**Exhibit4.1**

** **

**EXHIBIT A**

 

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY ISCONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION ORTHE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROMREGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”),AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO ANEFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO ANAVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATIONREQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATESECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TOSUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THECOMPANY.  THIS SECURITY AND THESECURITIES ISSUABLE UPON CONVERSION OF THIS SECURITY MAY BE PLEDGED INCONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCHSECURITIES.

 

Original Issue Date: October        ,2004

Original Conversion Price (subject to adjustment herein): $         (1)

 

$                        

 

**CONVERTIBLE DEBENTURE**

**DUE OCTOBER     ,2007**

 

THIS DEBENTURE is one of a series of duly authorized and issued Convertible Debentures of Power 3 Medical Products, Inc., a New York corporation, having a principal place of business at                                                  (the “Company”), designated as its Convertible Debenture, due October        , 2007 (the “Debentures”).

 

FOR VALUE RECEIVED, the Company promises to pay to                                                    or its registered assigns (the “Holder”), the principal sum of $                                   on October        ,2007 or such earlier date as the Debentures are required or permitted tobe repaid as provided hereunder (the “Maturity Date”).  This Debenture is subject to the followingadditional provisions:

 

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(1)                                  Asto the Debentures issued at the First Closing, 75% of the Market Price and asto the Debentures issued at the Second Closing, the lesser of (a) 75% of theMarket Price and (b) the lesser of (i) the average of the 5 consecutive ClosingPrices immediately prior to the Effective Date (as defined in the PurchaseAgreement) and (ii) the Closing Price on the Effective Date.

 

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Section 1.                                            Definitions.  For the purposes hereof, in addition to theterms defined elsewhere in this Debenture: (a) capitalized terms nototherwise defined herein have the meanings given to such terms in the PurchaseAgreement, and (b) the following terms shall have the following meanings:

 

“Alternate Consideration” shall havethe meaning set forth in Section 5(e)(iii).

 

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

 

“Change of Control Transaction” meansthe occurrence after the date hereof of any of (i) an acquisition afterthe date hereof by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgatedunder the Exchange Act) of effective control (whether through legal orbeneficial ownership of capital stock of the Company, by contract or otherwise)of in excess of 50% of the voting securities of the Company, or (ii) areplacement at one time or within a three year period of more than one-half ofthe members of the Company’s board of directors which is not approved by amajority of those individuals who are members of the board of directors on thedate hereof (or by those individuals who are serving as members of the board ofdirectors on any date whose nomination to the board of directors was approvedby a majority of the members of the board of directors who are members on thedate hereof), or (iii) the execution by the Company of an agreement towhich the Company is a party or by which it is bound, providing for any of theevents set forth above in (i) or (ii).

 

“Closing Price” means on anyparticular date (a) the daily volume weighted average price per share ofCommon Stock on such date (or the nearest preceding date) on the Trading Market(as reported by Bloomberg 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 bythe National Quotation Bureau Incorporated (or a similar organization or agencysucceeding to its functions of reporting prices), the most recent bid price pershare of the Common Stock so reported, or (c) if the shares of CommonStock are not then publicly traded the fair market value of a share of CommonStock as determined by a nationally-recognized independent appraiser selectedin good faith by the Purchasers of a majority in interest of the principalamount of Debentures then outstanding and reasonably acceptable to the Company.

 

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

 

“Conversion Date” shall have themeaning set forth in Section 4(a) hereof.

 

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

 

“Conversion Shares” means the sharesof Common Stock issuable upon conversion of Debentures in accordance with theterms hereof.

 

“Dilutive Issuance” shall have themeaning set forth in Section 5(b) hereof.

 

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

 

“Equity Conditions” shall mean, duringthe period in question, (i) the Company shall have duly honored allconversions and redemptions scheduled to occur or occurring by virtue of one ormore Notice of Conversions, if any, (ii) all liquidated damages and otheramounts owing in respect of the Debentures shall have been paid; (iii) thereis an effective Registration Statement pursuant to which the Holder ispermitted to utilize the prospectus thereunder to resell all of the sharesissuable pursuant to the Transaction Documents (and the Company believes, ingood faith, that such effectiveness will continue uninterrupted for theforeseeable future), (iv) the Common Stock is trading on the TradingMarket and all of the shares issuable pursuant to the Transaction Documents arelisted for trading on a Trading Market (and the Company believes, in goodfaith, that trading of the Common Stock on a Trading Market will continueuninterrupted for the foreseeable future), (v) there is a sufficientnumber of authorized but unissued and otherwise unreserved shares of CommonStock for the issuance of all of the shares issuable pursuant to theTransaction Documents, (vi) there is then existing no Event of Default orevent which, with the passage of time or the giving of notice, would constitutean Event of Default and (vii) all of the shares issued or issuablepursuant to the Transaction Documents in full, ignoring for such purposes anyconversion or exercise limitation therein, would not violate the limitationsset forth in Section 4(c) and (ix) no public announcement of apending or proposed Fundamental Transaction, Change of Control Transaction oracquisition transaction has occurred that has not been consummated.

 

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

 

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

 

“FundamentalTransaction” shall have the meaning set forth in Section 5(e)(iii) hereof.

 

“LateFees” shall have the meaning set forth in the second paragraph to thisDebenture.

 

“MandatoryPrepayment Amount” for any Debentures shall equal the sum of (i) thegreater of: (A) 130% of the principal amount of Debentures to be prepaid,or (B) the principal amount of Debentures to be prepaid, divided by theConversion Price on (x) the date the Mandatory Prepayment Amount is demanded orotherwise due or (y) the date the

 

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Mandatory Prepayment Amount is paid in full, whichever is less,multiplied by the Closing Price on (x) the date the Mandatory Prepayment Amountis demanded or otherwise due or (y) the date the Mandatory Prepayment Amount ispaid in full, whichever is greater, and (ii) all other amounts, costs,expenses and liquidated damages due in respect of such Debentures.

 

“Original Issue Date” shall mean thedate of the first issuance of the Debentures regardless of the number oftransfers of any Debenture and regardless of the number of instruments whichmay be issued to evidence such Debenture.

