ENDOCARE INC
8-K, 1999-08-06
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS
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<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                    FORM 8-K

                                 CURRENT REPORT


                     PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934



Date of Report (Date of earliest event reported) JULY 29, 1999
                                                 -------------------------------


                                 ENDOCARE, INC.
- --------------------------------------------------------------------------------
               (Exact name of registrant as specified in charter)


<TABLE>
<S>                                              <C>                                       <C>
                 DELAWARE                        0-27212                                    33-0618093
- ------------------------------------------------------------------------------------------------------------------
(State of incorporation or organization)         (Commission File Number)        (IRS Employer Identification No.)
</TABLE>


7 STUDEBAKER, IRVINE, CALIFORNIA                                      92618
- --------------------------------------------------------------------------------
(Address of principal executive offices)                            (Zip Code)


Registrant's telephone number, including area code   (949) 595-4770
                                                   -----------------------------


                                      NONE
- --------------------------------------------------------------------------------
          (Former name or former address, if changed since last report)


<PAGE>   2

ITEM 5.   OTHER EVENTS.
          -------------

          Sale of Convertible Debentures
          ------------------------------

          On July 30, 1999 Endocare, Inc., a Delaware corporation (the
"Company") received $3,000,000 from the sale of its 7% Convertible Debentures
due July 29, 2002 (the "Debentures") to investment funds managed by New
York-based Brown Simpson Asset Management, LLC (the "Purchasers"), the same
investors that completed a similar financing with the Company on June 7, 1999
(as reported in the Company's 8-K filed June 14, 1999). Under the financing
arrangement, the Purchasers have the option to purchase an additional $3,000,000
in aggregate principal amount of Debentures and, under the circumstances
described below, the Company may require the Purchasers to exercise this
purchase option. The Debentures were sold pursuant to a Securities Purchase
Agreement dated July 29, 1999 among the Company and the Purchasers. The
Securities Purchase Agreement, the Debentures, the related Registration Rights
Agreement and the Company's press release first announcing the sale of the
Debentures are included as exhibits to this report. The Debentures were sold
pursuant to an exemption from registration under the Securities Act of 1933, as
amended (the "Securities Act") by virtue of Rule 506 of Regulation D under the
Securities Act.

        The following is a summary of the principal terms of the Debentures.
This summary does not purport to explain all of the material terms of the
Debentures or the related Securities Purchase Agreement or Registration Rights
Agreement, which are filed as exhibits to this report. ONE SHOULD READ THE
DEBENTURES, THE SECURITIES PURCHASE AGREEMENT AND THE REGISTRATION RIGHTS
AGREEMENT FOR A MORE DETAILED UNDERSTANDING OF THEIR TERMS.

          The $3,000,000 principal amount of the Debentures must be repaid in
full in cash on July 29, 2002, but may be converted into the Company's Common
Stock in whole or in part at the Purchasers' option at any time, subject to
certain restrictions, on or prior to July 29, 2002 at a conversion price of
$6.00 per share. The $6.00 per share conversion price is subject to adjustment
for stock splits, stock dividends and the like. The conversion price is also
subject to anti-dilution adjustments, which provide that in the event the
Company issues or sells its Common Stock or securities convertible into Common
Stock at a price less than the conversion price of the Debentures, the
conversion price of the Debentures will be adjusted to such lower price. Certain
securities are exempted from this anti-dilution feature and will not cause an
adjustment to the conversion price. Exempted securities generally include shares
issued pursuant to a stock option plan approved by the Company's Board of
Directors, a limited number of shares issued to banks that provide senior debt
financing, and issuances of stock pursuant to warrants outstanding as of the
date the Debentures were sold.

        In addition to the Purchasers' option to convert the Debentures, the
Company, subject to certain restrictions, may require that the Purchasers
convert the Debentures into Common Stock at $6.00 per share (as may be adjusted
as described above) if the bid price for the Common Stock as listed for
quotation is above $9.00 per share for twenty (20) trading days during a
consecutive thirty (30) trading day period, and certain other conditions are
met.

        The Debentures bear interest at 7.00% per annum. Interest is payable
annually in cash, or at the Company's option, in Common Stock at a price per
share based on recent bid prices prior to the date interest is paid, and
certain other conditions are met.

<PAGE>   3

        Under the Securities Purchase Agreement, the Purchasers have a call
option exercisable at any time prior to July 29, 2002 to require that the
Company sell to the Purchasers an additional $3,000,000 principal amount of
Debentures. The additional Debentures will mature three years from the date they
are issued, will bear interest at 7% per annum and will be convertible in whole
or in part at the option of the Purchasers at any time prior to maturity into
Common Stock at a conversion price of $6.75 per share. The Company has a put
option to require the Purchasers to buy the $3,000,000 principal amount of
additional Debentures if the closing bid price for the Common Stock as listed
for quotation is more than $9.00 per share for twenty (20) trading days in a
consecutive thirty (30) trading day period and on the date the Company elects to
exercise the put option, and certain other conditions are met.

        As part of the Debenture financing, the Company has agreed, under the
Registration Rights Agreement among the Company and the Purchasers included in
this filing, to file a Form S-3 Registration Statement with the Securities and
Exchange Commission to register the resale under the Securities Act of the
Common Stock issuable upon the conversion of the initial $3,000,000 of
Debentures sold, the additional $3,000,000 which may be sold pursuant to the
option described above, and interest on the Debentures which may be paid in
stock.

        Certain events will trigger an event of default under the Debentures. An
event of default gives the Purchasers the right to accelerate all indebtedness
under the Debentures and declare it due immediately. Upon an event of default,
interest thereafter accrues at 20.00% per annum and a default premium is added
to the principal amount of the Debentures. The premium is the greater of 20.00%
of the principal amount, or higher based on recent trading prices of the
Company's Common Stock. The amount due upon an event of default (including
principal, interest and all premiums and penalties) must be paid in cash, or, at
the Purchaser's option in an equivalent value of shares of Common Stock of the
Company, calculated based on the average bid price per share of the Common Stock
for a certain number of days prior to the acceleration of the indebtedness by
the Purchasers.

        Circumstances which trigger an event of default include, without
limitation, the material breach of a representation or warranty by the Company,
the failure of the Company to perform covenants in its agreements with the
Purchasers, the failure of the Company to keep a registration statement for the
resale of the Common Stock issuable under the Debentures effective, and certain
changes of control of the Company if the average bid price of the Company's
Common Stock listed for quotation is not above $8.00 per share within a certain
number of days of the announcement of the change of control or the consummation
of the change of control. A change of control includes without limitation (i)
the failure of Paul W. Mikus to continue to be the Company's Chief Executive
Officer, unless replaced in a certain period of time, (ii) certain changes in
the composition of the Company's Board of Directors without the approval of
existing directors and (iii) a sale of all or substantially all of the Company's
assets or a change of ownership of 50% or more of the voting stock of the
Company (including by stock purchase, merger or similar transaction).

        Senior Debt Financing
        ---------------------

        On July 29, 1999, the Company entered into a Loan and Security Agreement
with Transamerica Business Credit Corporation ("TBCC") which provides for a
revolving credit line in the amount of $2,000,000 plus up to an additional
$1,000,000 based on eligible accounts receivable of the Company (the "Loan").
The Loan matures and all amounts must be repaid on July 31, 2001. The Loan bears
interest at the highest prime or equivalent rate announced by certain designated
banks, plus a 2% or 3.5% premium. The Loan is secured by a first priority lien
on all of the assets of the Company, except for intellectual property of the
Company. The Loan contains covenants restricting certain activities of the
Company. The covenants and the representations and warranties made by the
Company, if breached, give the TBCC the right to accelerate the debt.

        The Loan is fully guaranteed by Advanced Medical Procedures, Inc.
("AMP"), a subsidiary of the Company. This guarantee is secured by a lien on all
of the assets of AMP. The AMP loan documents contain covenants and
representations and warranties which, if breached, allow TBCC to accelerate the
Company's Loan.

        In connection with the Loan, the Company also issued a warrant to an
affiliate of TBCC to purchase 21,506 shares of common stock of the Company, at
a price of $4.65 per share, subject to adjustments in certain circumstances
(the "Warrant"). The Warrant expires on July 29, 2004. The Warrant was issued
pursuant to an exemption from registration under the Securities Act by virtue
of Rule 506 of Regulation D under the Securities Act.

        The above is a summary of the principal terms of the various loan
documents and does not purport to explain all of the material terms of these
documents. ONE SHOULD READ THE LOAN AND SECURITY AGREEMENT, THE STREAMLINED
FACILITY AGREEMENT, THE CONTINUING GUARANTY AND THE SECURITY AGREEMENT, WHICH
ARE FILED AS EXHIBITS TO THIS REPORT, FOR A MORE DETAILED UNDERSTANDING OF THEIR
TERMS.

                                       2
<PAGE>   4

ITEM 7.  FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT NO.         DESCRIPTION
- -----------         -----------
<S>                 <C>
 4.1                Debenture dated July 29, 1999 between the Company and Brown
                    Simpson Strategic Growth Fund, Ltd.

 4.2                Debenture dated July 29, 1999 between the Company and Brown
                    Simpson Strategic Growth Fund, L.P.

10.1                Securities Purchase Agreement dated July 29, 1999 among the
                    Company and the Purchasers.

10.2                Registration Rights Agreement dated July 29, 1999 among the
                    Company and the Purchasers.

10.3                Loan and Security Agreement dated July 29, 1999 between the
                    Company and TBCC.

10.4                Streamlined Facility Agreement dated July 29, 1999 between
                    the Company and TBCC.

10.5                Continuing Guaranty dated July 29, 1999 by the AMP in favor
                    of TBCC.

10.6                Security Agreement dated July 29, 1999 between AMP and TBCC.

99.1                Press Release dated August 5, 1999.
</TABLE>
<PAGE>   5

                                   SIGNATURES


     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date: August 5, 1999

                                        ENDOCARE, INC.



                                        By: /s/ PAUL W. MIKUS
                                           -------------------------------------
                                           Paul W. Mikus
                                           President and Chief Executive Officer

<PAGE>   6
                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
EXHIBIT NO.         DESCRIPTION
- -----------         -----------
<S>                 <C>
 4.1                Debenture dated July 29, 1999 between the Company and Brown
                    Simpson Strategic Growth Fund, Ltd.

 4.2                Debenture dated July 29, 1999 between the Company and Brown
                    Simpson Strategic Growth Fund, L.P.

10.1                Securities Purchase Agreement dated July 29, 1999 among the
                    Company and the Purchasers.

10.2                Registration Rights Agreement dated July 29, 1999 among the
                    Company and the Purchasers.

10.3                Loan and Security Agreement dated July 29, 1999 between the
                    Company and TBCC.

10.4                Streamlined Facility Agreement dated July 29, 1999 between
                    the Company and TBCC.

10.5                Continuing Guaranty dated July 29, 1999 by the AMP in favor
                    of TBCC.

10.6                Security Agreement dated July 29, 1999 between AMP and TBCC.

99.1                Press Release dated August 5, 1999.

</TABLE>


<PAGE>   1
                                                                     EXHIBIT 4.1



                            7% CONVERTIBLE DEBENTURES

            THE DEBENTURE REPRESENTED HEREBY HAS NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION 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.

            PAYMENTS ON ACCOUNT OF THE INDEBTEDNESS EVIDENCED BY THIS DEBENTURE
AND THE EXERCISE OF REMEDIES HEREUNDER ARE SUBORDINATED TO SENIOR INDEBTEDNESS
AS PROVIDED HEREIN.

No. 1                                                                 $2,000,000

                                 ENDOCARE, INC.

                 7% CONVERTIBLE DEBENTURES DUE JULY 29, 2002

            Endocare Inc., a Delaware corporation (the "Company"), for value
received hereby promises to pay to Brown Simpson Strategic Growth Fund, Ltd. or
its registered assigns ("Holder") the principal sum of Two Million Dollars at
the Company's office or agency for said purpose in New York, New York on July
29, 2002 in such coin or currency (or, as provided herein, at the Holder's
option in Common Stock) of the United States of America as at the time of
payment shall be legal tender for the payment of public and private debts at the
last address of the Holder (as defined herein) last appearing on the Register
(as defined herein).

            This Debenture is one of a duly authorized issue of 7% Convertible
Debentures, due July 29, 2002 of the Company (the "Debenture") referred to in
the Securities Purchase Agreement (the "Purchase Agreement"), dated as of July
29, 1999, by and among the Company and the Purchasers listed on Schedule I
thereto. The Debentures are subject to the terms and conditions of the Purchase
Agreement. The Company agrees to issue from time to time replacement Debentures
in the form hereof to facilitate any transfers and assignments. In addition,
after delivery of an indemnity in form and substance reasonably satisfactory to
the Company, the Company also agrees to issue replacement Debentures for
securities which have been lost, stolen, mutilated or destroyed.

            The Company shall keep at its principal office a register (the
"Register") in which shall be entered the names and addresses of the registered
holders of the Debentures and particulars of the respective Debentures held by
them and of all transfers of such Debentures. References to the "Holder" or
"Holders" shall mean the Person listed in the Register as the payee of any
Debenture unless the payee shall have presented such Debenture to the Company
for transfer and the transferee shall have been entered in the Register as a
subsequent holder, in which case the term shall mean such subsequent holder. The
ownership of the Debentures shall be proven by the Register, absent manifest
error. For the purpose of paying interest and principal

<PAGE>   2
on the Debentures, the Company shall be entitled to rely on the names and
addresses in the Register.

            No provision of this Debenture shall alter or impair the obligations
of the Company, which are absolute and unconditional, to pay the principal of
and interest on this Debenture at the place, times, rate, and in the currency,
herein prescribed.

            The principal of this Debenture shall bear interest at the rate of
seven (7%) per annum (the "Interest Rate"). The interest shall accrue daily from
the most recent Interest Payment Date to which interest has been paid on this
Debenture, or if no interest has been paid on this Debenture from the date
hereof until payment in full of the principal amount has been made. Interest is
payable in cash or an equivalent value of the Company's Common Stock calculated
based upon the Average Price (as defined herein), at the Company's option,
subject to certain conditions contained herein, annually on January 1 of each
year (an "Interest Payment Date"), commencing on January 1, 2000, to the Holder
hereof until the principal amount is paid or made available for payment. The
interest so payable, and punctually paid or duly provided for, on any Interest
Payment Date will be paid or delivered to the Holder of the Debenture at the
close of business on the Record Date for the interest payable on such Interest
Payment Date. The "Record Date" for any interest payment is the close of
business on December 15, whether or not a Business Day, immediately preceding
the Interest Payment Date on which such Interest is payable.

            Any amounts that have become due and payable hereunder and remain
unpaid by the Company shall accrue interest thereafter until payment in full of
such amount at the rate of twenty percent (20%) (the "Default Rate") per annum
and shall be payable upon demand by the Holder.

            Interest, whether at the Interest Rate or the Default Rate, will be
computed on the basis of a fraction, the denominator of which is 365 (or 366 for
any leap year) and the numerator of which is the actual number of days elapsed
from the date such interest begins to accrue, in the case of the Interest Rate,
or becomes due and payable, in the case of the Default Rate.

            Each of the Interest Rate and the Default Rate (if otherwise
applicable under the terms hereof) shall be effective both before and after any
judgment may be rendered in a court of competent jurisdiction, provided,
however, that if either the Interest Rate or Default Rate is deemed to be in
excess of the amount permitted to be charged by the Company under applicable
laws, the Holder shall be entitled to collect an Interest Rate or Default Rate,
as the case may be, only at the highest rate permitted by law, and any interest
collected by the Holder in excess of such lawful amount shall be deemed a
payment in reduction of the principal amount then outstanding under this
Debenture and shall be so applied.

            The principal of, and any interest paid in cash on, this Debenture
are payable in coin or currency of the United States of America as at the time
of payment is legal tender for payment of public or private debts, at the last
address of the Holder last appearing on the Register, except that interest due
on the principal amount, if any (but not interest overdue for more than five (5)
days), may, at the Company's option be paid in shares of Common Stock calculated
based upon the Average Price (as defined herein) on the date such interest was
due. It


                                       2
<PAGE>   3
shall be assumed that the Company shall elect to make all payments of interest
in Common Stock, unless the Company shall have given written notice to each
Holder not less than one (1) calendar month prior to the applicable Interest
Payment Date of its intention to pay such interest in cash. Notwithstanding
anything to the contrary contained herein, the Company may not issue shares of
Common Stock in payment of the interest on principal if: (i) the number of
shares of Common Stock at the time authorized, unissued and unreserved for all
other purposes is insufficient to pay interest hereunder in shares of Common
Stock or there is an insufficient number of authorized shares of Common Stock
reserved (pursuant to Section 3.6(b) of the Purchase Agreement) for issue for
full conversion of all of the Debentures issued pursuant to the Purchase
Agreement; (ii) such shares are not either registered for resale pursuant to the
Registration Statement (as defined in the Registration Rights Agreement (as
defined herein)) or freely transferable pursuant to Rule 144 promulgated under
the Act, as determined by counsel to the Company pursuant to a written opinion
letter addressed and in form and substance acceptable to the Holder and the
transfer agent for such shares, subject to receipt, if necessary for such
opinion, from the Holder of a representation from such Holder that it is not an
Affiliate (as defined herein) of the Company; (iii) such shares are not listed
or quoted on the Nasdaq (as defined herein) or a Subsequent Market (as defined
herein); (iv) the issuance of such shares would result in the recipient thereof
beneficially owning more than 9.99% of the issued and outstanding shares of
Common Stock as determined in accordance with Section 4.7 hereof; (v) an Event
of Default has occurred and is continuing or an event that, with the passage of
time or giving of notice or both would constitute an Event of Default, has
occurred and is continuing; or (vi) the Company has issued the Issuable Maximum
(as defined herein) upon conversion of or pursuant to the Debentures issued
pursuant to the Purchase Agreement and the Shareholder Approval has not been
obtained.

            The Holder may from time to time convert the principal amount of
this Debenture, or any portion thereof, with any accrued but unpaid interest,
into Common Stock, as more particularly set forth in Section 4.2.

                                    ARTICLE I

                                   DEFINITIONS

            1.1 CERTAIN TERMS DEFINED. The following terms for all purposes of
this Debenture shall have the respective meanings specified below. All
accounting terms used herein and not expressly defined shall have the meanings
given to them in accordance with generally accepted accounting principles (as
defined herein). Capitalized terms not otherwise defined herein shall have the
meanings assigned to them in the Purchase Agreement. The terms defined in this
Section 1.1 include the plural as well as the singular.

            "Acceleration Notice" has the meaning set forth in Section 3.1.

            "Affiliate" of any Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such Person. For the purposes of this definition, "control" when
used with respect to any Person means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of
such


                                       3
<PAGE>   4
Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.

            "Appraiser" shall mean a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants of
recognized standing.

            "Authorization Date" has the meaning set forth in Section 4.9.

            "Average Price" on any date means (x) the sum of the Per Share
Market Value for the ten (10) Trading Days immediately preceding such date minus
(y) the highest and lowest Per Share Market Value during the ten (10) Trading
Days immediately preceding such date, divided by (z) eight (8).

            "Board of Directors" means either the Board of Directors of the
Company or any committee of such Board duly authorized to act hereunder.

            "Business Day" means any day except a Saturday, Sunday or other day
on which commercial banks in the City of New York are authorized or required by
law to close.

            "Capital Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated) of
such Person's capital stock whether now outstanding or issued after the Original
Issue Date, including, without limitation, all Common Stock and all Preferred
Stock.

            "Change of Control" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Section 13(d)(3) of the Exchange Act) of in excess of 50% of
the voting securities of the Company, (ii) a replacement 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 their duly elected successors who are directors immediately
prior to such transaction, in one or a series of related transactions, (iii) the
merger of the Company with or into another entity, unless following such
transaction, the Holders of the Company's securities continue to hold at least
51% of such securities following such transaction, (iv) the consolidation or
sale of all or substantially all of the assets of the Company in one or a series
of related transactions, (v) Mr. Paul W. Mikus ceasing to serve as the Chief
Executive Officer, President or Chairman of the Board of the Company due to his
death or disability or termination for cause, unless he is replaced by the Board
within one hundred and twenty days (120) of his termination of service and (vi)
Mr. Paul W. Mikus ceasing to serve as the Chief Executive Officer, President or
Chairman of the Board of the Company due to his voluntary resignation, unless he
is replaced by the Board within ninety days (90) by a successor reasonably
acceptable to the Holders of a majority of a then-outstanding principal amount
of the Debentures.

            "Closing Date" has the meaning set forth in the Purchaser Agreement

            "Common Stock" means the common stock, par value $0.001 per share,
of the Company, or the common stock of any successor to the Company following a
Change in Control in which the Company's Common Stock is converted into the
Common Stock of the successor corporation.


                                       4
<PAGE>   5
            "Company" has the meaning set forth in the first paragraph hereof.

            "Convertible Securities" has the meaning set forth in Section
4.5(e)(i)(A).

            "Conversion Date" has the meaning set forth in Section 4.4(a).

            "Conversion Default" has the meaning set forth in Section 4.9.

            "Conversion Default Payments" has the meaning set forth in Section
4.9.

            "Conversion Notice" has the meaning set forth in Section 6.1.

            "Conversion Notice Date" has the meaning set forth in Section 6.3.

            "Conversion Price" has the meaning set forth in Section 4.2(a).

            "Conversion Trigger Price" has the meaning set forth in Section 6.1.

            "Debt" of any Person means, at any date, without duplication, (i)
all obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all obligations of such Person in respect of letters of credit or bankers'
acceptance or other similar instruments (or reimbursement obligations with
respect thereto), (iv) all obligations of such Person to pay the deferred
purchase price of property or services, (v) all obligations of such Person as
lessee under capitalized leases, (vi) all Debt of others secured by a Lien on
any asset of such Person, whether or not such Debt is assumed by such Person,
provided that for purposes of determining the amount of any Debt of the type
described in this clause, if recourse with respect to such Debt is limited to
such asset, the amount of such Debt shall be limited to the fair market value of
such asset, (vii) all Debt of others guaranteed by such Person, and (viii) all
redeemable stock valued at the greater of its voluntary or involuntary
liquidation preference plus accrued and unpaid dividends.

            "Debenture" or "Debentures" has the meaning set forth in the second
paragraph hereof.

            "Debenture Shares" means the shares of Common Stock underlying the
Debentures or shares issued upon conversion of the Debentures.

            "Default Rate" has the meaning set forth in the sixth paragraph
hereof.

            "Determination Date" has the meaning set forth in Section 4.6.

            "DTC" means the Depositary Trust Corporation.

            "Event of Default" has the meaning set forth in Section 3.1.

            "Excess Amount" has the meaning set forth in Section 4.9.

            "Excess Principal" has the meaning set forth in Section 4.6.


                                       5
<PAGE>   6
            "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.

            "FAST" has the meaning set forth in Section 4.4(c).

            "GAAP" or "generally accepted accounting principles" means generally
accepted accounting principles in the United States, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession.

            "Holder", "Holder of Debentures", "Debentureholder" or other similar
terms means the registered holder of any Debenture.

            "Incurrence" means the incurrence, creation, assumption or in any
other manner becoming liable with respect to, or the extension of the maturity
of or becoming responsible for the payment of, any Debt. "Incur" shall have a
comparable meaning.

            "Interest Payment Date" has the meaning set forth in the fifth
paragraph hereof.

            "Interest Rate" has the meaning set forth in the fifth paragraph
hereof.

            "Issuable Maximum" has the meaning set forth in Section 4.6.

            "Mandatory Prepayment Amount" for any Debenture means the greater of
(i) the sum of (x) 120% of the principal amount of the Debenture to be prepaid
and (y) all other amounts, costs, interest, expenses and liquidated damages due
in respect of such principal amount and (ii) the sum of (x) at the option of the
Holder, either (I) the principal amount of the Debenture to be repaid, plus all
accrued and unpaid interest thereon, divided by the Conversion Price on the date
the Mandatory Prepayment Amount is demanded or otherwise due, multiplied by the
Per Share Market Value on the date the Mandatory Prepayment Amount is demanded
or otherwise due or (II) the principal amount of the Debenture to be prepaid,
plus all accrued and unpaid interest thereon, divided by the lower of either the
Conversion Price or the Average Price on the Trading Day immediately prior to
the date the Mandatory Prepayment Amount is paid in full, multiplied by the Per
Share Market Value on the Trading Day immediately prior to the date the
Mandatory Prepayment Amount is paid in full, and (y) all other amounts, costs,
interest, expenses and liquidated damages due in respect of such principal
amount.

            "Maturity Date" means the date on which the principal of a Debenture
becomes due and payable as herein provided, whether on the Stated Maturity Date
or pursuant to acceleration upon an Event of Default.

            "Nasdaq" means the Nasdaq SmallCap Market.

            "Notice of Conversion" has the meaning set forth in Section 4.2.

            "Optional Conversion" has the meaning set forth in Section 6.1.


                                       6
<PAGE>   7
            "Optional Conversion Date" has the meaning set forth in Section 6.3.

            "Options" has the meaning set forth in Section 4.5(e)(i)(A).

            "Original Issue Date" of any Debenture (or portion thereof) means
the earlier of (i) the date of such Debenture and (ii) the date of any Debenture
(or portion thereof) for which such security was issued (directly or indirectly)
on registration of transfer, exchange or substitution.

            "Payment Blockage Notice" has the meaning set forth in Section
7.2(b).

            "Per Share Market Value" means (i) on any particular Trading Day the
closing bid price per share of the Common Stock on such date (as reported by
Bloomberg Information Services, Inc., or any successor reporting service) on
Nasdaq or, if the Common Stock is not then quoted on Nasdaq, any Subsequent
Market on which the Common Stock is then listed or if there is no such price on
such date, then the closing bid price on such exchange or quotation system on
the date nearest preceding such date (excluding bids posted by the Company, a
Holder or an Affiliate of any such person) or (ii) if the Common Stock is not
listed then on Nasdaq or any 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 (excluding bids posted by a Holder or an Affiliate of a Holder), or
(iii) if the Common Stock is 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 holder of this Debenture; provided, however, that the Company, after receipt
of the determination by such Appraiser, shall have the right to select in good
faith an additional Appraiser, in which case, the fair market value shall be
equal to the average of the determinations by each such Appraiser; and provided,
further that all determinations of the Per Share Market Value shall be
appropriately adjusted for any stock dividends, stock splits or other similar
transactions during such period.

            "Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.

            "Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated) of
such Person's preferred or preference stock whether now outstanding or issued
after the date of this Debenture, and includes, without limitation, all classes
and series of preferred or preference stock.

             "Property" of any Person means all types of real, personal,
tangible, intangible or mixed property owned by such Person whether or not
included in the most recent consolidated balance sheet of such Person under
generally accepted accounting principles.

            "Purchase Agreement" means that Securities Purchase Agreement dated
as of July 29, 1999 by and among the Company and the Purchasers.

            "Purchase Price" means, with respect to any Debenture, the purchase
price paid to the Company upon issuance of such Debenture.


                                       7
<PAGE>   8
            "Purchasers"  has the  meaning  ascribed  thereto in the  Purchase
Agreement.

            "Record Date" has the meaning set forth in the fifth paragraph
hereof.

            "Register" has the meaning set forth in the third paragraph hereof.

            "Registration Rights Agreement" means that Registration Rights
Agreement dated as of July 29, 1999 by and among the Company and the Purchasers.

            "Reserved Amount" has the meaning set forth in Section 4.9.

            "Reverse Stock Split" has the meaning set forth in Section 4.5(a).

            "Senior Indebtedness" shall have the meaning set forth in Section
7.1.

            "Shareholder Approval" has the meaning set forth in Section 4.6.

            "Stated Maturity Date" means July 29, 2002.

            "Stock Option Plan" means any contract, plan or agreement which has
been approved by the Board of Directors of the Company, pursuant to which the
Company's securities may be issued to any employee, officer, director or
consultant.

            "Subsidiary" means, with respect to any Person, any corporation or
other entity of which a majority of the Capital Stock or other ownership
interests having ordinary voting power to elect a majority of the Board of
Directors or other persons performing similar functions are at the time directly
or indirectly owned or controlled by such Person. A Person shall not be deemed
to directly or indirectly own a majority of the Capital Stock of another Person
solely because of ownership of an unexercised warrant to acquire Capital Stock
of such other Person if the warrant does not provide for voting control of the
warrant shares prior to its exercise.

            "Subsequent Market" means the New York Stock Exchange, American
Stock Exchange, Nasdaq National Market, London Stock Exchange or Tokyo Stock
Exchange.

            "Trading Day" means (a) a day on which the Common Stock is traded on
Nasdaq or, if the Common Stock is not then designated on Nasdaq, on such
Subsequent Market on which the Common Stock is then listed or quoted or (b) if
the Common Stock is not listed on Nasdaq or 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 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 or reporting prices) provided,
however that in any event that the Common Stock is not listed or quoted as set
forth in (a), (b), or (c) hereof, then a Trading Day shall mean any Business
Day.

            "Valuation Event" has the meaning set forth in Section
4.5(e)(i)(C)(I).


                                       8
<PAGE>   9
                                   ARTICLE II

                             PAYMENT; THE SECURITIES

            2.1 PAYMENT OF PRINCIPAL AND INTEREST. The Company covenants and
agrees that it will duly and punctually pay or cause to be paid the principal,
plus all accrued interest thereon, with respect to each of the Debentures at the
place or places, at the respective times and in the manner provided in the
Debentures.

            2.2 MUTILATED, DEFACED, DESTROYED, LOST AND STOLEN DEBENTURES. In
case any temporary or definitive Debenture shall become mutilated, defaced or be
apparently destroyed, lost or stolen, the Company shall execute and deliver a
new Debenture, bearing a number not contemporaneously outstanding, in exchange
and substitution for the mutilated or defaced Debenture. In every case the
applicant for a substitute Debenture shall furnish to the Company such security
or indemnity as it may reasonably require to indemnify and defend and to save it
harmless and, in every case of destruction, loss or theft evidence to the
Company's satisfaction of the apparent destruction, loss or theft of such
Debenture and of the ownership thereof.

            Upon the issuance of any substitute Debenture, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses connected
therewith. In case any Debenture which has matured or is about to mature, or has
been called for conversion in full, or is being surrendered for conversion in
full shall become mutilated or defaced or be apparently destroyed, lost or
stolen, the Company may, instead of issuing a substitute Debenture, with the
holder's consent, pay or authorize the payment or conversion of the same
(without surrender thereof except in the case of a mutilated or defaced
Debenture), if the applicant for such payment shall furnish to the Company such
security or indemnity as it may reasonably require to save it harmless from all
risks, however remote, and, in every case of apparent destruction, loss or
theft, the applicant shall also furnish to the Company evidence to the Company's
reasonable satisfaction of the apparent destruction, loss or theft of such
Debenture and of the ownership thereof.

            Every substitute Debenture issued pursuant to the provisions of this
Section by virtue of the fact that any Debenture is apparently destroyed, lost
or stolen shall constitute an additional contractual obligation of the Company,
whether or not the apparently destroyed, lost or stolen Debenture shall be at
any time enforceable by anyone and shall be entitled to all the benefits of (but
shall be subject to all the limitations of rights set forth in) this Debenture
equally and proportionately with any and all other Debentures duly authenticated
and delivered hereunder. All Debentures shall be held and owned upon the express
condition that, to the extent permitted by law, the foregoing provisions are
exclusive with respect to the replacement or payment or conversion of mutilated,
defaced, or apparently destroyed, lost or stolen Debentures and shall preclude
any and all other rights or remedies notwithstanding any law or statute existing
or hereafter enacted to the contrary with respect to the replacement or payment
of negotiable instruments or other securities without their surrender.

            2.3 CANCELLATION OF DEBENTURES; DESTRUCTION THEREOF. All Debentures
surrendered for payment, conversion, registration of transfer or exchange shall
be delivered to the Company for cancellation, and no Debentures shall be issued
in lieu thereof except as expressly permitted by any of the provisions of this
Debenture. The Company shall destroy


                                       9
<PAGE>   10
canceled Debentures held by it and deliver a certificate of destruction to the
Holder, unless otherwise required. If the Company shall acquire any of the
Debentures, such acquisition alone shall not operate as a redemption or
satisfaction of the indebtedness represented by such Debentures unless and until
such indebtedness is satisfied.

                                   ARTICLE III

                                    DEFAULTS

            3.1 EVENT OF DEFAULT DEFINED; ACCELERATION OF MATURITY; WAIVER OF
DEFAULT. In case one or more of the following events ("Events of Default")
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary or be 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) shall have occurred and be continuing:

            a. default in the payment in cash (or in Common Stock, as permitted
herein) of all or any part of the principal of and the entire accrued interest
on any of the Debentures as and when the same shall become due and payable
either at maturity, upon any conversion, by declaration or otherwise; or

            b. failure on the part of the Company to duly observe or perform any
other of the covenants or agreements on the part of the Company (or the making
by the Company of any announcement, statement or threat that it does not intend
to honor the obligations described in this paragraph) contained in this
Debenture (including the failure to issue Common Stock upon conversion of this
Debenture in accordance with the terms hereof) or the Purchase Agreement or the
Registration Rights Agreement for a period of ten (10) Business Days (other than
with respect to an announcement, statement or threat) in the case of a failure
due to circumstances within the Company's control, or thirty (30) Business Days
in the case of a failure due to circumstances not within the Company's control,
after the earlier of (x) the date on which any officer of the Company shall have
obtained actual knowledge of such failure (or such announcement, statement or
threat) or (y) the date on which written notice thereof has been given to the
Company by the Holder; or

            c. there shall have occurred with respect to any particular issue of
Debt of the Company and/or one or more Subsidiaries having an outstanding
principal amount of $1,000,000 or more, whether such Debt now exists or shall
hereafter be created, an event of default which has entitled the holder thereof
to declare such Debt to be due and payable in full prior to its stated maturity,
and the holder of such Debt has declared such Debt due and payable in full; or

            d. a judgment or order (not covered by insurance) for the payment of
money shall be rendered against the Company or any Subsidiary of the Company in
excess of $1,000,000 in the aggregate for all such judgments or orders against
all such Persons (treating any deductibles, self insurance or retention as not
so covered) that shall not be discharged, and all such judgments and orders
remain outstanding and there shall be any period of thirty (30) consecutive days
following entry of the judgment or order in excess of $1,000,000 or the judgment
or order which causes the aggregate amount described above to exceed $1,000,000


                                       10
<PAGE>   11
during which a stay of enforcement of such judgment or order, by reason of a
pending appeal or otherwise, shall not be in effect; or

            e. a court having jurisdiction in the premises shall enter a decree
or order for relief in respect of the Company or any of its subsidiaries in an
involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar official) of the Company or any of
its Subsidiaries or for any substantial part of the property of the Company or
any of its Subsidiaries or ordering the winding up or liquidation of the affairs
of the Company or any of its Subsidiaries, and such decree or order shall remain
unstayed and in effect for a period of sixty (60) consecutive days; or

            f. the Company or any of its Subsidiaries shall commence a voluntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consent to the entry of an order for relief in an
involuntary case under any such law, or consent to the appointment or taking
possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) of the Company or any of its Subsidiaries or for any
substantial part of the property of the Company or any of its Subsidiaries, or
the Company or any of its Subsidiaries shall make any general assignment for the
benefit of creditors; or

            g. any representation, warranty, certification or statement made by
the Company in the Purchase Agreement or in any certificate, financial statement
or other document delivered pursuant to the Purchase Agreement shall prove to
have been incorrect in any material respect when made; or

            h. the Common Stock shall be delisted from Nasdaq or shall be
suspended from trading on Nasdaq without resuming trading and/or being relisted
thereon or on a Subsequent Market or having such suspension lifted, as the case
may be, within five (5) Business Days (twenty (20) Business Days if the Company
is in good faith contesting such delisting or suspension); or

            i. a Registration Statement (as defined in the Registration Rights
Agreement) for the Debenture Shares shall not have been declared by the
Securities and Exchange Commission on or prior to the 30th day after the
Effectiveness Date (as defined in the Registration Rights Agreement) or after
its initial effectiveness and prior to the expiration of the Company's
obligation to keep the Registration Statement effective as required under the
Registration Rights Agreement, such Registration Statement lapses in effect or
sales of all of the Registrable Securities (as defined in the Registration
Rights Agreement) otherwise cannot be made thereunder (whether by reason of the
Company's failure to amend or supplement the prospectus included therein in
accordance with the Registration Rights Agreement or otherwise) for more than
fifteen (15) consecutive days or thirty (30) days in any twelve (12) month
period; or

            j. a Change of Control shall occur unless the Average Price of the
Company's Common Stock immediately (i) prior to the Change of Control if the
event leading to the Change of Control or the intent to consummate the Change of
Control was previously announced publicly, or (ii) after the tenth (10th)
Trading Day following the Change of Control if the event leading to the Change
of Control or intent to consummate a Change of Control was not


                                       11
<PAGE>   12
previously announced publicly, was at least $8.00 per share (which shall be
adjusted proportionately to the extent the Conversion Price is adjusted
hereunder), provided however that the Holders have been able to sell their
shares of Common Stock in the market under an effective Registration Statement
for the immediately preceding thirty (30) days and will be able to sell such
shares in the market for fifteen (15) days after the Change of Control; or

            k. an Event of Default has occurred and is continuing under any of
the other Debentures issued pursuant to the Purchase Agreement; or

            l. Failure on the part of the Company to comply with its obligations
to close the Second Closing (as defined in the Purchase Agreement) when
requested by the Holders.

            then, in each and every such case (other than an Event of Default
specified in Section 3.1(e) or 3.1(f) hereof), unless the principal shall have
already become due and payable, by notice in writing to the Company (the
"Acceleration Notice"), the Holders of at least a majority of the then
outstanding principal amount of the Debentures may declare the entire principal
of and the entire accrued interest on the Debentures owned by such Holders to be
due and payable immediately, and upon any such declaration the same shall become
immediately due and payable. If an Event of Default specified in Section 3.1(e)
or 3.1(f) occurs, the principal of and any accrued interest on the Debentures
(and the aggregate amounts described below) shall become and be immediately due
and payable without any declaration or other act on the part of any Debenture
Holder. In the event that the Company shall not have promptly, but in any event
within ten (10) Business Days upon receipt of an Acceleration Notice, paid the
Holder the amount specified below, the Conversion Price shall automatically be
adjusted to equal the average Per Share Market Value of the Common Stock during
the preceding thirty (30) consecutive Trading Days immediately preceding the
date of the Acceleration Notice; provided, that such Per Share Market Value is
lower than the Conversion Price.

            The aggregate amount payable upon an Event of Default described in
Section 3.1(a), (e), (f) and (i) shall be equal to the sum of (i) the Mandatory
Prepayment Amount plus (ii) at the option of the Holder, the Mandatory
Prepayment Amount for the principal amount of the Debentures (the "Converted
Debentures") that would then be held by such Holder had the principal amount of
Debentures converted into Debenture Shares that are then held by the Holder not
been so converted; provided, that the Holder shall not be entitled to a
Mandatory Prepayment Amount with respect to Converted Debentures if both the
following have occurred: (i) prior to the occurrence of an Event of Default, the
Debenture Shares into which the Converted Debentures were converted had been
held by the Holder for more than thirty (30) days and (ii) prior to the
occurrence of the Event of Default and after receipt by the Holder of the
Debenture Shares that are held by the Holder at the time of the occurrence of
the Event of Default, the Registration Statement with respect to such Debenture
Shares had been continuously effective, and the Common Stock has been quoted on
Nasdaq, for more than thirty (30) days.

            The aggregate principal amount payable on each Event of Default
other than as described in Section 3.1(a), (e), (f) and (i) shall be equal to
the sum of (i) the Mandatory Prepayment Amount plus (ii) at the option of the
Holder, the Mandatory Prepayment Amount for the Converted Debentures that would
then be held by such Holder had the principal amount of Debentures converted
into Debenture Shares (as defined herein) that are then held by the Holder


                                       12
<PAGE>   13
not been so converted; provided, that the Holder shall not be entitled to a
Mandatory Prepayment Amount with respect to Converted Debentures if prior to the
occurrence of an Event of Default, the Debenture Shares into which the Converted
Debentures were converted had been held by the Holder for more than three (3)
Trading Days.

            For purposes of this Section 3.1, the principal amount of the
Debentures is outstanding until such date as the Holder shall have been issued
Debenture Shares upon a conversion (or attempted conversion) thereof. Interest
shall accrue on the Mandatory Prepayment Amount hereunder from the day after
such amount is due (being the date of an Event of Default) through the date of
payment in full thereof at the rate of 20.0% per annum. Payment of the Mandatory
Prepayment Amount pursuant to this Section 3.1 shall be in addition to any other
amounts that may be due to the Holder pursuant to this Debenture. Within five
(5) Business Days of receipt by the Holder of payments of amounts due to the
Holder, (i) the Holder shall return the Debentures to the Company and (ii) in
the event the Mandatory Prepayment Amount relates to the Converted Debentures,
the Holder shall return the Debenture Shares into which such Converted
Debentures were converted. In the event of the occurrence of an Event of
Default, 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. Any demand for payment may be rescinded and annulled by a Holder
at any time prior to payment hereunder. If a majority of the Holders rescind and
annul any such demand, then the remaining Holders shall be deemed to rescind and
annul any such demand. No such rescission or annulment shall affect any
subsequent Event of Default or impair any right consequent thereon.

            Upon delivery of any Acceleration Notice to the Company, the Company
shall provide a copy of such notice to the other Holders, if any, within five
(5) Business Days of the Company's receipt thereof. Failure to deliver such
notice shall not affect the validity of the notice delivered by the Holders in
accordance with the provisions referred to above.

            3.2 POWERS AND REMEDIES CUMULATIVE; DELAY OR OMISSION NOT WAIVER OF
DEFAULT. No right or remedy herein conferred upon or reserved to the Holders is
intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.

            No delay or omission of the Holders to exercise any right or power
accruing upon any Event of Default occurring and continuing as aforesaid shall
impair any such right or power or shall be construed to be a waiver of any such
Event of Default or an acquiescence therein; and every power and remedy given by
the Debentures or by law may be exercised from time to time, and as often as
shall be deemed expedient, by the Holders.


                                       13
<PAGE>   14
                                   ARTICLE IV

                              EXCHANGE; CONVERSION

            4.1 RIGHT OF DEBENTUREHOLDERS TO EXCHANGE DEBENTURES. Subject to and
upon compliance with the provisions of this Section, this Debenture is
exchangeable for an equal 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.

            4.2 RIGHT OF DEBENTUREHOLDERS TO CONVERT DEBENTURES INTO COMMON
STOCK.

            a. Conversion Price. Subject to and upon compliance with the
provisions of this Section 4.2, the principal amount of this Debenture, or any
portion thereof which is $1,000 or a multiple thereof may, at any time and at or
before the close of business on the Maturity Date be converted into duly
authorized, validly issued, fully-paid and nonassessable shares of Common Stock
at $6.00 per share subject to adjustment under the provisions of this Article IV
(the "Conversion Price").

            b. Notice of Conversion. If an adjustment in the Conversion Price
and, if applicable, a change in the securities or other property issuable upon
conversion has taken place hereunder, then the conversion described in Section
4.2(a) shall be at the applicable Conversion Price and in such securities or
other property as so adjusted. The Purchaser desiring to make a conversion shall
deliver to the Company during usual business hours of the Company's office, or,
at the Purchaser's option, to the transfer agent of the Company during usual
business hours of the transfer agent, a written notice of election to convert,
as provided in the form attached hereto as Exhibit A (a "Notice of Conversion"),
accompanied, if required, by the Debenture or Debentures, representing at least
the principal amount to be converted.

            4.3 ADJUSTMENT FOR DIVIDENDS; INTEREST PAYMENT AFTER Conversion. No
payment or adjustment will be made for dividends on any Common Stock except as
provided herein. On conversion of a Debenture, that portion of interest accrued
and unpaid attributable to the period from the Original Issue Date to the
Conversion Date with respect to the converted Debenture shall not be canceled,
extinguished or forfeited, but rather shall be paid in full to the Holder
thereof by the payment of an amount of shares of Common Stock valued at the
Average Price equal thereto; provided, however, that the Company may pay such
amount in cash if it provides the Holder with not less than ten (10) days prior
written notice of such intention. If the Holder converts more than one Debenture
at the same time, the number of shares of Common Stock issuable upon the
conversion shall be based on the total principal amount of the Debentures
converted.

            4.4 ISSUANCE OF SHARES UPON CONVERSION.

            a. As promptly as practicable, but in any event no later than two
(2) Trading Days after delivery of a Notice of Conversion and, if required, the
surrender, as herein provided, of any Debenture or Debentures for conversion,
the Company shall deliver or cause to be delivered to the Holder of the
Debenture or Debentures delivering such Notice of Conversion, or


                                       14
<PAGE>   15
such Holder's designee, a certificate or certificates representing the number of
duly authorized, validly issued, fully-paid and nonassessable shares of Common
Stock, into which such Debenture or Debentures may be converted in accordance
with the provisions of this Article IV. Such conversion shall be deemed to have
been made at the time and on the date the Notice of Conversion is delivered to
the Company, as long as, if required, the Debenture or Debentures being
converted are promptly delivered to the Company and the rights of the Holder of
such Debenture or Debentures as a Holder (subject to the Company's satisfaction
of its obligations hereunder with respect to such conversion) shall cease at
such time with respect to the Converted Debentures, the Person or Persons
entitled to receive the shares of Common Stock, upon conversion of such
Debenture or Debentures, shall be treated for all purposes as having become the
record holder or holders of such shares of Common Stock at such time, and such
conversion shall be at the Conversion Price in effect at such time (the
"Conversion Date"). Subject to paragraph 4.4(b), if any Debenture is converted
in part only, upon such conversion the Company shall execute and deliver to the
Holder thereof, as requested by such Holder, a new Debenture or Debentures of
authorized denominations in aggregate principal amount equal to the unconverted
portion of such Debenture. Without in any way limiting the Holder's right to
pursue other remedies, including actual damages and/or equitable relief, the
parties hereto agree that if the Company fails to deliver the shares of Common
Stock required to be issued upon the conversion of such Debenture or Debentures
under this Section 4.4 within the two (2) Trading Day period referred above, the
Company shall pay to the Holder upon demand an amount of cash (at the Holder's
option) equal to: (i) the commissions, discounts and similar expenses charged to
the Holder in purchasing a number of shares of Common Stock no greater than the
number of shares of Common Stock required to be issued upon the conversion of
the Debenture or Debentures, or (ii) the product of (w) the number of shares of
Common Stock required to be issued upon the conversion of the Debenture or
Debentures, (x) the Per Share Market Value of such shares on the Conversion
Date, (y) the number of days after such two (2) day period that such shares are
not delivered to the Holder, and (z) 0.005.

            b. Notwithstanding anything to the contrary set forth herein, upon
conversion of a Debenture in accordance with the terms thereof, the Holder shall
not be required to physically surrender the Debenture to the Company unless the
entire unpaid principal amount of the Debenture is so converted. The Holder and
the Company shall maintain records showing the principal amount already
converted and the dates of such conversions or shall use such other method,
reasonably satisfactory to the Holder and the Company, so as not to require
physical surrender of the Debenture upon each such conversion. In the event of
any dispute or discrepancy, such records of the Company shall be controlling and
determinative in the absence of manifest error. Notwithstanding the foregoing,
if any portion of the Debenture is converted, the Holder may not transfer the
Debenture unless the Holder first physically surrenders the Debenture to the
Company, whereupon the Company shall promptly issue and deliver upon the order
of the Holder a new Debenture of like tenor, registered as the Holder (upon
payment by the Holder of any applicable transfer taxes) may request,
representing in the aggregate the remaining unpaid principal amount of the
Debenture. The Holder and any assignee, by acceptance of the Debenture,
acknowledge and agree that, by reason of the provisions of this paragraph,
following conversion of a portion of a Debenture, the unpaid and unconverted
principal amount of such Debenture represented by such Debenture may be less
than the amount stated on the face thereof.


                                       15
<PAGE>   16
            c. In lieu of delivering physical certificates representing the
Debenture Shares, provided the shares of Common Stock issuable upon conversion
of a Debenture may be sold pursuant to Rule 144(k) under the Act or under an
effective Registration Statement and the Company's transfer agent is
participating in the Depositary Trust Company Fast Automated Securities Transfer
("FAST") program, upon request of the Holder and in compliance with the
provisions of Sections 4.1, 4.2 and 4.4, the Company shall use its best efforts
to cause its transfer agent to electronically transmit the shares of Common
Stock issuable upon conversion of the Debenture to the Holder by crediting the
account of the Holder's Prime Broker with DTC through its Deposit Withdrawal
Agent Commission system. The time period for delivery described in the
immediately preceding paragraph shall apply to the electronic transmittals
described herein.

            d. 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 4.4(a), including for purposes hereof, any shares of Common Stock to
be issued on the Conversion Date on account of accrued but unpaid interest
hereunder, by the second (2nd) Trading Day after the Conversion Date, and if
after such second (2nd) 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 Debenture Shares which the Holder was entitled to receive
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 was
entitled to receive 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 return the Debentures 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 Company timely
complied with its conversion and delivery obligations under Section 4.4(a). 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 Debenture Shares on the date of
conversion totaled $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.

            4.5 ADJUSTMENT OF CONVERSION PRICE. In addition to any adjustment to
the Conversion Price provided elsewhere in this Debenture, the Conversion Price
in effect at any time shall be subject to adjustment from time to time upon the
happening of certain events, as follows:

            a. Common Stock Dividends; Common Stock Splits; Reverse Common Stock
Splits. If the Company, at any time while this Debenture is outstanding, (a)
shall pay a stock dividend on its 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 of shares of Common Stock any shares of Capital Stock of the
Company, the Conversion Price shall be multiplied by a fraction the numerator of
which shall


                                       16
<PAGE>   17
be the number of shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and the denominator of which shall be the number
of shares of Common Stock outstanding after such event. Any adjustment made
pursuant to this paragraph 4.5(a) 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.
Notwithstanding the foregoing, if the Company shall combine outstanding shares
of Common Stock into a smaller number of shares (a "Reverse Stock Split") at any
time prior to the Maturity Date, then the Conversion Price in effect immediately
prior to such reverse stock split shall not be adjusted and shall remain in
effect after giving effect to such reverse stock split.

            b. Rights; Warrants. If the Company, at any time while this
Debenture is outstanding, shall issue rights or warrants to all of the holders
of Common Stock entitling them to subscribe for or purchase shares of Common
Stock at a price per share less than the Conversion Price, the Conversion Price
shall be multiplied by a fraction, the denominator of which shall be the number
of shares of Common Stock (excluding treasury shares, if any) outstanding on the
date of issuance of such rights or warrants plus the number of additional shares
of Common Stock offered for subscription or purchase, and the numerator of which
shall be the number of shares of Common Stock (excluding treasury shares, if
any) outstanding on the date of issuance of such rights or warrants plus the
number of shares which the aggregate offering price of the total number of
shares so offered would purchase at the Conversion Price. Such adjustment shall
be made whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of shareholders entitled
to receive such rights or warrants.

            c. Other Distributions on Stock. If the Company, at any time while
this Debenture is outstanding, shall distribute to all of the holders of Common
Stock evidence of its indebtedness or assets or rights or warrants to subscribe
for or purchase any security (excluding those referred to in Sections 4.5(a) and
(b) above), then in each such case the Conversion Price at which the Debenture
shall thereafter be exercisable shall be determined by multiplying the
Conversion Price in effect immediately prior to the record date fixed for
determination of shareholders entitled to receive such distribution by a
fraction, the denominator of which shall be the Per Share Market Value of Common
Stock determined as of the record date mentioned above, and the numerator of
which shall be such Per Share Market Value of the Common Stock 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 Common Stock as determined by the Board of Directors in good faith;
provided, however, that in the event of a distribution exceeding thirty percent
(30%) of the net assets of the Company, such fair market value shall be
determined by an Appraiser selected in good faith by the Holder; and provided,
further, that the Company, after receipt of the determination by such Appraiser
shall have the right to select an additional Appraiser meeting the same
qualifications, in good faith, in which case the fair market value shall be
equal to the average of the determinations by each such Appraiser. Such
adjustment shall be made whenever any such distribution is made and shall become
effective immediately after the record date mentioned above.

            d. Other Events. In case of (A) any reclassification of the Common
Stock into other securities of the Company or (B) any compulsory share exchange
pursuant to which the


                                       17
<PAGE>   18
Common Stock is converted into other securities, cash or property (each of (A)
or (B), an "Extraordinary Event"), the Holder shall have the right thereafter to
convert the Debenture for shares of stock and other securities, cash and
property receivable upon or deemed to be held by holders of Common Stock
following such Extraordinary Event, and the Holder 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 Debenture could have been
converted immediately prior to such Extraordinary Event (without taking into
account any limitations or restrictions on the convertibility of the Debentures)
would have been entitled. In the case of an Extraordinary Event, the terms of
any such Extraordinary Event shall include such terms so as to continue to give
to the Holder the right to receive the securities, cash or property set forth in
this Section 4.5(d) upon any conversion following such Extraordinary Event. This
provision shall similarly apply to successive Extraordinary Events.

            e. Adjustment to Conversion Price for Dilutive Issuances. If the
Company, at any time while this Debenture is outstanding, takes any of the
actions described in this Section 4.5(e), then, in order to prevent dilution of
the rights granted under this Debenture, at any time prior to the Maturity Date,
the Conversion Price will be subject to adjustment from time to time as provided
in this Section 4.5(e).

                  (i) Adjustment of Conversion Price upon Issuance of Common
      Stock. If at any time while this Debenture is outstanding the Company
      issues or sells, or is deemed to have issued or sold, any shares of Common
      Stock for a consideration per share less than the Conversion Price in
      effect immediately prior to such issuance or sale, then immediately after
      such issuance or sale the Conversion Price then in effect shall be reduced
      to an amount equal to the consideration per share of Common Stock in such
      issuance or sale. For the purpose of determining the adjusted Conversion
      Price under this Section 4.5(e), the following shall be applicable:

                        (A) Issuance of Options. If at any time while this
            Debenture is outstanding the Company in any manner grants any rights
            or options to subscribe for or to purchase Common Stock or any stock
            or other securities convertible into or exchangeable for Common
            Stock (such rights or options, "Options," and such convertible or
            exchangeable stock or securities, "Convertible Securities") and the
            price per share for which Common Stock is issuable upon the exercise
            of such Options or upon conversion or exchange of such Convertible
            Securities is less than the Conversion Price in effect immediately
            prior to such grant or issuance, then the Conversion Price then in
            effect shall be reduced to the price per share for which Common
            Stock is issuable upon the exercise of such Options or upon the
            conversion or exchange of such Convertible Securities. No adjustment
            of the Conversion Price shall be made upon the actual issuance of
            such Common Stock upon conversion or exchange of such Options.

                        (B) Change in Option Price or Rate of Conversion. If
            there is a change at any time in (i) the exercise price provided for
            in any Options, (ii) the additional consideration, if any, payable
            upon the issue, conversion or exchange of any Convertible Securities
            or (iii) the rate at which any Convertible Securities are
            convertible into or exchangeable for Common Stock, other than a
            change


                                       18
<PAGE>   19
            which results from events set for in Sections 4.5(a), (b) and (c)
            which also cause a relative change in the Conversion Price, then
            immediately after such change in option price or rate of conversion
            the Conversion Price in effect at the time of such change shall be
            readjusted to the Conversion Price which would have been in effect
            had such Options or Convertible Securities had such changed exercise
            price, additional consideration or changed conversion rate, as the
            case may be, at the time initially granted, issued or sold; provided
            that no adjustment shall be made if such adjustment would result in
            an increase of the Conversion Price then in effect.

                        (C) Effect on Conversion Price of Certain Events. For
            purposes of determining the adjusted Conversion Price under this
            Section 4.5(e)(i), the following shall be applicable:

                              (I)   Calculation of Consideration Received. If
                                    any Common Stock, Options or Convertible
                                    Securities are issued or sold or deemed to
                                    have been issued or sold for cash, the
                                    consideration received therefor will be
                                    deemed to be the net amount received by the
                                    Company therefor. In case any Common Stock,
                                    Options or Convertible Securities are issued
                                    or sold for a consideration other than cash,
                                    the amount of the consideration other than
                                    cash received by the Company will be the
                                    fair value of such consideration, except
                                    where such consideration consists of
                                    publicly traded securities, in which case
                                    the amount of consideration received by the
                                    Company will be the average of the Per Share
                                    Market Values of such security for the five
                                    (5) consecutive Trading Days immediately
                                    preceding the date of receipt. In case any
                                    Common Stock, Options or Convertible
                                    Securities are issued to the owners of the
                                    non-surviving entity in connection with any
                                    merger in which the Company is the surviving
                                    entity the amount of consideration therefor
                                    will be deemed to be the fair value of such
                                    portion of the net assets and business of
                                    the non-surviving entity as is attributable
                                    to such Common Stock, Options or Convertible
                                    Securities, as the case may be. The fair
                                    value of any consideration other than cash
                                    or securities will be determined jointly by
                                    the Company and the Holders of Debentures
                                    representing a majority of the aggregate
                                    principal amount of Debentures then
                                    outstanding. If such parties are unable to
                                    reach agreement within ten (10) days after
                                    the occurrence of an event requiring


                                       19
<PAGE>   20

                                    valuation (the "Valuation Event"), the fair
                                    value of such consideration will be
                                    determined within forty eight (48) hours of
                                    the tenth (10th) day following the Valuation
                                    Event by an Appraiser selected in good faith
                                    by the Company and agreed upon by the
                                    Holders of Debentures representing a
                                    majority of the aggregate principal amount
                                    of Debentures then outstanding. The
                                    determination of such Appraiser shall be
                                    binding upon all parties absent manifest
                                    error.

                              (II)  Treasury Shares. The number of shares of
                                    Common Stock outstanding at any given time
                                    does not include shares owned or held by or
                                    for the account of the Company, and the
                                    disposition of any shares so owned or held
                                    will be considered an issue or sale of
                                    Common Stock.

                              (III) Record Date. If the Company establishes a
                                    record of the holders of Common Stock for
                                    the purpose of entitling them (1) to receive
                                    a dividend or other distribution payable in
                                    Common Stock, Options or in Convertible
                                    Securities or (2) to subscribe for or
                                    purchase Common Stock, Options or
                                    Convertible Securities, then such record
                                    date will be deemed to be the date of the
                                    issue or sale of the shares of Common Stock
                                    deemed to have been issued or sold upon the
                                    declaration of such dividend or the making
                                    of such other distribution or the date of
                                    the granting of such right of subscription
                                    or purchase, as the case may be.

                        (D) Certain Events. If any event occurs of the type
            contemplated by the provisions of Section 4.5(e) (subject to the
            exceptions stated therein) but not expressly provided for by such
            provisions (including, without limitation, the granting of stock
            appreciation rights, phantom stock rights or other rights with
            equity features), then the Company's Board of Directors will make an
            appropriate adjustment in the Conversion Price so as to protect the
            rights of the Holder, or assigns, of this Debenture; provided,
            however, that no such adjustment will increase the Conversion Price
            as otherwise determined pursuant to this Section 4.5(e).

            Notwithstanding anything to the contrary contained in this Section
4.5(e) no adjustment shall be made to the Conversion Price in connection with
the issuance, sale or grant of any of the following securities, whether or not
at a price that is less than the Conversion Price:


                                       20
<PAGE>   21
            (i) shares of Common Stock issuable upon the exercise of any options
or warrants outstanding on the date hereof and listed in Schedule 2.1(c) of the
Purchase Agreement;

            (ii) shares of Common Stock or options to acquire Common Stock
issued or deemed to have been issued by the Company in connection with a Stock
Option Plan;

            (iii) shares of Common Stock underlying the Debentures or shares
issued upon the conversion of the Debentures;

            (iv) up to 520,000 shares of Common Stock or securities convertible
into or exchangeable for Common Stock, in any twelve (12) month period, granted
in normal course of business activities to underwriters, placement agents,
service providers or business advisors, provided however, that such issuance,
sale or grant is not at a price below four dollars ($4.00) per share of Common
Stock; and

             (v) shares of Common Stock or securities convertible into or
exchangeable for Common Stock issued to Senior Lenders (as hereinafter defined)
in consideration for the issuance of Senior Indebtedness (as hereinafter
defined), so long as the Common Stock or securities represent no more than eight
percent (8%) in value of the Senior Indebtedness incurred in connection with the
issuance of such securities; provided that the amount of Senior Indebtedness
shall only include the actual amount that the Company may draw or incur on the
closing date for such Senior Indebtedness. For example, if the Company takes out
a twenty million dollar ($20,000,000) line of credit for which it can only draw
ten million dollars ($10,000,000) at the closing of the Senior Indebtedness,
then the Common Stock and securities convertible into or exchangeable for Common
Stock can only have a value based on a Per Share Market Value of eight hundred
thousand dollars ($800,000).

            [Section 4.5(e) will be removed from the Debenture issued pursuant
to the Second Closing (as defined in the Securities Purchase Agreement).]

            f. Rounding. All calculations under this Section 4.5 shall be made
to the nearest cent or the nearest l/l00th of a share, as the case may be.

            g. Notice of Adjustment. The Company shall give the Holder written
notice of the occurrence of any of the events specified in Sections 4.5(a), (b),
(c), (d) or (e) as soon as practicable, but in no even later than three (3)
Business Days after such event, provided further, that if such notice contains
material non-public information, the Company shall (i) publicly disclose such
information prior to or concurrently with the giving of such notice or (ii) only
disclose such information to the extent that the Holder shall not be in
possession of material non-public information. Such notice shall contain at
least: (A) a description of the event, (B) the adjusted Conversion Price with a
reference to the applicable paragraph in Section 4.5 hereof and (C) the date on
which the adjusted Conversion Price is effective.

            4.6 NASDAQ LIMITATION. If on any date (the "Determination Date") (a)
the Common Stock is listed for trading on Nasdaq, (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 the then outstanding principal
amount of the Debentures as if all such Debentures were converted on such
Determination Date (without regard to any limitations on


                                       21
<PAGE>   22
conversions) and as payment of interest thereon, as would equal or exceed 20% of
the number of shares of the Common Stock outstanding immediately prior to the
"Closing Date" (the "Issuable Maximum"), and (c) the Company shall not have
previously obtained the vote of the shareholders of the Company (the
"Shareholder Approval"), if any, as may be required by the applicable rules and
regulations of Nasdaq (or any successor entity) to approve the issuance of
shares of Common Stock in excess of the Issuable Maximum in a private placement
whereby shares of Common Stock are deemed to have been issued at a price that is
less than the greater of book value or fair market value of the Common Stock,
then with respect to the aggregate principal amount of the Debentures then held
by the Holders for which a conversion in accordance with the Conversion Price
would result in an issuance of shares of Common Stock in excess of such Holder's
pro rata allocation (as described below) of the Issuable Maximum (the "Excess
Principal") the Company may elect to prepay cash to the Holders in an amount
equal to the Mandatory Prepayment Amount. Any such election by the Company must
be made in writing to the Holders within two (2) Trading Days after the first
such Determination Date and the payment of such Mandatory Prepayment Amount
applicable to such prepayment must be made in full to the Holders with ten (10)
Business Days after the date such notice is delivered. If the Company does not
deliver timely a notice of its election to prepay under this Section or shall,
if it shall have delivered such a notice, fail to pay the prepayment amount
hereunder within ten (10) Business Days thereafter, then each Holder shall have
the option by written notice to the Company, to, if applicable, declare any such
notice given by the Company, if given, to be null and void and require the
Company to either: (i) 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 unless the Company has previously used its
best efforts to, but has failed to, obtain such approval (provided, that if the
Company shall fail to obtain the Shareholder Approval during such 60-day period,
the Holder may demand the cash payment set forth in Section 4.6(ii) herein) or
(ii) pay cash to such Holder, within five (5) Business Days of such Holder's
notice, in an amount equal to the Mandatory Prepayment Amount for such Holder's
portion of the Excess Principal. The payment of the Mandatory Prepayment Amount
to each Holder pursuant to this Section shall be determined on a pro rata basis
upon the principal amount of the Debentures held by such Holder on the
Determination Date which is in excess of the pro rata allocation of the Issuable
Maximum. If the Company fails to pay the Mandatory Prepayment Amount in full
pursuant to this Section within five (5) Business Days after the date payable,
the Company will pay interest thereon at a rate of 20% per annum to the
converting Holder, accruing interest daily from the date of conversion until
such amount, plus all such interest thereon, if any, is paid in full. Until the
Company has received the Shareholder Approval no Holder of the Debentures shall
be issued, upon conversion of Debentures, shares of Common Stock in an amount
greater than such Holder's allocated portion of the Issuable Maximum pursuant to
Section 4.15.

            4.7 RESTRICTION ON CONVERSION BY EITHER THE HOLDER OR THE COMPANY.
Notwithstanding anything herein to the contrary, in no event shall any Holder or
the Company have the right or be required to convert any or all of the aggregate
principal amount and interest accrued thereon of this Debenture if as a result
of such conversion the aggregate number of shares of Common Stock beneficially
owned by such Holder and its Affiliates would exceed 9.99% of the outstanding
shares of the Common Stock following such conversion. For purposes of this
Section 4.7, beneficial ownership shall be calculated in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended. The provisions of this
Section 4.7 may be


                                       22
<PAGE>   23
waived by a Holder as to itself (and solely as to itself) upon not less than 65
days prior written notice to the Company, and the provisions of this Section 4.7
shall continue to apply until such 65th day (or later, if stated in the notice
of waiver).

