ENDOCARE INC
8-K, 1999-06-14
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) JUNE 7, 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 June 7, 1999 Endocare, Inc., a Delaware corporation (the "Company")
received $5,000,000 from the sale of its 7% Convertible Debentures due June 7,
2002 (the "Debentures") to investment funds managed by New York-based Brown
Simpson Asset Management, LLC (the "Purchasers"). Under the financing
arrangement, the Purchasers have the option to purchase an additional $5,000,000
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 June 7, 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 $5,000,000 principal amount of the Debentures must be repaid in full
in cash on June 7, 2002, but may be converted into the Company's Common Stock in
whole or in part at the Purchasers' option at any time on or prior to June 7,
2002 at a conversion price of $5.125 per share. The $5.125 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 may require that the Purchasers convert the Debentures into Common Stock
at $5.125 per share (as may be adjusted as described above) if the bid price for
the Common Stock as listed for quotation is above $8.00 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.

<PAGE>   3

        Under the Securities Purchase Agreement, the Purchasers have a call
option exercisable at any time prior to June 7, 2002 to require that the Company
sell to the Purchasers an additional $5,000,000 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 (subject to adjustment as described
above). The Company has a put option to require the purchasers to buy the
$5,000,000 principal amount of additional Debentures if the closing bid price
for the Common Stock as listed for quotation is more than $10.00 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 $5,000,000 of
Debentures sold, the additional $5,000,000 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).


                                       2
<PAGE>   4
ITEM 7.  FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT NO.         DESCRIPTION
- -----------         -----------
<S>                 <C>
 4.1                Debenture dated June 7, 1999 between the Company and Brown
                    Simpson Strategic Growth Fund, Ltd.

 4.2                Debenture dated June 7, 1999 between the Company and Brown
                    Simpson Strategic Growth Fund, L.P.

10.1                Securities Purchase Agreement dated June 7, 1999 among the
                    Company and the Purchasers.

10.2                Registration Rights Agreement dated June 7, 1999 among the
                    Company and the Purchasers.

99.1                Press Release dated June 8, 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: June 14, 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 June 7, 1999 between the Company and Brown
                    Simpson Strategic Growth Fund, Ltd.

 4.2                Debenture dated June 7, 1999 between the Company and Brown
                    Simpson Strategic Growth Fund, L.P.

10.1                Securities Purchase Agreement dated June 7, 1999 among the
                    Company and the Purchasers.

10.2                Registration Rights Agreement dated June 7, 1999 among the
                    Company and the Purchasers.

99.1                Press Release dated June 8, 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                                                                $ 3,150,000


                                 ENDOCARE, INC.

                   7% CONVERTIBLE DEBENTURES DUE JUNE 7, 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 Three Million One Hundred
and Fifty Thousand Dollars at the Company's office or agency for said purpose in
New York, New York on June 7, 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 June 7, 2002 of the Company (the "Debenture")
referred to in the Securities Purchase Agreement (the "Purchase Agreement"),
dated as of June 7, 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 4.8 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 June 7, 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 June 7, 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 June 7, 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 $5.125 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 be the number of shares of Common Stock (excluding treasury shares,
if any) outstanding before such event and the denominator of which shall





                                       16
<PAGE>   17

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).

               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 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





                                       21
<PAGE>   22

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 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





                                       22
<PAGE>   23

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) 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





                                       23
<PAGE>   24

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 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





                                       24
<PAGE>   25

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:

               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





                                       25
<PAGE>   26

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 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





                                       26
<PAGE>   27

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 Eight Dollars ($8.00)
               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 Five Million Dollars
               ($5,000,000) 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 the Second Closing Date.

               6.3 MECHANICS OF CONVERSION. The Company must exercise its right
to cause





                                       27
<PAGE>   28

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 (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





                                       28
<PAGE>   29

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 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





                                       29
<PAGE>   30

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 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





                                       30
<PAGE>   31

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, 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





                                       31
<PAGE>   32

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 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





                                       32
<PAGE>   33

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 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





                                       33
<PAGE>   34

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. In case:





                                       34
<PAGE>   35

               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 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





                                       35
<PAGE>   36

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 June 7, 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:  Brown Simpson Asset Management LLC

                                             By:  Brown Simpson, LLC
                                                  Its Member

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








                                       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                                                                $ 1,850,000


                                 ENDOCARE, INC.

