CERTIFICATE OF DESIGNATIONS
                                       OF
                                 IMAGINON, INC.
                              --------------------

           Designation of Preferences, Limitations and Relative Rights
                                     of the
                     Series E 4% Convertible Preferred Stock
                             Pursuant to Section 151
                                     of the
                        Delaware General Corporation Law
                              --------------------


         ImaginOn,  Inc., a corporation organized and existing under the laws of
the State of Delaware (the  "Company"),  DOES HEREBY  CERTIFY that the following
resolution  was duly adopted by the Board of Directors of the Company on January
15, 1999.

         RESOLVED,  that pursuant to the authority  granted to and vested in the
         Board of Directors of this Corporation (the "Board of Directors" or the
         "Board")  in  accordance  with the  provisions  of its  Certificate  of
         Incorporation, the Board of Directors hereby authorizes a series of the
         Corporation's  previously  authorized  Preferred Stock, par value $0.01
         per share (the  "Preferred  Stock"),  and hereby states the designation
         and  number of  shares,  and fixes the  relative  rights,  preferences,
         privileges,  powers  and  restrictions  as set  forth in  Attachment  A
         attached hereto.

         IN WITNESS WHEREOF,  the undersigned hereby  acknowledges under penalty
of perjury that the execution of this instrument is the Company's act and deed.

                                       IMAGINON, INC.


March 31, 1999                         /S/ LEONARD W. KAIN
                                       -------------------------------------
                                       Leonard W. Kain, Secretary

<PAGE>
                                                                    ATTACHMENT A

                                    ARTICLE 1
                                   DEFINITIONS

         SECTION 1.1  DEFINITIONS.  The terms  defined in this Article  whenever
used in this Certificate of Designations have the following respective meanings;

         (a)  "ADDITIONAL  CAPITAL  SHARES" has the meaning set forth in Section
6.1(c).

         (b)  "AFFILIATE"  has the  meaning  ascribed to such term in Rule 12b-2
under the Securities Exchange Act of 1934, as amended.

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<PAGE>

         (c) "BUSINESS DAY" means a day other than  Saturday,  Sunday or any day
on which banks  located in the State of New York are  authorized or obligated to
close.

         (d) "CAPITAL  SHARES"  means the Common  Shares and any other shares of
any other class or series of common stock,  whether now or hereafter  authorized
and however designated,  which have the right to participate in the distribution
of earnings and assets (upon  dissolution,  liquidation  or  winding-up)  of the
Corporation.

         (e) "CLOSING DATE" means January 15, 1999.

         (f) "COMMON  SHARES" or "COMMON  STOCK" means  shares of common  stock,
$.01 par value, of the Corporation.

         (g) "COMMON STOCK ISSUED AT CONVERSION" when used with reference to the
securities  issuable upon conversion of the Series E Preferred Stock,  means all
Common Shares now or hereafter  Outstanding and securities of any other class or
series into which the Series E Preferred Stock hereafter shall have been changed
or substituted, whether now or hereafter created and however designated.

         (h)  "CONVERSION  DATE"  means any day on which all or any  portion  of
shares of the Series E  Preferred  Stock is  converted  in  accordance  with the
provisions hereof.

         (i) "CONVERSION NOTICE" has the meaning set forth in Section 6.2.

         (j)  "CONVERSION   PRICE"  means  on  any  date  of  determination  the
applicable  price for the conversion of shares of Series E Preferred  Stock into
Common Shares on such day as set forth in Section 6.1.

         (k)  "CONVERSION   RATIO"  on  any  date  means  of  determination  the
applicable  percentage of the Market Price for  conversion of shares of Series E
Preferred Stock into Common Shares on such day as set forth in Section 6.1.

         (l) "CORPORATION",  means Imaginon,  Inc., a Delaware corporation,  and
any successor or resulting corporation by way of merger, consolidation,  sale or
exchange of all or substantially all of the Corporation's assets, or otherwise.

         (m)  "CURRENT  MARKET  PRICE"  on any date of  determination  means the
closing  price of a Common  Share on such day as  reported on the Nasdaq - Small
Cap Market ("NASDAQ").

         (n)  "DEFAULT  DIVIDEND  RATE"  shall be equal to the  Preferred  Stock
Dividend Rate plus an additional 4% per annum.

         (o) "HOLDER" means the persons to whom the Series E Preferred  Stock is
issued,  any  successor  thereto,  or any Person to whom the Series E  Preferred

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<PAGE>

Stock is subsequently transferred in accordance with the provisions hereof.

         (p)  "MARKET  DISRUPTION  EVENT"  means any  event  that  results  in a
material suspension or limitation of trading of Common Shares on the NASDAQ.

         (q)  "MARKET  PRICE" per Common  Share means the average of the closing
prices of the Common  Shares as reported on the NASDAQ for the five Trading Days
in any valuation Period.

