Solicitation.  Neither theCompany nor, to the knowledge of the Company, any person acting on behalf ofthe Company has offered or sold any of the Securities by any form of generalsolicitation or general advertising.  TheCompany has offered the Securities for sale only to the Purchasers and certainother “accredited investors” within the meaning of Rule 501 under theSecurities Act.

 

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### (ee)                            Foreign Corrupt Practices.  Neither the Company, nor to the knowledge ofthe Company, any agent or other person acting on behalf of the Company, has (i) directlyor indirectly, used any corrupt funds for unlawful contributions, gifts,entertainment or other unlawful expenses related to foreign or domesticpolitical activity, (ii) made any unlawful payment to foreign or domesticgovernment officials or employees or to any foreign or domestic politicalparties or campaigns from corporate funds, (iii) failed to disclose fullyany contribution made by the Company (or made by any person acting on itsbehalf of which the Company is aware) which is in violation of law, or (iv) violatedin any material respect any provision of the Foreign Corrupt Practices Act of1977, as amended.

###  

### (ff)                                Accountants. The Company’s accountants are set forth on Schedule 3.1(ff)of the Disclosure Schedule.  To theCompany’s knowledge, such accountants, who the Company expects will expresstheir opinion with respect to the financial statements to be included in the Company’sAnnual Report on Form 10-KSB for the year ending December 31, 2004are a registered public accounting firm as required by the Securities Act.

###  

### (gg)                          Seniority.  Asof each Closing Date, no indebtedness of the Company is senior to theDebentures in right of payment, whether with respect to interest or uponliquidation or dissolution, or otherwise, other than indebtedness secured bypurchase money security interests (which is senior only as to underlying assetscovered thereby) and capital lease obligations (which is senior only as to theproperty covered thereby).

###  

### (hh)                          NoDisagreements with Accountants and Lawyers. There are no disagreements of any kind presently existing, or reasonablyanticipated by the Company to arise, between the accountants and lawyersformerly or presently employed by the Company and the Company is current withrespect to any fees owed to its accountants and lawyers.

###  

### (ii)                                  AcknowledgmentRegarding Purchasers’ Purchase of Securities.  The Company acknowledges and agrees that eachof the Purchasers is acting solely in the capacity of an arm’s length purchaserwith respect to the Transaction Documents and the transactions contemplatedhereby.  The Company further acknowledgesthat no Purchaser is acting as a financial advisor or fiduciary of the Company(or in any similar capacity) with respect to this Agreement and thetransactions contemplated hereby and any advice given by any Purchaser or anyof their respective representatives or agents in connection with this Agreementand the transactions contemplated hereby is merely incidental to the Purchasers’purchase of the Securities.  The Companyfurther represents to each Purchaser that the Company’s decision to enter intothis Agreement has been based solely on the independent evaluation of thetransactions contemplated hereby by the Company and its representatives.

###  

3.2                                 Representationsand Warranties of the Purchasers.   Each Purchaser hereby, for itself and for no other Purchaser, representsand warrants as of the date hereof and as of each Closing Date to the Companyas follows:

 

### (a)                                  Organization;Authority.  Such Purchaser is anentity duly organized, validly existing and in good standing under the laws ofthe jurisdiction of its organization with full right, corporate or partnershippower and authority to enter into and to consummate the transactionscontemplated by the Transaction Documents and otherwise to carry out its

 

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### obligationsthereunder.  The execution, delivery andperformance by such Purchaser of the transactions contemplated by thisAgreement have been duly authorized by all necessary corporate or similaraction on the part of such Purchaser. Each Transaction Document to which it is a party has been duly executedby such Purchaser, and when delivered by such Purchaser in accordance with theterms hereof, will constitute the valid and legally binding obligation of suchPurchaser, enforceable against it in accordance with its terms, except (i) aslimited by general equitable principles and applicable bankruptcy, insolvency,reorganization, moratorium and other laws of general application affectingenforcement of creditors’ rights generally, (ii) as limited by lawsrelating to the availability of specific performance, injunctive relief orother equitable remedies and (iii) insofar as indemnification andcontribution provisions may be limited by applicable law.

###  

### (b)                                 PurchaserRepresentation.  Such Purchaserunderstands that the Securities are “restricted securities” and have not beenregistered under the Securities Act or any applicable state securities law andis acquiring the Securities as principal for its own account and not with aview to or for distributing or reselling such Securities or any part thereof,has no present intention of distributing any of such Securities and has noarrangement or understanding with any other persons regarding the distributionof such Securities (this representation and warranty not limiting suchPurchaser’s right to sell the Securities pursuant to the Registration Statementor otherwise in compliance with applicable federal and state securitieslaws).  Such Purchaser is acquiring theSecurities hereunder in the ordinary course of its business.  Such Purchaser does not have any agreement orunderstanding, directly or indirectly, with any Person to distribute any of theSecurities.

###  

### (c)                                  PurchaserStatus.  At the time such Purchaserwas offered the Securities, it was, and at the date hereof it is, and on eachdate on which it exercises any Warrants or converts any Debentures or convertsthe Additional Investment Rights and Additional Investment Right Securities itwill be either: (i) an “accredited investor” as defined in Rule 501(a)(1),(a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a“qualified institutional buyer” as defined in Rule 144A(a) under theSecurities Act.  Such Purchaser has notbeen formed for the purpose of acquiring the Securities and is not required tobe registered as a broker-dealer under Section 15 of the Exchange Act.

###  

### (d)                                 Experienceof Such Purchaser.  Such Purchaser, either alone or together with its representatives, has suchknowledge, sophistication and experience in business and financial matters soas to be capable of evaluating the merits and risks of the prospectiveinvestment in the Securities, and has so evaluated the merits and risksof such investment.  Such Purchaser isable to bear the economic risk of an investment in the Securities and, at thepresent time, is able to afford a complete loss of such investment.

###  

### (e)                                  GeneralSolicitation.  Such Purchaser is notpurchasing the Securities as a result of any advertisement, article, notice orother communication regarding the Securities published in any newspaper,magazine or similar media or broadcast over television or radio or presented atany seminar or any other general solicitation or general advertisement.

###  

### (f)                                    ShortSales.  Such Purchaser has notdirectly or indirectly, nor has any Person acting on behalf of or pursuant toan understanding with the Purchaser, engaged in any

 

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### transactions in the securities of the Company(including, without limitation, short sales or other similar transactions withthe same economic effect as a short sale) since the earlier to occur of (i) thetime that such Purchaser was contacted regarding an investment in the Companyand (ii) the thirtieth (30th) day prior to the date of this Agreement.

###  

### (g)                                 Accessto Information.  Such Purchaseracknowledges that it has received the SEC Reports and the Disclosure Letter andhas had full and adequate opportunity to request additional information fromand ask questions of the Company.  EachPurchaser acknowledges and agrees that the Company does not make and has notmade, and Purchaser is not relying on, any representations or warranties withrespect to the transactions contemplated hereby other than those specificallyset forth in Section 3.1 hereof.

###  

The Company acknowledges and agrees that each Purchaser does not makeor has not made any representations or warranties with respect to thetransactions contemplated hereby other than those specifically set forth inthis Section 3.2.

