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                                                                     EXHIBIT 4.9

                            TERMS OF PREFERRED STOCK

     Section 1. Designation, Amount and Par Value. The series of preferred stock
shall be designated as 5% Series [ ] Preferred Stock (the "Preferred Stock") and
the number of shares so designated shall be [ ] (which shall not be subject to
increase without the consent of the holders of the Preferred Stock (each, a
"Holder" and collectively, the "Holders")); Each share of Preferred Stock shall
have a par value of $.001 and a stated value of $10,000 (the "Stated Value").

     Section 2. Dividends.

     (a) Holders shall be entitled to receive, when and as declared by the Board
of Directors out of funds legally available therefor, and the Corporation shall
pay, cumulative dividends at the rate per share (as a percentage of the Stated
Value per share) equal to 5% per annum, payable, subject to the provisions of
this Section 2(a), on each yearly anniversary of the Original Issue Date (as
defined in Section 8) while such share is outstanding (each a "Dividend Payment
Date") and on each Conversion Date (as defined herein) for such share,
commencing on the earlier to occur of the Conversion Date for such share and the
first Dividend Payment Date following the Original Issue Date, in cash or shares
of Common Stock (as defined in Section 8). Subject to the terms and conditions
herein, the decision whether to pay dividends hereunder in Common Stock or cash
shall be at the discretion of the Corporation. Dividends on the Preferred Stock
shall be calculated on the basis of a 360-day year, shall accrue daily
commencing on the Original Issue Date and shall be deemed to accrue from such
date whether or not earned or declared and whether or not there are profits,
surplus or other funds of the Corporation legally available for the payment of
dividends. A party that holds shares of Preferred Stock on the record date with
respect to a Dividend Payment Date will be entitled to receive such dividend
payment and any other accrued and unpaid dividends which accrued prior to such
Dividend Payment Date, without regard to any sale or disposition of such
Preferred Stock subsequent to the applicable record date. Except as otherwise
provided herein, if at any time the Corporation pays less than the total amount
of dividends then accrued on account of the Preferred Stock, such payment shall
be distributed ratably among the Holders based upon the number of shares of
Preferred Stock held by each Holder. The Corporation shall provide the Holders
notice of its intention to pay dividends in cash or shares of Common Stock not
less than 10 Trading Days (as defined in Section 8) prior to any Dividend
Payment Date, it being understood that a failure of the Corporation to timely
provide such notice shall be deemed an election (if permitted hereunder) to pay
such dividends in shares of Common Stock pursuant to the terms hereof. If the
Corporation has properly elected, and is permitted hereunder, to pay dividends
in shares of Common Stock, then such dividends will be due and payable on each
Conversion Date for the applicable shares of Preferred Stock (and not on each
Dividend Payment Date) and the number of shares of Common Stock issuable on
account of such dividend shall equal the cash amount of such dividend on such
Conversion Date divided by the Conversion Price (as defined below) on such date.
Any dividends to be paid in cash hereunder that are not paid on a Dividend
Payment Date shall continue to accrue and shall entail a late fee, which must be
paid in cash, at the rate of 15% per annum or the maximum amount that is
permitted by applicable law, whichever is less (such fees to accrue daily, from
the date such dividend is due hereunder through and including the date of
payment).
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     (b) Notwithstanding anything to the contrary contained herein, the
Corporation may not issue shares of Common Stock in payment of dividends on the
Preferred Stock (and must deliver cash in respect thereof) if:

         (i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes is insufficient to pay such dividends
in shares of Common Stock;

         (ii) after the Dividend Effectiveness Date (as defined in Section 8),
such shares (x) are not registered for resale pursuant to an effective
Underlying Securities Registration Statement (as defined in Section 8) and (y)
may not be sold without volume restrictions pursuant to Rule 144 promulgated
under the Securities Act (as defined in Section 8), as determined by counsel to
the Corporation pursuant to a written opinion letter, addressed to the
Corporation's transfer agent in the form and substance acceptable to the
applicable Holder and such transfer agent;

         (iii) such shares are not then listed or quoted on the Nasdaq National
Market (the "NASDAQ"), or on the New York Stock Exchange, American Stock
Exchange or Nasdaq SmallCap Market (each, a "Subsequent Market");

         (iv) the Corporation has failed to timely satisfy its conversion
obligations hereunder; or

         (v) the issuance of such shares would result in a violation of Section
5(a)(iii).

     (c) So long as any Preferred Stock shall remain outstanding, neither the
Corporation nor any subsidiary thereof shall redeem, purchase or otherwise
acquire directly or indirectly any Junior Securities (as defined in Section 8),
nor shall the Corporation directly or indirectly pay or declare any dividend or
make any distribution (other than dividends due and paid in the ordinary course
on preference shares of the Corporation at such times when the Corporation is in
compliance with its payment and other obligations hereunder) upon, nor shall any
distribution be made in respect of, any Junior Securities, nor shall any monies
be set aside for or applied to the purchase or redemption (through a sinking
fund or otherwise) of any Junior Securities.

     Section 3. Voting Rights. Except as otherwise provided herein and as
otherwise required by law, the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, the
Corporation shall not, without the affirmative vote of the Holders of all of the
shares of the Preferred Stock then outstanding, alter or change adversely the
powers, preferences or rights given to the Preferred Stock or alter or amend
this Certificate of Designation, authorize or create any class of stock ranking
as to dividends or distribution of assets upon a Liquidation (as defined in
Section 4) senior to or otherwise pari passu with the Preferred Stock, amend its
certificate of incorporation or other charter documents so as to affect
adversely any rights of the Holders, increase the authorized number of shares of
Preferred Stock, or (e) enter into any agreement with respect to the foregoing
that is not conditioned upon the receipt of an affirmative vote pursuant to this
Section.

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     Section 4. Liquidation. Upon any liquidation, dissolution or winding-up of
the Corporation, whether voluntary or involuntary (a "Liquidation"), the Holders
shall be entitled to receive out of the assets of the Corporation, whether such
assets are capital or surplus, for each share of Preferred Stock an amount equal
to the Stated Value plus all due but unpaid dividends per share, whether
declared or not, before any distribution or payment shall be made to the holders
of any Junior Securities, and if the assets of the Corporation shall be
insufficient to pay in full such amounts, then the entire assets to be
distributed to the Holders shall be distributed among the Holders ratably in
accordance with the respective amounts that would be payable on such shares if
all amounts payable thereon were paid in full. A sale, conveyance or disposition
of all or substantially all of the assets of the Corporation or the effectuation
by the Corporation of a transaction or series of related transactions in which
more than 33% of the voting power of the Corporation is disposed of, or a
consolidation or merger of the Corporation with or into any other company or
companies shall not be treated as a Liquidation, but instead shall be subject to
the provisions of Section 5. The Corporation shall mail written notice of any
such Liquidation, not less than 45 days prior to the payment date stated
therein, to each record Holder.

     Section 5. Conversion.

         (a) (i) (i) Conversions at Option of Holder. Each share of Preferred
Stock shall be convertible into shares of Common Stock (subject to the
limitations set forth in Section 5(a)(iii) hereof) at the Conversion Ratio (as
defined in Section 8) at the option of the Holder, at any time and from time to
time, from and after the Original Issue Date. Holders shall effect conversions
by surrendering the certificate or certificates representing the shares of
Preferred Stock to be converted to the Corporation, together with the form of
conversion notice attached hereto as Exhibit A (a "Conversion Notice"),
provided, that Holders shall not be required to surrender any such certificate
if the Corporation has failed to deliver such certificate to the Holders
pursuant to the Purchase Agreement prior the applicable Conversion Date. Each
Conversion Notice shall specify the number of shares of Preferred Stock to be
converted and the date on which such conversion is to be effected, which date
may not be prior to the date the Holder delivers such Conversion Notice by
facsimile (the "Conversion Date"). If no Conversion Date is specified in a
Conversion Notice, the Conversion Date shall be the date that the Conversion
Notice is deemed delivered hereunder. If the Holder is converting less than all
shares of Preferred Stock represented by the certificate or certificates
tendered by the Holder with the Conversion Notice, or if a conversion hereunder
cannot be effected in full for any reason, the Corporation shall promptly
deliver to such Holder (in the manner and within the time set forth in Section
5(b)) a certificate representing the number of shares of Preferred Stock as have
not been converted.

         (ii) Automatic Conversion. Subject to the provisions in this paragraph,
all outstanding shares of Preferred Stock for which conversion notices have not
previously been received or for which redemption has not been made or required
hereunder shall be automatically converted on the fifth anniversary of the
Closing Date (as defined in Section 8). The conversion contemplated by this
paragraph shall not occur at such time as (a) (1) an Underlying Securities
Registration Statement is not then effective or (2) the Holder is not permitted
to resell Underlying Shares (as defined in Section 8) pursuant to Rule 144(k)
promulgated under the Securities Act, without volume restrictions, as evidenced
by an opinion letter of counsel

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acceptable to the Holder and the transfer agent for the Common Stock; (b) there
are not sufficient shares of Common Stock authorized and reserved for issuance
upon such conversion; or (c) the Corporation shall have defaulted on its
covenants and obligations hereunder or under the Purchase Agreement (as defined
in Section 8) or Registration Rights Agreement (as defined in Section 8).
Notwithstanding the foregoing, the five-year period for conversion under this
Section shall be extended (on a day-for-day basis) for any Trading Days after
the date that the Commission declares effective an Underlying Securities
Registration Statement that a Holder is both unable to resell Underlying Shares
pursuant to Rule 144(k) promulgated under the Securities Act, without volume
restrictions and unable to resell Underlying Shares under an Underlying
Securities Registration Statement due to (a) the Common Stock not being listed
for trading on the NASDAQ or any Subsequent Market, (b) the failure of such
Underlying Securities Registration Statement to remain effective during the
Effectiveness Period (as defined in the Registration Rights Agreement) as to all
Underlying Shares; or (c) the suspension of the Holder's ability to resell
Underlying Shares thereunder. Notwithstanding anything to the contrary contained
herein, a conversion pursuant to this Section shall not be subject to the
provisions of Section 5(a)(iii)(A) and (B).

         (iii) Certain Conversion Restrictions.

               (A) A Holder may not convert shares of Preferred Stock or receive
shares of Common Stock as payment of dividends hereunder to the extent such
conversion or receipt of such dividend payment would result in the Holder,
together with any affiliate thereof, beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act (as defined in Section 8) and
the rules promulgated thereunder) in excess of 4.999% of the then issued and
outstanding shares of Common Stock, including shares issuable upon conversion
of, and payment of dividends on, the shares of Preferred Stock held by such
Holder after application of this Section. Since the Holder will not be obligated
to report to the Corporation the number of shares of Common Stock it may hold at
the time of a conversion hereunder, unless the conversion at issue would result
in the issuance of shares of Common Stock in excess of 4.999% of the then
outstanding shares of Common Stock without regard to any other shares which may
be beneficially owned by the Holder or an affiliate thereof, the Holder shall
have the authority and obligation to determine whether the restriction contained
in this Section will limit any particular conversion hereunder and to the extent
that the Holder determines that the limitation contained in this Section
applies, the determination of which portion of the shares of Preferred Stock are
convertible shall be the responsibility and obligation of the Holder. If the
Holder has delivered a Conversion Notice for shares of Preferred Stock that,
without regard to any other shares that the Holder or its affiliates may
beneficially own, would result in the issuance in excess of the permitted amount
hereunder, the Corporation shall notify the Holder of this fact and shall honor
the conversion for the maximum number of shares of Preferred Stock permitted to
be converted on such Conversion Date in accordance with the periods described in
Section 5(b) and, at the option of the Holder, either retain shares of Preferred
Stock tendered for conversion in excess of the permitted amount hereunder for
future conversions or return such excess shares of Preferred Stock permitted to
the Holder. The provisions of this Section may be waived by a Holder (but only
as to itself and not to any other Holder) upon not less than 61 days prior
notice to the Corporation. Other Holders shall be unaffected by any such waiver.

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               (B) A Holder may not convert shares of Preferred Stock or receive
shares of Common Stock as payment of dividends hereunder to the extent such
conversion or receipt of such dividend payment would result in the Holder,
together with any affiliate thereof, beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules promulgated
thereunder) in excess of 9.999% of the then issued and outstanding shares of
Common Stock, including shares issuable upon conversion of, and payment of
dividends on, the shares of Preferred Stock held by such Holder after
application of this Section. Since the Holder will not be obligated to report to
the Corporation the number of shares of Common Stock it may hold at the time of
a conversion hereunder, unless the conversion at issue would result in the
issuance of shares of Common Stock in excess of 9.999% of the then outstanding
shares of Common Stock without regard to any other shares which may be
beneficially owned by the Holder or an affiliate thereof, the Holder shall have
the authority and obligation to determine whether the restriction contained in
this Section will limit any particular conversion hereunder and to the extent
that the Holder determines that the limitation contained in this Section
applies, the determination of which portion of the shares of Preferred Stock are
convertible shall be the responsibility and obligation of the Holder. If the
Holder has delivered a Conversion Notice for shares of Preferred Stock that,
without regard to any other shares that the Holder or its affiliates may
beneficially own, would result in the issuance in excess of the permitted amount
hereunder, the Corporation shall notify the Holder of this fact and shall honor
the conversion for the maximum number of shares of Preferred Stock permitted to
be converted on such Conversion Date in accordance with the periods described in
Section 5(b) and, at the option of the Holder, either retain shares of Preferred
Stock tendered for conversion in excess of the permitted amount hereunder for
future conversions or return such excess shares of Preferred Stock permitted to
the Holder. The provisions of this Section may be waived by a Holder (but only
as to itself and not to any other Holder) upon not less than 61 days prior
notice to the Corporation. Other Holders shall be unaffected by any such waiver.