         (r) "MAXIMUM RATE" has the meaning set forth in Section 7.3(b).

         (s) "OUTSTANDING"  when used with reference to Common Shares or Capital
Shares (collectively, "Shares"), means, on any date of determination, all issued
and  outstanding  Shares,  and includes  all such Shares  issuable in respect of
outstanding scrip or any certificates  representing fractional interests in such
Shares; PROVIDED,  HOWEVER, that any such Shares directly or indirectly owned or
held  by or  for  the  account  of the  Corporation  or  any  Subsidiary  or the
Corporation shall not be deemed "Outstanding" for purposes hereof.

         (t) "PERSON" means an  individual,  a  corporation,  a partnership,  an
association,   a  limited   liability   company,   a   unincorporated   business
organization,  a trust or other entity or  organization,  and any  government or
political subdivision or any agency or instrumentality thereof.

         (u)  "REGISTRATION  RIGHTS  AGREEMENT" means that certain  Registration
Rights Agreement dated of date even herewith between the Corporation and Holder.

         (v) "SEC" means the United States Securities and Exchange Commission.

         (w) "SECURITIES ACT" means the Securities Act of 1933, as amended,  and
the rules and regulations of the SEC thereunder, all as in effect at the time.

         (x)  "SECURITIES  PURCHASE  AGREEMENT"  means that  certain  Securities
Purchase  Agreement  dated a date even  herewith  between  the  Corporation  and
Holder.

         (y)  "SERIES  E  PREFERRED  STOCK"  means the  Series E 4%  Convertible
Preferred  Stock of the  Corporation or such other  convertible  Preferred Stock
exchanged therefor as provided in Section 2.1.

         (aa) "STATED VALUE" has the meaning set forth in Article 2.

         (bb)  "SUBSIDIARY"  means  any  entity  of  which  securities  or other
ownership  interests  having  ordinary  voting  power to elect a majority of the
board of directors  or other  persons  performing  similar  functions  are owned
directly or indirectly by the Corporation.

                                        3

<PAGE>

         (cc)  "TRADING  DAY"  means  any day on which  purchases  and  sales of
securities  authorized  for quotation on the NASDAQ are reported  thereon and on
which no Market Disruption Event has occurred.

         (dd) "VALUATION EVENT" has the meaning set forth in Section 6.1.

         (ee)  VALUATION  PERIOD" means the five Trading Day period  immediately
preceding the Conversion Date.

         All  references  to "cash" or "$" herein  means  currency of the United
States of America.


                                    ARTICLE 2
                             DESIGNATION AND AMOUNT

         SECTION 2.1

               The designation of this series, which consists of 2,000 shares of
Preferred  Stock,  is Series E 4%  Convertible  Preferred  Stock (the  "Series E
Preferred  Stock") and the stated value shall be One Thousand  Dollars  ($1,000)
per share (the "Stated Value").


                                    ARTICLE 3
                                      RANK

         SECTION 3.1

               The Series E  Preferred  Stock shall rank (i) prior to the Common
Stock;  (ii)  prior to any class of series of capital  stock of the  Corporation
hereafter  created other than "Pari Passu  Securities"  (collectively,  with the
Common  Stock,  "Junior  Securities");  and (iii)  pari  passu with any class or
series  of  capital  stock of the  Corporation  hereafter  created  specifically
ranking on parity with the Series E Preferred Stock ("Pari Passu Securities").


                                    ARTICLE 4
                                    DIVIDENDS

         SECTION 4.1

               (a)(i) The Holder shall be entitled to receive,  when,  as and if
declared  by the Board of  Directors,  out of funds  legally  available  for the
payment of dividends,  dividends  (subject to Sections  4(a)(ii)  hereof) at the
rate of 4% per annum  (computed on the basis of a 360-day  year) (the  "Dividend
Rate") on the  Liquidation  Value (as  defined  below) of each share of Series E
Preferred  Stock  on and as of the most  recent  Dividend  Payment  Due Date (as


                                        4
<PAGE>

defined  below)  with  respect  to each  Dividend  Period  (as  defined  below).
Dividends on the Series E Preferred  Stock shall be cumulative  from the date of
issue, whether or not declared for any reason,  including if such declaration is
prohibited  under any outstanding  indebtedness or borrowings of the Corporation
or any of its Subsidiaries,  or any other  contractual  provision binding on the
Corporation or any of its Subsidiaries,  and whether or not there shall be funds
legally available for the payment thereof.

