Document:

Exhibit 4(g)

 

ADDENDUM
NO. 002

 

TO MASTER
SECURITY AGREEMENT

 

DATED AS
OF SEPTEMBER 24, 2004

 

THIS ADDENDUM
(“Addendum”), effective as of September 24, 2004, amends and supplements (i) the
above-referenced Agreement including Addendum No. 001 (the “Agreement”)
between GE Capital Public Finance, Inc. (together with its successors and
assigns, if any “Secured Party”) and MGP Ingredients, Inc. (“Debtor”), and
(ii) Collateral Schedule No. 001 to the Agreement (the “Schedule”),
and is hereby incorporated into the Agreement and the Schedule, as applicable,
as though fully set forth therein. Capitalized terms not otherwise defined
herein or for which other definitional references are not provided herein shall
have the meanings set forth in the Agreement.

 

1.             The following text
hereby replaces Section 2(m) of the Agreement:

 

On or before September 1,
2005, Debtor shall grant Secured Party a first priority perfected security
interest in all of Debtor’s equipment (as defined in the applicable Uniform
Commercial Code), whether now owned or hereafter acquired that is at any time
located at the facility commonly known as 16 Kansas Avenue, Wyandotte County,
Kansas 66105, pursuant to documents that are in form and substance satisfactory
to Secured Party.

 

2.             EXCEPT AS EXPRESSLY
AMENDED HEREBY, THE AGREEMENT AND THE SCHEDULE SHALL REMAIN IN FULL FORCE
AND EFFECT.

 

IN WITNESS
WHEREOF, the parties hereto have executed this Amendment by signature of their
respective authorized representative set forth below as of the 31st day of March,
2005.

 

	
  SECURED PARTY:

  	
  DEBTOR:

  
	
  General Electric Capital Corporation

  	
  MGP Ingredients, Inc.

  
	
   

  	
   

  
	
  By:

  	
  /s/ Craig D. Moody

  	
   

  	
  By:

  	
  /s/ Bran T. Cahill

  	
   

  
	
  Name: Craig D. Moody

  	
  Name: Brian T. Cahill

  
	
  Title: Risk Analyst

  	
  Title: CFOExhibit 4(h)

 

ADDENDUM
NO. 003

 

TO MASTER
SECURITY AGREEMENT

 

DATED AS
OF SEPTEMBER 24, 2004

 

THIS ADDENDUM
(“Addendum”), effective as of August 31, 2005, amends and supplements (i) the
above-referenced Agreement including Addendum No. 001 and Addendum No. 002
(the “Agreement”) between GE Capital Public Finance, Inc. (together with
its successors and assigns, if any, “Secured Party”) and MGP Ingredients, Inc.
(“Debtor”), and (ii) Collateral Schedule No. 001 to the
Agreement (the “Schedule”), and is hereby incorporated into the Agreement and
the Schedule, as applicable, as though fully set forth therein. Capitalized
terms not otherwise defined herein or for which other definitional references
are not provided herein shall have the meanings set forth in the Agreement.

 

1.             The following text
hereby replaces Section 2(m) of the Agreement:

 

On or before September 30,
2005, Debtor shall grant Secured Party a first priority perfected security
interest in all of Debtor’s equipment (as defined in the applicable Uniform
Commercial Code), whether now owned or hereafter acquired that is at any time
located at the facility commonly known as 16 Kansas Avenue, Wyandotte County,
Kansas 66105, pursuant to documents that are in form and substance satisfactory
to Secured Party.

 

2.             EXCEPT AS EXPRESSLY
AMENDED HEREBY, THE AGREEMENT AND THE SCHEDULE SHALL REMAIN IN FULL FORCE
AND EFFECT.

 

IN WITNESS
WHEREOF, the parties hereto have executed this Amendment by signature of their
respective authorized representative set forth below as of the 31st day of August,
2005.

 

	
  SECURED PARTY:

  	
  DEBTOR:

  
	
  General Electric Capital Corporation

  	
  MGP Ingredients, Inc.