               (C) At any time when the Common Stock is listed for trading on
the Nasdaq or the Nasdaq SmallCap Market and the Corporation has not obtained
the Shareholder Approval (as defined below), then the Corporation may not issue
in excess of [ ] shares of Common Stock (which equals 19.999% of the number of
shares of Common Stock outstanding on the Trading Day immediately preceding the
Original Issue Date) (i) upon conversions of shares of Preferred Stock, (ii) as
payment of dividends upon the shares of Preferred Stock, (iii) upon conversions
of debentures issued by the Corporation in accordance with the terms of the
Purchase Agreement (the "Debentures"), and (iv) as payment of interest on the
principal amount outstanding under the Debentures (such number of shares, the
"Issuable Maximum"). If on any Conversion Date: (A) the shares of Common Stock
are listed for trading on the Nasdaq or Nasdaq SmallCap Market, (B) the
Conversion Price then in effect is such that the aggregate number of shares of
Common Stock that would then be issuable upon conversion in full of all then
outstanding shares of Preferred Stock, together with any shares of Common Stock
previously issued (i) upon conversions of shares of Preferred Stock and (ii) as
payment of dividends upon the shares of Preferred Stock, (iii) upon conversion
of Debentures and (iv) as payment of interest on the principal amount
outstanding under the Debentures would exceed the Issuable Maximum, and (C) the
Corporation shall not have previously obtained the vote of shareholders (the
"Shareholder Approval"), if any, as may be required by the applicable rules and
regulations of the Nasdaq (or any successor entity) applicable to approve the
issuance of

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shares of Common Stock in excess of the Issuable Maximum pursuant to the terms
hereof, then the Corporation shall issue to a Holder requesting a conversion a
number of shares of Common Stock equal to the lesser of (x) the number of shares
of Common Stock issuable upon such conversion at the applicable Conversion Price
and (y) such portion of the Issuable Maximum less all shares of Common Stock
previously issued (i) upon conversions of Preferred Stock and (ii) as payment of
dividends upon the shares of Preferred Stock, (iii) upon conversions of
Debentures, and (iv) as payment of interest on the principal amount outstanding
under the Debentures (the "Current Issuable Maximum") as is applicable to the
shares of Preferred Stock to be converted. The Current Issuable Maximum
applicable to each share of Preferred Stock at any time shall be determined pro
rata by reference to the number of shares of Preferred Stock then outstanding.
With respect to the remainder of the aggregate Stated Value of the shares of
Preferred Stock tendered for conversion by such Holder for which a conversion in
accordance with the Conversion Price would result in an issuance of shares of
Common Stock in excess of the Issuable Maximum (the "Excess Stated Value"), the
converting Holder shall have the option to require the Corporation to either (1)
use its best efforts to obtain the Shareholder Approval applicable to such
issuance as soon as is possible, but in any event not later than the 60th day
after such request, or (2) pay cash to the converting Holder in an amount equal
to the Mandatory Redemption Amount (as defined in Section 8) for the Excess
Stated Value. If the converting Holder shall have elected the first option
pursuant to the immediately preceding sentence and the Corporation shall have
failed to obtain the Shareholder Approval on or prior to the 60th day after such
request, then within three (3) days of such 60th day, the Corporation shall pay
cash to the converting Holder an amount equal to the Mandatory Redemption Amount
for the Excess Stated Value. If the Corporation fails to pay the Mandatory
Redemption Amount in full pursuant to this Section within seven days after the
date payable, the Corporation will pay interest thereon at a rate of 18% per
annum or such lesser maximum amount that is permitted to be paid by applicable
law, to the converting Holder, accruing daily from the Conversion Date until
such amount, plus all such interest thereon, is paid in full. The Corporation
and the Holder understand and agree that shares of Common Stock issued to and
then held by the Holder as a result of conversions of Preferred Stock shall not
be entitled to cast votes on any resolution to obtain Shareholder Approval
pursuant hereto.

         (b) (i) (i) Not later than three (3) Trading Days after any Conversion
Date, the Corporation will deliver to the Holder (i) a certificate or
certificates which shall be free of restrictive legends and trading restrictions
(other than those required by Section 4.9 of the Purchase Agreement)
representing the number of shares of Common Stock being acquired upon the
conversion of shares of Preferred Stock (subject to the limitations set forth in
Section 5(a)(iii) hereof), (ii) one or more certificates representing the number
of shares of Preferred Stock not converted, (iii) a bank check in the amount of
accrued and unpaid dividends (if the Corporation has elected to pay accrued
dividends in cash) and the Floor Redemption Price (as defined in Section
5(c)(i)(B), if applicable, and (iv) if the Corporation has elected and is
permitted hereunder to pay accrued dividends in shares of Common Stock,
certificates, which shall be free of restrictive legends and trading
restrictions (other than those required by Section 4.9 of the Purchase
Agreement), representing such shares of Common Stock; provided, however, that
the Corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon conversion of any shares of Preferred Stock
until one Trading Day after certificates evidencing such shares of Preferred
Stock are delivered for conversion to the

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Corporation, or the Holder of such Preferred Stock notifies the Corporation that
such certificates have been lost, stolen or destroyed and provides a bond (or
other adequate security) reasonably satisfactory to the Corporation to indemnify
the Corporation from any loss incurred by it in connection therewith. The
Corporation shall, upon request of the Holder, if available, use its best
efforts to deliver any certificate or certificates required to be delivered by
the Corporation under this Section electronically through the Depository Trust
Corporation or another established clearing corporation performing similar
functions. If in the case of any Conversion Notice such certificate or
certificates, including for purposes hereof, any shares of Common Stock to be
issued on the Conversion Date on account of accrued but unpaid dividends
hereunder, are not delivered to or as directed by the applicable Holder by the
third (3rd) Trading Day after the Conversion Date, the Holder shall be entitled
by written notice to the Corporation at any time on or before its receipt of
such certificate or certificates thereafter, to rescind such conversion, in
which event the Corporation shall immediately return the certificates
representing the shares of Preferred Stock tendered for conversion.

         (ii) If the Corporation fails to deliver to the Holder such certificate
or certificates pursuant to Section 5(b)(i), including for purposes hereof, any
shares of Common Stock to be issued on the Conversion Date on account of accrued
but unpaid dividends hereunder, by the third (3rd) Trading Day after the
Conversion Date, the Corporation shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, $5,000 for each Trading Day after such
third (3rd) Trading Day until such certificates are delivered. Nothing herein
shall limit a Holder's right to pursue actual damages for the Corporation's
failure to deliver certificates representing shares of Common Stock upon
conversion within the period specified herein and such Holder shall have the
right to pursue all remedies available to it at law or in equity including,
without limitation, a decree of specific performance and/or injunctive relief.
The exercise of any such rights shall not prohibit the Holders from seeking to
enforce damages pursuant to any other Section hereof or under applicable law.
Further, if the Corporation shall not have delivered any cash due in respect of
conversions of Preferred Stock or as payment of dividends thereon by the third
(3rd) Trading Day after the Conversion Date, the Holder may, by notice to the
Corporation, require the Corporation to issue shares of Common Stock pursuant to
Section 5(c), except that for such purpose the Conversion Price applicable
thereto shall be the lesser of the Conversion Price on the Conversion Date and
the Conversion Price on the date of such Holder demand. Any such shares will be
subject to the provision of this Section.

         (iii) In addition to any other rights available to the Holder, if the
Corporation fails to deliver to the Holder such certificate or certificates
pursuant to Section 5(b)(i), including for purposes hereof, any shares of Common
Stock to be issued on the Conversion Date on account of accrued but unpaid
dividends hereunder, by the third (3rd) Trading Day after the Conversion Date,
and if after such third (3rd) Trading Day the Holder purchases (in an open
market transaction or otherwise) Common Stock to deliver in satisfaction of a
sale by such Holder of the Underlying Shares which the Holder was entitled to
receive upon such conversion (a "Buy-In"), then the Corporation shall (A) pay in
cash to the Holder (in addition to any remedies available to or elected by the
Holder) the amount by which (x) the Holder's total purchase price (including
brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the
product of (1) the aggregate number of shares of Common Stock that such Holder
was entitled to receive from the conversion at issue multiplied by (2) the
market

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price of the Common Stock at the time of the sale giving rise to such purchase
obligation and (B) at the option of the Holder, either return the shares of
Preferred Stock for which such conversion was not honored or deliver to such
Holder the number of shares of Common Stock that would have been issued had the
Corporation timely complied with its conversion and delivery obligations under
Section 5(b)(i). For example, if the Holder purchases Common Stock having a
total purchase price of $11,000 to cover a Buy-In with respect to an attempted
conversion of shares of Preferred Stock with respect to which the market price
of the Underlying Shares on the date of conversion was a total of $10,000 under
clause (A) of the immediately preceding sentence, the Corporation shall be
required to pay the Holder $1,000. The Holder shall provide the Corporation
written notice indicating the amounts payable to the Holder in respect of the
Buy-In. Notwithstanding anything contained herein to the contrary, if a Holder
requires the Corporation to make payment in respect of a Buy-In for the failure
to timely deliver certificates hereunder and the Corporation timely pays in full
such payment, the Corporation shall not be required to pay such Holder
liquidated damages under Section 5(b)(ii) in respect of the certificates
resulting in such Buy-In.

               (A) [The conversion price for each share of Preferred Stock (the
"Conversion Price") in effect on any Conversion Date shall be 101% of the
average of the ten (10) lowest Per Share Market Values during the thirty (30)
Trading Days immediately preceding the applicable Conversion Date (which, at the
Holder's option, may include Trading Days prior to the Original Issue Date),
provided, that such thirty (30) Trading Day period shall be extended for the
number of Trading Days, if any, during such period in which (A) trading in the
Common Stock is suspended from the NASDAQ or a Subsequent Market on which it is
listed for trading prior to such suspension, or (B) during the Effectiveness
Period (as defined in the Registration Rights Agreement), the Underlying
Securities Registration Statement is not effective, or (C) during the
Effectiveness Period, the Prospectus included in the Underlying Securities
Registration Statement may not be used by the Holder for the resale of
Underlying Shares.](1)

         (c) (i) (i) (A) (A) The conversion price for each share of Preferred
Stock (the "Conversion Price") in effect on any Conversion Date shall be the
lesser of (a) 120% of the Per Share Market Value on the Original Issue Date (the
"Initial Conversion Price") and (b) 101% of the average of the ten (10) lowest
Per Share Market Values during the thirty (30) Trading Days immediately
preceding the applicable Conversion Date (which, at the Holder's option, may
include Trading Days prior to the Original Issue Date), provided, that such
thirty (30) Trading Day period shall be extended for the number of Trading Days,
if any, during such period in which (A) trading in the Common Stock is suspended
from the NASDAQ or a Subsequent Market on which it is listed for trading prior
to such suspension, or (B) during the Effectiveness Period (as defined in the
Registration Rights Agreement), the Underlying Securities Registration Statement
is not effective, or (C) during the Effectiveness Period, the Prospectus
included in the Underlying Securities Registration Statement may not be used by
the Holder for the resale of Underlying Shares, provided, further, that during
the period from the Original Issue Date until

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(1) For Series B Preferred Stock

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the 90th day following the Original Issue Date, the Conversion Price shall be
the Initial Conversion Price.](2)

               (B) If on any Conversion Date, the Conversion Price shall be
lower than $7.00 (which number shall be subject to equitable adjustments for
stock splits, recombinations and similar events) (such Conversion Price, the
"Floor Price" and a Conversion Date on which such condition is met, a "Record
Date"), then the Corporation will have the right, exercisable by delivery of a
written notice to the Holders delivered no later than twenty Trading Days prior
to the Record Date (the "Corporation Notice"), which notice shall remain in
effect until a subsequent such notice is provided by the Corporation to the
Holders, to elect to honor the conversion at issue by either: (x) issuing the
number of shares of Common Stock issuable at the actual Conversion Price
pursuant to Section 5(c)(i)(A), or (y) issue the number of shares of Common
Stock issuable upon the conversion at issue, as if the conversion price
applicable to such conversion was equal to the Floor Price and pay cash, no
later than the third Trading Day following the Record Date, to the Holder, in an
amount equal to the product of (A) the average of the Per Share Market Values
for the five Trading Days preceding the Conversion Date for such conversion and
(B) the number of shares of Common Stock otherwise issuable at the actual
Conversion Price then in effect less the number of shares of Common Stock
issuable upon such conversion at the Floor Price (the "Floor Redemption Price").
Failure by the Corporation to timely deliver the Corporation Notice to the
Holder pursuant to the terms of this Section shall result conclusively be deemed
an election by the Corporation under subsection (x) hereunder. Failure by the
Corporation to pay any portion of the Floor Redemption Price by the third
Trading Day following the applicable Conversion Date shall result in the
invalidation ab initio of the unpaid portion of such optional redemption. In
such event, the Corporation shall, at the option of the Holder, either, (i) not
later than three Trading Days from receipt of Holder's request for such
election, return to the Holder all of the shares of Preferred Stock for which
such Floor Redemption Price has not been paid in full (the "Unpaid Redemption
Shares") or (ii) convert all or any portion of the Unpaid Redemption Shares in
which event the applicable Conversion Price shall be the lower of the Conversion
Price calculated on the date the Floor Redemption Price was originally due and
the Conversion Price as of the Holder's written demand for conversion. If the
Holder elects option (ii) above, the Corporation shall within three Trading Days
of its receipt of such election deliver to the Holder the shares of Common Stock
issuable upon conversion of the Unpaid Redemption Shares subject to such Holder
conversion demand and otherwise perform its obligations hereunder with respect
thereto.