            4.8 OFFICER'S CERTIFICATE. Whenever the number of shares purchasable
upon conversion shall be adjusted as required by the provisions of Section 4.5,
the Company shall forthwith file in the custody of its Secretary or an Assistant
Secretary at its principal office and with its stock transfer agent, if any, an
officer's certificate showing the adjusted number of shares determined as herein
provided, setting forth in reasonable detail the facts requiring such adjustment
and the manner of computing such adjustment. Each such officer's certificate
shall be signed by the chairman, president or chief financial officer of the
Company. Each such officer's certificate shall be made available at all
reasonable times for inspection by any holder of the Debentures and the Company
shall, forthwith after each such adjustment, deliver a copy of such certificate
to the each of the Holders.

            4.9 RESERVATION OF SHARES. The Company covenants that it will at all
times reserve and keep available out of its authorized shares of Common Stock,
free from preemptive rights, solely for the purpose of issue upon conversion of
the Debentures as herein provided, such number of shares of the Common Stock as
shall then be issuable upon the conversion of all outstanding Debentures into
Common Stock in accordance with Section 3.6(b) of the Purchase Agreement (the
"Reserved Amount"). The Company covenants that all shares of the Common Stock
issued upon conversion of the Debenture which shall be so issuable shall, when
issued, be duly and validly issued and fully paid and non-assessable.

            If, at any time a Holder of this Debenture submits a Notice of
Conversion, and the Company does not have sufficient authorized but unissued
shares of Common Stock available to effect such conversion in accordance with
the provisions of this Article IV (a "Conversion Default"), the Company shall
issue to the Holder all of the shares of Common Stock which are then available
to effect such conversion. The portion of this Debenture which the Holder
included in its Conversion Notice and which exceeds the amount which is then
convertible into available shares of Common Stock (the "Excess Amount") shall,
notwithstanding anything to the contrary contained herein, not be convertible
into Common Stock in accordance with the terms hereof until (and at the Holder's
option at any time after) the date additional shares of Common Stock are
authorized by the Company to permit such conversion at which time the Conversion
Price in respect thereof shall be the lesser of (i) the Per Share Market Value
on the Conversion Default Date (as defined below) and (ii) the Per Share Market
Value on the Conversion Date thereafter elected by the Holder in respect
thereof. In addition, the Company shall pay to the Holder payments ("Conversion
Default Payments") for a Conversion Default in the amount of (x) the sum of (1)
the then outstanding principal amount of this Debenture plus (2) accrued and
unpaid interest on the unpaid principal amount of this Debenture through the
Authorization Date (as defined below) plus (3) Default Interest, if any, on the
amounts referred to in clauses (1) and/or (2), multiplied by (y) .24, multiplied
by (z) (N/365), where N equals the number of days from the day the holder
submits a Notice of Conversion giving rise to a Conversion Default (the
"Conversion Default Date") to the date (the "Authorization Date") that the
Company authorizes a sufficient number of shares of Common Stock to effect
conversion of the full outstanding principal balance of this Debenture. The
Company shall use its best efforts to authorize a sufficient number of shares of
Common Stock as soon as practicable following the earlier of (i)


                                       23
<PAGE>   24
such time that the Holder notifies the Company or that the Company otherwise
becomes aware that there are or likely will be insufficient authorized and
unissued shares to allow full conversion thereof and (ii) a Conversion Default.
The Company shall send notice to the Holder of the authorization of additional
shares of Common Stock, the Authorization Date and the amount of Holder's
accrued Conversion Default Payments. The accrued Conversion Default Payments for
each calendar month shall be paid in cash or shall be convertible into Common
Stock (at such time as there are sufficient authorized shares of Common Stock
following the Authorization Date) at the applicable Conversion Price, at the
Holder's option, as follows:

            (a) In the event Holder elects to take such payment in cash, cash
payment shall be made to Holder by the fifth (5th) Business Day of the month
following the month in which it has accrued; and

            (b) In the event Holder elects to take such payment in Common Stock,
the Holder may convert such payment amount into Common Stock at the lesser of
the Conversion Price (as in effect at the time of conversion) and the Per Share
Market Value (on the fifth day of the month referred to below) at any time after
the fifth day of the month following the month in which it has accrued in
accordance with the terms of this Article IV (so long as there is then a
sufficient number of authorized shares of Common Stock).

            The Holder's election shall be made in writing to the Company at any
time prior to 8:00 p.m., New York City Time, on the third day of the month
following the month in which Conversion Default payments have accrued. If no
election is made, the Holder shall be deemed to have elected to receive cash.
Nothing herein shall limit the Holder's right to pursue actual damages (to the
extent in excess of the conversion Default Payments) for the Company's failure
to maintain a sufficient number of authorized shares of Common Stock, and each
Holder shall have the right to pursue all remedies available at law or in equity
(including degree of specific performance and/or injunctive relief).

            4.10 COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. The Company
covenants that if any shares of Common Stock required to be reserved for
purposes of conversion of Debentures hereunder require registration with or
approval of any governmental authority under any Federal or state law, or any
national securities exchange, before such shares may be issued upon conversion,
the Company will use its best efforts to cause such shares to be duly registered
or approved, as the case may be.

            4.11 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 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.

            4.12 PAYMENT OF TAX UPON ISSUE OR TRANSFER. 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


                                       24
<PAGE>   25
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.

            4.13 NOTICES. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be deemed to have
been received (a) upon hand delivery (receipt acknowledged) or delivery by telex
(with correct answer back received), telecopy or facsimile (with transmission
confirmation report) at the address or number designated below (if received by
8:00 p.m. EST where such notice is to be received), or the first Business Day
following such delivery (if received after 8:00 p.m. EST where such notice is to
be received) or (b) on the second Business Day following the date of mailing by
express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications are (i) if to the Company to Endocare, Inc., 7 Studebaker,
Irvine, California 92618, Attention: Paul W. Mikus, fax no. (949) 597-0607, with
copies to Brobeck, Phleger & Harrison LLP, 38 Technology Drive, Irvine,
California 92618, Attention: Richard A. Fink, fax no. (949) 790-6301, and (ii)
if to any Holder to the address set forth on Schedule II to the Purchase
Agreement with copies to Akin, Gump, Strauss, Hauer & Feld, L.L.P., 590 Madison
Avenue, New York, New York 10022, Attention: James Kaye, fax no. (212) 872-1002,
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.

            4.14 ALLOCATIONS OF ISSUABLE MAXIMUM AND RESERVED AMOUNT. The
Issuable Maximum and Reserved Amount shall be allocated pro rata among the
Holders based on the principal amount of Debentures issued to each Holder. Each
increase to the Issuable Maximum and Reserved Amount shall be allocated pro rata
among the Holders based on the principal amount of Debentures held by each
Holder at the time of the increase in the Issuable Maximum or Reserved Amount.
In the event a Holder shall sell or otherwise transfer any of such Holder's
Debentures, each transferee shall be allocated a pro rata portion of such
transferor's Issuable Maximum and Reserved Amount. Any portion of the Issuable
Maximum or Reserved Amount which remains allocated to any person or entity which
does not hold any Debentures shall be allocated to the remaining Holders, pro
rata, based on the principal amount of such Debentures then held by such
Holders.

                                    ARTICLE V

                    CONSOLIDATION, MERGER OR SALE OF COMPANY

            5.1 CONSOLIDATION, MERGER OR SALE ONLY ON CERTAIN TERMS. The Company
shall not consolidate with or merge into any other Person or convey, transfer or
lease its properties and assets substantially as an entirety to any Person, and
the Company shall not permit any Person to consolidate with or merge into the
Company or convey, transfer or lease its properties and assets substantially as
an entirety to the Company, unless:


                                       25
<PAGE>   26
            a. in case the Company shall consolidate with or merge into another
Person or convey, transfer or lease its properties and assets substantially as
an entirety to any Person, the Person formed by such consolidation or into which
the Company is merged or the Person which acquires by conveyance or transfer, or
which leases, the properties and assets of the Company substantially as an
entirety shall be a corporation, partnership or trust whose Common Stock is
traded or the Nasdaq or a Subsequent Market, and shall expressly assume, by a
Debenture supplemental hereto, executed and delivered to the Holders, in form
satisfactory to the Holders of a majority of the then outstanding principal
amount of the Debentures, the due and punctual payment of the principal of and
interest on all the Debentures and the performance or observance of every
covenant of this Debenture on the part of the Company to be performed or
observed and shall have provided for conversion rights in accordance with
Section 5.3; and

            b. immediately after giving effect to such transaction and treating
any indebtedness which becomes an obligation of the Company or a Subsidiary as a
result of such transaction as having been incurred by the Company or such
Subsidiary at the time of such transaction, no Event of Default shall have
happened and be continuing.

            5.2 SUCCESSOR SUBSTITUTED. Upon any consolidation of the Company
with, or merger of the Company into, any other Person or any conveyance,
transfer or lease of the properties and assets of the Company substantially as
an entirety in accordance with Section 5.1, the successor person formed by such
consolidation or into which the Company is merged or to which such conveyance,
transfer or lease is made shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Debenture with the
same effect as if such successor Person had been named as the Company herein,
and thereafter, except in the case of a lease, the predecessor Person shall be
relieved of all obligations and covenants under this Debenture.

            5.3 CONVERSION RIGHTS. In case of any consolidation of the Company
with, or merger of the Company into, any other Person, any merger of another
Person into the Company (other than a merger which does not result in any
reclassification, conversion, exchange or cancellation of outstanding shares of
Common Stock of the Company) or any sale or transfer of all or substantially all
of the assets of the Company, the Person formed by such consolidation or
resulting from such merger or which acquires such assets, as the case may be,
shall in the supplemental Debenture provided pursuant to Section 5.1(a) provide
that the Holder of each Debenture then outstanding shall have the right
thereafter, during the period such Debenture shall be convertible as specified
in Article IV, to convert such Debenture only into the kind and amount of
securities, cash or other assets receivable upon such consolidation, merger,
sale or transfer by a holder of the number of shares of Common Stock of the
Company into which such Debenture might have been converted immediately prior to
such consolidation, merger, sale or transfer, with which the Company
consolidated or into which the Company merged or which merged into the Company
or to which such sale or transfer was made, as the case may be ("Constituent
Person"), or an Affiliate of a Constituent Person. The supplemental indenture
also shall provide that if in connection with such consolidation, merger, sale
or transfer, each holder of Common Stock is entitled to elect to receive either
securities, cash or other assets receivable upon such consolidation, merger,
sale or transfer, the Company or the surviving or transferee corporation shall
provide each holder of securities with the right to elect to receive the
securities, cash or other assets into which the Debentures held by such Holder
shall be convertible after


                                       26
<PAGE>   27
completion of such consolidation, merger, sale or transfer on the same terms and
subject to the same conditions applicable to holders of Common Stock (including,
without limitation, notice of the right to elect, limitations on the period in
which such election shall be made and the effect of failing to exercise the
election). Such supplemental Debenture shall provide for adjustments which, for
events subsequent to the effective date of such supplemental Debenture, shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Article. The above provisions of this Section shall similarly apply to
successive consolidations, mergers, sales or transfers.

                                   ARTICLE VI
                               OPTIONAL CONVERSION

            6.1 OPTIONAL CONVERSION.

            a. The Debenture is convertible in whole at the option of the
Company, from time to time, subject to the following conditions, and subject
also to the other conditions set forth in this Article VI (the "Optional
Conversion"):

                  (i) If, after nine (9) months following the Effectiveness Date
            (as defined in the Registration Rights Agreement), the Per Share
            Market Value has been greater than Nine Dollars ($9.00) subject to
            adjustment in the same manner in which the Conversion Price is
            adjusted as provided in Sections 4.5(a), (b), (c) and (d) (the
            "Conversion Trigger Price") for at least twenty (20) out of thirty
            (30) consecutive Trading Days; or

                  (ii) If, after four (4) months following effectiveness of the
            Registration Statement for the Debenture Shares the Company receives
            net proceeds of at least Three Million Dollars ($3,000,000) from a
            sale of its Common Stock or, securities convertible into or
            exchangeable or exercisable for shares of Common Stock in an
            offering registered under the Securities Act of 1933 at an initial
            price to the public equal to or exceeding the Conversion Trigger
            Price.

            b. Subject to the conditions set forth in Section 5.1(a), so long as
(i) no Event of Default (or any event that with the passage of time or giving of
notice or both would constitute an Event of Default) shall have occurred and be
continuing, (ii) any Registration Statement required to be filed and be
effective pursuant to the Registration Rights Agreement is then in effect and
has been in effect and sales of all of the Registrable Securities can be made
thereunder for at least twenty (20) days prior to the Conversion Notice Date (as
defined below) and (iii) the Company has a sufficient number of authorized
shares of Common Stock reserved for issuance upon full conversion of the
Debentures, upon ten (10) Business Days prior written notice to the Holder (a
"Conversion Notice"), the entire principal amount of the Debenture may be
converted by the Company, in whole into shares of Common Stock at the Conversion
Price, and accrued interest may be converted into shares of Common Stock at the
Average Price on the Business Day prior to conversion.

            6.2 The right of Optional Conversion set forth in this Article VI
shall apply only to Debentures issued on the First Closing Date but shall not
apply to Debentures issued on


                                       27
<PAGE>   28
the Second Closing Date.

            6.3 MECHANICS OF CONVERSION. The Company must exercise its right to
cause an Optional Conversion hereunder by delivering Conversion Notice by
facsimile and overnight courier to each Holder, no later than two (2) Business
Days after the occurrence of a condition set forth in Section 6.1(a)(i) or (ii)
(such deadline the "Conversion Notice Date"). Such Conversion Notice shall
indicate (a) the Conversion Price, (b) the number of shares of Common Stock that
each Holder shall receive as a result of the Optional Conversion and (c) a
confirmation of the date that the Company shall effect the Optional Conversion
and issue shares of Common Stock to the Holders (the "Optional Conversion
Date"), on the Optional Conversion Date, unless there is a disagreement as
described below. The Company shall issue the Common Stock on the Optional
Conversion Date unless the Holder notifies the Company within three (3) Business
Days after receipt of the Conversion Notice from the Company that the Holder
disagrees with the occurrence of the Optional Conversion or any other matter
contained in the Conversion Notice. If the Holder and the Company fail to agree
upon the occurrence of the Optional Conversion or any other matter contained in
the Conversion Notice within one (1) Business Day after the Holder has given
such notice, the matter shall be determined promptly by a securities firm (the
fees and expenses of which shall be paid by the Company) acceptable to both the
Holder and the Company, and such computation shall be final and binding. The
Optional Conversion shall be subject to the provisions set forth in Section 4.4,
mutatis mutandis.

      If the Company does not deliver the Conversion Notice by the Conversion
Notice Date, then the Company shall not have the right to effect an Optional
Conversion until a condition set forth in Section 6.1(a)(i) or (ii) occurs again
after such Conversion Notice Date. An example of how the Optional Conversion
right operates is as follows: Thirty (30) consecutive Trading Days occur, and on
twenty (20) of such Trading Days, the Per Share Market Value of the Common Stock
is greater than the Conversion Trigger Price. The Conversion Notice Date is two
(2) Business Days after the end of the thirty (30) day trading period. If the
Company delivers the Conversion Notice by the Conversion Notice Date, it has
properly exercised its Optional Conversion right and subject to this Section
6.3, the Debentures will be converted as provided herein. If the Company fails
to deliver the Conversion Notice on or prior to the Conversion Notice Date, then
there must again occur a thirty (30) consecutive day trading period in which
there are twenty (20) days where the Per Share Market Value is in excess of the
Conversion Trigger Price before the Company may again exercise its Optional
Conversion right.

                                   ARTICLE VII

                           SUBORDINATION OF DEBENTURES

            7.1 DEBENTURES SUBORDINATE TO SENIOR INDEBTEDNESS. The Company
covenants and agrees, and each Holder of a Debenture, by his acceptance thereof,
likewise covenants and agrees, that, to the extent and in the manner hereinafter
set forth in this Article, the payment of the principal of (and premium, if any)
and interest on each and all of the Debentures are hereby expressly made
subordinate and subject in right of payment to the prior payment in full of all
Senior Indebtedness. "Senior Indebtedness" shall mean any indebtedness,
liabilities and other obligations of the Company (whether as primary obligor or
as guarantor) to any Person


                                       28
<PAGE>   29
(each a "Senior Lender"), now existing or incurred hereafter, with respect to
any working capital, revolving credit or other line of credit facility, any term
loan facility, or any other extension of credit by a bank, insurance company or
financial institution engaged in the business of lending money (whether or not
secured), including reimbursement obligations under letters of credit (or local
guaranties, as applicable) and obligations in respect of bankers' acceptances,
interest rate protection agreements and currency exchange and purchase
agreements, and any other indebtedness or other obligations of the Company for
borrowed money evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses and secured thereby. Senior Indebtedness shall
include renewals, refundings, refinancings or other extensions of the foregoing.
The terms "indebtedness," "liabilities" and "obligations" are used herein in
their most comprehensive sense and include any and all advances, debts,
obligations and liabilities, now existing or hereafter arising, whether
voluntary or involuntary and whether due or not due, absolute or contingent,
liquidated or unliquidated, determined or undetermined.

            7.2  NO PAYMENT ON DEBENTURES IN CERTAIN CIRCUMSTANCES.

            a. No payment or distribution of cash or property (other than Common
Stock of the Company or other securities of the Company that are subordinated to
Senior Indebtedness to at least the same extent as the Debentures) of the
Company will be made on account of principal of or interest on the Debentures,
or to defease or acquire any of the Debentures, or on account of the conversion
provisions of the Debentures and no action shall be taken (judicial or
otherwise) to collect any such payment or distribution (i) upon the maturity of
any Senior Indebtedness by lapse of time, acceleration or otherwise, unless and
until all Senior Indebtedness shall first be paid in full in cash, or such
payment duly made in a manner satisfactory to the holders of such Senior
Indebtedness or (ii) in the event that the Company defaults in the payment of
any principal of, premium, if any, or interest on or any other amounts payable
on or due in connection with any Senior Indebtedness when it becomes due and
payable, whether at maturity or at a date fixed for prepayment or by declaration
or otherwise, unless and until such default has been waived in writing by the
holders of the Senior Indebtedness. Payments on the Debentures may and shall be
resumed in the case of a payment default only upon the date on which such
default is waived in writing by the holders of the Senior Indebtedness or their
agent.

            b. If any default other than a default contemplated by Section
7.2(a)(ii) above shall have occurred and be continuing that would permit the
holders of the Senior Indebtedness to accelerate the maturity of Senior
Indebtedness, upon written notice (a "Payment Blockage Notice") of the default
given to the Company and the Holders by the holders of, or an agent, trustee or
other representative for, such Senior Indebtedness, then, unless and until such
default has been waived in writing, no payment or distribution of cash or
property (other than Common Stock of the Company or other securities of the
Company that are subordinated to Senior Indebtedness to at least the same extent
as the Debentures) shall be made by the Company with respect to the principal of
or interest on the Debentures or on account of conversion of the Debentures or
to acquire or repurchase any of the Debentures for cash or property other than
Common Stock of the Company, and no action shall be taken (judicial or
otherwise) to collect any such payment or distribution. If such Senior
Indebtedness is not declared due and payable within 180 days after written
notice of the event of default is given, promptly after the end of the 180-day
period the Company will pay all sums due in respect of the Debentures and not
paid


                                       29
<PAGE>   30
during the 180-day period. During any 360-day consecutive period, only one such
period during which payment with respect to the Debentures may not be made as
the result of a Payment Blockage Notice may commence and the duration of such
period may not exceed 180 days. No nonpayment default that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the Holders
shall be, or be made, the basis for a subsequent Payment Blockage Notice unless
such default shall have been waived for a period of not less than 90 days.

            c. If any payment or distribution of assets of the Company is
received by any Holder in respect of the Debentures at a time when that payment
or distribution should not have been made because of paragraph (a) or (b) of
this Section 7.2, and provided that prior to the Company's disbursement of such
distribution or payment, the Holders shall have received a written notice from
the Company or from an agent or representative for one or more holders of Senior
Indebtedness, such payment or distribution will be received and held and will be
paid over to the holders of Senior Indebtedness (pro rata as to each of such
holders on the basis of the respective amounts of Senior Indebtedness held by
them) until all such Senior Indebtedness has been paid in full, after giving
effect to any concurrent payment or distribution or provision therefor to the
holders of such Senior Indebtedness.

            7.3 DEBENTURES SUBORDINATED TO PRIOR PAYMENT OF ALL SENIOR
INDEBTEDNESS ON DISSOLUTION, LIQUIDATION OR REORGANIZATION. Upon any
distribution of assets of the Company upon any dissolution, winding up,
liquidation or reorganization of the Company (whether in bankruptcy, insolvency,
receivership or similar proceedings relating to the Company or its property or
upon an assignment for the benefit of creditors or any marshalling of the
Company's assets or liabilities or otherwise):

            a. the holders of all Senior Indebtedness will first be entitled to
receive payment in full of the principal of and interest due on Senior
Indebtedness (including interest accruing after the commencement of a bankruptcy
or insolvency) at the rate specified in the applicable Senior Indebtedness
documents and including, without limitation, in respect of premiums, indemnities
or otherwise, before the Holders are entitled to receive any payment or
distribution on account of the principal of or interest on the Debentures;

            b. any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities (except that Holders may
receive securities that are subordinated at least to the same extent as the
Debentures to Senior Indebtedness and any securities issued in exchange for
Senior Indebtedness), to which Holders would be entitled except for the
provisions of this Section 7.3 will be paid by the liquidating trustee or agent
or other persons legally empowered to make such a payment or distribution
directly to the holders of Senior Indebtedness (pro rata to such holders on the
basis of the respective amounts of Senior Indebtedness held by such holders) or
their representatives to the extent necessary to make or provide for payment in
full in cash of all Senior Indebtedness remaining unpaid, after giving effect to
any concurrent payment or distribution to the holders of such Senior
Indebtedness or provision for that payment or distribution; and

            c. if, notwithstanding the foregoing, any payment or distribution of
assets of the Company of any kind or character, whether in cash, property or
securities (except that Holders may receive securities that are subordinated at
least to the same extent as the Debentures to


                                       30
<PAGE>   31
Senior Indebtedness and any securities issued in exchange for Senior
indebtedness) is received by the Holders on account of the principal of or
interest on the Debentures before all Senior Indebtedness is paid in full, such
payment or distribution will be received and held in trust for and will be
forthwith paid over to the holders of the Senior Indebtedness remaining unpaid
or unprovided for or their representatives for application (in the cash of cash)
to, or as collateral (in the case of non-cash property or securities) for the
payment of such Senior Indebtedness until all such Senior Indebtedness has been
paid in full, after giving effect to any concurrent payment or distribution or
provision therefor to the holders of such Senior Indebtedness.

            The Company will give prompt written notice to the Holders of any
dissolution, winding up, liquidation or reorganization of it or any assignment
for the benefit of its creditors.

            7.4 SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS. Subject
to the payment in full of all Senior Indebtedness, the Holders shall be
subrogated to the rights of the holders of Senior Indebtedness to receive
payments or distributions of cash, property or securities of the Company
applicable to the Senior Indebtedness until all amounts owing on the Debentures
shall be paid in full; and, for the purposes of such subrogation:

            a. no payments or distributions to the holders of the Senior
Indebtedness of any cash, property or securities to which the Holders would be
entitled except for the provisions of this Article VII and no payment pursuant
to the provisions of this Article VII to the holders of Senior Indebtedness by
the Holders shall, as between the Company, its creditors (other than holders of
Senior Indebtedness) and the Holders, be deemed to be a payment by the Company
to or on account of the Senior Indebtedness; and

            b. no payment or distributions of cash, property or securities to or
for the benefit of the Holders pursuant to the subrogation provision of this
Article VII, which would otherwise have been paid to the holders of Senior
Indebtedness, shall be deemed to be a payment by the Company to or for the
account of the Debentures.

            7.5 PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS. The provisions of
this Article are and are intended solely for the purpose of defining the
relative rights of the Holders on the one hand and the holders of Senior
Indebtedness on the other hand. Nothing contained in this Article or elsewhere
in this Debenture or in the Debentures is intended to or shall (a) impair, as
among the Company, its creditors other than holders of Senior Indebtedness and
the Holders of the Debentures, the obligation of the Company, which is absolute
and unconditional to pay to the Holders of the Debentures the principal of (any
premium, if any) and interest on the Debentures as and when the same shall
become due and payable in accordance with their terms; or (b) affect the
relative rights against the Company of the Holders of the Debentures and
creditors of the Company other than the holders of Senior Indebtedness; or (c)
prevent the Holder of any Debenture from exercising all remedies otherwise
permitted by applicable law upon default under this Debentures, subject to the
rights, if any, under this Article VII of the holders of Senior Indebtedness to
receive cash, property and securities otherwise payable or deliverable to the
Holder upon the exercise of any such remedy.

            7.6 RIGHT TO FILE PROOF OF CLAIM. In the event of any dissolution,
winding up, liquidation or reorganization of the Company (whether in bankruptcy,
insolvency,


                                       31
<PAGE>   32
receivership, reorganization or similar proceedings or upon any assignment for
the benefit of creditors or otherwise) tending towards liquidation of the
business and assets of the Company, with respect to the filing of a claim for
the unpaid balance of any Holder's Debentures in the form required in those
proceedings, if the Holder does not file a proper claim or proof of debt in the
form required in such proceeding at least thirty (30) days before the expiration
of the time to file such claim or claims, then the holders of Senior
Indebtedness and their agents, trustees, or other representatives are hereby
authorized to have the right to file, and are hereby authorized to file, an
appropriate claim for and on behalf of each such Holder.

            7.7 NO WAIVER OF SUBORDINATION PROVISIONS. No right of any present
or future holder of any Senior Indebtedness to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by any act or
failure to act on the part of the Company or by any act or failure to act, in
good faith, by any such holder, or by any noncompliance by the Company with the
terms, provisions and covenants of this Debenture, regardless of any knowledge
thereof any such holder may have or be otherwise charged with.

            Without in any way limiting the generality of the foregoing
paragraph, the holders of Senior Indebtedness may, at any time and from time to
time, without the consent of or notice to the Holders of the Debentures, without
incurring responsibility to the Holders of the Debentures and without impairing
or releasing the subordination provided in this Article or the obligations
hereunder of the Holders of the Debentures to the holders of Senior
Indebtedness, do any one or more of the following: (i) change the manner, place
or terms of payment or extend the time of payment of, or renew or alter, Senior
Indebtedness, or otherwise amend or supplement in any manner Senior Indebtedness
or any instrument evidencing the same or any agreement under which Senior
Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with
any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii)
release any Person liable in any manner for the collection of Senior
Indebtedness; and (iv) exercise or refrain from exercising any rights against
the Company and any other Person.

            7.8 NOTICE TO HOLDERS. The Company shall give prompt written notice
to the Holders of any fact known to the Company which would prohibit the making
of any payment to or by the Holders in respect of the Debentures.
Notwithstanding the provisions of this Article or any other provision of this
Debenture, the Holders shall not be charged with knowledge of the existence of
any facts which would prohibit the making of any payment to the Holders in
respect of the Debentures, unless and until the Holders shall have received
written notice thereof from the Company or a holder of Senior Indebtedness; and,
prior to the receipt of any such written notice, the Holders shall be entitled
in all respects to assume that no such facts exist; provided, however, that if
the Holders shall not have received the notice provided for in this Section at
least two Business Days prior to the date upon which by the terms hereof any
money may become payable for any purpose (including, without limitation, the
payment of the principal of, and premium, if any, or interest on any Debenture),
then, anything herein contained to the contrary notwithstanding, the Holders
shall have full power and authority to receive such money and to apply the same
to the purpose for which such money was received and shall not be affected by
any notice to the contrary which may be received by it within two Business Days
prior to such date.

            The Holders shall be entitled to rely on the delivery to them of a
written notice by


                                       32
<PAGE>   33
a Person representing himself to be a holder of Senior Indebtedness (or a
representative thereof) to establish that such notice has been given by a holder
of Senior Indebtedness (or representative thereof). In the event that the
Holders determines in good faith that further evidence is required with respect
to the right of any Person as a holder of Senior Indebtedness (or a
representative thereof) to participate in any payment or distribution pursuant
to this Article, the Holders may request such Person to furnish evidence to the
reasonable satisfaction of the Holders as to the amount of Senior Indebtedness
held by such Person, the extent to which such Person is entitled to participate
in such payment or distribution and any other facts pertinent to the rights of
such Person under this Article, and if such evidence is not furnished, the
Holders may defer any payment to such Person pending judicial determination as
to the right of such Person to receive such payment.

            7.9 RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT.
Upon the payment or distribution of assets of the Company referred to in this
Article, the Holders of the Debentures shall be entitled to rely upon any order
or decree entered by any court of competent jurisdiction in which such
proceeding is pending, or a certificate of the trustee in bankruptcy, receiver,
liquidating trustee, custodian, assignee for the benefit of the creditors, agent
or other Person making such payment or distribution, delivered to the Holders of
Debentures, for the purpose of ascertaining the Persons entitled to participate
in such payment or distribution, the holders of the Senior Indebtedness and
other indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article VII.

            7.10 NO ADVERSE MODIFICATION TO DEBENTURE. Neither the Holders nor
the Company shall enter into any modification of the Debentures which is in any
way adverse to the holders of the Senior Indebtedness.

            7.11 NOTICE TO HOLDERS OF SENIOR INDEBTEDNESS. The Company will
furnish to the holders of Senior Indebtedness at the time Senior Indebtedness is
initially incurred, when there is a change in the Holders thereof, or at any
time upon request therefor, a true and correct copy of the then most current
register setting forth the names and addresses of the Holders as of such date.

            7.12 SUBORDINATION AGREEMENT. The Holder by its acceptance hereof
agrees to execute and deliver to any Senior Lender such subordination agreement
as may be reasonably requested by such Senior Lender, which may deviate in
certain minor respects from the subordination provisions contained herein but
which is commercially reasonable and customary, and to execute, acknowledge,
deliver, file, notarize and register all such further agreements, instruments,
certificates, documents and assurances, and perform such acts as such Senior
Lender shall deem necessary or appropriate to effectuate the purposes of the
subordination provisions contained herein.

                                  ARTICLE VIII

                                  MISCELLANEOUS

            8.1 MODIFICATION OF DEBENTURES. This Debenture may be modified
without


                                       33
<PAGE>   34
prior notice to any Holder upon the written consent of the Company and the
Holders of more than 75% of the principal amount of the Debentures then
outstanding. The Holders of more than 75% of the principal amount of the
Debentures then outstanding may waive compliance by the Company with any
provision of this Debenture without prior notice to any Holder. However, without
the consent of each Holder affected, an amendment, supplement or waiver may not
(1) reduce the amount of Debentures whose Holders must consent to an amendment,
supplement or waiver, (2) reduce the principal amount of or extend the fixed
maturity of any Debenture or (3) make any Debenture payable in money or property
other than as stated in the Debentures.

            8.2 MISCELLANEOUS. 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 hereby
irrevocably submits to the nonexclusive 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, that
such suit, action or proceeding is improper. Except as specifically provided
herein, the parties hereto, including all guarantors or endorsers, hereby waive
presentment, demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance and enforcement of this
Debenture, and assent to extensions of the time of payment, or forbearance or
other indulgence without notice. The Holder of this Debenture by acceptance of
this Debenture agrees to be bound by the provisions of this Debenture which are
expressly binding on such Holder.

            8.3 RANK AND SUBORDINATION. 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 (or, as provided herein, in Common Stock), herein
prescribed. This Debenture is a direct obligation of the Company and ranks
subordinate to all Senior Indebtedness. Except as otherwise provided herein, the
Company may not voluntarily prepay the outstanding principal amount of the
Debenture.

            8.4 DEBENTURES OWNED BY COMPANY DEEMED NOT OUTSTANDING. In
determining whether the Holders of the requisite aggregate principal amount of
Debentures have concurred in any direction, consent or waiver under this
Debenture, Debentures which are owned by the Company or any other obligor on the
Debentures or by any Person directly or indirectly controlling or controlled by
or under direct or indirect common control with the Company or any other obligor
on the Debentures shall be disregarded and deemed not to be outstanding for the
purpose of any such determination; provided that any Debentures owned by the
Purchasers shall be deemed outstanding for purposes of making such a
determination. Debentures so owned which have been pledged in good faith may be
regarded as outstanding if the pledgee establishes to the satisfaction of the
Company the pledgee's right so to act with respect to such Debentures and that
the pledgee is not the Company or any other obligor upon the securities or any
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with the Company or any other obligor on the Debentures.

      8.5 NOTICE TO DEBENTUREHOLDERS PRIOR TO TAKING CERTAIN TYPES OF ACTION.


                                       34
<PAGE>   35
In case:

            a. the Company shall authorize the issuance, at any time from and
after the Original Issue Date, to all holders of any class or series of its
Capital Stock, of rights or warrants to subscribe for or purchase shares of its
capital stock or of any other right;

            b. the Company shall authorize, at any time from and after the
Original Issue Date, the distribution to all holders of any class or series of
its Capital Stock, of evidences of its indebtedness or assets;

            c. the Company shall declare a dividend (or other distribution) on
its Common Stock or the Company shall declare a special nonrecurring dividend on
or a redemption of its Common Stock;

            d. of any subdivision, combination or reclassification of any class
or series of Capital Stock of the Company at any time from and after the
Original Issue Date or of any consolidation or merger to which the Company is a
party and for which approval by the shareholders of the Company is required, or
of the sale or transfer of all or substantially all of the assets of the Company
or any compulsory share exchange whereby the Common Stock is converted into
other securities, cash or property; or

            e. of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; then the Company shall cause to be mailed to the
Holders of this Debenture, at their last addresses as they shall appear upon the
registration books of the Company, at such time as the Company so notifies its
stockholders, a notice stating (i) the date as of which the holders of record of
such class or series of Capital Stock are to be entitled to receive any such
rights, warrants or distribution are to be determined, or (ii) the date on which
any such subdivision, combination, reclassification, consolidation, merger,
sale, transfer, dissolution, liquidation, winding up or other action is expected
to become effective, and the date as of which it is expected that holders of
record of such class or series of Capital Stock record shall be entitled to
exchange their stock for securities or other property, if any, deliverable upon
such subdivision, combination, reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation, winding up or other action.

            The failure to give the notice required by this Section 8.5 or any
defect therein shall not affect the legality or validity of any distribution,
right, warrant, subdivision, combination, reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation, winding up or other action, or
the vote upon any of the foregoing.

            8.6 EFFECT OF HEADINGS. The Section headings herein are for
convenience only and shall not affect the construction hereof.

            8.7 NO RIGHTS AS STOCKHOLDER. This Debenture shall not entitle the
Holder to any rights as a stockholder of the Company, including without
limitation, the right to vote, to receive dividends and other distributions
unless and to the extent converted into shares of Common Stock in accordance
with the terms hereof.

            8.8 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the
part of the


                                       35
<PAGE>   36
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privileges. All rights and remedies existing hereunder are
cumulative to, and not exclusive of, any rights or remedies otherwise available.

                  [Remainder of page intentionally left blank]


                                       36
<PAGE>   37

IN WITNESS WHEREOF, the Company and the Holder each has caused this instrument
to be duly executed as of July 29, 1999.

                                       ENDOCARE, INC.

                                       By /s/ Paul W. Mikus
                                              ----------------------------------
                                       Name:  Paul W. Mikus
                                       Title: Chief Executive Officer


                                       HOLDER

                                       Name of Holder:

                                       BROWN SIMPSON STRATEGIC GROWTH FUND, LTD.

                                       By /s/ Evan Levine
                                              ----------------------------------
                                       Name:
                                       Title:



                                       37
<PAGE>   38
                                                                       EXHIBIT A

                                 ENDOCARE, INC.
                                CONVERSION NOTICE

Reference is made to the Debenture issued by Endocare, Inc. (the "Debenture").
In accordance with and pursuant to the Debenture, the undersigned hereby
irrevocably elects to convert the principal amount of the Debenture, indicated
below into shares of Common Stock, par value $.001 per share (the "Common
Stock"), of the Company, by tendering the Debenture specified below as of the
date specified below.

Date of
Conversion:_____________________________________________________________________

Aggregate Principal Amount to be converted:_____________________________________

Debenture no(s). of Debenture to be converted:__________________________________

Please confirm the following information:

Conversion Price:_______________________________________________________________

Number of shares of Common Stock to be issued:__________________________________

Please issue the Common Stock into which the Debenture is being converted and,
if applicable, any check drawn on an account of the Company in the following
name and to the following address:

Issue to:_______________________________________________________________________

Facsimile Number:_______________________________________________________________

Authorization:__________________________________________________________________

By:_____________________________________________________________________________

Title:___________________________________

Dated:___________________________________

Account Number (if electronic book entry transfer):_____________________________

Transaction Code Number (if electronic book entry transfer):____________________


                                       38

<PAGE>   1
                                                                     EXHIBIT 4.2



                            7% CONVERTIBLE DEBENTURES

            THE DEBENTURE REPRESENTED HEREBY HAS NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION 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.

            PAYMENTS ON ACCOUNT OF THE INDEBTEDNESS EVIDENCED BY THIS
DEBENTURE AND THE EXERCISE OF REMEDIES HEREUNDER ARE SUBORDINATED TO SENIOR
INDEBTEDNESS AS PROVIDED HEREIN.

No. 2                                                                 $1,000,000

                                 ENDOCARE, INC.

                 7% CONVERTIBLE DEBENTURES DUE JULY 29, 2002

            Endocare Inc., a Delaware corporation (the "Company"), for value
received hereby promises to pay to Brown Simpson Strategic Growth Fund, L.P. or
its registered assigns ("Holder") the principal sum of One Million Dollars at
the Company's office or agency for said purpose in New York, New York on July
29, 2002 in such coin or currency (or, as provided herein, at the Holder's
option in Common Stock) of the United States of America as at the time of
payment shall be legal tender for the payment of public and private debts at the
last address of the Holder (as defined herein) last appearing on the Register
(as defined herein).

            This Debenture is one of a duly authorized issue of 7% Convertible
Debentures, due July 29, 2002 of the Company (the "Debenture") referred to in
the Securities Purchase Agreement (the "Purchase Agreement"), dated as of July
29, 1999, by and among the Company and the Purchasers listed on Schedule I
thereto. The Debentures are subject to the terms and conditions of the Purchase
Agreement. The Company agrees to issue from time to time replacement Debentures
in the form hereof to facilitate any transfers and assignments. In addition,
after delivery of an indemnity in form and substance reasonably satisfactory to
the Company, the Company also agrees to issue replacement Debentures for
securities which have been lost, stolen, mutilated or destroyed.

            The Company shall keep at its principal office a register (the
"Register") in which shall be entered the names and addresses of the registered
holders of the Debentures and particulars of the respective Debentures held by
them and of all transfers of such Debentures. References to the "Holder" or
"Holders" shall mean the Person listed in the Register as the payee of any
Debenture unless the payee shall have presented such Debenture to the Company
for transfer and the transferee shall have been entered in the Register as a
subsequent holder, in which case the term shall mean such subsequent holder. The
ownership of the Debentures shall be proven by the Register, absent manifest
error. For the purpose of paying interest and principal

<PAGE>   2
on the Debentures, the Company shall be entitled to rely on the names and
addresses in the Register.

            No provision of this Debenture shall alter or impair the obligations
of the Company, which are absolute and unconditional, to pay the principal of
and interest on this Debenture at the place, times, rate, and in the currency,
herein prescribed.

            The principal of this Debenture shall bear interest at the rate of
seven (7%) per annum (the "Interest Rate"). The interest shall accrue daily from
the most recent Interest Payment Date to which interest has been paid on this
Debenture, or if no interest has been paid on this Debenture from the date
hereof until payment in full of the principal amount has been made. Interest is
payable in cash or an equivalent value of the Company's Common Stock calculated
based upon the Average Price (as defined herein), at the Company's option,
subject to certain conditions contained herein, annually on January 1 of each
year (an "Interest Payment Date"), commencing on January 1, 2000, to the Holder
hereof until the principal amount is paid or made available for payment. The
interest so payable, and punctually paid or duly provided for, on any Interest
Payment Date will be paid or delivered to the Holder of the Debenture at the
close of business on the Record Date for the interest payable on such Interest
Payment Date. The "Record Date" for any interest payment is the close of
business on December 15, whether or not a Business Day, immediately preceding
the Interest Payment Date on which such Interest is payable.

            Any amounts that have become due and payable hereunder and remain
unpaid by the Company shall accrue interest thereafter until payment in full of
such amount at the rate of twenty percent (20%) (the "Default Rate") per annum
and shall be payable upon demand by the Holder.

            Interest, whether at the Interest Rate or the Default Rate, will be
computed on the basis of a fraction, the denominator of which is 365 (or 366 for
any leap year) and the numerator of which is the actual number of days elapsed
from the date such interest begins to accrue, in the case of the Interest Rate,
or becomes due and payable, in the case of the Default Rate.

            Each of the Interest Rate and the Default Rate (if otherwise
applicable under the terms hereof) shall be effective both before and after any
judgment may be rendered in a court of competent jurisdiction, provided,
however, that if either the Interest Rate or Default Rate is deemed to be in
excess of the amount permitted to be charged by the Company under applicable
laws, the Holder shall be entitled to collect an Interest Rate or Default Rate,
as the case may be, only at the highest rate permitted by law, and any interest
collected by the Holder in excess of such lawful amount shall be deemed a
payment in reduction of the principal amount then outstanding under this
Debenture and shall be so applied.

            The principal of, and any interest paid in cash on, this Debenture
are payable in coin or currency of the United States of America as at the time
of payment is legal tender for payment of public or private debts, at the last
address of the Holder last appearing on the Register, except that interest due
on the principal amount, if any (but not interest overdue for more than five (5)
days), may, at the Company's option be paid in shares of Common Stock calculated
based upon the Average Price (as defined herein) on the date such interest was
due. It


                                       2
<PAGE>   3
shall be assumed that the Company shall elect to make all payments of interest
in Common Stock, unless the Company shall have given written notice to each
Holder not less than one (1) calendar month prior to the applicable Interest
Payment Date of its intention to pay such interest in cash. Notwithstanding
anything to the contrary contained herein, the Company may not issue shares of
Common Stock in payment of the interest on principal if: (i) the number of
shares of Common Stock at the time authorized, unissued and unreserved for all
other purposes is insufficient to pay interest hereunder in shares of Common
Stock or there is an insufficient number of authorized shares of Common Stock
reserved (pursuant to Section 3.6(b) of the Purchase Agreement) for issue for
full conversion of all of the Debentures issued pursuant to the Purchase
Agreement; (ii) such shares are not either registered for resale pursuant to the
Registration Statement (as defined in the Registration Rights Agreement (as
defined herein)) or freely transferable pursuant to Rule 144 promulgated under
the Act, as determined by counsel to the Company pursuant to a written opinion
letter addressed and in form and substance acceptable to the Holder and the
transfer agent for such shares, subject to receipt, if necessary for such
opinion, from the Holder of a representation from such Holder that it is not an
Affiliate (as defined herein) of the Company; (iii) such shares are not listed
or quoted on the Nasdaq (as defined herein) or a Subsequent Market (as defined
herein); (iv) the issuance of such shares would result in the recipient thereof
beneficially owning more than 9.99% of the issued and outstanding shares of
Common Stock as determined in accordance with Section 4.7 hereof; (v) an Event
of Default has occurred and is continuing or an event that, with the passage of
time or giving of notice or both would constitute an Event of Default, has
occurred and is continuing; or (vi) the Company has issued the Issuable Maximum
(as defined herein) upon conversion of or pursuant to the Debentures issued
pursuant to the Purchase Agreement and the Shareholder Approval has not been
obtained.

            The Holder may from time to time convert the principal amount of
this Debenture, or any portion thereof, with any accrued but unpaid interest,
into Common Stock, as more particularly set forth in Section 4.2.

                                    ARTICLE I

                                   DEFINITIONS

            1.1 CERTAIN TERMS DEFINED. The following terms for all purposes of
this Debenture shall have the respective meanings specified below. All
accounting terms used herein and not expressly defined shall have the meanings
given to them in accordance with generally accepted accounting principles (as
defined herein). Capitalized terms not otherwise defined herein shall have the
meanings assigned to them in the Purchase Agreement. The terms defined in this
Section 1.1 include the plural as well as the singular.

            "Acceleration Notice" has the meaning set forth in Section 3.1.

            "Affiliate" of any Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such Person. For the purposes of this definition, "control" when
used with respect to any Person means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of
such


                                       3
<PAGE>   4
Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.

            "Appraiser" shall mean a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants of
recognized standing.

            "Authorization Date" has the meaning set forth in Section 4.9.

            "Average Price" on any date means (x) the sum of the Per Share
Market Value for the ten (10) Trading Days immediately preceding such date minus
(y) the highest and lowest Per Share Market Value during the ten (10) Trading
Days immediately preceding such date, divided by (z) eight (8).

            "Board of Directors" means either the Board of Directors of the
Company or any committee of such Board duly authorized to act hereunder.

            "Business Day" means any day except a Saturday, Sunday or other day
on which commercial banks in the City of New York are authorized or required by
law to close.

            "Capital Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated) of
such Person's capital stock whether now outstanding or issued after the Original
Issue Date, including, without limitation, all Common Stock and all Preferred
Stock.

            "Change of Control" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Section 13(d)(3) of the Exchange Act) of in excess of 50% of
the voting securities of the Company, (ii) a replacement 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 their duly elected successors who are directors immediately
prior to such transaction, in one or a series of related transactions, (iii) the
merger of the Company with or into another entity, unless following such
transaction, the Holders of the Company's securities continue to hold at least
51% of such securities following such transaction, (iv) the consolidation or
sale of all or substantially all of the assets of the Company in one or a series
of related transactions, (v) Mr. Paul W. Mikus ceasing to serve as the Chief
Executive Officer, President or Chairman of the Board of the Company due to his
death or disability or termination for cause, unless he is replaced by the Board
within one hundred and twenty days (120) of his termination of service and (vi)
Mr. Paul W. Mikus ceasing to serve as the Chief Executive Officer, President or
Chairman of the Board of the Company due to his voluntary resignation, unless he
is replaced by the Board within ninety days (90) by a successor reasonably
acceptable to the Holders of a majority of a then-outstanding principal amount
of the Debentures.

            "Closing Date" has the meaning set forth in the Purchaser Agreement

            "Common Stock" means the common stock, par value $0.001 per share,
of the Company, or the common stock of any successor to the Company following a
Change in Control in which the Company's Common Stock is converted into the
Common Stock of the successor corporation.


                                       4
<PAGE>   5
            "Company" has the meaning set forth in the first paragraph hereof.

            "Convertible Securities" has the meaning set forth in Section
4.5(e)(i)(A).

            "Conversion Date" has the meaning set forth in Section 4.4(a).

            "Conversion Default" has the meaning set forth in Section 4.9.

            "Conversion Default Payments" has the meaning set forth in Section
4.9.

            "Conversion Notice" has the meaning set forth in Section 6.1.

            "Conversion Notice Date" has the meaning set forth in Section 6.3.

            "Conversion Price" has the meaning set forth in Section 4.2(a).

            "Conversion Trigger Price" has the meaning set forth in Section 6.1.

            "Debt" of any Person means, at any date, without duplication, (i)
all obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all obligations of such Person in respect of letters of credit or bankers'
acceptance or other similar instruments (or reimbursement obligations with
respect thereto), (iv) all obligations of such Person to pay the deferred
purchase price of property or services, (v) all obligations of such Person as
lessee under capitalized leases, (vi) all Debt of others secured by a Lien on
any asset of such Person, whether or not such Debt is assumed by such Person,
provided that for purposes of determining the amount of any Debt of the type
described in this clause, if recourse with respect to such Debt is limited to
such asset, the amount of such Debt shall be limited to the fair market value of
such asset, (vii) all Debt of others guaranteed by such Person, and (viii) all
redeemable stock valued at the greater of its voluntary or involuntary
liquidation preference plus accrued and unpaid dividends.

            "Debenture" or "Debentures" has the meaning set forth in the second
paragraph hereof.

            "Debenture Shares" means the shares of Common Stock underlying the
Debentures or shares issued upon conversion of the Debentures.

            "Default Rate" has the meaning set forth in the sixth paragraph
hereof.

            "Determination Date" has the meaning set forth in Section 4.6.

            "DTC" means the Depositary Trust Corporation.

            "Event of Default" has the meaning set forth in Section 3.1.

            "Excess Amount" has the meaning set forth in Section 4.9.

            "Excess Principal" has the meaning set forth in Section 4.6.


                                       5
<PAGE>   6
            "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.

            "FAST" has the meaning set forth in Section 4.4(c).

            "GAAP" or "generally accepted accounting principles" means generally
accepted accounting principles in the United States, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession.

            "Holder", "Holder of Debentures", "Debentureholder" or other similar
terms means the registered holder of any Debenture.

            "Incurrence" means the incurrence, creation, assumption or in any
other manner becoming liable with respect to, or the extension of the maturity
of or becoming responsible for the payment of, any Debt. "Incur" shall have a
comparable meaning.

            "Interest Payment Date" has the meaning set forth in the fifth
paragraph hereof.

            "Interest Rate" has the meaning set forth in the fifth paragraph
hereof.

            "Issuable Maximum" has the meaning set forth in Section 4.6.


            "Mandatory Prepayment Amount" for any Debenture means the greater of
(i) the sum of (x) 120% of the principal amount of the Debenture to be prepaid
and (y) all other amounts, costs, interest, expenses and liquidated damages due
in respect of such principal amount and (ii) the sum of (x) at the option of the
Holder, either (I) the principal amount of the Debenture to be repaid, plus all
accrued and unpaid interest thereon, divided by the Conversion Price on the date
the Mandatory Prepayment Amount is demanded or otherwise due, multiplied by the
Per Share Market Value on the date the Mandatory Prepayment Amount is demanded
or otherwise due or (II) the principal amount of the Debenture to be prepaid,
plus all accrued and unpaid interest thereon, divided by the lower of either the
Conversion Price or the Average Price on the Trading Day immediately prior to
the date the Mandatory Prepayment Amount is paid in full, multiplied by the Per
Share Market Value on the Trading Day immediately prior to the date the
Mandatory Prepayment Amount is paid in full, and (y) all other amounts, costs,
interest, expenses and liquidated damages due in respect of such principal
amount.

            "Maturity Date" means the date on which the principal of a Debenture
becomes due and payable as herein provided, whether on the Stated Maturity Date
or pursuant to acceleration upon an Event of Default.

            "Nasdaq" means the Nasdaq SmallCap Market.

            "Notice of Conversion" has the meaning set forth in Section 4.2.

            "Optional Conversion" has the meaning set forth in Section 6.1.


                                       6
<PAGE>   7
            "Optional Conversion Date" has the meaning set forth in Section 6.3.

            "Options" has the meaning set forth in Section 4.5(e)(i)(A).

            "Original Issue Date" of any Debenture (or portion thereof) means
the earlier of (i) the date of such Debenture and (ii) the date of any Debenture
(or portion thereof) for which such security was issued (directly or indirectly)
on registration of transfer, exchange or substitution.

            "Payment Blockage Notice" has the meaning set forth in Section
7.2(b).

            "Per Share Market Value" means (i) on any particular Trading Day the
closing bid price per share of the Common Stock on such date (as reported by
Bloomberg Information Services, Inc., or any successor reporting service) on
Nasdaq or, if the Common Stock is not then quoted on Nasdaq, any Subsequent
Market on which the Common Stock is then listed or if there is no such price on
such date, then the closing bid price on such exchange or quotation system on
the date nearest preceding such date (excluding bids posted by the Company, a
Holder or an Affiliate of any such person) or (ii) if the Common Stock is not
listed then on Nasdaq or any 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 (excluding bids posted by a Holder or an Affiliate of a Holder), or
(iii) if the Common Stock is 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 holder of this Debenture; provided, however, that the Company, after receipt
of the determination by such Appraiser, shall have the right to select in good
faith an additional Appraiser, in which case, the fair market value shall be
equal to the average of the determinations by each such Appraiser; and provided,
further that all determinations of the Per Share Market Value shall be
appropriately adjusted for any stock dividends, stock splits or other similar
transactions during such period.

            "Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.

            "Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated) of
such Person's preferred or preference stock whether now outstanding or issued
after the date of this Debenture, and includes, without limitation, all classes
and series of preferred or preference stock.

             "Property" of any Person means all types of real, personal,
tangible, intangible or mixed property owned by such Person whether or not
included in the most recent consolidated balance sheet of such Person under
generally accepted accounting principles.

            "Purchase Agreement" means that Securities Purchase Agreement dated
as of July 29, 1999 by and among the Company and the Purchasers.

            "Purchase Price" means, with respect to any Debenture, the purchase
price paid to the Company upon issuance of such Debenture.


                                       7
<PAGE>   8
            "Purchasers" has the meaning ascribed thereto in the Purchase
Agreement.

            "Record Date" has the meaning set forth in the fifth paragraph
hereof.

            "Register" has the meaning set forth in the third paragraph hereof.

            "Registration Rights Agreement" means that Registration Rights
Agreement dated as of July 29, 1999 by and among the Company and the Purchasers.

            "Reserved Amount" has the meaning set forth in Section 4.9.

            "Reverse Stock Split" has the meaning set forth in Section 4.5(a).

            "Senior Indebtedness" shall have the meaning set forth in Section
7.1.

            "Shareholder Approval" has the meaning set forth in Section 4.6.

            "Stated Maturity Date" means July 29, 2002.

            "Stock Option Plan" means any contract, plan or agreement which has
been approved by the Board of Directors of the Company, pursuant to which the
Company's securities may be issued to any employee, officer, director or
consultant.

            "Subsidiary" means, with respect to any Person, any corporation or
other entity of which a majority of the Capital Stock or other ownership
interests having ordinary voting power to elect a majority of the Board of
Directors or other persons performing similar functions are at the time directly
or indirectly owned or controlled by such Person. A Person shall not be deemed
to directly or indirectly own a majority of the Capital Stock of another Person
solely because of ownership of an unexercised warrant to acquire Capital Stock
of such other Person if the warrant does not provide for voting control of the
warrant shares prior to its exercise.

            "Subsequent  Market" means the New York Stock  Exchange,  American
Stock Exchange,  Nasdaq National Market,  London Stock Exchange or Tokyo Stock
Exchange.

            "Trading Day" means (a) a day on which the Common Stock is traded on
Nasdaq or, if the Common Stock is not then designated on Nasdaq, on such
Subsequent Market on which the Common Stock is then listed or quoted or (b) if
the Common Stock is not listed on Nasdaq or 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 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 or reporting prices) provided,
however that in any event that the Common Stock is not listed or quoted as set
forth in (a), (b), or (c) hereof, then a Trading Day shall mean any Business
Day.

            "Valuation Event" has the meaning set forth in Section
4.5(e)(i)(C)(I).


                                       8
<PAGE>   9
                                   ARTICLE II

                             PAYMENT; THE SECURITIES

            2.1 PAYMENT OF PRINCIPAL AND INTEREST. The Company covenants and
agrees that it will duly and punctually pay or cause to be paid the principal,
plus all accrued interest thereon, with respect to each of the Debentures at the
place or places, at the respective times and in the manner provided in the
Debentures.

            2.2 MUTILATED, DEFACED, DESTROYED, LOST AND STOLEN DEBENTURES. In
case any temporary or definitive Debenture shall become mutilated, defaced or be
apparently destroyed, lost or stolen, the Company shall execute and deliver a
new Debenture, bearing a number not contemporaneously outstanding, in exchange
and substitution for the mutilated or defaced Debenture. In every case the
applicant for a substitute Debenture shall furnish to the Company such security
or indemnity as it may reasonably require to indemnify and defend and to save it
harmless and, in every case of destruction, loss or theft evidence to the
Company's satisfaction of the apparent destruction, loss or theft of such
Debenture and of the ownership thereof.

            Upon the issuance of any substitute Debenture, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses connected
therewith. In case any Debenture which has matured or is about to mature, or has
been called for conversion in full, or is being surrendered for conversion in
full shall become mutilated or defaced or be apparently destroyed, lost or
stolen, the Company may, instead of issuing a substitute Debenture, with the
holder's consent, pay or authorize the payment or conversion of the same
(without surrender thereof except in the case of a mutilated or defaced
Debenture), if the applicant for such payment shall furnish to the Company such
security or indemnity as it may reasonably require to save it harmless from all
risks, however remote, and, in every case of apparent destruction, loss or
theft, the applicant shall also furnish to the Company evidence to the Company's
reasonable satisfaction of the apparent destruction, loss or theft of such
Debenture and of the ownership thereof.

            Every substitute Debenture issued pursuant to the provisions of this
Section by virtue of the fact that any Debenture is apparently destroyed, lost
or stolen shall constitute an additional contractual obligation of the Company,
whether or not the apparently destroyed, lost or stolen Debenture shall be at
any time enforceable by anyone and shall be entitled to all the benefits of (but
shall be subject to all the limitations of rights set forth in) this Debenture
equally and proportionately with any and all other Debentures duly authenticated
and delivered hereunder. All Debentures shall be held and owned upon the express
condition that, to the extent permitted by law, the foregoing provisions are
exclusive with respect to the replacement or payment or conversion of mutilated,
defaced, or apparently destroyed, lost or stolen Debentures and shall preclude
any and all other rights or remedies notwithstanding any law or statute existing
or hereafter enacted to the contrary with respect to the replacement or payment
of negotiable instruments or other securities without their surrender.

            2.3 CANCELLATION OF DEBENTURES; DESTRUCTION THEREOF. All Debentures
surrendered for payment, conversion, registration of transfer or exchange shall
be delivered to the Company for cancellation, and no Debentures shall be issued
in lieu thereof except as expressly permitted by any of the provisions of this
Debenture. The Company shall destroy


                                       9
<PAGE>   10
canceled Debentures held by it and deliver a certificate of destruction to the
Holder, unless otherwise required. If the Company shall acquire any of the
Debentures, such acquisition alone shall not operate as a redemption or
satisfaction of the indebtedness represented by such Debentures unless and until
such indebtedness is satisfied.

                                   ARTICLE III

                                    DEFAULTS

            3.1 EVENT OF DEFAULT DEFINED; ACCELERATION OF MATURITY; WAIVER OF
DEFAULT. In case one or more of the following events ("Events of Default")
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary or be 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) shall have occurred and be continuing:

            a. default in the payment in cash (or in Common Stock, as permitted
herein) of all or any part of the principal of and the entire accrued interest
on any of the Debentures as and when the same shall become due and payable
either at maturity, upon any conversion, by declaration or otherwise; or

            b. failure on the part of the Company to duly observe or perform any
other of the covenants or agreements on the part of the Company (or the making
by the Company of any announcement, statement or threat that it does not intend
to honor the obligations described in this paragraph) contained in this
Debenture (including the failure to issue Common Stock upon conversion of this
Debenture in accordance with the terms hereof) or the Purchase Agreement or the
Registration Rights Agreement for a period of ten (10) Business Days (other than
with respect to an announcement, statement or threat) in the case of a failure
due to circumstances within the Company's control, or thirty (30) Business Days
in the case of a failure due to circumstances not within the Company's control,
after the earlier of (x) the date on which any officer of the Company shall have
obtained actual knowledge of such failure (or such announcement, statement or
threat) or (y) the date on which written notice thereof has been given to the
Company by the Holder; or

            c. there shall have occurred with respect to any particular issue of
Debt of the Company and/or one or more Subsidiaries having an outstanding
principal amount of $1,000,000 or more, whether such Debt now exists or shall
hereafter be created, an event of default which has entitled the holder thereof
to declare such Debt to be due and payable in full prior to its stated maturity,
and the holder of such Debt has declared such Debt due and payable in full; or

            d. a judgment or order (not covered by insurance) for the payment of
money shall be rendered against the Company or any Subsidiary of the Company in
excess of $1,000,000 in the aggregate for all such judgments or orders against
all such Persons (treating any deductibles, self insurance or retention as not
so covered) that shall not be discharged, and all such judgments and orders
remain outstanding and there shall be any period of thirty (30) consecutive days
following entry of the judgment or order in excess of $1,000,000 or the judgment
or order which causes the aggregate amount described above to exceed $1,000,000


                                       10
<PAGE>   11
during which a stay of enforcement of such judgment or order, by reason of a
pending appeal or otherwise, shall not be in effect; or

            e. a court having jurisdiction in the premises shall enter a decree
or order for relief in respect of the Company or any of its subsidiaries in an
involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar official) of the Company or any of
its Subsidiaries or for any substantial part of the property of the Company or
any of its Subsidiaries or ordering the winding up or liquidation of the affairs
of the Company or any of its Subsidiaries, and such decree or order shall remain
unstayed and in effect for a period of sixty (60) consecutive days; or

            f. the Company or any of its Subsidiaries shall commence a voluntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consent to the entry of an order for relief in an
involuntary case under any such law, or consent to the appointment or taking
possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) of the Company or any of its Subsidiaries or for any
substantial part of the property of the Company or any of its Subsidiaries, or
the Company or any of its Subsidiaries shall make any general assignment for the
benefit of creditors; or

            g. any representation, warranty, certification or statement made by
the Company in the Purchase Agreement or in any certificate, financial statement
or other document delivered pursuant to the Purchase Agreement shall prove to
have been incorrect in any material respect when made; or

            h. the Common Stock shall be delisted from Nasdaq or shall be
suspended from trading on Nasdaq without resuming trading and/or being relisted
thereon or on a Subsequent Market or having such suspension lifted, as the case
may be, within five (5) Business Days (twenty (20) Business Days if the Company
is in good faith contesting such delisting or suspension); or

            i. a Registration Statement (as defined in the Registration Rights
Agreement) for the Debenture Shares shall not have been declared by the
Securities and Exchange Commission on or prior to the 30th day after the
Effectiveness Date (as defined in the Registration Rights Agreement) or after
its initial effectiveness and prior to the expiration of the Company's
obligation to keep the Registration Statement effective as required under the
Registration Rights Agreement, such Registration Statement lapses in effect or
sales of all of the Registrable Securities (as defined in the Registration
Rights Agreement) otherwise cannot be made thereunder (whether by reason of the
Company's failure to amend or supplement the prospectus included therein in
accordance with the Registration Rights Agreement or otherwise) for more than
fifteen (15) consecutive days or thirty (30) days in any twelve (12) month
period; or

            j. a Change of Control shall occur unless the Average Price of the
Company's Common Stock immediately (i) prior to the Change of Control if the
event leading to the Change of Control or the intent to consummate the Change of
Control was previously announced publicly, or (ii) after the tenth (10th)
Trading Day following the Change of Control if the event leading to the Change
of Control or intent to consummate a Change of Control was not


                                       11
<PAGE>   12
previously announced publicly, was at least $8.00 per share (which shall be
adjusted proportionately to the extent the Conversion Price is adjusted
hereunder), provided however that the Holders have been able to sell their
shares of Common Stock in the market under an effective Registration Statement
for the immediately preceding thirty (30) days and will be able to sell such
shares in the market for fifteen (15) days after the Change of Control; or

            k. an Event of Default has occurred and is continuing under any of
the other Debentures issued pursuant to the Purchase Agreement; or

            l. Failure on the part of the Company to comply with its obligations
to close the Second Closing (as defined in the Purchase Agreement) when
requested by the Holders.

            then, in each and every such case (other than an Event of Default
specified in Section 3.1(e) or 3.1(f) hereof), unless the principal shall have
already become due and payable, by notice in writing to the Company (the
"Acceleration Notice"), the Holders of at least a majority of the then
outstanding principal amount of the Debentures may declare the entire principal
of and the entire accrued interest on the Debentures owned by such Holders to be
due and payable immediately, and upon any such declaration the same shall become
immediately due and payable. If an Event of Default specified in Section 3.1(e)
or 3.1(f) occurs, the principal of and any accrued interest on the Debentures
(and the aggregate amounts described below) shall become and be immediately due
and payable without any declaration or other act on the part of any Debenture
Holder. In the event that the Company shall not have promptly, but in any event
within ten (10) Business Days upon receipt of an Acceleration Notice, paid the
Holder the amount specified below, the Conversion Price shall automatically be
adjusted to equal the average Per Share Market Value of the Common Stock during
the preceding thirty (30) consecutive Trading Days immediately preceding the
date of the Acceleration Notice; provided, that such Per Share Market Value is
lower than the Conversion Price.

            The aggregate amount payable upon an Event of Default described in
Section 3.1(a), (e), (f) and (i) shall be equal to the sum of (i) the Mandatory
Prepayment Amount plus (ii) at the option of the Holder, the Mandatory
Prepayment Amount for the principal amount of the Debentures (the "Converted
Debentures") that would then be held by such Holder had the principal amount of
Debentures converted into Debenture Shares that are then held by the Holder not
been so converted; provided, that the Holder shall not be entitled to a
Mandatory Prepayment Amount with respect to Converted Debentures if both the
following have occurred: (i) prior to the occurrence of an Event of Default, the
Debenture Shares into which the Converted Debentures were converted had been
held by the Holder for more than thirty (30) days and (ii) prior to the
occurrence of the Event of Default and after receipt by the Holder of the
Debenture Shares that are held by the Holder at the time of the occurrence of
the Event of Default, the Registration Statement with respect to such Debenture
Shares had been continuously effective, and the Common Stock has been quoted on
Nasdaq, for more than thirty (30) days.

            The aggregate principal amount payable on each Event of Default
other than as described in Section 3.1(a), (e), (f) and (i) shall be equal to
the sum of (i) the Mandatory Prepayment Amount plus (ii) at the option of the
Holder, the Mandatory Prepayment Amount for the Converted Debentures that would
then be held by such Holder had the principal amount of Debentures converted
into Debenture Shares (as defined herein) that are then held by the Holder


                                       12
<PAGE>   13
not been so converted; provided, that the Holder shall not be entitled to a
Mandatory Prepayment Amount with respect to Converted Debentures if prior to the
occurrence of an Event of Default, the Debenture Shares into which the Converted
Debentures were converted had been held by the Holder for more than three (3)
Trading Days.