 

# **ARTICLE IV.**OTHER AGREEMENTS OF THE PARTIES

# ** **

4.1                                 TransferRestrictions.

 

### (a)                                  TheSecurities may only be disposed of in compliance with state and federalsecurities laws.  In connection with anytransfer of Securities other than pursuant to an effective registrationstatement or Rule 144, to the Company or to an affiliate of a Purchaser orin connection with a pledge as contemplated in Section 4.1(b), the Companymay require the transferor thereof to provide to the Company an opinion ofcounsel selected by the transferor and reasonably acceptable to the Company,the form and substance of which opinion shall be reasonably satisfactory to theCompany, to the effect that such transfer does not require registration of suchtransferred Securities under the Securities Act.  As a condition of transfer, any suchtransferee shall agree in writing to be bound by the terms of this Agreementand shall have the rights of a Purchaser under this Agreement and theRegistration Rights Agreement.

###  

### (b)                                 ThePurchasers agree to the imprinting, so long as is required by this Section 4.1(b),of a legend on any of the Securities in the following form:

###  

[NEITHER]THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE[EXERCISABLE] [CONVERTIBLE]] HAVE BEEN REGISTERED WITH THE SECURITIES ANDEXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPONAN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED(THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED ORSOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THESECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTIONNOT

 

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SUBJECT TO,THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITHAPPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TOTHE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLYACCEPTABLE TO THE COMPANY.  THESESECURITIES AND THE SECURITIES ISSUABLE UPON **[EXERCISE/CONVERSION]**OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGINACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

 

The Company acknowledgesand agrees that a Purchaser may from time to time pledge pursuant to a bona fidemargin agreement with a registered broker-dealer or grant a security interestin some or all of the Securities to a financial institution that is an“accredited investor” as defined in Rule 501(a) under the SecuritiesAct and who agrees to be bound by the provisions of this Agreement and theRegistration Rights Agreement and, if required under the terms of sucharrangement, such Purchaser may transfer pledged or secured Securities to thepledgees or secured parties.  Such apledge or transfer would not be subject to approval of the Company and no legalopinion of legal counsel of the pledgee, secured party or pledgor shall berequired in connection therewith. Further, no notice shall be required of such pledge.  At the appropriate Purchaser’s expense, theCompany will execute and deliver such reasonable documentation as a pledgee orsecured party of Securities may reasonably request in connection with a pledgeor transfer of the Securities, including, if the Securities are subject toregistration pursuant to the Registration Rights Agreement, the preparation andfiling of any required prospectus supplement under Rule 424(b)(3) underthe Securities Act or other applicable provision of the Securities Act toappropriately amend the list of Selling Stockholders thereunder.

 

### (c)                                  Certificatesevidencing the Underlying Shares shall not contain any legend (including thelegend set forth in Section 4.1(b) hereof): **[(i) while a registration statement (includingthe Registration Statement) covering the resale of such security is effectiveunder the Securities Act,]** or (ii) following any sale of suchUnderlying Shares pursuant to Rule 144, or (iii) if such UnderlyingShares are eligible for sale under Rule 144(k), or (iv) if suchlegend is not required under applicable requirements of the Securities Act(including judicial interpretations and pronouncements issued by the staff ofthe Commission); provided, however, in connection with theissuance of the Underlying Shares, each Purchaser, severally and not jointlywith the other Purchasers, hereby agrees to adhere to and abide by allprospectus delivery requirements under the Securities Act and rules andregulations of the Commission.  If all orany portion of a Debenture, Warrant or Additional Investment Rights Security isconverted or exercised (as applicable) at a time when there is an effectiveregistration statement to cover the resale of the Underlying Shares, or if suchUnderlying Shares may be sold under Rule 144(k) or if such legend is nototherwise required under applicable requirements of the Securities Act(including judicial interpretations thereof) then such Underlying Shares shallbe issued free of all legends.  TheCompany agrees that following the Effective Date or at such time as such legendis no longer required under this Section 4.1(c), it will, no later thanthree Trading Days following

 

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### the delivery by a Purchaser to the Company or theCompany’s transfer agent of a certificate representing Underlying Shares, asapplicable, issued with a restrictive legend (such third Trading Day, the “LegendRemoval Date”), deliver or cause to be delivered to such Purchaser acertificate representing such shares that is free from all restrictive andother legends.  The Company may not makeany notation on its records or give instructions to any transfer agent of theCompany that enlarge the restrictions on transfer set forth in this Section.

###  

### (d)                                 Inaddition to such Purchaser’s other available remedies, the Company shall pay tothe Purchaser, in cash, as partial liquidated damages and not as a penalty, foreach $1,000 of the Underlying Shares (based on the Closing Price of the CommonStock on the date such Securities are submitted to the Company’s transferagent) delivered for removal of the restrictive legend and subject to this Section 4.1(c),$10 per Trading Day (including to $20 per Trading Day 5 Trading Days after suchdamages have begun to accrue) for each Trading Day after the Legend RemovalDate until such certificate is delivered without a legend.  Nothing herein shall limit such Purchaser’sright to pursue actual damages for the Company’s failure to delivercertificates representing any Securities as required by the TransactionDocuments, and such Purchaser shall have the right to pursue all remediesavailable to it at law or in equity including, without limitation, a decree ofspecific performance and/or injunctive relief.

###  

### (e)                                  EachPurchaser, severally and not jointly with the other Purchasers, agrees that theremoval of the restrictive legend from certificates representing Securities asset forth in this Section 4.1 is predicated upon the Company’s reliancethat the Purchaser will sell any Securities pursuant to either the registrationrequirements of the Securities Act, including any applicable prospectus deliveryrequirements, or an exemption therefrom.

###  

4.2                                 Acknowledgmentof Dilution.    The Companyacknowledges that the issuance of the Securities may result in dilution of theoutstanding shares of Common Stock, which dilution may be substantial undercertain market conditions.  The Companyfurther acknowledges that its obligations under the Transaction Documents,including without limitation its obligation to issue the Underlying Sharespursuant to the Transaction Documents, are unconditional and absolute and notsubject to any right of set off, counterclaim, delay or reduction, regardlessof the effect of any such dilution or any claim the Company may have againstany Purchaser and regardless of the dilutive effect that such issuance may haveon the ownership of the other stockholders of the Company.

 

4.3                                 Furnishingof Information.    As long as anyPurchaser owns Securities, the Company covenants to timely file (or obtainextensions in respect thereof and file within the applicable grace period) allreports required to be filed by the Company after the date hereof pursuant tothe Exchange Act.  As long as anyPurchaser owns Securities, if the Company is not required to file reportspursuant to the Exchange Act, it will prepare and furnish to the Purchasers andmake publicly available in accordance with Rule 144(c) suchinformation as is required for the Purchasers to sell the Securities under Rule 144.  The Company further covenants that it willtake such further action as any holder of Securities may reasonably request,all to the extent required from time to time to enable such Person to sell suchSecurities without registration under the Securities Act within the limitationof the exemptions provided by Rule 144.

 

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4.4                                 Integration.    The Company shall not sell, offer for saleor solicit offers to buy or otherwise negotiate in respect of any security (asdefined in Section 2 of the Securities Act) that would be integrated withthe offer or sale of the Securities in a manner that would require theregistration under the Securities Act of the sale of the Securities to thePurchasers or that would be integrated with the offer or sale of the Securitiesfor purposes of the rules and regulations of any Trading Market.