         (ii) [If the Corporation, at any time while any shares of Preferred
Stock are outstanding, shall (a) pay a stock dividend or otherwise make a
distribution or distributions on shares of its Junior Securities or pari passu
securities payable in shares of Common Stock, (b) subdivide outstanding shares
of Common Stock into a larger number of shares, (c) combine outstanding shares
of Common Stock into a smaller number of shares, or (d) issue by
reclassification and exchange of the Common Stock any shares of capital stock of
the Corporation, then the Initial Conversion Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common Stock
outstanding before such event and of which the denominator shall be the number
of shares of Common Stock outstanding after such

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(2) For Series C Preferred Stock

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event. Any adjustment made pursuant to this Section 5(c)(ii) shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.

         (iii) If the Corporation, at any time while shares of Preferred Stock
are outstanding, shall distribute to all holders of Common Stock (and not to
Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security other than with respect to rights granted
pursuant to a stockholders rights plan adopted by the Corporation, then in each
such case the Initial Conversion Price shall be adjusted by multiplying the
Initial Conversion Price in effect immediately prior to the record date fixed
for determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the Per Share Market Value determined
as of the record date mentioned above, and of which the numerator shall be such
Per Share Market Value on such record date less the then fair market value at
such record date of the portion of such assets or evidence of indebtedness or
rights or warrants so distributed applicable to one outstanding share of the
Common Stock as determined by the Board of Directors in good faith. In either
case the adjustments shall be described in a statement provided to the Holders
of the portion of assets or evidences of indebtedness or rights or warrants so
distributed or such subscription rights applicable to one share of Common Stock.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.

         (iv) All calculations under this Section 5 shall be made to the nearest
cent or the nearest 1/100th of a share, as the case may be.

         (v) Whenever the Initial Conversion Price is adjusted pursuant to the
terms hereof, the Corporation shall promptly mail to each Holder, a notice
setting forth the Initial Conversion Price after such adjustment and setting
forth a brief statement of the facts requiring such adjustment.](3)

         (vi) In case of any reclassification of the Common Stock, or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property (other than compulsory share exchanges which
constitute Change of Control Transactions), the Holders of the Preferred Stock
then outstanding shall have the right thereafter to convert such shares only
into the shares of stock and other securities, cash and property receivable upon
or deemed to be held by holders of Common Stock following such reclassification
or share exchange, and the Holders of the Preferred Stock shall be entitled upon
such event to receive such amount of securities, cash or property as a holder of
the number of shares of Common Stock of the Corporation into which such shares
of Preferred Stock could have been converted immediately prior to such
reclassification or share exchange would have been entitled. This provision
shall similarly apply to successive reclassifications or share exchanges.

----------
(3) For Series C Preferred Stock

                                       10
<PAGE>   11
         (vii) If (a) the Corporation shall declare a dividend (or any other
distribution) on the Common Stock, (b) the Corporation shall declare a special
nonrecurring cash dividend on or a redemption of the Common Stock, (c) the
Corporation shall authorize the granting to all holders of Common Stock rights
or warrants to subscribe for or purchase any shares of capital stock of any
class or of any rights, (d) the approval of any stockholders of the Corporation
shall be required in connection with any reclassification of the Common Stock,
any consolidation or merger to which the Corporation is a party, any sale or
transfer of all or substantially all of the assets of the Corporation, of any
compulsory share of exchange whereby the Common Stock is converted into other
securities, cash or property, or (e) the Corporation shall authorize the
voluntary or involuntary dissolution, liquidation or winding up of the affairs
of the Corporation; then the Corporation shall cause to be filed at each office
or agency maintained for the purpose of conversion of Preferred Stock, and shall
cause to be mailed to the Holders at their last addresses as they shall appear
upon the stock books of the Corporation, at least 20 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange. Holders are entitled to convert shares of
Preferred Stock during the 20-day period commencing the date of such notice to
the effective date of the event triggering such notice.

         (viii) In case of the closing of any: (1) merger or consolidation of
the Corporation with or into another Person, or (2) sale by the Corporation of
more than one-half of the assets of the Corporation (on a market value basis) in
one or a series of related transactions, a Holder shall have the right to: (A)
if permitted under Section 7 hereof, exercise its rights of redemption under
Section 7 with respect to such event, or (B) convert its shares of Preferred
Stock into the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following such
merger, consolidation or sale, and such Holder shall be entitled upon conversion
of its shares of Preferred Stock to receive such amount of securities, cash and
property as the shares of Common Stock into which such shares of Preferred Stock
could have been converted immediately prior to such merger, consolidation or
sales would have been entitled. The terms of any such merger, sale or
consolidation shall include such terms so as to continue to give the Holders the
right to receive the securities, cash and property set forth in this Section
upon any conversion or redemption following such event. This provision shall
similarly apply to successive such events.

     (d) The Corporation covenants that it will at all times reserve and keep
available out of its authorized and unissued shares of Common Stock solely for
the purpose of issuance upon conversion of Preferred Stock and payment of
dividends on Preferred Stock, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holders, not less than such number of shares of Common Stock as shall (subject
to any additional requirements of the Corporation as to reservation of such
shares set

                                       11
<PAGE>   12
forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5(a) and Section 5(c)) upon the
conversion of all outstanding shares of Preferred Stock and payment of dividends
hereunder (assuming all such dividends are paid in shares of Common Stock). The
Corporation covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly and validly authorized, issued and fully paid,
nonassessable and freely tradeable, subject to the legend requirements of
Section 4.9 of the Purchase Agreement.

         (e) Upon a conversion hereunder the Corporation shall not be required
to issue stock certificates representing fractions of shares of Common Stock,
but may if otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the Per Share Market Value at such time. If the
Corporation elects not, or is unable, to make such a cash payment, the Holder of
a share of Preferred Stock shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.

         (f) The issuance of certificates for Common Stock on conversion of
Preferred Stock and as payment of dividends in shares of Common Stock shall be
made without charge to the Holders thereof for any documentary stamp or similar
taxes that may be payable in respect of the issue or delivery of such
certificate, provided that the Corporation shall not be required to pay any tax
that may be payable in respect of any transfer involved in the issuance and
delivery of any such certificate upon conversion in a name other than that of
the Holder of such shares of Preferred Stock so converted.

         (g) Shares of Preferred Stock converted into Common Stock or redeemed
in accordance with the terms hereof shall be canceled and may not be reissued.

         (h) Any and all notices or other communications or deliveries to be
provided by the Holders of the Preferred Stock hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile or sent by a nationally recognized overnight courier service,
addressed to the attention of the Chief Financial Officer of the Corporation at
the facsimile telephone number or address of the principal place of business of
the Corporation as set forth in the Purchase Agreement. Any and all notices or
other communications or deliveries to be provided by the Corporation hereunder
shall be in writing and delivered personally, by facsimile or sent by a
nationally recognized overnight courier service, addressed to each Holder at the
facsimile telephone number or address of such Holder appearing on the books of
the Corporation, or if no such facsimile telephone number or address appears, at
the principal place of business of the Holder. Any notice or other communication
or deliveries hereunder shall be deemed given and effective on the earliest of
(i) the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
8:00 p.m. (New York City time), (ii) the date after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section later than 8:00 p.m. (New York City
time) on any date and earlier than 11:59 p.m. (New York City time) on such date,
(iii) upon receipt, if sent by a nationally recognized overnight courier
service, or (iv) upon actual receipt by the party to whom such notice is
required to be given.

                                       12
<PAGE>   13
     Section 6. Optional Redemption.

     (a) During the time that any shares of Preferred Stock remain outstanding,
the Corporation shall have the right, exercisable on any Trading Day in which
the Conversion Price shall be less than $6.00 (which number shall be subject to
equitable adjustments for stock splits, recombinations and similar events), in
accordance with the terms hereof and upon three Trading Days' prior written
notice to the Holders to be redeemed (an "Optional Redemption Notice"), to
redeem all or any portion of the outstanding shares of Preferred Stock which
have not previously been redeemed or for which Conversion Notices have not
previously been delivered. The redemption price applicable to redemptions under
this Section 6 shall equal the Optional Redemption Price (as defined in Section
8) and shall be paid in cash. The Holders shall have the right to tender, and
the Corporation shall honor, Conversion Notices delivered on or prior to the
expiration of the fifteenth Trading Day after receipt by the Holders of an
Optional Redemption Notice for such Debentures (the fifteenth Trading Day after
receipt by the Holders of an Optional Redemption Notice is referred to herein as
the "Optional Redemption Date").

     (b) The Corporation shall not be entitled to deliver an Optional Redemption
Notice to the Holder (and, if after delivery thereof and prior to the Optional
Redemption Date, any of the following conditions shall cease to be met, such
notice, at the option of the Holders, shall be deemed no longer effective) if:
(i) the number of shares of Common Stock at the time authorized, unissued and
unreserved for all purposes is insufficient to satisfy the Corporation's
conversion obligations of the shares of Preferred Stock then outstanding, or
(ii) there is neither an effective Underlying Shares Registration Statement
under which the Holders can resell all of the issued Underlying Shares and all
of the Underlying Shares as are issuable upon conversion in full of the shares
of Preferred Stock subject to an Optional Redemption Notice nor may all of such
issued and issuable Underlying Shares be sold by the Holders subject to such
redemption without volume restrictions pursuant to Rule 144 promulgated under
the Securities Act, as determined by counsel to the Corporation pursuant to a
written opinion letter, addressed to the Corporation's transfer agent in the
form and substance acceptable to the Holders and such transfer agent, or (iii)
the Common Stock is not then listed for trading on the NASDAQ or on a Subsequent
Market.

     (c) If any portion of the Optional Redemption Price shall not be paid by
the Corporation by the Optional Redemption Date, the Optional Redemption Price
shall bear interest at the rate of 18% per annum (or such lesser maximum amount
that is permitted to be paid by applicable law) to accrue daily from the date
such interest is due hereunder through and including the date of payment (which
amount shall be paid as liquidated damages and not as a penalty). In addition,
if any portion of the Optional Redemption Price remains unpaid through the
expiration of the Optional Redemption Date, the Holder subject to such
redemption may elect by written notice to the Corporation to either (x) demand
conversion in accordance with the formula and the time period therefor set forth
in Section 5 of any portion of the shares of Preferred Stock for which the
Optional Redemption Price, plus accrued interest thereon, has not been paid in
full (the "Unpaid Redemption Amount"), in which event the applicable Conversion
Price shall be the lower of the Conversion Price calculated on the Optional
Redemption Date and the Conversion Price as of the Holder's written demand for
conversion, or (y) invalidate ab initio such optional redemption,
notwithstanding anything herein contained to the contrary. If the

                                       13
<PAGE>   14
Holder elects option (x) above, the Corporation shall, within three Trading Days
after such election is deemed delivered hereunder, deliver to the Holder the
shares of Common Stock issuable upon conversion of the Unpaid Redemption Amount
subject to such conversion demand and otherwise perform its obligations
hereunder with respect thereto. If the Holder elects option (y) above, the
Corporation shall promptly, and in any event not later than three (3) Trading
Days from receipt of notice of such election, return to the Holder new shares of
Preferred Stock for the full Unpaid Redemption Amount and shall no longer have
any redemption rights under this Section. If, upon an election under option (x)
above, the Corporation fails to deliver certificates representing the shares of
Common Stock issuable upon conversion of the Unpaid Redemption Amount within the
time period set forth in this Section, the Corporation shall pay to the Holder
in cash, as liquidated damages and not as a penalty, $5,000 per day until the
Corporation delivers such certificates to the Holder.

     Section 7. Redemption Upon Triggering Events.