            For purposes of this Section 3.1, the principal amount of the
Debentures is outstanding until such date as the Holder shall have been issued
Debenture Shares upon a conversion (or attempted conversion) thereof. Interest
shall accrue on the Mandatory Prepayment Amount hereunder from the day after
such amount is due (being the date of an Event of Default) through the date of
payment in full thereof at the rate of 20.0% per annum. Payment of the Mandatory
Prepayment Amount pursuant to this Section 3.1 shall be in addition to any other
amounts that may be due to the Holder pursuant to this Debenture. Within five
(5) Business Days of receipt by the Holder of payments of amounts due to the
Holder, (i) the Holder shall return the Debentures to the Company and (ii) in
the event the Mandatory Prepayment Amount relates to the Converted Debentures,
the Holder shall return the Debenture Shares into which such Converted
Debentures were converted. In the event of the occurrence of an Event of
Default, 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. Any demand for payment may be rescinded and annulled by a Holder
at any time prior to payment hereunder. If a majority of the Holders rescind and
annul any such demand, then the remaining Holders shall be deemed to rescind and
annul any such demand. No such rescission or annulment shall affect any
subsequent Event of Default or impair any right consequent thereon.

            Upon delivery of any Acceleration Notice to the Company, the Company
shall provide a copy of such notice to the other Holders, if any, within five
(5) Business Days of the Company's receipt thereof. Failure to deliver such
notice shall not affect the validity of the notice delivered by the Holders in
accordance with the provisions referred to above.

            3.2 POWERS AND REMEDIES CUMULATIVE; DELAY OR OMISSION NOT WAIVER OF
DEFAULT. No right or remedy herein conferred upon or reserved to the Holders is
intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.

            No delay or omission of the Holders to exercise any right or power
accruing upon any Event of Default occurring and continuing as aforesaid shall
impair any such right or power or shall be construed to be a waiver of any such
Event of Default or an acquiescence therein; and every power and remedy given by
the Debentures or by law may be exercised from time to time, and as often as
shall be deemed expedient, by the Holders.


                                       13
<PAGE>   14
                                   ARTICLE IV

                              EXCHANGE; CONVERSION

            4.1 RIGHT OF DEBENTUREHOLDERS TO EXCHANGE DEBENTURES. Subject to and
upon compliance with the provisions of this Section, this Debenture is
exchangeable for an equal 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.

            4.2 RIGHT OF DEBENTUREHOLDERS TO CONVERT DEBENTURES INTO COMMON
STOCK.

            a. Conversion Price. Subject to and upon compliance with the
provisions of this Section 4.2, the principal amount of this Debenture, or any
portion thereof which is $1,000 or a multiple thereof may, at any time and at or
before the close of business on the Maturity Date be converted into duly
authorized, validly issued, fully-paid and nonassessable shares of Common Stock
at $6.00 per share subject to adjustment under the provisions of this Article IV
(the "Conversion Price").

            b. Notice of Conversion. If an adjustment in the Conversion Price
and, if applicable, a change in the securities or other property issuable upon
conversion has taken place hereunder, then the conversion described in Section
4.2(a) shall be at the applicable Conversion Price and in such securities or
other property as so adjusted. The Purchaser desiring to make a conversion shall
deliver to the Company during usual business hours of the Company's office, or,
at the Purchaser's option, to the transfer agent of the Company during usual
business hours of the transfer agent, a written notice of election to convert,
as provided in the form attached hereto as Exhibit A (a "Notice of Conversion"),
accompanied, if required, by the Debenture or Debentures, representing at least
the principal amount to be converted.

            4.3 ADJUSTMENT FOR DIVIDENDS; INTEREST PAYMENT AFTER Conversion. No
payment or adjustment will be made for dividends on any Common Stock except as
provided herein. On conversion of a Debenture, that portion of interest accrued
and unpaid attributable to the period from the Original Issue Date to the
Conversion Date with respect to the converted Debenture shall not be canceled,
extinguished or forfeited, but rather shall be paid in full to the Holder
thereof by the payment of an amount of shares of Common Stock valued at the
Average Price equal thereto; provided, however, that the Company may pay such
amount in cash if it provides the Holder with not less than ten (10) days prior
written notice of such intention. If the Holder converts more than one Debenture
at the same time, the number of shares of Common Stock issuable upon the
conversion shall be based on the total principal amount of the Debentures
converted.

            4.4 ISSUANCE OF SHARES UPON CONVERSION.

            a. As promptly as practicable, but in any event no later than two
(2) Trading Days after delivery of a Notice of Conversion and, if required, the
surrender, as herein provided, of any Debenture or Debentures for conversion,
the Company shall deliver or cause to be delivered to the Holder of the
Debenture or Debentures delivering such Notice of Conversion, or


                                       14
<PAGE>   15
such Holder's designee, a certificate or certificates representing the number of
duly authorized, validly issued, fully-paid and nonassessable shares of Common
Stock, into which such Debenture or Debentures may be converted in accordance
with the provisions of this Article IV. Such conversion shall be deemed to have
been made at the time and on the date the Notice of Conversion is delivered to
the Company, as long as, if required, the Debenture or Debentures being
converted are promptly delivered to the Company and the rights of the Holder of
such Debenture or Debentures as a Holder (subject to the Company's satisfaction
of its obligations hereunder with respect to such conversion) shall cease at
such time with respect to the Converted Debentures, the Person or Persons
entitled to receive the shares of Common Stock, upon conversion of such
Debenture or Debentures, shall be treated for all purposes as having become the
record holder or holders of such shares of Common Stock at such time, and such
conversion shall be at the Conversion Price in effect at such time (the
"Conversion Date"). Subject to paragraph 4.4(b), if any Debenture is converted
in part only, upon such conversion the Company shall execute and deliver to the
Holder thereof, as requested by such Holder, a new Debenture or Debentures of
authorized denominations in aggregate principal amount equal to the unconverted
portion of such Debenture. Without in any way limiting the Holder's right to
pursue other remedies, including actual damages and/or equitable relief, the
parties hereto agree that if the Company fails to deliver the shares of Common
Stock required to be issued upon the conversion of such Debenture or Debentures
under this Section 4.4 within the two (2) Trading Day period referred above, the
Company shall pay to the Holder upon demand an amount of cash (at the Holder's
option) equal to: (i) the commissions, discounts and similar expenses charged to
the Holder in purchasing a number of shares of Common Stock no greater than the
number of shares of Common Stock required to be issued upon the conversion of
the Debenture or Debentures, or (ii) the product of (w) the number of shares of
Common Stock required to be issued upon the conversion of the Debenture or
Debentures, (x) the Per Share Market Value of such shares on the Conversion
Date, (y) the number of days after such two (2) day period that such shares are
not delivered to the Holder, and (z) 0.005.

            b. Notwithstanding anything to the contrary set forth herein, upon
conversion of a Debenture in accordance with the terms thereof, the Holder shall
not be required to physically surrender the Debenture to the Company unless the
entire unpaid principal amount of the Debenture is so converted. The Holder and
the Company shall maintain records showing the principal amount already
converted and the dates of such conversions or shall use such other method,
reasonably satisfactory to the Holder and the Company, so as not to require
physical surrender of the Debenture upon each such conversion. In the event of
any dispute or discrepancy, such records of the Company shall be controlling and
determinative in the absence of manifest error. Notwithstanding the foregoing,
if any portion of the Debenture is converted, the Holder may not transfer the
Debenture unless the Holder first physically surrenders the Debenture to the
Company, whereupon the Company shall promptly issue and deliver upon the order
of the Holder a new Debenture of like tenor, registered as the Holder (upon
payment by the Holder of any applicable transfer taxes) may request,
representing in the aggregate the remaining unpaid principal amount of the
Debenture. The Holder and any assignee, by acceptance of the Debenture,
acknowledge and agree that, by reason of the provisions of this paragraph,
following conversion of a portion of a Debenture, the unpaid and unconverted
principal amount of such Debenture represented by such Debenture may be less
than the amount stated on the face thereof.


                                       15
<PAGE>   16
            c. In lieu of delivering physical certificates representing the
Debenture Shares, provided the shares of Common Stock issuable upon conversion
of a Debenture may be sold pursuant to Rule 144(k) under the Act or under an
effective Registration Statement and the Company's transfer agent is
participating in the Depositary Trust Company Fast Automated Securities Transfer
("FAST") program, upon request of the Holder and in compliance with the
provisions of Sections 4.1, 4.2 and 4.4, the Company shall use its best efforts
to cause its transfer agent to electronically transmit the shares of Common
Stock issuable upon conversion of the Debenture to the Holder by crediting the
account of the Holder's Prime Broker with DTC through its Deposit Withdrawal
Agent Commission system. The time period for delivery described in the
immediately preceding paragraph shall apply to the electronic transmittals
described herein.

            d. 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 4.4(a), including for purposes hereof, any shares of Common Stock to
be issued on the Conversion Date on account of accrued but unpaid interest
hereunder, by the second (2nd) Trading Day after the Conversion Date, and if
after such second (2nd) 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 Debenture Shares which the Holder was entitled to receive
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 was
entitled to receive 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 return the Debentures 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 Company timely
complied with its conversion and delivery obligations under Section 4.4(a). 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 Debenture Shares on the date of
conversion totaled $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.

            4.5 ADJUSTMENT OF CONVERSION PRICE. In addition to any adjustment to
the Conversion Price provided elsewhere in this Debenture, the Conversion Price
in effect at any time shall be subject to adjustment from time to time upon the
happening of certain events, as follows:

            a. Common Stock Dividends; Common Stock Splits; Reverse Common Stock
Splits. If the Company, at any time while this Debenture is outstanding, (a)
shall pay a stock dividend on its 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 of shares of Common Stock any shares of Capital Stock of the
Company, the Conversion Price shall be multiplied by a fraction the numerator of
which shall


                                       16
<PAGE>   17
be the number of shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and the denominator of which shall be the number
of shares of Common Stock outstanding after such event. Any adjustment made
pursuant to this paragraph 4.5(a) 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.
Notwithstanding the foregoing, if the Company shall combine outstanding shares
of Common Stock into a smaller number of shares (a "Reverse Stock Split") at any
time prior to the Maturity Date, then the Conversion Price in effect immediately
prior to such reverse stock split shall not be adjusted and shall remain in
effect after giving effect to such reverse stock split.

            b. Rights; Warrants. If the Company, at any time while this
Debenture is outstanding, shall issue rights or warrants to all of the holders
of Common Stock entitling them to subscribe for or purchase shares of Common
Stock at a price per share less than the Conversion Price, the Conversion Price
shall be multiplied by a fraction, the denominator of which shall be the number
of shares of Common Stock (excluding treasury shares, if any) outstanding on the
date of issuance of such rights or warrants plus the number of additional shares
of Common Stock offered for subscription or purchase, and the numerator of which
shall be the number of shares of Common Stock (excluding treasury shares, if
any) outstanding on the date of issuance of such rights or warrants plus the
number of shares which the aggregate offering price of the total number of
shares so offered would purchase at the Conversion Price. Such adjustment shall
be made whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of shareholders entitled
to receive such rights or warrants.

            c. Other Distributions on Stock. If the Company, at any time while
this Debenture is outstanding, shall distribute to all of the holders of Common
Stock evidence of its indebtedness or assets or rights or warrants to subscribe
for or purchase any security (excluding those referred to in Sections 4.5(a) and
(b) above), then in each such case the Conversion Price at which the Debenture
shall thereafter be exercisable shall be determined by multiplying the
Conversion Price in effect immediately prior to the record date fixed for
determination of shareholders entitled to receive such distribution by a
fraction, the denominator of which shall be the Per Share Market Value of Common
Stock determined as of the record date mentioned above, and the numerator of
which shall be such Per Share Market Value of the Common Stock 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 Common Stock as determined by the Board of Directors in good faith;
provided, however, that in the event of a distribution exceeding thirty percent
(30%) of the net assets of the Company, such fair market value shall be
determined by an Appraiser selected in good faith by the Holder; and provided,
further, that the Company, after receipt of the determination by such Appraiser
shall have the right to select an additional Appraiser meeting the same
qualifications, in good faith, in which case the fair market value shall be
equal to the average of the determinations by each such Appraiser. Such
adjustment shall be made whenever any such distribution is made and shall become
effective immediately after the record date mentioned above.

            d. Other Events. In case of (A) any reclassification of the Common
Stock into other securities of the Company or (B) any compulsory share exchange
pursuant to which the


                                       17
<PAGE>   18
Common Stock is converted into other securities, cash or property (each of (A)
or (B), an "Extraordinary Event"), the Holder shall have the right thereafter to
convert the Debenture for shares of stock and other securities, cash and
property receivable upon or deemed to be held by holders of Common Stock
following such Extraordinary Event, and the Holder 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 Debenture could have been
converted immediately prior to such Extraordinary Event (without taking into
account any limitations or restrictions on the convertibility of the Debentures)
would have been entitled. In the case of an Extraordinary Event, the terms of
any such Extraordinary Event shall include such terms so as to continue to give
to the Holder the right to receive the securities, cash or property set forth in
this Section 4.5(d) upon any conversion following such Extraordinary Event. This
provision shall similarly apply to successive Extraordinary Events.

            e. Adjustment to Conversion Price for Dilutive Issuances. If the
Company, at any time while this Debenture is outstanding, takes any of the
actions described in this Section 4.5(e), then, in order to prevent dilution of
the rights granted under this Debenture, at any time prior to the Maturity Date,
the Conversion Price will be subject to adjustment from time to time as provided
in this Section 4.5(e).

                  (i) Adjustment of Conversion Price upon Issuance of Common
      Stock. If at any time while this Debenture is outstanding the Company
      issues or sells, or is deemed to have issued or sold, any shares of Common
      Stock for a consideration per share less than the Conversion Price in
      effect immediately prior to such issuance or sale, then immediately after
      such issuance or sale the Conversion Price then in effect shall be reduced
      to an amount equal to the consideration per share of Common Stock in such
      issuance or sale. For the purpose of determining the adjusted Conversion
      Price under this Section 4.5(e), the following shall be applicable:

                        (A) Issuance of Options. If at any time while this
            Debenture is outstanding the Company in any manner grants any rights
            or options to subscribe for or to purchase Common Stock or any stock
            or other securities convertible into or exchangeable for Common
            Stock (such rights or options, "Options," and such convertible or
            exchangeable stock or securities, "Convertible Securities") and the
            price per share for which Common Stock is issuable upon the exercise
            of such Options or upon conversion or exchange of such Convertible
            Securities is less than the Conversion Price in effect immediately
            prior to such grant or issuance, then the Conversion Price then in
            effect shall be reduced to the price per share for which Common
            Stock is issuable upon the exercise of such Options or upon the
            conversion or exchange of such Convertible Securities. No adjustment
            of the Conversion Price shall be made upon the actual issuance of
            such Common Stock upon conversion or exchange of such Options.

                        (B) Change in Option Price or Rate of Conversion. If
            there is a change at any time in (i) the exercise price provided for
            in any Options, (ii) the additional consideration, if any, payable
            upon the issue, conversion or exchange of any Convertible Securities
            or (iii) the rate at which any Convertible Securities are
            convertible into or exchangeable for Common Stock, other than a
            change


                                       18
<PAGE>   19
            which results from events set for in Sections 4.5(a), (b) and (c)
            which also cause a relative change in the Conversion Price, then
            immediately after such change in option price or rate of conversion
            the Conversion Price in effect at the time of such change shall be
            readjusted to the Conversion Price which would have been in effect
            had such Options or Convertible Securities had such changed exercise
            price, additional consideration or changed conversion rate, as the
            case may be, at the time initially granted, issued or sold; provided
            that no adjustment shall be made if such adjustment would result in
            an increase of the Conversion Price then in effect.

                        (C) Effect on Conversion Price of Certain Events. For
            purposes of determining the adjusted Conversion Price under this
            Section 4.5(e)(i), the following shall be applicable:

                              (I)   Calculation of Consideration Received. If
                                    any Common Stock, Options or Convertible
                                    Securities are issued or sold or deemed to
                                    have been issued or sold for cash, the
                                    consideration received therefor will be
                                    deemed to be the net amount received by the
                                    Company therefor. In case any Common Stock,
                                    Options or Convertible Securities are issued
                                    or sold for a consideration other than cash,
                                    the amount of the consideration other than
                                    cash received by the Company will be the
                                    fair value of such consideration, except
                                    where such consideration consists of
                                    publicly traded securities, in which case
                                    the amount of consideration received by the
                                    Company will be the average of the Per Share
                                    Market Values of such security for the five
                                    (5) consecutive Trading Days immediately
                                    preceding the date of receipt. In case any
                                    Common Stock, Options or Convertible
                                    Securities are issued to the owners of the
                                    non-surviving entity in connection with any
                                    merger in which the Company is the surviving
                                    entity the amount of consideration therefor
                                    will be deemed to be the fair value of such
                                    portion of the net assets and business of
                                    the non-surviving entity as is attributable
                                    to such Common Stock, Options or Convertible
                                    Securities, as the case may be. The fair
                                    value of any consideration other than cash
                                    or securities will be determined jointly by
                                    the Company and the Holders of Debentures
                                    representing a majority of the aggregate
                                    principal amount of Debentures then
                                    outstanding. If such parties are unable to
                                    reach agreement within ten (10) days after
                                    the occurrence of an event requiring


                                       19
<PAGE>   20
                                    valuation (the "Valuation Event"), the fair
                                    value of such consideration will be
                                    determined within forty eight (48) hours of
                                    the tenth (10th) day following the Valuation
                                    Event by an Appraiser selected in good faith
                                    by the Company and agreed upon by the
                                    Holders of Debentures representing a
                                    majority of the aggregate principal amount
                                    of Debentures then outstanding. The
                                    determination of such Appraiser shall be
                                    binding upon all parties absent manifest
                                    error.

                              (II)  Treasury Shares. The number of shares of
                                    Common Stock outstanding at any given time
                                    does not include shares owned or held by or
                                    for the account of the Company, and the
                                    disposition of any shares so owned or held
                                    will be considered an issue or sale of
                                    Common Stock.

                              (III) Record Date. If the Company establishes a
                                    record of the holders of Common Stock for
                                    the purpose of entitling them (1) to receive
                                    a dividend or other distribution payable in
                                    Common Stock, Options or in Convertible
                                    Securities or (2) to subscribe for or
                                    purchase Common Stock, Options or
                                    Convertible Securities, then such record
                                    date will be deemed to be the date of the
                                    issue or sale of the shares of Common Stock
                                    deemed to have been issued or sold upon the
                                    declaration of such dividend or the making
                                    of such other distribution or the date of
                                    the granting of such right of subscription
                                    or purchase, as the case may be.

                        (D) Certain Events. If any event occurs of the type
            contemplated by the provisions of Section 4.5(e) (subject to the
            exceptions stated therein) but not expressly provided for by such
            provisions (including, without limitation, the granting of stock
            appreciation rights, phantom stock rights or other rights with
            equity features), then the Company's Board of Directors will make an
            appropriate adjustment in the Conversion Price so as to protect the
            rights of the Holder, or assigns, of this Debenture; provided,
            however, that no such adjustment will increase the Conversion Price
            as otherwise determined pursuant to this Section 4.5(e).

            Notwithstanding anything to the contrary contained in this Section
4.5(e) no adjustment shall be made to the Conversion Price in connection with
the issuance, sale or grant of any of the following securities, whether or not
at a price that is less than the Conversion Price:


                                       20
<PAGE>   21
            (i) shares of Common Stock issuable upon the exercise of any options
or warrants outstanding on the date hereof and listed in Schedule 2.1(c) of the
Purchase Agreement;

            (ii) shares of Common Stock or options to acquire Common Stock
issued or deemed to have been issued by the Company in connection with a Stock
Option Plan;

            (iii) shares of Common Stock underlying the Debentures or shares
issued upon the conversion of the Debentures;

            (iv) up to 520,000 shares of Common Stock or securities convertible
into or exchangeable for Common Stock, in any twelve (12) month period, granted
in normal course of business activities to underwriters, placement agents,
service providers or business advisors, provided however, that such issuance,
sale or grant is not at a price below four dollars ($4.00) per share of Common
Stock; and

             (v) shares of Common Stock or securities convertible into or
exchangeable for Common Stock issued to Senior Lenders (as hereinafter defined)
in consideration for the issuance of Senior Indebtedness (as hereinafter
defined), so long as the Common Stock or securities represent no more than eight
percent (8%) in value of the Senior Indebtedness incurred in connection with the
issuance of such securities; provided that the amount of Senior Indebtedness
shall only include the actual amount that the Company may draw or incur on the
closing date for such Senior Indebtedness. For example, if the Company takes out
a twenty million dollar ($20,000,000) line of credit for which it can only draw
ten million dollars ($10,000,000) at the closing of the Senior Indebtedness,
then the Common Stock and securities convertible into or exchangeable for Common
Stock can only have a value based on a Per Share Market Value of eight hundred
thousand dollars ($800,000).

            [Section 4.5(e) will be removed from the Debenture issued pursuant
to the Second Closing (as defined in the Securities Purchase Agreement).]

            f. Rounding.  All  calculations  under this  Section  4.5 shall be
made to the nearest  cent or the nearest  l/l00th of a share,  as the case may
be.

            g. Notice of Adjustment. The Company shall give the Holder written
notice of the occurrence of any of the events specified in Sections 4.5(a), (b),
(c), (d) or (e) as soon as practicable, but in no even later than three (3)
Business Days after such event, provided further, that if such notice contains
material non-public information, the Company shall (i) publicly disclose such
information prior to or concurrently with the giving of such notice or (ii) only
disclose such information to the extent that the Holder shall not be in
possession of material non-public information. Such notice shall contain at
least: (A) a description of the event, (B) the adjusted Conversion Price with a
reference to the applicable paragraph in Section 4.5 hereof and (C) the date on
which the adjusted Conversion Price is effective.

            4.6 NASDAQ LIMITATION. If on any date (the "Determination Date") (a)
the Common Stock is listed for trading on Nasdaq, (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 the then outstanding principal
amount of the Debentures as if all such Debentures were converted on such
Determination Date (without regard to any limitations on


                                       21
<PAGE>   22
conversions) and as payment of interest thereon, as would equal or exceed 20% of
the number of shares of the Common Stock outstanding immediately prior to the
"Closing Date" (the "Issuable Maximum"), and (c) the Company shall not have
previously obtained the vote of the shareholders of the Company (the
"Shareholder Approval"), if any, as may be required by the applicable rules and
regulations of Nasdaq (or any successor entity) to approve the issuance of
shares of Common Stock in excess of the Issuable Maximum in a private placement
whereby shares of Common Stock are deemed to have been issued at a price that is
less than the greater of book value or fair market value of the Common Stock,
then with respect to the aggregate principal amount of the Debentures then held
by the Holders for which a conversion in accordance with the Conversion Price
would result in an issuance of shares of Common Stock in excess of such Holder's
pro rata allocation (as described below) of the Issuable Maximum (the "Excess
Principal") the Company may elect to prepay cash to the Holders in an amount
equal to the Mandatory Prepayment Amount. Any such election by the Company must
be made in writing to the Holders within two (2) Trading Days after the first
such Determination Date and the payment of such Mandatory Prepayment Amount
applicable to such prepayment must be made in full to the Holders with ten (10)
Business Days after the date such notice is delivered. If the Company does not
deliver timely a notice of its election to prepay under this Section or shall,
if it shall have delivered such a notice, fail to pay the prepayment amount
hereunder within ten (10) Business Days thereafter, then each Holder shall have
the option by written notice to the Company, to, if applicable, declare any such
notice given by the Company, if given, to be null and void and require the
Company to either: (i) 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 unless the Company has previously used its
best efforts to, but has failed to, obtain such approval (provided, that if the
Company shall fail to obtain the Shareholder Approval during such 60-day period,
the Holder may demand the cash payment set forth in Section 4.6(ii) herein) or
(ii) pay cash to such Holder, within five (5) Business Days of such Holder's
notice, in an amount equal to the Mandatory Prepayment Amount for such Holder's
portion of the Excess Principal. The payment of the Mandatory Prepayment Amount
to each Holder pursuant to this Section shall be determined on a pro rata basis
upon the principal amount of the Debentures held by such Holder on the
Determination Date which is in excess of the pro rata allocation of the Issuable
Maximum. If the Company fails to pay the Mandatory Prepayment Amount in full
pursuant to this Section within five (5) Business Days after the date payable,
the Company will pay interest thereon at a rate of 20% per annum to the
converting Holder, accruing interest daily from the date of conversion until
such amount, plus all such interest thereon, if any, is paid in full. Until the
Company has received the Shareholder Approval no Holder of the Debentures shall
be issued, upon conversion of Debentures, shares of Common Stock in an amount
greater than such Holder's allocated portion of the Issuable Maximum pursuant to
Section 4.15.

            4.7 RESTRICTION ON CONVERSION BY EITHER THE HOLDER OR THE COMPANY.
Notwithstanding anything herein to the contrary, in no event shall any Holder or
the Company have the right or be required to convert any or all of the aggregate
principal amount and interest accrued thereon of this Debenture if as a result
of such conversion the aggregate number of shares of Common Stock beneficially
owned by such Holder and its Affiliates would exceed 9.99% of the outstanding
shares of the Common Stock following such conversion. For purposes of this
Section 4.7, beneficial ownership shall be calculated in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended. The provisions of this
Section 4.7 may be


                                       22
<PAGE>   23
waived by a Holder as to itself (and solely as to itself) upon not less than 65
days prior written notice to the Company, and the provisions of this Section 4.7
shall continue to apply until such 65th day (or later, if stated in the notice
of waiver).

            4.8 OFFICER'S CERTIFICATE. Whenever the number of shares purchasable
upon conversion shall be adjusted as required by the provisions of Section 4.5,
the Company shall forthwith file in the custody of its Secretary or an Assistant
Secretary at its principal office and with its stock transfer agent, if any, an
officer's certificate showing the adjusted number of shares determined as herein
provided, setting forth in reasonable detail the facts requiring such adjustment
and the manner of computing such adjustment. Each such officer's certificate
shall be signed by the chairman, president or chief financial officer of the
Company. Each such officer's certificate shall be made available at all
reasonable times for inspection by any holder of the Debentures and the Company
shall, forthwith after each such adjustment, deliver a copy of such certificate
to the each of the Holders.

            4.9 RESERVATION OF SHARES. The Company covenants that it will at all
times reserve and keep available out of its authorized shares of Common Stock,
free from preemptive rights, solely for the purpose of issue upon conversion of
the Debentures as herein provided, such number of shares of the Common Stock as
shall then be issuable upon the conversion of all outstanding Debentures into
Common Stock in accordance with Section 3.6(b) of the Purchase Agreement (the
"Reserved Amount"). The Company covenants that all shares of the Common Stock
issued upon conversion of the Debenture which shall be so issuable shall, when
issued, be duly and validly issued and fully paid and non-assessable.

            If, at any time a Holder of this Debenture submits a Notice of
Conversion, and the Company does not have sufficient authorized but unissued
shares of Common Stock available to effect such conversion in accordance with
the provisions of this Article IV (a "Conversion Default"), the Company shall
issue to the Holder all of the shares of Common Stock which are then available
to effect such conversion. The portion of this Debenture which the Holder
included in its Conversion Notice and which exceeds the amount which is then
convertible into available shares of Common Stock (the "Excess Amount") shall,
notwithstanding anything to the contrary contained herein, not be convertible
into Common Stock in accordance with the terms hereof until (and at the Holder's
option at any time after) the date additional shares of Common Stock are
authorized by the Company to permit such conversion at which time the Conversion
Price in respect thereof shall be the lesser of (i) the Per Share Market Value
on the Conversion Default Date (as defined below) and (ii) the Per Share Market
Value on the Conversion Date thereafter elected by the Holder in respect
thereof. In addition, the Company shall pay to the Holder payments ("Conversion
Default Payments") for a Conversion Default in the amount of (x) the sum of (1)
the then outstanding principal amount of this Debenture plus (2) accrued and
unpaid interest on the unpaid principal amount of this Debenture through the
Authorization Date (as defined below) plus (3) Default Interest, if any, on the
amounts referred to in clauses (1) and/or (2), multiplied by (y) .24, multiplied
by (z) (N/365), where N equals the number of days from the day the holder
submits a Notice of Conversion giving rise to a Conversion Default (the
"Conversion Default Date") to the date (the "Authorization Date") that the
Company authorizes a sufficient number of shares of Common Stock to effect
conversion of the full outstanding principal balance of this Debenture. The
Company shall use its best efforts to authorize a sufficient number of shares of
Common Stock as soon as practicable following the earlier of (i)


                                       23
<PAGE>   24
such time that the Holder notifies the Company or that the Company otherwise
becomes aware that there are or likely will be insufficient authorized and
unissued shares to allow full conversion thereof and (ii) a Conversion Default.
The Company shall send notice to the Holder of the authorization of additional
shares of Common Stock, the Authorization Date and the amount of Holder's
accrued Conversion Default Payments. The accrued Conversion Default Payments for
each calendar month shall be paid in cash or shall be convertible into Common
Stock (at such time as there are sufficient authorized shares of Common Stock
following the Authorization Date) at the applicable Conversion Price, at the
Holder's option, as follows:

            (a) In the event Holder elects to take such payment in cash, cash
payment shall be made to Holder by the fifth (5th) Business Day of the month
following the month in which it has accrued; and

            (b) In the event Holder elects to take such payment in Common Stock,
the Holder may convert such payment amount into Common Stock at the lesser of
the Conversion Price (as in effect at the time of conversion) and the Per Share
Market Value (on the fifth day of the month referred to below) at any time after
the fifth day of the month following the month in which it has accrued in
accordance with the terms of this Article IV (so long as there is then a
sufficient number of authorized shares of Common Stock).

            The Holder's election shall be made in writing to the Company at any
time prior to 8:00 p.m., New York City Time, on the third day of the month
following the month in which Conversion Default payments have accrued. If no
election is made, the Holder shall be deemed to have elected to receive cash.
Nothing herein shall limit the Holder's right to pursue actual damages (to the
extent in excess of the conversion Default Payments) for the Company's failure
to maintain a sufficient number of authorized shares of Common Stock, and each
Holder shall have the right to pursue all remedies available at law or in equity
(including degree of specific performance and/or injunctive relief).

            4.10 COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. The Company
covenants that if any shares of Common Stock required to be reserved for
purposes of conversion of Debentures hereunder require registration with or
approval of any governmental authority under any Federal or state law, or any
national securities exchange, before such shares may be issued upon conversion,
the Company will use its best efforts to cause such shares to be duly registered
or approved, as the case may be.

            4.11 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 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.

            4.12 PAYMENT OF TAX UPON ISSUE OR TRANSFER. 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


                                       24
<PAGE>   25
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.

            4.13 NOTICES. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be deemed to have
been received (a) upon hand delivery (receipt acknowledged) or delivery by telex
(with correct answer back received), telecopy or facsimile (with transmission
confirmation report) at the address or number designated below (if received by
8:00 p.m. EST where such notice is to be received), or the first Business Day
following such delivery (if received after 8:00 p.m. EST where such notice is to
be received) or (b) on the second Business Day following the date of mailing by
express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications are (i) if to the Company to Endocare, Inc., 7 Studebaker,
Irvine, California 92618, Attention: Paul W. Mikus, fax no. (949) 597-0607, with
copies to Brobeck, Phleger & Harrison LLP, 38 Technology Drive, Irvine,
California 92618, Attention: Richard A. Fink, fax no. (949) 790-6301, and (ii)
if to any Holder to the address set forth on Schedule II to the Purchase
Agreement with copies to Akin, Gump, Strauss, Hauer & Feld, L.L.P., 590 Madison
Avenue, New York, New York 10022, Attention: James Kaye, fax no. (212) 872-1002,
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.

            4.14 ALLOCATIONS OF ISSUABLE MAXIMUM AND RESERVED AMOUNT. The
Issuable Maximum and Reserved Amount shall be allocated pro rata among the
Holders based on the principal amount of Debentures issued to each Holder. Each
increase to the Issuable Maximum and Reserved Amount shall be allocated pro rata
among the Holders based on the principal amount of Debentures held by each
Holder at the time of the increase in the Issuable Maximum or Reserved Amount.
In the event a Holder shall sell or otherwise transfer any of such Holder's
Debentures, each transferee shall be allocated a pro rata portion of such
transferor's Issuable Maximum and Reserved Amount. Any portion of the Issuable
Maximum or Reserved Amount which remains allocated to any person or entity which
does not hold any Debentures shall be allocated to the remaining Holders, pro
rata, based on the principal amount of such Debentures then held by such
Holders.

                                    ARTICLE V

                    CONSOLIDATION, MERGER OR SALE OF COMPANY

            5.1 CONSOLIDATION, MERGER OR SALE ONLY ON CERTAIN TERMS. The Company
shall not consolidate with or merge into any other Person or convey, transfer or
lease its properties and assets substantially as an entirety to any Person, and
the Company shall not permit any Person to consolidate with or merge into the
Company or convey, transfer or lease its properties and assets substantially as
an entirety to the Company, unless:


                                       25
<PAGE>   26
            a. in case the Company shall consolidate with or merge into another
Person or convey, transfer or lease its properties and assets substantially as
an entirety to any Person, the Person formed by such consolidation or into which
the Company is merged or the Person which acquires by conveyance or transfer, or
which leases, the properties and assets of the Company substantially as an
entirety shall be a corporation, partnership or trust whose Common Stock is
traded or the Nasdaq or a Subsequent Market, and shall expressly assume, by a
Debenture supplemental hereto, executed and delivered to the Holders, in form
satisfactory to the Holders of a majority of the then outstanding principal
amount of the Debentures, the due and punctual payment of the principal of and
interest on all the Debentures and the performance or observance of every
covenant of this Debenture on the part of the Company to be performed or
observed and shall have provided for conversion rights in accordance with
Section 5.3; and

            b. immediately after giving effect to such transaction and treating
any indebtedness which becomes an obligation of the Company or a Subsidiary as a
result of such transaction as having been incurred by the Company or such
Subsidiary at the time of such transaction, no Event of Default shall have
happened and be continuing.

            5.2 SUCCESSOR SUBSTITUTED. Upon any consolidation of the Company
with, or merger of the Company into, any other Person or any conveyance,
transfer or lease of the properties and assets of the Company substantially as
an entirety in accordance with Section 5.1, the successor person formed by such
consolidation or into which the Company is merged or to which such conveyance,
transfer or lease is made shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Debenture with the
same effect as if such successor Person had been named as the Company herein,
and thereafter, except in the case of a lease, the predecessor Person shall be
relieved of all obligations and covenants under this Debenture.

            5.3 CONVERSION RIGHTS. In case of any consolidation of the Company
with, or merger of the Company into, any other Person, any merger of another
Person into the Company (other than a merger which does not result in any
reclassification, conversion, exchange or cancellation of outstanding shares of
Common Stock of the Company) or any sale or transfer of all or substantially all
of the assets of the Company, the Person formed by such consolidation or
resulting from such merger or which acquires such assets, as the case may be,
shall in the supplemental Debenture provided pursuant to Section 5.1(a) provide
that the Holder of each Debenture then outstanding shall have the right
thereafter, during the period such Debenture shall be convertible as specified
in Article IV, to convert such Debenture only into the kind and amount of
securities, cash or other assets receivable upon such consolidation, merger,
sale or transfer by a holder of the number of shares of Common Stock of the
Company into which such Debenture might have been converted immediately prior to
such consolidation, merger, sale or transfer, with which the Company
consolidated or into which the Company merged or which merged into the Company
or to which such sale or transfer was made, as the case may be ("Constituent
Person"), or an Affiliate of a Constituent Person. The supplemental indenture
also shall provide that if in connection with such consolidation, merger, sale
or transfer, each holder of Common Stock is entitled to elect to receive either
securities, cash or other assets receivable upon such consolidation, merger,
sale or transfer, the Company or the surviving or transferee corporation shall
provide each holder of securities with the right to elect to receive the
securities, cash or other assets into which the Debentures held by such Holder
shall be convertible after


                                       26
<PAGE>   27
completion of such consolidation, merger, sale or transfer on the same terms and
subject to the same conditions applicable to holders of Common Stock (including,
without limitation, notice of the right to elect, limitations on the period in
which such election shall be made and the effect of failing to exercise the
election). Such supplemental Debenture shall provide for adjustments which, for
events subsequent to the effective date of such supplemental Debenture, shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Article. The above provisions of this Section shall similarly apply to
successive consolidations, mergers, sales or transfers.

                                   ARTICLE VI
                               OPTIONAL CONVERSION

            6.1 OPTIONAL CONVERSION.

            a. The Debenture is convertible in whole at the option of the
Company, from time to time, subject to the following conditions, and subject
also to the other conditions set forth in this Article VI (the "Optional
Conversion"):

                  (i) If, after nine (9) months following the Effectiveness Date
            (as defined in the Registration Rights Agreement), the Per Share
            Market Value has been greater than Nine Dollars ($9.00) subject to
            adjustment in the same manner in which the Conversion Price is
            adjusted as provided in Sections 4.5(a), (b), (c) and (d) (the
            "Conversion Trigger Price") for at least twenty (20) out of thirty
            (30) consecutive Trading Days; or

                  (ii) If, after four (4) months following effectiveness of the
            Registration Statement for the Debenture Shares the Company receives
            net proceeds of at least Three Million Dollars ($3,000,000) from a
            sale of its Common Stock or, securities convertible into or
            exchangeable or exercisable for shares of Common Stock in an
            offering registered under the Securities Act of 1933 at an initial
            price to the public equal to or exceeding the Conversion Trigger
            Price.

            b. Subject to the conditions set forth in Section 5.1(a), so long as
(i) no Event of Default (or any event that with the passage of time or giving of
notice or both would constitute an Event of Default) shall have occurred and be
continuing, (ii) any Registration Statement required to be filed and be
effective pursuant to the Registration Rights Agreement is then in effect and
has been in effect and sales of all of the Registrable Securities can be made
thereunder for at least twenty (20) days prior to the Conversion Notice Date (as
defined below) and (iii) the Company has a sufficient number of authorized
shares of Common Stock reserved for issuance upon full conversion of the
Debentures, upon ten (10) Business Days prior written notice to the Holder (a
"Conversion Notice"), the entire principal amount of the Debenture may be
converted by the Company, in whole into shares of Common Stock at the Conversion
Price, and accrued interest may be converted into shares of Common Stock at the
Average Price on the Business Day prior to conversion.

            6.2 The right of Optional Conversion set forth in this Article VI
shall apply only to Debentures issued on the First Closing Date but shall not
apply to Debentures issued on


                                       27
<PAGE>   28
the Second Closing Date.

            6.3 MECHANICS OF CONVERSION. The Company must exercise its right to
cause an Optional Conversion hereunder by delivering Conversion Notice by
facsimile and overnight courier to each Holder, no later than two (2) Business
Days after the occurrence of a condition set forth in Section 6.1(a)(i) or (ii)
(such deadline the "Conversion Notice Date"). Such Conversion Notice shall
indicate (a) the Conversion Price, (b) the number of shares of Common Stock that
each Holder shall receive as a result of the Optional Conversion and (c) a
confirmation of the date that the Company shall effect the Optional Conversion
and issue shares of Common Stock to the Holders (the "Optional Conversion
Date"), on the Optional Conversion Date, unless there is a disagreement as
described below. The Company shall issue the Common Stock on the Optional
Conversion Date unless the Holder notifies the Company within three (3) Business
Days after receipt of the Conversion Notice from the Company that the Holder
disagrees with the occurrence of the Optional Conversion or any other matter
contained in the Conversion Notice. If the Holder and the Company fail to agree
upon the occurrence of the Optional Conversion or any other matter contained in
the Conversion Notice within one (1) Business Day after the Holder has given
such notice, the matter shall be determined promptly by a securities firm (the
fees and expenses of which shall be paid by the Company) acceptable to both the
Holder and the Company, and such computation shall be final and binding. The
Optional Conversion shall be subject to the provisions set forth in Section 4.4,
mutatis mutandis.

      If the Company does not deliver the Conversion Notice by the Conversion
Notice Date, then the Company shall not have the right to effect an Optional
Conversion until a condition set forth in Section 6.1(a)(i) or (ii) occurs again
after such Conversion Notice Date. An example of how the Optional Conversion
right operates is as follows: Thirty (30) consecutive Trading Days occur, and on
twenty (20) of such Trading Days, the Per Share Market Value of the Common Stock
is greater than the Conversion Trigger Price. The Conversion Notice Date is two
(2) Business Days after the end of the thirty (30) day trading period. If the
Company delivers the Conversion Notice by the Conversion Notice Date, it has
properly exercised its Optional Conversion right and subject to this Section
6.3, the Debentures will be converted as provided herein. If the Company fails
to deliver the Conversion Notice on or prior to the Conversion Notice Date, then
there must again occur a thirty (30) consecutive day trading period in which
there are twenty (20) days where the Per Share Market Value is in excess of the
Conversion Trigger Price before the Company may again exercise its Optional
Conversion right.

                                   ARTICLE VII

                           SUBORDINATION OF DEBENTURES

            7.1 DEBENTURES SUBORDINATE TO SENIOR INDEBTEDNESS. The Company
covenants and agrees, and each Holder of a Debenture, by his acceptance thereof,
likewise covenants and agrees, that, to the extent and in the manner hereinafter
set forth in this Article, the payment of the principal of (and premium, if any)
and interest on each and all of the Debentures are hereby expressly made
subordinate and subject in right of payment to the prior payment in full of all
Senior Indebtedness. "Senior Indebtedness" shall mean any indebtedness,
liabilities and other obligations of the Company (whether as primary obligor or
as guarantor) to any Person


                                       28
<PAGE>   29
(each a "Senior Lender"), now existing or incurred hereafter, with respect to
any working capital, revolving credit or other line of credit facility, any term
loan facility, or any other extension of credit by a bank, insurance company or
financial institution engaged in the business of lending money (whether or not
secured), including reimbursement obligations under letters of credit (or local
guaranties, as applicable) and obligations in respect of bankers' acceptances,
interest rate protection agreements and currency exchange and purchase
agreements, and any other indebtedness or other obligations of the Company for
borrowed money evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses and secured thereby. Senior Indebtedness shall
include renewals, refundings, refinancings or other extensions of the foregoing.
The terms "indebtedness," "liabilities" and "obligations" are used herein in
their most comprehensive sense and include any and all advances, debts,
obligations and liabilities, now existing or hereafter arising, whether
voluntary or involuntary and whether due or not due, absolute or contingent,
liquidated or unliquidated, determined or undetermined.

            7.2 NO PAYMENT ON DEBENTURES IN CERTAIN CIRCUMSTANCES.

            a. No payment or distribution of cash or property (other than Common
Stock of the Company or other securities of the Company that are subordinated to
Senior Indebtedness to at least the same extent as the Debentures) of the
Company will be made on account of principal of or interest on the Debentures,
or to defease or acquire any of the Debentures, or on account of the conversion
provisions of the Debentures and no action shall be taken (judicial or
otherwise) to collect any such payment or distribution (i) upon the maturity of
any Senior Indebtedness by lapse of time, acceleration or otherwise, unless and
until all Senior Indebtedness shall first be paid in full in cash, or such
payment duly made in a manner satisfactory to the holders of such Senior
Indebtedness or (ii) in the event that the Company defaults in the payment of
any principal of, premium, if any, or interest on or any other amounts payable
on or due in connection with any Senior Indebtedness when it becomes due and
payable, whether at maturity or at a date fixed for prepayment or by declaration
or otherwise, unless and until such default has been waived in writing by the
holders of the Senior Indebtedness. Payments on the Debentures may and shall be
resumed in the case of a payment default only upon the date on which such
default is waived in writing by the holders of the Senior Indebtedness or their
agent.

            b. If any default other than a default contemplated by Section
7.2(a)(ii) above shall have occurred and be continuing that would permit the
holders of the Senior Indebtedness to accelerate the maturity of Senior
Indebtedness, upon written notice (a "Payment Blockage Notice") of the default
given to the Company and the Holders by the holders of, or an agent, trustee or
other representative for, such Senior Indebtedness, then, unless and until such
default has been waived in writing, no payment or distribution of cash or
property (other than Common Stock of the Company or other securities of the
Company that are subordinated to Senior Indebtedness to at least the same extent
as the Debentures) shall be made by the Company with respect to the principal of
or interest on the Debentures or on account of conversion of the Debentures or
to acquire or repurchase any of the Debentures for cash or property other than
Common Stock of the Company, and no action shall be taken (judicial or
otherwise) to collect any such payment or distribution. If such Senior
Indebtedness is not declared due and payable within 180 days after written
notice of the event of default is given, promptly after the end of the 180-day
period the Company will pay all sums due in respect of the Debentures and not
paid


                                       29
<PAGE>   30
during the 180-day period. During any 360-day consecutive period, only one such
period during which payment with respect to the Debentures may not be made as
the result of a Payment Blockage Notice may commence and the duration of such
period may not exceed 180 days. No nonpayment default that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the Holders
shall be, or be made, the basis for a subsequent Payment Blockage Notice unless
such default shall have been waived for a period of not less than 90 days.

            c. If any payment or distribution of assets of the Company is
received by any Holder in respect of the Debentures at a time when that payment
or distribution should not have been made because of paragraph (a) or (b) of
this Section 7.2, and provided that prior to the Company's disbursement of such
distribution or payment, the Holders shall have received a written notice from
the Company or from an agent or representative for one or more holders of Senior
Indebtedness, such payment or distribution will be received and held and will be
paid over to the holders of Senior Indebtedness (pro rata as to each of such
holders on the basis of the respective amounts of Senior Indebtedness held by
them) until all such Senior Indebtedness has been paid in full, after giving
effect to any concurrent payment or distribution or provision therefor to the
holders of such Senior Indebtedness.

            7.3 DEBENTURES SUBORDINATED TO PRIOR PAYMENT OF ALL SENIOR
INDEBTEDNESS ON DISSOLUTION, LIQUIDATION OR REORGANIZATION. Upon any
distribution of assets of the Company upon any dissolution, winding up,
liquidation or reorganization of the Company (whether in bankruptcy, insolvency,
receivership or similar proceedings relating to the Company or its property or
upon an assignment for the benefit of creditors or any marshalling of the
Company's assets or liabilities or otherwise):

            a. the holders of all Senior Indebtedness will first be entitled to
receive payment in full of the principal of and interest due on Senior
Indebtedness (including interest accruing after the commencement of a bankruptcy
or insolvency) at the rate specified in the applicable Senior Indebtedness
documents and including, without limitation, in respect of premiums, indemnities
or otherwise, before the Holders are entitled to receive any payment or
distribution on account of the principal of or interest on the Debentures;

            b. any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities (except that Holders may
receive securities that are subordinated at least to the same extent as the
Debentures to Senior Indebtedness and any securities issued in exchange for
Senior Indebtedness), to which Holders would be entitled except for the
provisions of this Section 7.3 will be paid by the liquidating trustee or agent
or other persons legally empowered to make such a payment or distribution
directly to the holders of Senior Indebtedness (pro rata to such holders on the
basis of the respective amounts of Senior Indebtedness held by such holders) or
their representatives to the extent necessary to make or provide for payment in
full in cash of all Senior Indebtedness remaining unpaid, after giving effect to
any concurrent payment or distribution to the holders of such Senior
Indebtedness or provision for that payment or distribution; and

            c. if, notwithstanding the foregoing, any payment or distribution of
assets of the Company of any kind or character, whether in cash, property or
securities (except that Holders may receive securities that are subordinated at
least to the same extent as the Debentures to


                                       30
<PAGE>   31
Senior Indebtedness and any securities issued in exchange for Senior
indebtedness) is received by the Holders on account of the principal of or
interest on the Debentures before all Senior Indebtedness is paid in full, such
payment or distribution will be received and held in trust for and will be
forthwith paid over to the holders of the Senior Indebtedness remaining unpaid
or unprovided for or their representatives for application (in the cash of cash)
to, or as collateral (in the case of non-cash property or securities) for the
payment of such Senior Indebtedness until all such Senior Indebtedness has been
paid in full, after giving effect to any concurrent payment or distribution or
provision therefor to the holders of such Senior Indebtedness.

            The Company will give prompt written notice to the Holders of any
dissolution, winding up, liquidation or reorganization of it or any assignment
for the benefit of its creditors.

            7.4 SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS. Subject
to the payment in full of all Senior Indebtedness, the Holders shall be
subrogated to the rights of the holders of Senior Indebtedness to receive
payments or distributions of cash, property or securities of the Company
applicable to the Senior Indebtedness until all amounts owing on the Debentures
shall be paid in full; and, for the purposes of such subrogation:

            a. no payments or distributions to the holders of the Senior
Indebtedness of any cash, property or securities to which the Holders would be
entitled except for the provisions of this Article VII and no payment pursuant
to the provisions of this Article VII to the holders of Senior Indebtedness by
the Holders shall, as between the Company, its creditors (other than holders of
Senior Indebtedness) and the Holders, be deemed to be a payment by the Company
to or on account of the Senior Indebtedness; and

            b. no payment or distributions of cash, property or securities to or
for the benefit of the Holders pursuant to the subrogation provision of this
Article VII, which would otherwise have been paid to the holders of Senior
Indebtedness, shall be deemed to be a payment by the Company to or for the
account of the Debentures.

            7.5 PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS. The provisions of
this Article are and are intended solely for the purpose of defining the
relative rights of the Holders on the one hand and the holders of Senior
Indebtedness on the other hand. Nothing contained in this Article or elsewhere
in this Debenture or in the Debentures is intended to or shall (a) impair, as
among the Company, its creditors other than holders of Senior Indebtedness and
the Holders of the Debentures, the obligation of the Company, which is absolute
and unconditional to pay to the Holders of the Debentures the principal of (any
premium, if any) and interest on the Debentures as and when the same shall
become due and payable in accordance with their terms; or (b) affect the
relative rights against the Company of the Holders of the Debentures and
creditors of the Company other than the holders of Senior Indebtedness; or (c)
prevent the Holder of any Debenture from exercising all remedies otherwise
permitted by applicable law upon default under this Debentures, subject to the
rights, if any, under this Article VII of the holders of Senior Indebtedness to
receive cash, property and securities otherwise payable or deliverable to the
Holder upon the exercise of any such remedy.

            7.6 RIGHT TO FILE PROOF OF CLAIM. In the event of any dissolution,
winding up, liquidation or reorganization of the Company (whether in bankruptcy,
insolvency,


                                       31
<PAGE>   32
receivership, reorganization or similar proceedings or upon any assignment for
the benefit of creditors or otherwise) tending towards liquidation of the
business and assets of the Company, with respect to the filing of a claim for
the unpaid balance of any Holder's Debentures in the form required in those
proceedings, if the Holder does not file a proper claim or proof of debt in the
form required in such proceeding at least thirty (30) days before the expiration
of the time to file such claim or claims, then the holders of Senior
Indebtedness and their agents, trustees, or other representatives are hereby
authorized to have the right to file, and are hereby authorized to file, an
appropriate claim for and on behalf of each such Holder.

            7.7 NO WAIVER OF SUBORDINATION PROVISIONS. No right of any present
or future holder of any Senior Indebtedness to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by any act or
failure to act on the part of the Company or by any act or failure to act, in
good faith, by any such holder, or by any noncompliance by the Company with the
terms, provisions and covenants of this Debenture, regardless of any knowledge
thereof any such holder may have or be otherwise charged with.

            Without in any way limiting the generality of the foregoing
paragraph, the holders of Senior Indebtedness may, at any time and from time to
time, without the consent of or notice to the Holders of the Debentures, without
incurring responsibility to the Holders of the Debentures and without impairing
or releasing the subordination provided in this Article or the obligations
hereunder of the Holders of the Debentures to the holders of Senior
Indebtedness, do any one or more of the following: (i) change the manner, place
or terms of payment or extend the time of payment of, or renew or alter, Senior
Indebtedness, or otherwise amend or supplement in any manner Senior Indebtedness
or any instrument evidencing the same or any agreement under which Senior
Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with
any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii)
release any Person liable in any manner for the collection of Senior
Indebtedness; and (iv) exercise or refrain from exercising any rights against
the Company and any other Person.

            7.8 NOTICE TO HOLDERS. The Company shall give prompt written notice
to the Holders of any fact known to the Company which would prohibit the making
of any payment to or by the Holders in respect of the Debentures.
Notwithstanding the provisions of this Article or any other provision of this
Debenture, the Holders shall not be charged with knowledge of the existence of
any facts which would prohibit the making of any payment to the Holders in
respect of the Debentures, unless and until the Holders shall have received
written notice thereof from the Company or a holder of Senior Indebtedness; and,
prior to the receipt of any such written notice, the Holders shall be entitled
in all respects to assume that no such facts exist; provided, however, that if
the Holders shall not have received the notice provided for in this Section at
least two Business Days prior to the date upon which by the terms hereof any
money may become payable for any purpose (including, without limitation, the
payment of the principal of, and premium, if any, or interest on any Debenture),
then, anything herein contained to the contrary notwithstanding, the Holders
shall have full power and authority to receive such money and to apply the same
to the purpose for which such money was received and shall not be affected by
any notice to the contrary which may be received by it within two Business Days
prior to such date.

            The Holders shall be entitled to rely on the delivery to them of a
written notice by


                                       32
<PAGE>   33
a Person representing himself to be a holder of Senior Indebtedness (or a
representative thereof) to establish that such notice has been given by a holder
of Senior Indebtedness (or representative thereof). In the event that the
Holders determines in good faith that further evidence is required with respect
to the right of any Person as a holder of Senior Indebtedness (or a
representative thereof) to participate in any payment or distribution pursuant
to this Article, the Holders may request such Person to furnish evidence to the
reasonable satisfaction of the Holders as to the amount of Senior Indebtedness
held by such Person, the extent to which such Person is entitled to participate
in such payment or distribution and any other facts pertinent to the rights of
such Person under this Article, and if such evidence is not furnished, the
Holders may defer any payment to such Person pending judicial determination as
to the right of such Person to receive such payment.

            7.9 RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT.
Upon the payment or distribution of assets of the Company referred to in this
Article, the Holders of the Debentures shall be entitled to rely upon any order
or decree entered by any court of competent jurisdiction in which such
proceeding is pending, or a certificate of the trustee in bankruptcy, receiver,
liquidating trustee, custodian, assignee for the benefit of the creditors, agent
or other Person making such payment or distribution, delivered to the Holders of
Debentures, for the purpose of ascertaining the Persons entitled to participate
in such payment or distribution, the holders of the Senior Indebtedness and
other indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article VII.

            7.10 NO ADVERSE MODIFICATION TO DEBENTURE. Neither the Holders nor
the Company shall enter into any modification of the Debentures which is in any
way adverse to the holders of the Senior Indebtedness.

            7.11 NOTICE TO HOLDERS OF SENIOR INDEBTEDNESS. The Company will
furnish to the holders of Senior Indebtedness at the time Senior Indebtedness is
initially incurred, when there is a change in the Holders thereof, or at any
time upon request therefor, a true and correct copy of the then most current
register setting forth the names and addresses of the Holders as of such date.

            7.12 SUBORDINATION AGREEMENT. The Holder by its acceptance hereof
agrees to execute and deliver to any Senior Lender such subordination agreement
as may be reasonably requested by such Senior Lender, which may deviate in
certain minor respects from the subordination provisions contained herein but
which is commercially reasonable and customary, and to execute, acknowledge,
deliver, file, notarize and register all such further agreements, instruments,
certificates, documents and assurances, and perform such acts as such Senior
Lender shall deem necessary or appropriate to effectuate the purposes of the
subordination provisions contained herein.

                                  ARTICLE VIII

                                  MISCELLANEOUS

            8.1 MODIFICATION OF DEBENTURES. This Debenture may be modified
without


                                       33
<PAGE>   34
prior notice to any Holder upon the written consent of the Company and the
Holders of more than 75% of the principal amount of the Debentures then
outstanding. The Holders of more than 75% of the principal amount of the
Debentures then outstanding may waive compliance by the Company with any
provision of this Debenture without prior notice to any Holder. However, without
the consent of each Holder affected, an amendment, supplement or waiver may not
(1) reduce the amount of Debentures whose Holders must consent to an amendment,
supplement or waiver, (2) reduce the principal amount of or extend the fixed
maturity of any Debenture or (3) make any Debenture payable in money or property
other than as stated in the Debentures.

            8.2 MISCELLANEOUS. 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 hereby
irrevocably submits to the nonexclusive 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, that
such suit, action or proceeding is improper. Except as specifically provided
herein, the parties hereto, including all guarantors or endorsers, hereby waive
presentment, demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance and enforcement of this
Debenture, and assent to extensions of the time of payment, or forbearance or
other indulgence without notice. The Holder of this Debenture by acceptance of
this Debenture agrees to be bound by the provisions of this Debenture which are
expressly binding on such Holder.

            8.3 RANK AND SUBORDINATION. 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 (or, as provided herein, in Common Stock), herein
prescribed. This Debenture is a direct obligation of the Company and ranks
subordinate to all Senior Indebtedness. Except as otherwise provided herein, the
Company may not voluntarily prepay the outstanding principal amount of the
Debenture.

            8.4 DEBENTURES OWNED BY COMPANY DEEMED NOT OUTSTANDING. In
determining whether the Holders of the requisite aggregate principal amount of
Debentures have concurred in any direction, consent or waiver under this
Debenture, Debentures which are owned by the Company or any other obligor on the
Debentures or by any Person directly or indirectly controlling or controlled by
or under direct or indirect common control with the Company or any other obligor
on the Debentures shall be disregarded and deemed not to be outstanding for the
purpose of any such determination; provided that any Debentures owned by the
Purchasers shall be deemed outstanding for purposes of making such a
determination. Debentures so owned which have been pledged in good faith may be
regarded as outstanding if the pledgee establishes to the satisfaction of the
Company the pledgee's right so to act with respect to such Debentures and that
the pledgee is not the Company or any other obligor upon the securities or any
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with the Company or any other obligor on the Debentures.

            8.5 NOTICE TO DEBENTUREHOLDERS PRIOR TO TAKING CERTAIN TYPES OF
ACTION.


                                       34
<PAGE>   35
In case:

            a. the Company shall authorize the issuance, at any time from and
after the Original Issue Date, to all holders of any class or series of its
Capital Stock, of rights or warrants to subscribe for or purchase shares of its
capital stock or of any other right;

            b. the Company shall authorize, at any time from and after the
Original Issue Date, the distribution to all holders of any class or series of
its Capital Stock, of evidences of its indebtedness or assets;

            c. the Company shall declare a dividend (or other distribution) on
its Common Stock or the Company shall declare a special nonrecurring dividend on
or a redemption of its Common Stock;

            d. of any subdivision, combination or reclassification of any class
or series of Capital Stock of the Company at any time from and after the
Original Issue Date or of any consolidation or merger to which the Company is a
party and for which approval by the shareholders of the Company is required, or
of the sale or transfer of all or substantially all of the assets of the Company
or any compulsory share exchange whereby the Common Stock is converted into
other securities, cash or property; or

            e. of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; then the Company shall cause to be mailed to the
Holders of this Debenture, at their last addresses as they shall appear upon the
registration books of the Company, at such time as the Company so notifies its
stockholders, a notice stating (i) the date as of which the holders of record of
such class or series of Capital Stock are to be entitled to receive any such
rights, warrants or distribution are to be determined, or (ii) the date on which
any such subdivision, combination, reclassification, consolidation, merger,
sale, transfer, dissolution, liquidation, winding up or other action is expected
to become effective, and the date as of which it is expected that holders of
record of such class or series of Capital Stock record shall be entitled to
exchange their stock for securities or other property, if any, deliverable upon
such subdivision, combination, reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation, winding up or other action.

            The failure to give the notice required by this Section 8.5 or any
defect therein shall not affect the legality or validity of any distribution,
right, warrant, subdivision, combination, reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation, winding up or other action, or
the vote upon any of the foregoing.

            8.6 EFFECT OF HEADINGS. The Section headings herein are for
convenience only and shall not affect the construction hereof.

            8.7 NO RIGHTS AS STOCKHOLDER. This Debenture shall not entitle the
Holder to any rights as a stockholder of the Company, including without
limitation, the right to vote, to receive dividends and other distributions
unless and to the extent converted into shares of Common Stock in accordance
with the terms hereof.

            8.8 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the
part of the


                                       35
<PAGE>   36
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privileges. All rights and remedies existing hereunder are
cumulative to, and not exclusive of, any rights or remedies otherwise available.

                 [Remainder of page intentionally left blank]


                                       36
<PAGE>   37

IN WITNESS WHEREOF, the Company and the Holder each has caused this instrument
to be duly executed as of July 29, 1999.

                                       ENDOCARE, INC.

                                       By      /s/ Paul W. Mikus
                                              ----------------------------------
                                       Name:  Paul W. Mikus
                                       Title: Chief Executive Officer


                                       HOLDER

                                       Name of Holder:

                                       BROWN SIMPSON STRATEGIC GROWTH FUND, L.P.

                                       By      /s/ Evan Levine
                                              ----------------------------------
                                       Name:
                                       Title:


                                       37
<PAGE>   38
                                                                       EXHIBIT A

                                 ENDOCARE, INC.
                                CONVERSION NOTICE

Reference is made to the Debenture issued by Endocare, Inc. (the "Debenture").
In accordance with and pursuant to the Debenture, the undersigned hereby
irrevocably elects to convert the principal amount of the Debenture, indicated
below into shares of Common Stock, par value $.001 per share (the "Common
Stock"), of the Company, by tendering the Debenture specified below as of the
date specified below.

Date of Conversion:_____________________________________________________________

Aggregate Principal Amount to be converted:_____________________________________

Debenture no(s). of Debenture to be converted:__________________________________

Please confirm the following information:

Conversion Price:_______________________________________________________________

Number of shares of Common Stock to be issued:__________________________________

Please issue the Common Stock into which the Debenture is being converted and,
if applicable, any check drawn on an account of the Company in the following
name and to the following address:

Issue to:_______________________________________________________________________

Facsimile Number:_______________________________________________________________

Authorization:__________________________________________________________________

By:_____________________________________________________________________________

Title:___________________________________

Dated:___________________________________

Account Number (if electronic book entry transfer):_____________________________

Transaction Code Number (if electronic book entry transfer):____________________


                                       38

<PAGE>   1
                                                                    EXHIBIT 10.1



================================================================================




                          SECURITIES PURCHASE AGREEMENT

                                      Among

                                 ENDOCARE, INC.

                                       and

                       THE PURCHASERS LISTED ON SCHEDULE I


                            Dated as of July 29, 1999




================================================================================

<PAGE>   2

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                           PAGE
                                                                                           ----
<S>                                                                                        <C>
ARTICLE I. PURCHASE AND SALE.................................................................2
   1.1  Purchase and Sale....................................................................2
   1.2  Closings.............................................................................2

ARTICLE II. REPRESENTATIONS AND WARRANTIES...................................................4
   2.1  Representations, Warranties and Agreements of the Company............................4
   2.2  Representations and Warranties of the Purchasers....................................14

ARTICLE III. OTHER AGREEMENTS...............................................................15
   3.1  Transfer Restrictions...............................................................15
   3.2  Stop Transfer Instruction...........................................................17
   3.3  Furnishing of Information...........................................................17
   3.4  Blue Sky Laws.......................................................................17
   3.5  Integration.........................................................................18
   3.6  Listing and Reservation of Debenture Shares.........................................18
   3.7  Notice of Breaches..................................................................19
   3.8  Form D..............................................................................19
   3.9  Use of Proceeds.....................................................................19
   3.10   Transactions with Affiliates......................................................19
   3.11   Transfer Agent Instructions.......................................................20
   3.12   Press Release; Filing of Form 8-K.................................................21
   3.13   Ordinary Course Brokerage and Trading.............................................21
   3.14   No Shorting.......................................................................21
   3.15   Best Efforts......................................................................21
   3.16   Corporate Existence...............................................................21
</TABLE>



                                       i
<PAGE>   3

<TABLE>
<S>                                                                                        <C>
   3.17   No Violation of Applicable Law....................................................21
   3.18   Subsequent Registrations..........................................................22

ARTICLE IV. CONDITIONS......................................................................22
   4.1  First Closing Conditions............................................................22
   4.2  Second Closing......................................................................25

ARTICLE V. INDEMNIFICATION..................................................................29
   5.1  Indemnification.....................................................................29

ARTICLE VI. MISCELLANEOUS...................................................................30
   6.1  Entire Agreement....................................................................30
   6.2  Notices.............................................................................30
   6.3  Amendments; Waivers.................................................................32
   6.4  Headings............................................................................32
   6.5  Successors and Assigns..............................................................32
   6.6  No Third-Party Beneficiaries........................................................32
   6.7  Governing Law.......................................................................32
   6.8  Survival............................................................................33
   6.9  Counterparts........................................................................33
   6.10   Publicity.........................................................................33
   6.11   Severability......................................................................34
   6.12   Remedies..........................................................................34
   6.13   Independent Nature of Purchasers Obligations and Rights...........................34
   6.14   Payment Set Aside.................................................................34
   6.15   Further Assurances................................................................35
   6.16   Fees and Expenses.................................................................35
</TABLE>



                                       ii
<PAGE>   4

                          SECURITIES PURCHASE AGREEMENT



               THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") is dated as
of July 29, 1999 among Endocare, Inc., a Delaware corporation (the "Company"),
and the various purchasers identified and listed on Schedule I hereto (each
referred to herein as a "Purchaser" and, collectively, the "Purchasers.")