  
	
   

  	
   

  
	
  By:

  	
   /s/
  Chris Jones

  	
   

  	
  By:

  	
   /s/
  Brian T. Cahill

  	
   

  
	
  Name: Chris Jones

  	
  Name: Brian T. Cahill

  
	
  Title: Sr. Risk Analyst

  	
  Title: CFOExhibit
4.1

 

EXHIBIT A

 

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY.  THIS SECURITY AND THE
SECURITIES ISSUABLE UPON CONVERSION OF THIS SECURITY MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH
SECURITIES.

 

Original Issue Date: October        ,
2004

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

 

$                        

 

CONVERTIBLE DEBENTURE

DUE OCTOBER     ,
2007

 

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

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

 

(1)                                  As
to the Debentures issued at the First Closing, 75% of the Market Price and as
to the Debentures issued at the Second Closing, the lesser of (a) 75% of the
Market Price and (b) the lesser of (i) the average of the 5 consecutive Closing
Prices immediately prior to the Effective Date (as defined in the Purchase
Agreement) and (ii) the Closing Price on the Effective Date.

 

 

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

 

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

 

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

 

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

 

“Closing Price” means on any
particular date (a) the daily volume weighted average price per share of
Common Stock on such date (or the nearest preceding date) on the Trading Market
(as reported by Bloomberg L.P. based on a Trading Day from 9:30 a.m.
Eastern Time to 4:02 p.m. Eastern Time) using the VAP function, or (b) if
the Common Stock is not then listed or quoted on the Trading Market and if
prices for the Common Stock are then reported in the “pink sheets” published by
the National Quotation Bureau Incorporated (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid price per
share of the Common Stock so reported, or (c) if the shares of Common
Stock are not then publicly traded the fair market value of a share of Common
Stock as determined by a nationally-recognized independent appraiser selected
in good faith by the Purchasers of a majority in interest of the principal
amount of Debentures then outstanding and reasonably acceptable to the Company.

 

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

 

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

 

2

 

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

 

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

 

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

 

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

 

“Equity Conditions” shall mean, during
the period in question, (i) the Company shall have duly honored all
conversions and redemptions scheduled to occur or occurring by virtue of one or
more Notice of Conversions, if any, (ii) all liquidated damages and other
amounts owing in respect of the Debentures shall have been paid; (iii) there
is an effective Registration Statement pursuant to which the Holder is
permitted to utilize the prospectus thereunder to resell all of the shares
issuable pursuant to the Transaction Documents (and the Company believes, in
good faith, that such effectiveness will continue uninterrupted for the
foreseeable future), (iv) the Common Stock is trading on the Trading
Market and all of the shares issuable pursuant to the Transaction Documents are
listed for trading on a Trading Market (and the Company believes, in good
faith, that trading of the Common Stock on a Trading Market will continue
uninterrupted for the foreseeable future), (v) there is a sufficient
number of authorized but unissued and otherwise unreserved shares of Common
Stock for the issuance of all of the shares issuable pursuant to the
Transaction Documents, (vi) there is then existing no Event of Default or
event which, with the passage of time or the giving of notice, would constitute
an Event of Default and (vii) all of the shares issued or issuable
pursuant to the Transaction Documents in full, ignoring for such purposes any
conversion or exercise limitation therein, would not violate the limitations
set forth in Section 4(c) and (ix) no public announcement of a
pending or proposed Fundamental Transaction, Change of Control Transaction or
acquisition transaction has occurred that has not been consummated.

 

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

 

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

 

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

 

“Late
Fees” shall have the meaning set forth in the second paragraph to this
Debenture.

 

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

 

3

 

Mandatory Prepayment Amount is paid in full, whichever is less,
multiplied by the Closing 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 greater, and (ii) all other amounts, costs,
expenses 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.

 

“Person” means a corporation, an
association, a partnership, a limited liability company, 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 October     , 2004, to which the Company
and the original Holder are parties, as amended, modified or supplemented from
time to time in accordance with its terms.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

4

 

Section 2.                                            Interest.

 

a)                                      No
Payment of Interest.  Except as set
forth herein, the Company shall not pay interest to the Holder on this
Debenture.

 

b)                                     Prepayment.  Except as otherwise set forth in this
Debenture, the Company may not prepay
any portion of the principal amount of this Debenture without the prior written
consent of the Holder.

 

Section 3.                                            Registration of Transfers and Exchanges.

 

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

 

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

 

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

 

Section 4.                                            Conversion.