 

4.5                                 Conversionand Exercise Procedures.    The formof Notice of Exercise included in the Warrants, the form of Notice ofConversion included in the Debentures and the form of Notice of Conversion setforth in the Additional Investment Rights and Additional Investment RightSecurities set forth the totality of the procedures required of the Purchasersin order to exercise the Warrants, convert the Debentures or convert theAdditional Investment Rights and Additional Investment Right Securities.  No additional legal opinion or otherinformation or instructions shall be required of the Purchasers to exercise theWarrants or convert the Debentures or exercise the Additional Investment Rightsand Additional Investment Right Securities. The Company shall honor exercises of the Warrants, conversions of the Debenturesand exercises of the Additional Investment Rights and conversions of theAdditional Investment Right Securities and shall deliver the AdditionalInvestment Securities and the Underlying Shares in accordance with the terms,conditions and time periods set forth in the Transaction Documents.

 

4.6                                 SecuritiesLaws Disclosure; Publicity.    TheCompany shall, by 8:30 a.m. Eastern time on the fourth Trading Dayfollowing the date hereof, issue a Current Report on Form 8-K, reasonablyacceptable to each Purchaser disclosing the material terms of the transactionscontemplated hereby, and shall attach the Transaction Documents thereto asexhibits.  The Company and each Purchasershall consult with each other in issuing any other press releases with respectto the transactions contemplated hereby, and neither the Company nor anyPurchaser shall issue any such press release or otherwise make any such publicstatement without the prior consent of the Company, with respect to any pressrelease of any Purchaser, or without the prior consent of each Purchaser, withrespect to any press release of the Company, which consent shall notunreasonably be withheld, except if such disclosure is required by law, inwhich case the disclosing party shall promptly provide the other party withprior notice of such public statement or communication.  Notwithstanding the foregoing, the Companyshall not publicly disclose the name of any Purchaser, or include the name ofany Purchaser in any filing with the Commission or any regulatory agency orTrading Market, without the prior written consent of such Purchaser, except (i) asrequired by federal securities law in connection with the registrationstatement contemplated by the Registration Rights Agreement and (ii) tothe extent such disclosure is required by law or Trading Market regulations, inwhich case the Company shall provide the Purchasers with prior notice of suchdisclosure permitted under subclause (i) or (ii).

 

4.7                                 ShareholderRights Plan.    No claim will be madeor enforced by the Company or, to the knowledge of the Company, any otherPerson that any Purchaser is an “Acquiring Person” under any shareholder rightsplan or similar plan or arrangement in effect or hereafter adopted by theCompany, or that any Purchaser could be deemed to trigger the provisions of anysuch plan or arrangement, by virtue of receiving Securities under theTransaction Documents or under any

 

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otheragreement between the Company and the Purchasers.  The Company shall conduct its business in a mannerso that it will not become subject to the Investment Company Act.

 

4.8                                 Non-PublicInformation.    The Company covenantsand agrees that neither it nor any other Person acting on its behalf willprovide any Purchaser or its agents or counsel with any information that theCompany believes constitutes material non-public information, unless priorthereto such Purchaser shall have executed a written agreement regarding theconfidentiality and use of such information. The Company understands and confirms that each Purchaser shall berelying on the foregoing representations in effecting transactions insecurities of the Company.

 

4.9                                 Useof Proceeds.    Except as set forthon Schedule 4.9 attached hereto, the Company shall use the netproceeds from the sale of the Securities hereunder for working capital purposesand not for the satisfaction of any portion of the Company’s debt (other thanpayment of trade payables in the ordinary course of the Company’s business andprior practices), to redeem any Company equity or equity equivalent securitiesor to settle any outstanding litigation.

 

4.10                           [Intentionally Deleted.]

 

4.11                           Indemnificationof Purchasers.    Subject to theprovisions of this Section 4.11, the Company will indemnify and hold thePurchasers and their directors, officers, shareholders, partners, employees andagents (each, a “Purchaser Party”) harmless from any and all losses,liabilities, obligations, claims, contingencies, damages, costs and expenses,including all judgments, amounts paid in settlements, court costs andreasonable attorneys’ fees and costs of investigation that any such PurchaserParty may suffer or incur as a result of or relating to (a) any breach ofany of the representations, warranties, covenants or agreements made by theCompany in this Agreement or in the other Transaction Documents or (b) anyaction instituted against a Purchaser, or any of them or their respectiveAffiliates, by any stockholder of the Company who is not an Affiliate of suchPurchaser, with respect to any of the transactions contemplated by theTransaction Documents (unless such action is based upon a breach of suchPurchaser’s representation, warranties or covenants under the TransactionDocuments or any agreements or understandings such Purchaser may have with anysuch stockholder or any violations by the Purchaser of state or federalsecurities laws or any conduct by such Purchaser which constitutes fraud, grossnegligence, willful misconduct or malfeasance). If any action shall be brought against any Purchaser Party in respect ofwhich indemnity may be sought pursuant to this Agreement, such Purchaser Partyshall promptly notify the Company in writing, and the Company shall have theright to assume the defense thereof with counsel of its own choosing.  Any Purchaser Party shall have the right toemploy separate counsel in any such action and participate in the defensethereof, but the fees and expenses of such counsel shall be at the expense ofsuch Purchaser Party except to the extent that (i) the employment thereofhas been specifically authorized by the Company in writing, (ii) theCompany has failed after a reasonable period of time to assume such defense andto employ counsel or (iii) in such action there is, in the reasonableopinion of such separate counsel, a material conflict on any material issuebetween the position of the Company and the position of such PurchaserParty.  The Company will not be liable toany Purchaser Party under this Agreement (i) for any settlement by aPurchaser Party effected without the Company’s prior written consent, whichshall not be unreasonably withheld or delayed; or (ii) to the extent, butonly to the extent that a loss, claim, damage or liability is attributable toany Purchaser Party’s breach of any of the representations,

 

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warranties,covenants or agreements made by the Purchasers in this Agreement or in theother Transaction Documents.

 

4.12                           Reservation and Listingof Securities.

 

### (a)                                  TheCompany shall maintain a reserve from its duly authorized shares of Common Stockfor issuance pursuant to the Transaction Documents in such amount as may berequired to fulfill its obligations in full under the Transaction Documents.

###  

### (b)                                 If,on any date, the number of authorized but unissued (and otherwise unreserved)shares of Common Stock is less than the Required Minimum on such date, then theBoard of Directors of the Company shall use commercially reasonable efforts toamend the Company’s certificate or articles of incorporation to increase thenumber of authorized but unissued shares of Common Stock to at least theRequired Minimum at such time, as soon as possible and in any event not laterthan the 75th date after such date.

###  

### (c)                                  TheCompany shall, if applicable: (i) in the time and manner required by theTrading Market, prepare and file with such Trading Market an additional shareslisting application covering a number of shares of Common Stock at least equalto the Required Minimum on the date of such application, (ii) take allsteps reasonably necessary to cause such shares of Common Stock to be approvedfor listing on the Trading Market as soon as possible thereafter, (iii) provideto the Purchasers evidence of such listing, and (iv) use commerciallyreasonable efforts to maintain the listing of such Common Stock on any date atleast equal to the Required Minimum on such date on such Trading Market oranother Trading Market.