 

“Person” means a corporation, anassociation, a partnership, a limited liability company, organization, abusiness, an individual, a government or political subdivision thereof or agovernmental agency.

 

“Purchase Agreement” means theSecurities Purchase Agreement, dated as of October     , 2004, to which the Companyand the original Holder are parties, as amended, modified or supplemented fromtime to time in accordance with its terms.

 

“Registration Rights Agreement” meansthe Registration Rights Agreement, dated as of the date of the PurchaseAgreement, to which the Company and the original Holder are parties, asamended, modified or supplemented from time to time in accordance with itsterms.

 

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

 

“Securities Act” means the SecuritiesAct of 1933, as amended, and the rules and regulations promulgatedthereunder.

 

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

 

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

 

“Trading Market” means the followingmarkets or exchanges on which the Common Stock is listed or quoted for tradingon the date in question: the Nasdaq SmallCap Market, the American StockExchange, the New York Stock Exchange, the Nasdaq National Market or the OTCBulletin Board.

 

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

 

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Section 2.                                            Interest.

 

a)                                      NoPayment of Interest.  Except as setforth herein, the Company shall not pay interest to the Holder on thisDebenture.

 

b)                                     Prepayment.  Except as otherwise set forth in thisDebenture, the Company may not prepayany portion of the principal amount of this Debenture without the prior writtenconsent of the Holder.

 

Section 3.                                            Registration of Transfers and Exchanges.

 

a)                                      DifferentDenominations. This Debenture is exchangeable for an equal aggregateprincipal amount of Debentures of different authorized denominations, asrequested by the Holder surrendering the same. No service charge will be made for such registration of transfer orexchange.

 

b)                                     InvestmentRepresentations. This Debenture has been issued subject to certaininvestment representations of the original Holder set forth in the PurchaseAgreement and may be transferred or exchanged only in compliance with thePurchase Agreement and applicable federal and state securities laws andregulations.

 

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

 

Section 4.                                            Conversion.

 

a)                                      VoluntaryConversion. Subject to the terms hereof and restrictions and limitations containedherein, at any time after the Original Issue Date until this Debenture is nolonger outstanding, this Debenture shall be convertible into shares of CommonStock at the option of the Holder, in whole or in part at any time and fromtime to time (subject to the limitations on conversion set forth in Section 4(c) hereof).  The Holder shall effect conversions bydelivering to the Company the form of Notice of Conversion attached hereto as AnnexA (a “Notice of Conversion”), specifying therein the principalamount of Debentures to be converted and the date on which such conversion isto be effected (a “Conversion Date”). If no Conversion Date is specified in a Notice of Conversion, theConversion Date shall be the date that such Notice of Conversion is providedhereunder.  To effect conversionshereunder, the Holder shall not be required to physically surrender Debenturesto the Company unless the entire principal amount of this Debenture has been soconverted. Conversions hereunder shall have the effect of lowering theoutstanding principal amount of this Debenture in an amount equal to theapplicable conversion.  The Holder andthe Company shall maintain records showing the principal amount converted andthe date of such conversions.  TheCompany shall deliver any objection to any Notice of Conversion within 1Business Day of receipt of such notice. In the event of any dispute or discrepancy, the records of the Holdershall be

 

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controlling anddeterminative in the absence of manifest error. The Holder and any assignee, byacceptance of this Debenture, acknowledge and agree that, by reason of theprovisions of this paragraph, following conversion of a portion of thisDebenture, the unpaid and unconverted principal amount of this Debenture may beless than the amount stated on the face hereof.

 

b)                                     ConversionPrice.  The conversion price ineffect on any Conversion Date shall be equal to **$        **(2)****(subject to adjustment herein) **[AS TO THE FIRST CLOSING DEBENTURES ONLY; provided, however,if the lesser of (i) the average of the 5 consecutive Closing Pricesimmediately prior to the Effective Date (as defined in the Purchase Agreement)and (ii) the Closing Price on the Effective Date (“Effective Date Price”)is less than the Conversion Price, the Conversion Price shall be reduced toequal the Effective Date Price]** (the “Conversion Price”).

 

c)                                      ConversionLimitations; Holder’s Restriction on Conversion. The Company shallnot effect any conversion of this Debenture, and the Holder shall not have theright to convert any portion of this Debenture, pursuant to Section 4(a) orotherwise, to the extent that after giving effect to such conversion, theHolder (together with the Holder’s affiliates), as set forth on the applicableNotice of Conversion, would beneficially own in excess of 4.99% of the numberof shares of the Common Stock outstanding immediately after giving effect tosuch conversion.  For purposes of the foregoing sentence, the number ofshares of Common Stock beneficially owned by the Holder and its affiliatesshall include the number of shares of Common Stock issuable upon conversion ofthis Debenture with respect to which the determination of such sentence isbeing made, but shall exclude the number of shares of Common Stock which wouldbe issuable upon (A) conversion of the remaining, nonconverted portion ofthis Debenture beneficially owned by the Holder or any of its affiliates and (B) exerciseor conversion of the unexercised or nonconverted portion of any othersecurities of the Company (including, without limitation, any other Debenturesor the Warrants) subject to a limitation on conversion or exercise analogous tothe limitation contained herein beneficially owned by the Holder or any of itsaffiliates.  Except as set forth in the preceding sentence, for purposesof this Section 4(c), beneficial ownership shall be calculated inaccordance with Section 13(d) of the Exchange Act.  To the extent that the limitation containedin this section applies, the determination of whether this Debenture isconvertible (in relation to other securities owned by the Holder) and of whichportion of this Debenture is convertible shall be in the sole discretion ofsuch Holder. To ensure compliance with this restriction, the Holder will bedeemed to represent to the Company each time it delivers a Notice of Conversionthat such Notice of Conversion has not violated the restrictions set forth inthis paragraph and the Company shall have no obligation to verify or confirm theaccuracy of such determination.  Forpurposes of this Section 4(c), in determining the number of outstandingshares of Common Stock, the

 

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(2)                                  Asto the Debentures issued at the First Closing, 75% of the Market Price and asto the Debentures issued at the Second Closing, the lesser of (a) 75% of theMarket Price and (b) the lesser of (i) the average of the 5 consecutive ClosingPrices immediately prior to the Effective Date (as defined in the PurchaseAgreement) and (ii) the Closing Price on the Effective Date.