 

a)                                      Voluntary
Conversion. Subject to the terms hereof and restrictions and limitations contained
herein, at any time after the Original Issue Date until this Debenture is no
longer outstanding, this Debenture shall be convertible into shares of Common
Stock at the option of the Holder, in whole or in part at any time and from
time to time (subject to the limitations on conversion set forth in Section 4(c) hereof).  The Holder shall effect conversions by
delivering to the Company the form of Notice of Conversion attached hereto as Annex
A (a “Notice of Conversion”), specifying therein the principal
amount of Debentures to be converted and the date on which such conversion is
to be effected (a “Conversion Date”). 
If no Conversion Date is specified in a Notice of Conversion, the
Conversion Date shall be the date that such Notice of Conversion is provided
hereunder.  To effect conversions
hereunder, the Holder shall not be required to physically surrender Debentures
to the Company unless the entire principal amount of this Debenture has been so
converted. Conversions hereunder shall have the effect of lowering the
outstanding principal amount of this Debenture in an amount equal to the
applicable conversion.  The Holder and
the Company shall maintain records showing the principal amount converted and
the date of such conversions.  The
Company shall deliver any objection to any Notice of Conversion within 1
Business Day of receipt of such notice. 
In the event of any dispute or discrepancy, the records of the Holder
shall be

 

5

 

controlling and
determinative in the absence of manifest error. The Holder and any assignee, by
acceptance of this Debenture, acknowledge and agree that, by reason of the
provisions of this paragraph, following conversion of a portion of this
Debenture, the unpaid and unconverted principal amount of this Debenture may be
less than the amount stated on the face hereof.

 

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

 

c)                                      Conversion
Limitations; Holder’s Restriction on Conversion. The Company shall
not effect any conversion of this Debenture, and the Holder shall not have the
right to convert any portion of this Debenture, pursuant to Section 4(a) or
otherwise, to the extent that after giving effect to such conversion, the
Holder (together with the Holder’s affiliates), as set forth on the applicable
Notice of Conversion, would beneficially own in excess of 4.99% of the number
of shares of the Common Stock outstanding immediately after giving effect to
such conversion.  For purposes of the foregoing sentence, the number of
shares of Common Stock beneficially owned by the Holder and its affiliates
shall include the number of shares of Common Stock issuable upon conversion of
this Debenture with respect to which the determination of such sentence is
being made, but shall exclude the number of shares of Common Stock which would
be issuable upon (A) conversion of the remaining, nonconverted portion of
this Debenture beneficially owned by the Holder or any of its affiliates and (B) exercise
or conversion of the unexercised or nonconverted portion of any other
securities of the Company (including, without limitation, any other Debentures
or the Warrants) subject to a limitation on conversion or exercise analogous to
the limitation contained herein beneficially owned by the Holder or any of its
affiliates.  Except as set forth in the preceding sentence, for purposes
of this Section 4(c), beneficial ownership shall be calculated in
accordance with Section 13(d) of the Exchange Act.  To the extent that the limitation contained
in this section applies, the determination of whether this Debenture is
convertible (in relation to other securities owned by the Holder) and of which
portion of this Debenture is convertible shall be in the sole discretion of
such Holder. To ensure compliance with this restriction, the Holder will be
deemed to represent to the Company each time it delivers a Notice of Conversion
that such Notice of Conversion has not violated the restrictions set forth in
this paragraph and the Company shall have no obligation to verify or confirm the
accuracy of such determination.  For
purposes of this Section 4(c), in determining the number of outstanding
shares of Common Stock, the

 

(2)                                  As
to the Debentures issued at the First Closing, 75% of the Market Price and as
to the Debentures issued at the Second Closing, the lesser of (a) 75% of the
Market Price and (b) the lesser of (i) the average of the 5 consecutive Closing
Prices immediately prior to the Effective Date (as defined in the Purchase
Agreement) and (ii) the Closing Price on the Effective Date.

 

6

 

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

 

d)             Mechanics
of Conversion 

 

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

 

ii.                                       Delivery
of Certificate Upon Conversion. Not later than
three Trading Days after any Conversion Date, the Company will deliver to the
Holder a certificate or certificates representing the Conversion Shares which
shall be free of restrictive legends and trading restrictions (other than those
required by the Purchase Agreement or applicable law) representing the number
of shares of Common Stock being acquired upon the conversion of Debentures. The
Company shall, if available and if allowed under applicable securities laws,
use its commercially reasonable 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.