###  

4.13                           Participationin Future Financing.    From the datehereof until the one year anniversary of the Effective Date, upon any financingby the Company or any of its Subsidiaries of Common Stock or Common StockEquivalents (a “Subsequent Financing”), each Purchaser shall have theright to participate in up to 100% of the Subsequent Financing (the “ParticipationMaximum”).  At least 5 Trading Daysprior to the closing of the Subsequent Financing, the Company shall deliver toeach Purchaser a written notice of its intention to effect a SubsequentFinancing (“Pre-Notice”), which Pre-Notice shall ask such Purchaser ifit wants to review the details of such financing (such additional notice, a “SubsequentFinancing Notice”).  Upon the requestof a Purchaser, and only upon a request by such Purchaser, for a SubsequentFinancing Notice, the Company shall promptly, but no later than 1 TradingDay after such request, deliver a Subsequent Financing Notice to suchPurchaser.  The Subsequent FinancingNotice shall describe in reasonable detail the proposed terms of suchSubsequent Financing, the amount of proceeds intended to be raised thereunder,the Person with whom such Subsequent Financing is proposed to be effected, andattached to which shall be a term sheet or similar document relatingthereto.  If by 5:30 p.m.(New York City time) on the 5th Trading Day after all of thePurchasers have received the Pre-Notice, notifications by the Purchasers oftheir willingness to participate in the Subsequent Financing (or to cause theirdesignees to participate) is, in the aggregate, less than the total amount ofthe Participation Amount, then the Company may effect the remaining portion ofsuch Subsequent Financing on the terms and to the Persons set forth in theSubsequent Financing Notice.  If theCompany receives no notice from a Purchaser as of such 5th TradingDay, such Purchaser shall be deemed to have notified the Company that it doesnot elect to participate.  The Companymust provide the Purchasers with a second Subsequent Financing

 

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Notice, and thePurchasers will again have the right of participation set forth above in this Section 4.13,if the Subsequent Financing subject to the initial Subsequent Financing Noticeis not consummated for any reason on the terms set forth in such SubsequentFinancing Notice within 60 Trading Days after the date of the initialSubsequent Financing Notice.  In theevent the Company receives responses to Subsequent Financing Notices fromPurchasers seeking to purchase more than the aggregate amount of theParticipation Amount, each such Purchaser shall have the right to purchasetheir Pro Rata Portion (as defined below) of the Participation Maximum.  “Pro Rata Portion” is the ratio of(x) the Subscription Amount of Securities purchased by a participatingPurchaser and (y) the sum of the aggregate Subscription Amount of allparticipating Purchasers. Notwithstanding the foregoing, this Section 4.13 shall not apply inrespect of an Exempt Issuance.

 

4.14                           SubsequentEquity Sales.    From the date hereofuntil 90 days after the Effective Date, neither the Company nor any Subsidiaryshall issue shares of Common Stock or Common Stock Equivalents; provided,however, the 90 day period set forth in this Section 4.14 shall beextended for the number of Trading Days during such period in which(y) trading in the Common Stock is suspended by any Trading Market, or(z) following the Effective Date, the Registration Statement is noteffective or the prospectus included in the Registration Statement may not beused by the Purchasers for the resale of the Underlying Shares.  In addition to the limitations set forthherein, from the date hereof until such time as no Purchaser holds any of theSecurities, the Company shall be prohibited from effecting or entering into anagreement to effect any Subsequent Financing involving a “Variable RateTransaction” or an “MEN Transaction” (each as defined below).  The term “Variable Rate Transaction” shallmean a transaction in which the Company issues or sells (i) any debt orequity securities that are convertible into, exchangeable or exercisable for,or include the right to receive additional shares of Common Stock either (A) ata conversion, exercise or exchange rate or other price that is based uponand/or varies with the trading prices of or quotations for the shares of CommonStock at any time after the initial issuance of such debt or equity securities,or (B) with a conversion, exercise or exchange price that is subject tobeing reset at some future date after the initial issuance of such debt orequity security or upon the occurrence of specified or contingent eventsdirectly or indirectly related to the business of the Company or the market forthe Common Stock.  The term “MENTransaction” shall mean a transaction in which the Company issues or sells anysecurities in a capital raising transaction or series of related transactionswhich grants to an investor the right to receive additional shares based uponfuture transactions of the Company on terms more favorable than those grantedto such investor in such offering.  AnyPurchaser shall be entitled to obtain injunctive relief against the Company topreclude any such issuance, which remedy shall be in addition to any right tocollect damages.  Notwithstanding theforegoing, this Section 4.14 shall not apply in respect of an ExemptIssuance or in respect of the issuance of securities issued in a stock dividendor similar transaction relating to the spin-off and related distribution of thesecurities of the Company’s wholly-owned subsidiary, Power3 Medical, Inc.,except that no Variable Rate Transaction or MEN Transaction shall be an ExemptIssuance.

 

4.15                           EqualTreatment of Purchasers.    Noconsideration shall be offered or paid to any person to amend or consent to awaiver or modification of any provision of any of the Transaction Documentsunless the same consideration is also offered to all of the parties to theTransaction Documents.  Further, theCompany shall not make any payment of principal on the

 

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Debenturesin amounts which are disproportionate to the respective principal amountsoutstanding on the Debentures at any applicable time.  For clarification purposes, this provisionconstitutes a separate right granted to each Purchaser by the Company andnegotiated separately by each Purchaser, and is intended to treat for theCompany the Debenture holders as a class and shall not in any way be construedas the Purchasers acting in concert or as a group with respect to the purchase,disposition or voting of Securities or otherwise.

 

4.16                           ShortSales.    During any periods in whichthe Conversion Price is being determined, no Purchaser nor any Person over whichthe Purchaser has direct control shall sell, offer to sell, solicit offers tobuy, dispose of, loan, pledge or grant any right with respect to the CommonStock, nor shall any Purchaser, nor any Person over which the Purchaser hasdirect control, have made any purchases or sales of, or granted any option forthe purchase of or entered into any hedging or similar transaction with thesame economic effect as a short sale, of the Common Stock.  Such obligation of each Purchaser hereunder,as with all obligations under the Transaction Documents, are several and notjoint with the other Purchasers.

 

# **ARTICLE V.MISCELLANEOUS**

# ** **

5.1                                 Termination.    This Agreement may be terminated by eitherthe Company or any Purchaser, by written notice to the other parties, if theClosing has not been consummated on or before October 31, 2004; providedthat no such termination will affect the right of any party to sue for anybreach by the other party (or parties).

 

5.2                                 Feesand Expenses.    The Company shalldeliver, prior to the Closing, a completed and executed copy of the ClosingStatement, attached hereto as Annex A.  Except as expressly set forth in theTransaction Documents to the contrary, each party shall pay the fees andexpenses of its advisers, counsel, accountants and other experts, if any, andall other expenses incurred by such party incident to the negotiation,preparation, execution, delivery and performance of this Agreement.  The Company shall pay all transfer agentfees, stamp taxes and other taxes and duties levied in connection with theissuance of any Securities.

 

5.3                                 EntireAgreement.    The TransactionDocuments, together with the exhibits and schedules thereto, contain the entireunderstanding of the parties with respect to the subject matter hereof andsupersede all prior agreements and understandings, oral or written, withrespect to such matters, which the parties acknowledge have been merged intosuch documents, exhibits and schedules.

 

5.4                                 Notices.    Any and all notices or other communicationsor deliveries required or permitted to be provided hereunder shall be inwriting and shall be deemed given and effective on the earliest of (a) thedate of transmission, if such notice or communication is delivered viafacsimile (and the sender receives a confirmation of successful transmission)at the facsimile number set forth on the signature pages attached heretoprior to 5:30 p.m. (New York City time) on a Trading Day, (b) thenext Trading Day after the date of transmission, if such notice orcommunication is delivered via facsimile at the facsimile number set forth onthe signature pages attached hereto on a day that is not a Trading Day orlater than 5:30 p.m. (New York City time) on any Trading Day, (c) thesecond Trading Day following the date of mailing, if sent by U.S.