 

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Holder may rely on the number of outstandingshares of Common Stock as reflected in (x) the Company’s most recent Form 10-QSBor Form 10-KSB, as the case may be, (y) a more recent public announcementby the Company or (z) any other notice by the Company or the Company’s TransferAgent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within twoTrading Days confirm orally and in writing to the Holder the number of sharesof Common Stock then outstanding.  In any case, the number of outstandingshares of Common Stock shall be determined after giving effect to theconversion or exercise of securities of the Company, including this Debenture,by the Holder or its affiliates since the date as of which such number ofoutstanding shares of Common Stock was reported.

 

d)             Mechanicsof Conversion 

 

i.                                          ConversionShares Issuable Upon Conversion of Principal Amount.  The number of shares of Common Stock issuableupon a conversion hereunder shall be determined by the quotient obtained bydividing (x) the outstanding principal amount of this Debenture to be convertedby (y) the Conversion Price.

 

ii.                                       Deliveryof Certificate Upon Conversion. Not later thanthree Trading Days after any Conversion Date, the Company will deliver to theHolder a certificate or certificates representing the Conversion Shares whichshall be free of restrictive legends and trading restrictions (other than thoserequired by the Purchase Agreement or applicable law) representing the numberof shares of Common Stock being acquired upon the conversion of Debentures. TheCompany shall, if available and if allowed under applicable securities laws,use its commercially reasonable efforts to deliver any certificate orcertificates required to be delivered by the Company under this Section electronicallythrough the Depository Trust Corporation or another established clearingcorporation performing similar functions.

 

iii.                                    Failureto Deliver Certificates.  If suchcertificate or certificates are not delivered to or as directed by theapplicable Holder by the third Trading Day after a Conversion Date, the Holdershall be entitled by written notice to the Company at any time on or before itsreceipt of such certificate or certificates thereafter, to rescind suchconversion, in which event the Company shall immediately return the certificaterepresenting the principal amount of Debentures tendered for conversion, if itwas delivered to the Company by the Holder, and the Holder shall immediatelyreturn any stock certificates representing Conversion Shares from suchrescinded conversion to the Company.

 

iv.                                   PartialLiquidated Damages.  If the Companyfails for any reason to deliver to the Holder such certificate or certificatespursuant to Section 4(d)(ii) by the thirdTrading Day after the Conversion Date, the Company shall pay to such Holder, incash, as liquidated damages and not as a penalty, for each $1000

 

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of principalamount being converted, $10 per Trading Day (increasing to $20 per Trading Dayafter 5 Trading Days after such damages begin to accrue) for each Trading Dayafter such third Trading Day until such certificates are delivered.  The Company’s obligations to issue anddeliver the Conversion Shares upon conversion of this Debenture in accordancewith the terms hereof are absolute and unconditional, irrespective of anyaction or inaction by the Holder to enforce the same, any waiver or consentwith respect to any provision hereof, the recovery of any judgment against anyPerson or any action to enforce the same, or any setoff, counterclaim,recoupment, limitation or termination, or any breach or alleged breach by theHolder or any other Person of any obligation to the Company or any violation oralleged violation of law by the Holder or any other person, and irrespective ofany other circumstance which might otherwise limit such obligation of theCompany to the Holder in connection with the issuance of such ConversionShares; provided, however, such delivery shall not operate as awaiver by the Company of any such action the Company may have against theHolder.  In the event a Holder of thisDebenture shall elect to convert any or all of the outstanding principal amounthereof, the Company may not refuse conversion based on any claim that theHolder or any one associated or affiliated with the Holder has been engaged inany violation of law, agreement or for any other reason, unless, an injunctionfrom a court, on notice, restraining and or enjoining conversion of all or partof this Debenture shall have been sought and obtained and the Company posts asurety bond for the benefit of the Holder in the amount equal to the principalamount of this Debenture outstanding, which is subject to the injunction, whichbond shall remain in effect until the completion of arbitration/litigation ofthe dispute and the proceeds of which shall be payable to such Holder to theextent it obtains judgment.  In theabsence of an injunction precluding the same, the Company shall issueConversion Shares or, if applicable, cash, upon a properly noticedconversion.  Nothing herein shall limit aHolder’s right to pursue actual damages or declare an Event of Default pursuantto Section 8 herein for the Company’s failure to deliver Conversion Shareswithin the period specified herein and such Holder shall have the right topursue all remedies available to it at law or in equity including, without limitation,a decree of specific performance and/or injunctive relief.  The exercise of any such rights shall notprohibit the Holders from seeking to enforce damages pursuant to any other Section hereofor under applicable law.

 

v.                                      Failureto Timely Deliver Certificates Upon Conversion. Inaddition to any other rights available to the Holder, if the Company fails forany reason to deliver to the Holder such certificate or certificates pursuantto Section 4(d)(ii) by the third Trading Day after the Conversion Date,and if after such third Trading Day the Holder is required by its brokeragefirm to purchase, or its brokerage firm purchases (in an open markettransaction or otherwise) Common Stock to deliver in satisfaction of a sale bysuch Holder of the Conversion Shares which the Holder anticipated receivingupon such conversion (a “Buy-In”), then the Company shall (A) payin cash to the Holder (in addition to any remedies

 

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available to or elected by the Holder) theamount by which (x) the Holder’s total purchase price (including brokeragecommissions, if any) for the Common Stock so purchased exceeds (y) the productof (1) the aggregate number of shares of Common Stock that such Holderanticipated receiving from the conversion at issue multiplied by (2) theactual sale price of the Common Stock at the time of the sale (includingbrokerage commissions, if any) giving rise to such purchase obligation and (B) atthe option of the Holder, either reissue Debentures in principal amount equalto the principal amount of the attempted conversion or deliver to the Holderthe number of shares of Common Stock that would have been issued had theCompany timely complied with its delivery requirements under Section 4(d)(ii).  For example, if the Holder purchases CommonStock having a total purchase price of $11,000 to cover a Buy-In with respectto an attempted conversion of Debentures with respect to which the actual saleprice of the Conversion Shares at the time of the sale (including brokeragecommissions, if any) giving rise to such purchase obligation was a total of$10,000 under clause (A) of the immediately preceding sentence, theCompany shall be required to pay the Holder $1,000.  The Holder shall provide the Company writtennotice indicating the amounts payable to the Holder in respect of theBuy-In.  Notwithstanding anythingcontained herein to the contrary, if a Holder requires the Company to makepayment in respect of a Buy-In for the failure to timely deliver certificateshereunder and the Company timely pays in full such payment, the Company shallnot be required to pay such Holder liquidated damages under Section 4(d)(iv) in respect of the certificates resulting in suchBuy-In.