               (ii) Each dividend shall be payable in equal quarterly amounts on
each March 31, June 30,  September  30 and  December  31 of each year  (each,  a
"Dividend Payment Due Date"),  commencing  September 30, 1998, to the holders of
record of shares of the Series E  Preferred  Stock,  as they appear on the stock
records of the Corporation at the close of business on any record date, not more
than 60 days or less than 10 days preceding the payment dates thereof,  as shall
be fixed by the Board of Directors.  For the purposes hereof,  "Dividend Period"
means the quarterly  period  preceding  Dividend  Payment Date and ending on and
including the immediately  subsequent  Dividend Payment Date. Accrued and unpaid
dividends  for any past  Dividend  Period may be declared  and paid at any time,
without reference to any Dividend Payment Due Date, to holders of record on such
date, not more than 15 days preceding the payment date thereof,  as may be fixed
by the Board of Directors.

               (iii) At the option of the  Corporation,  the  dividend  shall be
paid in cash or through the issuance of duly and validly  authorized and issued,
fully paid and non-assessable, freely tradeable shares of Common Stock valued at
the Market Price.  The Common Stock to be issued in lieu of cash payments  shall
be  registered  for  resale  in the  Registration  Statement  to be filed by the
Corporation to register the Common Stock issuable upon  conversion of the shares
of Series E Preferred  Stock and  exercise  of the  Warrants as set forth in the
Registration  Rights  Agreement.   Notwithstanding  the  foregoing,  until  such
Registration  Statement has been declared  effective under the Securities Act by
the SEC, payment of dividends on the Series E Preferred Stock shall be in cash.

               (b) The Holder  shall not be entitled to any  dividends in excess
of the  cumulative  dividends,  as herein  provided,  on the Series E  Preferred
Stock.  Except as provided in this  Article 4, no  interest,  or sum of money in
lieu of  interest,  shall be  payable  in  respect  of any  dividend  payment or
payments on the Series E Preferred Stock that may be in arrears.

               (c) So long as any  shares of the  Series E  Preferred  Stock are
outstanding,  no dividends, except as described in the next succeeding sentence,
shall be declared or paid or set apart for payment on Pari Passu  Securities for
any period  unless full  cumulative  dividends  required to be paid in cash have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the  payment  thereof  set apart for such  payment on the Series E Preferred
Stock for all Dividend Periods terminating on or prior to the date of payment of
the dividend on such class or series of Pari Passu  Securities.  When  dividends
are not paid in full or a sum sufficient  for such payment is not set apart,  as
aforesaid,  all dividends  declared upon shares of the Series E Preferred  Stock
and all  dividends  declared  upon any  other  class  or  series  of Pari  Passu
Securities shall be declared ratably in proportion to the respective  amounts of


                                        5
<PAGE>

dividends accumulated and unpaid on the Series E Preferred Stock and accumulated
and unpaid on such Pari Passu Securities.

               (d) So long as any  shares of the  Series E  Preferred  stock are
outstanding,  no dividends shall be declared or paid or set apart for payment or
other distribution declared or made upon Junior Securities, nor shall any Junior
Securities  be  redeemed,   purchased  or  otherwise   acquired  (other  than  a
redemption,  purchase or other  acquisition  of shares of Common  Stock made for
purposes of an employee  incentive  or benefit  plan  (including  a stock option
plan) of the Corporation or any subsidiary, (all such dividends,  distributions,
redemptions or purchases being hereinafter  referred to as a "Junior  Securities
Distribution") for any consideration (or any moneys be paid to or made available
for a sinking  fund for the  redemption  of any shares of any such stock) by the
Corporation, directly or indirectly, unless in each case (i) the full cumulative
dividends  required to be paid in cash on all outstanding shares of the Series E
Preferred Stock and any other Pari Passu  Securities shall have been paid or set
apart for payment for all past  Dividend  Periods  with  respect to the Series E
Preferred  Stock and all past  dividend  periods with respect to such Pari Passu
Securities,  and (ii) sufficient funds shall have been paid or set apart for the
payment of the  dividend  for the current  Dividend  Period with  respect to the
Series E Preferred  Stock and the current  dividend  period with respect to such
Pari Passu Securities.


                                    ARTICLE 5
                             LIQUIDATION PREFERENCE

         SECTION 5.1

               (a) If the Corporation  shall commence a voluntary case under the
Federal  bankruptcy laws or any other  applicable  Federal or State  bankruptcy,
insolvency  or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver,  liquidator,
assignee,  custodian,  trustee,  sequestrator (or other similar official) of the
Corporation or of any  substantial  part of its property,  or make an assignment
for the benefit of its  creditors,  or admit in writing its inability to pay its
debts  generally  as they  become  due,  or if a decree or order  for  relief in
respect of the  Corporation  shall be entered by a court having  jurisdiction in
the premises in an  involuntary  case under the Federal  bankruptcy  laws or any
other  applicable  Federal  or  state  bankruptcy,  insolvency  or  similar  law
resulting in the  appointment of a receiver,  liquidator,  assignee,  custodian,
trustee,  sequestrator (or other similar  official) of the Corporation or of any
substantial  part of its property,  or ordering the winding up or liquidation of
its affairs,  and any such decree or order shall be unstayed and in effect for a
period of thirty (30)  consecutive  days and, on account of any such event,  the
Corporation  shall  liquidate,  dissolve  or  wind up  (each  such  event  being
considered a "Liquidation  Event"), no distribution shall be made to the holders
of any shares of capital stock of the Corporation upon liquidation,  dissolution
or winding up unless prior thereto,  the holders of shares of Series E Preferred
Stock, subject to Article 5, shall have received the liquidation  Preference (as
defined in Article 5(c)) with respect to each share. If upon the occurrence of a
Liquidation  Event,  the assets and funds available for  distribution  among the