 

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nationallyrecognized overnight courier service, or (d) upon actual receipt by theparty to whom such notice is required to be given.  The address for such notices andcommunications shall be as set forth on the signature pages attached hereto.

 

5.5                                 Amendments;Waivers.    No provision of thisAgreement may be waived or amended except in a written instrument signed, inthe case of an amendment, by the Company and each Purchaser or, in the case ofa waiver, by the party against whom enforcement of any such waiver issought.  No waiver of any default withrespect to any provision, condition or requirement of this Agreement shall bedeemed to be a continuing waiver in the future or a waiver of any subsequentdefault or a waiver of any other provision, condition or requirement hereof,nor shall any delay or omission of either party to exercise any right hereunderin any manner impair the exercise of any such right.

 

5.6                                 Construction.    The headings herein are for convenienceonly, do not constitute a part of this Agreement and shall not be deemed tolimit or affect any of the provisions hereof. The language used in this Agreement will be deemed to be the languagechosen by the parties to express their mutual intent, and no rules ofstrict construction will be applied against any party.

 

5.7                                 Successorsand Assigns.    This Agreement shallbe binding upon and inure to the benefit of the parties and their successorsand permitted assigns.  The Company maynot assign this Agreement or any rights or obligations hereunder without theprior written consent of each Purchaser. Any Purchaser may assign any or all of its rights under this Agreementto any Person to whom such Purchaser assigns or transfers any Securities,provided such transferee agrees in writing to be bound, with respect to thetransferred Securities, by the provisions hereof that apply to the“Purchasers”.

 

5.8                                 NoThird-Party Beneficiaries.    ThisAgreement is intended for the benefit of the parties hereto and theirrespective successors and permitted assigns and is not for the benefit of, normay any provision hereof be enforced by, any other Person, except as otherwiseset forth in Section 4.11.

 

5.9                                 GoverningLaw.    All questions concerning theconstruction, validity, enforcement and interpretation of the TransactionDocuments shall be governed by and construed and enforced in accordance withthe internal laws of the State of New York, without regard to theprinciples of conflicts of law thereof. Each party agrees that all legal proceedings concerning theinterpretations, enforcement and defense of the transactions contemplated bythis Agreement and any other Transaction Documents (whether brought against aparty hereto or its respective affiliates, directors, officers, shareholders, employeesor agents) shall be commenced exclusively in the state and federal courtssitting in the City of New York. Each party hereby irrevocably submits to the exclusive jurisdiction ofthe state and federal courts sitting in the City of New York, borough ofManhattan for the adjudication of any dispute hereunder or in connectionherewith or with any transaction contemplated hereby or discussed herein(including with respect to the enforcement of any of the TransactionDocuments), and hereby irrevocably waives, and agrees not to assert in anysuit, action or proceeding, any claim that it is not personally subject to thejurisdiction of any such court, that such suit, action or proceeding isimproper or inconvenient venue for such proceeding.  Each party hereby irrevocably waives personalservice of process and consents to process being served in any such suit,action or proceeding by mailing

 

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acopy thereof via registered or certified mail or overnight delivery (withevidence of delivery) to such party at the address in effect for notices to itunder this Agreement and agrees that such service shall constitute good andsufficient service of process and notice thereof.  Nothing contained herein shall be deemed tolimit in any way any right to serve process in any manner permitted bylaw.  The parties hereby waive, to thefullest extent permitted by applicable law, all rights to a trial by jury.  If either party shall commence an action orproceeding to enforce any provisions of the Transaction Documents, then theprevailing party in such action or proceeding shall be reimbursed by the otherparty for its attorneys’ fees and other costs and expenses incurred with theinvestigation, preparation and prosecution of such action or proceeding.

 

5.10                           Survival.    The representations and warrantiescontained herein shall survive each Closing and the delivery, exercise and/orconversion of the Securities, as applicable for the applicable statue oflimitations.

 

5.11                           Execution.    This Agreement may be executed in two ormore counterparts, all of which when taken together shall be considered one andthe same agreement and shall become effective when counterparts have beensigned by each party and delivered to the other party, it being understood thatboth parties need not sign the same counterpart.  In the event that anysignature is delivered by facsimile transmission, such signature shall create avalid and binding obligation of the party executing (or on whose behalf suchsignature is executed) with the same force and effect as if such facsimilesignature page were an original thereof.

 

5.12                           Severability.    If any provision of this Agreement is heldto be invalid or unenforceable in any respect, the validity and enforceabilityof the remaining terms and provisions of this Agreement shall not in any way beaffected or impaired thereby and the parties will attempt to agree upon a validand enforceable provision that is a reasonable substitute therefor, and upon soagreeing, shall incorporate such substitute provision in this Agreement.

 

5.13                           Rescissionand Withdrawal Right.   Notwithstanding anything to the contrary contained in (and withoutlimiting any similar provisions of) the Transaction Documents, whenever anyPurchaser exercises a right, election, demand or option under a TransactionDocument and the Company does not timely perform its related obligations withinthe periods therein provided, then such Purchaser may rescind or withdraw, inits sole discretion from time to time upon written notice to the Company, any relevantnotice, demand or election in whole or in part without prejudice to its futureactions and rights; provided, however, in the case of arescission of a conversion of a Debenture, exercise of a Warrant or conversionand/or exercise of an Additional Investment Right Security, the Purchaser shallbe required to return any shares of Common Stock subject to any such rescindedconversion notice.

 

5.14                           Replacementof Securities.    If any certificateor instrument evidencing any Securities is mutilated, lost, stolen ordestroyed, the Company shall issue or cause to be issued in exchange andsubstitution for and upon cancellation thereof, or in lieu of and substitutiontherefor, a new certificate or instrument, but only upon receipt of evidencereasonably satisfactory to the Company of such loss, theft or destruction andcustomary and reasonable indemnity, if requested.  The applicants for a new certificate orinstrument under such circumstances shall also pay any reasonable third-partycosts associated with the issuance of such replacement Securities.

 

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5.15                           Remedies.    In addition to being entitled to exerciseall rights provided herein or granted by law, including recovery of damages,each of the Purchasers and the Company will be entitled to specific performanceunder the Transaction Documents.  Theparties agree that monetary damages may not be adequate compensation for anyloss incurred by reason of any breach of obligations described in the foregoingsentence and hereby agrees to waive in any action for specific performance ofany such obligation the defense that a remedy at law would be adequate.

 

5.16                           PaymentSet Aside.    To the extent that theCompany makes a payment or payments to any Purchaser pursuant to anyTransaction Document or a Purchaser enforces or exercises its rightsthereunder, and such payment or payments or the proceeds of such enforcement orexercise or any part thereof are subsequently invalidated, declared to befraudulent or preferential, set aside, recovered from, disgorged by or arerequired to be refunded, repaid or otherwise restored to the Company, atrustee, receiver or any other person under any law (including, withoutlimitation, any bankruptcy law, state or federal law, common law or equitablecause of action), then to the extent of any such restoration the obligation orpart thereof originally intended to be satisfied shall be revived and continuedin full force and effect as if such payment had not been made or suchenforcement or setoff had not occurred.