               WHEREAS, the Company and the Purchasers are executing and
delivering this Agreement in reliance upon the exemption from securities
registration afforded by Rule 506 under Regulation D as promulgated by the
United States Securities and Exchange Commission (the "Commission") under
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act");

               WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Company desires to issue and sell to the Purchasers, and the
Purchasers desire to acquire from the Company, an aggregate of $3,000,000
principal amount of the Company's 7% convertible debentures due 2002 (the
"Debentures," each of which a "Debenture"), in the form of Exhibit A annexed
hereto, convertible into shares of the Company's common stock, par value $0.001
per share (the "Common Stock"); and

               WHEREAS, contemporaneously with the execution and delivery of
this Agreement, the parties hereto are executing and delivering a Registration
Rights Agreement substantially in the form of Exhibit B attached hereto (the
"Registration Rights Agreement") pursuant to which the Company has agreed to
provide certain registration rights under the Securities Act and the rules and
regulations promulgated thereunder, and applicable state securities laws.

               NOW THEREFORE, in consideration of the promises and mutual
covenants and agreements hereinafter, the Company and the Purchasers hereby
agree as follows:

<PAGE>   5

                                   ARTICLE I.

                                PURCHASE AND SALE

        1.1 Purchase and Sale.

               a. On the First Closing Date (as defined below), subject to the
terms and conditions set forth herein, the Company shall issue and sell to each
Purchaser and each Purchaser, severally and not jointly, shall purchase from the
Company the principal amount of Debentures as set forth on Schedule I. The
aggregate principal amount of Debentures purchased by the Purchasers shall be
$3,000,000.

               b. On the Second Closing Date (as defined below), subject to the
terms and conditions set forth herein, the Company shall issue and sell to the
Purchasers an additional $3,000,000 principal amount of the Debentures.

        1.2 Closings.

               a. The First Closing. The closing of the purchase and sale of the
initial $3,000,000 aggregate principal amount of Debentures (the "First
Closing") shall take place at the offices of Akin, Gump, Strauss, Hauer & Feld,
L.L.P., 590 Madison Avenue, New York, New York 10022, or by transmission by
facsimile and overnight courier, immediately following the execution hereof or
such later date or different location as the parties shall agree, but not prior
to the date that the conditions set forth in Section 4.1 have been satisfied or
waived by the appropriate party (the "First Closing Date"). At the First
Closing:

                      (i) Each Purchaser shall deliver, as directed by the
Company, its portion of the purchase price as set forth next to its name on
Schedule I in United States dollars in immediately available funds to an account
or accounts designated in writing by the Company;

                      (ii) The Company shall deliver to each Purchaser a
Debenture, in the form of Exhibit A hereto, representing the principal amount
purchased by such Purchaser as set forth on Schedule I hereto;

                      (iii) The parties shall execute and deliver each of the
documents referred to in Section 4.1 hereof.

               b. Second Closing Date. Subject to the terms and conditions set
forth in Section 4.2 and elsewhere in this Agreement, the Purchasers shall have
the right (the "Purchasers Call Option") at any time within a three-year period
commencing on the First Closing Date to deliver a written notice to the Company
(a "Purchasers Call Option Notice") requiring the Company to issue and sell up
to an additional $3,000,000 principal amount of a three (3) year Debenture at a
conversion price of $6.75 per share. The closing of the purchase and sale of the
additional Debentures (such closing or the closing under the Company Put Option
Notice (defined below), the "Second Closing") under the Purchasers Call Option
Notice shall take place in the same manner as the First Closing, within two (2)
business days of the date after delivery of the Purchasers Call Option Notice
(such date or the date of the Second Closing under the Company Put Option
Notice, the "Second Closing Date"); provided that in no case shall the Second



                                       2
<PAGE>   6

Closing take place unless and until the conditions listed in Section 4.2 have
been satisfied or waived by the appropriate party. Upon the occurrence of any
Change of Control, the Company shall take appropriate action to ensure that the
Purchasers shall have the right to exercise the Purchasers Call Option after the
Change of Control. At the Second Closing:

                      (i) Each Purchaser shall deliver, as directed by the
Company, its portion of the purchase price as set forth next to its name on a
schedule similar to Schedule I (the "Second Closing Schedule"), to be attached
to the Purchasers Call Option Notice, in United States dollars in immediately
available funds to an account or accounts designated in writing by the Company;

                      (ii) The Company shall deliver to each Purchaser a
Debenture, substantially in the form of Exhibit A hereto (which shall mature
three (3) years from the date it is issued and in which the conversion price
shall be $6.75 per share), provided however, that such Debenture shall not
include the conversion price adjustment provision contained in Section 4.5(e) of
Exhibit A, representing the principal amount purchased by such Purchaser as set
forth on the Second Closing Schedule;

                      (iii) The parties shall execute and deliver each of the
documents referred to in Section 4.2 hereof.

               c. Company Put Option. Subject to the terms and conditions in
Section 4.2 and elsewhere in this Agreement, after the Redemption Date of the
Optional Conversion of the Debentures (as defined in Article VI of the
Debentures), the Company shall have the one time right (the "Company Put
Option") at any time subsequent to the First Closing to deliver a written notice
to the Purchasers (a "Company Put Option Notice") requiring the Purchasers to
exercise in full the Purchasers Call Option, provided that for at least twenty
(20) out of thirty (30) consecutive Trading Days (as defined in the Debentures)
prior to the exercise of the Company Put Option the Per Share Market Value (as
defined in the Debentures) was more than $9 dollars (such price, as may be
adjusted, the "Put Trigger Price," and the occurrence of twenty (20) Trading
Days at such price, a "Put Trigger"). The Company must exercise its Company Put
Option by delivering the Company Put Option Notice to each Holder within ten
(10) Business Days of the occurrence of a Put Trigger (such deadline, the "Put
Notice Date"). If the Company does not deliver the Company Put Option Notice by
the Put Notice Date, then the Company shall not have the right to effect a
Company Put Option until a Put Trigger occurs again after such Put Notice Date.
An example of how the Company Put Option operates is as follows: Thirty (30)
consecutive Trading Days occur. On twenty (20) Trading Days during the thirty
(30) day period, the Per Share Market Value of the Common Stock is greater than
the Put Trigger Price. The Put Notice Date is ten (10) Business Days after the
end of the thirty (30) day trading period. If the Company delivers the Company
Put Option Notice by the Put Notice Date, it has properly exercised its Company
Put Option. If the Company fails to deliver the Put Option Notice by the Put
Notice Date, then there must again occur a thirty (30) day trading period in
which there are twenty (20) days where the Per Share Market Value is in excess
of the Put Trigger Price before the Company may again exercise its Company Put
Option. The Second Closing under this Company Put Option Notice shall take place
on such date indicated in the Company Put Option Notice but no earlier than ten
(10) business days after the Purchasers' receipt of the Company Put Option
Notice; provided that in no case shall the Second Closing take place unless and
until



                                       3
<PAGE>   7

the conditions listed in Section 4.2 have been satisfied or waived by the
appropriate party. Five (5) business days after receipt of the Company Put
Option Notice, the Purchasers shall deliver to the Company a Second Closing
Schedule, indicating the principal amount of Debentures that each Purchaser
shall purchase for an aggregate total of $3,000,000. At the Second Closing under
the Company Put Option Notice:

                      (i) Each Purchaser shall deliver, as directed by the
Company, its portion of the purchase price as set forth next to its name on the
Second Closing Schedule, in United States dollars in immediately available funds
to an account or accounts designated in writing by the Company;

                      (ii) The Company shall deliver to each Purchaser a
Debenture, in the form of Exhibit A hereto, representing the principal amount
purchased by such Purchaser as set forth on the Second Closing Schedule;

                      (iii) The parties shall execute and deliver each of the
documents referred to in Section 4.2 hereof.

               d. Liquidated Damages. In addition to any other rights available
to the Purchasers, if the Company fails to deliver to each Purchaser the
Debentures required to be delivered at the Second Closing, the Company shall pay
each such Purchaser, upon the Purchaser's demand, as liquidated damages by cash
or wire transfer in immediately available funds to the account of such
Purchaser, or as otherwise directed by such Purchaser, the difference between
the Per Share Market Price (as defined in the Debentures) on the Second Closing
Date and the Conversion Price (as defined in the Debentures) multiplied by the
number of shares of Common Stock into which the Debentures that should have been
delivered at the Second Closing could have been converted.

               e. Adjustment of Put Trigger Price. The Put Trigger Price shall
be adjusted from time to time in the same manner and for the same reasons that
Conversion Price is subject to adjustment pursuant to Section 4.5(a), (b) and
(c) of the Debenture, including without limitation, for stock splits, reverse
stock splits, stock dividends and the like. The adjustment shall automatically
be effected on the record date established for purposes of determining the event
that causes the adjustment to the Put Trigger Price. Notice of adjustment to the
Put Trigger Price need not be given when such adjustment occurs, but must be
stated in the Notice of Company Put Option Notice.


                                   ARTICLE II.

                         REPRESENTATIONS AND WARRANTIES

        2.1 Representations, Warranties and Agreements of the Company. The
Company hereby makes the following representations and warranties as of the date
hereof to each of the Purchasers:

               a. Organization and Qualification. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware, with



                                       4
<PAGE>   8

the requisite corporate power and authority to own and use its properties and
assets and to carry on its business as currently conducted. Except as set forth
on Schedule 2.1(a), the Company has no subsidiaries (collectively, the
"Subsidiaries"). A "Subsidiary" for purposes of this Agreement means any entity
in which the Company, directly or indirectly, owns the majority of such entity's
capital stock or holds an equivalent equity or similar interest, but does not
include an entity in which the Company holds a warrant or similar right to
acquire controlling equity in the entity and does not otherwise have a
controlling equity interest in the entity. Each of the Subsidiaries is a
corporation duly incorporated, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or organization (as applicable),
with the full corporate power and authority to own and use its properties and
assets and to carry on its business as currently conducted. Each of the Company
and the Subsidiaries is duly qualified as a foreign corporation to do business
and is in good standing as a foreign corporation in each jurisdiction in which
the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, would not, individually or in the aggregate, (x)
adversely affect the legality, validity or enforceability of any of this
Agreement or the Transaction Documents (as defined in Section 2.1(b)) or any of
the transactions contemplated hereby or thereby, (y) have or result in a
material adverse effect on the results of operations, assets, prospects, or
financial condition of the Company and its Subsidiaries, taken as a whole or (z)
impair the Company's ability to perform fully on a timely basis its obligations
under any Transaction Document (any of (x), (y) or (z), being a "Material
Adverse Effect"). The Company has furnished to each of the Purchasers true and
correct copies of the Company's Certificate of Incorporation, as amended and as
in effect on the date hereof (the "Certificate of Incorporation"), and the
Company's Bylaws, as in effect on the date hereof (the "Bylaws").

               b. Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by this Agreement, the Debenture and the Registration Rights
Agreement (collectively, the "Transaction Documents"), and otherwise to carry
out its obligations hereunder and thereunder. The execution and delivery of each
of this Agreement and the Transaction Documents by the Company and the
consummation by it of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate action and no further action is
required by the Company, its Board of Directors or its stockholders. Each of
this Agreement and the Transaction Documents has been duly executed by the
Company and when delivered in accordance with the terms hereof will constitute
the valid and binding obligation of the Company enforceable against the Company
in accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally the enforcement of, creditors'
rights and remedies or by other equitable principles of general application and
except that rights to indemnification and contribution may be limited by Federal
or state securities laws or public policy relating thereto. Neither the Company
nor any Subsidiary is in any material violation of any of the provisions of its
respective certificate of incorporation, bylaws or other charter documents such
that any right of a holder of the Debentures would be affected.

               c. Capitalization. As of the date hereof, the authorized capital
stock of the Company is as set forth in Schedule 2.1(c). All of such outstanding
shares of capital stock have been, or upon issuance will be, validly authorized
and issued, fully paid and nonassessable and



                                       5
<PAGE>   9

were issued in accordance with the registration or qualification provisions of
the Securities Act, or pursuant to valid exemptions therefrom. Except as
disclosed in Schedule 2.1(c), (i) no shares of the Company's capital stock are
subject to preemptive rights or any other similar rights or any liens or
encumbrances suffered or permitted by the Company, nor is any holder of the
Common Stock entitled to preemptive or similar rights arising out of any
agreement or understanding with the Company by virtue of any Transaction
Document, (ii) there are no outstanding options, warrants, scrip rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into or exchangeable for, or giving any Person
(as defined below) any right to subscribe for or acquire, any shares of capital
stock of the Company or any of its Subsidiaries, or contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to issue additional shares of capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of the
Company or any of its Subsidiaries, (iii) there are no outstanding debt
securities, (iv) there are no agreements or arrangements under which the Company
or any of its Subsidiaries is obligated to register the sale of any of their
securities under the Securities Act (except the Registration Rights Agreement),
(v) there are no outstanding securities of the Company or any of its
Subsidiaries which contain any redemption or similar provisions, and there are
no contracts, commitments, understandings or arrangements by which the Company
or any of its Subsidiaries is or may become bound to redeem a security of the
Company or any of its Subsidiaries, (vi) there are no securities or instruments
containing anti-dilution or similar provisions that will be triggered by the
issuance of the shares of Common Stock as described in this Agreement, (vii) the
Company does not have any stock appreciation rights or "phantom stock" plans or
agreements or any similar plan or agreement and (viii) except as specifically
disclosed in the SEC Documents (as defined in Section 2.1(k) hereof), no Person
(as defined below) or group of related Persons beneficially owns (as determined
pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) or has the right to acquire by agreement with or
by obligation binding upon the Company beneficial ownership of in excess of 5%
of the Common Stock. "Person" means an individual or corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or subdivision
thereof) or other entity of any kind.

               d. Authorization and Validity; Issuance of Shares. The shares of
Common Stock issuable upon conversion of the Debentures (the "Debenture Shares")
are and will at all times hereafter continue to be duly authorized and reserved
for issuance and the Debenture Shares will be validly issued, fully paid and
non-assessable, free and clear of all liens, encumbrances and Company rights of
first refusal, other than liens and encumbrances created by the Purchasers
(collectively, "Liens") and will not be subject to any preemptive or similar
rights. The issuance by the Company of the Debentures and the Debenture Shares
is exempt from registration under the Securities Act, assuming the accuracy of
the Purchasers' representations and warranties herein.

               e. No Conflicts. The execution, delivery and performance of this
Agreement and each of the Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
(including the issuance of the Debenture Shares) do not and will not (i)
conflict with or violate any provision of the Certificate of



                                       6
<PAGE>   10

Incorporation, Bylaws or other organizational documents of the Company or any of
the Subsidiaries, (ii) subject to obtaining the consents referred to in Section
2.1(f), conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture, patent, patent license or instrument (evidencing a Company
or Subsidiary debt or otherwise) to which the Company or any Subsidiary is a
party or by which any property or asset of the Company or any Subsidiary is
bound or affected, or (iii) result in a violation of any law, rule, regulation,
order, judgment, injunction, decree or other restriction of any court or
governmental authority to which the Company or any Subsidiary is subject
(including Federal and state securities laws and regulations and the rules and
regulations of the principal market or exchange on which the Common Stock is
traded or listed) applicable to the Company or any of its Subsidiaries, or by
which any material property or asset of the Company or any Subsidiary is bound
or affected.

               f. Consents and Approvals. Except as specifically set forth on
Schedule 2.1(f), neither the Company nor any Subsidiary is required to obtain
any consent, waiver, authorization or order of, give any notice to, or make any
filing or registration with, any court or other federal, state, local or other
governmental authority, regulatory or self regulatory agency, or other Person in
connection with the execution, delivery and performance by the Company of this
Agreement or the Transaction Documents, other than (i) the filing of a
registration statement with the Commission, which shall be filed in accordance
with and in the time periods set forth in the Registration Rights Agreement,
(ii) the application(s) or any letter(s) acceptable to the Nasdaq SmallCap
Market ("Nasdaq") for the listing of the Debenture Shares with Nasdaq (and with
any other national securities exchange or market on which the Common Stock is
then listed), and (iii) any filings, notices or registrations under applicable
state securities laws (together with the consents, waivers, authorizations,
orders, notices and filings referred to on Schedule 2.1(f), the "Required
Approvals").

               g. Litigation; Proceedings. Except as specifically set forth on
Schedule 2.1(g), there is no action, suit, notice of violation, proceeding or
investigation pending or, to the knowledge of the Company, threatened against or
affecting the Company or any of its Subsidiaries or any of their respective
properties before or by any court, governmental or administrative agency or
regulatory authority (federal, state, county, local or foreign) which (i)
adversely affects or challenges the legality, validity or enforceability of any
of this Agreement or the Transaction Documents or (ii) could reasonably be
expected to, individually or in the aggregate, have a Material Adverse Effect.

               h. No Default or Violation. Neither the Company nor any
Subsidiary (i) is in default under or in violation of any indenture, loan or
other credit agreement or any other agreement or instrument to which it is a
party or by which it or any of its properties is bound and which is required to
be included as an exhibit to any SEC Document or will be required to be included
as an exhibit to the Company's next filing under either the Securities Act or
Exchange Act (ii) is in violation of any order of any court, arbitrator or
governmental body applicable to it, (iii) is in violation of any statute, rule
or regulation of any governmental authority to which it is subject, (iv) is in
default under or in violation of its Certificate of Incorporation, Bylaws or
other organizational documents, respectively, or (v) is in default under or in
violation of any of the listing requirements of Nasdaq as in effect on the date
hereof and is not aware of any facts which



                                       7
<PAGE>   11

would reasonably lead to delisting or suspension of the Common Stock by Nasdaq
in the foreseeable future. The business of the Company and its Subsidiaries is
not being conducted, and shall not be conducted, in violation of any law,
ordinance, rule or regulation of any governmental entity, except where such
violations have not resulted or would not reasonably result, individually or in
the aggregate, in a Material Adverse Effect. Neither the Company nor any of its
Subsidiaries is in breach of any agreement where such breach, individually or in
the aggregate, would have a Material Adverse Effect

               i. Disclosure; Absence of Certain Changes. None of this
Agreement, the Schedules to this Agreement, the Transaction Documents, the SEC
Documents or any other written or formally presented information, report,
financial statement, exhibit, schedule or document furnished by or on behalf of
the Company in connection with the negotiation of the transactions contemplated
hereby contained, contains, or will contain at the time it was or is so
furnished any untrue statement of a material fact or omitted, omits or will omit
at such time to state any material fact necessary in order to make the
statements made herein and therein, in light of the circumstances under which
they were made, not misleading. Except as disclosed on Schedule 2.1(i) or in SEC
Documents filed on EDGAR at least five business days prior to the date hereof,
since December 31, 1998, there has been no material adverse change and no
material adverse development in the business, properties, operations, financial
condition, liabilities or results of operations or, insofar as can reasonably be
foreseen, prospects of the Company or the Subsidiaries. The Company has not
taken any steps, and does not currently expect to take any steps, to seek
protection pursuant to any bankruptcy law nor does the Company or any of its
Subsidiaries have any knowledge or reason to believe that its creditors intend
to initiate involuntary bankruptcy proceedings. No event, liability, development
or circumstance has occurred or exists, or is contemplated to occur, with
respect to the Company or its Subsidiaries or their respective businesses,
properties, operations or financial condition or, insofar as can reasonably be
foreseen, prospects, that would be required to be disclosed by the Company under
applicable securities laws on a registration statement (including by way of
incorporation by reference) filed with the Commission, on the date this
representation is made or deemed to be made, relating to an issuance and sale by
the Company of its Common Stock and which has not been publicly disclosed.

               j. Private Offering. The Company and all Persons acting on its
behalf have not made, directly or indirectly, and will not make, offers or sales
of any securities or solicited any offers to buy any security under
circumstances that would require registration of the Debentures or the Debenture
Shares or the issuance of such securities under the Securities Act. The offer,
sale and issuance of the Debentures and the Debenture Shares to the Purchasers
will not be integrated with any other offer, sale and issuance of the Company's
securities (past, current, or future) under the Securities Act or any
regulations of any exchange or automated quotation system on which any of the
securities of the Company are listed or designated or for purposes of any
stockholder approval provision applicable to the Company or its securities.
Subject to the accuracy and completeness of the representations and warranties
of the respective Purchasers contained in Section 2.2 hereof, the offer, sale
and issuance by the Company to the Purchasers of the Debentures and the
Debenture Shares is exempt from the registration requirements of the Securities
Act.

               k. SEC Documents; Financial Statements. The Common Stock of the
Company



                                       8
<PAGE>   12

is registered pursuant to Section 12(b) of the Exchange Act. The Company has
filed all reports, schedules, forms, statements and other documents required to
be filed by it with the Commission pursuant to the reporting requirements of the
Exchange Act, including pursuant to Section 13, 14 or 15(d) thereof (the
foregoing materials and all exhibits included therein and financial statements
and schedules thereto and documents (other than exhibits to such documents)
incorporated by reference therein being collectively referred to herein as the
"SEC Documents"), on a timely basis or has received a valid extension of such
time of filing and has filed any such SEC Documents prior to the expiration of
any such extension. As of their respective dates, the SEC Documents complied in
all material respects with the requirements of the Securities Act and the
Exchange Act and the rules and regulations of the Commission promulgated
thereunder, and none of the SEC Documents, when filed, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. All agreements to
which the Company or any Subsidiary is a party or to which the property or
assets of the Company or any Subsidiary are subject and which are required to be
filed as exhibits to the SEC Documents have been filed as exhibits to the SEC
Documents as required and neither the Company nor any Subsidiary is in breach of
any such agreement, except for a breach or breaches which would not have a
Material Adverse Effect. As of their respective dates, the financial statements
of the Company included in the SEC Documents comply as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the Commission with respect thereto as in effect at the time of
filing. Such financial statements have been prepared in accordance with United
States generally accepted accounting principles applied on a consistent basis
during the periods involved, except as may be otherwise specified in such
financial statements or the notes thereto, and fairly present in all material
respects the financial position of the Company as of and for the dates thereof
and the results of operations and cash flows for the periods then ended,
subject, in the case of unaudited statements, to normal, immaterial year-end
audit adjustments. No other information provided by or on behalf of the Company
to the Purchasers which is not included in the SEC Documents, including, without
limitation, information referred to in Section 2.1(i) of this Agreement,
contains any untrue statement of a material fact or omits to state any material
fact necessary in order to make the statements therein, in the light of the
circumstance under which they are or were made, not misleading. Neither the
Company nor any of its Subsidiaries or any of their officers, directors,
employees or agents have provided the Purchasers with any material, nonpublic
information. The Company acknowledges that the Purchasers will be trading in the
securities of the Company in reliance on the foregoing representation and
warranty.

               l. Investment Company. The Company is not, and is not controlled
by or under common control with an affiliate (an "Affiliate") of an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.

               m. Broker's Fees. No fees or commissions or similar payments with
respect to the transactions contemplated by this Agreement or the Transaction
Documents have been paid or will be payable by the Company to any broker,
financial advisor, finder, investment banker, or bank, other than as set forth
in Schedule 2.1(m). The Purchasers shall have no obligation with respect to any
fees or with respect to any claims made by or on behalf of other Persons for
fees of a type contemplated in this Section 2.1(m) that may be due in connection
with the transactions contemplated by this Agreement and the Transaction
Documents.



                                       9
<PAGE>   13

               n. Form S-3 Eligibility. The Company is, and at the Closing Date
will be, eligible to register securities (including the Debenture Shares) for
resale with the Commission under Form S-3 (or any successor form) promulgated
under the Securities Act.

               o. Listing and Maintenance Requirements Compliance. The principal
markets on which the Common Stock is currently traded is Nasdaq. Except as
disclosed on Schedule 2.1(o), the Company has not in the three years preceding
the date hereof received notice (written or oral) from Nasdaq (or any stock
exchange, market or trading facility on which the Common Stock is or has been
listed (or on which it has been quoted)) to the effect that the Company is not
in compliance with the listing or maintenance requirements of such market or
exchange. The Company is not aware of any facts that would reasonably lead to
delisting or suspension of the Common Stock by Nasdaq. After giving effect to
the transactions contemplated by this Agreement and the Transaction Documents,
the Company is and will be in compliance with all such maintenance requirements.

               p. Intellectual Property Rights. To the Company's best knowledge,
the Company and each of its Subsidiaries own or possess adequate rights or
licenses to use all trademarks, trademark applications, trade names and service
marks, whether or not registered, and all patents, patent applications,
copyrights, inventions, licenses, approvals, governmental authorizations, trade
secrets and intellectual property rights (collectively, "Intellectual Property
Rights") which are necessary for use in connection with their respective
businesses as now conducted and as described in the SEC Documents. To the
Company's best knowledge, except as set forth on Schedule 2.1(p), none of the
Company's Intellectual Property Rights have expired or terminated, or are
expected to expire or terminate within two years from the date of this
Agreement. To the Company's best knowledge, neither the Company nor any of its
Subsidiaries has infringed or is infringing on any of the Intellectual Property
Rights of any Person and, except as set forth on Schedule 2.1(p), there is no
claim, action or proceeding which has been made or brought against, or to the
Company's knowledge, is being made, brought or threatened against, the Company
or its Subsidiaries regarding the infringement of any of the Intellectual
Property Rights, and the Company and its Subsidiaries are unaware of any facts
or circumstances which might give rise to any of the foregoing, except where any
of the foregoing would not have a Material Adverse Effect. The Company and its
Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their intellectual properties.

               q. Employee Relations. Neither the Company nor any of its
Subsidiaries is involved in any union labor dispute nor, to the knowledge of the
Company or any of its Subsidiaries, is any such dispute threatened. Neither the
Company nor any of its Subsidiaries is a party to a collective bargaining
agreement, and the Company and its Subsidiaries believe that relations with
their employees are good. Except as set forth on Schedule 2.1(q), since December
31, 1998 no executive officer (as defined in Rule 501(f) under the Securities
Act) has notified the Company that such officer intends to leave the Company or
otherwise terminate such officer's employment with the Company.

               r. Registration Rights; Rights of Participation. Except as
described on Schedule 2.1(r) hereto, (i) the Company has not granted or agreed
to grant to any Person any rights (including "piggy-back" registration rights)
to have any securities of the Company registered with the Commission or any
other governmental authority which has not been satisfied and (ii)



                                       10
<PAGE>   14

no Person, including, but not limited to, current or former stockholders of the
Company, underwriters, brokers or agents, has any right of first refusal,
preemptive right, right of participation, or any similar right to participate in
the transactions contemplated by this Agreement or any Transaction Document.

               s. Title. Except as disclosed on Schedule 2.1(s), the Company and
each of its Subsidiaries have good and marketable title in fee simple to all
real property and personal property owned by them which is material to the
business of the Company and its Subsidiaries, in each case free and clear of all
Liens, except for Liens that do not materially affect the value of such property
and do not interfere with the use made and proposed to be made of such property
by the Company and the Subsidiaries. Any real property and facilities held under
lease by the Company and the Subsidiaries are held by them under valid,
subsisting and, to the Company's best knowledge, enforceable leases with such
exceptions as are not material and do not interfere with the use made and
proposed to be made of such property and buildings by the Company and the
Subsidiaries.

               t. Permits. The Company and each of its Subsidiaries possess all
certificates, authorizations, licenses, easements, consents, approvals, orders
and permits necessary to own, lease and operate their respective properties and
to conduct their respective businesses as currently conducted except where the
failure to possess such permits would not, individually or in the aggregate,
have a Material Adverse Effect ("Material Permits"), and there is no proceeding
pending, or, to the knowledge of the Company, threatened relating to the
revocation, modification, suspension or cancellation of any Material Permit.
Neither the Company nor any of the Subsidiaries is in conflict with or default
or violation of any Material Permit.

               u. Insurance. The Company and each of its Subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged. Neither the Company nor any such Subsidiary has any
reason to believe that it will not be able to renew its existing insurance
coverages as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business, at a cost that
would not materially and adversely affect the condition, financial or otherwise,
or the earnings, business or operations of the Company and its Subsidiaries,
taken as a whole.

               v. Internal Accounting Controls. The Company and each of the
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with United States generally accepted accounting principles and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management's general or specific authorization and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

               w. Tax Status; Firpta. Except as set forth on Schedule 2.1(w),
the Company and each of its Subsidiaries has made or filed all federal and state
income and all other tax returns,



                                       11
<PAGE>   15

reports and declarations required by any jurisdiction to which it is subject
(unless and only to the extent that the Company and each of its Subsidiaries has
set aside on its books provisions reasonably adequate for the payment of all
unpaid and unreported taxes) and has paid all taxes and other governmental
assessments and charges that are material in amount, shown or determined to be
due on such returns, reports and declarations, except those being contested in
good faith (which are set forth on Schedule 2.1(w) hereof), and has set aside on
it books provisions reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or declarations apply.
There are no unpaid taxes in any material amount claimed to be due by the taxing
authority of any jurisdiction, and the officers of the Company know of no basis
for any such claim. The Company is not a "United States real property holding
corporation" within the meaning of Section 847(c)(2) of the Internal Revenue
Code of 1986, as amended.

               x. Transactions With Affiliates. Except as set forth on Schedule
2.1(c) or Schedule 2.1(x) or the Company's Proxy Statement for the 1999 Annual
Meeting of the Stockholders filed with the Commission, none of the officers,
directors, or employees of the Company is presently a party to any transaction
with the Company or any of its Subsidiaries (other than for services as
employees, officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any officer, director or such employee or, to the knowledge of the
Company, any corporation, partnership, trust or entity in which any officer,
director, or any such employee has a substantial interest or is an officer,
director, trustee or partner.

               y. Application to Takeover Protection. The Company and its Board
of Directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination or other
similar anti-takeover provision under the Certificate of Incorporation, Bylaws
or the laws of the state of incorporation which is or could become applicable to
the Purchasers or the Transaction Documents as a result of the transactions
contemplated by this Agreement or the Transaction Documents. None of the
transactions contemplated by this Agreement or the Transaction Documents,
including the conversion of the Debentures, will trigger any poison pill
provisions of any of the Company's stockholders' rights or similar agreements.

               z. Environmental Laws. Except as set forth on Schedule 2.1(z),
the Company and its Subsidiaries (i) are in compliance with any and all
applicable foreign, federal, state and local laws and regulations relating to
the protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii)
have received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii)
are in compliance with all terms and conditions of any such permits, licenses or
other approvals except where the failure of any of the foregoing would not
result in a Material Adverse Effect.

               aa. Foreign Corrupt Practices. Neither the Company, nor any of
its Subsidiaries, nor any director, officer, agent, employee or other person
acting on behalf of the Company or any of its Subsidiaries has, in the course of
its actions for, or on behalf of, the Company used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses



                                       12
<PAGE>   16

relating to political activity; made any direct or indirect unlawful payment to
any foreign or domestic government official or employee form corporate funds;
violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or made any unlawful bribe, rebate, payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic
government official or employee.

               bb. Solicitation Materials. The Company has not (i) distributed
any offering materials in connection with the offering and sale of the
Debentures, other than the SEC Documents, the Schedules to this Agreement, any
amendments and supplements thereto and the materials listed on Schedule 2.1(bb),
or (ii) solicited any offer to buy or sell the Debentures by means of any form
of general solicitation or advertising. Neither the Company, nor any of its
Affiliates, nor any Person acting on its or their behalf, has engaged or will
engage in any form of general solicitation or general advertising (within the
meaning of Regulation D under the Securities Act) in connection with the offer
or sale of the Debentures.

               cc. Acknowledgement of Dilution. The Company understands and
acknowledges the potentially dilutive effect to the Common Stock upon the
issuance of the Debenture Shares upon conversion of the Debentures. The Company
further acknowledges that its obligation to issue Debenture Shares upon
conversion of the Debentures in accordance with this Agreement is absolute and
unconditional regardless of the dilutive effect that such issuance may have on
the ownership interests of other stockholders of the Company.

               dd. Acknowledgement Regarding Purchasers' Purchase of Debentures.
The Company acknowledges and agrees that the Purchasers are acting solely in the
capacity of arm's length purchasers with respect to this Agreement and the
transactions contemplated hereby. The Company further acknowledges that no
Purchaser is acting as a financial advisor or fiduciary of the Company (or in
any similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any statement made by any Purchaser or any of their
respective representatives or agents in connection with this Agreement and the
transactions contemplated hereby is not advice or a recommendation and is merely
incidental to the Purchasers' purchase of the securities. The Company further
represents to each Purchaser that the Company's decision to enter into this
Agreement has been based solely on the independent evaluation of the Company and
its representatives.

               ee. Solvency. The Company (both before and after giving effect to
the transactions contemplated by this Agreement) is solvent (i.e., its assets
have a fair market value in excess of the amount required to pay its probable
liabilities on its existing debts as they become absolute and matured) and
currently the Company has no information that would lead it to reasonably
conclude that the Company would not have the ability to, nor does it intend to
take any action that would impair its ability to, pay its debts from time to
time incurred in connection therewith as such debts mature. The Company did not
receive a qualified opinion from its auditors with respect to its most recent
fiscal year end and does not anticipate or know of any basis upon which its
auditors might issue a qualified opinion in respect of its current fiscal year.

               ff. Seniority; Exclusivity. No class of equity securities of the
Company will be senior to the Debentures in right of payment, whether upon
liquidation, dissolution or otherwise. So long as any Debentures issued
hereunder remains outstanding, the Company shall not



                                       13
<PAGE>   17

exchange, redeem or covert any of the Company's capital stock for indebtedness,
including convertible debt, of the Company. Except as expressly permitted in
this Agreement, the Company shall not issue and sell any Debentures, other than
to the Purchasers pursuant to this Agreement, without the prior written consent
of each of the Purchasers.

               gg. Other Agreements. The Company has not, directly or
indirectly, made any agreements with any Purchasers relating to the terms and
conditions of the transactions contemplated by the Transaction Documents except
as set forth in the Transaction Documents.

        2.2 Representations and Warranties of the Purchasers. Each of the
Purchasers, severally and not jointly, hereby represents and warrants to the
Company as follows:

               a. Organization; Authority. Such Purchaser is a corporation or a
limited duration company or a limited liability company or limited partnership
duly formed, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or formation with the requisite power and
authority, corporate or otherwise, to enter into and to consummate the
transactions contemplated hereby and by the Transaction Documents and otherwise
to carry out its obligations hereunder and thereunder. The purchase by such
Purchaser of the Debentures hereunder has been duly authorized by all necessary
action on the part of such Purchaser. Each of this Agreement and the
Registration Rights Agreement has been duly executed and delivered by such
Purchaser and constitutes the valid and legally binding obligation of such
Purchaser, enforceable against such Purchaser in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights generally and to general principles of equity.

               b. Investment Intent. Such Purchaser is acquiring the Debentures
for its own account and not with a present view to or for distributing or
reselling the Debentures the Debenture Shares or any part thereof or interest
therein in violation of the Securities Act; provided, however, that by making
the representations herein, such Purchaser does not agree to hold any of the
Debentures or the Debenture Shares for any minimum or other specific term and
reserves the right to dispose of the Debentures at any time in accordance with
or pursuant to a registration statement or an exemption under the Securities
Act.

               c. Purchaser Status. At the time such Purchaser was offered the
Debentures, and at the Closing Date, (i) it was and will be an "accredited
investor" as defined in Rule 501 under the Securities Act and (ii) such
Purchaser, either alone or together with its representatives, had and will have
such knowledge, sophistication and experience in business and financial matters
so as to be capable of evaluating the merits and risks of the prospective
investment in the Debentures.

               d. Reliance. Such Purchaser understands and acknowledges that (i)
the Debentures are being offered and sold to such Purchaser without registration
under the Securities Act in a private placement that is exempt from the
registration provisions of the Securities Act under Section 4(2) of the
Securities Act or Regulation D promulgated thereunder and (ii) the availability
of such exemption depends in part on, and the Company will rely upon the
accuracy and truthfulness of, the representations set forth in this Section 2.2
and such Purchaser hereby consents to such reliance.



                                       14
<PAGE>   18

               e. Information. Such Purchaser and its advisors, if any, have
been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Debentures which have been requested by such Purchaser or its advisors. Such
Purchaser and its advisors, if any, have been afforded the opportunity to ask
questions of the Company. Neither such inquiries nor any other due diligence
investigation conducted by Purchaser or any of its advisors or representatives
shall modify, amend or affect Purchaser's right to rely on the Company's
representations and warranties contained in Section 2.1 above or representations
and warranties of the Company contained in any other transaction document. Such
Purchaser understands that its investment in the Debentures involves a
significant degree of risk. Such Purchaser has read and understands the "Risk
Factors" disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.

               f. Governmental Review. Such Purchaser understands that no United
States federal or state agency or any other government or governmental agency
has passed upon or made any recommendation or endorsement of the Debentures.

               g. Residency. Such Purchaser is a resident of the jurisdiction
set forth immediately below such Purchaser's name on Schedule II hereto.

               The Company acknowledges and agrees that the Purchasers make no
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.2.

                                  ARTICLE III.

                                OTHER AGREEMENTS

        3.1 Transfer Restrictions.

               a. If any Purchaser should decide to dispose of the Debentures or
the Debenture Shares held by it, such Purchaser understands and agrees that it
may do so only pursuant to an effective registration statement under the
Securities Act, to the Company or pursuant to an available exemption from the
registration requirements of the Securities Act or Rule 144 promulgated under
the Securities Act ("Rule 144"). The Company shall announce any material
non-public information that it legally is required to announce on or prior to
the Effectiveness Date (as defined in the Registration Rights Agreement) of the
registration statement filed pursuant to the Registration Rights Agreement and
shall not enter into any subsequent non-disclosure agreements that would prevent
it from announcing any such information that otherwise legally is required to be
announced on or prior to the Effectiveness Date, unless confidential treatment
for such information is granted by the Commission. In connection with any
transfer of any Debentures or Debenture Shares other than pursuant to an
effective registration statement, Rule 144 or to the Company, the Company may
require the transferor thereof to provide to the Company a written opinion of
counsel experienced in the area of United States securities laws selected by the
transferor, the form and substance of which opinion shall be customary for
opinions of counsel in comparable transactions, to the effect that such transfer
does not require registration of such transferred securities under the
Securities Act; provided, however, that if the Debentures or Debenture Shares
may be sold pursuant to Rule 144(k), no



                                       15
<PAGE>   19

written opinion of counsel shall be required from the Purchaser if such
Purchaser provides reasonable assurances that such security can be sold pursuant
to Rule 144(k). Notwithstanding the foregoing, the Company hereby consents to
and agrees to register any transfer by any Purchaser to an Affiliate of such
Purchaser, provided that the transferee certifies to the Company that it is an
"accredited investor" as defined in Rule 501(a) under the Securities Act. Any
such transferee shall agree in writing to be bound by the terms of this
Agreement and shall have the rights of a Purchaser under this Agreement and the
Transaction Documents. If a Purchaser provides the Company with an opinion of
counsel, the form and substance of which opinion shall be customary for opinions
of counsel in comparable transactions, to the effect that a public sale,
assignment or transfer of the Debentures and the Debenture Shares may be made
without registration under the Securities Act or the Purchaser provides the
Company with reasonable assurances that the Debentures and the Debenture Shares
can be sold pursuant to Rule 144 without any restriction as to the number of
securities acquired as of a particular date that can then be immediately sold,
the Company shall permit the transfer, and, in the case of the Debenture Shares,
promptly instruct its transfer agent to issue one or more certificates in such
name and in such denominations as specified by such Purchaser and without any
restrictive legend. Notwithstanding the foregoing or anything else contained
herein to the contrary, the securities may be pledged as collateral in
connection with a bona fide margin account or other lending arrangement.

               b. Each Purchaser agrees to the imprinting, so long as is
required by this Section 3.1(b), of the following legend on the Debentures and
the Debenture Shares:

                      THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
               WITH THE SECURITIES AND EXCHANGE COMMISSION 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.

               Neither the Debentures nor the Debenture Shares shall contain the
legend set forth above (or any other legend) if in the written opinion of
counsel to the Company experienced in the area of United States securities laws
such legend is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the staff of
the Commission) because such Debentures or Debenture Shares may be sold pursuant
to Rule 144 or otherwise. The Company agrees that it will provide each
Purchaser, upon request, with a certificate or certificates representing
Debentures or Debenture Shares, free from such legend at such time as such
legend is no longer required hereunder. If such certificate or certificates had
previously been issued with such a legend or any other legend, the Company
shall, upon request, receive such certificate or certificates free of any
legend.



                                       16
<PAGE>   20

        3.2 Stop Transfer Instruction. The Company may not make any notation on
its records or give instructions to any transfer agent of the Company which
enlarge the restrictions on transfer set forth in Section 3.1.

        3.3 Furnishing of Information. As long as any Purchaser owns the
Debentures or the Debenture Shares, the Company will cause the Common Stock to
continue at all times to be registered under Section 12(g) of the Exchange Act,
will timely file (or obtain extensions in respect thereof and file within the
applicable grace period) all reports required to be filed by the Company after
the date hereof pursuant to Section 13, 14 or 15(d) of the Exchange Act and
promptly furnish, but in no event later than five (5) business days after the
filing thereof with the Commission, the Purchasers with true and complete copies
of all such filings, and will not take any action or file any document (whether
or not permitted by the Exchange Act or the rules thereunder) to terminate or
suspend such reporting and filing obligations. As long as any Purchaser owns the
Debentures or the Debenture Shares, if the Company is not required to file
reports pursuant to Section 13(a) or 15(d) of the Exchange Act, it will prepare
and furnish to the Purchasers and make publicly available in accordance with
Rule 144(c) promulgated under the Securities Act annual and quarterly financial
statements, together with a discussion and analysis of such financial statements
in form and substance substantially similar to those that would otherwise be
required to be included in reports required by Section 13(a) or 15(d) of the
Exchange Act, as well as any other information required thereby, in the time
period that such filings would have been required to have been made under the
Exchange Act. The Company further covenants that it will take such further
action as any holder of the Debentures or the Debenture Shares may reasonably
request, all to the extent required from time to time to enable such Person to
sell the Debentures or the Debenture Shares without registration under the
Securities Act within the limitation of the exemptions provided by Rule 144
promulgated under the Securities Act, including the legal opinion referenced
above in Section 3.1(b). Upon the request of any such Person, the Company shall
deliver to such Person a written certification of a duly authorized officer as
to whether it has complied with such requirements.

        3.4 Blue Sky Laws. In accordance with the Registration Rights Agreement,
the Company shall (i) qualify the Debenture Shares under the securities or "blue
sky" laws of such jurisdictions as the Purchasers may request (or to obtain an
exemption from such qualification), (ii) shall provide evidence of any such
action so taken to each Purchaser on or prior to the Closing Date and (iii)
shall continue such qualification at all times through the resale of all
Debenture Shares, but in any event not past the fourth anniversary of the
Closing Date.

        3.5 Integration. The Company shall not sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the Debentures or the Debenture Shares in a manner that would require the
registration under the Securities Act of the sale of the Debentures or the
Debenture Shares to any Purchaser or cause the offering of such securities to be
integrated with any other offering of securities by the Company for the purpose
of any stockholder approval provision applicable to the Company or its
securities.

        3.6 Listing and Reservation of Debenture Shares.

               a. The Company shall (i) not later than the time the Company
filed the



                                       17
<PAGE>   21

registration statement on Form S-3 to register the Debenture Shares for resale,
prepare and file with Nasdaq (as well as any other national securities exchange
or market on which the Common Stock is then listed) additional shares listing
applications or letters acceptable to Nasdaq covering and listing a number of
shares of Common Stock which is at least equal to the maximum number of
Debenture Shares then issuable, assuming that the payment of all interest
payments on the Debentures for a period of one year and all future dividends on
such shares then outstanding were made in shares of Common Stock, (ii) take all
steps necessary to cause the Debenture Shares to be approved for listing on
Nasdaq (as well as on any other national securities exchange or market on which
the Common Stock is then listed) as soon as possible thereafter, (iii) maintain,
so long as any other shares of Common Stock shall be so listed, such listing of
all such Debenture Shares, and (iv) provide to the Purchasers evidence of such
listing. Neither the Company nor any of its Subsidiaries shall take any action
that may result in the delisting or suspension of the Common Stock on Nasdaq.
The Company shall promptly provide to each Purchaser copies of any notices it
receives from Nasdaq regarding the continued eligibility of the Common Stock for
listing on such automated quotation system, so long as such notice does not
include material, nonpublic information. The Company shall pay all fees and
expenses in connection with satisfying its obligations under this Section
3.6(a).

               b. The Company at all times shall reserve a sufficient number of
shares of its authorized but unissued Common Stock to provide for the full
conversion of the outstanding Debentures (including the payment of all interest
thereon for a one year period). Shares of Common Stock reserved for issuance
upon conversion of the Debentures shall be allocated pro rata to each of the
Purchasers in accordance with the amount of Debentures issued and delivered to
such Purchaser at the Closing. If at any time the number of shares of Common
Stock authorized and reserved for issuance is insufficient to cover the number
of Debenture Shares issued and issuable upon conversion of the Debentures (based
on the Conversion Price (as defined in the Debenture) in effect from time to
time without regard to any limitation on conversions or exercises and the number
of shares of Common Stock issuable upon the payment of interest on the principal
amount of the Debentures then outstanding for a one year period, the Company
will promptly take all corporate action necessary to authorize and reserve such
number of shares of Common Stock of such shares, including, without limitation,
calling a special meeting of stockholders to authorize additional shares to meet
the Company's obligations under this Section 3.6(b), in the case of an
insufficient number of authorized shares, and using its best efforts to obtain
stockholder approval of an increase in such authorized number of shares. In
addition, if on the actual date of an adjustment of the Conversion Price
pursuant to Section 4.5 of the Debenture, the registration statements are
insufficient to register such number of shares of Common Stock, the Company
shall immediately, but in no more than five (5) business days thereafter, file a
registration statement sufficient to register such additional shares of Common
Stock. All calculations of the above amount shall be made without regard to any
limitation on conversions of Debentures.

        3.7 Notice of Breaches.

               a. The Company and each Purchaser shall give prompt written
notice to the other of any breach by it of any representation, warranty or other
agreement contained in this Agreement or in the Transaction Documents, as well
as any events or occurrences arising after the date hereof and prior to the
Closing Date, which would reasonably be likely to cause any



                                       18
<PAGE>   22

representation or warranty or other agreement of such party, as the case may be,
contained herein to be incorrect or breached as of the Closing Date provided
such notice will not constitute material non-public information. However, no
disclosure by either party pursuant to this Section 3.7 shall be deemed to cure
any breach of any representation, warranty or other agreement contained herein
or in the Transaction Documents.

               b. Notwithstanding the generality of Section 3.7(a), the Company
shall promptly notify, provided such notification will not constitute material
non-public information, each Purchaser of any notice or claim (written or oral)
that it receives from any lender of the Company or any Subsidiary to the effect
that the consummation of the transactions contemplated hereby and by the
Registration Rights Agreement violates or would violate any written agreement or
understanding between such lender and the Company or any Subsidiary, and the
Company shall promptly furnish by facsimile to the Purchasers a copy of any
written statement in support of or relating to such claim or notice.

               c. The default by any Purchaser of any of its obligations,
representations or warranties under this Agreement or the Transaction Documents
shall not be imputed to, and shall have no effect upon, any other Purchaser or
affect the Company's obligations under this Agreement or any Transaction
Document to any non-defaulting Purchaser.

        3.8 Form D. The Company agrees to file a Form D with respect to the
Debentures as required by Rule 506 under Regulation D and to provide a copy
thereof to each Purchaser promptly after such filing.

        3.9 Use of Proceeds. The Company shall use the proceeds from the sale of
the Debentures for working capital.

        3.10 Transactions with Affiliates. So long as any Debentures are
outstanding, the Company shall not, and shall cause each of its Subsidiaries not
to, enter into, amend, modify or supplement, or permit any Subsidiary to enter
into, amend, modify or supplement, any agreement, transaction, commitment or
arrangement with any of its or any Subsidiary's officers, directors or persons
who were officers or directors at any time during the previous two years,
stockholders who beneficially own 5% or more of the Common Stock, or Affiliates
or any individual related by blood, marriage or adoption to any such individual
or with any entity in which any such entity or individual owns a 5% or more
beneficial interest (each a "Related Party"), except for (a) customary
employment arrangements and benefit programs on reasonable terms, (b) any
agreement, transaction, commitment or arrangement on an arms-length basis on
terms no less favorable than terms which would have been obtainable from a
Person other than such Related Party, or (c) any agreement, transaction,
commitment or arrangement which is approved by a majority of the disinterested
directors of the Company. For purposes hereof, any director who is also an
officer of the Company or any Subsidiary of the Company shall not be a
disinterested director with respect to any such agreement, transaction,
commitment or arrangement. "Affiliate" for purposes of this section only means,
with respect to any person or entity, another person or entity that, directly or
indirectly, (i) has a 5% or more equity interest in that person or entity, (ii)
has 5% or more common ownership with that person or entity, (iii) controls that
person or entity, or (iv) shares common control with that person or entity.



                                       19
<PAGE>   23

"Control" or "Controls" for purposes of this section means that a person or
entity has the power, direct or indirect, to conduct or govern the policies of
another person or entity.

        3.11 Transfer Agent Instructions. At each Closing the Company shall
issue irrevocable instructions to its transfer agent (and shall issue to any
subsequent transfer agent as required), to issue certificates, registered in the
name of each such Purchaser or its respective nominee(s), for the Debenture
Shares in such amounts as specified from time to time by each Purchaser to the
Company in a form acceptable to such Purchasers (the "Irrevocable Transfer Agent
Instructions"). So long as required pursuant to Section 3.1(b), all such
certificates shall bear the restrictive legend specified in Section 3.1(b) of
this Agreement. The Company warrants that no instruction other than the
Irrevocable Transfer Agent Instructions referred to in this Section 3.11, and
stop transfer instructions to give effect to Section 3.1 hereof (in the case of
the Debenture Shares, prior to registration of the Debenture Shares under the
Securities Act) will be given by the Company to its transfer agent and that the
Debentures and the Debenture Shares shall otherwise be freely transferable on
the books and records of the Company as and to the extent provided in this
Agreement and the Transaction Documents. If a Purchaser provides the Company
with an opinion of counsel, the form and substance of which opinion shall be
customary for opinions of counsel in comparable transactions, to the effect that
a public sale, assignment or transfer of the Debentures and the Debenture Shares
may be made without registration under the Securities Act pursuant to Rule 144
without any restriction as to the number of securities acquired as of a
particular date that can then be immediately sold, the Company shall permit the
transfer, and, in the case of the Debenture Shares, promptly instruct its
transfer agent to issue one or more certificates in such name and in such
denominations as specified by such Purchaser and without any restrictive legend.
The Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Purchasers by violating the intent and purpose of
the transactions contemplated hereby. Accordingly, the Company acknowledges that
the remedy at law for a breach of its obligations under this Section 3.11 will
be inadequate and agrees, in the event of a beach or threatened breach by the
Company of the provisions of this Section 3.11, that the Purchasers, shall be
entitled, in addition to all other available remedies, to an order and/or
injunction restraining any breach and requiring immediate issuance and transfer,
without the necessity of showing economic loss and without any bond or other
security being required.

        3.12 Press Release; Filing of Form 8-K. Subject to the provisions of
Section 6.10 hereof, on or before the fifth (5th) business day following the
Closing Date, the Company shall (i) file a press release in form and substance
acceptable to the Purchasers and (ii) file a Form 8-K with the Commission
describing the terms of the transaction contemplated by this Agreement and the
Transaction Documents in the form required by the Exchange Act.

        3.13 Ordinary Course Brokerage and Trading. Subject to compliance with
all applicable securities laws, Nasdaq regulations, no Purchaser shall be
prohibited from engaging in its ordinary course brokerage and trading activities
in respect of the Company's Common Stock; provided that the personnel engaged in
such activities have not been involved with the transactions contemplated hereby
and have not been provided with confidential information with respect to the
Company.



                                       20
<PAGE>   24

        3.14 Trading Restrictions.Each Purchaser represents and agrees: (i) that
it has not and will not maintain a short position within twenty (20) days of the
First Closing, (ii) that all short positions taken in the Company's Common
Stock, by such Purchaser, will be covered within thirty (30) Trading Days, (iii)
that if such Purchaser exercises the Purchasers Call Option, then within twenty
(20) days of the Second Closing Date, such Purchaser will not short the
Company's Common Stock at a price below the applicable Conversion Price (as set
forth in the Debenture) and (iv) upon notice from the Company that the Company,
in its good faith belief, is planning to consummate a transaction pursuant to
which there will be a reset event pursuant to Section 4.5(e) of the Debenture,
the Purchasers shall not hold a short position below the applicable Conversion
Price for the lesser of twenty (20) days and the closing of such transaction.

        3.15 Best Efforts. Each of the parties hereto shall use its best efforts
to satisfy each of the conditions to be satisfied by it as provided in Article
IV of this Agreement.

        3.16 Corporate Existence. Until such time as all of the Purchasers
provide the Company with written notice that they do not beneficially own any
Debentures, the Company shall maintain its corporate existence and shall not
sell all or substantially all of the Company's assets, except in the event of a
merger or consolidation or sale of all or substantially all of the Company's
assets, where the surviving or successor entity in such transaction (i) assumes
the Company's obligations hereunder and under the agreements and instruments
entered into in connection herewith and (ii) is a publicly traded corporation
whose common stock is listed for trading on the Nasdaq or any subsequent Market
(as defined in the Debentures).

        3.17 No Violation of Applicable Law. Notwithstanding any provision of
this Agreement to the contrary, if the redemption of Debentures or Debenture
Shares otherwise required under this Agreement or the Registration Rights
Agreement would be prohibited by the relevant provisions of the General
Corporation Law of the State of Delaware, such redemption shall be effected as
soon as it is permitted under such law; provided, however, that from the fifth
(5th) day after such redemption notice until such redemption price is paid in
full, interest on any such unpaid amount shall accrue and be payable at the rate
of 15% per annum in accordance with the Debentures.

        3.18 Subsequent Registrations. Other than Debenture Shares and other
Registrable Securities (as defined in the Registration Rights Agreement) to be
registered in accordance with the Registration Rights Agreement, the Company
shall not, for a period of not less than 90 Trading Days after the date that the
Registration Statement is declared effective by the Commission, without the
prior written consent of Purchasers holding two-thirds of the principal amount
of the Debentures, (i) except for securities issuable in connection with the
transactions identified on Schedule 3.18 hereto, issue or sell any of its or any
of its Affiliates' equity or equity-equivalent securities unless such issuance
or sale is equal to or at a premium to the Per Share Market Price (as defined in
the Registration Rights Agreement) on the date such issuance or sale, (ii)
except in connection with the transactions identified on Schedule 3.18 hereto,
register for resale any securities of the Company or (iii) except in connection
with the transactions identified on Schedule 3.18 hereto, have a registration
statement declared effective covering an issuance by the Company of any of its
securities. Any days that any Purchaser is unable to sell



                                       21
<PAGE>   25

Debenture Shares under an Registration Statement shall be added to such 90
Trading Day period for the purposes of (i), (ii) and (iii) above.

                                  ARTICLE IV.

                                   CONDITIONS

        4.1 First Closing Conditions.

               a. Conditions Precedent to the Obligation of the Company to Sell
the Debentures. The obligation of the Company to sell the Debentures is subject
to the satisfaction or waiver (with prior written notice to each Purchaser) by
the Company, at or before the First Closing Date of each of the following
conditions:

                      (i) Accuracy of the Purchasers' Representations and
Warranties. The representations and warranties of each Purchaser in this
Agreement shall be true and correct in all material respects as of the date when
made and as of the First Closing;

                      (ii) Performance by the Purchasers. Each Purchaser shall
have performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with by such Purchaser at or before the First Closing; and

                      (iii) No Injunction. No statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement or the Transaction Documents.

               b. Conditions Precedent to the Obligation of the Purchasers to
Purchase the Debentures at the First Closing. The obligation of each Purchaser
hereunder to acquire and pay for the Debentures at the First Closing is subject
to the satisfaction or waiver by such Purchaser, at or before the First Closing
Date, of each of the following conditions:

                      (i) Accuracy of the Company's Representations and
Warranties. The representations and warranties of the Company set forth in this
Agreement and in the Registration Rights Agreement shall be true and correct in
all respects as of the date when made and as of the First Closing Date;

                      (ii) Performance by the Company. The Company shall have
performed, satisfied and complied in all respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or before the First Closing Date;

                      (iii) No Injunction. No statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement and the Transaction Documents;



                                       22
<PAGE>   26

                      (iv) No Suspensions of Trading in Common Stock. The
trading in the Common Stock shall not have been suspended by the Commission, on
Nasdaq (except for any suspension of trading of limited duration solely to
permit dissemination of material information regarding the Company);

                      (v) Listing of Common Stock. The Common Stock shall have
been at all times since the date of this Agreement and on the Closing Date
listed for trading on the Nasdaq;

                      (vi) Required Approvals. All Required Approvals, other
than those relating solely to Closing Dates other than the First Closing Date,
shall have been obtained and copies thereof delivered to the Purchasers other
than those relating solely to Closing Dates other than the First Closing Date;

                      (vii) Shares of Common Stock. The Company shall have duly
reserved the number of Debenture Shares required by this Agreement and the
Transaction Documents to be reserved upon the conversion of the Debentures
acquired by the Purchaser on the First Closing Date;

                      (viii) Adverse Changes. Since the date of the financial
statements included in the Company's Quarterly Report on Form 10-Q or Annual
Report on Form 10-K, whichever is more recent, last filed prior to the date of
this Agreement, no event which had a Material Adverse Effect shall have occurred
which is not disclosed on any Schedule hereto (for purposes hereof, changes in
the market price of the Common Stock may be considered in determining whether
there has occurred an event which has had a Material Adverse Effect);

                      (ix) Litigation. No litigation shall have been instituted
or threatened against the Company which could reasonably be expected to,
individually or in the aggregate, have had a Material Adverse Effect;

                      (x) Change of Control. No Change of Control shall have
occurred between the date hereof and the First Closing Date. "Change of Control"
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), other than the Purchasers or any of their
Affiliates, of in excess of 50% of the voting securities of the Company, (ii) a
replacement of more than one-half of the members of the Company's Board of
Directors that is not approved by those individuals who are members of the Board
of Directors on the date hereof in one or a series of related transactions,
(iii) the merger of the Company with or into another entity, (iv) the
consolidation or sale of all or substantially all of the assets of the Company
in one or a series of related transactions, (v) Mr. Paul W. Mikus ceasing to
serve as the Chief Executive Officer, President and Chairman of the Board of the
Company, or (vi) 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), (iii), (iv) or (v); and

                      (xi) Transfer Agent Instructions. The Irrevocable Transfer
Agent Instructions, in a form acceptable to the Purchasers, shall have been
delivered to and



                                       23
<PAGE>   27

acknowledged in writing by the Company's transfer agent with a copy forwarded to
each Purchaser.

               c. Documents and Certificates. At the First Closing, the Company
shall have delivered to the Purchasers, the following in form and substance
reasonably satisfactory to the Purchasers:

                      (i) Opinion. An opinion of the Company's legal counsel in
the form attached hereto as Exhibit C dated as of the First Closing Date;

                      (ii) Debenture. A Debenture(s) representing the principal
amount of Debentures purchased by such Purchaser as set forth next to such
Purchaser's name on Schedule I, registered in the name of such Purchaser, each
in form satisfactory to the Purchaser;

                      (iii) Registration Rights. The Company shall have executed
and delivered the Registration Rights Agreement;

                      (iv) Officer's Certificate. An Officer's Certificate dated
the First Closing Date and signed by an executive officer of the Company
confirming the accuracy of the Company's representations, warranties and
covenants as of such First Closing Date and confirming the compliance by the
Company with the conditions precedent set forth in this Section 4.1 as of the
First Closing Date;

                      (v) Secretary's Certificate. A Secretary's Certificate
dated the First Closing Date and signed by the Secretary or Assistant Secretary
of the Company certifying (A) that attached thereto is a true and complete copy
of the Certificate of Incorporation of the Company, as in effect on the First
Closing Date, (B) that attached thereto is a true and complete copy of the
by-laws of the Company, as in effect on the First Closing Date and (C) that
attached thereto is a true and complete copy of the Resolutions duly adopted by
the Board of Directors of the Company authorizing the execution, delivery and
performance of this Agreement and of the Transaction Documents, and that such
Resolutions have not been modified, rescinded or revoked;

                      (vi) Certificate of Incorporation. The Company shall have
delivered to each of the Purchasers a copy of a certificate evidencing the
incorporation and good standing of the Company and each Subsidiary, in such
corporation's state of incorporation issued by the Secretary of State of such
state of incorporation as of a date within ten days of the First Closing Date;

                      (vii) Transfer Agent Letter. The Company shall have
delivered to each Purchaser a letter from the Company's transfer agent
certifying the number of shares of Common Stock outstanding as of a date within
five days of the First Closing Date;

                      (viii) Lockup Agreement. Mr. Paul W. Mikus shall deliver
to the Purchasers a letter in the form of Exhibit D hereto pursuant to which he
agrees not to offer or sell shares of Common Stock he beneficially owns during
the twelve (12) month period following the First Closing, unless the Purchasers
are able to freely offer for sale or to sell any Debenture



                                       24
<PAGE>   28

Shares pursuant to an effective registration statement under the Securities Act
and the market price of the Common Stock is more than $8.00 per share.

        4.2 Second Closing.

               a. Conditions Precedent to the Obligation of the Company to Sell
the Debentures. The obligation of the Company to sell the Debentures is subject
to the satisfaction or waiver (with prior written notice to each Purchaser) by
the Company, at or before the Second Closing Date of each of the following
conditions:

                      (i) Accuracy of the Purchasers' Representations and
Warranties. The representations and warranties of each Purchaser in this
Agreement shall be true and correct in all material respects as of the date when
made and as of the Second Closing;

                      (ii) Performance by the Purchasers. Each Purchaser shall
have performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with by such Purchaser at or before the Second Closing;
and

                      (iii) No Injunction. No statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement or the Transaction Documents.

               b. Conditions Precedent to the Obligation of the Purchasers to
Purchase. The obligation of each Purchaser hereunder to acquire and pay for the
Debentures at the Second Closing is subject to the satisfaction or waiver (with
prior written notice to the Company and each other Purchaser) by such Purchaser,
at or before the Second Closing Date, of each of the following conditions:

                      (i) First Closing. The First Closing shall have occurred;

                      (ii) Accuracy of the Company's Representations and
Warranties. The representations and warranties of the Company set forth in this
Agreement and the Registration Rights Agreement shall be true and correct in all
respects as of the date when made and as of the Second Closing Date as though
made at that time, except for changes made to the Schedules to update them since
the First Closing and except for other exceptions to the representations and
warranties necessary to update then since the First Closing (in either case with
information about matters that do not have a Material Adverse Effect);

                      (iii) Performance by the Company. The Company shall have
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement and the Transaction
Documents to be performed, satisfied or complied with by the Company at or
before to the Second Closing;

                      (iv) No Injunction. No statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any



                                       25
<PAGE>   29

court or governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this Agreement and the
Transaction Documents;

                      (v) Registration Statements for Debentures. (A) The
Registration Statement with respect to the Debenture Shares with respect to the
Debenture(s) sold at the First Closing shall have been declared effective under
the Securities Act by the Commission; (B) a Registration Statement with respect
to the Debenture Shares with respect to the Debenture(s) sold at the Second
Closing shall have been declared effective under the Securities Act for the
entire thirty (30) day period referred to in Section 1.2(c); and (C) on the
Second Closing Date such Registration Statements shall be effective, not subject
to any stop order and not be subject to any suspension of the Registration
Rights Agreement, and shall have been effective and shall not have been subject
to any stop order for the thirty (30) business days prior to the Second Closing
Date and no stop order shall be pending or threatened at the Second Closing
Date. The Company shall register the Debenture Shares with respect to the
Debenture(s) sold at the Second Closing along with the Debenture Shares with
respect to the Debenture(s) sold at the First Closing. Notwithstanding the
foregoing, if the Commission prohibits the simultaneous registration of the
Debenture Shares with respect to the Debenture(s) sold at the Second Closing,
then a Registration Statement with respect to the Debenture(s) to be sold at the
Second Closing need not be effective as a prerequisite to the Second Closing,
but a Registration Statement for such shares must be filed within fifteen (15)
business days of the Second Closing Date.

                      (vi) Adverse Changes. Since the date of the financial
statements included in the Company's Quarterly Report on Form 10-Q or Annual
Report on Form 10-K, whichever is more recent, last filed prior to the date of
this Agreement, no event which had a Material Adverse Effect shall have occurred
which is not disclosed on any Schedule hereto or otherwise in writing to each of
the Purchasers;

                      (vii) Litigation. No litigation shall have been instituted
or threatened against the Company which could reasonably be expected to,
individually or in the aggregate, have a Material Adverse Effect;

                      (viii) No Suspensions of Trading in Common Stock. The
trading in the Common Stock shall not have been suspended by the Commission, on
Nasdaq during the sixty (60) days prior to the Second Closing (except for any
suspension of trading of limited duration solely to permit dissemination of
material information regarding the Company);

                      (ix) Listing of Common Stock. The Debenture Shares shall
on the Second Closing Date be, listed for trading on Nasdaq, or other exchange
acceptable to Purchasers;

                      (x) Required Approvals. All Required Approvals shall have
been obtained and copies thereof delivered to the Purchasers.

                      (xi) Shares of Common Stock. The Company shall have duly
reserved the number of Debenture Shares required by this Agreement to be
reserved for issuance upon the conversion of the Debentures purchased on the
First Closing Date and on the Second Closing Date.



                                       26
<PAGE>   30

                      (xii) Performance of Conversion/Exercise Obligations. The
Company shall have delivered Debenture Shares upon any demand for conversion of
any of the Debentures and otherwise performed its obligations in accordance with
the terms, conditions and timing requirements of the Transaction Documents.