 

vi.                                   Reservationof Shares Issuable Upon Conversion. The Companycovenants that it will at all times reserve and keep available out of itsauthorized and unissued shares of Common Stock solely for the purpose ofissuance upon conversion of the Debentures free from preemptive rights or anyother actual contingent purchase rights of persons other than the Holders, notless than such number of shares of the Common Stock as shall (subject to anyadditional requirements of the Company as to reservation of such shares setforth in the Purchase Agreement) be issuable (taking into account theadjustments and restrictions of Section 5) upon the conversion of theoutstanding principal amount of the Debentures. The Company covenants that all shares of Common Stock that shall be soissuable shall, upon issue, be duly and validly authorized, issued and fullypaid, nonassessable and, if the Registration Statement is then effective underthe Securities Act, registered for public resale in accordance with suchRegistration Statement.

 

vii.                                FractionalShares. Upon a conversion hereunder the Company shall not be required toissue stock certificates representing fractions of shares of the Common Stock,but may if otherwise permitted, make a cash payment inrespect of any final fraction of a share based on the Closing Price at suchtime.  If the Company elects not, or isunable, to make such a cash payment, the Holder

 

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shall be entitledto receive, in lieu of the final fraction of a share, one whole share of CommonStock.

 

viii.                             TransferTaxes.  The issuance of certificatesfor shares of the Common Stock on conversion of the Debentures shall be madewithout charge to the Holders thereof for any documentary stamp or similartaxes that may be payable in respect of the issue or delivery of suchcertificate, provided that the Company shall not be required to pay any taxthat may be payable in respect of any transfer involved in the issuance anddelivery of any such certificate upon conversion in a name other than that of theHolder of such Debentures so converted and the Company shall not be required toissue or deliver such certificates unless or until the person or personsrequesting the issuance thereof shall have paid to the Company the amount ofsuch tax or shall have established to the satisfaction of the Company that suchtax has been paid.

 

Section 5.                                            Certain Adjustments.

 

a)                                      StockDividends and Stock Splits.  If theCompany, at any time while the Debentures are outstanding: (A) shall pay astock dividend or otherwise make a distribution or distributions on shares ofits Common Stock or any other equity or equity equivalent securities payable inshares of Common Stock (which, for avoidance of doubt, shall not include anyshares of Common Stock issued by the Company pursuant to this Debenture, theWarrants or the Additional Investment Rights), (B) subdivide outstandingshares of Common Stock into a larger number of shares, (C) combine(including by way of reverse stock split) outstanding shares of Common Stockinto a smaller number of shares, or (D) issue by reclassification ofshares of the Common Stock any shares of capital stock of the Company, then theConversion Price shall be multiplied by a fraction of which the numerator shallbe the number of shares of Common Stock (excluding treasury shares, if any)outstanding before such event and of which the denominator shall be the numberof shares of Common Stock outstanding after such event.  Any adjustment made pursuant to this Section shallbecome effective immediately after the record date for the determination ofstockholders entitled to receive such dividend or distribution and shall becomeeffective immediately after the effective date in the case of a subdivision,combination or re-classification.

 

b)                                     SubsequentEquity Sales.  If the Company or anySubsidiary thereof, as applicable, at any time while Debentures areoutstanding, shall offer, sell, grant any option to purchase or offer, sell orgrant any right to reprice its securities, or otherwise dispose of or issue (orannounce any offer, sale, grant or any option to purchase or other disposition)any Common Stock or Common Stock Equivalents entitling any Person to acquireshares of Common Stock, at an effective price per share less than the thenConversion Price (“Dilutive Issuance”), as adjusted hereunder (if theholder of the Common Stock or Common Stock Equivalents so issued shall at anytime, whether by operation of purchase price adjustments, reset provisions,floating conversion, exercise or exchange prices or otherwise, or due towarrants, options or rights per share which is

 

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issued in connection with such issuance, beentitled to receive shares of Common Stock at an effective price per sharewhich is less than the Conversion Price, such issuance shall be deemed to haveoccurred for less than the Conversion Price), then the Conversion Price shallbe reduced to equal the effective conversion, exchange or purchase price forsuch Common Stock or Common Stock Equivalents (including any reset provisionsthereof) at issue.  Such adjustment shallbe made whenever such Common Stock or Common Stock Equivalents are issued.  The Company shall notify the Holder inwriting, no later than the business day following the issuance of any CommonStock or Common Stock Equivalents subject to this section, indicating thereinthe applicable issuance price, or of applicable reset price, exchange price,conversion price and other pricing terms.

 

c)                                      ProRata Distributions. If the Company, at any time while Debentures areoutstanding, shall distribute to all holders of Common Stock (and not toHolders) evidences of its indebtedness or assets or rights or warrants tosubscribe for or purchase any security, then in each such case the ConversionPrice shall be determined by multiplying such Conversion Price in effectimmediately prior to the record date fixed for determination of stockholdersentitled to receive such distribution by a fraction of which the denominatorshall be the Closing Price determined as of the record date mentioned above,and of which the numerator shall be such Closing Price on such record date lessthe then fair market value at such record date of the portion of such assets orevidence of indebtedness so distributed applicable to one outstanding share ofthe Common Stock as determined by the Board of Directors in good faith.  In either case the adjustments shall bedescribed in a statement provided to the Holders of the portion of assets orevidences of indebtedness so distributed or such subscription rights applicableto one share of Common Stock.  Suchadjustment shall be made whenever any such distribution is made and shallbecome effective immediately after the record date mentioned above.