                                        6
<PAGE>

holders of the Series E  Preferred  Stock and  holders of Pari Passu  Securities
shall be insufficient to permit the payment to such holders of the  preferential
amounts  payable  thereon,  then the entire assets and funds of the  Corporation
legally  available for distribution to the Series E Preferred Stock and the Pari
Passu Securities shall be distributed ratably among such shares in proportion to
the ratio that the  Liquidation  preference  payable on each such share bears to
the aggregate liquidation Preference payable on all such shares.

               (b) At the  option  of  each  Holder,  the  sale,  conveyance  of
disposition of all or substantially  all of the assets of the  Corporation,  the
effectuation   by  the  Corporation  of  a  transaction  or  series  of  related
transactions  in which more than 50% of the voting power of the  Corporation  is
not the survivor shall either: (i) be deemed to be a liquidation, dissolution or
winding  up of the  Corporation  pursuant  to  which  the  Corporation  shall be
required  to  distribute,  upon  consummation  of and as a  condition  to,  such
transaction an amount equal to 120% of the  Liquidation  Preference with respect
to each  outstanding  sharer of Series E Preferred  Stock in accordance with and
subject to the terms of this  Article 5 or (ii) be treated  pursuant  to Article
5(c) (iii) hereof;  provided, that all holders of Series E Preferred Stock shall
be  deemed  to elect the  option  set  forth in cause  (i)  hereof if at least a
majority in interest of such holders elect such option.  "Person" shall mean any
individual,  corporation,  limited liability company, partnership,  association,
trust or other entity or organization.

               (c)  For  purposes  hereof,  the  "Liquidation  Preference"  with
respect to a share of the Series E Preferred Stock shall mean an amount equal to
the sum of (i) the Stated  Value  thereof,  plus (ii) an amount  equal to thirty
percent (30%) of such Stated Value,  plus (iii) the aggregate of all accrued and
unpaid dividends on such share of Series E Preferred Stock until the most recent
Dividend  Payment Date;  PROVIDED  that, in the event of an actual  liquidation,
dissolution or winding up of the  Corporation,  the amount referred to in clause
(iii) above shall be calculated by including accrued and unpaid dividends to the
actual date of such  liquidation,  dissolution  or winding  up,  rather than the
Dividend Payment Due Date referred to above.


                                    ARTICLE 6
                          CONVERSION OF PREFERRED STOCK

         SECTION 6.1 CONVERSION;  CONVERSION PRICE. At the option of the Holder,
the shares of Preferred Stock may be converted, either in whole or in part, into
Common Shares (calculated as to each such conversion to the nearest 1/100th of a
share), at any time, and from time to time following the date of issuance of the
Series E Preferred  Stock (the "Issue Date") at a conversion  Price equal to the
lower of (a) 75% of the Market Price or (b) 120% of the closing  market price on
the day of  Closing,  as  adjusted  for any stock  splits or  reclassifications;
provided,  however,  that the  Holder  shall not have the right to  convert  any
portion of the Series E Preferred  Stock to the extent that the  issuance to the
Holder of Common  Shares upon such  conversion  would result in the Holder being
deemed  the  "beneficial  owner"  of 5% or more of the then  outstanding  Common
Shares within meaning of Rule 13d-3 of the  Securities  Exchange Act of 1934, as
amended. At the Corporation's option, the amount of accrued and unpaid dividends

                                        7
<PAGE>

as of the conversion  Date shall not be subject to conversion but instead may be
paid in cash as of the Conversion Date; if the Corporation elects to convert the
amount of accrued and unpaid dividends at the Conversion Date into Common Stock,
the Common Stock issued to the Holder shall be valued at the  Conversion  Price.
Notwithstanding  the  previous  sentence,  in no event shall the Holder have the
right to convert that portion of the Series E Preferred Stock to the extent that
the  issuance of Common  Shares upon the  conversion  of such Series E Preferred
Stock, when combined with shares of Common Stock received upon other conversions
of Series E  Preferred  Stock by such  Holder and any other  holders of Series E
Preferred  Stock,  would exceed  19.99% of the Common Stock  outstanding  on the
Closing Date.  Within ten (10) Business Days after the receipt of the Conversion
Notice which upon  conversion  would,  when combined with shares of Common Stock
received upon other  conversions of Series E Preferred  Stock by such Holder and
any other holders of Series E Preferred Stock and Warrants, exceed 19.99% of the
Common Stock  outstanding on the Closing Date, the Corporation  shall redeem all
remaining  outstanding  shares of Series E Preferred  Stock at on hundred twenty
percent (120%) of the Stated Value thereof, together with all accrued and unpaid
dividends thereon, in cash, to the date of redemption.