 

iii.                                    Failure
to Deliver Certificates.  If 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 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 certificate
representing the principal amount of Debentures tendered for conversion, if it
was delivered to the Company by the Holder, and the Holder shall immediately
return any stock certificates representing Conversion Shares from such
rescinded conversion to the Company.

 

iv.                                   Partial
Liquidated Damages.  If the Company
fails for any reason to deliver to the Holder such certificate or certificates
pursuant to Section 4(d)(ii) by the third
Trading Day after the Conversion Date, the Company shall pay to such Holder, in
cash, as liquidated damages and not as a penalty, for each $1000

 

7

 

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

 

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

 

8

 

available to or elected by the Holder) the
amount by which (x) the Holder’s total purchase price (including brokerage
commissions, if any) for the Common Stock so purchased exceeds (y) the product
of (1) the aggregate number of shares of Common Stock that such Holder
anticipated receiving from the conversion at issue multiplied by (2) the
actual sale price of the Common Stock at the time of the sale (including
brokerage commissions, if any) giving rise to such purchase obligation and (B) at
the option of the Holder, either reissue 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(d)(ii).  For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect
to an attempted conversion of Debentures with respect to which the actual sale
price of the Conversion Shares at the time of the sale (including brokerage
commissions, if any) giving rise to such purchase obligation was a total of
$10,000 under clause (A) of the immediately preceding sentence, the
Company shall be required to pay the Holder $1,000.  The Holder shall provide the Company written
notice indicating the amounts payable to the Holder in respect of the
Buy-In.  Notwithstanding anything
contained herein to the contrary, if a Holder requires the Company to make
payment in respect of a Buy-In for the failure to timely deliver certificates
hereunder and the Company timely pays in full such payment, the Company shall
not be required to pay such Holder liquidated damages under Section 4(d)(iv) in respect of the certificates resulting in such
Buy-In.

 

vi.                                   Reservation
of Shares Issuable Upon Conversion. The Company
covenants that it will at all times 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 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 5) upon the conversion of the
outstanding principal amount of the Debentures. 
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 Registration Statement is then effective under
the Securities Act, registered for public resale in accordance with such
Registration Statement.

 

vii.                                Fractional
Shares. Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of the Common Stock,
but may if otherwise permitted, make a cash payment in
respect of any final fraction of a share based on the Closing Price at such
time.  If the Company elects not, or is
unable, to make such a cash payment, the Holder

 

9

 

shall be entitled
to receive, in lieu of the final fraction of a share, one whole share of Common
Stock.

 

viii.                             Transfer
Taxes.  The issuance of certificates
for shares of the Common Stock on conversion of 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.

 

Section 5.                                            Certain Adjustments.

 

a)                                      Stock
Dividends and Stock Splits.  If the
Company, at any time while the 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 (which, for avoidance of doubt, shall not include any
shares of Common Stock issued by the Company pursuant to this Debenture, the
Warrants or the Additional Investment Rights), (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
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.

 

b)                                     Subsequent
Equity Sales.  If the Company or any
Subsidiary thereof, as applicable, at any time while Debentures are
outstanding, shall offer, sell, grant any option to purchase or offer, sell or
grant any right to reprice its securities, or otherwise dispose of or issue (or
announce any offer, sale, grant or any option to purchase or other disposition)
any Common Stock or Common Stock Equivalents entitling any Person to acquire
shares of Common Stock, at an effective price per share less than the then
Conversion Price (“Dilutive Issuance”), as adjusted hereunder (if the
holder of the Common Stock or Common Stock Equivalents so issued shall at any
time, whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights per share which is

 

10

 

issued in connection with such issuance, be
entitled to receive shares of Common Stock at an effective price per share
which is less than the Conversion Price, such issuance shall be deemed to have
occurred for less than the Conversion Price), then the Conversion Price shall
be reduced to equal the effective conversion, exchange or purchase price for
such Common Stock or Common Stock Equivalents (including any reset provisions
thereof) at issue.  Such adjustment shall
be made whenever such Common Stock or Common Stock Equivalents are issued.  The Company shall notify the Holder in
writing, no later than the business day following the issuance of any Common
Stock or Common Stock Equivalents subject to this section, indicating therein
the applicable issuance price, or of applicable reset price, exchange price,
conversion price and other pricing terms.