                   7% CONVERTIBLE DEBENTURES DUE JUNE 7, 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 Eight Hundred
and Fifty Thousand Dollars at the Company's office or agency for said purpose in
New York, New York on June 7, 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 June 7, 2002 of the Company (the "Debenture")
referred to in the Securities Purchase Agreement (the "Purchase Agreement"),
dated as of June 7, 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 4.8 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 June 7, 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 June 7, 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 June 7, 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 $5.125 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).

               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 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





                                       21
<PAGE>   22

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 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





                                       22
<PAGE>   23

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) 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





                                       23
<PAGE>   24

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 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





                                       24
<PAGE>   25

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:

               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





                                       25
<PAGE>   26

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 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





                                       26
<PAGE>   27

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 Eight Dollars ($8.00)
               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 Five Million Dollars
               ($5,000,000) 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 the Second Closing Date.

               6.3 MECHANICS OF CONVERSION. The Company must exercise its right
to cause





                                       27
<PAGE>   28

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 (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





                                       28
<PAGE>   29

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 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





                                       29
<PAGE>   30

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 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





                                       30
<PAGE>   31

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, 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





                                       31
<PAGE>   32

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 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





                                       32
<PAGE>   33

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 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





                                       33
<PAGE>   34

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. In case:





                                       34
<PAGE>   35

               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 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





                                       35
<PAGE>   36

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 June 7, 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:  Brown Simpson Capital, LLC
                                           Its General Partner

                                           By:  Brown Simpson Partners, LLC
                                                Its Member

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


















                                       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 June 7, 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.........................................................................17
   3.6  Listing and Reservation of Debenture Shares.........................................17
   3.7  Notice of Breaches..................................................................18
   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.................................................20
   3.13   Ordinary Course Brokerage and Trading.............................................20
   3.14   No Shorting.......................................................................21
   3.15   Best Efforts......................................................................21
   3.16   Corporate Existence...............................................................21
   3.17   No Violation of Applicable Law....................................................21
   3.18   Subsequent Registrations..........................................................21

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

ARTICLE V. INDEMNIFICATION..................................................................28
   5.1  Indemnification.....................................................................28

ARTICLE VI. MISCELLANEOUS...................................................................29
   6.1  Entire Agreement....................................................................29
   6.2  Notices.............................................................................29
   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
</TABLE>





                                       i



<PAGE>   3

<TABLE>
<S>                                                                                         <C>
   6.11   Severability......................................................................33
   6.12   Remedies..........................................................................34
   6.13   Independent Nature of Purchasers' Obligations and Rights..........................34
   6.14   Payment Set Aside.................................................................34
   6.15   Further Assurances................................................................34
   6.16   Fees and Expenses.................................................................34
</TABLE>








































                                       ii


<PAGE>   4

                          SECURITIES PURCHASE AGREEMENT



               THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") is dated as
of June 7, 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 $5,000,000
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
$5,000,000.

            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 $5,000,000 principal amount of the Debentures.

        1.2 Closings.

            a. The First Closing. The closing of the purchase and sale of the
initial $5,000,000 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 $5,000,000 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





                                       2
<PAGE>   6

Second 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), 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 $10 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 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





                                       3
<PAGE>   7

the Company a Second Closing Schedule, indicating the principal amount of
Debentures that each Purchaser shall purchase for an aggregate total of
$5,000,000. 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 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





                                       4
<PAGE>   8

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 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





                                       5
<PAGE>   9

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 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





                                       6
<PAGE>   10

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 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,





                                       7
<PAGE>   11

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 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





                                       8
<PAGE>   12

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.

            n. Form S-3 Eligibility. The Company is, and at the Closing Date
will be,





                                       9
<PAGE>   13

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) no Person,
including, but not limited to, current or former stockholders of the Company,





                                       10
<PAGE>   14

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, reports and declarations required by any
jurisdiction to which it is subject (unless and





                                       11
<PAGE>   15

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 SEC, 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 relating
to political activity; made any direct or indirect unlawful payment to





                                       12
<PAGE>   16

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 exchange, redeem or covert
any of the Company's capital stock for indebtedness, including





                                       13
<PAGE>   17

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





                                       15
<PAGE>   19

144(k), no 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 and Warranties of
First Closing. (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 SEC; (B) a Registration
Statement with respect to the Debenture Shares with respect to the Debenture(s)
to be 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. (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.

               (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.





                                       26
<PAGE>   30

               (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 ten dollars ($10);
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 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





                                       27
<PAGE>   31

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 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





                                       28
<PAGE>   32

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:

            If to the Company:

                      Endocare, Inc.





                                       29
<PAGE>   33

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





























                                       30

<PAGE>   34





               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


            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





                                       31
<PAGE>   35

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

        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





                                       32
<PAGE>   36

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 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





                                       33
<PAGE>   37

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.