                      (xiii) Change of Control. Subject to Section 4.2(c), no
Change of Control in the Company shall have occurred;

                      (xiv) Transfer Agent Instructions. The Irrevocable
Transfer Agent Instructions, in a form acceptable to the Purchasers, shall have
been delivered to and acknowledged by the Company's transfer agent with a copy
forwarded to each Purchaser;

                      (xv) Minimum Per Share Market Value. On the date of the
Company Put Option Notice, the Per Share Market Value was more than nine dollars
($9); and

                      (xvi) Optional Conversion. The Company shall have
exercised the Optional Conversion (as defined the Debenture).

               c. Elected Change of Control. Within ten (10) days after a
Purchaser receives actual notice, with an election form, of a Change of Control
(as defined in the Debenture) Purchasers holding a majority of the then
outstanding principal amount of the Debenture, at their option, shall elect in
writing to either (i) waive the condition set forth in Section 4.2(b)(xiii) with
respect to such Change of Control and thereby permit a Second Closing to proceed
(whether pursuant to a Purchasers Call Option or Company Put Option) or (ii) not
waive the condition set forth in Section 4.2(b)(xiii) in which event such
Purchaser shall forfeit its right to the Purchasers Call Option and the Company
will no longer have the Company Put Option. If such Purchasers do not timely
make an election, they shall have been deemed to have elected option (ii);

               d. Documents and Certificates. On the Second Closing Date, the
Company shall have delivered to the Purchasers, the following in form and
substance reasonably satisfactory to the Purchasers:

                      (i) Opinion. An opinion of the Company's legal counsel, in
substantially the form attached hereto as Exhibit C dated as of the Second
Closing Date;

                      (ii) Debenture(s). A Debenture(s) representing the
Debenture(s) purchased by such Purchaser as set forth next to such Purchaser's
name on the Second Closing Schedule registered in the name of such Purchaser,
each in form satisfactory to the Purchaser;

                      (iii) Officer's Certificate. The Company shall deliver to
the Purchasers an Officer's Certificate dated the Second Closing Date and signed
by an executive officer of the Company confirming the accuracy of the Company's
representations, warranties and covenants as of such Second Closing Date and
confirming the compliance by the Company with the conditions precedent set forth
in this Section 4.2(c) as of the Second Closing Date;

                      (iv) Secretary's Certificate. A Secretary's Certificate
dated the Second Call Option Closing Date and signed by the Secretary or
Assistant Secretary of the Company certifying (A) that attached thereto is a
true and complete copy of the Certificate of Incorporation



                                       27
<PAGE>   31

of the Company, as in effect on the Second Closing Date, (B) that attached
thereto is a true and complete copy of the bylaws of the Company, as in effect
on the Second Closing Date and (C) that attached thereto is a true and complete
copy of the resolutions duly adopted by the Board of Directors of the Company
authorizing the execution, delivery and performance of the Agreement and the
Transaction Documents and that such resolutions have not been modified,
rescinded or revoked;

                      (v) Certificate of Incorporation. The Company shall have
delivered to each of the Purchasers a copy of a certificate evidencing the
incorporation and good standing of the Company and each Subsidiary, in such
corporation's state of incorporation issued by the Secretary of State of such
state of incorporation as of a date within ten days of the Second Closing Date;

                      (vi) Transfer Agent Letter. The Company shall have
delivered to each Purchaser a letter from the Company's transfer agent
certifying the number of shares of Common Stock outstanding as of a date within
five days of the Second Closing Date; and

                      (vii) Lockup Agreements. Mr. Paul W. Mikus shall deliver
to the Purchasers a letter in the form of Exhibit D hereto pursuant to which he
agrees not to offer or sell shares of Common Stock he beneficially owns under
the circumstances described in Section 4.1(c)(viii).

                      (viii) Other Documents. The Company shall have delivered
to each Purchaser such other documents relating to the transactions contemplated
by the Transaction Documents as the Purchasers or its counsel may reasonably
request.


                                   ARTICLE V.

                                 INDEMNIFICATION

               5.1 Indemnification. Except to the extent that matters which
could be covered by this Section 5 are covered by Section 5 of the Registration
Rights Agreement, in consideration of the Purchasers execution and delivery of
this Agreement and the Transaction Documents and acquiring the Debentures and
Debenture Shares thereunder and in addition to all of the Company's other
obligations under this Agreement and the Transaction Documents, the Company
shall defend, protect, indemnify and hold harmless each Purchaser, its past and
present Affiliates and their successors and assigns (in accordance with the
provisions of Section 6.5 hereof), each other holder of the Debenture Shares and
all of their stockholders, officers, directors, employees and direct or indirect
investors and any of the foregoing Person's agents or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "Indemnities")
from and against any and all actions, causes of action, suits, claims, losses,
proceedings, costs (as incurred), penalties, fees (including legal fees and
expenses), liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnity is a party to the action for which
indemnification hereunder is sought), and including interest, penalties and
attorneys' fees and disbursements (the "Indemnified Liabilities"), incurred by
any Indemnitee as a result of, or



                                       28
<PAGE>   32

arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in this Agreement or in the
Transaction Documents, or any other certificate, instrument or document
contemplated hereby or thereby, (b) any breach of any covenant, agreement or
obligation of the Company contained in this Agreement or the Transaction
Documents, or any other certificate, instrument or document contemplated hereby
or thereby, or (c) any cause of action, suit or claim brought or made, other
than by the Company, against such Indemnitee and arising out of or resulting
from (i) any action or inaction by the Company in connection with the execution,
delivery, performance or enforcement of this Agreement or the Transaction
Documents, (ii) any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of the issuance of the Debentures or
(iii) solely the status of such Purchasers or holder of the Debentures or the
Debenture Shares as an investor in the Company. The indemnification obligations
of the Company under this paragraph shall be in addition to any liability which
the Company may otherwise have, shall extend upon the same terms and conditions
to any affiliate of the Purchasers and partners, directors, agents, employees
and controlling Persons (if any), as the case may be, of the Purchasers and any
such affiliate, and shall be binding upon and inure to the benefit of any
successors, assigns, heirs and personal representatives of the Company, the
Purchasers and any such affiliate and any such Person. The Company also agrees
that neither the Purchasers nor any such Affiliates, partners, directors,
agents, employees or controlling Persons shall have any liability to the Company
or any Person asserting claims on behalf of or in right of the Company in
connection with or as a result of the consummation of this Agreement or any of
the Transaction Documents except to the extent that any losses, claims, damages,
liabilities or expenses incurred by the Company result from the gross negligence
or willful misconduct of such Purchaser or entity in connection with the
transactions contemplated by this Agreement or the Transaction Documents. To the
extent that the foregoing undertaking by the Company may be unenforceable for
any reason, the Company shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law.

                                   ARTICLE VI.

                                  MISCELLANEOUS

        6.1 Entire Agreement. This Agreement, together with the Exhibits and
Schedules hereto and the Transaction Documents contain the entire understanding
of the parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, oral or written, with respect to such matters.

        6.2 Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile, provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party (if received by 8:00 p.m. EST where such
notice is received) or the first business day following such delivery (if
received after 8:00 p.m. EST where such notice is received); or (iii) one
business day after deposit with a nationally recognized overnight delivery
service, in each case properly addressed to the party to receive the same. The
addresses and facsimile numbers for such communications shall be:



                                       29
<PAGE>   33

               If to the Company:

                      Endocare, Inc.
                      7 Studebaker
                      Irvine, California  92618
                      Telephone: (949) 595-4770
                      Facsimile: (949) 597-0607
                      Attention: Paul W. Mikus

               With a copy to:

                      Brobeck, Phleger & Harrison LLP
                      38 Technology Drive
                      Irvine, California  92618
                      Telephone: (949) 790-6300
                      Facsimile: (949) 790-6301
                      Attention: Richard A. Fink

               If to the Transfer Agent:

                      U.S. Stock Transfer Corporation
                      1745 Gardena Ave.
                      Glendale, CA  91204-2991
                      Telephone: (818) 502-1404
                      Facsimile: (818) 502-0674
                      Attention: William Garza

               If to Brown Simpson Strategic Growth Fund, Ltd. to:

                      152 West 57th Street, 40th Floor
                      New York, New York  10029
                      Telephone: (212) 247-8200
                      Facsimile: (212) 247-1329
                      Attention: Paul Gustus

               If to Brown Simpson Strategic Growth Fund, L.P. to:

                      152 West 57th Street, 40th Floor
                      New York, New York  10029
                      Telephone: (212) 247-8200
                      Facsimile: (212) 247-1329
                      Attention: Paul Gustus



                                       30
<PAGE>   34

               With a copy, in the case of Notice to Brown Simpson Strategic
Growth Fund, Ltd. or Brown Simpson Strategic Growth Fund, L.P. to:

                      Akin, Gump, Strauss, Hauer & Feld, L.L.P.
                      590 Madison Avenue
                      New York, New York  10022
                      Telephone:  (212) 872-1000
                      Facsimile:  (212) 872-1002
                      Attention:  James Kaye

               Each party shall provide written notice to the other party of any
change in address or facsimile number in accordance with the provisions hereof.



                                       31
<PAGE>   35

        6.3 Amendments; Waivers. No provision of this Agreement may be waived or
amended except in a written instrument signed, in the case of an amendment, by
both the Company and each of the Purchasers or, in the case of a waiver, by the
Company (if a waiver of the Company' rights) or Purchasers holding a majority of
the then outstanding principal amount of Debentures or who will be purchasing
the majority of the principal amount of the Debentures (if a waiver of the
Purchasers' rights). No waiver of any default with respect to any provision,
condition or requirement of this Agreement shall be deemed to be a continuing
waiver in the future or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right accruing
to it thereafter. Notwithstanding the foregoing, no such amendment shall be
effective to the extent that it applies to less than all of the holders of the
Debentures outstanding without the consent of the Company and those Holders who
might be adversely affected by such an amendment. The Company shall not offer or
pay any consideration to a Purchaser for consenting to such an amendment or
waiver unless the same consideration is offered to each Purchaser and the same
consideration is paid to each Purchaser which consents to such amendment or
waiver.

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

        6.5 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of each of the Purchasers. The Purchasers may
assign this Agreement or any rights or obligations hereunder without the prior
written consent of the Company, provided, that any assignees must make the
representations and warranties set forth in Section 2.2 and otherwise comply
with the terms of this Agreement otherwise applicable to its assignor. This
provision shall not limit a Purchaser's right to transfer securities in
accordance with all of the terms of this Agreement or the Transaction Documents.

        6.6 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.

        6.7 Governing Law. This Agreement 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 hereby
irrevocably submits to the nonexclusive 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, that
such suit, action or proceeding is improper. 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 to such party at the
address for such notices to it under this Agreement 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 HEREBY



                                       32
<PAGE>   36

IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY
TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR
ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

        6.8 Survival. The representations and warranties of the Company and the
Purchasers contained in Sections 2.1 and 2.2, the agreements and covenants set
forth in Section 3, and the indemnification provisions set forth in Section 5,
shall survive the Closing and any conversion of the Debentures regardless of any
investigation made by or on behalf of the such Purchaser or by or on behalf of
the Company, except that, in the case of representations and warranties such
survival shall be limited to the period of four (4) years following the Closing
Date on which they were made or deemed to have been made (other than with
respect to any claim by a third party against the party to this Agreement who
seeks to assert a claim based on such representations and warranties). This
section shall have no effect on the survival of the indemnification provisions
of the Registration Rights Agreement.

        6.9 Counterparts. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.

        6.10 Publicity. The Company and the Purchasers shall consult with each
other in issuing any press releases or otherwise making public statements with
respect to the transactions contemplated hereby and neither party shall issue
any such press release or otherwise make any such public statement without the
prior written consent of the other, which consent shall not be unreasonably
withheld or delayed, except that no prior consent shall be required if such
disclosure is required by law, in which such case the disclosing party shall
provide the other party with prior notice of such public statement. The Company
shall not publicly or otherwise disclose the names of any of the Purchasers
without each such Purchaser's prior written consent. The Purchasers and their
affiliated companies shall, without further cost, have the right to use in its
advertising, marketing or other similar materials the Company's logo and
trademarks and all or parts of the Company's press releases that focus on the
Transaction forming the subject matter of this Agreement or which make reference
to the Transaction. The Purchasers understand that this grant by the Company
only waives objections that the Company might have to the use of such materials
by the Purchasers and in no way constitutes a representation by the Company that
references in such materials to the activities of third-parties have been
cleared or constitute a fair use.

        6.11 Severability. In case any one or more of the provisions of this
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Agreement shall not
in any way be affected or impaired thereby and the parties will attempt to agree
upon a valid and enforceable provision which shall be a reasonable substitute
therefor, and upon so agreeing, shall incorporate such substitute provision in
this Agreement.



                                       33
<PAGE>   37

        6.12 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, the Purchasers
will be entitled to specific performance of the obligations of the Company under
this Agreement or the Transaction Documents without the showing of economic loss
and without any bond or other security being required. Each of the Company and
the Purchasers (severally and not jointly) agree that monetary damages would not
be adequate compensation for any loss incurred by reason of any breach of its
obligations described in the foregoing sentence and hereby agree to waive in any
action for specific performance of any such obligation the defense that a remedy
at law would be adequate.

        6.13 Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser hereunder is several and not joint with the
obligations of the other Purchasers hereunder, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser hereunder. Nothing contained herein or in any other agreement or
document delivered at any closing, and no action taken by any Purchaser pursuant
hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or
create a presumption that the Purchasers are in any way acting in concert with
respect to such obligations or the transactions contemplated by this Agreement.
Each Purchaser shall be entitled to protect and enforce its rights, including
without limitation the rights arising out of this Agreement or out of the
Transaction Documents, and it shall not be necessary for any other Purchaser to
be joined as an additional party in any proceeding for such purpose.

        6.14 Payment Set Aside. To the extent that the Company makes a payment
or payments to the Purchasers hereunder or pursuant to the Transaction Documents
or the Purchasers enforce or exercise their rights hereunder or thereunder, and
such payment or payments or the proceeds of such enforcement or exercise or any
part thereof are subsequently invalidated, declared fraudulent or preferential,
set aside, recovered from, disgorged by or are required to be refunded, repaid
or otherwise restored to the Company, a trustee, receiver or any other Person
under any law (including, without limitation, any bankruptcy law, state or
federal law, common law or equitable cause of action), then to the extent of any
such restoration the obligation or part thereof originally intended to be
satisfied shall be revived and continued in full force and effect as if such
payment had not been made or such enforcement or setoff had not occurred.

        6.15 Further Assurances. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

        6.16 Fees and Expenses. Except as set forth in the Registration Rights
Agreement, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement; provided, however, that the Company shall pay the
Purchasers an aggregate fee of $15,000 at the First Closing. The Company shall



                                       34
<PAGE>   38

pay all stamp and other taxes and duties levied in connection with the issuance
of the Debenture Shares pursuant hereto.



                  [Remainder of page intentionally left blank]



                                       35
<PAGE>   39

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

                                        ENDOCARE, INC.



                                        By: /s/ Paul W. Mikus
                                           -------------------------------------
                                        Name: Paul W. Mikus
                                        Title:  Chief Executive Officer


                                        BROWN SIMPSON STRATEGIC
                                        GROWTH FUND, LTD.

                                        By: Brown Simpson Asset Management LLC

                                            By: Brown Simpson, LLC
                                                Its Member

                                                By: /s/ Evan M. Levine
                                                   -----------------------------
                                                   Evan M. Levine
                                                   Its Member


                                        BROWN SIMPSON STRATEGIC GROWTH
                                        FUND, L.P.

                                        By: Brown Simpson Capital, LLC
                                            Its General Partner

                                            By: Brown Simpson Partners, LLC
                                                Its Member

                                                By: /s/ Evan M. Levine
                                                   -----------------------------
                                                   Evan M. Levine
                                                   Its Member

<PAGE>   40
                                   SCHEDULE I



<TABLE>
<CAPTION>
                                      Principal Amount of                Number of Shares
Name of Purchaser                     Debentures at Closing Date         Underlying Debentures
- -----------------                     --------------------------         ---------------------
<S>                                   <C>                                <C>
Brown Simpson Strategic                        $2,000,000                 333,333.33
Growth Fund, Ltd.

Brown Simpson Strategic                        $1,000,000                 166,666.66
Growth Fund, L.P.
</TABLE>

<PAGE>   41

                                   SCHEDULE II

<TABLE>
<CAPTION>
Name of Purchaser                                 Address
<S>                                               <C>

Brown Simpson Strategic Growth Fund, Ltd.         152 West 57th Street, 40th Floor
                                                  New York, New York 10019
                                                  Attn:  Paul Gustus
                                                  Fax: (212) 247-1329
                                                  Residence:  Grand Cayman, Cayman Islands


Brown Simpson Strategic Growth Fund, L.P.         152 West 57th Street, 40th Floor
                                                  New York, New York 10019
                                                  Attn:  Paul Gustus
                                                  Fax: (212) 247-1329
                                                  Residence:  New York, New York
</TABLE>

<PAGE>   42

                                                                       Exhibit A


                          Form of Convertible Debenture
                                   (attached)

<PAGE>   43

                                                                       Exhibit B


                      Form of Registration Rights Agreement
                                   (attached)



                                       2
<PAGE>   44

                                    Exhibit C


                             Company's Legal Opinion
                                   (attached)



                                       3
<PAGE>   45

                                                                       Exhibit D



                              Form of Lockup Letter
                                   (attached)

<PAGE>   1
                                                                    EXHIBIT 10.2



                          REGISTRATION RIGHTS AGREEMENT

            This Registration Rights Agreement (this "Agreement") is made and
entered into as of July 29, 1999, among Endocare, Inc., a Delaware corporation
(the "Company"), and the parties who have executed this Agreement and whose
names appear on Schedule I hereto (each party listed on Schedule I hereto is
sometimes individually referred to herein as a "Purchaser" and all such parties
are sometimes collectively referred to herein as the "Purchasers").

            This Agreement is made pursuant to the Securities Purchase
Agreement, dated as of the date hereof among the Company and the Purchasers (the
"Purchase Agreement").

            The Company and the Purchasers hereby agree as follows:

      1.    Definitions

            Capitalized terms used and not otherwise defined herein shall have
the meanings given such terms in the Purchase Agreement. As used in this
Agreement, the following terms shall have the following meanings:

            "Advice" has meaning set forth in Section 3(o) hereof.

            "Affiliate" means, with respect to any Person, any other Person that
directly or indirectly controls or is controlled by or under common control with
such Person. For the purposes of this definition, "control," when used with
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "affiliated," controlling" and "controlled" have meanings
correlative to the foregoing.

            "Aggregate Price" has the meaning set forth in Section 2(b) hereof.

            "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 generally are authorized or required by law or other
government actions to close.

            "Closing Date" shall mean the First Closing Date as defined in the
Purchase Agreement.

            "Commission" means the Securities and Exchange Commission.

            "Common Stock" means the Company's Common Stock, par value $0.001
per share.

            "Debenture Shares" means shares of Common Stock issuable upon
conversion of the Debentures.

<PAGE>   2
            "Debentures" means the Company's 7% convertible debentures due July
29, 2002 issuable pursuant to the Debenture and the Purchase Agreement.

            "Effectiveness Date" means the earlier of (i) the 120th day
following the Closing Date, or (ii) the fifth Business Day after the Company has
received notice (written or oral) from the Commission that the Commission Staff
will not be reviewing the Registration Statement or has no further comments on
the Registration Statement.

            "Effectiveness Period" has the meaning set forth in Section 2(a)
hereof.

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

            "Event" has the meaning set forth in Section 2(b) hereof.

            "Filing Date" means as soon as practicable but in no event later
than the 30th day following the Closing Date.

            "Holder" or "Holders" means the holder or holders, as the case may
be, from time to time of Registrable Securities.

            "Indemnified Party" has the meaning set forth in Section 5(c)
hereof.

            "Indemnifying Party" has the meaning set forth in Section 5(c)
hereof.

            "Initial Registration Statement" has the meaning set forth in
Section 2(a) hereof.

            "Losses" has the meaning set forth in Section 5(a) hereof.

            "Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.

            "Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.

            "Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference in such Prospectus.

            "Registrable Securities" means the shares of Common Stock issued or
issuable upon (i) conversion of or with respect to $6,000,000 principal amount
of the Debentures, (ii) payment of interest on $3,000,000 principal amount of
Debentures for a one year period


                                       2
<PAGE>   3
assuming a price per share of $6.00 and (iii) any shares of the Company's
capital stock issued with respect to (i) or (ii) as a result of any stock split,
stock dividend, recapitalization, exchange or similar event or otherwise.

            "Registration Delay Payment" has the meaning set forth in Section
2(b) hereof.

            "Registration Statement" means the Initial Registration Statement
and any additional registration statements contemplated by Sections 2(a), 2(b)
and 7(d), including (in each case) the Prospectus, amendments and supplements to
such registration statement or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and all material incorporated by reference in
such registration statement.

            "Rule 144" means Rule 144 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.

            "Rule 158" means Rule 158 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.

            "Rule 415" means Rule 415 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.

            "Second Closing" and "Second Closing Date" shall mean the Second
Closing and the Second Closing Date as defined in the Purchase Agreement.

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

            "Trading Day" means a day on which Nasdaq (or such other securities
market on which the Common Stock is listed) is open for trading.

            "Underlying Shares" means the shares of Common Stock issuable upon
conversion of the Debentures.

            "Underwritten Registration or Underwritten Offering" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.

      2.    Registration Requirements

            (a) On or prior to the Filing Date, the Company shall prepare and
file with the Commission a Registration Statement (the "Initial Registration
Statement") which shall cover all Registrable Securities for an offering to be
made on a continuous basis pursuant to a "Shelf" registration statement under
Rule 415. The Initial Registration Statement shall be on Form S-3 or any
successor form (except if the Company is not then eligible to register for
resale the Registrable Securities on Form S-3, in which case such registration
shall be on another appropriate form in accordance herewith, subject to the
reasonable consent of the original


                                       3
<PAGE>   4
Holders of the Registrable Securities). If the Commission prohibits registration
of the Debenture Shares issuable upon conversion of Debentures issued pursuant
to the Second Closing in the Initial Registration Statement, then the Company
shall register such shares after the Second Closing Date and this Agreement
shall apply mutatis mutandis to the registration of such shares except that (i)
the following changes shall be made to the definition of Filing Date: "the 30th
day" shall be changed to "the 15th Business Day" and "Closing Date" shall be
changed to "Second Closing Date" and (ii) the following changes shall be made to
the definition of Effectiveness Date: "the 120th day" shall be changed to "the
90th day" and "Closing Date" shall be changed to "Second Closing Date." In
addition, the number of shares of Common Stock that could be issued as payment
of interest on the Debentures issued pursuant to the Second Closing for a period
of one year, assuming a price per share of $6.75, shall be registered in
accordance with the immediately preceding sentence. The Company shall (i) not
permit any securities other than the Registrable Securities to be included in
the Initial Registration Statement (except for up to 150,000 shares underlying
convertible securities that have piggyback registration rights as of the Closing
Date and as disclosed on Schedule 2.1c in the Purchase Agreement (or as set
forth in Section 6.b. or 6.c. of such Schedule)) and (ii) use its best efforts
to cause the Initial Registration Statement to be declared effective under the
Securities Act as promptly as possible after the filing thereof, but in any
event on or prior to the Effectiveness Date, and to keep such Initial
Registration Statement continuously effective under the Securities Act until the
date which is four years after the date that such Initial Registration Statement
is declared effective by the Commission or such earlier date when all
Registrable Securities covered by such Initial Registration Statement have been
sold or may be sold without volume restrictions pursuant to Rule 144 as
determined by counsel to the Company pursuant to a written opinion letter,
addressed to the Holders and the Company's transfer agent to such effect (the
"Effectiveness Period"). The number of shares of Common Stock initially included
in the Initial Registration Statement shall be no less than (a) the number of
shares of Common Stock that are then issuable upon conversion of the Debentures
(based on the Conversion Price (as defined in the Debentures) as would then be
in effect at such time), without regard to any limitation on the Investor's
ability to convert the Debentures, and (b) the number of shares of Common Stock
that could be issued as payment of interest on the Debentures for a one year
period. If on the date of an actual adjustment to the Conversion Price pursuant
to Section 4.5 of the Debenture the Registration Statements are insufficient to
register all Underlying Shares (after giving effect to such adjustment) and the
number of shares of Common Stock issuable upon the payment of interest on the
principal amount of the then outstanding Debentures for a one year period, the
Company shall immediately, but in no more than ten (10) Business Days, file a
Registration Statement sufficient to register such additional shares of Common
Stock.;

            (b) If (i) any of the Investors desires to sell Debenture Shares and
the Initial Registration Statement covering all the applicable Registrable
Securities required to be filed by the Company pursuant to this Agreement is not
(A) filed with the Commission on or before the Filing Date or (B) declared
effective by the Commission on or before the applicable Effectiveness Date, (ii)
on any day after the Registration Statement has been declared effective by the
Commission any of the Investors desires to sell Debenture Shares and cannot do
so pursuant to Rule 144 and (A) sales of all the Registrable Securities which
such Investors desire to sell cannot be made pursuant to the Registration
Statement (including, without limitation, because of a failure to keep the
Registration Statement effective, to disclose such information as is necessary
for sales to be made pursuant to the Registration Statement, or to register
sufficient


                                       4
<PAGE>   5
shares of Common Stock) or (B) the Common Stock is not listed or included for
quotation on the National Market System of the Nasdaq Stock Market ("Nasdaq"),
the New York Stock Exchange ("NYSE") or the American Stock Exchange (the "AMEX")
after being so listed or included for quotation or (iii) the Company shall
otherwise fail to file a Registration Statement required by Section 2(a) hereof
that is necessary in order to permit sales of Debenture Shares that Investors
desire to sell (each such event specified in (i), (ii) and (iii) above, an
"Event"), then, as partial relief for the damages to any Holder by reason of any
such delay in or reduction of its ability to sell the Registrable Securities
(which remedy shall not be exclusive of any other remedies available at law or
in equity), the Company shall pay to each Holder an amount in cash (a
"Registration Delay Payment") equal to the portion of the then outstanding
principal amount of the Debentures which the Investors desired to convert to
Common Stock and sell and cannot sell under Rule 144 (and, in the case of
Holders, the principal amount of such Debentures from which such Registrable
Securities were converted) (the "Aggregate Price") multiplied by two hundredths
(.020) times the sum of: (i) the number of months (prorated for partial months)
after the end of the Effectiveness Date and prior to the date the Registration
Statement is declared effective by the Commission or such shares can be sold
under Rule 144, provided, however, that there shall be excluded from such period
any delays which are solely attributable to changes required by the Purchasers
in the Registration Statement with respect to information relating to the
Purchasers, or to the failure of the Purchasers to conduct their review of the
Registration Statement pursuant to Section 3(a); (ii) the number of months
(prorated for partial months) that sales cannot be made either pursuant to Rule
144 or the Registration Statement after the Registration Statement has been
declared effective (including, without limitation, when sales cannot be made by
reason of the Company's failure to properly supplement or amend the Prospectus
in accordance with the terms of this Agreement, or otherwise, but excluding when
such sales cannot be made solely by reason of any act or omission solely
attributable to the Purchasers); and (iii) the number of months (prorated for
partial months) that the Common Stock is not listed or included for quotation on
the Nasdaq, NYSE or AMEX or that trading thereon is halted after the
Registration Statement has been declared effective. The Company shall pay any
Required Registration Delay Payments to each Holder in cash on the last Business
Day of each month during which an Event has occurred and is continuing. In the
event the Company fails to make a Registration Delay Payment in a timely manner,
such Registration Delay Payment shall bear interest at the rate of 2.0% per
month (prorated for partial months) until paid in full.

            (c) The Company represents and warrants that it meets the registrant
eligibility and transaction requirements for the use of Form S-3 (for secondary
offerings) for the registration of the sale of Registrable Securities by the
Purchasers and any other Holders and the Company shall file all reports required
to be filed by the Company with the Commission in a timely manner so as to
maintain such eligibility for the use of Form S-3.

      3.    Registration Procedures

            In connection with the Company's registration obligations hereunder,
the Company shall:

            (a) Prepare and file with the Commission on or prior to the Filing
Date a Registration Statement on Form S-3 or its successor form (or if the
Company is not then eligible to register for resale the Registrable Securities
on Form S-3 such registration shall be on another


                                       5
<PAGE>   6
appropriate form in accordance herewith (which shall include a Plan of
Distribution substantially in the form of Exhibit A annexed hereto, unless in
connection with an Underwritten Offering) or in connection with an Underwritten
Offering hereunder, such other form agreed to by the Company and by a
majority-in-interest of Holders of Registrable Securities to be covered by such
Registration Statement) (except if otherwise directed by the Holders), and cause
the Registration Statement to become effective and remain effective as provided
herein; provided, however, that not less than three (3) Business Days prior to
the filing of the Registration Statement or any related Prospectus or any
amendment or supplement thereto (including any document that would be
incorporated therein by reference), the Company shall, if reasonably practicable
(i) furnish to the Holders, their counsel and any managing underwriters, copies
of all such documents proposed to be filed (including documents incorporated by
reference), which documents will be subject to the review of such Holders, their
counsel and such managing underwriters, and (ii) cause its officers and
directors, counsel and independent certified public accountants to respond to
such inquiries as shall be necessary, in the reasonable opinion of respective
counsel to such Holders and such underwriters, to conduct a reasonable
investigation within the meaning of the Securities Act. The Company shall not
file the Registration Statement or any such Prospectus or any amendments or
supplements thereto to which the Holders of a majority of the Registrable
Securities, their counsel or any managing underwriters shall reasonably object,
and will not request acceleration of such Registration Statement without prior
notice to such counsel. The sections of such Registration Statement covering
information with respect to the Holders, the Holder's beneficial ownership of
securities of the Company or the Holders intended method of disposition of
Registrable Securities shall conform to the information provided to the Company
by each of the Holders.

            (b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective for the
Effectiveness Period and prepare and file with the Commission such additional
Registration Statements in order to register for resale under the Securities Act
all of the Registrable Securities; (ii) cause the related Prospectus to be
amended or supplemented by any required Prospectus supplement, and as so
supplemented or amended to be filed pursuant to Rule 424 (or any similar
provisions then in force) promulgated under the Securities Act; (iii) respond as
promptly as possible to any comments received from the Commission with respect
to the Registration Statement or any amendment thereto and as promptly as
possible provide the Holders true and complete copies of all correspondence from
and to the Commission relating to the Registration Statement; and (iv) comply in
all material respects with the provisions of the Securities Act and the Exchange
Act with respect to the disposition of all Registrable Securities covered by the
Registration Statement during the applicable period in accordance with the
intended methods of disposition by the Holders thereof set forth in the
Registration Statement as so amended or in such Prospectus as so supplemented.
In the event the number of shares available under a Registration Statement filed
pursuant to this Agreement is insufficient to cover the number of the
Registrable Securities required by Section 2(a) hereof, the Company shall amend
the Registration Statement, or file a new Registration Statement (on the short
form available therefore, if applicable), or both, so as to cover such number of
the Registrable Securities, in each case, as soon as practicable, but in any
event within ten (10) Business Days after the necessity therefor arises (based
on the Conversion Price of the Debentures and other relevant factors on which
the Company reasonably elects to rely). The Company shall use its best efforts
to cause such amendment and/or new Registration Statement


                                       6
<PAGE>   7
to become effective as soon as practicable following the filing thereof. The
provisions of Section 2(b) above shall be applicable with respect to such
obligation, with the ninety (90) days running from the day after the date on
which the Company reasonably first determines (or reasonably should have
determined) the need therefor.

            (c) Notify the Holders of Registrable Securities to be sold, their
counsel and any managing underwriters as promptly as possible (and, in the case
of (i)(A) below, not less than five (5) days prior to such filing and, in the
case of (i)(C) below, not later than the first Business Day after effectiveness)
and (if requested by any such Person) confirm such notice in writing no later
than one (1) Business Day following the day (i)(A) when a Prospectus or any
Prospectus supplement or post-effective amendment to the Registration Statement
is proposed to be filed; (B) when the Commission notifies the Company whether
there will be a "review" of such Registration Statement and whenever the
Commission comments in writing on such Registration Statement and (C) with
respect to the Registration Statement or any post-effective amendment, when the
same has become effective; (ii) of any request by the Commission or any other
Federal or state governmental authority for amendments or supplements to the
Registration Statement or Prospectus or for additional information; (iii) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement covering any or all of the Registrable Securities or the
initiation of any Proceedings for that purpose; (iv) if at any time any of the
representations and warranties of the Company contained in any agreement
(including any underwriting agreement) contemplated hereby ceases to be true and
correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event that makes any statement made
in the Registration Statement or Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.

            (d) Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of (i) any order suspending the effectiveness of the
Registration Statement or (ii) any suspension of the qualification (or exemption
from qualification) of any of the Registrable Securities for sale in any
jurisdiction, at the earliest practicable moment.

            (e) If requested by any managing underwriter or the Holders of a
majority in interest of the Registrable Securities to be sold in connection with
an Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as the
Company reasonably agrees should be included therein and (ii) make all required
filings of such Prospectus supplement or such post-effective amendment as soon
as practicable after the Company has received notification of the matters to be
incorporated in such Prospectus supplement or post-effective amendment;
provided, however, that the Company shall not be required to take any action
pursuant to this Section 3(e) that would, in the opinion of counsel for the
Company, violate applicable law.


                                       7
<PAGE>   8
            (f) Furnish to each Holder, their counsel, and any managing
underwriters, without charge, at least one conformed copy of each Registration
Statement and each amendment thereto, including financial statements and
schedules, all documents incorporated or deemed to be incorporated therein by
reference, and all exhibits to the extent requested by such Person (including
those previously furnished or incorporated by reference) promptly after the
filing of such documents with the Commission.

            (g) Promptly deliver to each Holder, their counsel, and any
underwriters, without charge, as many copies of the Prospectus or Prospectuses
(including each form of prospectus) and each amendment or supplement thereto as
such Persons may reasonably request; and the Company hereby consents to the use
of such Prospectus and each amendment or supplement thereto by each of the
selling Holders and any underwriters in connection with the offering and sale of
the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.

            (h) Prior to any public offering of Registrable Securities, use its
best efforts to register or qualify or cooperate with the selling Holders, any
underwriters and their counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of such
Registrable Securities for offer and sale under the securities or Blue Sky laws
of such jurisdictions within the United States as any Holder or underwriter
requests in writing, to keep each such registration or qualification (or
exemption therefrom) effective during the Effectiveness Period and to do any and
all other acts or things necessary or advisable to enable the disposition in
such jurisdictions of the Registrable Securities covered by a Registration
Statement; provided, however, that the Company shall not be required to qualify
generally to do business in any jurisdiction where it is not then so qualified
or to take any action that would subject it to general service of process in any
such jurisdiction where it is not then so subject or subject the Company to any
material tax in any such jurisdiction where it is not then so subject.

            (i) Cooperate with the Holders and any managing underwriters to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold pursuant to a Registration Statement, which
certificates shall be free, to the extent permitted by applicable law and the
Purchase Agreement, of all restrictive legends, and to enable such Registrable
Securities to be in such denominations and registered in such names as any such
managing underwriters or Holders may request at least two (2) Business Days
prior to any sale of Registrable Securities.

            (j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as possible, prepare a supplement or amendment, including
a post-effective amendment, to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.


                                       8
<PAGE>   9
            (k) Cause all Registrable Securities relating to such Registration
Statement to be listed on Nasdaq and any other securities exchange, quotation
system, market or over-the-counter bulletin board, if any, on which similar
securities issued by the Company are then listed as and when required pursuant
to the Purchase Agreement.

            (l) Enter into such agreements (including an underwriting agreement
in form, scope and substance as is customary in Underwritten Offerings) and take
all such other actions in connection therewith (including those reasonably
requested by any managing underwriters and the Holders of a majority of the
Registrable Securities being sold) in order to expedite or facilitate the
disposition of such Registrable Securities, and whether or not an underwriting
agreement is entered into, (i) make such representations and warranties to such
Holders and such underwriters as are customarily made by issuers to underwriters
in underwritten public offerings, and confirm the same if and when requested;
(ii) in the case of an Underwritten Offering obtain and deliver copies thereof
to the managing underwriters, if any, or in the case of non-Underwritten
Offerings, if reasonably requested by the selling Holders, obtain and deliver
copies thereof to such selling Holders, of opinions of counsel to the Company
and updates thereof addressed to each such underwriter, in form, scope and
substance reasonably satisfactory to any such managing underwriters and counsel
to the selling Holders covering the matters customarily covered in opinions
requested in Underwritten Offerings and such other matters as may be reasonably
requested by such counsel and underwriters; (iii) immediately prior to the
effectiveness of the Registration Statement, and, in the case of an Underwritten
Offering, at the time of delivery of any Registrable Securities sold pursuant
thereto, and, in the case of non-Underwritten Offerings, at such time as the
selling Holders may reasonably request, obtain and deliver copies to the Holders
and the managing underwriters, if any, of "cold comfort" letters and updates
thereof from the independent certified public accountants of the Company (and,
if required, any other independent certified public accountants of any
subsidiary of the Company or of any business acquired by the Company for which
financial statements and financial data is, or is required to be, included in
the Registration Statement), addressed to each of the underwriters, if any, in
form and substance as are customary in connection with Underwritten Offerings;
(iv) if an underwriting agreement is entered into, the same shall contain
indemnification provisions and procedures no less favorable to the selling
Holders and the underwriters, if any, than those set forth in Section 5 (or such
other provisions and procedures acceptable to the managing underwriters, if any,
and holders of a majority of Registrable Securities participating in such
Underwritten Offering; and (v) deliver such documents and certificates as may be
reasonably requested by the Holders of a majority of the Registrable Securities
being sold, their counsel and any managing underwriters to evidence the
continued validity of the representations and warranties made pursuant to clause
3(1)(i) above and to evidence compliance with any customary conditions contained
in the underwriting agreement or other agreement entered into by the Company.

            (m) Make available for inspection by the selling Holders, any
representative of such Holders, any underwriter participating in any disposition
of Registrable Securities, and any attorney or accountant retained by such
selling Holders or underwriters, at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
officers, directors, agents and employees of the Company and its subsidiaries to
supply all information in each case reasonably requested by any such Holder,
representative, underwriter, attorney or


                                       9
<PAGE>   10
accountant in connection with the Registration Statement; provided, however,
that if any information is determined in good faith by the Company in writing to
be of a confidential nature at the time of delivery of such information, then
prior to delivery of such information, the Company and the Holders shall enter
into a confidentiality agreement reasonably acceptable to the Company and the
Holders providing that such information shall be kept confidential, unless (i)
disclosure of such information is required by court or administrative order or
is necessary to respond to inquiries of regulatory authorities (provided,
however, that the Company shall be given notice of any such pending disclosure
so that the Company may seek a protective order); (ii) disclosure of such
information, in the opinion of counsel to such Person, is required by law; (iii)
such information becomes generally available to the public other than as a
result of a disclosure or failure to safeguard by such Person; or (iv) such
information becomes available to such Person from a source other than the
Company and such source is not known by such Person to be bound by a
confidentiality agreement with the Company.

            (n) Comply in all material respects with all applicable rules and
regulations of the Commission and make generally available to its
securityholders earning statements satisfying the provisions of Section 11(a) of
the Securities Act and Rule 158 not later than 45 days after the end of any
12-month period (or 90 days after the end of any 12-month period if such period
is a fiscal year) (i) commencing at the end of any fiscal quarter in which
Registrable Securities are sold to underwriters in a firm commitment or best
efforts Underwritten Offering and (ii) if not sold to underwriters in such an
offering, commencing on the first day of the first fiscal quarter of the Company
after the effective date of the Registration Statement, which statement shall
conform to the requirements of Rule 158.

            (o) The Company may require each selling Holder to furnish to the
Company information regarding such Holder and the distribution of such
Registrable Securities as is required by law to be disclosed in the Registration
Statement, and the Company may exclude from such registration the Registrable
Securities of any such Holder who unreasonably fails to furnish such information
within a reasonable time after receiving such request.

            The Company shall hold in confidence and not make any disclosure of
information concerning a Holder provided to the Company unless (i) disclosure of
such information is necessary to comply with federal or state securities laws,
(ii) the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other order from a court
or governmental body of competent jurisdiction, or (iv) such information has
been made generally available to the public other than by disclosure in
violation of this or any other agreement. The Company agrees that it shall, upon
learning that disclosure of such information concerning a Holder is sought in or
by a court or governmental body of competent jurisdiction or through other
means, give prompt notice to such Holder prior to making such disclosure, and
allow the Holder, at its expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, such information.

            If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (if such reference to such Holder by name or otherwise
is not required by the Securities Act or any similar Federal statute then in
force) the deletion of the reference to such Holder in any


                                       10
<PAGE>   11
amendment or supplement to the Registration Statement filed or prepared
subsequent to the time that such reference ceases to be required.

            Each Holder covenants and agrees that (i) it will not sell any
Registrable Securities under the Registration Statement until it has received
copies of the Prospectus as then amended or supplemented as contemplated in
Section 3(g) and notice from the Company that such Registration Statement and
any post-effective amendments thereto have become effective as contemplated by
Section 3(c) and (ii) it and its officers, directors or Affiliates, if any, will
comply with the prospectus delivery requirements of the Securities Act as
applicable to them in connection with sales of Registrable Securities pursuant
to the Registration Statement.

            Each Holder agrees by its acquisition of such Registrable Securities
that, upon receipt of a notice from the Company of the occurrence of any event
of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or
3(c)(vi), such Holder will forthwith discontinue disposition of such Registrable
Securities under the Registration Statement until such Holder's receipt of the
copies of the supplemented Prospectus and/or amended Registration Statement
contemplated by Section 3(j), or until it is advised in writing (the "Advice")
by the Company that the use of the applicable Prospectus may be resumed, and, in
either case, has received copies of any additional or supplemental filings that
are incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement. Notwithstanding anything to the contrary, the Company
shall cause its transfer agent to deliver unlegended shares of Common Stock to a
transferee of a Holder in accordance with the terms of the Securities Purchase
Agreement in connection with any sale of Registrable Securities with respect to
which an Holder has entered into a contract for sale prior to the Holder's
receipt of a notice from the Company of the happening of any event of the kind
described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or 3(c)(vi) and for
which the Holder has not yet settled.

            (p) The Company agrees to respond fully and completely to any and
all comments on a Registration Statement received from the Commission staff as
promptly as possible but, for non-Underwritten Offerings, in no event later than
ten (10) Business Days of the receipt of such comments, regardless of whether
such comments are in oral or written form.

            (q) Within two (2) Business Days after a Registration Statement
which covers applicable Registrable Securities is ordered effective by the
Commission, the Company shall deliver, and shall cause legal counsel for the
Company to deliver, to the transfer agent for such Registrable Securities (with
copies to the Holders whose Registrable Securities are included in such
Registration Statement) confirmation that such Registration Statement has been
declared effective by the Commission in the form attached hereto as Exhibit B.

      4.    Registration Expenses

            All fees and expenses incident to the performance of or compliance
with this Agreement by the Company shall be borne by the Company, whether or not
pursuant to an underwritten offering and whether or not the Registration
Statement is filed or becomes effective and whether or not any Registrable
Securities are sold pursuant to the Registration Statement. The fees and
expenses referred to in the foregoing sentence shall include, without limitation
(and except as provided herein), (i) all registration and filing fees
(including, without limitation, fees


                                       11
<PAGE>   12
and expenses (A) with respect to filings required to be made with Nasdaq and
each other securities exchange or market on which Registrable Securities are
required hereunder to be listed and (B) in compliance with state securities or
Blue Sky laws (including, without limitation, fees and disbursements of counsel
for the Holders in connection with Blue Sky qualifications of the Registrable
Securities and determination of the eligibility of the Registrable Securities
for investment under the laws of such jurisdictions as the managing
underwriters, if any, or the Holders of a majority of Registrable Securities may
designate), (ii) printing expenses (including, without limitation, expenses of
printing certificates for Registrable Securities and of printing prospectuses if
the printing of prospectuses is requested by the managing underwriters, if any,
or by the holders of a majority of the Registrable Securities included in the
Registration Statement), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company and counsel for the Holders
(no more than $5,000 per effectiveness), (v) Securities Act liability insurance,
if the Company so desires such insurance, and (vi) fees and expenses of all
other Persons retained by the Company in connection with the consummation of the
transactions contemplated by this Agreement. In addition, the Company shall be
responsible for all of its internal expenses incurred in connection with the
consummation of the transactions contemplated by this Agreement (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit, and the
fees and expenses incurred in connection with the listing of the Registrable
Securities on any securities exchange as required hereunder.

      5.    Indemnification

            (a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents (including any underwriters
retained by such Holder in connection with the offer and sale of Registrable
Securities), brokers (including brokers who offer and sell Registrable
Securities as principal as a result of a pledge or any failure to perform under
a margin call of Common Stock), investment advisors and employees of each of
them, each Person who controls any such Holder (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents and employees of each such controlling Person, to the fullest
extent permitted by applicable law, from and against any and all joint or
several losses, claims, damages, liabilities, costs (including, without
limitation, costs of preparation and attorneys' fees) and expenses
(collectively, together with actions, proceedings or inquiries by any regulatory
or self-regulatory organization, whether commenced or threatened, "Losses"), as
incurred, arising out of or relating to (i) any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
Prospectus or any form of prospectus or in any amendment or supplement thereto
or in any preliminary Prospectus, or arising out of or relating to any omission
or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein (in the case of any Prospectus or form
of prospectus or supplement thereto, in light of the circumstances under which
they were made) not misleading (in the case of any Prospectus or form of
prospectus or supplement thereto, in light of the circumstances under which they
were made), except to the extent, but only to the extent, that such untrue
statements or omissions are based solely upon and in conformity with information
regarding such Holder furnished in writing to the Company by such Holder
expressly for use therein, which information was reasonably relied on by the
Company for use therein or to the extent that such information relates to such
Holder or such Holder's proposed method of


                                       12
<PAGE>   13
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement, such
Prospectus or such form of prospectus or in any amendment or supplement thereto
(provided that the Company amended any disclosure with respect to the method of
distribution upon written notice from the Holders that such section of the
Prospectus should be revised in any way) or (ii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any other law,
including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of Registrable Securities.
The Company shall not, however, be liable for any Losses to any Holder with
respect to any untrue or alleged untrue statement of material fact or omission
or alleged omission of material fact if such statement or omission was made in a
preliminary Prospectus and such Holder did not receive a copy of the final
Prospectus (or any amendment or supplement thereto) at or prior to the
confirmation of the sale of the Registrable Securities in any case where such
delivery is required by the Securities Act and the untrue or alleged untrue
statement of material fact or omission or alleged omission of material fact
contained in such preliminary Prospectus was corrected in the final Prospectus
(or any amendment or supplement thereto), unless the failure to deliver such
final Prospectus (as amended or supplemented) was a result of noncompliance by
the Company with Section 3(g) of this Agreement. The Company shall notify the
Holders promptly of the institution, threat or assertion of any Proceeding of
which the Company is aware in connection with the transactions contemplated by
this Agreement.

            (b) Indemnification by Holders. Each Holder shall, severally and not
jointly, indemnify and hold harmless the Company, the directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses, as
incurred, arising solely out of or based solely upon any untrue statement of a
material fact contained in the Registration Statement, any Prospectus, or any
form of prospectus, or arising solely out of or based solely upon any omission
of a material fact required to be stated therein or necessary to make the
statements therein not misleading to the extent, but only to the extent, that
such untrue statement or omission is contained in any information so furnished
in writing by such Holder to the Company specifically for inclusion in the
Registration Statement or such Prospectus and that such information was
reasonably relied upon by the Company for use in the Registration Statement,
such Prospectus or such form of prospectus or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement, such
Prospectus or such form of prospectus; provided, however, that the indemnity
agreement contained in this Section 5(b) shall not apply to amounts paid in
settlement of any Losses if such settlement is effected without the prior
written consent of such Holder, which consent shall not be unreasonably
withheld. In no event shall the liability of any selling Holder hereunder be
greater in amount than the dollar amount of the net proceeds received by such
Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.

            (c) Conduct of Indemnification Proceedings. If any Proceeding shall
be brought or asserted against any Person entitled to indemnity hereunder (an
"Indemnified Party"), such Indemnified Party promptly shall notify the Person
from whom indemnity is sought (the


                                       13
<PAGE>   14
"Indemnifying Party") in writing, and the Indemnifying Party shall assume the
defense thereof, including the employment of counsel reasonably satisfactory to
the Indemnified Party and the payment of all fees and expenses incurred in
connection with defense thereof; provided, however, that the failure of any
Indemnified Party to give such notice shall not relieve the Indemnifying Party
of its obligations or liabilities pursuant to this Agreement, except (and only)
to the extent that it shall be finally determined by a court of competent
jurisdiction (which determination is not subject to appeal or further review)
that such failure shall have proximately and materially adversely prejudiced the
Indemnifying Party.

            An Indemnified Party shall have the right to employ separate counsel
in any such Proceeding and to participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Party
or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; or (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such Indemnified Party
shall have been advised by counsel that a conflict of interest is likely to
exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.

            All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within ten (10)
Business Days of written notice thereof to the Indemnifying Party (regardless of
whether it is ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).

            (d) Contribution. If a claim for indemnification under Section 5(a)
or 5(b) is unavailable to an Indemnified Party because of a failure or refusal
of a court of competent jurisdiction to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise), then each
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses, in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party and Indemnified Party in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such Indemnifying
Party and Indemnified Party shall be determined by reference to, among other


                                       14
<PAGE>   15
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission of a material fact,
has been taken or made by, or relates to information supplied by, such
Indemnifying Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a result
of any Losses shall be deemed to include, subject to the limitations set forth
in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses
incurred by such party in connection with any Proceeding to the extent such
party would have been indemnified for such fees or expenses if the
indemnification provided for in this Section was available to such party in
accordance with its terms. In no event shall any selling Holder be required to
contribute an amount under this Section 5(d) in excess of the net proceeds
received by such Holder upon sale of the Registrable Securities pursuant to the
Registration Statement giving rise to such contribution obligation.

            The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.

            The indemnity and contribution agreements contained in this Section
are in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.

      6.    Rule 144

            As long as any Holder owns Registrable Securities, the Company
covenants to timely file (or obtain extensions in respect thereof and file
within the applicable grace period) all reports required to be filed by the
Company after the date hereof pursuant to Section 13(a) or l5(d) of the Exchange
Act and to promptly furnish the Holders with true and complete copies of all
such filings. As long as any Holder owns Registrable Securities, if the Company
is not required to file reports pursuant to Section 13(a) or l5(d) of the
Exchange Act, it will prepare and furnish to the Holders and make publicly
available in accordance with Rule 144(c) promulgated under the Securities Act
annual and quarterly financial statements, together with a discussion and
analysis of such financial statements in form and substance substantially
similar to those that would otherwise be required to be included in reports
required by Section 13(a) or 15(d) of the Exchange Act, as well as any other
information required thereby, in the time period that such filings would have
been required to have been made under the Exchange Act. The Company further
covenants that it will take such further action as any Holder may reasonably
request, all to the extent required from time to time to enable such Person to
sell Underlying Shares without registration under the Securities Act within the
limitation of the exemptions provided by Rule 144 promulgated under the
Securities Act, including providing any legal opinions referred to in the
Purchase Agreement. Upon the request of any Holder, the Company shall deliver to
such Holder a written certification of a duly authorized officer as to whether
it has complied with such requirements.


                                       15
<PAGE>   16
      7.    Miscellaneous

            (a) Remedies. In the event of a breach by the Company or by a Holder
of any of their obligations under this Agreement, each Holder or the Company, as
the case may be, in addition to being entitled to exercise all rights granted by
law and under this Agreement, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company and each
Holder agree that monetary damages would not provide adequate compensation for
any losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense that
a remedy at law would be adequate.

            (b) No Inconsistent Agreements. Neither the Company nor any of its
subsidiaries has, as of the date hereof, nor shall the Company or any of its
subsidiaries, on or after the date of this Agreement, enter into any agreement
with respect to its securities that is inconsistent with the rights granted to
the Holders in this Agreement or otherwise conflicts with the provisions hereof.
Except as disclosed in Schedule 2.1(r) of the Purchase Agreement, neither the
Company nor any of its subsidiaries has previously entered into any agreement
granting any registration rights with respect to any of its securities to any
Person. Without limiting the generality of the foregoing, without the written
consent of the Holders of a majority of the then outstanding Registrable
Securities, the Company shall not grant to any Person the right to request the
Company to register any securities of the Company under the Securities Act
unless the rights so granted are subordinated in all respects to the rights in
full of the Holders set forth in Section 2 herein, and are not otherwise in
conflict or inconsistent with the provisions of this Agreement; provided that
such consent obligation shall not apply to registration rights that the Company
may grant to any other Persons covering an aggregate of up to 500,000 shares of
Common Stock. This Agreement, together with the Purchase Agreement, contain the
entire understanding of the parties with respect to the subject matter hereof
and supersede all prior agreements and understandings, oral or written, with
respect to such matters.

            (c) No Piggyback on Registrations. Except as disclosed on Schedule
2.1(r) of the Purchase Agreement, neither the Company nor any of its
securityholders (other than the Holders in such capacity pursuant hereto) may
include securities of the Company in the Registration Statements and the Company
shall not after the date hereof enter into any agreement providing such right to
any of its securityholders, unless the right so granted is subordinated in all
respects to the rights in full of the Holders set forth herein, and is not
otherwise in conflict or inconsistent with the provisions of this Agreement.

            (d) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least two thirds of the then outstanding Registrable
Securities; provided, however, that for the purposes of this sentence,
Registrable Securities that are owned, directly or indirectly, by the Company,
or an Affiliate of the Company are not deemed outstanding. Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with respect
to a matter that relates exclusively to the rights of Holders and that does not
directly or indirectly affect the rights of other Holders may be given by
Holders of


                                       16
<PAGE>   17
at least a majority of the Registrable Securities to which such waiver or
consent relates; provided, however, that the provisions of this sentence may not
be amended, modified, or supplemented except in accordance with the provisions
of the immediately preceding sentence.

            (e) Notices. Any notice or other communication required or permitted
to be given hereunder shall be in writing and shall be deemed to have been
received (a) upon hand delivery (receipt acknowledged) or delivery by telex
(with correct answer back received), telecopy or facsimile (with transmission
confirmation report) at the address or number designated below (if received by
8:00 p.m. EST where such notice is to be received), or the first Business Day
following such delivery (if received after 8:00 p.m. EST where such notice is to
be received) or (b) on the second Business Day following the date of mailing by
express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications are (i) if to the Company to Endocare, Inc., 7 Studebaker,
Irvine, California 92618, Telephone: (949) 595-4770, Facsimile: (949) 597-0607,
Attention: Paul W. Mikus with copies to Brobeck, Phleger & Harrison LLP, 38
Technology Drive, Irvine, California 92618, Telephone: (949) 790-6300,
Facsimile: (949) 790-6301, Attention: Richard A. Fink, Esq. and (ii) if to any
Purchaser to the address set forth on Schedule I hereto with copies to those
specified on the signature pages hereto and to Akin, Gump, Strauss, Hauer &
Feld, L.L.P., 590 Madison Avenue, New York, New York 10022, Attn: James Kaye,
Esq., fax no. (212) 872-1002 or such other address as may be designated in
writing hereafter, in the same manner, by such Person.

            (f) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. Each Holder may assign its rights hereunder in the manner and to
the Persons as permitted under the Purchase Agreement. In addition, the rights
of each Holder hereunder, including the right to have the Company register for
resale Registrable Securities in accordance with the terms of this Agreement,
shall be automatically assignable by each Holder if: (i) the Holder agrees in
writing with the transferee or assignee to assign such rights, and a copy of
such agreement is furnished to the Company within a reasonable time after such
assignment, (ii) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (a) the name and address of such
transferee or assignee, and (b) the securities with respect to which such
registration rights are being transferred or assigned, (iii) following such
transfer or assignment the further disposition of such securities by the
transferee or assignees is restricted under the Securities Act and applicable
state securities laws, (iv) at or before the time the Company receives the
written notice contemplated by clause (ii) of this Section, the transferee or
assignee agrees in writing with the Company to be bound by all of the provisions
of this Agreement, and (v) such transfer shall have been made in accordance with
the applicable requirements of the Purchase Agreement. The rights to assignment
shall apply to the Holders (and to subsequent) successors and assigns.

            (g) Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same Agreement. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid and binding obligation of


                                       17
<PAGE>   18
the party executing (or on whose behalf such signature is executed) the same
with the same force and effect as if such facsimile signature were the original
thereof.

            (h) Governing Law. The corporate laws of the State of Delaware shall
govern all issues concerning the relative rights of the Company and the
Purchasers as its stockholders. All other questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
and construed in accordance with the laws of the State of New York, without
regard to principles of conflicts of law. Each party 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, that such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consent to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement 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.

            (i) Cumulative Remedies. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.

            (j) Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.

            (k) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.

            (l) Shares Held by The Company and its Affiliates. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than any Holder or transferees or successors or assigns
thereof if such Holder is deemed to be an Affiliate solely by reason of its
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.

                  [Remainder of Page Intentionally Left Blank]


                                       18
<PAGE>   19

            IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first written above.

                              ENDOCARE, INC.

                              By: /s/ Paul W. Mikus
                                 -----------------------------------------------
                                 Name:    Paul W. Mikus
                                 Title:   Chief Executive Officer

                                    BROWN SIMPSON STRATEGIC
                                    GROWTH FUND, LTD.

                                    By: Brown Simpson Asset Management LLC

                                        By:  Brown Simpson, LLC
                                             Its Member

                                             By:   /s/ Evan Levine
                                                  ------------------------------
                                                  Evan M. Levine
                                                  Its Member

                                    BROWN SIMPSON STRATEGIC GROWTH FUND, L.P.

                                    By: Brown Simpson Capital, LLC
                                        Its General Partner

                                        By:  Brown Simpson Partners, LLC
                                             Its Member

                                             By:   /s/ Evan Levine
                                                  ------------------------------
                                                  Evan M. Levine
                                                  Its Member

                                       19
<PAGE>   20
                                                                  (1) SCHEDULE I

Company

ENDOCARE, INC.

7 Studebaker
Irvine, California 92618
Attn: Paul W. Mikus
Fax: (949) 597-0607

Purchasers:

BROWN SIMPSON STRATEGIC GROWTH FUND, L.P.

152 West 57th Street, 40th Floor
New York, New York 10019
Attn: Paul Gustus

Fax: (212) 247-1329

BROWN SIMPSON STRATEGIC GROWTH FUND, LTD.

152 West 57th Street, 40th Floor
New York, New York 10019
Attn: Paul Gustus

Fax: (212) 247-1329


                                       20
<PAGE>   21
                                                                       EXHIBIT A


                              PLAN OF DISTRIBUTION

      The Company is registering the Registrable Securities on behalf of the
Holder. As used herein, the term Holder means the holder of the Registrable
Securities and includes donees and pledgees selling Registrable Securities
received from a named Holder after the date of this Prospectus. All costs,
expenses and fees in connection with the registration of the Registrable
Securities offered hereby will be borne by the Company. Brokerage commissions
and similar selling expenses, if any, attributable to the sale of Registrable
Securities will be borne by the Holders. Sales of Registrable Securities may be
effected by Holders from time to time in one or more types of transactions
(which may include block transactions) on Nasdaq, on the BSE, in the
over-the-counter market, in negotiated transactions, through put or call options
transactions relating to the Registrable Securities, through short sales of
Registrable Securities, or a combination of such methods of sale, at market
prices prevailing at the time of sale, or at negotiated prices. Such
transactions may or may not involve brokers or dealers. The Holders have advised
the Company that they have not entered into any agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of their
securities, nor is there an underwriter or coordinated broker acting in
connection with the proposed sale of Registrable Securities by the Holders.

      The Holders may enter into hedging transactions with broker-dealers or
other financial institutions. In connection with such transactions,
broker-dealers or other financial institutions may engage in short sales of the
Registrable Securities or of securities convertible into or exchangeable for the
Registrable Securities in the course of hedging positions they assume with
Holders. The Holders may also enter into options or other transactions with
broker-dealers or other financial institutions which require the delivery to
such broker-dealers or other financial institutions of Registrable Securities
offered by this Prospectus, which Registrable Securities such broker-dealer or
other financial institution may resell pursuant to this Prospectus (as amended
or supplemented to reflect such transaction).

      The Holders may effect such transactions by selling Registrable Securities
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from Holders and/or the purchasers of
Registrable Securities for whom such broker-dealers may act as agents or to whom
they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions).

      The Holders and any broker-dealers that act in connection with the sale of
Registrable Securities might be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act, and any commissions received by such
broker-dealers any profit on the resale of the Registrable Securities sold by
them while acting as principals might be deemed to be underwriting discounts or
commissions under the Securities Act. The Company has agreed to indemnify each
Holder against certain liabilities, including liabilities arising under the
Securities Act. The Holders may agree to indemnify any agent, dealer or
broker-dealer that participates in


                                       21
<PAGE>   22
transactions involving sales of the Registrable Securities against certain
liabilities, including liabilities arising under the Securities Act.

      The Holders may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act.

      The Holders will be subject to the prospectus delivery requirements of the
Securities Act. The Company has informed the Holders that the anti-manipulative
provisions of Regulation M promulgated under the Exchange Act may apply to their
sales in the market.

      Holders also may resell all or a portion of the Registrable Securities in
open market transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of such Rule.

      Upon the Company being notified by a Holder that any material arrangement
has been entered into with a broker-dealer for the sale of Registrable
Securities through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, a supplement to this
Prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing (i) the name of each such Holder and of the
participating broker-dealer(s), (ii) the number of Registrable Securities
involved, (iii) the initial price at which such Registrable Securities were
sold, (iv) the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not
conduct any investigation to verify the information set out or incorporated by
reference in this Prospectus and (vi) other facts material to the transactions.
In addition, upon the Company being notified by a Holder that a donee or pledgee
intends to sell more than 5,000 Registrable Securities, a supplement to this
Prospectus will be filed.


                                       22
<PAGE>   23
                                                                       EXHIBIT B


                         FORM OF NOTICE OF EFFECTIVENESS

                            OF REGISTRATION STATEMENT

[TRANSFER AGENT]
Attn.:

            Re:   Endocare, Inc.

Ladies and Gentlemen:

                  We are counsel to Endocare, Inc., a Delaware corporation (the
"Company"), and have represented the Company in connection with that certain
Securities Purchase Agreement (the "Purchase Agreement") entered into by and
among the Company and the buyers named therein (collectively, the "Holders")
pursuant to which the Company issued to the Holders its 7% convertible
debentures due July 29, 2002 (the "Debentures") convertible into shares of the
Company's common stock, par value $0.001 per share (the "Common Stock").
Pursuant to the Purchase Agreement, the Company also has entered into a
Registration Rights Agreement with the Holders (the "Registration Rights
Agreement") pursuant to which the Company agreed, among other things, to
register the Registrable Securities (as defined in the Registration Rights
Agreement), including the shares of Common Stock issuable upon conversion of the
Debentures, under the Securities Act of 1933, as amended (the "1933 Act"). In
connection with the Company's obligations under the Registration Rights
Agreement, on _______________, 1999, the Company filed a Registration Statement
on Form S-3 (File No. 333-_____________) (the "Registration Statement") with the
Securities and Exchange Commission (the "SEC") relating to the Registrable
Securities which names each of the Holders as a selling stockholder thereunder.

      In connection with the foregoing, we advise you that a member of the SEC's
staff has advised us by telephone that the SEC has entered an order declaring
the Registration Statement effective under the 1933 Act at [ENTER TIME OF
EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after
telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.

                                          Very truly yours,

                                          [ISSUER'S COUNSEL]

CC: [LIST NAMES OF HOLDERS]


                                       23

<PAGE>   1
                                                                    EXHIBIT 10.3



TBCC

                           LOAN AND SECURITY AGREEMENT

BORROWER:         ENDOCARE, INC.,
                  A DELAWARE CORPORATION

ADDRESS:          7 STUDEBAKER
                  IRVINE, CALIFORNIA 92618

DATE:             JULY 29, 1999

THIS LOAN AND SECURITY AGREEMENT is entered into as of the above date, between
the above borrower(s) (jointly and severally, the "Borrower"), having its chief
executive office and principal place of business at the address shown above, and
TRANSAMERICA BUSINESS CREDIT CORPORATION, a Delaware corporation, ("TBCC")
having its principal office at 9399 West Higgins Road, Suite 600, Rosemont,
Illinois 60018 and having an office at 15260 Ventura Blvd., Suite 1240, Sherman
Oaks, CA 91403. The Schedule to this Agreement (the "Schedule") being signed
concurrently is an integral part of this Agreement. (Definitions of certain
terms used in this Agreement are set forth in Section 9 below.) The parties
agree as follows:

1. Loans.

  1.1. Loans. TBCC, subject to the terms and conditions of this Agreement,
agrees to make loans (the "Loans") to Borrower, from time to time during the
period from the date of this Agreement to the Maturity Date set forth in the
Schedule, at Borrower's request, in an aggregate principal amount at any one
time outstanding not to exceed the Credit Limit shown on the Schedule (the
"Credit Limit"). If at any time the total outstanding Loans and other monetary
Obligations exceed the Credit Limit, Borrower shall repay the excess immediately
without demand*. Borrower shall use the proceeds of all Loans solely for lawful
general business purposes.

  * , PROVIDED, HOWEVER, THAT IF THE TOTAL OUTSTANDING LOANS AND OTHER MONETARY
OBLIGATIONS EXCEED THE CREDIT LIMIT BECAUSE OF A CHANGE IN THE MANNER IN WHICH
ELIGIBLE RECEIVABLES IS COMPUTED, THEN BORROWER SHALL HAVE TWO (2) BUSINESS DAYS
TO REPAY SUCH EXCESS.

  1.2. Due Date. The Loans, all accrued interest and all other monetary
Obligations shall be payable in full on the Maturity Date. Borrower may borrow,
repay and reborrow Loans (other than any Term Loans), in whole or in part, in
accordance with the terms of this Agreement.