               The  number  of shares of  Common  Stock due upon  conversion  of
Series E Preferred Stock shall be (i) the number of shares of Series E Preferred
Stock to be converted,  multiplied by (ii) the State Value and dividend by (iii)
the applicable Conversion Price.

               Within two (2)  Business  Days of the  occurrence  of a Valuation
Event, the Corporation  shall send notice (the "Valuation Event Notice") of such
occurrence  to the Holder.  Notwithstanding  anything to the contrary  contained
herein, if a Valuation Event occurs during any Valuation Period, a new Valuation
Period shall begin on the Trading Day  immediately  following the  occurrence of
such  Valuation  Event  and end on the  Conversion  Date;  PROVIDED  that,  if a
Valuation  Event  occurs  on the  fifth day of any  Valuation  Period,  then the
Conversion  Price shall be the Current Market Price of the Common Shares on such
day; and PROVIDED,  FURTHER,  that the Holder may, in its  discretion,  postpone
such  Conversion  Date to a Trading  Day which is no more than five (5)  Trading
Days  after  the  occurrence  of the  latest  Valuation  Event by  delivering  a
notification to the Corporation with two (2) Business Days of the receipt of the
Valuation Period to be other than the five (5) Trading Days immediately Prior to
the  Conversion  Date,  the Holder shall give written notice of such fact to the
Corporation in the related Conversion Notice at the time of conversion.

For purposes of this  Section  6.1, a  "Valuation  Event" shall mean an event in
which the  Corporation  at any time during a Valuation  Period  takes any of the
following actions:

               (a) subdivides or combines its Capital Shares;

               (b) makes any distribution of its Capital Shares;

               (c) issues any additional Capital Shares (the "Additional Capital
Shares"), otherwise than as provided in the foregoing Sections 6.1(a) and 6.1(b)
above,  at a  price per shareless, or for other  consideration  lower,  than the

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<PAGE>

Current Market Price in effect  immediately prior to such issuances,  or without
consideration, except for issuances under employee benefit plans consistent with
those presently in effect and issuances under  presently  outstanding  warrants,
options or convertible securities;

               (d) issues any warrants, options or other rights to subscribe for
or  purchase  any  Additional  Capital  Shares and the price per share for which
Additional  Capital  Shares may at any time  thereafter be issuable  pursuant to
such  warrants,  options or other rights  shall be less than the Current  Market
Price in effect immediately prior to such issuance;

               (e) issues any securities  convertible  into or  exchangeable  or
exercisable  for  Capital  Shares  and the  consideration  per  share  for which
Additional Capital Shares may at any time thereafter be issuable pursuant to the
terms of such convertible,  exchangeable or exercisable securities shall be less
than the Current Market Price in effect immediately prior to such issuance;

               (f)  makes  a   distribution   of  its  assets  or  evidences  of
indebtedness  to the holders of its Capital  Shares as a dividend in liquidation
or by way of  return of  capital  or other  than as a  dividend  payable  out of
earnings  or  surplus  legally  available  for the  payment of  dividends  under
applicable law or any  distribution  to such holders made in respect of the sale
of all or substantially  all of the  Corporation's  assets (other than under the
circumstances provided for in the foregoing Sections 6.1(a) through 6.1(e)); or

               (g) takes any action affecting the number of Outstanding  Capital
Shares,  other than an action described in any of the foregoing  Sections 6.1(a)
through  6.1(f)  hereof,  inclusive,  which in the opinion of the  Corporation's
Board of  Directors,  determined  in good faith,  would have a material  adverse
effect  upon  the  rights  of the  Holder  at the  time of a  conversion  of the
Preferred Stock.

         SECTION 6.2 EXERCISE OF  CONVERSION  PRIVILEGE.  (a)  Conversion of the
Series E Preferred Stock may be exercised, in whole or in part, by the Holder by
telecopying  an executed and completed  notice of conversion in the form annexed
hereto as Annex I (the  "Conversion  Notice") to the  Corporation.  Each date on
which a Conversion  Notice is telecopied to and received by the  Corporation  in
accordance with the provisions of this Section 6.2 shall constitute a Conversion
Date.  The  Corporation  shall convert the Preferred  Stock and issue the Common
Stock Issued at Conversion  effective as of the Conversion  Date. The Conversion
Notice also shall state the name or names  (with  addresses)  of the persons who
are to become the holders of the Common Stock Issued at Conversion in connection
with such conversion.  The Holder shall deliver the shares of Series E Preferred
Stock to the Corporation by express courier within 30 days following the date on
which the telecopied  Conversion Notice has been transmitted to the Corporation.
Upon  surrender for  conversion,  the Preferred  Stock shall be accompanied by a
proper assignment hereof to the Corporation or be endorsed in blank. As promptly
as practicable after the receipt of the Conversion  Notice as aforesaid,  but in
any event not more than five  Business Days after the  Corporation's  receipt of
such Conversion  Notice, the Corporation shall (i) issue the Common Stock issued