        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,





                                       34
<PAGE>   38

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
$30,000 at the First Closing. The Company shall 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




                         Principal Amount of               Number of Shares
Name of Purchaser        Debentures at Closing Date        Underlying Debentures
- -----------------        --------------------------        ---------------------
Brown Simpson                    $3,150,000                       614,634
Strategic Growth
Fund, Ltd.

Brown Simpson                    $1,850,000                       360,975
Strategic Growth
Fund, L.P.





<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>   1
                                                                    EXHIBIT 10.2

                          REGISTRATION RIGHTS AGREEMENT


               This Registration Rights Agreement (this "Agreement") is made and
entered into as of June 7, 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 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.

               "Debentures" means the Company's 7% convertible debentures due
June 7, 2002 issuable pursuant to the Debenture and the Purchase Agreement.





<PAGE>   2

               "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 $5,000,000 principal
amount of the Debentures, (ii) payment of interest or any other payments in
respect of the Debentures 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.





                                       2
<PAGE>   3

               "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.

               "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 Holders of the Registrable Securities). The
Company shall (i) not permit any securities other than the Registrable
Securities to be included in the Initial Registration Statement other than
securities which may be issued in connection with the acquisition of Advanced
Medical Procedures ("AMP") 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





                                       3
<PAGE>   4

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 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





                                       4
<PAGE>   5

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 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





                                       5
<PAGE>   6

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 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





                                       6
<PAGE>   7

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.

               (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





                                       7
<PAGE>   8

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.

               (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





                                       8
<PAGE>   9

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 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





                                       9
<PAGE>   10

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 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





                                       10
<PAGE>   11

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 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.





                                       11
<PAGE>   12

        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 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.





                                       12
<PAGE>   13

               (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 "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





                                       13
<PAGE>   14

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
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.





                                       14
<PAGE>   15

               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.

        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





                                       15
<PAGE>   16

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 (i) registration rights that the
Company may grant in connection with its acquisition of AMP and (ii)
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 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.





                                       16
<PAGE>   17

               (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 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.





                                       17
<PAGE>   18

               (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 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










                                       19


<PAGE>   20

                                                                      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 June 7, 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 99.1

Contacts:    Paul W. Mikus                                FOR IMMEDIATE RELEASE
             CEO and Chairman
             714/ 595-4770

             William R. Hughes
             Chief Financial Officer
             714/ 595-4770

             Paul Williams
             Media Relations
             310/ 581-5115

          ENDOCARE COMPLETES FINANCING AND PREPARES TO LAUNCH CRYOCARE
                         TECHNOLOGY FOR PROSTATE CANCER

Irvine, Calif., June 8, 1999 -- Endocare, Inc. (Nasdaq: ENDO), a leading
provider of prostate cancer and prostatic stent technologies designed to treat
prostate cancer and benign prostate growth, today announced it has received $5
million from an institutional investor as part of a convertible debenture
financing. Under the financing agreement, the investor has the option to invest
an additional $5 million in convertible debentures and, under certain
circumstances, the Company may require the investor to exercise the option. CIBC
Oppenheimer acted as placement agent on the transaction.

"This investment will help Endocare aggressively launch its Cryocare technology
for prostate cancer in conjunction with the July 1 start of Medicare's national
coverage policy, which provides reimbursement of cryosurgical treatments for
prostate cancer," said Paul W. Mikus, president and chief executive officer of
Endocare, Inc. "These funds will also be used to support the anticipated
international launch of the company's Horizon Prostatic Stent for acute urinary
retention."

The financing consists of an initial $5 million private placement of 7%
non-voting convertible debentures due in June 2002. The debentures are
convertible at any time at the investor's option into a fixed number of shares
of Endocare common stock at $5 1/8 per share, subject to certain antidilution
provisions. The Company also has the ability, under certain circumstances, to
obligate the investor to convert the debentures into common stock. As part of
the debenture financing, the investor has the option at any time to purchase an
additional $5 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.

Endocare (www.ecare.org) develops, manufactures, and markets an array of
innovative, temperature-based surgical devices and technologies, including those
used in targeted




<PAGE>   2

cryoablation for the treatment of prostate cancer. The Company is also
developing innovative stent technologies for prostate obstruction.


                                       ###

This release does not explain all of the details of the debenture financing, and
investors should read the Current Report on Form 8-K to be filed with the
Securities and Exchange Commission regarding the financing to obtain additional
information regarding it. 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.






                                       2





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