  1.3. Loan Account. TBCC shall maintain an account on its books in the name of
Borrower (the "Loan Account"). All Loans and advances made by TBCC to Borrower
or for Borrower's account and all other monetary Obligations will be charged to
the Loan Account. All amounts received by TBCC from Borrower or for Borrower's
account will be credited to the Loan Account. TBCC will send Borrower a monthly
statement reflecting the activity in the Loan Account, and each such monthly
statement shall be an account stated between Borrower and TBCC and shall be
final, conclusive and binding absent manifest error.

  1.4. Collection of Receivables. Borrower shall remit to TBCC all Collections
including all checks, drafts and other documents and instruments evidencing
remittances in payment (collectively referred to as "Items of Payment") within
one Business Day after receipt, in the same form as received, with any necessary
indorsements. For purposes of calculating interest due to TBCC, credit will be
given for Collections and all other proceeds of Collateral and other payments to
TBCC three Business Days after receipt of cleared funds. For all purposes of
this Agreement any cleared funds received by TBCC later than 10:00 a.m.
(California time) on any Business Day shall be deemed to have been received on
the following Business Day and any applicable interest or fee shall continue to
accrue. Borrower's Loan Account will be credited only with the net amounts
actually received in payment of Receivables, and such payments shall be credited
to the Obligations in such order as TBCC shall determine in its discretion.
Pending delivery to TBCC, Borrower will not commingle any Items of Payment with
any of its other funds or property, but will segregate them from the other
assets of Borrower and will hold them in trust and for the account and as the
property of TBCC. Borrower hereby agrees to endorse any Items of Payment upon
the request of TBCC.

  1.5. Reserves. TBCC may, from time to time, in its Good Faith business
judgment: (i) establish and modify reserves against Eligible Receivables,
(ii) modify advance rates with respect to Eligible Receivables and Eligible
Inventory, (iii) modify the standards of eligibility set forth in the
definitions of Eligible Receivables and Eligible Inventory, and (iv) establish
reserves against available Loans.

  1.6. Term.

   (a) The term of this Agreement shall be from the date of this Agreement to
the Maturity Date set forth in the Schedule, unless sooner terminated in
accordance with the


                                      -1-
<PAGE>   2
terms of this Agreement, provided that the Maturity Date shall automatically be
extended, and this Agreement shall automatically and continuously renew, for
successive additional terms of one year each, unless one party gives written
notice to the other, not less than sixty days prior to the next Maturity Date,
that such party elects to terminate this Agreement effective on the next
Maturity Date. On the Maturity Date or on any earlier termination of this
Agreement Borrower shall pay in full all Obligations, and notwithstanding any
termination of this Agreement all of TBCC's security interests and all of TBCC's
other rights and remedies shall continue in full force and effect until payment
and performance in full of all Obligations.

   (b) This Agreement may be terminated prior to the Maturity Date as follows:
(i) by Borrower, effective three Business Days after written notice of
termination is given to TBCC; or (ii) by TBCC at any time after the occurrence
of an Event of Default, *, effective immediately. If this Agreement is
terminated by Borrower or by TBCC under this Section 1.6(b), Borrower shall pay
to TBCC a termination fee (the "Termination Fee") in the amount shown on the
Schedule. The Termination Fee shall be due and payable on the effective date of
termination. Notwithstanding the foregoing, Borrower shall have no right to
terminate this Agreement at any time that any principal of, or interest on any
of the Loans or any other monetary Obligations are outstanding, except upon
prepayment of all Obligations and the satisfaction of all other conditions set
forth in the Loan Documents.

   *UPON NOTICE TO BORROWER

  1.7. Payment Procedures. Borrower hereby authorizes TBCC to charge the Loan
Account with the amount of all interest, fees, expenses and other payments to be
made hereunder and under the other Loan Documents. TBCC may, but shall not be
obligated to, discharge Borrower's payment obligations hereunder by so charging
the Loan Account. Whenever any payment to be made hereunder is due on a day that
is not a Business Day, the payment may be made on the next succeeding Business
Day and such extension of time shall be included in the computation of the
amount of interest due.

  1.8. Conditions to Initial Loan. The obligation of TBCC to make the initial
Loan is subject to the satisfaction of the following conditions prior to or
concurrent with such initial Loan, and Borrower shall cause all such conditions
to be satisfied by the Closing Deadline set forth in the Schedule:

   (a) Except for the filing of termination statements under the Code by the
existing lender to Borrower whose loans are being repaid with the Loan proceeds,
no consent or authorization of, filing with or other act by or in respect of any
Governmental Authority or any other Person is required in connection, with the
execution, delivery, performance, validity or enforceability of this Agreement,
or the other Loan Documents or the consummation of the transactions contemplated
hereby or thereby or the continuing operations of the Borrower following the
consummation of such transactions.

   (b) TBCC and its counsel shall have performed (i) a review satisfactory to
TBCC of all of the Material Contracts and other assets of the Borrower, the
financial condition of the Borrower, including all of its tax, litigation,
environmental and other potential contingent liabilities, and the corporate and
capital structure of the Borrower and (ii) a pre-closing audit and collateral
review, in each case with results satisfactory to TBCC.

   (c) TBCC shall have received the following, each dated the date of the
initial Loan or as of an earlier date acceptable to TBCC, in form and substance
satisfactory to TBCC and its counsel: (i) a Depository Account Agreement (as
TBCC shall designate), duly executed by the Borrower and its bank on TBCC's
standard form; (ii) acknowledgment copies of Uniform Commercial Code financing
statements (naming TBCC as secured party and the Borrower as debtor), duly filed
in all jurisdictions that TBCC deems necessary or desirable to perfect and
protect the Liens created hereunder, and evidence that all other filings,
registrations and recordings have been made in the appropriate governmental
offices, and all other action has been taken, which shall be necessary to
create, in favor of TBCC, a perfected first priority Lien on the Collateral;
(iii) the opinion of counsel for the Borrower covering such matters incident to
the transactions contemplated by this Agreement as TBCC may specify in its
discretion; (iv) certified copies of all policies of insurance required by this
Agreement and the other Loan Documents, together with loss payee endorsements
for all such policies naming TBCC as lender loss payee and an additional
insured; (v) copies of the Borrower's articles or certificate of incorporation,
certified as true, correct and complete by the secretary of state of Borrower's
state of incorporation within 45 days of the date hereof; (vi) copies of the
bylaws of the Borrower and a copy of the resolutions of the Board of Directors
of the Borrower authorizing the execution, delivery and performance of this
Agreement, the other Loan Documents, and the transactions contemplated hereby
and thereby, attached to which is a certificate of the Secretary or an Assistant
Secretary of the Borrower certifying (A) that such copies of the bylaws and
resolutions are true, complete and accurate copies thereof, have not been
amended or modified since the date of such certificate and are in full force and
effect and (B) the incumbency, names and true signatures of the officers of the
Borrower; (vii) a good standing certificate from the Secretary of State of
Borrower's state of incorporation and each state in which the Borrower is
qualified as a foreign corporation, each dated within ten days of the date
hereof; (viii) the additional documents and agreements, if any, listed in the
Schedule; and (ix) such other agreements and instruments as TBCC deems necessary
in its sole and absolute discretion in connection with the transactions
contemplated hereby.

  1.9. Conditions to Lending. The obligation of TBCC to make any Loan is subject
to the satisfaction of the following conditions precedent:

   (a) There shall be no pending or, to the knowledge of Borrower after due
inquiry, threatened litigation, proceeding, inquiry or other action relating to
this Agreement, or any other Loan Document, or which could be expected to have a
Material Adverse Effect in the judgment of TBCC;

   (b) Borrower shall be in compliance with all Requirements of Law and Material
Contracts, other than such noncompliance that could not have a Material Adverse
Effect;

   (c) The Liens in favor of TBCC shall have been duly perfected and shall
constitute first priority Liens, except for Permitted Liens;


                                      -2-
<PAGE>   3
TBCC                                                 LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------

   (d) All representations and warranties contained in this Agreement and the
other Loan Documents shall be true and correct * on and as of the date of such
Loan as if then made, other than representations and warranties that expressly
relate solely to an earlier date, in which case they shall have been true and
correct * as of such earlier date;

   (e) No Default or Event of Default shall have occurred and be continuing or
would result from the making of the requested Loan as of the date of such
request; and

   (f) No Material Adverse Effect shall have occurred.

* IN ALL MATERIAL RESPECTS

2. INTEREST AND FEES.

  2.1. Interest. Borrower shall pay TBCC interest on all outstanding Loans and
other monetary Obligations, at the interest rate set forth in the Schedule.
Interest shall be payable monthly in arrears on the first Business Day of each
month, and on the Maturity Date. Following the occurrence and during the
continuance of any Event of Default, the interest rate applicable to all
Obligations shall be increased by two percent per annum.

  2.2. Fees. Borrower shall pay TBCC the fees set forth in the Schedule.

  2.3. Calculations. All interest and fees under this Agreement shall be
calculated on the basis of a year of 360 days for the actual number of days
elapsed in the period for which such interest or fees are payable.

  2.4. Taxes. Any and all payments by Borrower under this Agreement or any other
Loan Document shall be made free and clear of and without deduction for any and
all present or future taxes, levies, imposts, deductions, charges or
withholdings and penalties, interest and all other liabilities with respect
thereto, excluding in the case of TBCC, taxes imposed on its net income and
franchise taxes imposed on it by the jurisdiction under the laws of which TBCC
is organized or any political subdivision thereof.

3. SECURITY.

  3.1. Grant of Security Interest. To secure the payment and performance when
due of all of the Obligations, Borrower hereby grants to TBCC a security
interest in all of its present and future Receivables, Investment Property,
Inventory, Equipment, Other Property, and other Collateral, wherever located*.

  * , PROVIDED THAT THE SECURITY INTEREST GRANTED TO TBCC SHALL NOT EXTEND TO
ANY OF BORROWER'S PRESENT OR FUTURE "INTELLECTUAL PROPERTY" (AS DEFINED IN
SECTION 9(A) OF THE SCHEDULE), BUT THE SECURITY INTEREST OF TBCC SHALL EXTEND TO
ANY AND ALL PRESENT AND FUTURE PAYMENTS IN RESPECT TO, AND PROCEEDS OF,
INTELLECTUAL PROPERTY, OF EVERY KIND (INCLUDING WITHOUT LIMITATION ALL ROYALTIES
AND LICENSE FEES)

  3.2. Other Liens; Location of Collateral. Borrower represents, warrants and
covenants that all of the Collateral is, and will at all times continue to be,
free and clear of all Liens, other than Permitted Liens and Liens in favor of
TBCC. All Collateral is and will continue to be maintained at the locations
shown on the Schedule.

  3.3. Receivables.

   (a) Schedules and Other Actions. As often as requested by TBCC, Borrower
shall execute and deliver to TBCC written schedules of Receivables and Eligible
Receivables (but the failure to execute or deliver any schedule shall not affect
or limit TBCC's security interest in all Receivables). On TBCC's request,
Borrower shall also furnish to TBCC copies of invoices to customers and shipping
and delivery receipts. Borrower shall deliver to TBCC the originals of all
letters of credit, notes, and instruments in its favor and such endorsements or
assignments as TBCC may reasonably request and, upon the request of TBCC,
Borrower shall deliver to TBCC all certificated securities with respect to any
Investment Property, with all necessary indorsements, and obtain such account
control agreements with securities intermediaries and take such other action
with respect to any Investment Property, as TBCC shall request, in form and
substance satisfactory to TBCC. Upon request of TBCC Borrower additionally shall
obtain consents from any letter of credit issuers with respect to the assignment
to TBCC of any letter of credit proceeds.

   (b) Records, Collections. Borrower shall report all customer credits to TBCC,
on the regular reports to TBCC in the form from time to time specified by TBCC.
Borrower shall notify TBCC of all returns and recoveries of merchandise and of
all claims asserted with respect to merchandise, on its regular reports to TBCC.
Borrower shall not settle or adjust any dispute or claim, or grant any discount,
credit or allowance or accept any return of merchandise, except in the ordinary
course of its business, without TBCC's prior written consent.

   (c) Representations. Borrower represents and warrants to TBCC that each
Receivable with respect to which Loans are requested by Borrower shall, on the
date each Loan is requested and made, represent an undisputed, bona fide,
existing, unconditional obligation of the account debtor created by the sale,
delivery, and acceptance of goods, the licensing of software or the rendition of
services, in the ordinary course of Borrower's business, and meet the Minimum
Eligibility Requirements set forth in Section 9.1(n) below.

  3.4. Inventory. Borrower shall maintain full, accurate and complete records
respecting the Inventory describing the kind, type and quantity of the Inventory
and Borrower's cost therefor, withdrawals therefrom and additions thereto,
including a perpetual inventory for work in process and finished goods.

  3.5. Equipment. Borrower shall at all times keep correct and accurate records
itemizing and describing the location, kind, type, age and condition of the
Equipment, Borrower's cost therefor and accumulated depreciation thereof and
retirements, sales, or other dispositions thereof. Borrower shall keep all of
its Equipment in a satisfactory state of repair and satisfactory operating
condition in accordance with industry standards, ordinary wear and tear
excepted. No Equipment shall be annexed or affixed to or become part of any
realty, unless the owner of the realty has executed and delivered a Landlord
Waiver in such form as TBCC shall specify. Where Borrower is permitted to
dispose of any Equipment under this Agreement or by any consent thereto
hereafter given by TBCC, Borrower shall do so at arm's length, in good faith and
by obtaining the maximum amount of recovery practicable therefor and without
impairing the operating integrity or value of the remaining Equipment.


                                      -3-
<PAGE>   4
TBCC                                                 LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------

  3.6. Investment Property. Borrower shall have the right to retain all
Investment Property payments and distributions, unless and until a Default or an
Event of Default has occurred. If a Default or an Event of Default exists,
Borrower shall hold all payments on, and proceeds of, and distributions with
respect to, Investment Property in trust for TBCC, and Borrower shall deliver
all such payments, proceeds and distributions to TBCC, immediately upon receipt,
in their original form, duly endorsed, to be applied to the Obligations in such
order as TBCC shall determine. Upon the request of TBCC, any such distributions
and payments with respect to any Investment Property held in any securities
account shall be held and retained in such securities account as part of the
Collateral.

  3.7 Further Assurances. Borrower will perform any and all steps that TBCC may
reasonably request to perfect TBCC's security interests in the Collateral,
including, without limitation, executing and filing financing and continuation
statements in form and substance satisfactory to TBCC. TBCC is hereby authorized
by Borrower to sign Borrower's name or file any financing statements or similar
documents or instruments covering the Collateral whether or not Borrower's
signature appears thereon. Borrower agrees, from time to time, at TBCC's
request, to file notices of Liens, financing statements, similar documents or
instruments, and amendments, renewals and continuations thereof, and cooperate
with TBCC, in connection with the continued perfection and protection of the
Collateral. If any Collateral is in the possession or control of any Person
other than a public warehouseman where the warehouse receipt is in the name of
or held by TBCC, Borrower shall notify such Person of TBCC's security interest
therein and, upon request, instruct such Person or Persons to hold all such
Collateral for the account of TBCC and subject to TBCC's instructions. If so
requested by TBCC, Borrower will deliver to TBCC warehouse receipts covering any
Collateral located in warehouses showing TBCC as the beneficiary thereof and
will also cause the warehouseman to execute and deliver such agreements as TBCC
may request relating to waivers of liens by such warehouseman and the release of
the Inventory to TBCC on its demand. Borrower shall defend the Collateral
against all claims and demands of all Persons.

  3.8. Power of Attorney. Borrower hereby appoints and constitutes TBCC as
Borrower's attorney-in-fact (i) to request at any time from account debtors
verification of information concerning Receivables and the amount owing thereon,
(ii) upon the occurrence and during the continuance of an Event of Default, to
convey any item of Collateral to any purchaser thereof, (iii) to give or sign
Borrower's name to any notices or statements necessary or desirable to create or
continue the Lien on any Collateral granted hereunder, (iv) to execute and
deliver to any securities intermediary or other Person any entitlement order,
account control agreement or other notice, document or instrument with respect
to any Investment Property, and (v) to make any payment or take any act
necessary or desirable to protect or preserve any Collateral. TBCC's authority
hereunder shall include, without limitation, the authority to execute and give
receipt for any certificate of ownership or any document, transfer title to any
item of Collateral and take any other actions arising from or incident to the
powers granted to TBCC under this Agreement. This power of attorney is coupled
with an interest and is irrevocable.

4. Representations and Warranties of Borrower. Borrower represents and warrants
as follows:

  4.1. Organization, Good Standing and Qualification. Borrower (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the State set forth above, (ii) has the corporate power and authority to own
its properties and assets and to transact the businesses in which it is engaged
and (iii) is duly qualified, authorized to do business and in good standing in
each jurisdiction where it is engaged in business, except to the extent that the
failure to so qualify or be in good standing would not have a Material Adverse
Effect.

  4.2. Locations of Offices, Records and Collateral. The address of the
principal place of business and chief executive office of Borrower is, and the
books and records of Borrower and all of its chattel paper and records relating
to Collateral are maintained exclusively in the possession of Borrower at, the
address of Borrower specified in the heading of this Agreement. Borrower has
places of business, and Collateral is located, only at such address and at the
addresses set forth in the Schedule and at any additional locations reported to
TBCC as provided in Section 5.8(c) as to which TBCC has taken all necessary
action to perfect and protect its security interests in the Collateral at any
such locations.

  4.3. Authority. Borrower has the requisite corporate power and authority to
execute, deliver and perform its obligations under each of the Loan Documents.
All corporate action necessary for the execution, delivery and performance by
Borrower of the Loan Documents has been taken.

  4.4. Enforceability. This Agreement is, and, when executed and delivered, each
other Loan Document will be, the legal, valid and binding obligation of Borrower
enforceable in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency or similar laws affecting creditors' rights
generally and general principles of equity.

  4.5. No Conflict. The execution, delivery and performance of each Loan
Document by Borrower does not and will not contravene (i) any of the Governing
Documents, (ii) any Requirement of Law or (iii) any Material Contract and will
not result in the imposition of any Liens other than in favor of TBCC.

  4.6. Consents and Filings. No consent, authorization or approval of, or filing
with or other act by, any shareholders of Borrower or any Governmental Authority
or other Person is required in connection with the execution, delivery,
performance, validity or enforceability of this Agreement or any other Loan
Document, the consummation of the transactions contemplated hereby or thereby or
the continuing operations of Borrower following such consummation, except (i)
those that have been obtained or made, (ii) the filing of financing statements
under the Uniform Commercial Code and (iii) any necessary filings with the U.S.
Copyright Office and the U.S. Patent and Trademark Office.

  4.7. Solvency. Borrower is Solvent and will be Solvent upon the completion of
all transactions contemplated to occur on or before the date of this Agreement
(including, without limitation, the Loans to be made on the date of this
Agreement).


                                      -4-
<PAGE>   5
TBCC                                                 LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------

  4.8. Financial Data. Borrower has provided to TBCC complete and accurate
Financial Statements, which have been prepared in accordance with GAAP
consistently applied throughout the periods involved and fairly present the
financial position and results of operations of Borrower for each of the periods
covered, subject, in the case of any quarterly financial statements, to normal
year-end adjustments and the absence of notes. Borrower has no Contingent
Obligation or liability for taxes, unrealized losses, unusual forward or
long-term commitments or long-term leases, which is not reflected in such
Financial Statements or the footnotes thereto. Since the last date covered by
such Financial Statements, there has been no sale, transfer or other disposition
by Borrower of any material part of its business or property and no purchase or
other acquisition of any business or property (including any capital stock of
any other Person) material in relation to the financial condition of Borrower at
said date. Since said date, (i) there has been no change, occurrence,
development or event which has had or could reasonably be expected to have a
Material Adverse Effect and (ii) none of the capital stock of Borrower has been
redeemed, retired, purchased or otherwise acquired for value by Borrower. *

  * THE FINANCIAL STATEMENTS DO NOT REFLECT THE SALE ON JUNE 7, 1999 OF
$5,000,000 AGGREGATE PRINCIPAL AMOUNT OF BORROWER'S 7% CONVERTIBLE DEBENTURES
DUE JUNE 7, 2002 (THE "DEBENTURES"). THE TERMS OF THE DEBENTURES (INCLUDING THE
ABILITY OF THE PURCHASERS OF THE DEBENTURES TO PURCHASE AN ADDITIONAL $5,000,000
IN AGGREGATE PRINCIPAL AMOUNT) ARE SUMMARIZED IN, AND THE DOCUMENTS EVIDENCING
THE DEBENTURES ARE FILED WITH, THE BORROWER'S CURRENT REPORT ON FORM 8-K FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 1999. THE FINANCIAL
STATEMENTS ALSO DO NOT REFLECT THE ACQUISITION OF AMP, DESCRIBED BELOW IN
SECTION 4.10 (THE "AMP ACQUISITION").

  4.9. Accuracy and Completeness of Information. All data, reports and
information previously, now or hereafter furnished by or on behalf of Borrower
to TBCC or the Auditors are or will be true and accurate in all material
respects on the date as of which such data, reports and information are dated or
certified, and not incomplete by omitting to state any material fact necessary
to make such data, reports and information not materially misleading at such
time. There are no facts now known to Borrower which individually or in the
aggregate would reasonably be expected to have a Material Adverse Effect and
which have not been disclosed in writing to TBCC.

  4.10. No Joint Ventures, Partnerships or Subsidiaries. Borrower is not engaged
in any joint venture or partnership with any other Person. Borrower has no
Subsidiaries*.

  * OTHER THAN ADVANCED MEDICAL PROCEDURES, INC., A DELAWARE CORPORATION
("AMP"), ALL OF WHOSE ASSETS ARE LOCATED IN THE STATE OF FLORIDA

  4.11. Corporate and Trade Name. During the past five years, Borrower has not
been known by or used any other corporate, trade or fictitious name except for
its name as set forth on the signature page of this Agreement and the other
names specified in the Schedule.

  4.12. No Actual or Pending Material Modification of Business. There exists no
actual or, to the best of Borrower's knowledge after due inquiry, threatened
termination, cancellation or limitation of, or any modification or change in the
business relationship of Borrower with any customer or group of customers whose
purchases individually or in the aggregate are material to the operation of
Borrower's business or with any material supplier.

  4.13. No Broker's or Finder's Fees. No broker or finder brought about this
Agreement or the Loans. No broker's or finder's fees or commissions will be
payable by Borrower to any Person in connection with the transactions
contemplated by this Agreement.

  4.14. Taxes and Tax Returns. Borrower has properly completed and timely filed
all income tax returns it is required to file. The information filed is complete
and accurate in all material respects. All deductions taken in such income tax
returns are appropriate and in accordance with applicable laws and regulations,
except deductions that may have been disallowed but are being challenged in good
faith and for which adequate reserves have been made in accordance with GAAP.
All taxes, assessments, fees and other governmental charges for periods
beginning prior to the date of this Agreement have been timely paid (or, if not
yet due, adequate reserves therefor have been established in accordance with
GAAP) and Borrower has no liability for taxes in excess of the amounts so paid
or reserves so established. No deficiencies for taxes have been claimed,
proposed or assessed by any taxing or other Governmental Authority against
Borrower and no notice of any tax Lien has been filed. There are no pending or
threatened audits, investigations or claims for or relating to any liability for
taxes and there are no matters under discussion with any Governmental Authority
which could result in an additional liability for taxes*. No extension of a
statute of limitations relating to taxes, assessments, fees or other
governmental charges is in effect with respect to Borrower. Borrower is not a
party to and does not have any obligations under any written tax sharing
agreement or agreement regarding payments in lieu of taxes.

  * , BUT THERE IS A PENDING ORDINARY COURSE SALES AND USE TAX AUDIT BEING
CONDUCTED

  4.15. No Judgments or Litigation. Except as set forth in the Schedule, no
judgments, orders, writs or decrees are outstanding against Borrower, nor is
there now pending or, to the knowledge of Borrower after due inquiry, threatened
litigation, contested claim, investigation, arbitration, or governmental
proceeding by or against Borrower that (i) could individually or in the
aggregate be likely in the reasonable business judgment of TBCC to have a
Material Adverse Effect or (ii) purports to affect the legality, validity or
enforceability of this Agreement, any other Loan Document or the consummation of
the transactions contemplated hereby or thereby.

  4.16. Investments; Contracts. Borrower (i) has not committed to make any
Investment*; (ii) is not a party to any indenture, agreement, contract,
instrument or lease or subject to any charter, by-law or other corporate
restriction or any injunction, order, restriction or decree, which would
materially and adversely affect its business, operations, assets or financial
condition; (iii) is not a party to any take or pay contract as to which it is
the purchaser; or (iv) has no material contingent or long-term liability,
including management contracts (excluding employment contracts of full-time
individual officers or employees), which could have a Material Adverse Effect.


                                      -5-
<PAGE>   6
TBCC                                                 LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------

  * OTHER THAN THE SANARUS TRANSACTION (DEFINED BELOW)

  4.17. No Defaults; Legal Compliance. Borrower is not in default under any term
of any Material Contract or in violation of any Requirement of Law, nor is
Borrower subject to any investigation with respect to a claimed violation of any
Requirement of Law.

  4.18. Rights in Collateral; Priority of Liens. All Collateral is owned or
leased by Borrower, free and clear of any and all Liens in favor of third
parties, other than Permitted Liens. The Liens granted to TBCC pursuant to the
Loan Documents constitute valid, enforceable and perfected first-priority Liens
on the Collateral, except for Permitted Liens.

  4.19. Intellectual Property. Set forth in the written Representations and
Warranties of Borrower previously delivered to TBCC is a complete and accurate
list of all patents, trademarks, trade names, service marks and copyrights
(registered and unregistered), and all applications therefor and licenses
thereof, of Borrower. Borrower owns or licenses all material patents,
trademarks, service-marks, logos, tradenames, trade secrets, know-how,
copyrights, or licenses and other rights with respect to any of the foregoing,
which are necessary or advisable for the operation of its business as presently
conducted or proposed to be conducted. To the best of its knowledge after due
inquiry, Borrower has not infringed any patent, trademark, service-mark,
tradename, copyright, license or other right owned by any other Person by the
sale or use of any product, process, method, substance, part or other material
presently contemplated to be sold or used, where such sale or use would
reasonably be expected to have a Material Adverse Effect and no claim or
litigation is pending, or to the best of Borrower's knowledge, threatened
against or affecting Borrower that contests its right to sell or use any such
product, process, method, substance, part or other material.

  4.20. Labor Matters. There are no existing or threatened strikes, lockouts or
other disputes relating to any collective bargaining or similar agreement to
which Borrower is a party which would, individually or in the aggregate, be
reasonably likely to have a Material Adverse Effect.

  4.21. Licenses and Permits. Borrower has obtained and holds in full force and
effect, all franchises, licenses, leases, permits, certificates, authorizations,
qualifications, easements, rights of way and other rights and approvals which
are necessary or advisable for the operation of its business as presently
conducted and as proposed to be conducted, except where the failure to possess
any of the foregoing (individually or in the aggregate) would not have a
Material Adverse Effect.

  4.22. Government Regulation. Borrower is not subject to regulation under the
Public Utility Holding Company Act of 1935, the Federal Power Act, the
Interstate Commerce Act, the Investment Company Act of 1940, or any other
Requirement of Law that limits its ability to incur indebtedness or its ability
to consummate the transactions contemplated by this Agreement and the other Loan
Documents.

  4.23. Business and Properties. The business of Borrower is not affected by any
fire, explosion, accident, strike, lockout or other labor dispute, drought,
storm, hail, earthquake, embargo, act of God or of the public enemy or other
casualty (whether or not covered by insurance) that could reasonably be expected
to have a Material Adverse Effect.

  4.24. Affiliate Transactions. Borrower is not a party to or bound by any
agreement or arrangement (whether oral or written) to which any Affiliate of
Borrower is a party except * (i) in the ordinary course of and pursuant to the
reasonable requirements of the business of Borrower and (ii) upon fair and
reasonable terms no less favorable to Borrower than it could obtain in a
comparable arm's-length transaction with an unaffiliated Person.

  * FOR THE AGREEMENT AND PLAN OF MERGER DATED JUNE 30, 1999, FOR THE AMP
ACQUISITION, TO WHICH ROBERT BYNES IS A PARTY, AS DISCLOSED IN BORROWER'S PROXY
STATEMENT FOR ITS 1999 ANNUAL MEETING OF SHAREHOLDERS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION OR AS ENTERED INTO

  4.25. Survival of Representations. All representations made by Borrower in
this Agreement and in any other Loan Document executed and delivered by it in
connection herewith shall survive the execution and delivery hereof and thereof
and the closing of the transactions contemplated hereby and thereby.

5. AFFIRMATIVE COVENANTS OF THE BORROWER. Until termination of this Agreement
and payment and satisfaction of all Obligations:

  5.1. Corporate Existence. Borrower shall (i) maintain its corporate existence,
(ii) maintain in full force and effect all material licenses, bonds, franchises,
leases, trademarks, qualifications and authorizations to do business, and all
material patents, contracts and other rights necessary or advisable to the
profitable conduct of its business, and (iii) continue in, and limit its
operations to, the same lines of business as presently conducted by it.

  5.2. Maintenance of Property. Borrower shall keep all property useful and
necessary to its business in good working order and condition (ordinary wear and
tear excepted) in accordance with its past operating practices.

  5.3. Affiliate Transactions. Borrower shall conduct transactions with any of
its Affiliates on an arm's-length basis or other basis no less favorable to
Borrower and which are approved by the board of directors of Borrower.

  5.4. Taxes. Borrower shall pay when due (i) all tax assessments, and other
governmental charges and levies imposed against it or any of its property and
(ii) all lawful claims that, if unpaid, might by law become a Lien upon its
property; provided, however, that, unless such tax assessment, charge, levy or
claim has become a Lien on any of the property of Borrower, it need not be paid
if it is being contested in good faith, by appropriate proceedings diligently
conducted and an adequate reserve or other appropriate provision shall have been
made therefor as required in accordance with GAAP.

  5.5. Requirements of Law. Borrower shall comply with all Requirements of Law
applicable to it, including, without limitation, all applicable Federal, State,
local or foreign laws and regulations, including, without limitation, those
relating to environmental matters, employee matters, the Employee Retirement
Income Security Act of 1974, and the collection, payment and deposit of
employees' income, unemployment and social security taxes, provided that
Borrower shall not be deemed in violation hereof if


                                      -6-
<PAGE>   7
TBCC                                                 LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------

Borrower's failure to comply with any of the foregoing would not require more
than * $50,000 to cure the same.

  *$100,000

  5.6. Insurance. Borrower shall maintain public liability insurance, business
interruption insurance, third party property damage insurance and replacement
value insurance on its assets (including the Collateral) under such policies of
insurance, with such insurance companies, in such amounts and covering such
risks as are at all times satisfactory to TBCC in its commercially reasonable
judgment, all of which policies covering the Collateral shall name TBCC as an
additional insured and lender loss payee in case of loss, and contain other
provisions as TBCC may reasonably require to protect fully TBCC's interest in
the Collateral and any payments to be made under such policies.

  5.7. Books and Records; Inspections. Borrower shall (i) maintain books and
records (including computer records) pertaining to the Collateral in such
detail, form and scope as is consistent with good business practice and (ii)
provide TBCC and its agents access to the premises of Borrower at any time and
from time to time, during normal business hours and upon reasonable notice under
the circumstances, and at any time on and after the occurrence of a Default or
Event of Default, for the purposes of (A) inspecting and verifying the
Collateral, (B) inspecting and copying (at Borrower's expense) any and all
records pertaining thereto, and (C) discussing the affairs, finances and
business of Borrower with any officer, employee or director of Borrower or with
the Auditors. Borrower shall reimburse TBCC for the reasonable travel and
related expenses of TBCC's employees or, at TBCC's option, of such outside
accountants or examiners as may be retained by TBCC to verify or inspect
Collateral, records or documents of Borrower on a regular basis or for a special
inspection if TBCC deems the same appropriate. If TBCC's own employees are used,
Borrower shall also pay therefor $600 per person per day (or such other amount
as shall represent TBCC's then current standard charge for the same), or, if
outside examiners or accountants are used, Borrower shall also pay TBCC such sum
as TBCC may be obligated to pay as fees therefor.

  5.8. Notification Requirements. Borrower shall give TBCC the following notices
and other documents:

   (a) Notice of Defaults. Borrower shall give TBCC written notice of any
Default or Event of Default within two Business Days after becoming aware of the
same.

   (b) Proceedings or Adverse Changes. Borrower shall give TBCC written notice
of any of the following, promptly, and in any event within five Business Days
after Borrower becomes aware of any of the following: (i) any proceeding being
instituted or threatened by or against it in any federal, state, local or
foreign court or before any commission or other regulatory body involving a sum,
together with the sum involved in all other similar proceedings, in excess of *
in the aggregate, (ii) any order, judgment or decree being entered against
Borrower or any of its properties or assets involving a sum, together with the
sum of all other orders, judgments or decrees, in excess of * in the aggregate,
and (iii) any actual or prospective change, development or event which has had
or could reasonably be expected to have a Material Adverse Effect.

   *$100,000

   (c) Change of Name or Chief Executive Office; Opening Additional Places of
Business. Borrower shall give TBCC at least 30 days prior written notice of any
change of Borrower's corporate name or its chief executive office or of the
opening of any additional place of business.

   (d) Casualty Loss. Borrower shall (i) provide written notice to TBCC, within
ten Business Days, of any material damage to, the destruction of or any other
material loss to any asset or property owned or used by Borrower other than any
such asset or property with a net book value (individually or in the aggregate)
less than * or any condemnation, confiscation or other taking, in whole or in
part, or any event that otherwise diminishes so as to render impracticable or
unreasonable the use of such asset or property owned or used by Borrower
together with the amount of the damage, destruction, loss or diminution in value
and (ii) diligently file and prosecute its claim or claims for any award or
payment in connection with any of the foregoing.

   *$50,000

   (e) Intellectual Property. Borrower shall promptly give TBCC written notice
of any copyright registration made by it, any rights Borrower may obtain to any
copyrightable works, new trademarks or any new patentable inventions, and of any
renewal or extension of any trademark registration, or if it shall otherwise
become entitled to the benefit of any patent or patent application or trademark
or trademark application.

   (f) Deposit Accounts and Security Accounts. Borrower shall promptly give TBCC
written notice of the opening of any new bank account or other deposit account,
and any new securities account.

  5.9. Qualify to Transact Business. Borrower shall qualify to transact business
as a foreign corporation in each jurisdiction where the nature or extent of its
business or the ownership of its property requires it to be so qualified or
authorized and where failure to qualify or be authorized would have a Material
Adverse Effect.

  5.10. Financial Reporting. Borrower shall timely deliver to TBCC the following
financial information: the information set forth in the Schedule, and, when
requested by TBCC in its good-faith judgment, any further information respecting
Borrower or any Collateral. Borrower authorizes TBCC to communicate directly
with its officers, employees and Auditors and to examine and make abstracts from
its books and records. Borrower authorizes its Auditors to disclose to TBCC any
and all financial statements, work papers and other information of any kind that
they may have with respect to Borrower and its business and financial and other
affairs. Borrower shall deliver a letter addressed to the Auditors requesting
them to comply with the provisions of this paragraph when requested by TBCC.

  5.11. Payment of Liabilities. Borrower shall pay and discharge, in the
ordinary course of business, all Indebtedness, except where the same may be
contested in good faith by appropriate proceedings and adequate reserves with
respect thereto have been provided on the books and records of Borrower in
accordance with GAAP.

  5.12. Patents, Trademarks, Etc. Borrower shall do and cause to be done all
things necessary to preserve, maintain and keep in full force and effect all of
its registrations of trademarks, service marks and other marks, trade names


                                      -7-
<PAGE>   8
TBCC                                                 LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------

and other trade rights, patents, copyrights and other intellectual property in
accordance with prudent business practices.

  5.13. Proceeds of Collateral. Without limiting any of the other terms of this
Agreement, and without implying any consent to any sale or other transfer of
Collateral in violation of any provision of this Agreement, Borrower shall
deliver to TBCC all proceeds of any sale or other transfer or disposition of any
Collateral, immediately upon receipt of the same and in the same form as
received, with any necessary endorsements, and Borrower will not commingle any
such proceeds with any of its other funds or property, but will segregate them
from the other assets of Borrower and will hold them in trust and for the
account and as the property of TBCC.

  5.14. Solvency.  Borrower shall be Solvent at all times.

6. Negative Covenants. Until termination of this Agreement and payment and
satisfaction of all Obligations:

  6.1. Contingent Obligations. Borrower will not, directly or indirectly, incur,
assume, or suffer to exist any Contingent Obligation, excluding indemnities
given in connection with this Agreement or the other Loan Documents in favor of
TBCC or in connection with the sale of Inventory or other asset dispositions
permitted hereunder.

  6.2. Corporate Changes. Borrower will not, directly or indirectly, merge or
consolidate with any Person, or liquidate or dissolve (or suffer any liquidation
or dissolution)*.

  * EXCEPT THAT (I) BORROWER MAY MERGE AMP INTO BORROWER, AND (II) CERTAIN
PROPOSED GENERALLY ACCEPTED ACCOUNTING PROCEDURES MAY REQUIRE THAT SANARUS BE
CONSOLIDATED WITH BORROWER FOR FINANCIAL ACCOUNTING PURPOSES

  6.3. Change in Nature of Business. Borrower will not at any time make any
material change in the lines of its business as carried on at the date of this
Agreement or enter into any new line of business.

  6.4. Sales of Assets. Borrower will not, directly or indirectly, in any fiscal
year, sell, transfer or otherwise dispose of any assets, or grant any option or
other right to purchase or otherwise acquire any assets other than (i) Equipment
with an aggregate value of less than * the proceeds of which shall be paid to
TBCC and applied to the Obligations, (ii) sales of Inventory in the ordinary
course of business and (iii) licenses or sublicenses on a non-exclusive basis of
intellectual property in the ordinary course of Borrower's business**.

  *$50,000

  **AND EXCLUSIVE DISTRIBUTION LICENSES AND MANUFACTURING LICENSES IN ARMS
LENGTH TRANSACTIONS

  6.5. Cancellation of Debt. Borrower will not cancel any claim or debt owed to
it, except in the ordinary course of business.

  6.6. Loans to Other Persons. Borrower will not at any time make loans or
advance any credit (except to trade debtors in the ordinary course of business)
to any Person in excess of * in the aggregate at any time for all such loans. **

  *$150,000

  ** THE FOREGOING NEGATIVE COVENANT SHALL NOT BE CONSTRUED TO PROHIBIT ISSUANCE
OF BORROWER'S CAPITAL STOCK TO ITS EMPLOYEES, CONSULTANTS OR DIRECTORS IN
EXCHANGE FOR PROMISSORY NOTES, I.E., IN A COMPLETELY CASHLESS TRANSACTION.
NOTWITHSTANDING THE PROVISIONS OF THIS SECTION 6.6, BORROWER MAY MAKE LOANS TO
AMP, PROVIDED THAT THE OUTSTANDING BALANCE OF ALL AMOUNTS OWING FROM AMP TO
BORROWER, INCLUDING BUT NOT LIMITED TO PRINCIPAL AND INTEREST, SHALL NOT EXCEED
(I) $685,000 AT ANY TIME FROM THE DATE OF THIS AGREEMENT THROUGH JUNE 30, 2000,
AND (II) $1,185,000 AT ANY TIME AFTER JUNE 30, 2000.

  6.7. Liens. Borrower will not, directly or indirectly, at any time create,
incur, assume or suffer to exist any Lien on or with respect to any of the
Collateral, other than: Liens created hereunder and by any other Loan Document;
and Permitted Liens.

  6.8. Dividends, Stock Redemptions. Borrower will not, directly or indirectly,
pay any dividends or distributions on, purchase, redeem or retire any shares of
any class of its capital stock or any warrants, options or rights to purchase
any such capital stock, whether now or hereafter outstanding (Stock), or make
any payment on account of or set apart assets for a sinking or other analogous
fund for, the purchase, redemption, defeasance, retirement or other acquisition
of its Stock, or make any other distribution in respect thereof, either directly
or indirectly, whether in cash or property or in obligations of Borrower, except
for dividends paid solely in stock of the Borrower *.

  * , PROVIDED HOWEVER, THAT BORROWER MAY REPURCHASE STOCK, PROVIDED THAT NO
DEFAULT OR EVENT OF DEFAULT SHALL EXIST EITHER IMMEDIATELY PRIOR TO OR AFTER
GIVING EFFECT TO ANY SUCH REPURCHASE, AND PROVIDED THAT THE AGGREGATE AMOUNTS SO
PAID FOR SUCH REPURCHASE(S) OF STOCK DURING THE TERM OF THIS AGREEMENT AND ANY
RENEWAL TERMS SHALL NOT EXCEED $250,000 CUMULATIVELY

  6.9. Investments in Other Persons. Borrower will not, directly or indirectly,
at any time make or hold any Investment in any Person (whether in cash,
securities or other property of any kind) other than Investments in Cash
Equivalents*.

  * AND IN CONNECTION WITH THE SANARUS TRANSACTION (DEFINED BELOW)

  6.10. Partnerships; Subsidiaries; Joint Ventures; Management Contracts.
Borrower will not at any time create any direct or indirect Subsidiary, enter
into any joint venture or similar arrangement or become a partner in any general
or limited partnership or enter into any management contract (other than an
employment contract for the employment of an officer or employee entered into in
the regular course of Borrower's business) permitting third party management
rights with respect to Borrower's business*.

  * , EXCEPT FOR THE SANARUS TRANSACTION (DEFINED BELOW)

  6.11. Fiscal Year. Borrower will not change its fiscal year.

  6.12. Accounting Changes. Borrower will not at any time make or permit any
change in accounting policies or reporting practices, except as required by
GAAP.


                                      -8-
<PAGE>   9
TBCC                                                 LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------

  6.13. Broker's or Finder's Fees. Borrower will not pay or incur any broker's
or finder's fees in connection with this Agreement or the transactions
contemplated hereby.

  6.14. Unusual Terms of Sale. Borrower will not sell goods or products on
extended terms, consignment terms, on a progress billing or bill and hold basis,
or on any other unusual terms*.

  * , EXCEPT THAT BORROWER MAY FROM TIME TO TIME (I) LOAN A CRYOCARE SYSTEM TO A
USER, AND (II) TRANSFER A CRYOCARE SYSTEM TO A USER WHO HAS PURCHASED A
SUFFICIENT NUMBER OF DISPOSABLE UNITES WHICH ARE USED IN CONNECTION WITH SUCH
CRYOCARE SYSTEM

  6.15. Amendments of Material Contracts. Borrower will not amend, modify,
cancel or terminate, or permit the amendment, modification, cancellation or
termination of, any Material Contract, if such amendment, modification,
cancellation or termination could * have a Material Adverse Effect.

  *REASONABLY BE EXPECTED TO

  6.16. Sale and Leaseback Obligations. Borrower will not at any time create,
incur or assume any obligations as lessee for the rental of real or personal
property in connection with any sale and leaseback transaction.

  6.17. Acquisition of Stock or Assets. Borrower will not acquire or commit or
agree to acquire all or any stock, securities or assets of any other Person
other than Inventory and Equipment acquired in the ordinary course of business*.

  * , EXCEPT THAT BORROWER MAY ACQUIRE, AND TBCC CONSENTS TO THE ACQUISITION OF
THE FOLLOWING: (I) SERIES A PREFERRED STOCK OF SANARUS MEDICAL INCORPORATED
("SANARUS") REPRESENTING APPROXIMATELY SIX PERCENT (6%) OF THE CURRENT
OUTSTANDING CAPITAL STOCK OF SANARUS (THE "SANARUS STOCK"), FOR A PURCHASE PRICE
OF APPROXIMATELY $500,000; AND (II) A WARRANT TO PURCHASE AN ADDITIONAL
EIGHTY-TWO PERCENT (82%) OF THE CURRENT OUTSTANDING CAPITAL STOCK OF SANARUS
(THE "SANARUS WARRANT"), FOR A PURCHASE PRICE OF APPROXIMATELY $100,000 (THE
PURCHASE BY BORROWER OF THE SANARUS STOCK AND THE SANARUS WARRANT MAY BE
COLLECTIVELY REFERRED TO HEREIN AS THE "SANARUS TRANSACTION"), PROVIDED THAT,
BORROWER EXECUTES SUCH DOCUMENTS, INSTRUMENTS, AND AGREEMENTS, INCLUDING BUT NOT
LIMITED TO PLEDGE AGREEMENTS WITH RESPECT TO THE SANARUS STOCK AND THE SANARUS
WARRANT, AND TAKES SUCH OTHER ACTION WITH RESPECT THERETO, INCLUDING BUT NOT
LIMITED TO DELIVERING POSSESSION OF THE SANARUS STOCK AND THE SANARUS WARRANT TO
TBCC, AS TBCC MAY SPECIFY

7. EVENTS OF DEFAULT.

  7.1. Events of Default. The occurrence of any of the following events shall
constitute an Event of Default:

   (a) Borrower shall fail to pay any principal, interest, fees, expenses or
other Obligations when payable, whether at stated maturity, by acceleration, or
otherwise; or

   (b) Borrower shall default in the performance or observance of any agreement,
covenant, condition, provision or term contained in Section 1.1, 1.2, 1.4, 3.3,
5.7, 5.13, 6 (and its Sections and subsections), or 8.1 of this Agreement, or
Borrower shall fail to perform any non-monetary Obligation which by its nature
cannot be cured; or

   (c) Borrower shall default in the performance or observance of any other
agreement, covenant, condition, provision or term of this Agreement (other than
those referred to in Section 7.1(a) above or Section 7.1(b) above) or any other
Loan Document, and such failure continues uncured for a period of * Business
Days after the date it occurs; or

   *TEN

   (d) Borrower or any Guarantor shall dissolve, wind up or otherwise cease to
conduct its business; or

   (e) Borrower or any Guarantor shall become the subject of (i) an Insolvency
Event except as set forth in clause (e) of the definition of Insolvency Event or
(ii) an Insolvency Event as set forth in clause (e) of the definition of
Insolvency Event that is not dismissed within sixty days; or

   (f) any representation or warranty made by or on behalf of Borrower or any
Guarantor to TBCC, under this Agreement or otherwise, shall be incorrect or
misleading in any material respect when made or deemed made; or

   (g) A change in the ownership or control of more than * of the voting stock
of the Borrower compared to such ownership on the date of this Agreement; or

   *30%

   (h) any judgment or order for the payment of money shall be rendered against
Borrower and shall not be stayed, vacated, bonded or discharged within thirty
days; or

   (i) any defined "Event of Default" shall occur under any other Loan Document;
or Borrower or any Guarantor shall deny or disaffirm its obligations under any
of the Loan Documents or any Liens granted in connection therewith or shall
otherwise challenge any of its obligations under any of the Loan Documents; or
any Liens granted in any of the Collateral shall be determined to be void,
voidable or invalid, are subordinated or are not given the priority contemplated
by this Agreement; or

   (j) any Loan Document shall for any reason cease to create a valid and
perfected Lien on the Collateral purported to be covered thereby, of first
priority (except for Permitted Liens)*; or

   *AND, IF THE FOREGOING IS THROUGH NO FAULT OF THE BORROWER, THE SAME SHALL
NOT BE CURED WITHIN FIVE (FIVE) DAYS

   (k) the Auditors for Borrower shall deliver a Qualified opinion on any
Financial Statement; or

   (l) Borrower or any Guarantor (i) shall fail to pay any Indebtedness owing to
TBCC under any other agreement with TBCC or note or instrument in favor of TBCC,
when due (whether at scheduled maturity or by required prepayment, acceleration,
demand or otherwise), or (ii) shall otherwise be in breach of or default in any
of its obligations under any such agreement, note or instrument with respect to
any such Indebtedness*; or

   *WHICH WOULD PERMIT ACCELERATION OF SUCH INDEBTEDNESS

  (m) Borrower or any Guarantor (i) shall fail to pay any Indebtedness in excess
of * owing to any Person other than TBCC or any interest or premium thereon,
when due (whether at scheduled maturity or by required


                                      -9-
<PAGE>   10
TBCC                                                 LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------

prepayment, acceleration, demand or otherwise), ** or (ii) shall otherwise be in
breach or default in any of its obligations under any agreement with respect to
any such Indebtedness, if the effect of such breach, default or failure to pay
is to cause such Indebtedness to become due or redeemed or permit the holder or
holders of such Indebtedness (or a trustee or agent on behalf of such holder or
holders) to declare such Indebtedness due or require such Indebtedness to be
redeemed prior to its stated maturity***; or

   *$100,000

   ** PROVIDED THAT, THIS PROVISION SHALL NOT APPLY WITH RESPECT TO ANY CLAIM BY
CIRCLE SEAL FOR UP TO $250,000 PURPORTEDLY DUE FROM BORROWER IN CONNECTION WITH
SALES OF VALVES BY CIRCLE SEAL TO BORROWER WHICH WERE SHIPPED TO, AND REJECTED
BY, BORROWER BETWEEN APRIL AND SEPTEMBER OF 1997,

   *** AND THE HOLDER OR HOLDERS OF SUCH INDEBTEDNESS (OR A TRUSTEE OR AGENT ON
BEHALF OF SUCH HOLDER OR HOLDERS) DO DECLARE SUCH INDEBTEDNESS DUE OR REQUIRE
SUCH INDEBTEDNESS TO BE REDEEMED PRIOR TO ITS STATED MATURITY

   (n) the occurrence of any event or condition that, in TBCC's * judgment,
could reasonably be expected to have a Material Adverse Effect.

* REASONABLE GOOD FAITH

TBCC may cease making any Loans hereunder during any of the above cure periods,
and thereafter if any Event of Default has occurred and is continuing.

  7.2. Remedies. Upon the occurrence and during the continuance of an Event of
Default, TBCC shall have all rights and remedies under applicable law and the
Loan Documents, and TBCC may do any or all of the following:

   (a) Declare all Obligations to be immediately due and payable (except with
respect to any Event of Default with respect to Borrower set forth in Section
7.1(e), in which case all Obligations shall automatically become immediately due
and payable) without presentment, demand, protest or any other action or
obligation of TBCC;

   (b) Cease making any Loans or other extensions of credit to Borrower of any
kind;

   (c) Take possession of all documents, instruments, files and records
(including the copying of any computer records) relating to the Receivables or
other Collateral and use (at the expense of Borrower) such supplies or space of
Borrower at Borrower's places of business necessary to administer and collect
the Receivables and other Collateral;

   (d) Accelerate or extend the time of payment, compromise, issue credits, or
bring suit on the Receivables and other Collateral (in the name of Borrower or
TBCC) and otherwise administer and collect the Receivables and other Collateral;

   (e) Collect, receive, dispose of and realize upon any Investment Property,
including withdrawal of any and all funds from any securities accounts;

   (f) Sell, assign and deliver the Receivables and other Collateral, with or
without advertisement, at public or private sale, for cash, on credit or
otherwise, subject to applicable law;

   (g) Foreclose on the security interests created pursuant to the Loan
Documents by any available procedure, take possession of any or all of the
Collateral, with or without judicial process and enter any premises where any
Collateral may be located for the purpose of taking possession of or removing
the same; and

   (h) Bid or become a purchaser at any sale, free from any right of redemption,
which right is expressly waived by Borrower, if permitted under applicable law.
If notice of intended disposition of any Collateral is required by law, it is
agreed that ten days' notice shall constitute reasonable notification. Borrower
will assemble the Collateral and make it available at such locations as TBCC may
specify, whether at the premises of Borrower or elsewhere, and will make
available to TBCC the premises and facilities of Borrower for the purpose of
TBCC's taking possession of or removing the Collateral or putting the Collateral
in salable form.

   (i) Borrower recognizes that TBCC may be unable to make a public sale of any
or all of the Investment Property, by reasons of prohibitions contained in
applicable securities laws or otherwise, and expressly agrees that a private
sale to a restricted group of purchasers for investment and not with a view to
any distribution thereof shall be considered a commercially reasonable sale.

  7.3. Receivables. Upon the occurrence and during the continuance of an Event
of Default, or at any time that TBCC believes in good faith that fraud has
occurred or that Borrower has failed to deliver the proceeds of Receivables or
other Collateral to TBCC as required by this Agreement or any other Loan
Document, TBCC may (i) settle or adjust disputes or claims directly with account
debtors for amounts and upon terms which it considers advisable, and (ii) notify
account debtors on the Receivables and other Collateral that the Receivables and
Collateral have been assigned to TBCC, and that payments in respect thereof
shall be made directly to TBCC. If an Event of Default has occurred and is
continuing or TBCC reasonably believes in good faith that fraud has occurred, or
that Borrower has failed to deliver the proceeds of Receivables or other
Collateral to TBCC as required by this Agreement or any other Loan Document,
Borrower hereby irrevocably authorizes and appoints TBCC, or any Person TBCC may
designate, as its attorney-in-fact, at Borrower's sole cost and expense, to
exercise, all of the following powers, which are coupled with an interest and
are irrevocable, until all of the Obligations have been indefeasibly paid and
satisfied in full in cash: (A) to receive, take, endorse, sign, assign and
deliver, all in the name of TBCC or Borrower, any and all checks, notes, drafts,
and other documents or instruments relating to the Collateral; (B) to receive,
open and dispose of all mail addressed to Borrower and to notify postal
authorities to change the address for delivery thereof to such address as TBCC
may designate; and (C) to take or bring, in the name of TBCC or Borrower, all
steps, actions, suits or proceedings deemed by TBCC necessary or desirable to
enforce or effect collection of Receivables and other Collateral or file and
sign Borrower's name on a proof of claim in bankruptcy or similar document
against any obligor of Borrower.

  7.4. Right of Setoff. In addition to all rights of offset that TBCC may have
under applicable law, upon the occurrence and during the continuance of any
Event of Default, and whether or not TBCC has made any demand or the Obligations
of Borrower have matured, TBCC shall have


                                      -10-
<PAGE>   11
TBCC                                                 LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------

the right to appropriate and apply to the payment of the Obligations of Borrower
all deposits and other obligations then or thereafter owing by TBCC to or for
the credit or the account of Borrower. In the event that TBCC exercises any of
its rights under this Section, TBCC shall provide notice to Borrower of such
exercise, provided that the failure to give such notice shall not affect the
validity of the exercise of such rights.

  7.5. License for Use of Software and Other Intellectual Property. After the
occurrence and during the continuance of an Event of Default, unless expressly
prohibited by any licensor thereof, TBCC is hereby granted a license to use all
computer software programs, data bases, processes, trademarks, tradenames and
materials used by Borrower in connection with its businesses or in connection
with the Collateral.

  7.6. No Marshalling; Deficiencies; Remedies Cumulative. The net cash proceeds
resulting from TBCC's exercise of any of its rights with respect to Collateral,
including any and all Collections (after deducting all of TBCC's reasonable
expenses related thereto), shall be applied by TBCC to such of the Obligations
in such order as TBCC shall elect in its sole and absolute discretion, whether
due or to become due. Borrower shall remain liable to TBCC for any deficiencies
and TBCC shall remit to Borrower or its successor or assign, any surplus
resulting therefrom. The remedies specified in this Agreement are cumulative,
may be exercised in such order and with respect to such Collateral as TBCC may
deem desirable and are not intended to be exclusive, and the full or partial
exercise of any of them shall not preclude the full or partial exercise of any
other available remedy under this Agreement, under any other Loan Document, at
equity or at law.

  7.7. Waivers. Borrower hereby waives any bonds, security or sureties required
by any statute, rule or any other law as an incident to any taking of possession
by TBCC of any Collateral. Borrower also waives any damages (direct,
consequential or otherwise) occasioned by the enforcement of TBCC's rights under
this Agreement or any other Loan Document including the taking of possession of
any Collateral or the giving of notice to any account debtor or the collection
of any Receivable or other Collateral (other than damages that are the result of
acts or omissions constituting gross negligence or willful misconduct of TBCC).
These waivers and all other waivers provided for in this Agreement and the other
Loan Documents have been negotiated by the parties and Borrower acknowledges
that it has been represented by counsel of its own choice and has consulted such
counsel with respect to its rights hereunder.

  7.8. Right to Make Payments. In the event that Borrower shall fail to purchase
or maintain insurance required hereunder, or to pay any tax, assessment,
government charge or levy, except as the same may be otherwise permitted
hereunder, or in the event that any Lien prohibited hereby shall not be paid in
full or discharged, or in the event that Borrower shall fail to perform or
comply with any other covenant, promise or obligation to TBCC hereunder or under
any other Loan Document, TBCC may (but shall not be required to) perform, pay,
satisfy, discharge or bond the same for the account of Borrower, and all amounts
so paid by TBCC shall be treated as a Loan hereunder to Borrower and shall
constitute part of the Obligations.

8. Assignments and Participations.

  8.1. Assignments. Borrower shall not assign this Agreement or any right or
obligation hereunder without the prior written consent of TBCC. TBCC may assign
(without the consent of Borrower) to one or more Persons all or a portion of its
rights and obligations under this Agreement and the other Loan Documents.

  8.2. Participations. TBCC may sell participations in or to all or a portion of
its rights and obligations under this Agreement (including, without limitation,
all or a portion of the Loans); provided, however, that TBCC's obligations under
this Agreement shall remain unchanged.

  8.3. Disclosure. TBCC may, in connection with any permitted assignment or
participation or proposed assignment or participation pursuant to this
Agreement, disclose to the assignee or participant or proposed assignee or
participant any information relating to Borrower furnished to TBCC by or on
behalf of Borrower.

9. DEFINITIONS.

  9.1. General Definitions. As used herein, the following terms shall have the
meanings herein specified (to be equally applicable to both the singular and
plural forms of the terms defined):

   (a) Affiliate means as to any Person, any other Person who directly or
indirectly controls, is under common control with, is controlled by or is a
director or officer of such Person. As used in this definition, "control"
(including its correlative meanings, "controlled by" and "under common control
with") means possession, directly or indirectly, of the power to direct or cause
the direction of management or policies (whether through ownership of voting
securities or partnership or other ownership interests, by contract or
otherwise), provided that, in any event, any Person who owns directly or
indirectly twenty percent (20%) or more of the securities having ordinary voting
power for the election of the members of the board of directors or other
governing body of a corporation or twenty percent (20%) or more of the
partnership or other ownership interests of any other Person (other than as a
limited partner of such other Person) will be deemed to control such
corporation, partnership or other Person.

   (b) Agreement means this Loan and Security Agreement, as amended,
supplemented or otherwise modified from time to time.

   (c) Auditors means a nationally recognized firm of independent public
accountants selected by Borrower and reasonably satisfactory to TBCC.

   (d) Bankruptcy Code means Title 11 of the United States Code entitled
"Bankruptcy," as that title may be amended from time to time, or any successor
statute.

   (e) Borrowing means a borrowing of Loans.

   (f) Business Day means any day other than a Saturday, Sunday or any other day
on which commercial banks in Chicago, Illinois are required or permitted by law
to close.

  (g) Cash Equivalents means (i) securities issued, guaranteed or insured by the
United States or any of its agencies with maturities of not more than one year
from the date acquired; (ii) certificates of deposit with maturities of not more
than one year from the date acquired, issued by any U.S. federal or state
chartered commercial bank of


                                      -11-
<PAGE>   12
TBCC                                                 LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------

recognized standing which has capital and unimpaired surplus in excess of
$100,000,000; (iii) investments in money market funds registered under the
Investment Company Act of 1940; and (iv) other instruments, commercial paper or
investments acceptable to TBCC in its sole discretion.

   (h) Collateral means Receivables, Investment Property, Inventory, Equipment,
and Other Property, and all additions and accessions thereto and substitutions
and replacements therefor and improvements thereon, and all proceeds (whether
cash or other property) and products thereof, including, without limitation, all
proceeds of insurance covering the same and all tort claims in connection
therewith, and all records, files, computer programs and files, data and
writings relating to the foregoing, and all equipment containing the foregoing.

   (i) Collections means all cash, funds, checks, notes, instruments, any other
form of remittance tendered by account debtors in respect of payment of
Receivables and any other payments received by Borrower with respect to any
other Collateral.

   (j) Compliance Certificate means a certificate as to compliance with the
Obligations, on TBCC's standard form (in effect from time to time).

   (k) Contingent Obligation means any direct, indirect, contingent or
non-contingent guaranty or obligation for the Indebtedness of another Person,
except endorsements in the ordinary course of business.

   (l) Default means any of the events specified in Section 7.1, whether or not
any of the requirements for the giving of notice, the lapse of time, or both, or
any other condition, has been satisfied.

   (m) [Omitted]

   (n) Eligible Receivables means and includes only those Receivables which TBCC
in its * deems eligible for borrowing, based on such considerations as TBCC in
its sole discretion may deem appropriate from time to time and less any such
reserves as TBCC, in its sole discretion, may require. Without limiting the fact
that the determination of which Receivables are eligible for borrowing is a
matter of TBCC's sole discretion, the following (the "Minimum Eligibility
Requirements") are the minimum requirements for a Receivable to be an Eligible
Receivable: (i) the Receivable must not be outstanding for more than 90 days
from its invoice date, (ii) the Receivable must not represent progress billings,
or be due under a fulfillment or requirements contract with the account debtor,
(iii) the Receivable must not be subject to any contingencies (including
Receivables arising from sales on consignment, guaranteed sale or other terms
pursuant to which payment by the account debtor may be conditional), (iv) the
Receivable must not be owing from an account debtor with whom the Borrower has
any dispute (whether or not relating to the particular Receivable), (v) the
Receivable must not be owing from an Affiliate of Borrower, (vi) the Receivable
must not be owing from an account debtor which is subject to any insolvency or
bankruptcy proceeding, or whose financial condition is not acceptable to TBCC,
or which, fails or goes out of a material portion of its business, (vii) the
Receivable must not be owing from the United States or any department, agency or
instrumentality thereof (unless there has been compliance, to TBCC's
satisfaction, with the United States Assignment of Claims Act), (viii) the
Receivable must not be owing from an account debtor located outside the United
States or Canada (unless pre-approved by TBCC in its discretion in writing, or
backed by a letter of credit satisfactory to TBCC, or FCIA insured satisfactory
to TBCC), (ix) the Receivable must not be owing from an account debtor to whom
Borrower is or may be liable for goods purchased from such account debtor or
otherwise, (x) the Receivable must not violate any representation or warranty
set forth in this Agreement, and (xi) the Receivable must not be one in which
TBCC does not have a first-priority, valid, perfected Lien. Without limiting the
generality of the foregoing, Borrower must be in compliance with all
requirements of the Loan Documents regarding registration with the U.S.
Copyright Office of any copyrightable software in order for any Receivable
arising from any licensing of such software to constitute an Eligible Receivable
hereunder. Receivables owing from one account debtor will not be deemed Eligible
Receivables to the extent they exceed 35% of the total eligible Receivables
outstanding. In addition, if more than 50% of the Receivables owing from an
account debtor are outstanding more than 90 days from their invoice date
(without regard to unapplied credits) or are otherwise not eligible Receivables,
then all Receivables owing from that account debtor will be deemed ineligible
for borrowing. TBCC may, from time to time, in its sole discretion, revise the
Minimum Eligibility Requirements, upon written notice to the Borrower.

   *GOOD FAITH BUSINESS JUDGMENT

   (o) Equipment means all machinery, equipment, furniture, fixtures, conveyors,
tools, materials, storage and handling equipment, hydraulic presses, cutting
equipment, computer equipment and hardware, including central processing units,
terminals, drives, memory units, printers, keyboards, screens, peripherals and
input or output devices, molds, dies, stamps, vehicles, and other equipment of
every kind and nature and wherever situated now or hereafter owned by Borrower
or in which Borrower may have any interest as lessee or otherwise (to the extent
of such interest), together with all additions and accessions thereto, all
replacements and all accessories and parts therefor, all manuals, blueprints,
know-how, warranties and records in connection therewith, all rights against
suppliers, warrantors, manufacturers, sellers or others in connection therewith,
and together with all substitutes for any of the foregoing.

   (p) Event of Default means the occurrence of any of the events specified in
Section 7.1.

   (q) Financial Statements means the balance sheets, profit and loss
statements, statements of cash flow, and statements of changes in intercompany
accounts, if any, for the period specified, prepared in accordance with GAAP and
consistent with prior practices.

   (r) GAAP means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board that are applicable to the
circumstances as of the date of determination. Whenever any accounting term is
used herein which is not otherwise defined, it shall be interpreted in
accordance with GAAP.


                                      -12-
<PAGE>   13
TBCC                                                 LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------

   (s) Good Faith means "good faith" as defined in the Uniform Commercial Code,
from time to time in effect in the State of Illinois.

   (t) Governing Documents means the articles or certificate of incorporation
and by-laws of Borrower.

   (u) Governmental Authority means any nation or government, any state or other
political subdivision thereof or any entity exercising executive, legislative,
judicial, regulatory or administrative functions thereof or pertaining thereto.

   (v) Guarantor means any present or future guarantor of any or all of the
Obligations.

   (w) Indebtedness means, with respect to any Person, as of the date of
determination any indebtedness, liability or obligation of such Person
(including without limitation obligations under capital leases and Contingent
Obligations).

   (x) Insolvency Event means, with respect to any Person, the occurrence of any
of the following: (a) such Person shall be adjudicated insolvent or bankrupt, or
shall generally fail to pay or admit in writing its inability to pay its debts
as they become due, (b) such Person shall seek dissolution or reorganization or
the appointment of a receiver, trustee, custodian or liquidator for it or a
substantial portion of its property, assets or business or to effect a plan or
other arrangement with its creditors, (c) such Person shall make a general
assignment for the benefit of its creditors, or consent to or acquiesce in the
appointment of a receiver, trustee, custodian or liquidator for a substantial
portion of its property, assets or business, (d) such Person shall file a
voluntary petition under any bankruptcy, insolvency or similar law or take any
corporate or similar act in furtherance thereof, or (e) such Person, or a
substantial portion of its property, assets or business shall become the subject
of an involuntary proceeding or petition for its dissolution, reorganization,
and such proceeding is not dismissed or stayed within sixty days, or the
appointment of a receiver, trustee, custodian or liquidator, and such receiver
is not dismissed within sixty days.