                                        9
<PAGE>

at  Conversion  in  accordance  with the  provisions of this Article 6, and (ii)
cause to be mailed  for  delivery  by  overnight  courier  to the  Holder  (X) a
certificate or certificate(s)  representing the number of Common Shares to which
the Holder is entitled by virtue of such  conversion,  (Y) cash,  as provided in
Section 6.3, in respect of any fraction of a Share issuable upon such conversion
and (Z) cash in the amount of accrued and unpaid  dividends as of the Conversion
Date. Such conversion shall be deemed to have been effected at the time at which
the Conversion  Notice  indicates so long as the Preferred Stock shall have been
surrendered as aforesaid at such time, and at such time the rights of the Holder
of the Preferred Stock, as such, shall cease and the Person and Persons in whose
name or names the Common Stock Issued at Conversion  shall be issuable  shall be
deemed to have  become the  holder or  holders  of record of the  Common  Shares
represented  thereby.  The Conversion Notice shall constitute a contract between
the Holder and the Corporation,  whereby the Holder shall be deemed to subscribe
for the number of Common  Shares  which it will be entitled to receive upon such
conversion and, in payment and  satisfaction of such  subscription  (and for any
cash  adjustment to which it is entitled  pursuant to Section 6.4), to surrender
the Preferred Stock and to release the Corporation  from all liability  thereon.
No cash payment aggregating less than $1.50 shall be required to be given unless
specifically requested by the Holder.

               (b) If, at any time (i) the Corporation  challenges,  disputes or
denies the right of the Holder hereof to effect the  conversion of the Preferred
Stock into Common Shares or otherwise dishonors or rejects any Conversion Notice
delivered in accordance with this Section 6.2 or (ii) any third party who is not
and has  never  been  an  Affiliate  of the  Holder  commences  any  lawsuit  or
proceeding  or  otherwise  asserts  any  claim  before  any  court or  public or
governmental  authority which seeks to challenge,  deny enjoin,  limit,  modify,
delay or dispute the right of the Holder hereof to effect the  conversion of the
Preferred  Stock into Common  Shares,  then the Holder shall have the right,  by
written notice to the Corporation, to require the Corporation to promptly redeem
the Series E Preferred Stock for cash at a redemption price equal to one hundred
thirty-five percent (135%) of the Stated Value thereof together with all accrued
and unpaid dividends thereon (the "Mandatory Purchase Amount"). Under any of the
circumstances  set forth above,  the  Corporation  shall be responsible  for the
payment of all costs and expenses of the Holder, including reasonable legal fees
and expenses,  as and when incurred in disputing any such action or pursuing its
rights hereunder (in addition to any other rights of the Holder).

         SECTION 6.3  FRACTIONAL  SHARES.  No fractional  Common Shares or scrip
representing  fractional  Common  Shares shall be issued upon  conversion of the
Series  E  Preferred  Stock.  Instead  of any  fractional  Common  Shares  which
otherwise would be issuable upon conversion of the Series E Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction. No cash payment of less than $1.50 shall be required
to be given unless specifically requested by the Holder.

         SECTION 6.4 RECLASSIFICATION,  CONSOLIDATION, MERGER OR MANDATORY SHARE
EXCHANGE. At any time while the Series E Preferred Stock remains outstanding and
any shares thereof has not been converted,  in case of any  reclassification  or
change of  Outstanding  Common Shares  issuable upon  conversion of the Series E


                                       10
<PAGE>

Preferred  Stock (other than a change in par value,  or from par value to no par
value per share, of from no par value per share to par value or as a result of a
subdivision or combination of outstanding securities issuable upon conversion of
the  Series  E  Preferred  Stock)  or in case of any  consolidation,  merger  or
mandatory  share exchange of the  Corporation  with or into another  corporation
(other than a merger or mandatory  share  exchange with another  corporation  in
which the  Corporation is a continuing  corporation and which does not result in
any  reclassification  or change,  other than a change in par value, or from par
value to not par value per  share,  or from no par value per share to par value,
or as a result of a subdivision of combination of Outstanding Common Shares upon
conversion  of the  Series  E  Preferred  Stock),  or in the case of any sale or
transfer  to  another  corporation  of the  property  of the  Corporation  as an
entirety or substantially as an entirety,  the Corporation,  as the case may be,
shall, without payment of any additional  consideration therefor,  execute a new
Series E  Preferred  Stock  providing  that the  Holder  shall have the right to
convert such new Series E Preferred  Stock (upon terms and  conditions  not less
favorable to the Holder than those in effect  pursuant to the Series E Preferred
Stock)  and to  receive  upon  such  exercise,  in  lieu of  each  Common  Share
theretofore  issuable upon conversion of the Series E Preferred  Stock, the kind
and amount of shares of stock,  other securities,  money or property  receivable
upon such  reclassification,  change,  consolidation,  merger,  mandatory  share
exchange,  sale or  transfer  by the holder of one Common  Share  issuable  upon
conversion of the Series E Preferred Stock had the Series E Preferred Stock been
converted  immediately prior to such  reclassification,  change,  consolidation,
merger,  mandatory  share  exchange or sale or transfer.  The provisions of this
Section 6.4 shall  similarly  apply to  successive  reclassifications,  changes,
consolidations, mergers, mandatory share exchanges and sales and transfers.