 

5.17                           Usury.    To the extent it may lawfully do so, theCompany hereby agrees not to insist upon or plead or in any manner whatsoeverclaim, and will resist any and all efforts to be compelled to take the benefitor advantage of, usury laws wherever enacted, now or at any time hereafter inforce, in connection with any claim, action or proceeding that may be broughtby any Purchaser in order to enforce any right or remedy under any TransactionDocument.  Notwithstanding any provisionto the contrary contained in any Transaction Document, it is expressly agreedand provided that the total liability of the Company under the TransactionDocuments for payments in the nature of interest shall not exceed the maximumlawful rate authorized under applicable law (the “Maximum Rate”), and,without limiting the foregoing, in no event shall any rate of interest ordefault interest, or both of them, when aggregated with any other sums in thenature of interest that the Company may be obligated to pay under theTransaction Documents exceed such Maximum Rate. It is agreed that if the maximum contract rate of interest allowed bylaw and applicable to the Transaction Documents is increased or decreased bystatute or any official governmental action subsequent to the date hereof, thenew maximum contract rate of interest allowed by law will be the Maximum Rateapplicable to the Transaction Documents from the effective date forward, unlesssuch application is precluded by applicable law.  If under any circumstances whatsoever,interest in excess of the Maximum Rate is paid by the Company to any Purchaserwith respect to indebtedness evidenced by the Transaction Documents, suchexcess shall be applied by such Purchaser to the unpaid principal balance ofany such indebtedness or be refunded to the Company, the manner of handlingsuch excess to be at such Purchaser’s election.

 

5.18                           IndependentNature of Purchasers’ Obligations and Rights.    The obligations of each Purchaser under anyTransaction Document are several and not joint with the obligations of anyother Purchaser, and no Purchaser shall be responsible in any way for theperformance of the obligations of any other Purchaser under any TransactionDocument.  Nothing contained herein or inany Transaction Document, and no action taken by any Purchaser pursuantthereto, shall be deemed to constitute the Purchasers as a partnership, anassociation, a joint venture or any other

 

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kind of entity, orcreate a presumption that the Purchasers are in any way acting in concert or asa group with respect to such obligations or the transactions contemplated bythe Transaction Document.  Each Purchasershall be entitled to independently protect and enforce its rights, includingwithout limitation the rights arising out of this Agreement or out of the otherTransaction Documents, and it shall not be necessary for any other Purchaser tobe joined as an additional party in any proceeding for such purpose.  Each Purchaser has been represented by itsown separate legal counsel in their review and negotiation of the TransactionDocuments.  For reasons of administrativeconvenience only, Purchasers and their respective counsel have chosen tocommunicate with the Company through FW. FW does not represent all of the Purchasers but only RAM.  The Company has elected to provide allPurchasers with the same terms and Transaction Documents for the convenience ofthe Company and not because it was required or requested to do so by thePurchasers.

 

5.19                           Liquidated Damages.  The Company’s obligations to pay any partialliquidated damages or other amounts owing under the Transaction Documents is acontinuing obligation of the Company and shall not terminate until all unpaidpartial liquidated damages and other amounts have been paid notwithstanding thefact that the instrument or security pursuant to which such partial liquidateddamages or other amounts are due and payable shall have been canceled.

 

*(SignaturePages Follow)*

 

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IN WITNESS WHEREOF, the parties hereto have caused this SecuritiesPurchase Agreement to be duly executed by their respective authorizedsignatories as of the date first indicated above.

 
| **POWER 3  MEDICAL PRODUCTS, INC.**             | Address for  Notice: |
|------------------------------------------------------|----------------------|
|                                                 |                 |
|                                                 |                 |
| By:                                                  | /s/: Steven B.  Rash | ** ** | ** ** |
| ** **                                           | Name:                | Steven B. Rash | ** ** |
| ** **                                           | Title:               | Chairman and CEO | ** ** |
|                                                 |                 |
| With a copy to  (which shall not constitute notice): |                 |
|                                                      |                      |  |  |  |

 

 

[REMAINDER OF PAGEINTENTIONALLY LEFT BLANKSIGNATURE PAGE FOR PURCHASER FOLLOWS]

 

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[PURCHASER SIGNATURE PAGES TO PWRM SECURITIES PURCHASE AGREEMENT]

 

IN WITNESS WHEREOF, the undersigned havecaused this Securities Purchase Agreement to be duly executed by theirrespective authorized signatories as of the date first indicated above.

 

Name of Investing Entity: Otape Investments LLC

 
| Signature of Authorized Signatory of  Investing Entity: | /s/ Richard M. Cayne |   |
|---------------------------------------------------------|----------------------|--------|

 

Name of Authorized Signatory: Richard M. Cayne

 

Title of Authorized Signatory: General Counsel

 

Email Address of Authorized Entity:

 

Address for Notice of Investing Entity:

 

1 Manhattanville Rd

Purchase, NY  10577

 

Address for Delivery of Securities for Investing Entity (if not same asabove):

 
| First  Closing Subscription Amount: |   | $      | 100,000 |   |
|-------------------------------------|--------|--------|---------|--------|
| Second Closing Subscription Amount: |   | $      | 200,000 |   |
| Warrant Shares:                     |   |   |    |   |
| Additional Investment Right:        |   |   |    |   |

 

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[PURCHASER SIGNATURE PAGES TO PWRM SECURITIES PURCHASE AGREEMENT]

 

IN WITNESS WHEREOF, the undersigned havecaused this Securities Purchase Agreement to be duly executed by theirrespective authorized signatories as of the date first indicated above.

 

Name of Investing Entity: Mohawk Funding

 
| Signature of Authorized Signatory of  Investing Entity: | /s/ Richard H. Bach |   |
|---------------------------------------------------------|---------------------|--------|

 

Name of Authorized Signatory: Richard H. Bach

 

Title of Authorized Signatory: Managing Member

 

Email Address of Authorized Entity:

 

Address for Notice of Investing Entity:

 

Address for Delivery of Securities for Investing Entity (if not same asabove):

 
| First  Closing Subscription Amount: |   | 10,000 |   |
|-------------------------------------|--------|--------|--------|
| Second Closing Subscription Amount: |   | 20,000 |   |
| Warrant Shares:                     |   |   |   |
| Additional Investment Right:        |   |   |   |

 

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[PURCHASER SIGNATURE PAGES TO PWRM SECURITIES PURCHASE AGREEMENT]

 

IN WITNESS WHEREOF, the undersigned havecaused this Securities Purchase Agreement to be duly executed by theirrespective authorized signatories as of the date first indicated above.

 

Name of Investing Entity: Richard Molinsky

 
| Signature of Authorized Signatory of  Investing Entity: | /s/ Richard Molinsky |   |
|---------------------------------------------------------|----------------------|--------|

 

Name of Authorized Signatory:

 

Title of Authorized Signatory:

 

Email Address of Authorized Entity:

 

Address for Notice of Investing Entity:

 

51 Lourdes Hwy E.

Weston, CT  06883

 

Address for Delivery of Securities for Investing Entity (if not same asabove):

 
| First  Closing Subscription Amount: |   | $      | 30,000 |   |
|-------------------------------------|--------|--------|--------|--------|
| Second Closing Subscription Amount: |   | $      | 60,000 |   |
| Warrant Shares:                     |   |   |   |   |
| Additional Investment Right:        |   |   |   |   |

 

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[PURCHASER SIGNATURE PAGES TO PWRM SECURITIES PURCHASE AGREEMENT]

 

IN WITNESS WHEREOF, the undersigned havecaused this Securities Purchase Agreement to be duly executed by theirrespective authorized signatories as of the date first indicated above.