     (a) Upon the occurrence of a Triggering Event, each Holder shall (in
addition to all other rights it may have hereunder or under applicable law),
have the right, exercisable at the sole option of such Holder, to require the
Corporation to redeem all or a portion of the Preferred Stock then held by such
Holder for a redemption price, in cash, equal to the sum of (i) the Mandatory
Redemption Amount plus (ii) the product of (A) the number of Underlying Shares
issued in respect of conversions or as payment of dividends hereunder and then
held by the Holder (the "Redeemable Stock") and (B) the Per Share Market Value
on the date such redemption is demanded or the date the redemption price
hereunder is paid in full, whichever is greater (such sum, the "Redemption
Price"). The Redemption Price shall be due and payable within (10) days of the
date on which the notice for the payment therefor is provided by a Holder. If
the Corporation fails to pay the redemption price hereunder in full pursuant to
this Section on the date such amount is due in accordance with this Section, the
Corporation will pay interest thereon at a rate of 15% (or the maximum amount
permitted under applicable law, whichever is less) per annum, accruing daily
from such date until the redemption price, plus all such interest thereon, is
paid in full. For purposes of this Section, a share of Preferred Stock is
outstanding until such date as the Holder shall have received Underlying Shares
upon a conversion (or attempted conversion) thereof that meets the requirements
hereof. Upon receipt of the full Redemption Price, the Holder shall deliver the
Redeemable Stock to the Company.

         A "Triggering Event" means any one or more of the following events
(whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgement, decree or order of
any court, or any order, rule or regulation of any administrative or
governmental body):

         (i) the failure of an Underlying Securities Registration Statement to
be declared effective by the Commission on or prior to the 180th day after the
Closing Date;

         (ii) if, during the Effectiveness Period, the effectiveness of the
Underlying Securities Registration Statement lapses for any reason for more than
an aggregate of three (3) Trading Days, or the Holder shall not be permitted to
resell Registrable Securities under the Underlying Securities Registration
Statement for more than 5 consecutive Trading Days or an aggregate of 10 Trading
Days (which need not be consecutive Trading Days);

                                       14
<PAGE>   15
         (iii) the failure of the Common Stock to be listed for trading on the
NASDAQ or on a Subsequent Market or the suspension of the Common Stock from
trading on the NASDAQ or on a Subsequent Market, in either case, for more than 5
consecutive Trading Days or an aggregate of 10 Trading Days (which need not be
consecutive Trading Days);

         (iv) the Corporation shall fail for any reason to deliver certificates
representing Underlying Shares issuable upon a conversion hereunder that comply
with the provisions hereof prior to the 10th day after the Conversion Date or
the Corporation shall provide notice to any Holder, including by way of public
announcement, at any time, of its intention not to comply with requests for
conversion of any Preferred Stock in accordance with the terms hereof;

         (v) the Corporation shall, without the consent of the Holders of a
majority of the then outstanding shares of Preferred Stock, be a party to any
Change of Control Transaction, shall agree to sell (in one or a series of
related transactions) all or substantially all of its assets (whether or not
such sale would constitute a Change of Control Transaction) or shall redeem more
than a de minimis number of Common Stock or other Junior Securities (other than
redemptions of Underlying Shares);

         (vi) an Event (as defined in the Registration Rights Agreement) shall
not have been cured to the satisfaction of the Holders prior to the expiration
of thirty (30) days from the Event Date (as defined in the Registration Rights
Agreement) relating thereto other than an Event resulting from a failure of an
Underlying Shares Registration Statement to be timely declared effective by the
Commission;

         (vii) the Corporation shall fail for any reason to pay in full the
amount of cash due pursuant to a Buy-In within seven (7) days after notice
therefor is delivered hereunder; or

         (viii) the Corporation shall fail to have available a sufficient number
of authorized and unreserved shares of Common Stock to issue to such Holder upon
a conversion hereunder.

     Section 8. Definitions. For the purposes hereof, the following terms shall
have the following meanings:

     "Change of Control Transaction" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
effective control (whether through legal or beneficial ownership of capital
stock of the Corporation, by contract or otherwise) of in excess of 33% of the
voting securities of the Corporation, (ii) a replacement at one time or over
time of more than one-half of the members of the Corporation's board of
directors which is not approved by a majority of those individuals who are
members of the board of directors on the date hereof (or by those individuals
who are serving as members of the board of directors on any date whose
nomination to the board of directors was approved by a majority of the members
of the board of directors who are members on the date hereof), (iii) the merger
of the Corporation with or into another entity, consolidation or sale of all or
substantially all of the assets of the Corporation in

                                       15
<PAGE>   16
one or a series of related transactions, or (iv) the execution by the
Corporation of an agreement to which the Corporation is a party or by which it
is bound, providing for any of the events set forth above in (i), (ii) or (iii).

         "Closing Date" shall have the meaning set forth in the Purchase
Agreement.

         "Commission" means the Securities and Exchange Commission.

         "Common Stock" means the Corporation's Common Stock, par value $.001
per share, and stock of any other class into which such shares may hereafter
have been reclassified or changed.

         "Conversion Ratio" means, at any time, a fraction, the numerator of
which is Stated Value plus accrued but unpaid dividends but only to the extent
not paid in Common Stock in accordance with the terms hereof, and the
denominator of which is the Conversion Price at such time.

         "Dividend Effectiveness Date" means the earlier to occur of (x) the
Effectiveness Date (as defined in the Registration Rights Agreement) and (y) the
date that an Underlying Securities Registration Statement is declared effective
by the Commission.

         "Exchange Act" means the Securities Exchange Act of 1934, as amended.

         "Junior Securities" means the Common Stock and all other equity
securities of the Corporation which are junior in rights and liquidation
preference to the Preferred Stock.

         "Mandatory Redemption Amount" for each share of Preferred Stock means
the sum of (i) the greater of (A) the Stated Value and all accrued dividends
with respect to such share and (B) the product of (a) the Per Share Market Value
on the Trading Day immediately preceding (x) the date of the Triggering Event or
the Conversion Date, as the case may be, or (y) the date of payment in full by
the Corporation of the applicable redemption price, whichever is greater, and
(b) the Conversion Ratio calculated on the date of the Triggering Event, or the
Conversion Date, as the case may be, and (ii) all other amounts, costs, expenses
and liquidated damages due in respect of such share of Preferred Stock.

         "Optional Redemption Price" shall be sum of 106% of the Stated Value of
the shares of Preferred Stock to be redeemed pursuant to the terms hereof and
(ii) all other amounts, costs, expenses and liquidated damages due in respect of
such shares of Preferred Stock.

         "Original Issue Date" shall mean the date of the first issuance of any
shares of the Preferred Stock regardless of the number of transfers of any
particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.

         "Per Share Market Value" means on any particular date (a) the closing
bid price per share of Common Stock on such date on the NASDAQ or on the
Subsequent Market on which the Common Stock is then listed or quoted, or if
there is no such price on such date, then the closing bid price on the NASDAQ or
on such Subsequent Market on the date nearest

                                       16
<PAGE>   17
preceding such date, or (b) if the Common Stock is not then listed or quoted on
the NASDAQ or on a Subsequent Market, the closing bid price for a shares of
Common Stock in the over-the-counter market, as reported by the National
Quotation Bureau Incorporated or similar organization or agency succeeding to
its functions of reporting prices) at the close of business on such date, or (c)
if the Common Stock is not then reported by the National Quotation Bureau
Incorporated (or similar organization or agency succeeding to its functions of
reporting prices), then the average of the "Pink Sheet" quotes for the relevant
conversion period, as determined in good faith by the Holder, or (d) if the
Common Stock are not then publicly traded the fair market value of a Common
Share as determined by an Appraiser selected in good faith by the Holders of a
majority of the shares of the Preferred Stock.

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

         "Purchase Agreement" means the Securities Purchase Agreement, dated as
of September 21, 2000, to which the Corporation, NeoGene Technologies, Inc. and
the original Holders are parties, as amended, modified or supplemented from time
to time in accordance with its terms.

         "Registration Rights Agreement" means the Registration Rights
Agreement, dated September 21, 2000, to which the Corporation and the original
Holders are parties, as amended, modified or supplemented from time to time in
accordance with its terms.

         "Securities Act" means the Securities Act of 1933, as amended.

         "Trading Day" means (a) a day on which the Common Stock is traded on
the NASDAQ or on the Subsequent Market on which the Common Stock is then listed
or quoted, as the case may be, or (b) if the Common Stock s not listed on the
NASDAQ or on a Subsequent Market, a day on which the Common Stock is traded in
the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if
the Common Stock is not quoted on the OTC Bulletin Board, a day on which the
Common Stock is quoted in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency
succeeding its functions of reporting prices); provided, however, that in the
event that the Common Stock is not listed or quoted as set forth in (a), (b) and
(c) hereof, then Trading Day shall mean any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.

         "Underlying Securities Registration Statement" means a registration
statement that meets the requirements of the Registration Rights Agreement and
registers the resale of all Underlying Shares by the recipient thereof, who
shall be named as a "selling stockholder" thereunder.

         "Underlying Shares" means, collectively, the shares of Common Stock
into which the Shares are convertible and the shares of Common Stock issuable
upon payment of dividends thereon in accordance with the terms hereof.

                                       17
<PAGE>   18
                                    EXHIBIT A

                              NOTICE OF CONVERSION

(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)

     The undersigned hereby elects to convert the number of shares of 5% Series
[ ] Preferred Stock with Conversion Features indicated below, into shares of
Common Stock, par value $.001 per share (the "Common Stock"), of
NeoTherapeutics, Inc. (the "Corporation") according to the conditions hereof, as
of the date written below. If shares are to be issued in the name of a person
other than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Corporation in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if
any.

Conversion calculations:

Date to Effect Conversion
                                                    ----------------------------

Number of shares of Preferred Stock to be Converted
                                                    ----------------------------

Number of shares of Common Stock to be Issued
                                                    ----------------------------

Applicable Conversion Price
                                                    ----------------------------

                                    --------------------------------------------
                                    Signature
                                    Name
                                                    ----------------------------

                                    Address
                                                    ----------------------------

                                    --------------------------------------------<PAGE>   1
                                                                    EXHIBIT 4.10
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.

                                                                      No. 1 $[ ]

                              NEOTHERAPEUTICS, INC.
                      5% SUBORDINATED CONVERTIBLE DEBENTURE
                                   DUE [ ](1)

         THIS DEBENTURE is one of a series of duly authorized and issued
debentures of NeoTherapeutics, Inc., a Delaware corporation, having a principal
place of business at 157 Technology Drive, Irvine, CA 92618 (the "Company"),
designated as its 5% Convertible Debentures, due [ ](2), in the aggregate
principal amount of [ ] (the "Debentures").

         FOR VALUE RECEIVED, the Company promises to pay to [ ], or its
registered assigns (the "Holder"), the principal sum of [ ], on [ ](3) or such
earlier date as the Debentures are required or permitted to be repaid as
provided hereunder (the "Maturity Date") and to pay interest to the Holder on
the aggregate unconverted and then outstanding principal amount of this
Debenture at the rate of 5% per annum, payable on each Conversion Date (as
defined in Section 4(a)(i)(C)) with respect to the principal amount then
converted and on the Maturity Date, in cash or shares of Common Stock (as
defined in Section 6). Subject to the terms and conditions set forth herein, the
decision whether to pay interest hereunder in shares of Common Stock or cash
shall be at the discretion of the Company. Not less than ten Trading Days (as
defined in Section 6) prior to each Conversion Date, the Company shall provide
the Holder with written notice of its election to pay interest hereunder either
in cash or shares of Common Stock pursuant to the terms of Section 4(a)(i) (the
Company may indicate in such notice that the election contained in such notice
shall continue for later periods until revised). Failure to timely provide such
written notice shall be deemed an election by the Company to pay the interest on
such Conversion Date in shares of Common Stock pursuant to the terms of Section
4(a)(i). Interest shall be calculated on the basis on a 360-day year and shall
accrue daily commencing on the Original Issue Date (as defined in Section 6)
until payment in full of the principal sum, together with all accrued and unpaid
interest and other amounts which may become due hereunder, has been made.
Interest hereunder will be paid to the Person (as defined in Section 6) in whose
name this Debenture is

--------------------------------

(1) Five years from the Closing Date.

(2) Five years from the Closing Date.

(3) Five years from the Closing Date.
<PAGE>   2
registered on the records of the Company regarding registration and transfers of
Debentures (the "Debenture Register"). All overdue accrued and unpaid interest
to be paid in cash hereunder shall entail a late fee at the rate of 18% per
annum (or such lower maximum amount of interest permitted to be charged under
applicable law) to accrue daily, from the date such interest is due hereunder
through and including the date of payment, payable in cash.

         This Debenture is subject to the following additional provisions:

         Section 1.        This Debenture is exchangeable for an equal aggregate
principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same. No service charge will be made
for the registration of such exchange.