 

c)                                      Pro
Rata Distributions. 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, then in each such case the Conversion
Price shall be determined by multiplying such Conversion Price in effect
immediately prior to the record date fixed for determination of stockholders
entitled to receive such distribution by a fraction of which the denominator
shall be the Closing Price determined as of the record date mentioned above,
and of which the numerator shall be such Closing Price on such record date less
the then fair market value at such record date of the portion of such assets or
evidence of indebtedness so distributed applicable to one outstanding share of
the Common Stock as determined by the Board of Directors in good faith.  In either case the adjustments shall be
described in a statement provided to the Holders of the portion of assets or
evidences of indebtedness so distributed or such subscription rights applicable
to one share of Common Stock.  Such
adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.

 

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

 

e)                                      Notice
to Holders.

 

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

 

11

 

possible
adjustment price in the case of an MFN Transaction (as defined in the Purchase
Agreement).

 

ii.                                       Notice
to Allow Conversion by Holder.  If (A) the
Company shall declare a dividend (or any other distribution) on the Common
Stock; (B) the Company shall declare a special nonrecurring cash dividend
on or a redemption of the Common Stock; (C) the Company shall authorize
the granting to all holders of the Common Stock rights or warrants to subscribe
for or purchase any shares of capital stock of any class or of any rights; (D) the
approval of any stockholders of the Company shall be required in connection
with any reclassification of the Common Stock, any consolidation or merger to
which the Company is a party, any sale or transfer of all or substantially all
of the assets of the Company, of any compulsory share exchange whereby the
Common Stock is converted into other securities, cash or property; (E) the
Company shall authorize the voluntary or involuntary dissolution, liquidation
or winding up of the affairs of the Company; then, in each case, the Company
shall cause to be filed at each office or agency maintained for the purpose of
conversion of 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.

 

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

 

12

 

Transaction”), then
upon any subsequent conversion of this Debenture, the Holder shall have the
right to receive, for each Conversion Share that would have been issuable upon
such conversion absent such Fundamental Transaction, the same kind and amount
of securities, cash or property as it would have been entitled to receive upon
the occurrence of such Fundamental Transaction if it had been, immediately
prior to such Fundamental Transaction, the holder of one share of Common Stock
(the “Alternate Consideration”). 
For purposes of any such conversion, the determination of the Conversion
Price shall be appropriately adjusted to apply to such Alternate Consideration
based on the amount of Alternate Consideration issuable in respect of one share
of Common Stock in such Fundamental Transaction, and the Company shall
apportion the Conversion Price among the Alternate Consideration in a
reasonable manner reflecting the relative value of any different components of
the Alternate Consideration.  If holders
of Common Stock are given any choice as to the securities, cash or property to
be received in a Fundamental Transaction, then the Holder shall be given the
same choice as to the Alternate Consideration it receives upon any conversion
of this Debenture following such Fundamental Transaction.  To the extent necessary to effectuate the
foregoing provisions, any successor to the Company or surviving entity in such
Fundamental Transaction shall issue to the Holder a new debenture consistent
with the foregoing provisions and evidencing the Holder’s right to convert such
debenture into Alternate Consideration. The terms of any agreement pursuant to
which a Fundamental Transaction is effected shall include terms requiring any
such successor or surviving entity to comply with the provisions of this
paragraph (iii) and insuring that this Debenture (or any such replacement
security) will be similarly adjusted upon any subsequent transaction analogous
to a Fundamental Transaction.

 

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

 

Section 6.                                            RESERVED.