 

d)                                     Calculations.  All calculations under this Section 5shall be made to the nearest cent or the nearest 1/100th of a share, as thecase may be.  For purposes of this Section 5,the number of shares of Common Stock outstanding as of a given date shall bethe sum of the number of shares of Common Stock (excluding treasury shares, ifany) outstanding.

 

e)                                      Noticeto Holders.

 

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

 

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possibleadjustment price in the case of an MFN Transaction (as defined in the PurchaseAgreement).

 

ii.                                       Noticeto Allow Conversion by Holder.  If (A) theCompany shall declare a dividend (or any other distribution) on the CommonStock; (B) the Company shall declare a special nonrecurring cash dividendon or a redemption of the Common Stock; (C) the Company shall authorizethe granting to all holders of the Common Stock rights or warrants to subscribefor or purchase any shares of capital stock of any class or of any rights; (D) theapproval of any stockholders of the Company shall be required in connectionwith any reclassification of the Common Stock, any consolidation or merger towhich the Company is a party, any sale or transfer of all or substantially allof the assets of the Company, of any compulsory share exchange whereby theCommon Stock is converted into other securities, cash or property; (E) theCompany shall authorize the voluntary or involuntary dissolution, liquidationor winding up of the affairs of the Company; then, in each case, the Companyshall cause to be filed at each office or agency maintained for the purpose ofconversion of the Debentures, and shall cause to be mailed to the Holders attheir last addresses as they shall appear upon the stock books of the Company,at least 20 calendar days prior to the applicable record or effective datehereinafter specified, a notice stating (x) the date on which a record is to betaken for the purpose of such dividend, distribution, redemption, rights orwarrants, or if a record is not to be taken, the date as of which the holdersof the Common Stock of record to be entitled to such dividend, distributions,redemption, rights or warrants are to be determined or (y) the date on whichsuch reclassification, consolidation, merger, sale, transfer or share exchangeis expected to become effective or close, and the date as of which it isexpected that holders of the Common Stock of record shall be entitled toexchange their shares of the Common Stock for securities, cash or otherproperty deliverable upon such reclassification, consolidation, merger, sale,transfer or share exchange; provided, that the failure to mail suchnotice or any defect therein or in the mailing thereof shall not affect thevalidity of the corporate action required to be specified in such notice.  Holders are entitled to convert Debenturesduring the 20-day period commencing the date of such notice to the effectivedate of the event triggering such notice.

 

iii.                                    FundamentalTransaction. If, at any time while this Debenture is outstanding, (A) theCompany effects any merger or consolidation of the Company with or into anotherPerson, (B) the Company effects any sale of all or substantially all ofits assets in one or a series of related transactions, (C) any tenderoffer or exchange offer (whether by the Company or another Person) is completedpursuant to which holders of Common Stock are permitted to tender or exchangetheir shares for other securities, cash or property, or (D) the Companyeffects any reclassification of the Common Stock or any compulsory shareexchange pursuant to which the Common Stock is effectively converted into orexchanged for other securities, cash or property (in any such case, a “Fundamental

 

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Transaction”), thenupon any subsequent conversion of this Debenture, the Holder shall have theright to receive, for each Conversion Share that would have been issuable uponsuch conversion absent such Fundamental Transaction, the same kind and amountof securities, cash or property as it would have been entitled to receive uponthe occurrence of such Fundamental Transaction if it had been, immediatelyprior to such Fundamental Transaction, the holder of one share of Common Stock(the “Alternate Consideration”). For purposes of any such conversion, the determination of the ConversionPrice shall be appropriately adjusted to apply to such Alternate Considerationbased on the amount of Alternate Consideration issuable in respect of one shareof Common Stock in such Fundamental Transaction, and the Company shallapportion the Conversion Price among the Alternate Consideration in areasonable manner reflecting the relative value of any different components ofthe Alternate Consideration.  If holdersof Common Stock are given any choice as to the securities, cash or property tobe received in a Fundamental Transaction, then the Holder shall be given thesame choice as to the Alternate Consideration it receives upon any conversionof this Debenture following such Fundamental Transaction.  To the extent necessary to effectuate theforegoing provisions, any successor to the Company or surviving entity in suchFundamental Transaction shall issue to the Holder a new debenture consistentwith the foregoing provisions and evidencing the Holder’s right to convert suchdebenture into Alternate Consideration. The terms of any agreement pursuant towhich a Fundamental Transaction is effected shall include terms requiring anysuch successor or surviving entity to comply with the provisions of thisparagraph (iii) and insuring that this Debenture (or any such replacementsecurity) will be similarly adjusted upon any subsequent transaction analogousto a Fundamental Transaction.

 

iv.                                   ExemptIssuance. Notwithstanding the foregoing, no adjustment will be made underthis Section 5 in respect of an Exempt Issuance.

 

Section 6.                                            RESERVED.

 

Section 7.                                            Negative Covenants. So long as any portion of thisDebenture is outstanding, the Company will not and will not permit any of itsSubsidiaries to directly or indirectly take any of the following actions unlessapproved by the holder(s) of a two-thirds majority of the then-outstandingprincipal amount of all Debentures:

 

a)                                      enterinto, create, incur, assume or suffer to exist any indebtedness or liens of anykind, on or with respect to any of its property or assets now owned orhereafter acquired or any interest therein or any income or profits therefromthat is senior to, in any respect, the Company’s obligations under theDebentures except for Permitted Indebtedness and Permitted Liens describedbelow;

 

b)                                     amend its certificate of incorporation, bylaws or to hercharter documents so as to adversely affect any rights of the Holder (it beingagreed by the Holder that the

 

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proposed amendments to the Company’s Series APreferred Stock and the designation of the proposed Series B PreferredStock shall not be considered as adversely affecting any rights of the Holder);

 

c)                                      repay,repurchase or offer to repay, repurchase or otherwise acquire more than a deminimis number of shares of its Common Stock or other equity securitiesother than as to the Conversion Shares to the extent permitted or requiredunder the Transaction Documents or as otherwise permitted by the TransactionDocuments; or

 

d)                                     enter into any agreement with respect to any of theforegoing.