         Section 2.        This Debenture has been issued subject to certain
investment representations of the original Holder set forth in the Purchase
Agreement (as defined in Section 6) and may be transferred or exchanged only in
compliance with the Purchase Agreement. Prior to due presentment to the Company
for transfer of this Debenture, the Company and any agent of the Company may
treat the Person (as defined in Section 6) in whose name this Debenture is duly
registered on the Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or not
this Debenture is overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.

         Section 3.        Events of Default.

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

                           (i)      any default in the payment of the principal
         of, interest on or liquidated damages in respect of, any Debentures,
         free of any claim of subordination, as and when the same shall become
         due and payable (whether on a Conversion Date or the Maturity Date or
         by acceleration or otherwise);

                           (ii)     the Company shall fail to observe or perform
         any other covenant, agreement or warranty contained in, or otherwise
         commit any breach of any of the Transaction Documents (as defined in
         Section 6), and such failure or breach shall not have been remedied
         within five Business Days (as defined in Section 6) after the date on
         which written notice of such failure or breach shall have been received
         by the Company;

                           (iii)    the Company or any of its subsidiaries shall
         commence, or there shall be commenced against the Company or any such
         subsidiary a case under any applicable bankruptcy or insolvency laws as
         now or hereafter in effect or any successor thereto, or the Company
         commences any other proceeding under any reorganization, arrangement,
         adjustment of debt, relief of debtors, dissolution, insolvency or
         liquidation or similar law of any jurisdiction whether now or hereafter
         in effect relating to the Company or any subsidiary thereof or there is
         commenced against the Company or any subsidiary thereof any such
         bankruptcy, insolvency or other proceeding which remains undismissed
         for a period of 60 days; or the Company or any subsidiary thereof is

                                       2
<PAGE>   3
         adjudicated insolvent or bankrupt; or any order of relief or other
         order approving any such case or proceeding is entered; or the Company
         or any subsidiary thereof suffers any appointment of any custodian or
         the like for it or any substantial part of its property which continues
         undischarged or unstayed for a period of 60 days; or the Company or any
         subsidiary thereof makes a general assignment for the benefit of
         creditors; or the Company shall fail to pay, or shall state that it is
         unable to pay, or shall be unable to pay, its debts generally as they
         become due; or the Company or any subsidiary thereof shall call a
         meeting of its creditors with a view to arranging a composition,
         adjustment or restructuring of its debts; or the Company or any
         subsidiary thereof shall by any act or failure to act expressly
         indicate its consent to, approval of or acquiescence in any of the
         foregoing; or any corporate or other action is taken by the Company or
         any subsidiary thereof for the purpose of effecting any of the
         foregoing;

                           (iv)     the Company shall default in any of its
         obligations under any mortgage, credit agreement or other facility,
         indenture agreement, factoring agreement or other instrument under
         which there may be issued, or by which there may be secured or
         evidenced any indebtedness for borrowed money or money due under any
         long term leasing or factoring arrangement of the Company in an amount
         exceeding one hundred thousand dollars ($100,000), whether such
         indebtedness now exists or shall hereafter be created and such default
         shall result in such indebtedness becoming or being declared due and
         payable prior to the date on which it would otherwise become due and
         payable;

                           (v)      the Common Stock either be delisted from the
         Nasdaq National Market ("NASDAQ") or suspended from trading on the
         NASDAQ without resuming trading and/or being relisted thereon or listed
         on the New York Stock Exchange, American Stock Exchange or the Nasdaq
         SmallCap Market (each, a "Subsequent Market") or having such suspension
         lifted, in either case, for five consecutive Trading Days or ten
         Trading Days in the aggregate (which need not be consecutive Trading
         Days);

                           (vi)     the Company shall be a party to any Change
         of Control Transaction (as defined in Section 6), shall agree to sell
         or dispose all or in excess of 33% of the fair market value of its
         assets in one or more transactions (whether or not such sale would
         constitute a Change of Control Transaction), or shall redeem or
         repurchase of shares of Common Stock or other equity securities of the
         Company for an aggregate of purchase prices in excess of $75,000 (other
         than redemptions of Underlying Shares (as defined in Section 6));

                           (vii)    an Underlying Shares Registration Statement
         (as defined in Section 6) shall not have been declared effective by the
         Commission (as defined in Section 6) on or prior to the 180th day after
         the Closing Date (as defined in Section 6);

                           (viii)   if, during the Effectiveness Period (as
         defined in the Registration Rights Agreement (as defined in Section
         6)), the effectiveness of the Underlying Shares Registration Statement
         lapses for any reason or the Holder shall not be permitted to resell
         Registrable Securities (as defined in the Registration Rights
         Agreement) under the Underlying Shares Registration Statement, in
         either case, for more than five consecutive

                                       3
<PAGE>   4
         Trading Days or an aggregate of ten Trading Days (which need not be
         consecutive Trading Days);

                           (ix)     an Event (as defined in the Registration
         Rights Agreement) shall not have been cured to the satisfaction of the
         Holder prior to the expiration of thirty days from the Event Date (as
         defined in the Registration Rights Agreement) relating thereto unless
         no Registration Delay Payment (as defined in the Registration Rights
         Agreement) is due in respect to such Event, and excluding an Event
         resulting from a failure of an Underlying Shares Registration Statement
         to be timely declared effective by the Commission which shall be
         covered by Section 3(a)(vii);

                           (x)      the Company shall fail for any reason to
         deliver certificates to a Holder prior to the twelfth (12th) day after
         a Conversion Date pursuant to and in accordance with Section 4(b) or
         the Company shall provide notice to the Holder, including by way of
         public announcement, at any time, of its intention not to comply with
         requests for conversions of any Debentures in accordance with the terms
         hereof; or

                           (xi)     the Company shall fail for any reason to
         deliver the payment in cash pursuant to a Buy-In (as defined herein)
         within seven (7) days after notice is deemed delivered hereunder.

                  (b)      During the time that any portion of this Debenture
remains outstanding, if any Event of Default occurs and is continuing, the full
principal amount of this Debenture (and, at the Holder's option, all other
Debentures then held by such Holder), together with interest and other amounts
owing in respect thereof to the date of acceleration, shall become, immediately
due and payable in cash. The aggregate amount payable upon an Event of Default
shall be equal to the sum of (i) the Mandatory Prepayment Amount (as defined in
Section 6) plus (ii) the product of (A) the number of Underlying Shares issued
in respect of conversions hereunder within thirty (30) days of the date of a
declaration of an Event of Default and then held by the Holder and (B) the Per
Share Market Value (as defined in Section 6) on the date prepayment is due or
the date the full prepayment price is paid, whichever is greater. Interest shall
accrue on the prepayment amount hereunder from the seventh day after such amount
is due (being the date of an Event of Default) through the date of prepayment in
full thereof at the rate of 18% per annum (or such lesser maximum amount that is
permitted to be paid by applicable law), to accrue daily from the date such
payment is due hereunder through and including the date of payment. All
Debentures and Underlying Shares for which the full prepayment price hereunder
shall have been paid in accordance herewith shall promptly be surrendered to or
as directed by the Company. The Holder need not provide and the Company hereby
waives any presentment, demand, protest or other notice of any kind, and the
Holder may immediately and without expiration of any grace period enforce any
and all of its rights and remedies hereunder and all other remedies available to
it under applicable law. Such declaration may be rescinded and annulled by
Holder at any time prior to payment hereunder. No such rescission or annulment
shall affect any subsequent Event of Default or impair any right consequent
thereon.

                                       4
<PAGE>   5
         Section 4.        Section Conversion.

                  (a)      Conversion at Option of Holder.

                                    (A)      This Debenture shall be convertible
                  into shares of Common Stock at the option of the Holder, in
                  whole or in part at any time and from time to time, after the
                  Original Issue Date (subject to the limitations on conversion
                  set forth in Section 4(a)(iii) hereof). The number of shares
                  of Common Stock issuable upon a conversion hereunder shall be
                  determined by adding the sum of (i) the quotient obtained by
                  dividing (x) the outstanding principal amount of this
                  Debenture to be converted by (y) the Conversion Price (as
                  defined herein), and (ii) the amount equal to (I) the product
                  of (x) the outstanding principal amount of this Debenture to
                  be converted and (y) the product of (1) the quotient obtained
                  by dividing .05 by 360 and (2) the number of days for which
                  such principal amount was outstanding, divided by (II) the
                  Conversion Price on the Conversion Date, provided, that if the
                  Company shall have timely elected to pay the interest due on a
                  Conversion Date in cash pursuant to the terms hereof,
                  subsection (ii) shall not be used in the calculation of the
                  number of shares of Common Stock issuable upon a conversion
                  hereunder.

                                    (B)      Notwithstanding anything to the
                  contrary contained herein, if on any Conversion Date:

                                            (1)      the number of shares of
                           Common Stock at the time authorized, unissued and
                           unreserved for all purposes, or held as treasury
                           stock, is insufficient to pay interest hereunder in
                           shares of Common Stock;

                                            (2)      after the Interest
                           Effectiveness Date (as defined in Section 6) such
                           shares of Common Stock (x) are not registered for
                           resale pursuant to an effective Underlying Shares
                           Registration Statement and (y) may not be sold
                           without volume restrictions pursuant to Rule 144(k)
                           promulgated under the Securities Act (as defined in
                           Section 6), as determined by counsel to the Company
                           pursuant to a written opinion letter, addressed to
                           the Company's transfer agent in the form and
                           substance acceptable to the applicable Holder and
                           such transfer agent;

                                            (3)      the Common Stock is not
                           listed or quoted on the NASDAQ or on a Subsequent
                           Market;

                                            (4)      the Company has failed to
                           timely satisfy its conversion obligations hereunder;
                           or

                                            (5)      the issuance of such shares
                           of Common Stock would result in a violation of
                           Sections 4(a)(iii)(A) and (B),

then, at the option of the Holder, the Company, in lieu of delivering shares of
Common Stock pursuant to Section 4(a)(i)(A)(ii), shall deliver, within three
Trading Days of the applicable Conversion Date, an amount in cash equal to the
product of (a) the outstanding principal amount

                                       5
<PAGE>   6
of the Debentures to be converted on such Conversion Date and (b) the product of
(x) the quotient obtained by dividing .05 by 360 and (y) the number of days for
which such principal amount was outstanding.

                                    (C)      The Holder shall effect conversions
                  by surrendering the Debentures (or such portions thereof) to
                  be converted, together with the form of conversion notice
                  attached hereto as Exhibit A (a "Conversion Notice") to the
                  Company, provided that a Holder shall not be required to
                  surrender any such Debenture if the Corporation has failed to
                  deliver such Debenture to such Holder pursuant to the Purchase
                  Agreement prior to the applicable Conversion Date. Each
                  Conversion Notice shall specify the principal amount of
                  Debentures to be converted and the date on which such
                  conversion is to be effected, which date may not be prior to
                  the date such Conversion Notice is deemed to have been
                  delivered hereunder (a "Conversion Date"). If no Conversion
                  Date is specified in a Conversion Notice, the Conversion Date
                  shall be the date that such Conversion Notice is deemed
                  delivered hereunder. Subject to Section 4(b), each Conversion
                  Notice, once given, shall be irrevocable. If the Holder is
                  converting less than all of the principal amount represented
                  by the Debenture(s) tendered by the Holder with the Conversion
                  Notice, or if a conversion hereunder cannot be effected in
                  full for any reason, the Company shall honor such conversion
                  to the extent permissible hereunder and shall promptly deliver
                  to such Holder (in the manner and within the time set forth in
                  Section 4(b)) a new Debenture for such principal amount as has
                  not been converted.

                           (ii)     Automatic Conversion. Subject to the
         provisions in this paragraph, the principal amount of Debentures for
         which conversion notices have not previously been received or for which
         prepayment has not been made or required hereunder shall be
         automatically converted on the fifth anniversary of the Closing Date
         (the "Automatic Conversion Date") pursuant to Section 4(a)(i), at the
         Conversion Price on such date. The conversion contemplated by this
         paragraph shall not occur if (a) (1) an Underlying Securities
         Registration Statement is not then effective that names the Holder as a
         selling stockholder thereunder and (2) the Holder is not permitted to
         resell Underlying Shares pursuant to Rule 144(k) promulgated under the
         Securities Act, without volume restrictions, as evidenced by an opinion
         letter of counsel acceptable to the Holder and the transfer agent for
         the Common Stock; or (b) there are not sufficient shares of Common
         Stock authorized and reserved for issuance upon such conversion.
         Notwithstanding anything herein to the contrary, the Automatic
         Conversion Date shall be extended (on a day-for-day basis) for any
         Trading Days after the Effectiveness Date that the Holder is both
         unable to resell Underlying Shares pursuant to Rule 144(k) promulgated
         under the Securities Act, without volume restrictions, and unable to
         resell Underlying Shares due to (a) the Common Stock not being listed
         for trading on the NASDAQ or any Subsequent Market, (b) the failure of
         an Underlying Securities Registration Statement to be declared
         effective by the Commission or, if so declared, to remain effective
         during the Effectiveness Period as to all Underlying Shares, or (c) the
         suspension of the Holder's right to resell Underlying Shares
         thereunder. Notwithstanding anything to the contrary contained herein,
         a conversion pursuant to this Section shall not be subject to the
         provisions of Section 4(a)(iii)(A) and (B).