 

Name of Investing Entity: Gryphon Master Fund L.P.

 
| Signature of Authorized Signatory of  Investing Entity: | /s/ E. B. Lyon IV |   |
|---------------------------------------------------------|-------------------|--------|

 

Name of Authorized Signatory: E. B. Lyon IV

 

Title of Authorized Signatory: Authorized Agent

 

Email Address of Authorized Entity:

 

Address for Notice of Investing Entity:

 

100 Crescent Court, Suite 490

Dallas, TX  75201

 

Address for Delivery of Securities for Investing Entity (if not same asabove):

 

Same

 

 
| First  Closing Subscription Amount: |   | $      | 100,000 |   |
|-------------------------------------|--------|--------|---------|--------|
| Second Closing Subscription Amount: |   | $      | 200,000 |   |
| Warrant Shares:                     |   |   |    |   |
| Additional Investment Right:        |   |   |    |   |

 

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[PURCHASER SIGNATURE PAGES TO PWRM SECURITIES PURCHASE AGREEMENT]

 

IN WITNESS WHEREOF, the undersigned havecaused this Securities Purchase Agreement to be duly executed by theirrespective authorized signatories as of the date first indicated above.

 

Name of Investing Entity: GSSF Master Fund, LP

 
| Signature of Authorized Signatory of  Investing Entity: | /s/ E. B. Lyon IV |   |
|---------------------------------------------------------|-------------------|--------|

 

Name of Authorized Signatory: E. B. Lyon IV

 

Title of Authorized Signatory: Authorized Agent

 

Email Address of Authorized Entity:

 

Address for Notice of Investing Entity:

 

100 Crescent Court, Suite 490

Dallas, TX  75201

 

Address for Delivery of Securities for Investing Entity (if not same asabove):

 

Same

 

 
| First  Closing Subscription Amount: |   | $      | 100,000 |   |
|-------------------------------------|--------|--------|---------|--------|
| Second Closing Subscription Amount: |   | $      | 200,000 |   |
| Warrant Shares:                     |   |   |    |   |
| Additional Investment Right:        |   |   |    |   |

 

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[PURCHASER SIGNATURE PAGES TO PWRM SECURITIES PURCHASE AGREEMENT]

 

IN WITNESS WHEREOF, the undersigned havecaused this Securities Purchase Agreement to be duly executed by theirrespective authorized signatories as of the date first indicated above.

 

Name of Investing Entity: Sage Capital Investments Limited

 
| Signature of Authorized Signatory of  Investing Entity: | /s/ Anthony Thompson |   |
|---------------------------------------------------------|----------------------|--------|

 

Name of Authorized Signatory: Anthony Thompson

 

Title of Authorized Signatory: Secretary

 

Email Address of Authorized Entity:

 

Address for Notice of Investing Entity:

 

P. O. Box N-4826 (For regular mail)

Nassau, Bahamas

 

Address for Delivery of Securities for Investing Entity (if not same asabove):

 

Marron House, Virginia Street (For delivery, Fed X, etc)

Nassau, Bahamas

 
| First Closing Subscription Amount:  |   | $      | 25,000 |  (Twenty Five Thousand and no/100) |
|-------------------------------------|--------|--------|--------|-----------------------------------------|
| Second Closing Subscription Amount: |   | $      | 50,000 |  (Fifty Thousand and no/100)       |
| Warrant Shares:                     |   |   |   |                                    |
| Additional Investment Right:        |   |   |   |                                    |

 

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[PURCHASER SIGNATURE PAGES TO PWRM SECURITIES PURCHASE AGREEMENT]

 

IN WITNESS WHEREOF, the undersigned havecaused this Securities Purchase Agreement to be duly executed by their respectiveauthorized signatories as of the date first indicated above.

 

Name of Investing Entity: Crestview Capital Master, LLC

 
| Signature of Authorized Signatory of  Investing Entity: | /s/ Stewart R. Flink |   |
|---------------------------------------------------------|----------------------|--------|

 

Name of Authorized Signatory: Stewart R. Flink

 

Title of Authorized Signatory: Manager

 

Email Address of Authorized Entity:

 

Address for Notice of Investing Entity:

 

95 Revere Drive, Suite A

Northbrook, Illinois  60062

 

Address for Delivery of Securities for Investing Entity (if not same asabove):

 
| First Closing  Subscription Amount: |   | $      | 150,000 |   |
|-------------------------------------|--------|--------|---------|--------|
| Second Closing Subscription Amount: |   | $      | 300,000 |   |
| Warrant Shares:                     |   |   |    |   |
| Additional Investment Right:        |   |   |    |   |

 

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[PURCHASER SIGNATURE PAGES TO PWRM SECURITIES PURCHASE AGREEMENT]

 

IN WITNESS WHEREOF, the undersigned havecaused this Securities Purchase Agreement to be duly executed by theirrespective authorized signatories as of the date first indicated above.

 

Name of Investing Entity: Omicron Master Trust

 
| Signature of Authorized Signatory of  Investing Entity: | /s/ Bruce Bernstein |   |
|---------------------------------------------------------|---------------------|--------|

 

Name of Authorized Signatory: Bruce Bernstein

 

Title of Authorized Signatory: Managing Partner

 

Email Address of Authorized Entity:

 

Address for Notice of Investing Entity:

 

650 Fifth Ave, 24th Fl

New York, NY  10019

Attn:  Brian Daly

Tel# 212 258-2302

Fax 212 258-2315

 

Address for Delivery of Securities for Investing Entity (if not same asabove):

 
| First  Closing Subscription Amount: |   | $      | 100,000 |   |
|-------------------------------------|--------|--------|---------|--------|
| Second Closing Subscription Amount: |   | $      | 200,000 |   |
| Warrant Shares:                     |   |   |    |   |
| Additional Investment Right:        |   |   |    |   |
|                                     |        |        |         |        |  |

 

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[PURCHASER SIGNATURE PAGES TO PWRM SECURITIES PURCHASE AGREEMENT]

 

IN WITNESS WHEREOF, the undersigned havecaused this Securities Purchase Agreement to be duly executed by theirrespective authorized signatories as of the date first indicated above.

 

Name of Investing Entity: Citiplatz Limited

 
| Signature of Authorized Signatory of  Investing Entity: | /s/ Francis [Illegible] |   |
|---------------------------------------------------------|-------------------------|--------|

 

Name of Authorized Signatory: Francis [Illegible]

 

Title of Authorized Signatory: Secretary of Citiplatz Limited

 

Email Address of Authorized Entity:

 

Address for Notice of Investing Entity:

 

12-14 Finch Road

Douglas

Isle of Man

IM991TT

 

Address for Delivery of Securities for Investing Entity (if not same asabove):

 

 
| First  Closing Subscription Amount: |   | $      | 50,000  |  USD |
|-------------------------------------|--------|--------|---------|-----------|
| Second Closing Subscription Amount: |   | $      | 100,000 |  USD |
| Warrant Shares:                     |   |   |    |      |
| Additional Investment Right:        |   |   |    |      |

 

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[PURCHASER SIGNATURE PAGES TO PWRM SECURITIES PURCHASE AGREEMENT]

 

IN WITNESS WHEREOF, the undersigned havecaused this Securities Purchase Agreement to be duly executed by theirrespective authorized signatories as of the date first indicated above.