 

As used herein, “Permitted Indebtedness” shall mean:

 

i.                                          indebtednessexisting as of the date of the Purchase Agreement;

ii.                                       indebtedness,including capitalized lease obligations, incurred by the Company or anysubsidiary for the purpose of financing all or any part of the purchase price ofproperty, plant, equipment or other assets (tangible or intangible) used in thebusiness of the Company or any subsidiary; and

iii.                                    funded indebtednessfrom a non-affiliated lending institution or other third party in an amount notto exceed $5,000,000.

 

As used herein, “Permitted Liens” shall mean:

 

i.                                          liens fortaxes, assessments for governmental charges or claims either not delinquent orcontested in good faith by appropriate proceedings;

ii.                                       statutory liensof landlords, carriers, warehousemen, mechanics, suppliers, materialmen andother liens imposed by law incurred in the ordinary course of business for sumsnot yet delinquent or being contested in good faith;

iii.                                    liens incurredor deposits made in the ordinary course of business in connection with workers’compensation, unemployment insurance and other types of social security, or tosecure the performance of statutory obligations, surety and appeal bonds andother similar obligations;

iv.                                   liens securing anyPermitted Indebtedness; and

v.                                      liens arisingfrom filing Uniform Commercial Code financing statements regarding leases.

 

Section 8.                                            Events of Default.

 

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

 

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i.           any default in the paymentof the principal amount of any Debenture, or liquidated damages in respect of,any Debenture, in each case free of any claim of subordination, as and when thesame shall become due and payable (whether on a Conversion Date or the MaturityDate or by acceleration or otherwise) which default, is not cured, within 3Trading Days;

 

ii.          the Company shall fail toobserve or perform any other covenant or agreement contained in this Debentureor any of the other Transaction Documents (other than a breach by the Companyof its obligations to deliver shares of Common Stock to the Holder uponconversion which breach is addressed in clause (xii) below) which failure isnot cured, if possible to cure, within 10 Trading Days after notice of suchdefault sent by the Holder or by any other holder of Debentures;

 

iii.         a default or event ofdefault (subject to any grace or cure period provided for in the applicableagreement, document or instrument) shall occur under (A) any of theTransaction Documents other than the Debentures, or (B) any other materialagreement, lease, document or instrument to which the Company or any Subsidiaryis bound;

 

iv.        any representation orwarranty made herein, in any other Transaction Document, in any writtenstatement pursuant hereto or thereto, or in any other report, financialstatement or certificate made or delivered to the Holder or any other holder ofDebentures pursuant to the Purchase Agreement shall be untrue or incorrect inany material respect as of the date when made or deemed made;

 

v.         (i) the Company or anyof its Subsidiaries shall commence, or there shall be commenced against theCompany or any such Subsidiary, a case under any applicable bankruptcy orinsolvency laws as now or hereafter in effect or any successor thereto, or theCompany or any Subsidiary commences any other proceeding under anyreorganization, arrangement, adjustment of debt, relief of debtors,dissolution, insolvency or liquidation or similar law of any jurisdictionwhether now or hereafter in effect relating to the Company or any Subsidiarythereof or (ii) there is commenced against the Company or any Subsidiarythereof any such bankruptcy, insolvency or other proceeding which remainsundismissed for a period of 60 days; or (iii) the Company or anySubsidiary thereof is adjudicated by a court of competent jurisdictioninsolvent or bankrupt; or any order of relief or other

 

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order approving any such case or proceeding is entered; or (iv) theCompany or any Subsidiary thereof suffers any appointment of any custodian orthe like for it or any substantial part of its property which continuesundischarged or unstayed for a period of 60 days; or (v) the Company orany Subsidiary thereof makes a general assignment for the benefit of creditors;or (vi) the Company shall fail to pay, or shall state that it is unable topay, or shall be unable to pay, its debts generally as they become due; or (vii) theCompany or any Subsidiary thereof shall call a meeting of its creditors with aview to arranging a composition, adjustment or restructuring of its debts; or (viii) theCompany or any Subsidiary thereof shall by any act or failure to act expresslyindicate its consent to, approval of or acquiescence in any of the foregoing; or(ix) any corporate or other action is taken by the Company or anySubsidiary thereof for the purpose of effecting any of the foregoing;

 

vi.        the Company or anySubsidiary shall default in any of its obligations under any mortgage, creditagreement or other facility, indenture agreement, factoring agreement or otherinstrument under which there may be issued, or by which there may be secured orevidenced any indebtedness for borrowed money or money due under any long termleasing or factoring arrangement of the Company in an amount exceeding$150,000, whether such indebtedness now exists or shall hereafter be createdand such default shall result in such indebtedness becoming or being declareddue and payable prior to the date on which it would otherwise become due andpayable;

 

vii.       the Common Stock shall notbe eligible for quotation on or quoted for trading on a Trading Market andshall not again be eligible for and quoted or listed for trading thereon within10 Trading Days;

 

viii.      the Company shall be a partyto any Change of Control Transaction or Fundamental Transaction (other than aFundamental Transaction undertaken for the purpose of changing the domicile ofthe Company), shall agree to sell or dispose of all or in excess of 33% of itsassets in one or more transactions (whether or not such sale would constitute aChange of Control Transaction), provided, that any license by the Company ofits intellectual property rights shall not be considered a sale or otherdisposal hereunder, or shall redeem or repurchase more than a de minimis numberof its outstanding shares of Common Stock or other equity securities of theCompany (other than redemptions

 

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of Conversion Shares and repurchases of shares of Common Stock or otherequity securities of departing officers and directors of the Company; providedsuch repurchases shall not exceed $100,000, in the aggregate, for all officersand directors during the term of this Debenture);

 

ix.         a RegistrationStatement shall not have been declared effective by the Commission on or priorto the 180th calendar day after the First Closing Date;

 

x.          if, during the EffectivenessPeriod (as defined in the Registration Rights Agreement), the effectiveness ofthe Registration Statement lapses for any reason or the Holder shall not bepermitted to resell Registrable Securities (as defined in the RegistrationRights Agreement) under the Registration Statement, in either case, for morethan 30 consecutive Trading Days or 60 non-consecutive Trading Days during any12 month period; provided, however, that in the event that theCompany is negotiating a merger, consolidation, acquisition or sale of all orsubstantially all of its assets or a similar transaction and in the writtenopinion of counsel to the Company, the Registration Statement, would berequired to be amended to include information concerning such transactions orthe parties thereto that is not available or may not be publicly disclosed atthe time, the Company shall be permitted an additional 10 consecutive Tradingduring any 12 month period relating to such an event;