 

Section 7.                                            Negative Covenants. So long as any portion of this
Debenture is outstanding, the Company will not and will not permit any of its
Subsidiaries to directly or indirectly take any of the following actions unless
approved by the holder(s) of a two-thirds majority of the then-outstanding
principal amount of all Debentures:

 

a)                                      enter
into, create, incur, assume or suffer to exist any indebtedness or liens of any
kind, on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits therefrom
that is senior to, in any respect, the Company’s obligations under the
Debentures except for Permitted Indebtedness and Permitted Liens described
below;

 

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

 

13

 

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

 

c)                                      repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a de
minimis number of shares of its Common Stock or other equity securities
other than as to the Conversion Shares to the extent permitted or required
under the Transaction Documents or as otherwise permitted by the Transaction
Documents; or

 

d)                                     enter into any agreement with respect to any of the
foregoing.

 

As used herein, “Permitted Indebtedness” shall mean:

 

i.                                          indebtedness
existing as of the date of the Purchase Agreement;

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

iii.                                    funded indebtedness
from a non-affiliated lending institution or other third party in an amount not
to exceed $5,000,000.

 

As used herein, “Permitted Liens” shall mean:

 

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

ii.                                       statutory liens
of landlords, carriers, warehousemen, mechanics, suppliers, materialmen and
other liens imposed by law incurred in the ordinary course of business for sums
not yet delinquent or being contested in good faith;

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

iv.                                   liens securing any
Permitted Indebtedness; and

v.                                      liens arising
from filing Uniform Commercial Code financing statements regarding leases.

 

Section 8.                                            Events of Default.

 

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

 

14

 

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

 

ii.          the Company shall fail to
observe or perform any other covenant or agreement contained in this Debenture
or any of the other Transaction Documents (other than a breach by the Company
of its obligations to deliver shares of Common Stock to the Holder upon
conversion which breach is addressed in clause (xii) below) which failure is
not cured, if possible to cure, within 10 Trading Days after notice of such
default sent by the Holder or by any other holder of Debentures;

 

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

 

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

 

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

 

15

 

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

 

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

 

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

 

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

 

16

 

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

 

ix.         a Registration
Statement shall not have been declared effective by the Commission on or prior
to the 180th calendar day after the First Closing Date;

 

x.          if, during the Effectiveness
Period (as defined in the Registration Rights Agreement), the effectiveness of
the 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 Registration Statement, in either case, for more
than 30 consecutive Trading Days or 60 non-consecutive Trading Days during any
12 month period; provided, however, that in the event that the
Company is negotiating a merger, consolidation, acquisition or sale of all or
substantially all of its assets or a similar transaction and in the written
opinion of counsel to the Company, the Registration Statement, would be
required to be amended to include information concerning such transactions or
the parties thereto that is not available or may not be publicly disclosed at
the time, the Company shall be permitted an additional 10 consecutive Trading
during any 12 month period relating to such an event;

 

xi.         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 (other than an
Event resulting from a failure of an Registration Statement to be declared
effective by the Commission on or prior to the Effectiveness Date (as defined
in the Registration Rights Agreement), which shall be covered by Section 8(a)(ix);

 

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

 

17

 

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

 

b)                                     Remedies
Upon Event of Default. If any Event of Default
occurs, the full principal amount of this Debenture, together with other
amounts owing in respect thereof, to the date of acceleration shall become, at
the Holder’s election, immediately due and payable in cash.   The aggregate amount payable upon an acceleration by reason of an Event of Default shall be
equal to the Mandatory Prepayment Amount. 
Commencing 5 days after the occurrence of any Event of Default that
results in the eventual acceleration of this Debenture, the interest rate on
this Debenture shall accrue at the rate of 18% per annum, or such lower maximum
amount of interest permitted to be charged under applicable law.  All Debentures for which the full Mandatory
Prepayment Amount 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 and the Holder shall have all rights as a Debenture
holder until such time, if any, as the full payment under this Section shall
have been received by it.  No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon.

 

Section 9.                                            Miscellaneous.