         SECTION 6.5 ADJUSTMENTS TO CONVERSION  RATIO. For so long as any shares
of the Series E Preferred Stock are  outstanding,  if the Corporation (i) issues
and sells  pursuant to an exemption from  registration  under the Securities Act
(A) Common  Shares at a purchase  price on the date of issuance  thereof that is
lower than the Conversion  Price, (B) warrants or options with an exercise price
representing  a percentage of the Current Market Price with an exercise price on
the date of  issuance of the  warrants or options  that is lower than the agreed
upon exercise price for the Holder,  except for employee stock option agreements
or  stock  incentive   agreements  of  the  Corporation,   or  (C)  convertible,
exchangeable  or exercisable  securities  with a right to exchange at lower than
the Current Market Price on the date of issuance or  conversion,  as applicable,
of such convertible,  exchangeable or exercisable  securities,  except for stock
option  agreements or stock incentive  agreements;  and (ii) grants the right to
the  purchaser(s)  thereof to demand  that the  Corporation  register  under the
Securities  Act such Common  Shares  issued or the Common  Shares for which such
warrants  or options  may be  exercised  or such  convertible,  exchangeable  or
exercisable  securities  may be  converted,  exercised  or  exchanged,  then the
Conversion Ratio shall be reduced to equal the lowest of any such lower rates.

         SECTION 6.6 OPTIONAL REDEMPTION UNDER CERTAIN CIRCUMSTANCES. At anytime
after the date of issuance of the Series E Preferred  Stock until July 15, 1999,
the Corporation, upon notice delivered to the Holder as provided in Section 6.7,
may redeem the Series E Preferred Stock (but only with respect to such shares as
to which  the  Holder  has not  theretofore  furnished  a  Conversion  Notice in

                                       11
<PAGE>

compliance with Section 6.2), at one hundred twenty percent (120%) of the Stated
Value thereof (the "Optional  Redemption Price"),  together with all accrued and
unpaid  dividends  thereon to the date of redemption  (the  "Redemption  Date");
PROVIDED,  HOWEVER,  that the Corporation may only redeem the Series E Preferred
Stock  under  this  Section  6.6 if the  Current  Market  Price is less than the
Current  Market Price on the Closing  Date.  Except as set forth in this Section
6.6, the  Corporation  shall not have the right to prepay or redeem the Series E
Preferred Stock.

         SECTION  6.7 NOTICE OF  REDEMPTION.  Notice of  redemption  pursuant to
Section 6.6 shall be provided  by the  Corporation  to the Holder in writing (by
registered mail or overnight  courier at the Holder's last address  appearing in
the  Corporation's  security  registry)  not less  than  ten (10) nor more  than
fifteen (15) days prior to the Redemption  Date,  which notice shall specify the
Redemption Date and refer to Section 6.6  (including,  a statement of the Market
Price per Common Share) and this Section 6.7.

         SECTION 6.8 SURRENDER OF PREFERRED  STOCK.  Upon any  redemption of the
Series E  Preferred  Stock  pursuant to Sections  6.6 or 6.7,  the Holder  shall
either  deliver the Series E Preferred  Stock by hand to the  Corporation at its
principal  executive  offices or surrender the same to the  Corporation  at such
address by express courier.  Payment of the Optional  Redemption Price specified
in Section 6.6 shall be made by the Corporation to the Holder against receipt of
the Series E Preferred  Stock (as provided in this Section 6.8) by wire transfer
of immediately available funds to such account(s) as the Holder shall specify to
the Corporation.  If payment of such redemption price is not made in full by the
Mandatory Redemption Date or the Redemption Date, as the case may be, the Holder
shall again have the right to convert  the Series E Preferred  Stock as provided
in Article 6 hereof.