 

xi.         an Event (as defined in theRegistration Rights Agreement) shall not have been cured to the satisfaction ofthe Holder prior to the expiration of thirty days from the Event Date (asdefined in the Registration Rights Agreement) relating thereto (other than anEvent resulting from a failure of an Registration Statement to be declaredeffective by the Commission on or prior to the Effectiveness Date (as definedin the Registration Rights Agreement), which shall be covered by Section 8(a)(ix);

 

xii.        the Company shall fail forany reason to deliver certificates to a Holder prior to the fifth Trading Dayafter a Conversion Date pursuant to and in accordance with Section 4(d) orthe Company shall provide notice to the Holder, including by way of publicannouncement, at any time, of its intention not to comply with requests forconversions of any Debentures in accordance with the terms hereof; or

 

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xiii.       the Company shall fail forany reason to pay in full the amount of cash due pursuant to a Buy-In within 10Trading Days after notice therefor is delivered hereunder or shall fail to payall amounts owed on account of an Event of Default within 10 Trading Days ofthe date due.

 

b)                                     RemediesUpon Event of Default. If any Event of Defaultoccurs, the full principal amount of this Debenture, together with otheramounts owing in respect thereof, to the date of acceleration shall become, atthe Holder’s election, immediately due and payable in cash.   The aggregate amount payable upon an acceleration by reason of an Event of Default shall beequal to the Mandatory Prepayment Amount. Commencing 5 days after the occurrence of any Event of Default thatresults in the eventual acceleration of this Debenture, the interest rate onthis Debenture shall accrue at the rate of 18% per annum, or such lower maximumamount of interest permitted to be charged under applicable law.  All Debentures for which the full MandatoryPrepayment Amount hereunder shall have been paid in accordance herewith shallpromptly be surrendered to or as directed by the Company.  The Holder need not provide and the Companyhereby waives any presentment, demand, protest or other notice of any kind, andthe Holder may immediately and without expiration of any grace period enforceany and all of its rights and remedies hereunder and all other remediesavailable to it under applicable law. Such declaration may be rescinded and annulled by Holder at any timeprior to payment hereunder and the Holder shall have all rights as a Debentureholder until such time, if any, as the full payment under this Section shallhave been received by it.  No suchrescission or annulment shall affect any subsequent Event of Default or impairany right consequent thereon.

 

Section 9.                                            Miscellaneous.

 

a)                                      Notices.  Any and all notices or other communicationsor deliveries to be provided by the Holders hereunder, including, withoutlimitation, any Notice of Conversion, shall be in writing and deliveredpersonally, by facsimile, sent by a nationally recognized overnight courierservice, addressed to the Company, at the address set forth above, facsimilenumber (281) 466-1480, Attn: Steven B. Rash, or such other address or facsimile number as theCompany may specify for such purposes by notice to the Holders delivered inaccordance with this Section.  Any andall notices or other communications or deliveries to be provided by the Companyhereunder shall be in writing and delivered personally, by facsimile, sent by anationally recognized overnight courier service addressed to each Holder at thefacsimile telephone number or address of such Holder appearing on the books ofthe Company, or if no such facsimile telephone number or address appears, atthe principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall bedeemed given and effective on the earliest of (i) the date oftransmission, if such notice or communication is delivered via facsimile (andthe sender receives a confirmation of successful transmission) at the facsimiletelephone number specified in this Section prior to 5:30 p.m. (NewYork City time), (ii) the date after the date of transmission, if suchnotice or communication is

 

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delivered via facsimile at the facsimiletelephone number specified in this Section later than 5:30 p.m. (NewYork City time) on any date and earlier than 11:59 p.m. (New York Citytime) on such date, (iii) the second Business Day following the date ofmailing, if sent by nationally recognized overnight courier service, or (iv) uponactual receipt by the party to whom such notice is required to be given.

 

b)                                     AbsoluteObligation. Except as expressly provided herein, no provision of thisDebenture shall alter or impair the obligation of the Company, which isabsolute and unconditional, to pay the principal of and liquidated damages (ifany) on, this Debenture at the time, place, and rate, and in the coin orcurrency, herein prescribed.  ThisDebenture is a direct debt obligation of the Company.  This Debenture ranks paripassuwith all other Debentures now or hereafter issued under the terms set forthherein.

 

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

 

d)                                     GoverningLaw.  All questions concerning theconstruction, validity, enforcement and interpretation of this Debenture shallbe governed by and construed and enforced in accordance with the internal lawsof the State of New York, without regard to the principles of conflicts of lawthereof.  Each party agrees that alllegal proceedings concerning the interpretations, enforcement and defense ofthe transactions contemplated by any of the Transaction Documents (whetherbrought against a party hereto or its respective affiliates, directors,officers, shareholders, employees or agents) shall be commenced in the stateand federal courts sitting in the City of New York, Borough of Manhattan (the “NewYork Courts”).  Each party heretohereby irrevocably submits to the exclusive jurisdiction of the New York Courtsfor the adjudication of any dispute hereunder or in connection herewith or withany transaction contemplated hereby or discussed herein (including with respectto the enforcement of any of the Transaction Documents), and hereby irrevocablywaives, and agrees not to assert in any suit, action or proceeding, any claimthat it is not personally subject to the jurisdiction of any such court, or suchNew York Courts are improper 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 a copy thereof via registered or certified mailor overnight delivery (with evidence of delivery) to such party at the addressin effect for notices to it under this Debenture and agrees that such serviceshall constitute good and sufficient 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 by law.Each party hereto hereby irrevocably waives, to the fullest extent permitted byapplicable law, any and all right to trial by jury in any legal proceedingarising out of or relating to this Debenture or the transactions contemplated

 

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hereby. If eitherparty shall commence an action or proceeding to enforce any provisions of thisDebenture, then the prevailing party in such action or proceeding shall bereimbursed by the other party for its attorneys feesand other costs and expenses incurred with the investigation, preparation andprosecution of such action or proceeding.