 

a)                                      Notices.  Any and all notices or other communications
or deliveries to be provided by the Holders hereunder, including, without
limitation, any Notice of Conversion, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service, addressed to the Company, at the address set forth above, facsimile
number (281) 466-1480, Attn: 
Steven B. Rash, 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.  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 addressed to each Holder at the
facsimile telephone number or address of such Holder appearing on the books of
the Company, or if no such facsimile telephone number or address appears, at
the principal place of business of the Holder. 
Any notice or other communication or deliveries hereunder shall be
deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile (and
the sender receives a confirmation of successful transmission) at the facsimile
telephone number specified in this Section prior to 5:30 p.m. (New
York City time), (ii) the date after the date of transmission, if such
notice or communication is

 

18

 

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

 

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

 

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

 

d)                                     Governing
Law.  All questions concerning the
construction, validity, enforcement and interpretation of this Debenture shall
be governed by and construed and enforced in accordance with the internal laws
of the State of New York, without regard to the principles of conflicts of law
thereof.  Each party agrees that all
legal proceedings concerning the interpretations, enforcement and defense of
the transactions contemplated by any of the Transaction Documents (whether
brought against a party hereto or its respective affiliates, directors,
officers, shareholders, employees or agents) shall be commenced in the state
and federal courts sitting in the City of New York, Borough of Manhattan (the “New
York Courts”).  Each party hereto
hereby irrevocably submits to the exclusive jurisdiction of the New York Courts
for the adjudication of any dispute hereunder or in connection herewith or with
any transaction contemplated hereby or discussed herein (including with respect
to the enforcement of any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or such
New York Courts are improper or inconvenient venue for such proceeding.  Each party hereby irrevocably waives personal
service of process and consents to process being served in any such suit,
action or proceeding by mailing a copy thereof via registered or certified mail
or overnight delivery (with evidence of delivery) to such party at the address
in effect for notices to it under this Debenture and agrees that such service
shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by law.
Each party hereto hereby irrevocably waives, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal proceeding
arising out of or relating to this Debenture or the transactions contemplated

 

19

 

hereby. If either
party shall commence an action or proceeding to enforce any provisions of this
Debenture, then the prevailing party in such action or proceeding shall be
reimbursed by the other party for its attorneys fees
and other costs and expenses incurred with the investigation, preparation and
prosecution of such action or proceeding.

 

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

 

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

 

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

 

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

 

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

 

20

 

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.

 

 

	
   

  	
  POWER 3 MEDICAL
  PRODUCTS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/: Steven B. Rash

  	
   

  
	
   

  	
   

  	
  Name:  Steven B. Rash

  	
   

  
	
   

  	
   

  	
  Title:  Chairman and CEO

  	
   

  

 

21

 

ANNEX A

 

NOTICE OF CONVERSION

 

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

 

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

 

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

 

Conversion calculations:

 

Date to Effect Conversion:

 

Principal Amount of Debentures to be Converted:

 

Number of shares of Common Stock to be issued:

 

 

Signature:

 

Name:

 

Address:

 

22

 

Schedule 1

 

CONVERSION SCHEDULE

 

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

 

Dated:

 

	
  Date of Conversion

  (or for first entry,

  Original Issue Date)

  	
   

  	
  Amount of

  Conversion

  	
   

  	
  Aggregate

  Principal

  Amount

  Remaining

  Subsequent to

  Conversion

  (or original

  Principal

  Amount)

  	
   

  	
  Company Attest

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

23

 

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

	
  HOLDER

  	
   

  	
  ORIGINAL PRINCIPAL AMOUNT

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Cityplatz
  Limited

  	
   

  	
  $

  	
  50,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Crescent
  International Ltd.

  	
   

  	
  $

  	
  200,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Crestview
  Capital Master, LLC

  	
   

  	
  $

  	
  150,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  DKR
  SoundShore Oasis Holding Fund Ltd.

  	
   

  	
  $

  	
  50,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Gryphon
  Master Fund L.P.

  	
   

  	
  $

  	
  100,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  GSSF Master
  Fund, LP

  	
   

  	
  $

  	
  100,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Mohawk
  Funding

  	
   

  	
  $

  	
  10,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Omicron
  Master Trust

  	
   

  	
  $

  	
  100,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Otape Investments
  LLC

  	
   

  	
  $

  	
  100,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Platinum
  Partners Value Arbitrage Fund L.P.

  	
   

  	
  $

  	
  83,333

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Richard
  Molinsky

  	
   

  	
  $

  	
  30,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Sage Capital
  Investments Limited

  	
   

  	
  $

  	
  25,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Bach Farms
  LLC

  	
   

  	
  $

  	
  1,667

  	
   

  

 

24

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00090-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00090-of-00352.parquet"}], [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00090-of-00352.parquet"}]]