                                       6
<PAGE>   7
                           (iii)    Certain Conversion Restrictions.

                                    (A)      A Holder may not convert Debentures
                  or receive shares of Common Stock as payment of interest
                  hereunder to the extent such conversion or receipt of such
                  interest payment would result in the Holder, together with any
                  affiliate thereof, beneficially owning (as determined in
                  accordance with Section 13(d) of the Exchange Act (as defined
                  in Section 6) and the rules promulgated thereunder) in excess
                  of 4.999% of the then issued and outstanding shares of Common
                  Stock, including shares issuable upon conversion of, and
                  payment of interest on, the Debentures held by such Holder
                  after application of this Section. Since the Holder will not
                  be obligated to report to the Company the number of shares of
                  Common Stock it may hold at the time of a conversion
                  hereunder, unless the conversion at issue would result in the
                  issuance of shares of Common Stock in excess of 4.999% of the
                  then outstanding shares of Common Stock without regard to any
                  other shares which may be beneficially owned by the Holder or
                  an affiliate thereof, the Holder shall have the authority and
                  obligation to determine whether the restriction contained in
                  this Section will limit any particular conversion hereunder
                  and to the extent that the Holder determines that the
                  limitation contained in this Section applies, the
                  determination of which portion of the principal amount of
                  Debentures are convertible shall be the responsibility and
                  obligation of the Holder. If the Holder has delivered a
                  Conversion Notice for a principal amount of Debentures that,
                  without regard to any other shares that the Holder or its
                  affiliates may beneficially own, would result in the issuance
                  in excess of the permitted amount hereunder, the Company shall
                  notify the Holder of this fact and shall honor the conversion
                  for the maximum principal amount permitted to be converted on
                  such Conversion Date in accordance with the periods described
                  in Section 4(b) and, at the option of the Holder, either
                  retain any principal amount tendered for conversion in excess
                  of the permitted amount hereunder for future conversions or
                  return such excess principal amount to the Holder. The
                  provisions of this Section may be waived by a Holder (but only
                  as to itself and not to any other Holder) upon not less than
                  61 days prior notice to the Company. Other Holders shall be
                  unaffected by any such waiver.

                                    (B)      A Holder may not convert Debentures
                  or receive shares of Common Stock as payment of interest
                  hereunder to the extent such conversion or receipt of such
                  interest payment would result in the Holder, together with any
                  affiliate thereof, beneficially owning (as determined in
                  accordance with Section 13(d) of the Exchange Act and the
                  rules promulgated thereunder) in excess of 9.999% of the then
                  issued and outstanding shares of Common Stock, including
                  shares issuable upon conversion of, and payment of interest
                  on, the Debentures held by such Holder after application of
                  this Section. Since the Holder will not be obligated to report
                  to the Company the number of shares of Common Stock it may
                  hold at the time of a conversion hereunder, unless the
                  conversion at issue would result in the issuance of shares of
                  Common Stock in excess of 9.999% of the then outstanding
                  shares of Common Stock without regard to any other shares
                  which may be beneficially owned by the Holder or an affiliate
                  thereof, the Holder shall have the authority and obligation to
                  determine whether the restriction contained in

                                       7
<PAGE>   8
                  this Section will limit any particular conversion hereunder
                  and to the extent that the Holder determines that the
                  limitation contained in this Section applies, the
                  determination of which portion of the principal amount of
                  Debentures are convertible shall be the responsibility and
                  obligation of the Holder. If the Holder has delivered a
                  Conversion Notice for a principal amount of Debentures that,
                  without regard to any other shares that the Holder or its
                  affiliates may beneficially own, would result in the issuance
                  in excess of the permitted amount hereunder, the Company shall
                  notify the Holder of this fact and shall honor the conversion
                  for the maximum principal amount permitted to be converted on
                  such Conversion Date in accordance with the periods described
                  in Section 4(b) and, at the option of the Holder, either
                  retain any principal amount tendered for conversion in excess
                  of the permitted amount hereunder for future conversions or
                  return such excess principal amount to the Holder. The
                  provisions of this Section may be waived by a Holder (but only
                  as to itself and not to any other Holder) upon not less than
                  61 days prior notice to the Company. Other Holders shall be
                  unaffected by any such waiver.

                                    (C)      At any time when the Common Stock
                  is listed for trading on the Nasdaq or the Nasdaq SmallCap
                  Market and the Corporation has not obtained the Shareholder
                  Approval (as defined below), then the Corporation may not
                  issue in excess of [ ] shares of Common Stock (which equals
                  19.999% of the number of shares of Common Stock outstanding on
                  the Trading Day immediately preceding the Original Issue Date)
                  (i) upon conversions of Debentures, (ii) as payment of
                  interest in respect of Debentures, (iii) upon conversions of
                  shares of preferred stock issued by the Corporation in
                  accordance with the terms of the Purchase Agreement (the
                  "Preferred Stock") and (iv) as payment of dividends under the
                  Preferred Stock (such number of shares, the "Issuable
                  Maximum"). If on any Conversion Date: (A) the shares of Common
                  Stock are listed for trading on the Nasdaq or Nasdaq SmallCap
                  Market, (B) the Conversion Price then in effect is such that
                  the aggregate number of shares of Common Stock that would then
                  be issuable upon conversion in full of all then outstanding
                  principal amount under the Debentures, together with any
                  shares of Common Stock previously issued (i) upon conversions
                  of Debentures, (ii) as payment of interest in respect of
                  Debentures, (iii) upon conversions of shares of Preferred
                  Stock and (iv) as payment of dividends under the Preferred
                  Stock would exceed the Issuable Maximum, and (C) the
                  Corporation shall not have previously obtained the vote of
                  shareholders (the "Shareholder Approval"), if any, as may be
                  required by the applicable rules and regulations of the Nasdaq
                  (or any successor entity) applicable to approve the issuance
                  of shares of Common Stock in excess of the Issuable Maximum
                  pursuant to the terms hereof, then the Corporation shall issue
                  to a Holder requesting a conversion a number of shares of
                  Common Stock equal to the lesser of (x) the number of shares
                  of Common Stock issuable upon such conversion at the
                  applicable Conversion Price and (y) such portion of the
                  Issuable Maximum less all shares of Common Stock previously
                  issued (i) upon conversions of Debentures, (ii) as payment of
                  interest in respect of Debentures, (iii) upon conversions of
                  shares of Preferred Stock and (iv) as payment of dividends
                  under the Preferred Stock (the "Current Maximum Issuable").
                  The

                                       8
<PAGE>   9
                  Current Issuable Maximum applicable to the principal amount of
                  each Debenture at any time shall be determined pro rata by
                  reference to the principal amount of all Debentures then
                  outstanding. With respect to the remainder of the principal
                  amount of Debentures tendered for conversion by such Holder
                  for which a conversion in accordance with the Conversion Price
                  would result in an issuance of shares of Common Stock in
                  excess of the Issuable Maximum (the "Excess Principal"), the
                  converting Holder shall have the option to require the
                  Corporation to either (1) use its best efforts to obtain the
                  Shareholder Approval applicable to such issuance as soon as is
                  possible, but in any event not later than the 60th day after
                  such request, or (2) pay cash to the converting Holder in an
                  amount equal to the Mandatory Prepayment Amount (as defined in
                  Section 6) for the Excess Principal. If the converting Holder
                  shall have elected the first option pursuant to the
                  immediately preceding sentence and the Corporation shall have
                  failed to obtain the Shareholder Approval on or prior to the
                  60th day after such request, then within three (3) days of
                  such 60th day, the Corporation shall pay cash to the
                  converting Holder an amount equal to the Mandatory Redemption
                  Amount for the Excess Stated Value. If the Corporation fails
                  to pay the Mandatory Prepayment Amount in full pursuant to
                  this Section within seven days after the date payable, the
                  Corporation will pay interest thereon at a rate of 18% per
                  annum or such lesser maximum amount that is permitted to be
                  paid by applicable law, to the converting Holder, accruing
                  daily from the Conversion Date until such amount, plus all
                  such interest thereon, is paid in full. The Corporation and
                  the Holder understand and agree that shares of Common Stock
                  issued to and then held by the Holder as a result of
                  conversions of Debentures shall not be entitled to cast votes
                  on any resolution to obtain Shareholder Approval pursuant
                  hereto.

                  (b)      (i)      Not later than three Trading Days after any
         Conversion Date, the Company will deliver to the Holder (i) a
         certificate or certificates which shall be free of restrictive legends
         and trading restrictions (other than those required by Section 4.9 of
         the Purchase Agreement) representing the number of shares of Common
         Stock being acquired upon the conversion of Debentures (subject to the
         limitations set forth in Section 4(a)(iii) hereof), (ii) Debentures in
         a principal amount equal to the principal amount of Debentures not
         converted, and (iii) a bank check in the amount of accrued and unpaid
         interest (if the Company has timely elected or is required to pay
         accrued interest in cash) and the Floor Prepayment Price (as defined in
         Section 4(c)(i)(B)) (if applicable), provided, that the Company shall
         not be obligated to issue certificates evidencing the shares of Common
         Stock issuable upon conversion of the principal amount of Debentures
         until one Trading Day after Debentures are delivered for conversion to
         the Company, or the Holder notifies the Company that such Debentures
         have been lost, stolen or destroyed and provides a bond (or other
         adequate security) reasonably satisfactory to the Company to indemnify
         the Company from any loss incurred by it in connection therewith. The
         Company shall, upon request of the Holder, if available, use its best
         efforts to deliver any certificate or certificates required to be
         delivered by the Company under this Section electronically through the
         Depository Trust Corporation or another established clearing
         corporation performing similar functions. If in the case of any
         Conversion Notice such certificate or certificates are not delivered to
         or as directed by the applicable Holder by the third Trading Day after
         a Conversion Date, the Holder shall be entitled by written

                                       9
<PAGE>   10
         notice to the Company at any time on or before its receipt of such
         certificate or certificates thereafter, to rescind such conversion, in
         which event the Company shall immediately return the certificates
         representing the principal amount of Debentures tendered for
         conversion.

                           (ii)     If the Company fails to deliver to the
         Holder such certificate or certificates pursuant to Section 4(b)(i) by
         the third Trading Day after the Conversion Date, the Company shall pay
         to such Holder, in cash, as liquidated damages and not as a penalty,
         $5,000 for each Trading Day after such third Trading Day until such
         certificates are delivered. Nothing herein shall limit a Holder's right
         to pursue actual damages or declare an Event of Default pursuant to
         Section 3 herein for the Company's failure to deliver certificates
         representing shares of Common Stock upon conversion within the period
         specified herein and such Holder shall have the right to pursue all
         remedies available to it at law or in equity including, without
         limitation, a decree of specific performance and/or injunctive relief.
         The exercise of any such rights shall not prohibit the Holders from
         seeking to enforce damages pursuant to any other Section hereof or
         under applicable law. Further, if the Company shall not have delivered
         any cash due in respect of conversions of Debentures or as payment of
         interest thereon by the third Trading Day after the Conversion Date,
         the Holder may, by notice to the Company, require the Company to issue
         shares of Common Stock pursuant to Section 4(c), except that for such
         purpose the Conversion Price applicable thereto shall be the lesser of
         the Conversion Price on the Conversion Date and the Conversion Price on
         the date of such Holder demand. Any such shares will be subject to the
         provisions of this Section.

                           (iii)    In addition to any other rights available to
         the Holder, if the Company fails to deliver to the Holder such
         certificate or certificates pursuant to Section 4(b)(i) by the third
         Trading Day after the Conversion Date, and if after such third Trading
         Day the Holder purchases (in an open market transaction or otherwise)
         Common Stock to deliver in satisfaction of a sale by such Holder of the
         Underlying Shares which the Holder anticipated receiving upon such
         conversion (a "Buy-In"), then the Company shall (A) pay in cash to the
         Holder (in addition to any remedies available to or elected by the
         Holder) the amount by which (x) the Holder's total purchase price
         (including brokerage commissions, if any) for the Common Stock so
         purchased exceeds (y) the product of (1) the aggregate number of shares
         of Common Stock that such Holder anticipated receiving from the
         conversion at issue multiplied by (2) the market price of the Common
         Stock at the time of the sale giving rise to such purchase obligation
         and (B) at the option of the Holder, either reissue Debentures in
         principal amount equal to the principal amount of the attempted
         conversion or deliver to the Holder the number of shares of Common
         Stock that would have been issued had the Company timely complied with
         its delivery requirements under Section 4(b)(i). For example, if the
         Holder purchases Common Stock having a total purchase price of $11,000
         to cover a Buy-In with respect to an attempted conversion of Debentures
         with respect to which the market price of the Underlying Shares on the
         date of conversion was a total of $10,000 under clause (A) of the
         immediately preceding sentence, the Company shall be required to pay
         the Holder $1,000. The Holder shall provide the Company written notice
         indicating the amounts payable to the Holder in respect of the Buy-In.
         Notwithstanding anything contained herein to the contrary, if a Holder
         requires the Company to make payment in respect of a

                                       10
<PAGE>   11
         Buy-In for the failure to timely deliver certificates hereunder and the
         Company timely pays in full such payment, the Company shall not be
         required to pay such Holder liquidated damages under Section 4(b)(ii)
         in respect of the certificates resulting in such Buy-In.