 

Name of Investing Entity: Platinum Partners Value Arbitrage Fund L.P.

 
| Signature of Authorized Signatory of  Investing Entity: | /s/ Richard Geyser |   |
|---------------------------------------------------------|--------------------|--------|

 

Name of Authorized Signatory: Richard Geyser

 

Title of Authorized Signatory: Managing Director

 

Email Address of Authorized Entity:

 

Address for Notice of Investing Entity:

 

Platinum Partners

152 W. 57th St., 54th Fl.

New York, NY  10019-3310

 

Address for Delivery of Securities for Investing Entity (if not same asabove):

 

 
| First Closing Subscription  Amount:  |   | $      | 83,333 |   |
|--------------------------------------|--------|--------|--------|--------|
| Second  Closing Subscription Amount: |   |   |   |
| Warrant  Shares:                     |   |   |   |
| Additional  Investment Right:        |   |   |   |

 

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[PURCHASER SIGNATURE PAGES TO PWRM SECURITIES PURCHASE AGREEMENT]

 

IN WITNESS WHEREOF, the undersigned havecaused this Securities Purchase Agreement to be duly executed by theirrespective authorized signatories as of the date first indicated above.

 

Name of Investing Entity: Crescent International Ltd.

 
| Signature of Authorized Signatory of  Investing Entity: | /s/ Mel Craw /s/ Maxi Brezzi |   |
|---------------------------------------------------------|------------------------------|--------|

 

Name of Authorized Signatory: Mel Craw and Maxi Brezzi

 

Title of Authorized Signatory: Authorized Signatory

 

Email Address of Authorized Entity:

 

Address for Notice of Investing Entity:

 

Crescent International Ltd.

C/o GreenLight (Switzerland) SA

84, av. Louis-Casai

CH 1216 COINTRIN

Geneva, Switzerland

 

Fax Number of Notice of Investing Entity:  +41 22 791 7171

 

Address for Delivery of Securities for Investing Entity (if not same asabove):

 

Crescent International Ltd.

C/o GreenLight (Switzerland) SA

84, av. Louis-Casai

CH 1216 COINTRIN

Geneva, Switzerland

 

 
| First  Closing Subscription Amount: |   | $      | 200,000 |   |
|-------------------------------------|--------|--------|---------|--------|
| Second Closing Subscription Amount: |   | $      | 400,000 |   |
| Warrant Shaes:                      |   |   |    |   |
| Additional Investment Right:        |   |   |    |   |

 

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[PURCHASER SIGNATURE PAGES TO PWRM SECURITIES PURCHASE AGREEMENT]

 

IN WITNESS WHEREOF, the undersigned havecaused this Securities Purchase Agreement to be duly executed by theirrespective authorized signatories as of the date first indicated above.

 
| Name of Investing Entity:                               | DKR SoundShore Oasis Holding Fund Ltd. |   |
|---------------------------------------------------------|----------------------------------------|--------|
|                                                    |                                   |
| Signature of Authorized Signatory of  Investing Entity: | /s/ Barbara Burger                     |   |
|                                                    |
| Name of Authorized Signatory:                           | Barbara Burger                         |   |
|                                                    |                                   |
| Title of Authorized Signatory:                          | Alternate Director                     |   |
|                                                         |                                        |        |  |  |  |  |

 

Email Address of Authorized Entity:

 

 

Address for Notice of Investing Entity:

 

c/o DKR CapitalPartners L.P.

1281 East Main Street

Stambord, CT  06902

 

Address for Delivery of Securities for Investing Entity (if not same asabove):

 

(Same)

 

Registered Address:

 

29 Richmond Road

Pembroke HM08

Bermuda

 
| First  Closing Subscription Amount: |   | $      | 50,000  |   |
|-------------------------------------|--------|--------|---------|--------|
| Second Closing Subscription Amount: |   | $      | 100,000 |   |
| Warrant Shares:                     |   |   |    |   |
| Additional Investment Right:        |   |   |    |   |
|                                     |        |        |         |        |  |

 

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[PURCHASER SIGNATURE PAGES TO PWRM SECURITIESPURCHASE AGREEMENT]

 

IN WITNESS WHEREOF, the undersigned havecaused this Securities Purchase Agreement to be duly executed by theirrespective authorized signatories as of the date first indicated above.

 
| Name of Investing Entity:                               | Bach Farms LLC      |   |
|---------------------------------------------------------|---------------------|--------|
|                                                    |                |
| Signature of Authorized Signatory of  Investing Entity: | /s/ Richard H. Bach |   |
|                                                    |
| Name of Authorized Signatory:                           | Richard H. Bach     |   |
|                                                    |                |
| Title of Authorized Signatory:                          |                |   |
|                                                    |                |   |
| Email Address of Authorized Entity:                     |                |   |
|                                                         |                     |        |  |  |  |  |

 

Address for Notice of Investing Entity:

 

 

Address for Delivery of Securities for Investing Entity (if not same asabove):

 

(Same)

 

Registered Address:

 

 
| First  Closing Subscription Amount: |   | $      | 1,667  |   |
|-------------------------------------|--------|--------|--------|--------|
| Second Closing Subscription Amount: |   | $      | 3,333  |   |
| Warrant Shares:                     |   |   |   |   |
| Additional Investment Right:        |   |   |   |   |

 

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ANNEX A

 

CLOSING STATEMENT

 

Pursuant to the attached Securities Purchase Agreement, dated as of thedate hereto, the purchasers shall purchase up to $3,000,000 of Debentures,Warrants and Additional Investment Rights from Power 3 Medical Products, Inc.(the “Company”). All funds will be wired into an escrow account maintained byHSBC Bank, as escrow agent. All funds will be disbursed in accordance with this

Closing Statement.

 

DISBURSEMENT DATE:         October    ,2004

 

I. PURCHASE PRICE

 
| GROSS  PROCEEDS TO BE RECEIVED IN ESCROW |   | $ | 1,000,000 |   |
|------------------------------------------|--------|---|-----------|--------|

 

 

II. DISBURSEMENTS

 
| Westor  Online, L.L.C.             |   | $      | 130,000   |   |
|------------------------------------|--------|--------|-----------|--------|
| Andrews Kurth, LLP                 |   | $      | 40,000    |   |
| HSBC Bank - escrow fees            |   | $      | 2,500     |   |
| Power3 Medical Products, Inc. |   | $      | 827,500   |   |
|                               |   |   |      |
| TOTAL AMOUNT DISBURSED:            |   | $      | 1,000,000 |   |

 

WIRE INSTRUCTIONS:

 
| To:           | Westor Online, L.L.C.           |
|---------------|---------------------------------|
|          | Bank Name: Charter One Bank     |
|          | Address: 266 Genesee St.        |
|          | Utica, Ny 13502                 |
| Account Name: | Westor Online, Inc.        |
| Address:      | 258 Genesee St., Suite 601 |
|          | Utica, NY 13502                 |
| ABA           | 221370030                       |
| Account #     | 5250030032                      |
|               |                                 |  |

 

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| To:    | Andrews Kurth, LLP                                 |
|--------|----------------------------------------------------|
|   | Chase Bank, National Association, Houston,  Texas  |
|   | Account Number 00100184952                         |
|   | ABA Code 113000609                                 |
|   | Reference number 0024268/0156088                   |
|   | Attention Jodie Hubbard, phone number 713-750-3725 |
|   |                                               |
| To:    | HSBC Bank                                          |
|   | 452 Fifth Avenue                                   |
|   | New York, New York                                 |
|   | ABA#021-001-088                                    |
|   | Power3 Medical Products, Inc.                 |
|   | Escrow Account                                     |
|   |                                               |
| To:    | Power3 Medical Products, Inc.                 |
|   | JP Morgan Chase                                    |
|   | ABA # 113-000-609                                  |
|   | Account # 336915653665                             |
|   | Power3 Medical Products                            |

 

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