 

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

 

f)                                        Severability.  If any provision of this Debenture isinvalid, illegal or unenforceable, the balance of this Debenture shall remainin effect, and if any provision is inapplicable to any person or circumstance,it shall nevertheless remain applicable to all other persons andcircumstances.  If it shall be found thatany interest or other amount deemed interest due hereunder violates applicablelaws governing usury, the applicable rate of interest due hereunder shallautomatically be lowered to equal the maximum permitted rate of interest. TheCompany covenants (to the extent that it may lawfully do so) that it shall notat any time insist upon, plead, or in any manner whatsoever claim or take thebenefit or advantage of, any stay, extension or usury law or other law whichwould prohibit or forgive the Company from paying all or any portion of theprincipal of or interest on this Debenture as contemplated herein, whereverenacted, now or at any time hereafter in force, or which may affect thecovenants or the performance of this indenture, and the Company (to the extentit may lawfully do so) hereby expressly waives all benefits or advantage of anysuch law, and covenants that it will not, by resort to any such law, hinder,delay or impeded the execution of any power herein granted to the Holder, butwill suffer and permit the execution of every such as though no such law hasbeen enacted.

 

g)                                     NextBusiness Day.  Whenever any paymentor other obligation hereunder shall be due on a day other than a Business Day,such payment shall be made on the next succeeding Business Day and no interestshall be payable in respect of such extension.

 

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

 

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

 

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IN WITNESS WHEREOF, the Company has causedthis Convertible Debenture to be duly executed by a duly authorized officer asof the date first above indicated.

 

 
|   | **POWER 3 MEDICAL  PRODUCTS, INC.** |
|--------|-------------------------------------|
|   |                                |
|   |                                |
|   | By:                            | /s/: Steven B. Rash |   |
|   |                                | Name:  Steven B. Rash |   |
|   |                                | Title:  Chairman and CEO |   |

 

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**ANNEX A**

 

**NOTICE OF CONVERSION**

 

The undersigned hereby elects to convert principal under theConvertible Debenture of Power 3 Medical Products, Inc., a New Yorkcorporation (the “Company”), due on October        , 2007, intoshares of common stock, par value $0.001per share (the “Common Stock”), of the Company according to theconditions hereof, as of the date written below.  If shares are to be issued in the name of aperson other than the undersigned, the undersigned will pay all transfer taxespayable with respect thereto and is delivering herewith such certificates andopinions as reasonably requested by the Company in accordance therewith.  No fee will be charged to the holder for anyconversion, except for such transfer taxes, if any.

 

By the delivery of this Notice of Conversion the undersigned representsand warrants to the Company that its ownership of the Common Stock does notexceed the amounts determined in accordance with Section 13(d) of theExchange Act, specified under Section 4 of this Debenture.

 

The undersigned agrees to comply with the prospectus deliveryrequirements under the applicable securities laws in connection with anytransfer of the aforesaid shares of Common Stock.

 

Conversion calculations:

 

Date to Effect Conversion:

 

Principal Amount of Debentures to be Converted:

 

Number of shares of Common Stock to be issued:

 

 

Signature:

 

Name:

 

Address:

 

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**Schedule 1**

 

**CONVERSION SCHEDULE**

 

The Convertible Debentures due on October      ,2007, in the aggregate principal amount of $                          issued by Power 3 Medical Products, Inc., a New York corporation.  This Conversion Schedule reflectsconversions made under Section 4 of the above referenced Debenture.

 

Dated:

 
| **Date of Conversion  (or for first entry,  Original Issue Date)** | ** ** | **Amount of  Conversion** | ** ** | **Aggregate  Principal  Amount  Remaining  Subsequent to  Conversion  (or original  Principal  Amount)** | ** ** | **Company Attest** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
|                                                               |       |                      |       |                                                                                                     |       |               |       |
|                                                               |       |                      |       |                                                                                                     |       |               |       |
|                                                               |       |                      |       |                                                                                                     |       |               |       |
|                                                               |       |                      |       |                                                                                                     |       |               |       |

 

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SCHEDULE TO

FORM OF CONVERTIBLE DEBENTURE

 

The Company has issued Convertible Debentures Due October 28, 2007 to the following listed holders. The terms of the Convertible Debentures issued by the Company to each of the following holders are identical except for the name of the holder and the original principal amount of the Convertible Debenture.

 
| **HOLDER**                                   | ** ** | **ORIGINAL PRINCIPAL AMOUNT** | ** ** |
|----------------------------------------------|------------|-------------------------------|------------|
| ** **                                   | ** ** | ** **                    | ** ** |
| Cityplatz  Limited                           |       | $                             | 50,000     |   |
|                                         |       |                          |       |
| Crescent  International Ltd.                 |       | $                             | 200,000    |   |
|                                         |       |                          |       |
| Crestview  Capital Master, LLC               |       | $                             | 150,000    |   |
|                                         |       |                          |       |
| DKR  SoundShore Oasis Holding Fund Ltd.      |       | $                             | 50,000     |   |
|                                         |       |                          |       |
| Gryphon  Master Fund L.P.                    |       | $                             | 100,000    |   |
|                                         |       |                          |       |
| GSSF Master  Fund, LP                        |       | $                             | 100,000    |   |
|                                         |       |                          |       |
| Mohawk  Funding                              |       | $                             | 10,000     |   |
|                                         |       |                          |       |
| Omicron  Master Trust                        |       | $                             | 100,000    |   |
|                                         |       |                          |       |
| Otape Investments  LLC                       |       | $                             | 100,000    |   |
|                                         |       |                          |       |
| Platinum  Partners Value Arbitrage Fund L.P. |       | $                             | 83,333     |   |
|                                         |       |                          |       |
| Richard  Molinsky                            |       | $                             | 30,000     |   |
|                                         |       |                          |       |
| Sage Capital  Investments Limited            |       | $                             | 25,000     |   |
|                                         |       |                          |       |
| Bach Farms  LLC                              |       | $                             | 1,667      |   |

 

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