   (y) Inventory means all present and future goods intended for sale, lease or
other disposition by Borrower including, without limitation, all raw materials,
work in process, finished goods and other retail inventory, goods in the
possession of outside processors or other third parties, goods consigned to
Borrower to the extent of its interest therein as consignee, materials and
supplies of any kind, nature or description which are or might be used in
connection with the manufacture, packing, shipping, advertising, selling or
finishing of any such goods, and all documents of title or documents
representing the same.

   (z) Investment in any Person means, as of the date of determination thereof,
any payment or contribution, or commitment to make a payment or contribution, by
any Person including, without limitation, property contributed or committed to
be contributed by any Person, on its account for or in connection with its
acquisition of any stock, bonds, notes, debentures, partnership or other
ownership interest or any other security of the Person in whom such Investment
is made or any evidence of indebtedness by reason of a loan, advance, extension
of credit, guaranty or other similar obligation for any debt, liability or
indebtedness of such Person in whom the Investment is made.

   (aa) Investment Property means any and all investment property of Borrower,
including all securities, whether certificated or uncertificated, security
entitlements, securities accounts, commodity contracts and commodity accounts,
and all financial assets held in any securities account or otherwise, wherever
located, and whether now existing or hereafter acquired or arising.

   (bb) Lien means any lien, claim, charge, pledge, security interest,
assignment, hypothecation, deed of trust, mortgage, lease, conditional sale,
retention of title or other preferential arrangement having substantially the
same economic effect as any of the foregoing, whether voluntary or imposed by
law.

   (cc) Loan Account has the meaning specified in Section 1.3.

   (dd) Loan Documents means this Agreement and all present and future documents
and instruments delivered or to be delivered by Borrower or any of its
Affiliates or any Guarantor under, in connection with or relating to this
Agreement, or any other present or future instrument or agreement between TBCC
and Borrower, as each of the same may be amended, supplemented or otherwise
modified from time to time.

   (ee) Loans means the loans and financial accommodations made by TBCC
hereunder.

   (ff) Material Adverse Effect means (i) a material adverse effect on the
business, prospects, operations, results of operations, assets, liabilities or
condition (financial or otherwise) of Borrower, (ii) the impairment of
Borrower's ability to perform its obligations under the Loan Documents to which
it is a party or of TBCC to enforce the Obligations or realize upon the
Collateral or (iii) a material adverse effect on the value of the Collateral or
the amount which TBCC would be likely to receive (after giving consideration to
delays in payment and costs of enforcement) in the liquidation of the
Collateral.

   (gg) Material Contract means any contract or other arrangement to which
Borrower is a party (other than the Loan Documents) for which breach,
nonperformance, cancellation or failure to renew could have a Material Adverse
Effect.

  (hh) Obligations means and includes all loans (including the Loans), advances,
debts, liabilities, obligations, covenants and duties owing by Borrower to TBCC
of any kind or nature, present or future, whether or not evidenced by any note,
guaranty or other instrument, whether or not arising under or in connection
with, this Agreement, any other Loan Document or any other present or future
instrument or agreement, whether or not for the payment of money, whether
arising by reason of an extension of credit, opening, guaranteeing or confirming
of a letter of credit, loan, guaranty, indemnification or in any other manner,
whether direct or indirect (including those acquired by assignment, purchase,
discount or otherwise), whether absolute or contingent, due or to become due,
now due or hereafter arising and however acquired (including without limitation
all loans previously made by TBCC to Borrower). The term includes, without
limitation, all interest (including interest accruing on or after an Insolvency
Event, whether or not an allowed claim), charges, expenses, commitment,
facility, closing and collateral management fees, letter of credit fees,
reasonable attorneys' fees, and any other sum properly chargeable to


                                      -13-
<PAGE>   14
TBCC                                                 LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------

Borrower under this Agreement, the other Loan Documents or any other present or
future agreement between TBCC and Borrower.

  (ii) Other Property means all present and future: instruments, documents,
documents of title, securities, bonds, notes, promissory notes, drafts,
acceptances, letters of credit and rights to receive proceeds of letters of
credit, deposit accounts, chattel paper, certificates, insurance policies,
insurance proceeds, leases, computer tapes, causes of action, judgments, claims
against third parties, leasehold rights in any personal property, books,
ledgers, files and records, general intangibles (including without limitation,
all contract rights, tax refunds, rights to receive tax refunds, royalties,
licenses, permits, franchise rights, authorizations, customer lists, rights of
indemnification, contribution and subrogation, computer programs, discs and
software, computer service contracts, trademarks, trade names, service marks and
names, logos, goodwill, deposits, choses in action, telephone numbers and rights
thereto, credits, reserves, and all forms of obligations whatsoever now or
hereafter owing to Borrower), all property at any time in the possession or
under the control of TBCC, and all security given by Borrower to TBCC pursuant
to any other Loan Document or agreement.

   (jj) Permitted Liens means such of the following as to which no enforcement,
collection, execution, levy or foreclosure proceeding shall have been commenced
and be continuing: (i) Liens for taxes, assessments and other governmental
charges or levies or the claims or demands of landlords, carriers, warehousemen,
mechanics, laborers, materialmen and other like Persons arising by operation of
law in the ordinary course of business for sums which are not yet due and
payable, (ii) deposits or pledges to secure the payment of workmen's
compensation, unemployment insurance or other social security benefits or
obligations, public or statutory obligations, surety or appeal bonds, bid or
performance bonds, or other obligations of a like nature incurred in the
ordinary course of business (but nothing in this clause (ii) shall permit the
creation of Liens on Receivables, Investment Property, Inventory or Other
Property), (iii) zoning restrictions, easements, encroachments, licenses,
restrictions or covenants on the use of property which do not materially impair
either the use of the property in the operation of the business of Borrower or
the value of the property, (iv) rights of general application reserved to or
vested in any municipality or other governmental, statutory or public authority
to control or regulate property, or to use property in a manner which does not
materially impair the use of the property for the purposes for which it is held
by Borrower, (v) state and municipal Liens for personal property taxes which are
not yet due and payable, and (vi) Purchase Money Liens.

   (kk) Person means any individual, sole proprietorship, partnership, joint
venture, limited liability company, trust, unincorporated organization, joint
stock company, association, corporation, institution, entity, party or
government (including any division, agency or department thereof) or any other
legal entity, whether acting in an individual, fiduciary or other capacity, and,
as applicable, the successors, heirs and assigns of each.

   (ll) Plan means any employee benefit plan, program or arrangement maintained
or contributed to by Borrower or with respect to which it may incur liability.

   (mm) Purchase Money Lien means a Lien on any item of Equipment created
substantially simultaneously with the acquisition of such Equipment for the
purpose of financing such acquisition, provided that such Lien shall attach only
to the Equipment acquired.

   (nn) Qualification or Qualified means, with respect to any report of Auditors
covering Financial Statements, a material qualification to such report (i)
resulting from a limitation on the scope of examination of such Financial
Statements or the underlying data, (ii) as to the capability of Borrower to
continue operations as a going concern or (iii) which could be eliminated by
changes in Financial Statements or notes thereto covered by such report (such as
by the creation of or increase in a reserve or a decrease in the carrying value
of assets) and which if so eliminated by the making of any such change and after
giving effect thereto would result in a Default or an Event of Default.

   (oo) Receivables means all present and future accounts and accounts
receivable, together with all security therefor and guaranties thereof and all
rights and remedies relating thereto, including any right of stoppage in
transit.

   (pp) Requirement of Law means (a) the Governing Documents, (b) any law,
treaty, rule, regulation, order or determination of an arbitrator, court or
other Governmental Authority or (c) any franchise, license, lease, permit,
certificate, authorization, qualification, easement, right of way, right or
approval binding on Borrower or any of its property.

   (qq) Schedule means the Schedule to this Agreement being signed concurrently
by Borrower and TBCC, as amended from time to time.

   (rr) Solvent means when used with respect to any Person that as of the date
as to which such Person's solvency is to be measured: (a) the fair salable value
of its assets is in excess of the total amount of its liabilities (including
contingent liabilities as valued in accordance with applicable law) as they
become absolute and matured; (b) it has sufficient capital to conduct its
business; and (c) it is able to meet its debts as they mature.

   (ss) Subsidiary means, as to any Person, a corporation or other entity in
which that Person directly or indirectly owns or controls shares of stock or
other ownership interests having ordinary voting power to elect a majority of
the board of directors or appoint other managers of such corporation or other
entity.

  9.2. Accounting Terms and Determinations. Unless otherwise defined or
specified herein, all accounting terms used in this Agreement shall be construed
in accordance with GAAP, applied on a basis consistent in all material respects
with the Financial Statements delivered to TBCC on or before the date of this
Agreement. All accounting determinations for purposes of determining compliance
with this Agreement shall be made in accordance with GAAP as in effect on the
date of this Agreement and applied on a basis consistent in all material
respects with the audited Financial Statements delivered to TBCC on or before
the date of this Agreement. The Financial Statements required to be delivered
hereunder, and all financial records, shall be maintained in accordance with
GAAP. If GAAP shall change from the basis used in preparing the audited
Financial Statements delivered to TBCC on or before the date of this Agreement,
the Compliance Certificates required to be delivered pursuant


                                      -14-
<PAGE>   15
TBCC                                                 LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------

to this Agreement shall include calculations setting forth the adjustments
necessary to demonstrate how Borrower is in compliance with the Financial
Covenants (if any) based upon GAAP as in effect on the date of this Agreement.

  9.3. Other Terms; Headings; Construction. Unless otherwise defined herein,
terms used herein that are defined in the Uniform Commercial Code, from time to
time in effect in the State of Illinois, shall have the meanings set forth
therein. Each of the words "hereof," "herein," and "hereunder" refer to this
Agreement as a whole. The term "including", whenever used in this Agreement,
shall mean "including (but not limited to)". An Event of Default shall
"continue" or be "continuing" unless and until such Event of Default has been
waived or cured within the grace period specified therefor under Section 7.1.
References to Articles, Sections, Annexes, Schedules, and Exhibits are internal
references to this Agreement, and to its attachments, unless otherwise
specified. The headings and any Table of Contents are for convenience only and
shall not affect the meaning or construction of any provision of this Agreement.
This Agreement has been fully reviewed and negotiated between the parties and no
uncertainty or ambiguity in any term or provision of this Agreement shall be
construed strictly against TBCC or Borrower under any rule of construction or
otherwise.

10. GENERAL PROVISIONS.

  10.1. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS AND ANY DISPUTE ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, WHETHER
SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE GOVERNED BY THE
INTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS.

  10.2. SUBMISSION TO JURISDICTION. ALL DISPUTES BETWEEN THE BORROWER AND TBCC,
WHETHER SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY
BY STATE AND FEDERAL COURTS LOCATED IN CHICAGO, ILLINOIS, AND THE COURTS TO
WHICH AN APPEAL THEREFROM MAY BE TAKEN; PROVIDED, HOWEVER, THAT TBCC SHALL HAVE
THE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE
BORROWER OR ITS PROPERTY IN ANY LOCATION REASONABLY SELECTED BY TBCC IN GOOD
FAITH TO ENABLE TBCC TO REALIZE ON SUCH PROPERTY, OR TO ENFORCE A JUDGMENT OR
OTHER COURT ORDER IN FAVOR OF TBCC. THE BORROWER AGREES THAT IT WILL NOT ASSERT
ANY PERMISSIVE COUNTERCLAIMS, SETOFFS OR CROSS-CLAIMS IN ANY PROCEEDING BROUGHT
BY TBCC. THE BORROWER WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF
THE COURT IN WHICH TBCC HAS COMMENCED A PROCEEDING, INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON FORUM NON
CONVENIENS.

  10.3. SERVICE OF PROCESS. THE BORROWER HEREBY IRREVOCABLY DESIGNATES * AS THE
DESIGNEE AND AGENT OF THE BORROWER TO RECEIVE, FOR AND ON BEHALF OF THE
BORROWER, SERVICE OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO
THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. IT IS UNDERSTOOD THAT A COPY OF SUCH
PROCESS SERVED ON SUCH AGENT AT ITS ADDRESS WILL BE PROMPTLY FORWARDED BY MAIL
TO THE BORROWER, BUT THE FAILURE OF THE BORROWER TO RECEIVE SUCH COPY SHALL NOT
AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. NOTHING HEREIN SHALL AFFECT THE
RIGHT OF THE LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.

  *PRENTICE-HALL CORPORATION SYSTEM, INC., 1013 CENTRE ROAD, WILMINGTON,
DELAWARE  19805

  10.4. LIMITATION OF LIABILITY. TBCC SHALL HAVE NO LIABILITY TO THE BORROWER
(WHETHER SOUNDING IN TORT, CONTRACT, OR OTHERWISE) FOR LOSSES SUFFERED BY THE
BORROWER IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO THE
TRANSACTIONS OR RELATIONSHIPS CONTEMPLATED BY THIS AGREEMENT, OR ANY ACT,
OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH, UNLESS IT IS DETERMINED BY
A FINAL AND NONAPPEALABLE JUDGMENT OR COURT ORDER BINDING ON TBCC THAT THE
LOSSES WERE THE RESULT OF ACTS OR OMISSIONS CONSTITUTING GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF TBCC. THE BORROWER HEREBY WAIVES ALL FUTURE CLAIMS AGAINST
TBCC FOR SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES.

  10.5. Delays; Partial Exercise of Remedies. No delay or omission of TBCC to
exercise any right or remedy hereunder shall impair any such right or operate as
a waiver thereof. No single or partial exercise by TBCC of any right or remedy
shall preclude any other or further exercise thereof, or preclude any other
right or remedy.

  10.6. Notices. Except as otherwise provided herein, all notices and
correspondence hereunder shall be in writing and sent by certified or registered
mail, return receipt requested, by overnight delivery service, with all charges
prepaid, or by telecopier followed by a hard copy sent by regular mail, to the
parties at their addresses set forth in the heading to this Agreement. All such
notices and correspondence shall be deemed given (i) if sent by certified or
registered mail, three Business Days after being postmarked, (ii) if sent by
overnight delivery service, when received at the above stated addresses or when
delivery is refused and (iii) if sent by telecopier transmission, when receipt
of such transmission is acknowledged. Borrower's and TBCC's telecopier numbers
for purpose of notice hereunder are set forth in the Schedule; each party's
number may be changed by written notice to the other party.

  10.7. Indemnification; Reimbursement of Expenses of Collection. Borrower
hereby indemnifies and agrees, whether or not any of the transactions
contemplated by this Agreement or the other Loan Documents are consummated, to
defend and hold harmless (on an after-tax basis) TBCC, its successors and
assigns and their respective directors,


                                      -15-
<PAGE>   16
TBCC                                                 LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------

officers, agents, employees, advisors, shareholders, attorneys and Affiliates
(each, an "Indemnified Party") from and against any and all losses, claims,
damages, liabilities, deficiencies, obligations, fines, penalties, actions
(whether threatened or existing), judgments, suits (whether threatened or
existing) or expenses (including, without limitation, reasonable fees and
disbursements of counsel, experts, consultants and other professionals) incurred
by any of them (collectively, "Claims") (except, in the case of each Indemnified
Party, to the extent that any Claim is determined in a final and non-appealable
judgment by a court of competent jurisdiction to have directly resulted from
such Indemnified Party's gross negligence or willful misconduct) arising out of
or by reason of (i) any litigation, investigation, claim or proceeding which
arises out of or is related to (A) Borrower, or this Agreement, any other Loan
Document or the transactions contemplated hereby or thereby, (B) any actual or
proposed use by Borrower of the proceeds of the Loans, or (C) TBCC's entering
into this Agreement or any other Loan Document or any other agreements and
documents relating hereto, including, without limitation, amounts paid in
settlement, court costs and the reasonable fees and disbursements of counsel
incurred in connection with any such litigation, investigation, claim or
proceeding, (ii) any remedial or other action taken by Borrower in connection
with compliance by Borrower, or any of its properties, with any federal, state
or local environmental laws, rules or regulations, and (iii) any pending,
threatened or actual action, claim, proceeding or suit by any shareholder or
director of Borrower or any actual or purported violation of Borrower's charter,
by-laws or any other agreement or instrument to which Borrower is a party or by
which any of its properties is bound. In addition and without limiting the
generality of the foregoing, Borrower shall, upon demand, pay to TBCC all
reasonable costs and expenses incurred by TBCC (including the reasonable fees
and disbursements of counsel and other professionals) in connection with the
preparation, execution, delivery, administration, modification and amendment of
the Loan Documents, and pay to TBCC all reasonable costs and expenses (including
the reasonable fees and disbursements of counsel and other professionals) paid
or incurred by TBCC in order to enforce or defend any of its rights under or in
respect of this Agreement, any other Loan Document or any other document or
instrument now or hereafter executed and delivered in connection herewith,
collect the Obligations or otherwise administer this Agreement, foreclose or
otherwise realize upon the Collateral or any part thereof, prosecute actions
against, or defend actions by, account debtors; commence, intervene in, or
defend any action or proceeding; initiate any complaint to be relieved of the
automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy
claim, third-party claim, or other claim; examine, audit, copy, and inspect any
of the Collateral or any of Borrower's books and records; protect, obtain
possession of, lease, dispose of, or otherwise enforce TBCC's security interest
in, the Collateral; and otherwise represent TBCC in any litigation relating to
Borrower. Without limiting the generality of the foregoing, Borrower shall pay
TBCC a fee with respect to each wire transfer in the amount of $15 plus all bank
charges and a fee of $15 for all returned checks plus all bank charges. If
either TBCC or Borrower files any lawsuit against the other predicated on a
breach of this Agreement, the prevailing party in such action shall be entitled
to recover its reasonable costs and attorneys' fees, including (but not limited
to) reasonable attorneys' fees and costs incurred in the enforcement of,
execution upon or defense of any order, decree, award or judgment. If and to the
extent that the Obligations of Borrower hereunder are unenforceable for any
reason, Borrower hereby agrees to make the maximum contribution to the payment
and satisfaction of the Obligations which is permissible under applicable law.
Borrower's obligations under Section 2.4 and this Section shall survive any
termination of this Agreement and the other Loan Documents and the payment in
full of the Obligations, and are in addition to, and not in substitution of, any
of the other Obligations.

  10.8. Amendments and Waivers. Any provision of this Agreement or any other
Loan Document may be amended or waived if, but only if, such amendment or waiver
is in writing and signed by Borrower and TBCC and then any such amendment or
waiver shall be effective only to the extent set forth therein. The failure of
TBCC at any time or times to require Borrower to strictly comply with any of the
provisions of this Agreement or any other present or future agreement between
Borrower and TBCC shall not waive or diminish any right of TBCC later to demand
and receive strict compliance therewith. Any waiver of any default shall not
waive or affect any other default, whether prior or subsequent, and whether or
not similar. None of the provisions of this Agreement or any other agreement now
or in the future executed by Borrower and delivered to TBCC shall be deemed to
have been waived by any act or knowledge of TBCC or its agents or employees, but
only by a specific written waiver signed by an authorized officer of TBCC and
delivered to Borrower.

  10.9. Counterparts; Telecopied Signatures. This Agreement and any waiver or
amendment hereto may be executed in counterparts and by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but both of which shall together constitute one and the same
instrument. This Agreement and each of the other Loan Documents and any notices
given in connection herewith or therewith may be executed and delivered by
telecopier or other facsimile transmission all with the same force and effect as
if the same was a fully executed and delivered original manual counterpart.

  10.10. Severability. In case any provision in or obligation under this
Agreement or any other Loan Document shall be invalid, illegal or unenforceable
in any jurisdiction, the validity, legality and enforceability of the remaining
provisions or obligations, or of such provision or obligation in any other
jurisdiction, shall not in any way be affected or impaired thereby.

  10.11. Joint and Several Liability. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.

  10.12. Maximum Rate. Notwithstanding anything to the contrary contained
elsewhere in this Agreement or in any other Loan Document, the parties hereto
hereby agree that all agreements between them under this Agreement and the other
Loan Documents, whether now existing or hereafter arising and whether written or
oral, are expressly limited so that in no contingency or event whatsoever shall
the amount paid, or agreed to be paid, to TBCC for the use, forbearance, or
detention of the money loaned to Borrower and evidenced hereby or thereby or for
the performance or


                                      -16-
<PAGE>   17
TBCC                                                 LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------

payment of any covenant or obligation contained herein or therein, exceed the
maximum non-usurious interest rate, if any, that at any time or from time to
time may be contracted for, taken, reserved, charged or received on the
Obligations, under the laws of the State of Illinois (or the laws of any other
jurisdiction whose laws may be mandatorily applicable notwithstanding other
provisions of this Agreement and the other Loan Documents), or under applicable
federal laws which may presently or hereafter be in effect and which allow a
higher maximum non-usurious interest rate than under the laws of the State of
Illinois (or such other jurisdiction), in any case after taking into account, to
the extent permitted by applicable law, any and all relevant payments or charges
under this Agreement and the other Loan Documents executed in connection
herewith, and any available exemptions, exceptions and exclusions (the "Highest
Lawful Rate"). If due to any circumstance whatsoever, fulfillment of any
provisions of this Agreement or any of the other Loan Documents at the time
performance of such provision shall be due shall exceed the Highest Lawful Rate,
then, automatically, the obligation to be fulfilled shall be modified or reduced
to the extent necessary to limit such interest to the Highest Lawful Rate, and
if from any such circumstance TBCC should ever receive anything of value deemed
interest by applicable law which would exceed the Highest Lawful Rate, such
excessive interest shall be applied to the reduction of the principal amount
then outstanding hereunder or on account of any other then outstanding
Obligations and not to the payment of interest, or if such excessive interest
exceeds the principal unpaid balance then outstanding hereunder and such other
then outstanding Obligations, such excess shall be refunded to Borrower. All
sums paid or agreed to be paid to TBCC for the use, forbearance, or detention of
the Obligations and other indebtedness of Borrower to TBCC shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term of such indebtedness, until payment in full thereof, so
that the actual rate of interest on account of all such indebtedness does not
exceed the Highest Lawful Rate throughout the entire term of such indebtedness.
The terms and provisions of this Section shall control every other provision of
this Agreement, the other Loan Documents and all other agreements between the
parties hereto.

  10.13. Entire Agreement; Successors and Assigns. This Agreement and the other
Loan Documents constitute the entire agreement between the parties, supersede
any prior written and verbal agreements between them, and shall bind and benefit
the parties and their respective successors and permitted assigns. There are no
oral understandings, oral representations or oral agreements between the parties
which are not set forth in this Agreement or in other written agreements signed
by the parties in connection herewith.

  10.14. MUTUAL WAIVER OF JURY TRIAL. TBCC AND BORROWER EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT; OR (II) ANY OTHER PRESENT OR
FUTURE INSTRUMENT OR AGREEMENT BETWEEN TBCC AND BORROWER; OR (III) ANY CONDUCT,
ACTS OR OMISSIONS OF TBCC OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH TBCC OR
BORROWER; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT
OR OTHERWISE.

BORROWER:
ENDOCARE, INC.

By     /s/ William Hughes
      ---------------------------------
Title  Senior Vice President and
       Chief Financial Officer
      ---------------------------------

TBCC:

TRANSAMERICA BUSINESS CREDIT
CORPORATION

By     /s/ Ian Schnider
      ---------------------------------
Title
      ---------------------------------

Version: -6
<PAGE>   18
TBCC

                                  SCHEDULE TO
                          LOAN AND SECURITY AGREEMENT

BORROWER:         ENDOCARE, INC.
ADDRESS:          7 STUDEBAKER
                  IRVINE, CALIFORNIA 92618

DATE:             JULY 29, 1999

This Schedule is an integral part of the Loan and Security Agreement between
TRANSAMERICA BUSINESS CREDIT CORPORATION (TBCC) and the above borrower
(Borrower) of even date.

1.    CREDIT LIMIT (Section 1.1):

      An amount (the "Credit Limit") not to exceed the lesser of: $3,000,000 at
      any one time outstanding; or the sum of (a) and (b) below:

      (a)   Loans (the "Formula Loans") in an amount equal to 80% of the amount
            of Borrower's Eligible Receivables (as defined in Section 9.1(n)
            above); plus

      (b)   Loans (the "Non-Formula Loans") in an amount equal to $2,000,000.

      Loans made to the Borrower will first be Formula Loans to the extent
      Formula Loans are available to Borrower (based on the most recent
      Borrowing Base Certificate provided by Borrower to TBCC under the
      Streamlined Facility Agreement of even date), and next Non-Formula Loans
      to the extent available to Borrower.

2.    INTEREST.

      (Section 2.1): The interest rate in effect throughout each calendar month
      during the term of this Agreement shall be the highest "Base Rate" in
      effect during such month, plus

      (a)   In the case of Formula Loans, 2% per annum, and

      (b)   In the case of Non-Formula Loans, 3.5% per annum;

      provided that the interest charged for each month shall be a minimum of
      $5,000, regardless of the amount of the Obligations outstanding. Interest
      shall be calculated on the basis of a 360-day year for the actual number
      of days elapsed. "Base Rate" shall mean the highest prime, base or
      equivalent rate of interest announced from time to time by Citibank, N.A.,
      First National Bank of Chicago and Bank of America National Trust and
      Savings

<PAGE>   19
TBCC                                     SCHEDULE TO LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------

      Association (which may not be the lowest rate of interest charged by such
      bank).

3.    FEES:

      Loan Fee (Section 2.2): $30,000, payable concurrently herewith, plus
      $30,000 payable on the earlier of (i) the first anniversary of the date
      hereof, or (ii) termination of this Agreement. Both such Loan Fees are
      fully earned on the date hereof and are non-refundable.

      Termination Fee (Section 1.6(b)): An amount equal to $5,000 multiplied by
      each month (or portion thereof) from the effective date of termination to
      the Maturity Date, provided that the Termination Fee shall not exceed
      $45,000. The Termination Fee shall be payable on the date of termination.

4.    MATURITY DATE
      (Section 1.6):
      JULY 31, 2001 (the "Maturity Date"), subject to automatic renewal and
      early termination as provided in Section 1.6 above.

5.    REPORTING (Section 5.10): Borrower shall provide TBCC with the following
      reports:

      (a).  Monthly Financial Statements. Monthly unaudited financial
            statements, as soon as available, and in any event within 30 days
            after the end of each month.

      (b).  Monthly Receivable Agings. Monthly Receivable agings, aged by
            invoice date, within 10 days after the end of each month.

      (c).  Monthly Payable Agings. Monthly accounts payable agings, aged by
            invoice date, and outstanding or held check registers within 10 days
            after the end of each month.

      (d).  Monthly Compliance Certificates. As soon as available, but not later
            than thirty days after the end of each month, a Compliance
            Certificate, with an attached schedule of calculations demonstrating
            compliance or indicating non-compliance with any Financial
            Covenants.

      (e).  Quarterly Financial Statements. Quarterly unaudited financial
            statements, as soon as available, and in any event within * 30 days
            after the end of each fiscal quarter of Borrower.

            * 45

      (f).  Annual Financial Statements. As soon as available, but not later
            than 90 days after the end of the Borrower's fiscal year, (A)
            Borrower's annual audited Financial Statements; (B) a comparison in
            reasonable detail to the prior year's audited Financial Statements;
            (C) the Auditors' opinion without Qualification, *


                                      -2-
<PAGE>   20
TBCC                                     SCHEDULE TO LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------

            (D) a narrative discussion of Borrower's financial condition and
            results of operations and the liquidity and capital resources for
            such fiscal year.

            * AND ANY RELATED MANAGEMENT LETTER FROM THE AUDITORS TO BORROWER

6.    BORROWER INFORMATION:

      (a)   Prior Names of Borrower (Section 4.11): None

      (b)   Prior Trade Names of Borrower (Section 4.11): None

      (c)   Existing Trade Names of Borrower (Section 4.11): None

      (d)   Other Places of Business and Locations of Collateral (Section 4.2):
            None

7.    FACSIMILE NUMBERS:

      Borrower: (949) 597-0607

      TBCC: (818) 995-3214

8.    CLOSING DEADLINE (Section 1.8): JULY 31, 1999

9.    ADDITIONAL PROVISIONS:

      (a)   NEGATIVE PLEDGE-INTELLECTUAL PROPERTY. Borrower agrees, throughout
            the term of this Agreement and until all Obligations have been paid
            and performed in full, not to permit any of Borrower's present or
            future Intellectual Property to be subject to any voluntary or
            involuntary security interest, pledge, lien or encumbrance, of any
            kind or nature whatsoever, which secures any indebtedness, liability
            or obligation, except for indebtedness which is subordinated to the
            Obligations pursuant to a written subordination agreement between
            TBCC and the subordinating creditor on TBCC's standard form. As used
            herein "Intellectual Property" shall mean all of Borrower's present
            and future software, copyrights, copyright applications, patents,
            patent applications, trade secrets, designs, blueprints, plans, know
            how, and licenses of any of the foregoing.

      (b)   LIMITATION ON INDEBTEDNESS. Borrower shall not, throughout the term
            of this Agreement and until all Obligations have been paid and
            performed in full, incur any Indebtedness, except for (i)
            Indebtedness to TBCC, (ii) trade payables incurred in the ordinary
            course of business, (iii) indebtedness which is subordinated to the
            Obligations pursuant to a written subordination agreement between
            TBCC and the subordinating creditor acceptable to TBCC, * (iv)
            Indebtedness which is outstanding on the date hereof, ** and (v)
            Indebtedness secured by Permitted Liens.


                                      -3-
<PAGE>   21
TBCC                                                          SECURITY AGREEMENT
- --------------------------------------------------------------------------------

            * OR PURSUANT TO THE TERMS OF AN AGREEMENT BETWEEN SUCH
            SUBORDINATING CREDITOR AND BORROWER WHICH PROVIDE THAT SUCH
            INDEBTEDNESS IS SUBORDINATED TO THE OBLIGATIONS UPON TERMS
            ACCEPTABLE TO TBCC, INCLUDING UP TO $11,000,000 IN INDEBTEDNESS
            WHICH MAY BE INCURRED PURSUANT TO THE TERMS OF THE DEBENTURES OR
            ADDITIONAL DEBENTURES SUBSTANTIALLY SIMILAR TO THE DEBENTURES, AS
            DETERMINED BY TBCC IN ITS SOLE DISCRETION (IN ADDITION TO THE
            $5,000,000 IN OUTSTANDING INDEBTEDNESS OWING AS OF THE DATE OF THIS
            AGREEMENT), PROVIDED THAT SUCH ADDITIONAL $11,000,000 IN
            INDEBTEDNESS IS SUBJECT TO (I) THE SAME SUBORDINATION PROVISIONS AS
            SET FORTH IN THE DEBENTURES, OR (II) SUBORDINATION PROVISIONS MORE
            FAVORABLE TO TBCC, AS DETERMINED BY TBCC IN ITS SOLE DISCRETION,

            ** INCLUDING THE $5,000,000 IN INDEBTEDNESS EVIDENCED BY, AND
            SUBJECT TO THE SUBORDINATION PROVISIONS OF, THE DEBENTURES,

      (c)   ADVANCED MEDICAL PROCEDURES. Concurrently herewith, Borrower shall
            cause AMP to execute and deliver to TBCC a Continuing Guaranty (the
            "AMP Guaranty"), and Certified Resolution in connection therewith,
            with respect to all of the Obligations, together with a Security
            Agreement (the "AMP Security Agreement"), and UCC-1 Financing
            Statements, in order to secure the AMP Guaranty, all such
            documentation in form reasonably satisfactory to Borrower and TBCC
            and consistent with this Agreement.

      (d)   AMP INDEBTEDNESS TO ONIK AND NARAYAN. Within 30 days of the date
            hereof, Borrower shall cause Gary Onik ("Onik") and Perinchery
            Narayan ("Narayan") to either: (i) terminate any security
            interest(s) they may have in any assets of AMP, and in connection
            therewith execute any and all documentation required by TBCC,
            including but not limited to terminations of any UCC Financing
            Statements filed in connection with such security interest(s); or
            (ii) subordinate their security interest(s) to the security interest
            of TBCC in the assets of AMP, as evidenced by the AMP Security
            Agreement, and subordinate all indebtedness of AMP to Onik and/or
            Narayan to the obligations of AMP to TBCC under the AMP Guaranty.

Borrower:                               TBCC:

ENDOCARE, INC.                          TRANSAMERICA BUSINESS CREDIT CORPORATION

                                        By     /s/ Ian Schnider
                                              ----------------------------------
By  /s/ William Hughes                  Title
   ------------------------------             ----------------------------------
   President or Vice President

Version: -6


                                      -4-

<PAGE>   1
                                                                    EXHIBIT 10.4




TBCC

                         STREAMLINED FACILITY AGREEMENT

                                  July 29, 1999

Endocare, Inc.
7 Studebaker
Irvine, California  92618

Ladies and Gentlemen:

           This Streamlined Facility Agreement (this "Agreement") is entered
into between Transamerica Business Credit Corporation ("TBCC"), and Endocare,
Inc. ("Borrower"), in connection with the Loan and Security Agreement between
TBCC and Borrower dated July 29, 1999 (the "Loan Agreement"). (This Agreement,
the Loan Agreement, and all other written documents and agreements between TBCC
and Borrower are referred to herein collectively as the "Loan Documents".
Capitalized terms used but not defined in this Agreement, shall have the
meanings set forth in the Loan Agreement.)

           This will confirm our agreement that the following provisions (the
"Streamlined Provisions") shall apply, effective on the date hereof, until
terminated as provided below:

      1. Borrower will provide TBCC with a monthly Borrowing Base Certificate,
in such form as TBCC shall from time to time specify, within 10 days after the
end of each month, and TBCC shall not require more frequent schedules of
Receivables or other Collateral reporting with respect to the Receivables,
except for the information required in connection with an advance request. In
the event, as of the end of any month, the total of all Loans and all other
Obligations exceeds the Credit Limit, Borrower shall immediately pay the amount
of the excess to TBCC.

      2. Delivery of the proceeds of Receivables within one Business Day after
receipt, as called for by Section 1.4 of the Loan Agreement, will not be
required.

      3. TBCC will also not require any Depository Account Agreement or Blocked
Account Agreement, as called for by Section 1.8 of the Loan Agreement. In
addition, Borrower will not be required to provide TBCC with copies of invoices
to customers or shipping and delivery receipts, as called for by Section 3.3(a)
of the Loan Agreement, or to report customer credits, returns and recoveries of
merchandise as called for by Section 3.3(b) of the Loan Agreement.

      The Streamlined Provisions shall immediately terminate if any Default or
Event of Default occurs and is continuing. Upon any termination of the
Streamlined Provisions, without limiting TBCC's other rights and remedies,
Borrower shall, then and thereafter, provide TBCC


                                      -7-
<PAGE>   2
with such other or additional reporting of Receivables as TBCC shall request
under Section 3.3(a) of the Loan Agreement, comply in all respects with Section
3.3(b), and deliver all proceeds of Receivables to TBCC, within one Business Day
after receipt, as called for by Section 1.4 of the Loan Agreement. Additionally,
Borrower and its bank shall execute and deliver a Blocked Account Agreement or
Depository Account Agreement (as TBCC shall designate), in form and substance
satisfactory to TBCC.

      Please confirm your agreement to the foregoing by signing the enclosed
copy of this Agreement and returning it to us.

                                       Sincerely yours,

                                       Transamerica Business Credit Corporation

                                       By:     /s/ Ian Schnider
                                              ----------------------------------
                                       Title:
                                              ----------------------------------

Acknowledged and Agreed.

Endocare, Inc.

By:    /s/ William Hughes
      -----------------------------
Title: Senior Vice President
       and Chief Financial Officer
      -----------------------------


                                      -2-

<PAGE>   1
                                                                    EXHIBIT 10.5



TBCC

                               CONTINUING GUARANTY

GUARANTOR:  ADVANCED MEDICAL PROCEDURES, INC., A DELAWARE CORPORATION

BORROWER:   ENDOCARE, INC.

DATE:       JULY 29, 1999

THIS CONTINUING GUARANTY dated as of the above date (the "Guaranty"), is made by
the above guarantor, whose address is set forth below, in favor of TRANSAMERICA
BUSINESS CREDIT CORPORATION, a Delaware corporation, ("TBCC") having its
principal office at 9399 West Higgins Road, Suite 600, Rosemont, Illinois 60018
and having an office at 15260 Ventura Blvd., Suite 1240, Sherman Oaks,
California 91403, with respect to the "Indebtedness" (as defined below) of the
above Borrower (the "Borrower").

1. Guaranty. In order to induce TBCC to enter into a Loan and Security Agreement
with the Borrower or to continue to provide financing thereunder, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Guarantor hereby (a) unconditionally and irrevocably
guarantees the payment and performance when due (whether at stated maturity, by
acceleration or otherwise) of all of the Indebtedness, and (b) agrees to pay any
and all reasonable costs and expenses (including reasonable attorneys' fees and
related expenses) incurred by TBCC in enforcing any rights under this Guaranty
or in enforcing any of the Indebtedness against the Borrower. As used herein,
"Indebtedness" means and includes all present and future loans (including the
Loans), advances, debts, liabilities, obligations, guarantees, covenants and
duties now or hereafter owing by Borrower to TBCC of any kind or nature, present
or future, absolute or contingent, liquidated or unliquidated, certain or
uncertain, determined or undetermined, monetary or nonmonetary, written or oral,
whether Borrower may be liable individually or jointly with others, whether
incurred directly to TBCC or acquired by TBCC by assignment or otherwise, or
held by TBCC on behalf of others, and regardless of whether recovery thereon may
be or hereafter become barred by any statute of limitations, discharged or
uncollectible in any bankruptcy, insolvency or other proceeding, or otherwise
unenforceable, including without limitation all indebtedness, liabilities and
obligations which may arise under, out of, or in connection with, any present or
future Loan and Security Agreement between Borrower and TBCC (the "Loan
Agreement"), any other Loan Document or any other agreement executed in
connection herewith or therewith, whether or not for the payment of money,
whether arising by reason of an extension of credit, opening, guaranteeing or
confirming of a letter of credit, loan, guaranty, indemnification or in any
other manner, whether direct or indirect (including those acquired by
assignment, purchase, discount or otherwise), whether absolute or contingent,
due or to become due, now due or hereafter arising and however acquired. The
term "Indebtedness" includes, without limitation, all interest (including
interest accruing on or after an Insolvency Event, whether or not an allowed
claim), charges, expenses, commitment, facility, closing and collateral
management fees, letter of credit fees, reasonable attorneys' fees, and any
other sum chargeable to Borrower under the Loan Agreement or the other Loan
Documents. (Capitalized terms used in this Guaranty, which are not defined,
shall have the meanings set forth in the Loan Agreement.) As used herein, the
term "Borrower" shall include any successor to the business and assets of
Borrower, and shall also include Borrower in its capacity as a debtor or debtor
in possession under the federal Bankruptcy Code, and any trustee, custodian or
receiver for Borrower or any of its assets, should Borrower hereafter become the
subject of any bankruptcy or insolvency proceeding, voluntary or involuntary;
and all indebtedness, liabilities and obligations incurred by any such person
shall be included in the Indebtedness guaranteed hereby. This Guaranty is given
in consideration for credit and other financial accommodations which may, from
time to time, be given by TBCC to Borrower in TBCC's sole discretion, but
Guarantor acknowledges and agrees that acceptance by TBCC of this Guaranty shall
not constitute a commitment of any kind by TBCC to extend such credit or other
financial accommodation to Borrower or to permit Borrower to incur Indebtedness
to TBCC. All sums due under this Guaranty shall bear interest from the date due
until the date paid at the highest rate charged with respect to any of the
Indebtedness.

2. Guaranty Absolute. The Guarantor guarantees that the Indebtedness will be
paid and performed strictly in accordance with its terms regardless of any law,
regulation or order now or hereafter in effect in any jurisdiction affecting any
of the terms or the rights of TBCC with respect thereto. The liability of the
Guarantor
<PAGE>   2
TBCC                                                         CONTINUING GUARANTY
- --------------------------------------------------------------------------------

under this Guaranty shall be absolute and unconditional irrespective of:

         (a). any lack of validity or enforceability of the Loan Agreement or
any other document agreement or instrument relating to Borrower (whether or not
relating to the Loan Agreement), including, without limitation, this Guaranty
(collectively, the "Loan Documents");

         (b). any change in the time, manner or place of payment of, or in any
other term of, all or any of the Indebtedness, or any amendment or waiver of any
term of, or any consent to departure from, the terms of the Loan Agreement or
any other Loan Document or any other document or agreement;

         (c). any exchange, release or non-perfection of any collateral, or any
release, amendment or waiver of any term of, or consent to departure from, any
other guaranty for all or any of the Indebtedness;

         (d). any failure on the part of TBCC or any other person or entity to
exercise, or any delay in exercising, any right under the Loan Agreement or any
other Loan Document; or

         (e). any other circumstance which might otherwise constitute a defense
available to, or a discharge of, the Borrower, the Guarantor or any other
guarantor with respect to the Indebtedness (including, without limitation, all
defenses based on suretyship or impairment of collateral, and all defenses that
the Borrower may assert to the repayment of the Indebtedness, including, without
limitation, failure of consideration, breach of warranty, fraud, statute of
frauds, bankruptcy, lack of legal capacity, statute of limitations, lender
liability, accord and satisfaction, and usury) or which might otherwise
constitute a defense to this Guaranty and the obligations of the Guarantor under
this Guaranty.

The Guarantor hereby agrees that if the Borrower or any other guarantor of all
or a portion of the Indebtedness is the subject of a bankruptcy proceeding under
Title 11 of the United States Code, it will not assert the pendency of such
proceeding or any order entered therein as a defense to the timely payment of
the Indebtedness. If any claim is ever made upon TBCC for repayment or recovery
of any amount or amounts received by TBCC in payment of or on account of any of
the Indebtedness, because of any claim that any such payment constituted a
preferential transfer or fraudulent conveyance, or for any other reason
whatsoever, and TBCC repays all or part of said amount by reason of any
judgment, decree or order of any court or administrative body having
jurisdiction over TBCC or any of its property, or by reason of any settlement or
compromise of any such claim effected by TBCC with any such claimant (including
without limitation the Borrower), then and in any such event, Guarantor agrees
that any such judgment, decree, order, settlement and compromise shall be
binding upon Guarantor, notwithstanding any revocation or release of this
Guaranty or the cancellation of any note or other instrument evidencing any of
the Indebtedness, or any release of any of the Indebtedness, and the Guarantor
shall be and remain liable to TBCC under this Guaranty for the amount so repaid
or recovered, to the same extent as if such amount had never originally been
received by TBCC, and the provisions of this sentence shall survive, and
continue in effect, notwithstanding any revocation or release of this Guaranty.

3. Waiver. The Guarantor hereby waives promptness, diligence, notice of
acceptance protest, notice of protest, and any other notice with respect to any
of the Indebtedness and this Guaranty and any requirement that TBCC protect,
secure, perfect or insure any security interest or lien or any property subject
thereto or exhaust any right to take any action against the Borrower or any
other person or any collateral. Guarantor further waives: (a) all other notices
and demands to which Guarantor might be entitled, including without limitation
notice of all of the following: the creation, existence, or acquisition of any
Indebtedness; the amount of the Indebtedness from time to time outstanding; any
foreclosure sale or other disposition of any property which secures any or all
of the Indebtedness or which secures the obligations of any other guarantor of
any or all of the Indebtedness; any adverse change in Borrower's financial
position; any other fact which might increase Guarantor's risk; any default,
partial payment or non-payment of all or any part of the Indebtedness; the
occurrence of any other Event of Default (as hereinafter defined); any and all
agreements and arrangements between TBCC and Borrower and any changes,
modifications, or extensions thereof, and any revocation, modification or
release of any guaranty of any or all of the Indebtedness by any person
(including without limitation any other person signing this Guaranty); (b) any
right to require TBCC to institute suit against, or to exhaust its rights and
remedies against, Borrower or any other person, or to proceed against any
property of any kind which secures all or any part of the Indebtedness, or to
exercise any right of offset or other right with respect to any reserves,
credits or deposit accounts held by or maintained with TBCC or any indebtedness
of TBCC to Borrower, or to exercise any other right or power, or pursue any
other remedy TBCC may have.

4. Subrogation. The Guarantor hereby irrevocably waives, to the fullest extent
permitted by law, any and all claims, rights or remedies which it may now have
or hereafter acquire against the Borrower that arise hereunder or from the
performance by him hereunder including, without limitation, any claims, rights
or remedies of subrogation, reimbursement, exoneration, contribution,
indemnification or participation in any claims, rights or remedies of TBCC
against the Borrower or in any security which TBCC now has or hereafter
acquires, whether or not the claims, rights or remedies arise in equity, under
contract, by statute, under common law or otherwise.

5. Representations and Warranties. The Guarantor hereby represents and warrants
as follows:

         (a). Power and Authority. The Guarantor has full power, authority,
capacity and legal right to execute and deliver and to perform its obligations
under this Guaranty and the other Loan Documents to which the Guarantor is a
party.

         (b). Enforceability. This Guaranty and the other Loan Documents to
which the Guarantor is a party have been duly executed and delivered by the
Guarantor and constitute a legal, valid and binding obligation of the


                                      -2-
<PAGE>   3
TBCC                                                         CONTINUING GUARANTY
- --------------------------------------------------------------------------------

Guarantor, enforceable against the Guarantor, its successors and assigns in
accordance with their respective terms, except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally.

         (c). No Conflicts. The execution, delivery and performance of this
Guaranty and the other Loan Documents to which the Guarantor is a party will not
violate any requirement of law or contractual obligation of the Guarantor or
result in the creation or imposition of any lien on any of the property or
assets of the Guarantor, except for liens (if any) granted in favor of TBCC
pursuant to the Loan Documents.

         (d). No Consents. No consent of any other Person and no consent,
license, permit, approval or authorization, of, exemption by, notice or report
to, or registration, filing or declaration with, and governmental authority is
required in connection with the execution, delivery, performance, validity or
enforceability of this Guaranty and the other Loan Documents to which the
Guarantor is a party.

         (e). Solvency. The fair value of the property of the Guarantor exceeds
the total amount of liabilities (including, without limitation, contingent
liabilities*) of the Guarantor; the present fair saleable value of the assets of
the Guarantor exceeds the amount that will be required to pay the probable
liability of the Guarantor on its existing debts as they become absolute and
matured; the Guarantor is able to realize upon its assets and pay its debts and
other liabilities, contingent obligations and other commitments as they mature
and the Guarantor does not intend to, and does not believe that it will, incur
debts or liabilities beyond the Guarantor's ability to pay as the debts and
liabilities mature. In computing the amount of contingent liabilities at any
time, it is intended that the liabilities will be computed at the amount which,
in light of all facts and circumstances existing at such time, represents the
amount that can reasonably be expected to become an actual or matured liability.

* , BUT EXCLUDING LIABILITIES OF GUARANTOR TO BORROWER

         (f). Absence of Litigation. Except as otherwise heretofore disclosed to
TBCC in writing, there are no actions, suits, investigations, litigation or
proceedings pending or, to the knowledge of the Guarantor, threatened against or
affecting the Guarantor or any of its properties before any court, arbitrator or
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, that has an amount in controversy in excess of * , or which
purports to affect any part of the transactions contemplated hereby or by the
other Loan Documents to which the Guarantor is a party or the legality, validity
or enforceability of this Guaranty or the other Loan Documents to which the
Guarantor is a party.

* $62,500

         (g). Financial Condition. The financial condition and net worth of the
Guarantor contained in the financial statements, most recently provided to TBCC
are true and correct*; there is no event, fact, circumstance or condition known
to the Guarantor which is inconsistent with the statements or is required to be
disclosed in order to cause the statements not to be ** misleading; and the
Guarantor knows of no reason why it will not be able to perform duly and
promptly its obligations under this Guaranty ***.

* IN ALL MATERIAL RESPECTS

** MATERIALLY

*** (PROVIDED THAT GUARANTOR DOES NOT REPRESENT THAT IT HAS OR WILL HAVE
SUFFICIENT ASSETS TO REPAY ALL INDEBTEDNESS OF BORROWER TO TBCC)

         (h). Payment of Taxes. The Guarantor has filed all tax returns
(federal, state, local and foreign) required to be filed and paid all taxes
shown thereon to be due, including interest and penalties, except for such taxes
as are being contested in good faith and by proper proceedings.

6. Covenants. The Guarantor covenants and agrees that, so long as any part of
the Indebtedness shall remain unpaid, the Guarantor shall provide TBCC with
financial statements relating to the financial condition and net worth of the
Guarantor and the ability of the Guarantor to satisfy its obligations hereunder,
such financial statements to be certified as being true and correct by the
Guarantor. Such financial statements shall be provided within 120 days after the
end of the Guarantor's fiscal year.

7. Acceleration. Notwithstanding the terms of all or any part of the
Indebtedness, the obligations of the Guarantor hereunder to pay and perform all
of the Indebtedness shall, at the option of TBCC, immediately become due and
payable, without notice, and without regard to the expressed maturity of any of
the Indebtedness, in the event: (a) any default or Event of Default under, or as
defined in any Loan Document, occurs and is continuing; (b) any warranty,
representation, statement, report, or certificate made or delivered to TBCC by
Guarantor, or any of its officers, partners, employees, or agents, is incorrect,
false, untrue, or misleading when given in any material respect; or (c) there
shall be made or exist any levy, assessment, attachment, seizure, lien, or
encumbrance * for any cause or reason whatsoever upon all or any part of the
property of Guarantor (unless discharged by payment, release or bond not more
than twenty days after such event has occurred); or (d) there shall occur the
dissolution, termination of existence, insolvency, or business failure of
Guarantor, or the appointment of a receiver, trustee or custodian for Guarantor
or all or any part of its property, or the assignment for the benefit of
creditors by Guarantor, or the commencement of any proceeding by or against
Guarantor under any reorganization, bankruptcy, insolvency, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, now or hereafter in effect; or


                                      -3-
<PAGE>   4
TBCC                                                         CONTINUING GUARANTY
- --------------------------------------------------------------------------------

(f) Guarantor shall generally not pay its debts as they become due or shall
enter into any agreement (whether written or oral), or offer to enter into any
such agreement, with all or a significant number of its creditors regarding any
moratorium or other indulgence with respect to its debts or the participation of
such creditors or their representatives in the supervision, management, or
control of the business of either of them; or (g) the board of directors or
shareholders of Guarantor shall adopt any resolution or plan for its dissolution
or the liquidation of all or substantially all of its assets**; or (h) Guarantor
shall revoke this Guaranty or contest or deny liability under this Guaranty. All
of the foregoing are hereinafter referred to as "Events of Default".

* (OTHER THAN A PERMITTED LIEN, AS DEFINED IN THAT CERTAIN SECURITY AGREEMENT OF
EVEN DATE HEREWITH BETWEEN GUARANTOR AND TBCC)

** , PROVIDED THAT GUARANTOR MAY BE MERGED INTO BORROWER OR MAY BE LIQUIDATED OR
DISSOLVED IF ALL OF ITS ASSETS ARE TRANSFERRED TO BORROWER

8. Revocation. This is a Continuing Guaranty relating to all of the
Indebtedness, including Indebtedness arising under successive transactions which
from time to time continue the Indebtedness or renew it after it has been
satisfied. Guarantor agrees that the obligations of Guarantor hereunder may not
be terminated or revoked in any manner except by giving 90 days' advance written
notice of revocation to TBCC at its address above by registered first-class U.S.
mail, postage prepaid, return receipt requested, and only as to new Loans made
by TBCC to Borrower more than 90 days after actual receipt of such written
notice by TBCC. No termination or revocation of this Guaranty shall be effective
until 90 days following the date of actual receipt of said written notice of
revocation by TBCC. Notwithstanding such written notice of revocation or any
other act of Guarantor or any other event or circumstance, Guarantor agrees that
this Guaranty and all consents, waivers and other provisions hereof shall
continue in full force and effect as to any and all Indebtedness which is
outstanding on or before the 90th day following actual receipt of said written
notice of revocation by TBCC, and all extensions, renewals and modifications of
said Indebtedness (including without limitation amendments, extensions, renewals
and modifications which are evidenced by new or additional instruments,
documents or agreements executed before or after expiration of said 90-day
period), and all interest thereon, accruing before or after expiration of said
90-day period, and all attorneys' fees, court costs and collection charges,
incurred before or after expiration of said 90-day period, in endeavoring to
collect or enforce any of the foregoing against Borrower, Guarantor or any other
person liable thereon (whether or not suit be brought) and any other expenses
of, for or incidental to collection thereof. *

* NOTWITHSTANDING THE FOREGOING, THE 90-DAY PERIOD SET FORTH IN THIS SECTION 8
SHALL NOT APPLY TO A REVOCATION OF GUARANTOR'S OBLIGATIONS HEREUNDER IF IT
OCCURS DUE TO THE MERGER OF GUARANTOR INTO BORROWER OR THE DISSOLUTION OR
LIQUIDATION OF GUARANTOR AND TRANSFER OF ALL OF ITS ASSETS TO BORROWER.

9. Financial Condition of Borrower. Guarantor warrants that it is fully aware of
the financial condition of Borrower and is executing and delivering this
Guaranty at Borrower's request and based solely upon its own independent
investigation of all matters pertinent hereto, and Guarantor is not relying in
any manner upon any representation or statement of TBCC with respect thereto.
Guarantor represents and warrants that it is in a position to obtain, and
Guarantor hereby assumes full responsibility for obtaining, any additional
information concerning Borrower's financial condition and any other matter
pertinent hereto as Guarantor may desire, and Guarantor is not relying upon or
expecting TBCC to furnish to it any information now or hereafter in TBCC's
possession concerning the same or any other matter. By executing this Guaranty,
Guarantor knowingly accepts the full range of risks encompassed within a
contract of continuing guaranty, which risks Guarantor acknowledges include
without limitation the possibility that Borrower will incur additional
Indebtedness for which Guarantor will be liable hereunder after Borrower's
financial condition or ability to pay such Indebtedness has deteriorated and/or
after bankruptcy or insolvency proceedings have been commenced by or against
Borrower. Guarantor shall have no right to require TBCC to obtain or disclose
any information with respect to the Indebtedness, the financial condition or
character of Borrower, the existence of any collateral or security for any or
all of the Indebtedness, the existence of any other guaranties of all or any
part of the Indebtedness, any action or non-action on the part of TBCC,
Borrower, or any other person, or any other matter, fact, or occurrence.

10. Amendments, Etc. No amendment or waiver of any provision of this Guaranty or
consent to any departure by the Guarantor therefrom shall in any event be
effective unless the same shall be in writing and signed by TBCC, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.

11. Addresses for Notices. All notices and other communications provided for
hereunder shall be in writing (including by telecopier) and, if to the
Guarantor, mailed or delivered to him at its address specified on the first page
of this Guaranty, if to TBCC, mailed or delivered to it at the address of TBCC
specified on the first page of this Guaranty, or as to each party at such other
address as shall be designated by the party in a written notice to the other
party. All the notices and other communications shall, if mailed, be effective
when deposited in the mail addressed as aforesaid (except for notice of
revocation, which shall be governed by Section 8 of this Guaranty). TBCC and
Guarantor may change their address for purposes of receiving notices hereunder
by giving written notice thereof to the other party in accordance herewith.
Guarantor shall give TBCC immediate written notice of any change in its address.

12. No Waiver; Remedies. No failure on the part of TBCC to exercise, and no
delay in exercising, any right hereunder shall operate as a waiver thereof. No
single or partial exercise of any right hereunder shall preclude any other or
further exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.


                                      -4-
<PAGE>   5
TBCC                                                         CONTINUING GUARANTY
- --------------------------------------------------------------------------------

13. Right of Set-off. TBCC is hereby authorized at any time and from
time-to-time following an Event of Default, to the fullest extent permitted by
law, to set off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and other indebtedness at any
time owing by TBCC to or for the credit or the account of the Guarantor against
any and all of the obligations of the Guarantor now or hereafter existing under
this Guaranty, irrespective of whether or not TBCC shall have made any demand
under this Guaranty and although such obligations may be contingent and
unmatured. TBCC agrees promptly to notify the Guarantor after any such set-off
and application, provided that the failure to give such notice shall not affect
the validity of such set-off and application. The rights of TBCC under this
Section are in addition to the other rights and remedies (including, without
limitation, other rights of set-off) which TBCC may have.

14. Continuing Guaranty; Assignments. This Guaranty is a continuing guaranty and
shall (a) remain in full force and effect until the indefeasible payment in full
of the Indebtedness and all other amounts payable under this Guaranty, (b) be
binding upon the Guarantor and its successors, assigns, beneficiaries and
indorsees (including, without limitation, the heirs, administrators, executors
and estate of the Guarantor), except that no Guarantor shall assign or transfer
any of its rights or obligations hereunder without the prior written consent of
TBCC, and (c) inure to the benefit of and be enforceable by TBCC and its
successors, transferees and assigns. Without limiting the generality of the
foregoing clause (c), TBCC may assign or otherwise transfer any of the
Indebtedness to any other person or entity, and such other person or entity
shall thereupon become vested with all the rights in respect thereof granted to
TBCC herein or otherwise. This Guaranty and the obligations of the Guarantor
hereunder shall terminate upon the indefeasible payment in full of all of the
Indebtedness and all other amounts payable under this Guaranty.

15. Subordination. Any and all payments on all indebtedness and obligations of
the Borrower now or hereafter owing to the Guarantor other than in respect of
salaries or wages (the "Junior Debt") is hereby subordinated and junior in right
of payment and exercise of remedies to the prior payment in full in cash of the
Indebtedness. Upon the written request of TBCC, the Junior Debt shall be
collected, enforced and received by the Guarantor as trustee for TBCC and paid
over to TBCC on account of the Indebtedness but without reducing or affecting in
any manner the liability of the Guarantor under the other provisions of this
Guaranty. So long as any of the Indebtedness is outstanding, no payments shall
be made on any of the Junior Debt without the prior written consent of TBCC.

16. Telecopier; Counterparts. This Guaranty may be executed and delivered by
telecopier or other facsimile transmission with the same force and effect as if
the same was a fully executed and delivered original counterpart. This Guaranty
may be executed by the parties in one or more counterparts, each of which shall
be an original and all of this shall constitute one and the same agreement.

17. GOVERNING LAW. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF ILLINOIS WITHOUT
GIVEN EFFECT TO CONFLICTS OF LAW PRINCIPLES THEREOF.

18.  CONSENT TO JURISDICTION.

         (a). THE GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF
ANY ILLINOIS STATE OR FEDERAL COURT SITTING IN ILLINOIS IN ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY OR ANY OTHER LOAN
DOCUMENTS, AND THE GUARANTOR HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN
RESPECT OF THE ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH ILLINOIS
STATE OR FEDERAL COURT. THE GUARANTOR HEREBY IRREVOCABLY WAIVES, TO THE FULLEST
EXTENT HE MAY EFFECTIVELY DO SO, ANY OBJECTION TO THE LAYING OF VENUE OR ANY
DEFENSE OF AN INCONVENIENT FORUM WHICH HE MAY NOW OR HEREAFTER HAVE TO THE
BRINGING OF SUCH ACTION OR PROCEEDING. THE GUARANTOR IRREVOCABLY CONSENTS TO THE
SERVICE OF ANY AND ALL PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING
OF COPIES OF SUCH PROCESS TO THE GUARANTOR AT HIS ADDRESS SPECIFIED ON THE FIRST
PAGE OF THIS GUARANTY. THE GUARANTOR AGREES THAT A FINAL JUDGMENT IN ANY SUCH
ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER
JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.

         (b). NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF TBCC TO SERVE
LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF TBCC
TO BRING ANY ACTION OR PROCEEDING AGAINST THE GUARANTOR OR HIS PROPERTY IN THE
COURTS OF ANY OTHER JURISDICTIONS.

19. MUTUAL WAIVER OF RIGHT TO JURY TRIAL. TBCC AND GUARANTOR HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION, CLAIM, LAWSUIT OR PROCEEDING BASED UPON,
ARISING OUT OF, OR IN ANY WAY RELATING TO: (I) THIS GUARANTEE OR ANY OTHER LOAN
DOCUMENTS OR ANY SUPPLEMENT OR AMENDMENT THERETO; OR (II) ANY OTHER PRESENT OR
FUTURE INSTRUMENT OR AGREEMENT BETWEEN TBCC AND GUARANTOR; OR (III) ANY BREACH,
CONDUCT, ACTS OR OMISSIONS OF TBCC OR GUARANTOR OR ANY OF THEIR RESPECTIVE
DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSON AFFILIATED
WITH OR REPRESENTING TBCC OR GUARANTOR; IN EACH OF THE FOREGOING CASES, WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE.


                                      -5-
<PAGE>   6
TBCC                                                         CONTINUING GUARANTY
- --------------------------------------------------------------------------------

         IN WITNESS WHEREOF, the Guarantor has executed this Guaranty as of the
date first above written.

Guarantor:

ADVANCED MEDICAL PROCEDURES, INC.

By     /s/ William Hughes
      ----------------------------------
Title  Chief Financial Officer
      ----------------------------------
     Address:
              --------------------------

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

Version: -0


                                      -6-

<PAGE>   1
                                                                    EXHIBIT 10.6



TBCC

                               SECURITY AGREEMENT

OBLIGOR:      ADVANCED MEDICAL PROCEDURES, INC.,
              A DELAWARE CORPORATION

ADDRESS:      206A WEST OAK STREET
              KISSIMMEE, FL 34741

DATE:         JULY 29, 1999

THIS SECURITY AGREEMENT is entered into as of the above date, between the above
Obligor (the "Obligor"), having its chief executive office and principal place
of business at the address shown above, and TRANSAMERICA BUSINESS CREDIT
CORPORATION, a Delaware corporation, ("TBCC") having its principal office at
9399 West Higgins Road, Suite 600, Rosemont, Illinois 60018 and having an office
at 15260 Ventura Blvd., Suite 1240, Sherman Oaks, California 91403. (Definitions
of certain terms used in this Agreement are set forth in Section 7 below.) The
parties agree as follows:

1. Security.

   1.1. Grant of Security Interest. To secure the payment and performance when
due of all of the Obligations, Obligor hereby grants to TBCC a security interest
in all of its present and future Receivables, Inventory, Equipment, Other
Property, and other Collateral, wherever located.

   1.2. Other Liens; Location of Collateral. Obligor represents, warrants and
covenants that all of the Collateral is, and will at all times continue to be,
free and clear of all Liens, other than Permitted Liens and Liens in favor of
TBCC. All Collateral is and will continue to be maintained at the locations
shown on the Schedule.

   1.3. Records. Obligor shall maintain full, accurate and complete records
respecting the Receivables, Inventory (including without limitation records
describing the kind, type and quantity of the Inventory and Obligor's cost
therefor, withdrawals therefrom and additions thereto, including a perpetual
inventory for work in process and finished goods, and Equipment (including
without limitation records itemizing and describing the location, kind, type,
age and condition of the Equipment, Obligor's cost therefor and accumulated
depreciation thereof and retirements, sales, or other dispositions thereof).

   1.4. Equipment. Obligor shall keep all of its Equipment in a satisfactory
state of repair and satisfactory operating condition in accordance with industry
standards, ordinary wear and tear excepted. No Equipment shall be annexed or
affixed to or become part of any realty, unless the owner of the realty has
executed and delivered a Landlord Waiver in such form as TBCC shall specify.
Where Obligor is permitted to dispose of any Equipment under this Agreement or
by any consent thereto hereafter given by TBCC, Obligor shall do so at arm's
length, in good faith and by obtaining the maximum amount of recovery
practicable therefor and without impairing the operating integrity or value of
the remaining Equipment.

   1.5. Further Assurances. Obligor will perform any and all steps that TBCC may
reasonably request to perfect TBCC's security interests in the Collateral,
including, without limitation, executing and filing financing and continuation
statements in form and substance satisfactory to TBCC. TBCC is hereby authorized
by Obligor to sign Obligor's name or file any financing statements or similar
documents or instruments covering the Collateral whether or not Obligor's
signature appears thereon. Obligor agrees, from time to time, at TBCC's request,
to file notices of Liens, financing statements, similar document or instruments,
and amendments, renewals and continuations thereof, and cooperate with TBCC, in
connection with the continued perfection and protection of the Collateral. If
any Collateral is in the possession or control of any Person other than a public
warehouseman where the warehouse receipt is in the name of or held by TBCC,
Obligor shall notify such Person of TBCC's security interest therein and, upon
request, instruct such Person or Persons to hold all such Collateral for the
account of TBCC and subject to TBCC's instructions. If so requested by TBCC,
Obligor will deliver to TBCC warehouse receipts covering any Collateral located
in warehouses showing TBCC as the beneficiary thereof and will also cause the
warehouseman to execute and deliver such agreements as TBCC may request relating
to waivers of liens by such warehouseman and the release of the Inventory to
TBCC on its demand. Obligor shall defend the Collateral against all claims and
demands of all Persons.

   1.6. Power of Attorney. Obligor hereby appoints and constitutes TBCC as
Obligor's attorney-in-fact (i) to request at any time from account debtors
verification of information concerning Receivables and the amount owing thereon,
(ii) upon the occurrence and during the continuance of an Event of Default, to
convey any item of Collateral to any purchaser thereof, (iii) to give or sign
Obligor's name to any notices or statements necessary or desirable to create or
continue the Lien on any Collateral


                                      -1-
<PAGE>   2
TBCC                                                          SECURITY AGREEMENT
- --------------------------------------------------------------------------------

granted hereunder and (iv) to make any payment or take any act necessary or
desirable to protect or preserve any Collateral. TBCC's authority hereunder
shall include, without limitation, the authority to execute and give receipt for
any certificate of ownership or any document, transfer title to any item of
Collateral and take any other actions arising from or incident to the powers
granted to TBCC under this Agreement. This power of attorney is coupled with an
interest and is irrevocable.