                  (c)      [(i)    (A)      The conversion price (the
                  "Conversion Price") in effect on any Conversion Date shall
                  equal 101% of the average of the ten lowest Per Share Market
                  Values during the thirty Trading Days immediately preceding
                  the applicable Conversion Date (which may include Trading Days
                  prior to the Original Issue Date), provided, however, that
                  such thirty Trading Day period shall be extended for the
                  number of Trading Days during such period in which (A) trading
                  in the Common Stock is suspended by the NASDAQ or a Subsequent
                  Market on which the Common Stock is then listed, or (B) during
                  the Effectiveness Period (as defined in the Registration
                  Rights Agreement) the Underlying Shares Registration Statement
                  is not effective, or (C) during the Effectiveness Period the
                  Prospectus included in the Underlying Shares Registration
                  Statement may not be used by the Holder for the resale of
                  Underlying Shares.](4)

                  (c)      [(i)     (A)     The conversion price (the
                  "Conversion Price") in effect on any Conversion Date occurring
                  on or prior to the 90th day following the Original Issue Date
                  shall equal 120% of the Per Share Market Value on the Original
                  Issue Date (the "Initial Conversion Price"), provided, that
                  for any Conversion Date occurring after the 90th day following
                  the Original Issue Date, the Conversion Price shall be the
                  lesser of (A) the Initial Conversion Price and (B) 101% of the
                  average of the ten lowest Per Share Market Values during the
                  thirty Trading Days immediately preceding the applicable
                  Conversion Date (which may include Trading Days prior to the
                  Original Issue Date), provided, however, that such thirty
                  Trading Day period shall be extended for the number of Trading
                  Days during such period in which (A) trading in the Common
                  Stock is suspended by the NASDAQ or a Subsequent Market on
                  which the Common Stock is then listed, or (B) during the
                  Effectiveness Period (as defined in the Registration Rights
                  Agreement), the Underlying Shares Registration Statement is
                  not effective, or (C) during the Effectiveness Period, the
                  Prospectus included in the Underlying Shares Registration
                  Statement may not be used by the Holder for the resale of
                  Underlying Shares.](5)

                                    (B)      If on any Conversion Date, the
                  Conversion Price shall be lower than $7.00 (which number shall
                  be subject to equitable adjustments for stock splits,
                  recombinations and similar events) (such Conversion Price, the
                  "Floor Price" and a Conversion Date on which such condition is
                  met, a "Record Date"), then the Company will have the right,
                  exercisable by delivery of a written notice to the Holders
                  delivered no later than twenty Trading Days prior to the
                  Record Date (the "Company Notice"), which notice shall remain
                  in effect until a subsequent such notice is provided by the
                  Company to the Holders, to elect to

--------------------------------

(4) For Series A Debentures

(5) For Series B Debentures

                                       11
<PAGE>   12
                  honor the conversion at issue by either: (x) issuing the
                  number of shares of Common Stock issuable at the actual
                  Conversion Price pursuant to Section 4(c)(i)(A), or (y) issue
                  the number of shares of Common Stock issuable upon the
                  conversion at issue, as if the conversion price applicable to
                  such conversion was equal to the Floor Price and pay cash, no
                  later than the third Trading Day following the Record Date, to
                  the Holder, in an amount equal to the product of (A) the
                  average of the Per Share Market Values for the five Trading
                  Days preceding the Conversion Date for such conversion and (B)
                  the number of shares of Common Stock otherwise issuable at the
                  actual Conversion Price then in effect less the number of
                  shares of Common Stock issuable upon such conversion at the
                  Floor Price (the "Floor Prepayment Price"). Failure by the
                  Company to timely deliver the Company Notice to the Holder
                  pursuant to the terms of this Section shall result
                  conclusively be deemed an election by the Company under
                  subsection (x) hereunder. Failure by the Company to pay any
                  portion of the Floor Prepayment Price by the third Trading Day
                  following the applicable Conversion Date shall result in the
                  invalidation ab initio of the unpaid portion of such optional
                  prepayment. In such event, the Company shall, at the option of
                  the Holder, either, (i) not later than three Trading Days from
                  receipt of Holder's request for such election, return to the
                  Holder all of the principal amount of Debentures for which
                  such Floor Prepayment Price has not been paid in full (the
                  "Unpaid Prepayment Debentures") or (ii) convert all or any
                  portion of the Unpaid Prepayment Debentures in which event the
                  applicable Conversion Price shall be the lower of the
                  Conversion Price calculated on the date the Floor Prepayment
                  Price was originally due and the Conversion Price as of the
                  Holder's written demand for conversion. If the Holder elects
                  option (ii) above, the Company shall within three Trading Days
                  of its receipt of such election deliver to the Holder the
                  shares of Common Stock issuable upon conversion of the Unpaid
                  Prepayment Debentures subject to such Holder conversion demand
                  and otherwise perform its obligations hereunder with respect
                  thereto.

                           (ii)     [If the Company, at any time while any
         Debentures are outstanding, (a) shall pay a stock dividend or otherwise
         make a distribution or distributions on shares of its Common Stock or
         any other equity or equity equivalent securities payable in shares of
         Common Stock, (b) subdivide outstanding shares of Common Stock into a
         larger number of shares, (c) combine (including by way of reverse stock
         split) outstanding shares of Common Stock into a smaller number of
         shares, or (d) issue by reclassification of shares of the Common Stock
         any shares of capital stock of the Company, then the Initial Conversion
         Price shall be multiplied by a fraction of which the numerator shall be
         the number of shares of Common Stock (excluding treasury shares, if
         any) outstanding before such event and of which the denominator shall
         be the number of shares of Common Stock outstanding after such event.
         Any adjustment made pursuant to this Section shall become effective
         immediately after the record date for the determination of stockholders
         entitled to receive such dividend or distribution and shall become
         effective immediately after the effective date in the case of a
         subdivision, combination or re-classification.

                                       12
<PAGE>   13
                           (iii)    If the Company, at any time while Debentures
         are outstanding, shall distribute to all holders of Common Stock (and
         not to Holders) evidences of its indebtedness or assets or rights or
         warrants to subscribe for or purchase any security other than with
         respect to rights granted pursuant to a stockholders rights plan
         adopted by the Company, then in each such case the Initial Conversion
         Price shall be adjusted by multiplying the Initial Conversion Price in
         effect immediately prior to the record date fixed for determination of
         stockholders entitled to receive such distribution by a fraction of
         which the denominator shall be the Per Share Market Value determined as
         of the record date mentioned above, and of which the numerator shall be
         such Per Share Market Value on such record date less the then fair
         market value at such record date of the portion of such assets or
         evidence of indebtedness or rights or warrants so distributed
         applicable to one outstanding share of the Common Stock as determined
         by the Board of Directors in good faith. In either case the adjustments
         shall be described in a statement provided to the Holders of the
         portion of assets or evidences of indebtedness or rights or warrants so
         distributed or such subscription rights applicable to one share of
         Common Stock. Such adjustment shall be made whenever any such
         distribution is made and shall become effective immediately after the
         record date mentioned above.](6)

                           (iv)     In case of any reclassification of the
         Common Stock or any compulsory share exchange pursuant to which the
         Common Stock is converted into other securities, cash or property, the
         Holders shall have the right thereafter to, at their option, (A)
         convert the then outstanding principal amount, together with all
         accrued but unpaid interest and any other amounts then owing hereunder
         in respect of this Debenture only into the shares of stock and other
         securities, cash and property receivable upon or deemed to be held by
         holders of the Common Stock following such reclassification or share
         exchange, and the Holders of the Debentures shall be entitled upon such
         event to receive such amount of securities, cash or property as the
         shares of the Common Stock of the Company into which the then
         outstanding principal amount, together with all accrued but unpaid
         interest and any other amounts then owing hereunder in respect of this
         Debenture could have been converted immediately prior to such
         reclassification or share exchange would have been entitled or (B)
         require the Company to prepay the aggregate of its outstanding
         principal amount of Debentures, plus all interest and other amounts due
         and payable thereon, at a price determined in accordance with Section
         3(b). The entire prepayment price shall be paid in cash. This provision
         shall similarly apply to successive reclassifications or share
         exchanges.

                           (v)      [All calculations under this Section 4 shall
         be made to the nearest cent or the nearest 1/100th of a share, as the
         case may be. No adjustments in the Initial Conversion Price shall be
         required if such adjustment is less than $0.01, provided, however, that
         any adjustments which by reason of this Section are not required to be
         made shall be carried forward and taken into account in any subsequent
         adjustment.

                           (vi)     Whenever the Initial Conversion Price is
         adjusted pursuant to Section 4(c)(ii) or (iii), the Company shall
         promptly mail to each Holder a notice setting

--------------------------------

(6) For Series B Debentures.

                                       13
<PAGE>   14
         forth the Initial Conversion Price after such adjustment and setting
         forth a brief statement of the facts requiring such adjustment.](7)

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

                           (viii)   In case of the closing of any (1) merger or
         consolidation of the Company with or into another Person, or (2) sale
         by the Company of more than one-half of the assets of the Company (on a
         market value basis) in one or a series of related transactions, a
         Holder shall have the right to (A) if permitted under Section 3(b)
         hereof, exercise its rights of prepayment under Section 3(b) with
         respect to such event, or (B) convert its aggregate principal amount of
         Debentures then outstanding into the shares of stock and other
         securities, cash and property receivable upon or deemed to be held by
         holders of Common Stock following such merger, consolidation or sale,
         and such Holder shall be entitled upon conversion of the Debentures to
         receive such amount of securities, cash and property as the shares of
         Common Stock into which such aggregate principal amount of Debentures
         could have been converted immediately prior to such merger,
         consolidation or sales would have been entitled. The terms of any such
         merger, sale or consolidation shall include such terms so as to
         continue to give the Holders the right to

--------------------------------

(7) For Series B Debentures.

                                       14
<PAGE>   15
         receive the securities, cash and property set forth in this Section
         upon any conversion or redemption following such event. This provision
         shall similarly apply to successive such events.

                  (d)      The Company covenants that it will at all times
reserve and keep available out of its authorized and unissued shares of Common
Stock solely for the purpose of issuance upon conversion of the Debentures and
payment of interest on the Debentures, each as herein provided, free from
preemptive rights or any other actual contingent purchase rights of persons
other than the Holders, not less than such number of shares of the Common Stock
as shall (subject to any additional requirements of the Company as to
reservation of such shares set forth in the Purchase Agreement) be issuable
(taking into account the adjustments and restrictions of Section 4(b)) upon the
conversion of the outstanding principal amount of the Debentures and payment of
interest hereunder. The Company covenants that all shares of Common Stock that
shall be so issuable shall, upon issue, be duly and validly authorized, issued
and fully paid, nonassessable and, if the Underlying Shares Registration
Statement has been declared effective under the Securities Act, registered for
public sale in accordance with such Underlying Shares Registration Statement.

                  (e)      Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of the
Common Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the Per Share Market Value at such time.
If the Company elects not, or is unable, to make such a cash payment, the Holder
shall be entitled to receive, in lieu of the final fraction of a share, one
whole share of Common Stock.

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

                  (g)      Any and all notices or other communications or
deliveries to be provided by the Holders of the Debentures hereunder, including,
without limitation, any Conversion Notice, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid, addressed to
the Company, at 157 Technology Drive, Irvine, CA 92618, Facsimile No.: (949)
788-6706, attention Chief Financial Officer, or such other address or facsimile
number as the Company may specify for such purposes by notice to the Holders
delivered in accordance with this Section, with a copy to Latham & Watkins, 650
Town Center Drive, Suite 2000, Costa Mesa, CA 92661-1925 (facsimile number (714)
755-8290), attention Alan W. Pettis, Esq. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service or sent by certified or registered mail, postage
prepaid, addressed to each Holder of the Debentures at the facsimile telephone
number or address of such Holder appearing on the books of the

                                       15
<PAGE>   16
Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
6:30 p.m. (New York City time), (ii) the date after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section later than 6:30 p.m. (New York City
time) on any date and earlier than 11:59 p.m. (New York City time) on such date,
(iii) four days after deposit in the United States mail, (iv) the Business Day
following the date of mailing, if sent by nationally recognized overnight
courier service, or (v) upon actual receipt by the party to whom such notice is
required to be given.

         Section  5.       Optional Prepayment.

                  (a)      During the time that any portion of this Debenture
remains outstanding, the Company shall have the right, exercisable on any
Trading Day in which the Conversion Price shall be less than $6.00 (which number
shall be subject to equitable adjustments for stock splits, recombinations and
similar events), in accordance with the terms hereof and upon three Trading
Days' prior written notice to the Holders to be prepaid (an "Optional Prepayment
Notice"), to prepay all or any portion of the outstanding principal amount of
the Debentures which has not previously been repaid or for which Conversion
Notices have not previously been delivered. The prepayment price applicable to
prepayments under this Section 5(a) shall equal the Optional Prepayment Price
(as defined in Section 6) and shall be paid in cash. Any such prepayment shall
be free of any claim of subordination. The Holders shall have the right to
tender, and the Company shall honor, Conversion Notices delivered on or prior to
the expiration of the fifteenth Trading Day after receipt by the Holders of an
Optional Prepayment Notice for such Debentures (the fifteenth Trading Day after
receipt by the Holders of an Optional Prepayment Notice is referred to herein as
the "Optional Prepayment Date").

                  (b)      The Company shall not be entitled to deliver an
Optional Prepayment Notice to the Holder (and, if after delivery thereof and
prior to the Optional Prepayment Date, any of the following conditions shall
cease to be met, such notice, at the option of the Holders, shall be deemed no
longer effective) if: (i) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes is insufficient to satisfy
the Company's conversion obligations of the aggregate principal amount of
Debentures then outstanding, or (ii) there is neither an effective Underlying
Shares Registration Statement under which the Holders can resell all of the
issued Underlying Shares and all of the Underlying Shares as are issuable upon
conversion in full of the principal amount of Debentures subject to an Optional
Prepayment Notice nor may all of such issued and issuable Underlying Shares be
sold by the Holders subject to such prepayment without volume restrictions
pursuant to Rule 144 promulgated under the Securities Act, as determined by
counsel to the Company pursuant to a written opinion letter, addressed to the
Company's transfer agent in the form and substance acceptable to the Holders and
such transfer agent, or (iii) the Common Stock is not then listed for trading on
the NASDAQ or on a Subsequent Market.

                  (c)      If any portion of the Optional Prepayment Price shall
not be paid by the Company by the Optional Prepayment Date, the Optional
Prepayment Price shall bear interest at the rate of 18% per annum (or such
lesser maximum amount that is permitted to be paid by

                                       16
<PAGE>   17
applicable law) to accrue daily from the date such interest is due hereunder
through and including the date of payment (which amount shall be paid as
liquidated damages and not as a penalty). In addition, if any portion of the
Optional Prepayment Price remains unpaid through the expiration of the Optional
Prepayment Date, the Holder subject to such prepayment may elect by written
notice to the Company to either (x) demand conversion in accordance with the
formula and the time period therefor set forth in Section 4 of any portion of
the principal amount of Debentures for which the Optional Prepayment Price, plus
accrued interest thereon, has not been paid in full (the "Unpaid Prepayment
Principal Amount"), in which event the applicable Conversion Price shall be the
lower of the Conversion Price calculated on the Optional Prepayment Date and the
Conversion Price as of the Holder's written demand for conversion, or (y)
invalidate ab initio such optional prepayment, notwithstanding anything herein
contained to the contrary. If the Holder elects option (x) above, the Company
shall, within three Trading Days after such election is deemed delivered
hereunder, deliver to the Holder the shares of Common Stock issuable upon
conversion of the Unpaid Prepayment Principal Amount subject to such conversion
demand and otherwise perform its obligations hereunder with respect thereto. If
the Holder elects option (y) above, the Company shall promptly, and in any event
not later than three Trading Days from receipt of notice of such election,
return to the Holder new Debentures for the full Unpaid Prepayment Principal
Amount and shall no longer have any prepayment rights under this Debenture. If,
upon an election under option (x) above, the Company fails to deliver
certificates representing the shares of Common Stock issuable upon conversion of
the Unpaid Prepayment Principal Amount within the time period set forth in this
Section, the Company shall pay to the Holder in cash, as liquidated damages and
not as a penalty, $5,000 per day until the Company delivers such certificates to
the Holder.

         Section 6.        Definitions. For the purposes hereof, the following
terms shall have the following meanings:

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

         "Change of Control Transaction" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
effective control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 33% of the
voting securities of the Company, (ii) a replacement at one time or over time of
more than one-half of the members of the Company's board of directors which is
not approved by a majority of those individuals who are members of the board of
directors on the date hereof (or by those individuals who are serving as members
of the board of directors on any date whose nomination to the board of directors
was approved by a majority of the members of the board of directors who are
members on the date hereof), (iii) the merger or consolidation of the Company
with or into another entity that is not wholly-owned by the Company upon the
completion of which the stockholders of the Company, immediately before such
merger or consolidation, own or control less than 2/3 of the voting securities
of the surviving entity, or sale of 50% or more of the assets of the Company in
one or a series of related transactions, or (iv) the execution by the Company of
an agreement to which the Company is a party or by which it is bound, providing
for any of the events set forth above in (i), (ii) or (iii).

                                       17
<PAGE>   18
         "Closing Date" shall have the meaning set forth in the Purchase
Agreement.

         "Commission" means the Securities and Exchange Commission.

         "Common Stock" means the common stock, $.001 par value per share, of
the Company and stock of any other class into which such shares may hereafter
have been reclassified or changed.

         "Exchange Act" means the Securities Exchange Act of 1934, as amended.

         "Interest Effectiveness Date" means the earlier to occur of (x) the
Effectiveness Date (as defined in the Registration Rights Agreement) and (y) the
date that an Underlying Shares Registration Statement is declared effective by
the Commission.

         "Mandatory Prepayment Amount" for any Debentures shall equal the sum of
(i) the greater of (A) 120% of the principal amount of Debentures to be prepaid,
plus all accrued and unpaid interest thereon, and (B) the principal amount of
Debentures to be prepaid, plus all accrued and unpaid interest thereon, divided
by the Conversion Price on (x) the date the Mandatory Prepayment Amount is
demanded or otherwise due or (y) the date the Mandatory Prepayment Amount is
paid in full, whichever is less, multiplied by the Per Share Market Value on (x)
the date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the
date the Mandatory Prepayment Amount is paid in full, whichever is greater, and
(ii) all other amounts, costs, expenses and liquidated damages due in respect of
such Debentures.

          "Optional Prepayment Price" shall equal the sum of (i) 106% of the
principal amount of Debentures to be prepaid, plus all accrued and unpaid
interest thereon, and (ii) all other amounts, expenses, costs and liquidated
damages due in respect of such Debentures.

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

         "Per Share Market Value" means on any particular date (a) the closing
bid price per share of Common Stock on such date on the NASDAQ or on such
Subsequent Market on which the shares of Common Stock are then listed or quoted,
or if there is no such price on such date, then the closing bid price on the
NASDAQ or on such Subsequent Market on the date nearest preceding such date, or
(b) if the shares of Common Stock are not then listed or quoted on the NASDAQ or
a Subsequent Market, the closing bid price for a share of Common Stock in the
over-the-counter market, as reported by the National Quotation Bureau
Incorporated or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or (c) if the shares of
Common Stock are not then reported by the National Quotation Bureau Incorporated
(or similar organization or agency succeeding to its functions of reporting
prices), then the average of the "Pink Sheet" quotes for the relevant conversion
period, as determined in good faith by the Holder, or (d) if the shares of
Common Stock are not then publicly traded the fair market value of a share of
Common Stock as determined by an Appraiser selected in good faith by the Holders
of a majority in interest of the principal amount of Debentures then
outstanding.

                                       18
<PAGE>   19
         "Person" means a corporation, an association, a partnership, an
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.

         "Purchase Agreement" means the Securities Purchase Agreement, dated as
of September 21, 2000, to which the Company, NeoGene Technologies, Inc. and the
original Holders are parties, as amended, modified or supplemented from time to
time in accordance with its terms.

         "Registration Rights Agreement" means the Registration Rights
Agreement, dated September 21, 2000, to which the Company and the original
Holders are parties, as amended, modified or supplemented from time to time in
accordance with its terms.

         "Securities Act" means the Securities Act of 1933, as amended.

         "Trading Day" means (a) a day on which the shares of Common Stock are
traded on the NASDAQ or on such Subsequent Market on which the shares of Common
Stock are then listed or quoted, or (b) if the shares of Common Stock are not
listed on the NASDAQ or a Subsequent Market, a day on which the shares of Common
Stock are traded in the over-the-counter market, as reported by the OTC Bulletin
Board, or (c) if the shares of Common Stock are not quoted on the OTC Bulletin
Board, a day on which the shares of Common Stock are quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices); provided, however, that in the event that the shares of
Common Stock are not listed or quoted as set forth in (a), (b) and (c) hereof,
then Trading Day shall mean any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the State of
New York are authorized or required by law or other government action to close.

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

         "Underlying Shares" means the shares of Common Stock issuable upon
conversion of Debentures or as payment of interest in accordance with the terms
hereof.

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

         Section 7.        Except as expressly provided herein, no provision of
this Debenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, interest and liquidated
damages (if any) on, this Debenture at the time, place, and rate, and in the
coin or currency, herein prescribed. This Debenture is a direct obligation of
the Company. This Debenture ranks pari passu with all other Debentures now or
hereafter issued under the terms set forth herein. As long as there are
Debentures outstanding, the Company shall not and shall cause its subsidiaries
not to, without the consent of the Holders, (i) amend its certificate of
incorporation, bylaws or other charter documents so as to adversely affect any
rights of the Holders; (ii) repay, repurchase or offer to repay, repurchase or
otherwise acquire shares of the Company's Common Stock or other equity
securities other than as to the Underlying Shares to the extent permitted or
required under the Transaction Documents; or (iii) enter into any agreement with
respect to any of the foregoing that is not conditioned upon

                                       19
<PAGE>   20
the receipt of an affirmative vote pursuant to this Section. The Company may
only voluntarily prepay the outstanding principal amount on the Debentures in
accordance with Section 5 hereof.

         Section 8.        This Debenture shall not entitle the Holder to any of
the rights of a stockholder of the Company, including without limitation, the
right to vote, to receive dividends and other distributions, or to receive any
notice of, or to attend, meetings of stockholders or any other proceedings of
the Company, unless and to the extent converted into shares of Common Stock in
accordance with the terms hereof.

         Section 9.        If this Debenture shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Debenture, or in lieu of or in
substitution for a lost, stolen or destroyed debenture, a new Debenture for the
principal amount of this Debenture so mutilated, lost, stolen or destroyed but
only upon receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.

         Section 10.       This Debenture is subordinate to all bank debt of the
Company outstanding as of the Original Issue Date and set forth in Schedule
2.1(n) to the Purchase Agreement or at any time thereafter.

         Section 11.       This Debenture shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
conflicts of laws thereof. The Company and the Holder hereby irrevocably submits
to the exclusive jurisdiction of the state and federal courts sitting in the
City of New York, Borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, or that such suit, action or proceeding is
improper. Each of the Company and the Holder hereby irrevocably waives personal
service of process and consents to process being served in any such suit, action
or proceeding by receiving a copy thereof sent to the Company at the address in
effect for notices to it under this instrument and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law.

         Section 12.       Any waiver by the Company or the Holder of a breach
of any provision of this Debenture shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Debenture. The failure of the Company or the Holder to insist
upon strict adherence to any term of this Debenture on one or more occasions
shall not be considered a waiver or deprive that party of the right thereafter
to insist upon strict adherence to that term or any other term of this
Debenture. Any waiver must be in writing.

         Section 13.       If any provision of this Debenture is invalid,
illegal or unenforceable, the balance of this Debenture shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances. If it
shall be found that any interest or other amount deemed interest due hereunder
shall violate applicable laws governing usury, the applicable rate of interest
due hereunder shall automatically be lowered to equal the maximum permitted rate
of interest.

                                       20
<PAGE>   21
         Section 14.       Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day.

                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                             SIGNATURE PAGE FOLLOWS]

                                       21
<PAGE>   22
         IN WITNESS WHEREOF, the Company has caused this Convertible Debenture
to be duly executed by a duly authorized officer as of the date first above
indicated.

                                         NEOTHERAPEUTICS, INC.

                                         By:
                                                --------------------------------
                                         Name:
                                                --------------------------------
                                         Title:
                                                --------------------------------

Attest:

By:
       --------------------------------
Name:
       --------------------------------
Title:
       --------------------------------

                                       22
<PAGE>   23
                                    EXHIBIT A
                              NOTICE OF CONVERSION

(To be Executed by the Registered Holder in order to Convert the Debenture)

         The undersigned hereby elects to convert the attached Debenture into
shares of common stock, $.001 par value per share (the "Common Stock"), of
NeoTherapeutics, Inc. (the "Company") according to the conditions hereof, as of
the date written below. If shares are to be issued in the name of a person other
than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.

Conversion calculations:

Date to Effect Conversion
                                                      --------------------------
Number of shares of Preferred Stock to be Converted
                                                      --------------------------
Number of shares of Common Stock to be Issued
                                                      --------------------------
Applicable Conversion Price
                                                      --------------------------

                                             -----------------------------------
                                             Signature
                                             Name
                                                   -----------------------------
                                             Address
                                                    ----------------------------

                                             -----------------------------------

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00017-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00017-of-00352.parquet"}]]