2. Representations and Warranties of Obligor. Obligor represents and warrants as
follows:

   2.1. Organization, Good Standing and Qualification. Obligor (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the State set forth above, (ii) has the corporate power and authority to own
its properties and assets and to transact the businesses in which it is engaged
and (iii) is duly qualified, authorized to do business and in good standing in
each jurisdiction where it is engaged in business, except to the extent that the
failure to so qualify or be in good standing would not have a Material Adverse
Effect.

   2.2. Locations of Offices, Records and Collateral. The address of the
principal place of business and chief executive office of Obligor is *, and the
books and records of Obligor and all of its chattel paper and records relating
to Collateral are maintained exclusively in the possession of Obligor at ** the
address of Obligor specified in the heading of this Agreement. Obligor has
places of business, and Collateral is located, only at such address and at the
addresses set forth in the Schedule.

   * THE ADDRESS OF OBLIGOR SPECIFIED IN THE HEADING OF THIS AGREEMENT

   ** 7 STUDEBAKER, IRVINE, CALIFORNIA 92618 AND/OR AT

   2.3. Authority. Obligor has the requisite corporate power and authority to
execute, deliver and perform its obligations under each of the Loan Documents.
All corporate action necessary for the execution, delivery and performance by
Obligor of the Loan Documents has been taken.

   2.4. Enforceability. This Agreement is, and, when executed and delivered,
each other Loan Document will be, the legal, valid and binding obligation of
Obligor enforceable in accordance with its terms, except as enforceability may
be limited by bankruptcy, insolvency or similar laws affecting creditors' rights
generally and general principles of equity.

   2.5. No Conflict. The execution, delivery and performance of each Loan
Document by Obligor does not and will not contravene (i) any of the Governing
Documents, (ii) any Requirement of Law or (iii) any Material Contract and will
not result in the imposition of any Liens other than in favor of TBCC.

   2.6. Consents and Filings. No consent, authorization or approval of, or
filing with or other act by, any shareholders of Obligor or any Governmental
Authority or other Person is required in connection with the execution,
delivery, performance, validity or enforceability of this Agreement or any other
Loan Document, the consummation of the transactions contemplated hereby or
thereby or the continuing operations of Obligor following such consummation,
except (i) those that have been obtained or made, and (ii) the filing of
financing statements under the Uniform Commercial Code.

   2.7. Solvency. Obligor is Solvent and will be Solvent upon the completion of
all transactions contemplated to occur on or before the date of this Agreement.

   2.8. Financial Data. Obligor has provided to TBCC complete Financial
Statements * which have been prepared in accordance with GAAP consistently
applied throughout the periods involved and fairly present the financial
position and results of operations of Obligor for each of the periods covered.
Obligor has no Contingent Obligation or liability ** for taxes, unrealized
losses, unusual forward or long-term commitments or long-term leases, which is
not reflected in such Financial Statements. Since the last date covered by such
Financial Statements, there has been no sale, transfer or other disposition by
Obligor of any material part of its business or property and no purchase or
other acquisition of any business or property (including any capital stock of
any other Person) material in relation to the financial condition of Obligor at
said date. Since said date, (i) there has been no change, occurrence,
development or event which has had or could reasonably be expected to have a
Material Adverse Effect and (ii) none of the capital stock of Obligor has been
redeemed, retired, purchased or otherwise acquired for value by Obligor.

   * WHICH ARE ACCURATE IN ALL MATERIAL RESPECTS AND

   ** IN EXCESS OF $50,000

   2.9. Accuracy and Completeness of Information. All data, reports and
information previously, now or hereafter furnished by or on behalf of Obligor to
TBCC or the Auditors are or will be true and accurate in all material respects
on the date as of which such data, reports and information are dated or
certified, and not incomplete by omitting to state any material fact necessary
to make such data, reports and information not materially misleading at such
time. There are no facts now known to Obligor which individually or in the
aggregate would reasonably be expected to have a Material Adverse Effect and
which have not been disclosed in writing to TBCC.

   2.10. No Joint Ventures, Partnerships or Subsidiaries. Obligor is not engaged
in any joint venture or partnership with any other Person. Obligor has no
Subsidiaries.

   2.11. Corporate and Trade Name. During the past five years, Obligor has not
been known by or used any other corporate, trade or fictitious name except for
its name as set forth on the signature page of this Agreement and the other
names specified in the Schedule.

   2.12. No Actual or Pending Material Modification of Business. There exists no
actual or, to the best of Obligor's knowledge after due inquiry, threatened
termination, cancellation or limitation of, or any modification or change in the
business relationship of Obligor with any customer or group of customers whose
purchases individually or in the aggregate are material to the operation of
Obligor's business or with any material supplier.

   2.13. Taxes and Tax Returns. * Obligor has properly completed and timely
filed all income tax returns it is required to file. The information filed is
complete and accurate in all material respects. * all deductions taken in such
income tax returns are appropriate and in accordance with applicable laws and
regulations, except deductions that may have been disallowed but are being
challenged in good faith and for which adequate reserves have been made in
accor-


                                      -2-
<PAGE>   3
TBCC                                                          SECURITY AGREEMENT
- --------------------------------------------------------------------------------

dance with GAAP. * all taxes, assessments, fees and other governmental charges
for periods beginning prior to the date of this Agreement have been timely paid
(or, if not yet due, adequate reserves therefor have been established) and
Obligor has no liability for taxes in excess of the amounts so paid or reserves
so established. No deficiencies for taxes have been claimed, proposed or
assessed by any taxing or other Governmental Authority against Obligor and no
notice of any tax Lien has been filed. There are no pending or threatened
audits, investigations or claims for or relating to any liability for taxes and
there are no matters under discussion with any Governmental Authority which
could result in an additional liability for taxes. No extension of a statute of
limitations relating to taxes, assessments, fees or other governmental charges
is in effect with respect to Obligor. Obligor is not a party to and does not
have any obligations under any written tax sharing agreement or agreement
regarding payments in lieu of taxes.

   * EXCEPT AS WOULD NOT REASONABLY BE EXPECTED TO HAVE A MATERIAL ADVERSE
EFFECT AND WOULD NOT MATERIALLY ADVERSELY AFFECT THE SECURITY INTEREST OF TBCC
IN THE COLLATERAL,

   2.14. No Judgments or Litigation. No judgments, orders, writs or decrees are
outstanding against Obligor, nor is there now pending or, to the knowledge of
Obligor after due inquiry, threatened litigation, contested claim,
investigation, arbitration, or governmental proceeding by or against Obligor
that (i) could individually or in the aggregate be likely in the reasonable
business judgment of TBCC to have a Material Adverse Effect or (ii) purports to
affect the legality, validity or enforceability of this Agreement, any other
Loan Document or the consummation of the transactions contemplated hereby or
thereby.

   2.15. Investments; Contracts. Obligor (i) has not committed to make any
Investment; (ii) is not a party to any indenture, agreement, contract,
instrument or lease or subject to any charter, by-law or other corporate
restriction or any injunction, order, restriction or decree, which would
materially and adversely affect its business, operations, assets or financial
condition; (iii) is not a party to any "take or pay" contract as to which it is
the purchaser; or (iv) has no material contingent or long-term liability,
including management contracts (excluding employment contracts of full-time
individual officers or employees), which could have a Material Adverse Effect.

   2.16. No Defaults; Legal Compliance. * Obligor is not in default under any
term of any Material Contract or in violation of any Requirement of Law, nor is
Obligor subject to any investigation with respect to a claimed violation of any
Requirement of Law.

   * EXCEPT AS WOULD NOT REASONABLY BE EXPECTED TO HAVE A MATERIAL ADVERSE
EFFECT AND WOULD NOT MATERIALLY ADVERSELY AFFECT THE SECURITY INTEREST OF TBCC
IN THE COLLATERAL,

   2.17. Rights in Collateral; Priority of Liens. All Collateral is owned or
leased by Obligor, free and clear of any and all Liens in favor of third
parties, other than Permitted Liens. The Liens granted to TBCC pursuant to the
Loan Documents constitute valid, enforceable and perfected first-priority Liens
on the Collateral, except for Permitted Liens.

   2.18. Intellectual Property. Obligor * patents, trademarks, trade names,
service marks and copyrights (registered and unregistered), ** applications
therefor and licenses thereof. Obligor owns or licenses all material patents,
trademarks, service-marks, logos, tradenames, trade secrets, know-how,
copyrights, or licenses and other rights with respect to any of the foregoing,
which are necessary or advisable for the operation of its business as presently
conducted or proposed to be conducted. To the best of its knowledge after due
inquiry, Obligor has not infringed any patent, trademark, service-mark,
tradename, copyright, license or other right owned by any other Person by the
sale or use of any product, process, method, substance, part or other material
presently contemplated to be sold or used, where such sale or use would
reasonably be expected to have a Material Adverse Effect and no claim or
litigation is pending, or to the best of Obligor's knowledge, threatened against
or affecting Obligor that contests its right to sell or use any such product,
process, method, substance, part or other material.

   * HAS NO

   ** OR

   2.19. Labor Matters. There are no existing or threatened strikes, lockouts or
other disputes relating to any collective bargaining or similar agreement to
which Obligor is a party which would, individually or in the aggregate, be
reasonably likely to have a Material Adverse Effect.

   2.20. Licenses and Permits. Obligor has obtained and holds in full force and
effect, all franchises, licenses, leases, permits, certificates, authorizations,
qualifications, easements, rights of way and other rights and approvals which
are necessary or advisable for the operation of its business as presently
conducted and as proposed to be conducted, except where the failure to possess
any of the foregoing (individually or in the aggregate) would not have a
Material Adverse Effect.

   2.21. Government Regulation. Obligor is not subject to regulation under the
Public Utility Holding Company Act of 1935, the Federal Power Act, the
Interstate Commerce Act, the Investment Company Act of 1940, or any other
Requirement of Law that limits its ability to incur indebtedness or its ability
to consummate the transactions contemplated by this Agreement and the other Loan
Documents.

   2.22. Business and Properties. The business of Obligor is not affected by any
fire, explosion, accident, strike, lockout or other labor dispute, drought,
storm, hail, earthquake, embargo, act of God or of the public enemy or other
casualty (whether or not covered by insurance) that could reasonably be expected
to have a Material Adverse Effect.

   2.23. Affiliate Transactions. Obligor is not a party to or bound by any
agreement or arrangement (whether oral or written) to which any Affiliate of
Obligor is a party except * (i) in the ordinary course of and pursuant to the
reasonable requirements of the business of Obligor and (ii) upon fair and
reasonable terms no less favorable to Obligor than it could obtain in a
comparable arm's-length transaction with an unaffiliated Person.


                                      -3-
<PAGE>   4
TBCC                                                          SECURITY AGREEMENT
- --------------------------------------------------------------------------------


   * FOR THAT CERTAIN AGREEMENT AND PLAN OF MERGER DATED JUNE 30, 1999, BETWEEN
OBLIGOR AND BORROWER, AND EXCEPT

   2.24. Survival of Representations. All representations made by Obligor in
this Agreement and in any other Loan Document executed and delivered by it in
connection herewith shall survive the execution and delivery hereof and thereof
and the closing of the transactions contemplated hereby and thereby.

3. AFFIRMATIVE COVENANTS OF THE OBLIGOR. Until termination of this Agreement and
payment and satisfaction of all Obligations:

   3.1. Corporate Existence. Obligor shall (i) maintain its corporate existence,
(ii) maintain in full force and effect all material licenses, bonds, franchises,
leases, trademarks, qualifications and authorizations to do business, and all
material patents, contracts and other rights necessary or advisable to the
profitable conduct of its business, and (iii) continue in, and limit its
operations to, the same lines of business as presently conducted by it.

   3.2. Maintenance of Property. Obligor shall keep all property useful and
necessary to its business in good working order and condition (ordinary wear and
tear excepted) in accordance with its past operating practices.

   3.3. Affiliate Transactions. Obligor shall conduct transactions with any of
its Affiliates on an arm's-length basis or other basis no less favorable to
Obligor and which are approved by the board of directors of Obligor.

   3.4. Taxes. Obligor shall pay when due (i) all tax assessments, and other
governmental charges and levies imposed against it or any of its property and
(ii) all lawful claims that, if unpaid, might by law become a Lien upon its
property; provided, however, that, unless such tax assessment, charge, levy or
claim has become a Lien on any of the property of Obligor, it need not be paid
if it is being contested in good faith, by appropriate proceedings diligently
conducted and an adequate reserve or other appropriate provision shall have been
made therefor as required in accordance with GAAP.

   3.5. Requirements of Law. Obligor shall comply with all Requirements of Law
applicable to it, including, without limitation, all applicable Federal, State,
local or foreign laws and regulations, including, without limitation, those
relating to environmental matters, employee matters, the Employee Retirement
Income Security Act of 1974, and the collection, payment and deposit of
employees' income, unemployment and social security taxes, provided that Obligor
shall not be deemed in violation hereof if Obligor's failure to comply with any
of the foregoing would not require more than * to cure the same.

   * $75,000

   3.6. Insurance. Obligor shall maintain public liability insurance, business
interruption insurance, third party property damage insurance and replacement
value insurance on its assets (including the Collateral) under such policies of
insurance, with such insurance companies, in such amounts and covering such
risks as are at all times satisfactory to TBCC in its commercially reasonable
judgment, all of which policies covering the Collateral shall name TBCC as an
additional insured and lender loss payee in case of loss, and contain other
provisions as TBCC may reasonably require to protect fully TBCC's interest in
the Collateral and any payments to be made under such policies.

   3.7. Books and Records; Inspections. Obligor shall (i) maintain books and
records (including computer records) pertaining to the Collateral in such
detail, form and scope as is consistent with good business practice and (ii)
provide TBCC and its agents access to the premises of Obligor at any time and
from time to time, during normal business hours and upon reasonable notice under
the circumstances, and at any time on and after the occurrence of a Default or
Event of Default, for the purposes of (A) inspecting and verifying the
Collateral, (B) inspecting and copying (at Obligor's expense) any and all
records pertaining thereto, and (C) discussing the affairs, finances and
business of Obligor with any officer, employee or director of Obligor or with
the Auditors. Obligor shall reimburse TBCC for the reasonable travel and related
expenses of TBCC's employees or, at TBCC's option, of such outside accountants
or examiners as may be retained by TBCC to verify or inspect Collateral, records
or documents of Obligor on a regular basis or for a special inspection if TBCC
deems the same appropriate. If TBCC's own employees are used, Obligor shall also
pay therefor $600 per person per day (or such other amount as shall represent
TBCC's then current standard charge for the same), or, if outside examiners or
accountants are used, Obligor shall also pay TBCC such sum as TBCC may be
obligated to pay as fees therefor.

   3.8. Notification Requirements. Obligor shall give TBCC the following notices
and other documents:

     (a) Notice of Defaults. Obligor shall give TBCC written notice of any
Default or Event of Default within two Business Days after becoming aware of the
same.

     (b) Proceedings or Adverse Changes. Obligor shall give TBCC written notice
of any of the following, promptly, and in any event within five Business Days
after Obligor becomes aware of any of the following: (i) any proceeding being
instituted or threatened by or against it in any federal, state, local or
foreign court or before any commission or other regulatory body involving a sum,
together with the sum involved in all other similar proceedings, in excess of *
in the aggregate, (ii) any order, judgment or decree being entered against
Obligor or any of its properties or assets involving a sum, together with the
sum of all other orders, judgments or decrees, in excess of * in the aggregate,
and (iii) any actual or prospective change, development or event which has had
or could reasonably be expected to have a Material Adverse Effect.

     * $75,000

     (c) Change of Name or Chief Executive Office; Opening Additional Places of
Business. Obligor shall give TBCC at least 30 days prior written notice of any
change of Obligor's corporate name or its chief executive office or of the
opening of any additional place of business.

     (d) Casualty Loss. Obligor shall (i) provide written notice to TBCC, within
ten Business Days, of any material damage to, the destruction of or any other
material loss to any asset or property owned or used by Obligor other than any
such asset or property with a net book value (individually or in the aggregate)
less than * or any condemnation, confiscation or other taking, in whole or in
part, or any event that otherwise diminishes so as to render impracticable or
unreasonable the use of such asset or prop-


                                      -4-
<PAGE>   5
TBCC                                                          SECURITY AGREEMENT
- --------------------------------------------------------------------------------

erty owned or used by Obligor together with the amount of the damage,
destruction, loss or diminution in value and (ii) diligently file and prosecute
its claim or claims for any award or payment in connection with a any of the
foregoing.

   * $30,000

   3.9. Qualify to Transact Business. Obligor shall qualify to transact business
as a foreign corporation in each jurisdiction where the nature or extent of its
business or the ownership of its property requires it to be so qualified or
authorized and where failure to qualify or be authorized would have a Material
Adverse Effect.

   3.10. Financial Reporting. Obligor shall timely deliver to TBCC such
information respecting Obligor or any Collateral as TBCC may from time to time
request in its good-faith business judgment. Obligor authorizes TBCC to
communicate directly with its officers, employees and Auditors and to examine
and make abstracts from its books and records. Obligor authorizes its Auditors
to disclose to TBCC any and all financial statements, work papers and other
information of any kind that they may have with respect to Obligor and its
business and financial and other affairs. Obligor shall deliver a letter
addressed to the Auditors requesting them to comply with the provisions of this
paragraph when requested by TBCC.

   3.11. Payment of Liabilities. Obligor shall pay and discharge, in the
ordinary course of business, all Indebtedness, except where the same may be
contested in good faith by appropriate proceedings and adequate reserves with
respect thereto have been provided on the books and records of Obligor in
accordance with GAAP.

   3.12. Trademarks. Obligor shall do and cause to be done all things necessary
to preserve and keep in full force and effect all of its material registrations
of trademarks, service marks and other marks, trade names and other trade
rights.

   3.13. Proceeds of Collateral. Without limiting any of the other terms of this
Agreement, and without implying any consent to any sale or other transfer of
Collateral in violation of any provision of this Agreement, Obligor shall
deliver to TBCC all proceeds of any sale or other transfer or disposition of any
Collateral, immediately upon receipt of the same and in the same form as
received, with any necessary endorsements, and Obligor will not commingle any
such proceeds with any of its other funds or property, but will segregate them
from the other assets of Obligor and will hold them in trust and for the account
and as the property of TBCC.

   3.14. Solvency. Obligor shall be Solvent at all times.

   3.15. Interest. Obligor shall pay TBCC interest on all sums due from Obligor
to TBCC hereunder at an interest rate equal to the highest interest rate
applicable to any of the Loans, from the date due to the date paid.

4. Negative Covenants. Until termination of this Agreement and payment and
satisfaction of all Obligations:

   4.1. Contingent Obligations. Obligor will not, directly or indirectly, incur,
assume, or suffer to exist any Contingent Obligation, excluding indemnities
given in connection with this Agreement or the other Loan Documents in favor of
TBCC or in connection with the sale of Inventory or other asset dispositions
permitted hereunder.

   4.2. Corporate Changes. Obligor will not, directly or indirectly, merge or
consolidate with any Person*, or liquidate or dissolve (or suffer any
liquidation or dissolution)**.

   * OTHER THAN BORROWER

   ** UNLESS ALL OF OBLIGOR'S ASSETS ARE TRANSFERRED TO BORROWER

   4.3. Change in Nature of Business. Obligor will not at any time make any
material change in the lines of its business as carried on at the date of this
Agreement or enter into any new line of business.

   4.4. Sales of Assets. Obligor will not, directly or indirectly, in any fiscal
year, sell, transfer or otherwise dispose of any assets, or grant any option or
other right to purchase or otherwise acquire any assets other than (i) Equipment
with an aggregate value of less than * the proceeds of which shall be paid to
TBCC and applied to the Obligations, and (ii) sales of Inventory in the ordinary
course of business.

   * $37,500

   4.5. Cancellation of Debt. Obligor will not cancel any claim or debt owed to
it, except in the ordinary course of business.

   4.6. Loans to Other Persons. Obligor will not at any time make loans or
advance any credit (except to trade debtors in the ordinary course of business)
to any Person in excess of * in the aggregate at any time for all such loans.

   * $37,500

   4.7. Liens. Obligor will not, directly or indirectly, at any time create,
incur, assume or suffer to exist any Lien on or with respect to any of the
Collateral, other than: Liens created hereunder and by any other Loan Document;
and Permitted Liens.

   4.8. Dividends, Stock Redemptions. Obligor will not, directly or indirectly,
pay any dividends or distributions on, purchase, redeem or retire any shares of
any class of its capital stock or any warrants, options or rights to purchase
any such capital stock, whether now or hereafter outstanding ("Stock"), or make
any payment on account of or set apart assets for a sinking or other analogous
fund for, the purchase, redemption, defeasance, retirement or other acquisition
of its Stock, or make any other distribution in respect thereof, either directly
or indirectly, whether in cash or property or in obligations of Obligor, except
for dividends paid solely in stock of the Obligor*.

   * AND EXCEPT FOR DIVIDENDS PAID TO BORROWER

   4.9. Investments in Other Persons. Obligor will not, directly or indirectly,
at any time make or hold any Investment in any Person (whether in cash,
securities or other property of any kind) other than Investments in Cash
Equivalents.

   4.10. Partnerships; Subsidiaries; Joint Ventures; Management Contracts.
Obligor will not at any time create any direct or indirect Subsidiary, enter
into any joint venture or similar arrangement or become a partner in any general
or limited partnership or enter into any management contract (other than an
employment contract for the employment of an officer or employee entered into in
the regular course of Obligor's business) permitting third party management
rights with respect to Obligor's business.


                                      -5-
<PAGE>   6
TBCC                                                          SECURITY AGREEMENT
- --------------------------------------------------------------------------------

   4.11. Fiscal Year. Obligor will not change its fiscal year.

   4.12. Accounting Changes. Obligor will not at any time make or permit any
change in accounting policies or reporting practices, except as required by
GAAP.

   4.13. Broker's or Finder's Fees. Obligor will not pay or incur any broker's
or finder's fees in connection with this Agreement or the transactions
contemplated hereby.

   4.14. Unusual Terms of Sale. Obligor will not sell goods or products on
extended terms, consignment terms, on a progress billing or bill and hold basis,
or on any other unusual terms*.

   * , EXCEPT THAT OBLIGOR MAY FROM TIME TO TIME (I) LOAN A CRYOCARE SYSTEM TO A
USER, AND (II) TRANSFER A CRYOCARE SYSTEM TO A USER WHO HAS PURCHASED A
SUFFICIENT NUMBER OF DISPOSABLE UNITES WHICH ARE USED IN CONNECTION WITH SUCH
CRYOCARE SYSTEM

   4.15. Amendments of Material Contracts. Obligor will not amend, modify,
cancel or terminate, or permit the amendment, modification, cancellation or
termination of, any Material Contract, if such amendment, modification,
cancellation or termination could * have a Material Adverse Effect.

   * REASONABLY BE EXPECTED TO

   4.16. Sale and Leaseback Obligations. Obligor will not at any time create,
incur or assume any obligations as lessee for the rental of real or personal
property in connection with any sale and leaseback transaction.

   4.17. Acquisition of Stock or Assets. Obligor will not acquire or commit or
agree to acquire all or any stock, securities or assets of any other Person
other than Inventory and Equipment acquired in the ordinary course of business.

5. Events of Default.

   5.1. Events of Default. The occurrence of any of the following events shall
constitute an "Event of Default":

     (a) Obligor shall fail to pay any Obligation when payable, whether at
stated maturity, by acceleration, or otherwise; or

     (b) Obligor shall default in the performance or observance of any
agreement, covenant, condition, provision or term contained in Section 3.7,
3.13, 4 (and its Sections and subsections), or 6.2 of this Agreement, or Obligor
shall fail to perform any non-monetary Obligation which by its nature cannot be
cured; or

     (c) Obligor shall default in the performance or observance of any other
agreement, covenant, condition, provision or term of this Agreement (other than
those referred to in Section 5.1(a) above or Section 5.1(b) above) or any other
Loan Document, and such failure continues uncured for a period of * Business
Days after the date it occurs; or

     * TEN

     (d) Obligor shall dissolve, wind up or otherwise cease to conduct its
business*; or

     * UNLESS IN CONNECTION THEREWITH ALL OF OBLIGOR'S ASSETS ARE TRANSFERRED TO
BORROWER

     (e) Obligor shall become the subject of (i) an Insolvency Event except as
set forth in clause (e) of the definition of Insolvency Event or (ii) an
Insolvency Event as set forth in clause (e) of the definition of Insolvency
Event that is not dismissed within sixty days; or

     (f) any representation or warranty made by or on behalf of Obligor to TBCC,
under this Agreement or otherwise, shall be incorrect or misleading in any
material respect when made or deemed made; or

     (g) A change in the ownership or control of more than * of the voting stock
of the Obligor compared to such ownership on the date of this Agreement;

     * 30%

     (h) any judgment or order for the payment of money shall be rendered
against Obligor and shall not be stayed, vacated, bonded or discharged within
thirty days; or

     (i) Obligor shall deny or disaffirm its obligations under any of the Loan
Documents or any Liens granted in connection therewith or shall otherwise
challenge any of its obligations under any of the Loan Documents; or any Liens
granted in any of the Collateral shall be determined to be void, voidable or
invalid, are subordinated or are not given the priority contemplated by this
Agreement; or

     (j) any Loan Document shall for any reason cease to create a valid and
perfected Lien on the Collateral purported to be covered thereby, of first
priority (except for Permitted Liens)*; or

     *AND, IF THE FOREGOING IS THROUGH NO FAULT OF THE OBLIGOR, THE SAME SHALL
NOT BE CURED WITHIN FIVE (5) DAYS

     (k) the independent public accountants for Obligor shall deliver a
Qualified opinion on any Financial Statement; or

     (l) Obligor (i) shall fail to pay any Indebtedness in excess of * owing to
any Person other than TBCC or any interest or premium thereon, when due (whether
at scheduled maturity or by required prepayment, acceleration, demand or
otherwise), or (ii) shall otherwise be in breach or default in any of its
obligations under any agreement with respect to any such Indebtedness, if the
effect of such breach, default or failure to pay is to cause such Indebtedness
to become due or redeemed or permit the holder or holders of such Indebtedness
(or a trustee or agent on behalf of such holder or holders) to declare such
Indebtedness due or require such Indebtedness to be redeemed prior to its stated
maturity**; or

     * $75,000

     ** AND THE HOLDER OR HOLDERS OF SUCH INDEBTEDNESS (OR A TRUSTEE OR AGENT ON
BEHALF OF SUCH HOLDER OR HOLDERS) DO DECLARE SUCH INDEBTEDNESS DUE OR REQUIRE
SUCH INDEBTEDNESS TO BE REDEEMED PRIOR TO ITS STATED MATURITY

     (m) the occurrence of any event or condition that, in TBCC's * judgment,
could reasonably be expected to have a Material Adverse Effect.

   * REASONABLE GOOD FAITH

   5.2. Remedies. Upon the occurrence and during the continuance of an Event of
Default, TBCC shall have all rights and remedies under applicable law and the
Loan Documents, and TBCC may do any or all of the following:


                                      -6-
<PAGE>   7
TBCC                                                          SECURITY AGREEMENT
- --------------------------------------------------------------------------------

     (a) Declare all Obligations to be immediately due and payable (except with
respect to any Event of Default with respect to Obligor set forth in Section
5.1(e), in which case all Obligations shall automatically become immediately due
and payable) without presentment, demand, protest or any other action or
obligation of TBCC.

     (b) Cease making any extensions of credit to Obligor of any kind.

     (c) Take possession of all documents, instruments, files and records
(including the copying of any computer records) relating to the Receivables or
other Collateral and use (at the expense of Obligor) such supplies or space of
Obligor at Obligor's places of business necessary to administer and collect the
Receivables and other Collateral;

     (d) Accelerate or extend the time of payment, compromise, issue credits, or
bring suit on the Receivables and other Collateral (in the name of Obligor or
TBCC) and otherwise administer and collect the Receivables and other Collateral;

     (e) Sell, assign and deliver the Receivables and other Collateral, with or
without advertisement, at public or private sale, for cash, on credit or
otherwise, subject to applicable law; and

     (f) Foreclose the security interests created pursuant to the Loan Documents
by any available procedure, take possession of any or all of the Collateral,
with or without judicial process and enter any premises where any Collateral may
be located for the purpose of taking possession of or removing the same.

     (g) TBCC may bid or become a purchaser at any sale, free from any right of
redemption, which right is expressly waived by Obligor, if permitted under
applicable law. If notice of intended disposition of any Collateral is required
by law, it is agreed that ten days' notice shall constitute reasonable
notification. Obligor will assemble the Collateral and make it available at such
locations as TBCC may specify, whether at the premises of Obligor or elsewhere,
and will make available to TBCC the premises and facilities of Obligor for the
purpose of TBCC's taking possession of or removing the Collateral or putting the
Collateral in salable form.

   5.3. Receivables. Upon the occurrence and during the continuance of an Event
of Default, or at any time that TBCC believes in good faith that fraud has
occurred or that Obligor has failed to deliver the proceeds of Receivables or
other Collateral to TBCC as required by this Agreement or any other Loan
Document, TBCC may (i) settle or adjust disputes or claims directly with account
debtors for amounts and upon terms which it considers advisable, and (ii) notify
account debtors on the Receivables and other Collateral that the Receivables and
Collateral have been assigned to TBCC, and that payments in respect thereof
shall be made directly to TBCC. If an Event of Default has occurred and is
continuing or TBCC reasonably believes in good faith that fraud has occurred, or
that Obligor has failed to deliver the proceeds of Receivables or other
Collateral to TBCC as required by this Agreement or any other Loan Document,
Obligor hereby irrevocably authorizes and appoints TBCC, or any Person TBCC may
designate, as its attorney-in-fact, at Obligor's sole cost and expense, to
exercise, all of the following powers, which are coupled with an interest and
are irrevocable, until all of the Obligations have been indefeasibly paid and
satisfied in full in cash: (A) to receive, take, endorse, sign, assign and
deliver, all in the name of TBCC or Obligor, any and all checks, notes, drafts,
and other documents or instruments relating to the Collateral; (B) to receive,
open and dispose of all mail addressed to Obligor and to notify postal
authorities to change the address for delivery thereof to such address as TBCC
may designate; and (C) to take or bring, in the name of TBCC or Obligor, all
steps, actions, suits or proceedings deemed by TBCC necessary or desirable to
enforce or effect collection of Receivables and other Collateral or file and
sign Obligor's name on a proof of claim in bankruptcy or similar document
against any obligor of Obligor.

   5.4. Right of Setoff. In addition to all rights of offset that TBCC may have
under applicable law, upon the occurrence and during the continuance of any
Event of Default, and whether or not TBCC has made any demand or the Obligations
of Obligor have matured, TBCC shall have the right to appropriate and apply to
the payment of the Obligations of Obligor all deposits and other obligations
then or thereafter owing by TBCC to or for the credit or the account of Obligor.
In the event that TBCC exercises any of its rights under this Section, TBCC
shall provide notice to Obligor of such exercise, provided that the failure to
give such notice shall not affect the validity of the exercise of such rights.

   5.5. License for Use of Software and Other Intellectual Property. After the
occurrence and during the continuance of an Event of Default, unless expressly
prohibited by any licensor thereof, TBCC is hereby granted a license to use all
computer software programs, data bases, processes, trademarks, tradenames and
materials used by Obligor in connection with its businesses or in connection
with the Collateral.

   5.6. No Marshalling; Deficiencies; Remedies Cumulative. The net cash proceeds
resulting from TBCC's exercise of any of its rights with respect to Collateral,
including any and all Collections (after deducting all of TBCC's reasonable
expenses related thereto), shall be applied by TBCC to such of the Obligations
in such order as TBCC shall elect in its sole and absolute discretion, whether
due or to become due. Obligor shall remain liable to TBCC for any deficiencies
and TBCC shall remit to Obligor or its successor or assign, any surplus
resulting therefrom. The remedies specified in this Agreement are cumulative,
may be exercised in such order and with respect to such Collateral as TBCC may
deem desirable and are not intended to be exclusive, and the full or partial
exercise of any of them shall not preclude the full or partial exercise of any
other available remedy under this Agreement, under any other Loan Document, at
equity or at law.

   5.7. Waivers. Obligor hereby waives any bonds, security or sureties required
by any statute, rule or any other law as an incident to any taking of possession
by TBCC of any Collateral. Obligor also waives any damages (direct,
consequential or otherwise) occasioned by the enforcement of TBCC's rights under
this Agreement or any other Loan Document including the taking of possession of
any Collateral or the giving of notice to any account debtor or the collection
of any Receivable or other Collateral (other than damages that are the result of
acts or omissions constituting gross negligence or willful misconduct of TBCC).
These waivers and all other waivers provided for in this Agreement and the other
Loan Documents have been


                                      -7-
<PAGE>   8
TBCC                                                          SECURITY AGREEMENT
- --------------------------------------------------------------------------------

negotiated by the parties and Obligor acknowledges that it has been represented
by counsel of its own choice and has consulted such counsel with respect to its
rights hereunder.

   5.8. Right to Make Payments. In the event that Obligor shall fail to purchase
or maintain insurance required hereunder, or to pay any tax, assessment,
government charge or levy, except as the same may be otherwise permitted
hereunder, or in the event that any Lien prohibited hereby shall not be paid in
full or discharged, or in the event that Obligor shall fail to perform or comply
with any other covenant, promise or obligation to TBCC hereunder or under any
other Loan Document, TBCC may (but shall not be required to) perform, pay,
satisfy, discharge or bond the same for the account of Obligor, and Obligor
shall immediately reimburse TBCC for all amounts so paid by TBCC.

6. TERM, Assignments and Participations.

   6.1. Term. This Agreement shall continue in effect until all of the
Obligations have been paid and performed in full and the Loan Agreement has
terminated.

   6.2. Assignments. Obligor shall not assign this Agreement or any right or
obligation hereunder without the prior written consent of TBCC. TBCC may assign
(without the consent of Obligor) to one or more Persons all or a portion of its
rights and obligations under this Agreement and the other Loan Documents.

   6.3. Participations. TBCC may sell participations in or to all or a portion
of its rights and obligations under this Agreement; provided, however, that
TBCC's obligations under this Agreement shall remain unchanged.

   6.4. Disclosure. TBCC may, in connection with any permitted assignment or
participation or proposed assignment or participation pursuant to this
Agreement, disclose to the assignee or participant or proposed assignee or
participant any information relating to Obligor furnished to TBCC by or on
behalf of Obligor.

7. DEFINITIONS.

   7.1. General Definitions. As used herein, the following terms shall have the
meanings herein specified (to be equally applicable to both the singular and
plural forms of the terms defined):

     (a) "Affiliate" means as to any Person, any other Person who directly or
indirectly controls, is under common control with, is controlled by or is a
director or officer of such Person. As used in this definition, "control"
(including its correlative meanings, "controlled by" and "under common control
with") means possession, directly or indirectly, of the power to direct or cause
the direction of management or policies (whether through ownership of voting
securities or partnership or other ownership interests, by contract or
otherwise), provided that, in any event, any Person who owns directly or
indirectly twenty percent (20%) or more of the securities having ordinary voting
power for the election of the members of the board of directors or other
governing body of a corporation or twenty percent (20%) or more of the
partnership or other ownership interests of any other Person (other than as a
limited partner of such other Person) will be deemed to control such
corporation, partnership or other Person.

     (b) "Agreement" means this Security Agreement, as amended, supplemented or
otherwise modified from time to time.

     (c) "Auditors" means a nationally recognized firm of independent public
accountants selected by Obligor and reasonably satisfactory to TBCC.

     (d) "Bankruptcy Code" means Title 11 of the United States Code entitled
"Bankruptcy," as that title may be amended from time to time, or any successor
statute.

     (e) "Borrower" means Endocare, Inc., a Delaware corporation, and its
successors.

     (f) "Business Day" means any day other than a Saturday, Sunday or any other
day on which commercial banks in Chicago, Illinois are required or permitted by
law to close.

     (g) "Cash Equivalents" means (i) securities issued, guaranteed or insured
by the United States or any of its agencies with maturities of not more than one
year from the date acquired; (ii) certificates of deposit with maturities of not
more than one year from the date acquired, issued by any U.S. federal or state
chartered commercial bank of recognized standing which has capital and
unimpaired surplus in excess of $100,000,000; (iii) investments in money market
funds registered under the Investment Company Act of 1940; and (iv) other
instruments, commercial paper or investments acceptable to TBCC in its sole
discretion.

     (h) "Collateral" means Receivables, Inventory, Equipment, and Other
Property, and all additions and accessions thereto and substitutions and
replacements therefor and improvements thereon, and all proceeds (whether cash
or other property) and products thereof, including, without limitation, all
proceeds of insurance covering the same and all tort claims in connection
therewith, and all records, files, computer programs and files, data and
writings relating to the foregoing, and all equipment containing the foregoing.

     (i) "Collections" means all cash, funds, checks, notes, instruments, any
other form of remittance tendered by account debtors in respect of payment of
Receivables and any other payments received by Obligor with respect to any other
Collateral.

     (j) "Compliance Certificate" means a certificate as to compliance with the
Obligations, on TBCC's standard form (in effect from time to time).

     (k) "Contingent Obligation" means any direct, indirect, contingent or
non-contingent guaranty or obligation for the Indebtedness of another Person,
except endorsements in the ordinary course of business.

     (l) "Default" means any of the events specified in Section 5.1, whether or
not any of the requirements for the giving of notice, the lapse of time, or
both, or any other condition, has been satisfied.

     (m) "Equipment" means all machinery, equipment, furniture, fixtures,
conveyors, tools, materials, storage and handling equipment, hydraulic presses,
cutting equipment, computer equipment and hardware, including central processing
units, terminals, drives, memory units, printers, keyboards, screens,
peripherals and input or output devices, molds, dies, stamps, vehicles, and
other equipment of every


                                      -8-
<PAGE>   9
TBCC                                                          SECURITY AGREEMENT
- --------------------------------------------------------------------------------

kind and nature and wherever situated now or hereafter owned by Obligor or in
which Obligor may have any interest as lessee or otherwise (to the extent of
such interest), together with all additions and accessions thereto, all
replacements and all accessories and parts therefor, all manuals, blueprints,
know-how, warranties and records in connection therewith, all rights against
suppliers, warrantors, manufacturers, sellers or others in connection therewith,
and together with all substitutes for any of the foregoing.

     (n) "Event of Default" means the occurrence of any of the events specified
in Section 5.1.

     (o) "Financial Statements" means the balance sheets, profit and loss
statements, for the period specified, prepared in accordance with GAAP and
consistent with prior practices.

     (p) "GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board that are applicable to the
circumstances as of the date of determination. Whenever any accounting term is
used herein which is not otherwise defined, it shall be interpreted in
accordance with GAAP.

     (q) "Governing Documents" means the articles or certificate of
incorporation and by-laws of Obligor.

     (r) "Governmental Authority" means any nation or government, any state or
other political subdivision thereof or any entity exercising executive,
legislative, judicial, regulatory or administrative functions thereof or
pertaining thereto.

     (s) "Indebtedness" means, with respect to any Person, as of the date of
determination any indebtedness, liability or obligation of such Person
(including without limitation obligations under capital leases and contingent
obligations).

     (t) "Insolvency Event" means, with respect to any Person, the occurrence of
any of the following: (a) such Person shall be adjudicated insolvent or
bankrupt, or shall generally fail to pay or admit in writing its inability to
pay its debts as they become due, (b) such Person shall seek dissolution or
reorganization or the appointment of a receiver, trustee, custodian or
liquidator for it or a substantial portion of its property, assets or business
or to effect a plan or other arrangement with its creditors, (c) such Person
shall make a general assignment for the benefit of its creditors, or consent to
or acquiesce in the appointment of a receiver, trustee, custodian or liquidator
for a substantial portion of its property, assets or business, (d) such Person
shall file a voluntary petition under any bankruptcy, insolvency or similar law
or take any corporate or similar act in furtherance thereof, or (e) such Person,
or a substantial portion of its property, assets or business shall become the
subject of an involuntary proceeding or petition for its dissolution,
reorganization, and such proceeding is not dismissed or stayed within sixty
days, or the appointment of a receiver, trustee, custodian or liquidator, and
such receiver is not dismissed within sixty days.

     (u) "Inventory" means all present and future goods intended for sale, lease
or other disposition by Obligor including, without limitation, all raw
materials, work in process, finished goods and other retail inventory, goods in
the possession of outside processors or other third parties, goods consigned to
Obligor to the extent of its interest therein as consignee, materials and
supplies of any kind, nature or description which are or might be used in
connection with the manufacture, packing, shipping, advertising, selling or
finishing of any such goods, and all documents of title or documents
representing the same.

     (v) "Investment" in any Person means, as of the date of determination
thereof, any payment or contribution, or commitment to make a payment or
contribution, by any Person including, without limitation, property contributed
or committed to be contributed by any Person, on its account for or in
connection with its acquisition of any stock, bonds, notes, debentures,
partnership or other ownership interest or any other security of the Person in
whom such Investment is made or any evidence of indebtedness by reason of a
loan, advance, extension of credit, guaranty or other similar obligation for any
debt, liability or indebtedness of such Person in whom the Investment is made.

     (w) "Lien" means any lien, claim, charge, pledge, security interest,
assignment, hypothecation, deed of trust, mortgage, lease, conditional sale,
retention of title or other preferential arrangement having substantially the
same economic effect as any of the foregoing, whether voluntary or imposed by
law.

     (x) "Loan Agreement" means the Loan and Security Agreement dated
approximately even date herewith between TBCC and the Borrower (and all
extensions, renewals, replacements and modifications thereof).

     (y) "Loan Documents" means this Agreement, the Loan Agreement, and all
present and future documents and instruments delivered or to be delivered by
Borrower, Obligor or any of their Affiliates under, in connection with or
relating to this Agreement or the Loan Agreement as each of the same may be
amended, supplemented or otherwise modified from time to time.

     (z) "Material Adverse Effect" means (i) a material adverse effect on the
business, prospects, operations, results of operations, assets, liabilities or
condition (financial or otherwise) of Obligor, (ii) the impairment of Obligor's
ability to perform its obligations under the Loan Documents to which it is a
party or of TBCC to enforce the Obligations or realize upon the Collateral or
(iii) a material adverse effect on the value of the Collateral or the amount
which TBCC would be likely to receive (after giving consideration to delays in
payment and costs of enforcement) in the liquidation of the Collateral.

     (aa) "Material Contract" means any contract or other arrangement to which
Obligor is a party (other than the Loan Documents) for which breach,
nonperformance, cancellation or failure to renew could have a Material Adverse
Effect.

     (bb) "Obligations" means and includes all debts, liabilities, obligations,
guaranties, covenants and duties owing by Obligor to TBCC of any kind or nature,
present or future, whether or not evidenced by any note, guaranty or other
instrument, which may arise under, out of, or in connection with, that certain
Guaranty dated approximately even date herewith executed by Obligor in favor of
TBCC with respect to the Borrower (and all extensions, renewals, replacements
and modifications thereof), this Agreement,


                                      -9-
<PAGE>   10
TBCC                                                          SECURITY AGREEMENT
- --------------------------------------------------------------------------------

any other Loan Document or any other agreement executed in connection herewith
or therewith, whether or not for the payment of money, whether arising by reason
of an extension of credit, opening, guaranteeing or confirming of a letter of
credit, loan, guaranty, indemnification or in any other manner, whether direct
or indirect (including those acquired by assignment, purchase, discount or
otherwise), whether absolute or contingent, due or to become due, now due or
hereafter arising and however acquired. The term includes, without limitation,
all interest (including interest accruing on or after an Insolvency Event,
whether or not an allowed claim), charges, expenses, reasonable attorneys' fees,
and any other sum properly chargeable to Obligor under this Agreement, the other
Loan Documents or any other agreement executed in connection herewith or
therewith.

     (cc) "Other Property" means all present and future: instruments, documents,
documents of title, securities, investment securities, bonds, notes, promissory
notes, drafts, acceptances, letters of credit and rights to receive proceeds of
letters of credit, deposit accounts, chattel paper, certificates, insurance
policies, insurance proceeds, leases, computer tapes, causes of action,
judgments, claims against third parties, leasehold rights in any personal
property, books, ledgers, files and records, general intangibles (including
without limitation, all contract rights, tax refunds, rights to receive tax
refunds, patents, patent applications, copyrights (registered and unregistered),
royalties, licenses, permits, franchise rights, authorizations, customer lists,
rights of indemnification, contribution and subrogation, computer programs,
discs and software, trade secrets, computer service contracts, trademarks, trade
names, service marks and names, logos, goodwill, deposits, choses in action,
designs, blueprints, plans, know-how, telephone numbers and rights thereto,
credits, reserves, and all forms of obligations whatsoever now or hereafter
owing to Obligor), all property at any time in the possession or under the
control of TBCC, and all security given by Obligor to TBCC pursuant to any other
Loan Document or agreement.

     (dd) "Permitted Liens" means such of the following as to which no
enforcement, collection, execution, levy or foreclosure proceeding shall have
been commenced and be continuing: (i) Liens for taxes, assessments and other
governmental charges or levies or the claims or demands of landlords, carriers,
warehousemen, mechanics, laborers, materialmen and other like Persons arising by
operation of law in the ordinary course of business for sums which are not yet
due and payable, (ii) deposits or pledges to secure the payment of workmen's
compensation, unemployment insurance or other social security benefits or
obligations, public or statutory obligations, surety or appeal bonds, bid or
performance bonds, or other obligations of a like nature incurred in the
ordinary course of business (but nothing in this clause (ii) shall permit the
creation of Liens on Receivables or Inventory or Other Property), (iii) zoning
restrictions, easements, encroachments, licenses, restrictions or covenants on
the use of the Property which do not materially impair either the use of the
Property in the operation of the business of Obligor or the value of the
Property, (iv) rights of general application reserved to or vested in any
municipality or other governmental, statutory or public authority to control or
regulate property, or to use property in a manner which does not materially
impair the use of the property for the purposes for which it is held by Obligor,
(v) state and municipal Liens for personal property taxes which are not yet due
and payable, and (vi) Purchase Money Liens.

     (ee) "Person" means any individual, sole proprietorship, partnership, joint
venture, limited liability company, trust, unincorporated organization, joint
stock company, association, corporation, institution, entity, party or
government (including any division, agency or department thereof) or any other
legal entity, whether acting in an individual, fiduciary or other capacity, and,
as applicable, the successors, heirs and assigns of each.

     (ff) "Plan" means any employee benefit plan, program or arrangement
maintained or contributed to by Obligor or with respect to which it may incur
liability.

     (gg) "Purchase Money Lien" means a Lien on any item of Equipment created
substantially simultaneously with the acquisition of such Equipment for the
purpose of financing such acquisition, provided that such Lien shall attach only
to the Equipment acquired.

     (hh) "Qualification" or "Qualified" means, with respect to any report of
independent public accountants covering Financial Statements, a material
qualification to such report (i) resulting from a limitation on the scope of
examination of such Financial Statements or the underlying data, (ii) as to the
capability of Obligor to continue operations as a going concern or (iii) which
could be eliminated by changes in Financial Statements or notes thereto covered
by such report (such as by the creation of or increase in a reserve or a
decrease in the carrying value of assets) and which if so eliminated by the
making of any such change and after giving effect thereto would result in a
Default or an Event of Default.

     (ii) "Receivables" means all present and future accounts and accounts
receivable, together with all security therefor and guaranties thereof and all
rights and remedies relating thereto, including any right of stoppage in
transit.

     (jj) "Requirement of Law" means (a) the Governing Documents, (b) any law,
treaty, rule, regulation, order or determination of an arbitrator, court or
other Governmental Authority or (c) any franchise, license, lease, permit,
certificate, authorization, qualification, easement, right of way, right or
approval binding on Obligor or any of its property.

     (kk) "Schedule" means the Schedule to this Agreement being signed
concurrently by Obligor and TBCC, as amended from time to time.

     (ll) "Solvent" means when used with respect to any Person that as of the
date as to which such Person's solvency is to be measured: (a) the fair salable
value of its assets is in excess of the total amount of its liabilities
(including contingent liabilities as valued in accordance with applicable law*)
as they become absolute and matured; (b) it has sufficient capital to conduct
its business; and (c) it is able to meet its debts as they mature.

     * , PROVIDED THAT, IN DETERMINING WHETHER OR NOT OBLIGOR IS SOLVENT, ANY
LIABILITIES OF OBLIGOR TO BORROWER SHALL BE EXCLUDED

     (mm) "Subsidiary" means, as to any Person, a corporation or other entity in
which that Person directly or indirectly owns or controls shares of stock or
other ownership interests having ordinary voting power to elect a majority of
the board of directors or appoint other managers of such corporation or other
entity.


                                      -10-
<PAGE>   11
TBCC                                                          SECURITY AGREEMENT
- --------------------------------------------------------------------------------

   7.2. Accounting Terms and Determinations. Unless otherwise defined or
specified herein, all accounting terms used in this Agreement shall be construed
in accordance with GAAP, applied on a basis consistent in all material respects
with the Financial Statements delivered to TBCC on or before the date of this
Agreement. All accounting determinations for purposes of determining compliance
with this Agreement shall be made in accordance with GAAP as in effect on the
date of this Agreement and applied on a basis consistent in all material
respects with the audited Financial Statements delivered to TBCC on or before
the date of this Agreement. The Financial Statements required to be delivered
hereunder, and all financial records, shall be maintained in accordance with
GAAP. If GAAP shall change from the basis used in preparing the audited
Financial Statements delivered to TBCC on or before the date of this Agreement,
the Compliance Certificates required to be delivered pursuant to this Agreement
shall include calculations setting forth the adjustments necessary to
demonstrate how Obligor is in compliance with the Financial Covenants (if any)
based upon GAAP as in effect on the date of this Agreement.

   7.3. Other Terms; Headings; Construction. Capitalized terms used in this
Agreement, which are not defined, shall have the meanings set forth in the Loan
Agreement. Unless otherwise defined herein, terms used herein that are defined
in the Uniform Commercial Code, from time to time in effect in the State of
Illinois, shall have the meanings set forth therein. Each of the words "hereof,"
"herein," and "hereunder" refer to this Agreement as a whole. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". An Event of Default shall "continue" or be "continuing" unless and
until such Event of Default has been waived or cured within the grace period
specified therefor under Section 5.1. References to Articles, Sections, Annexes,
Schedules, and Exhibits are internal references to this Agreement, and to its
attachments, unless otherwise specified. The headings and any Table of Contents
are for convenience only and shall not affect the meaning or construction of any
provision of this Agreement. This Agreement has been fully reviewed and
negotiated between the parties and no uncertainty or ambiguity in any term or
provision of this Agreement shall be construed strictly against TBCC or Obligor
under any rule of construction or otherwise.

8. GENERAL PROVISIONS.

   8.1. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS AND ANY DISPUTE ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, WHETHER
SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE GOVERNED BY THE
INTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS.

   8.2. SUBMISSION TO JURISDICTION. ALL DISPUTES BETWEEN THE OBLIGOR AND TBCC,
WHETHER SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY
BY STATE AND FEDERAL COURTS LOCATED IN CHICAGO, ILLINOIS, AND THE COURTS TO
WHICH AN APPEAL THEREFROM MAY BE TAKEN; PROVIDED, HOWEVER, THAT TBCC SHALL HAVE
THE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE
OBLIGOR OR ITS PROPERTY IN ANY LOCATION REASONABLY SELECTED BY TBCC IN GOOD
FAITH TO ENABLE TBCC TO REALIZE ON SUCH PROPERTY, OR TO ENFORCE A JUDGMENT OR
OTHER COURT ORDER IN FAVOR OF TBCC. THE OBLIGOR AGREES THAT IT WILL NOT ASSERT
ANY PERMISSIVE COUNTERCLAIMS, SETOFFS OR CROSS-CLAIMS IN ANY PROCEEDING BROUGHT
BY TBCC. THE OBLIGOR WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF
THE COURT IN WHICH TBCC HAS COMMENCED A PROCEEDING, INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON FORUM NON
CONVENIENS.

   8.3. SERVICE OF PROCESS. THE OBLIGOR HEREBY IRREVOCABLY DESIGNATES * AS THE
DESIGNEE AND AGENT OF THE OBLIGOR TO RECEIVE, FOR AND ON BEHALF OF THE OBLIGOR,
SERVICE OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT. IT IS UNDERSTOOD THAT A COPY OF SUCH
PROCESS SERVED ON SUCH AGENT AT ITS ADDRESS WILL BE PROMPTLY FORWARDED BY MAIL
TO THE OBLIGOR, BUT THE FAILURE OF THE OBLIGOR TO RECEIVE SUCH COPY SHALL NOT
AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. NOTHING HEREIN SHALL AFFECT THE
RIGHT OF THE LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.

   *PRENTICE-HALL CORPORATION SYSTEM, INC., 1013 CENTRE ROAD, WILMINGTON,
DELAWARE 19805

   8.4. LIMITATION OF LIABILITY. TBCC SHALL HAVE NO LIABILITY TO THE OBLIGOR
(WHETHER SOUNDING IN TORT, CONTRACT, OR OTHERWISE) FOR LOSSES SUFFERED BY THE
OBLIGOR IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO THE
TRANSACTIONS OR RELATIONSHIPS CONTEMPLATED BY THIS AGREEMENT, OR ANY ACT,
OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH, UNLESS IT IS DETERMINED BY
A FINAL AND NONAPPEALABLE JUDGMENT OR COURT ORDER BINDING ON TBCC THAT THE
LOSSES WERE THE RESULT OF ACTS OR OMISSIONS CONSTITUTING GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF TBCC. THE OBLIGOR HEREBY WAIVES ALL FUTURE CLAIMS AGAINST
TBCC FOR SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES.

   8.5. Delays; Partial Exercise of Remedies. No delay or omission of TBCC to
exercise any right or remedy hereunder shall impair any such right or operate as
a waiver thereof. No single or partial exercise by TBCC of any right or remedy
shall preclude any other or further exercise thereof, or preclude any other
right or remedy.

   8.6. Notices. Except as otherwise provided herein, all notices and
correspondence hereunder shall be in writing and sent by certified or registered
mail, return receipt requested, by overnight delivery service, with all charges
prepaid, or by telecopier followed by a hard copy sent by


                                      -11-
<PAGE>   12
TBCC                                                          SECURITY AGREEMENT
- --------------------------------------------------------------------------------

regular mail, to the parties at their addresses set forth in the heading to this
Agreement. All such notices and correspondence shall be deemed given (i) if sent
by certified or registered mail, three Business Days after being postmarked,
(ii) if sent by overnight delivery service, when received at the above stated
addresses or when delivery is refused and (iii) if sent by telecopier
transmission, when receipt of such transmission is acknowledged. Obligor's and
TBCC's telecopier numbers for purpose of notice hereunder are set forth in the
Schedule; each party's number may be changed by written notice to the other
party.

   8.7. Indemnification; Reimbursement of Expenses of Collection. Obligor hereby
indemnifies and agrees, whether or not any of the transactions contemplated by
this Agreement or the other Loan Documents are consummated, to defend and hold
harmless (on an after-tax basis) TBCC, its successors and assigns and their
respective directors, officers, agents, employees, advisors, shareholders,
attorneys and Affiliates (each, an "Indemnified Party") from and against any and
all losses, claims, damages, liabilities, deficiencies, obligations, fines,
penalties, actions (whether threatened or existing), judgments, suits (whether
threatened or existing) or expenses (including, without limitation, reasonable
fees and disbursements of counsel, experts, consultants and other professionals)
incurred by any of them (collectively, "Claims") (except, in the case of each
Indemnified Party, to the extent that any Claim is determined in a final and
non-appealable judgment by a court of competent jurisdiction to have directly
resulted from such Indemnified Party's gross negligence or willful misconduct)
arising out of or by reason of (i) any litigation, investigation, claim or
proceeding which arises out of or is related to (A) Obligor, or this Agreement,
any other Loan Document or the transactions contemplated hereby or thereby, (B)
any actual or proposed use by Borrower of the proceeds of the Loans, or (C)
TBCC's entering into this Agreement or any other Loan Document or any other
agreements and documents relating hereto, including, without limitation, amounts
paid in settlement, court costs and the reasonable fees and disbursements of
counsel incurred in connection with any such litigation, investigation, claim or
proceeding, (ii) any remedial or other action taken by Obligor in connection
with compliance by Obligor, or any of its properties, with any federal, state or
local environmental laws, rules or regulations, and (iii) any pending,
threatened or actual action, claim, proceeding or suit by any shareholder or
director of Obligor or any actual or purported violation of Obligor's charter,
by-laws or any other agreement or instrument to which Obligor is a party or by
which any of its properties is bound. In addition and without limiting the
generality of the foregoing, Obligor shall, upon demand, pay to TBCC all
reasonable costs and expenses incurred by TBCC (including the reasonable fees
and disbursements of counsel and other professionals) in connection with the
preparation, execution, delivery, administration, modification and amendment of
the Loan Documents, and pay to TBCC all reasonable costs and expenses (including
the reasonable fees and disbursements of counsel and other professionals) paid
or incurred by TBCC in order to enforce or defend any of its rights under or in
respect of this Agreement, any other Loan Document or any other document or
instrument now or hereafter executed and delivered in connection herewith,
collect the Obligations or otherwise administer this Agreement, foreclose or
otherwise realize upon the Collateral or any part thereof, prosecute actions
against, or defend actions by, account debtors; commence, intervene in, or
defend any action or proceeding; initiate any complaint to be relieved of the
automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy
claim, third-party claim, or other claim; examine, audit, copy, and inspect any
of the Collateral or any of Obligor's books and records; protect, obtain
possession of, lease, dispose of, or otherwise enforce TBCC's security interest
in, the Collateral; and otherwise represent TBCC in any litigation relating to
Obligor. If either TBCC or Obligor files any lawsuit against the other
predicated on a breach of this Agreement, the prevailing party in such action
shall be entitled to recover its reasonable costs and attorneys' fees, including
(but not limited to) reasonable attorneys' fees and costs incurred in the
enforcement of, execution upon or defense of any order, decree, award or
judgment. If and to the extent that the Obligations of Obligor hereunder are
unenforceable for any reason, Obligor hereby agrees to make the maximum
contribution to the payment and satisfaction of the Obligations which is
permissible under applicable law. Obligor's obligations under this Section shall
survive any termination of this Agreement and the other Loan Documents and the
payment in full of the Obligations, and are in addition to, and not in
substitution of, any of the other Obligations.

   8.8. Amendments and Waivers. Any provision of this Agreement or any other
Loan Document may be amended or waived if, but only if, such amendment or waiver
is in writing and signed by Obligor and TBCC and then any such amendment or
waiver shall be effective only to the extent set forth therein. The failure of
TBCC at any time or times to require Obligor to strictly comply with any of the
provisions of this Agreement or any other present or future agreement between
Obligor and TBCC shall not waive or diminish any right of TBCC later to demand
and receive strict compliance therewith. Any waiver of any default shall not
waive or affect any other default, whether prior or subsequent, and whether or
not similar. None of the provisions of this Agreement or any other agreement now
or in the future executed by Obligor and delivered to TBCC shall be deemed to
have been waived by any act or knowledge of TBCC or its agents or employees, but
only by a specific written waiver signed by an authorized officer of TBCC and
delivered to Obligor.

   8.9. Counterparts; Telecopied Signatures. This Agreement and any waiver or
amendment hereto may be executed in counterparts and by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but both of which shall together constitute one and the same
instrument. This Agreement and each of the other Loan Documents and any notices
given in connection herewith or therewith may be executed and delivered by
telecopier or other facsimile transmission all with the same force and effect as
if the same was a fully executed and delivered original manual counterpart.

   8.10. Severability. In case any provision in or obligation under this
Agreement or any other Loan Document shall be invalid, illegal or unenforceable
in any jurisdiction, the validity, legality and enforceability of the remaining
provisions or obligations, or of such provision or obligation in any other
jurisdiction, shall not in any way be affected or impaired thereby.


                                      -12-
<PAGE>   13
TBCC                                     SCHEDULE TO LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------

   8.11. Joint and Several Liability. If Obligor consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Obligor shall not constitute a compromise
with, or a release of, any other Obligor.

   8.12. Entire Agreement; Successors and Assigns. This Agreement and the other
Loan Documents constitute the entire agreement between the parties, supersede
any prior written and verbal agreements between them, and shall bind and benefit
the parties and their respective successors and permitted assigns. There are no
oral understandings, oral representations or oral agreements between the parties
which are not set forth in this Agreement or in other written agreements signed
by the parties in connection herewith.

   8.13. MUTUAL WAIVER OF JURY TRIAL. TBCC AND OBLIGOR EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT; OR (II) ANY OTHER PRESENT OR
FUTURE INSTRUMENT OR AGREEMENT BETWEEN TBCC AND OBLIGOR; OR (III) ANY CONDUCT,
ACTS OR OMISSIONS OF TBCC OR OBLIGOR OR ANY OF THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH TBCC OR
OBLIGOR; IN EACH OF THE FOREGOING

WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.

OBLIGOR:

ADVANCED MEDICAL PROCEDURES, INC.

By      /s/ William Hughes
      ---------------------------------
Title  Chief Financial Officer
      ---------------------------------


TBCC:

TRANSAMERICA BUSINESS CREDIT

CORPORATION

By     /s/ Ian Schnider
      ---------------------------------
Title
      ---------------------------------


                                      -13-
<PAGE>   14

                                   SCHEDULE TO

                               SECURITY AGREEMENT

<TABLE>
<S>                                                 <C>
Prior Names of Obligor (Section 2.11):              Advanced Medical Procedures, LLC

Prior Trade Names of Obligor (Section 2.11):        Advanced Medical Procedures, LLC

Existing Trade Names of Obligor (Section 2.11):     Advanced Medical Procedures, Inc.

Other Places of Business and
Locations of Collateral (Section 2.2):              7 Studebaker, Irvine, CA 92618

Facsimile Numbers:

         Obligor:  (949) 597-0607

         TBCC:    (818) 995-3214
</TABLE>

<PAGE>   1
                             [ENDOCARE LETTERHEAD]



Contact:       Paul W. Mikus                           FOR IMMEDIATE RELEASE
               Chairman and CEO
               (949) 595-4770

               or

               William R. Hughes
               Senior Vice President and  CFO
               (949) 595-4770

             ENDOCARE RAISES $3 MILLION IN NEW FINANCING AND CLOSES
                  $3 MILLION CREDIT FACILITY TO SUPPORT PRODUCT
                                DEMAND AND LAUNCH

Irvine, Calif., August 5, 1999- As a result of increasing demand for the
Company's cryosurgical technology for prostate cancer and an aggressive launch
program, Endocare, Inc. (Nasdaq: ENDO) today announced it has raised an
additional $3 million from an institutional investor as part of a convertible
debenture financing. This investment is in addition to $5 million received from
the same institutional investor under a convertible debenture financing which
closed in June 1999, and its conversion price is at a premium to the conversion
price in the first transaction. Under a separate transaction, Endocare also
completed a two year, $3 million working capital facility with Transamerica
Technology Finance, a division of Transamerica Business Credit Corp., a unit of
Transamerica Corp.

"This additional investment in the company, which includes a conversion price at
a premium to the current market price of the company's common stock, evidences
the confidence the investment community has in Endocare. Additionally, the
current launch of the Company's Cryocare technology for prostate cancer, off
recent national Medicare coverage effective July 1, has been going extremely
well," said Paul W. Mikus, president and chief executive officer.

The convertible debenture financing consists of an initial $3 million private
placement of 7% non-voting convertible debentures due in July 2002. The
debentures are convertible at any time at the investor's option into a fixed
number of shares of Endocare common stock at $6 per share, subject to certain
antidilution provisions. The Company also has the ability, under certain
circumstances, to obligate the investor to convert the debentures

<PAGE>   2

into common stock. As part of the debenture financing, the investor has the
option at any time to purchase an additional $3 million of three-year 7%
non-voting convertible debentures, convertible into Endocare common stock at
$6 3/4 per share. Additionally, under certain circumstances, the Company may
require the investor to exercise the option and purchase the debentures.

As part of the debenture financing, the Company has agreed to file a Form S-3
Registration Statement with the Securities and Exchange Commission relating to
the resale of the common stock issuable upon the conversion of the debentures.

ABOUT ENDOCARE

Endocare, Inc.--www.ecare.org--develops, manufactures and markets an array of
innovative, temperature-based surgical devices and technologies, including those
used in targeted cryoablation for the treatment of prostate cancer. The Company
is also developing innovative stage technologies for prostate obstruction.


ABOUT TRANSAMERICA TECHNOLOGY FINANCE

Transamerica Technology Finance provides equipment, senior and bridge term loans
and working capital facilities to venture and intermediate stage technology and
life science companies.



                                      # # #

        This release does not explain all of the details of the financings
described above, and investors should read the Current Report on Form 8-K to be
filed with the Securities and Exchange Commission regarding the financings to
obtain additional information regarding them. In addition, this release contains
forward looking statements regarding the business and prospects of Endocare. The
Company's business and results of operations are subject to risk and
uncertainties including, but not limited to, those discussed in the Company's
most recent Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Such risk factors include, but are not limited to, limited operating
history of the Company with a history of losses; fluctuations in the Company's
order levels; uncertainty regarding market acceptance of the Company's new
products; uncertainty of product development and the associated risks related to
clinical trials; the rapid pace of technological change in the Company's
industry; the Company's limited sales, marketing and manufacturing experience,
and the ability to convince health care professionals and third party payers of
the medical and economic benefits of the Company's products. The actual results
that the Company achieves may differ materially from any forward looking
statements due to such risks and uncertainties.


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