         SECTION 6.9 MANDATORY CONVERSION.  On the third anniversary of the date
of this Agreement (the  "Mandatory  Conversion  Date"),  the  Corporation  shall
convert  all Series E  Preferred  Stock  outstanding  at the  Conversion  Price.
Notwithstanding the previous sentence, in no event shall the Corporation convert
that portion of the Series E Preferred  Stock to the extent that the issuance of
Common  Shares  upon the  conversion  of such  Series E  Preferred  Stock,  when
combined  with shares of Common  Stock by such  Holder and any other  holders of
Series E Preferred  Stock and Warrants,  would exceed 19.99% of the Common Stock
outstanding  on the  Closing  Date.  Within  ten (10)  Business  Days  after the
Mandatory   Conversion   Date,  the  Corporation   shall  redeem  all  remaining
outstanding  Series E Preferred  Stock at one hundred  and  thirty-five  percent
(135%) of the  Stated  Value  thereof,  together  with all  accrued  and  unpaid
dividends thereon, in cash, to the date of redemption.


                                    ARTICLE 7
                                  VOTING RIGHTS

               The holders of the Series E Preferred Stock have no voting power,
except as  otherwise  provided  by the General  Corporation  Law of the State of
Delaware ("DGCL"), in this Article 7, and in Article 8 below.

               Notwithstanding  the above,  the  Corporation  shall provide each
holder of Series E Preferred Stock with prior notification of any meeting of the

                                       12
<PAGE>

shareholders  (and  copies  of proxy  materials  and other  information  sent to
shareholders).  In the event of any taking by the Corporation of a record of its
shareholders  for the purpose of  determining  shareholders  who are entitled to
receive  payment of any dividend or other  distribution,  any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining  shareholders  who
are entitled to vote in connection with any proposed liquidation, dissolution or
winding  up of the  Corporation,  the  Corporation  shall  mail a notice to each
holder,  at least thirty (30) days prior to the  consummation of the transaction
or event,  whichever is earlier),  of the date on which any such action is to be
taken for the purpose of such  dividend,  distribution,  right or other event to
the extent known at such time.

               To the extent  that under the DGCL the vote of the holders of the
Series E Preferred Stock,  voting separately as a class or series as applicable,
is required to authorize a given action of the Corporation, the affirmative vote
or consent of the  holders of at least a majority  of the shares of the Series E
Preferred Stock  represented at a duly held meeting at which a quorum is present
or by written  consent of a majority of the shares of Series E  Preferred  Stock
(except as  otherwise  may be  required  under the DGCL)  shall  constitute  the
approval of such action by the class.  To the extent that under the DGCL holders
of the Series E Preferred Stock are entitled to vote on a matter with holders of
Common  Stock,  voting  together as one class,  each share of Series E Preferred
Stock  shall be  entitled  to a number of votes equal to the number of shares of
Common  Stock into which it is then  convertible  using the record  date for the
taking of such vote of shareholders as the date as of which the Conversion Price
is  calculated.  Holders of the Series E  Preferred  Stock  shall be entitled to
notice of all  shareholder  meetings  or written  consents  (and copies of proxy
materials and other information sent to shareholders) with respect to which they
would be  entitled  tonight,  which  notice  would be  provided  pursuant to the
Corporation's bylaws and the DGCL.


                                    ARTICLE 8
                              PROTECTIVE PROVISIONS

               So long as shares of Series E  Preferred  Stock are  outstanding,
the  Corporation  shall not,  without  first  obtaining the approval (by vote or
written consent,  as provided by the DGCL) of the holders of at least a majority
of the then outstanding shares of Series E Preferred Stock:

                  (a) alter or change the rights,  preferences  or privileges of
the Series E Preferred Stock;

                  (b) create any new class or series of capital  stock  having a
preference  over the Series E Preferred  Stock as to distribution of assets upon
liquidation,  dissolution or winding up of the Corporation ("Senior Securities")
or  alter  or  change  the  rights,  preferences  or  privileges  of any  Senior
Securities so as to affect adversely the Series E Preferred Stock;

                  (c)  increase  the  authorized  number  of  shares of Series E
Preferred Stock; or

                                       13
<PAGE>

                  (d) do any act or thing not authorized or contemplated by this
Certificate  of  Designation  which  would  result in taxation of the holders of
shares of the Series E Preferred Stock under Section 305 of the Internal Revenue
Code of 1986, as amended (or any  comparable  provision of the Internal  Revenue
Code as hereafter from time to time amended).

               In  the  event  holders  of at  least  a  majority  of  the  then
outstanding shares of Series E Preferred Stock agree to allow the Corporation to
alter or change the rights,  preferences or privileges of the shares of Series E
Preferred Stock,  pursuant to subsection (a) above, so as to affect the Series E
Preferred  Stock,  then the  Corporation  will deliver  notice of such  approved
change to the  holders  of Series E  Preferred  Stock that did not agree to such
alteration or change (the  "Dissenting  Holders") and  Dissenting  Holders shall
have the right for a period of thirty (30) days to convert pursuant to the terms
of this  Certificate of  Designation  as they exist prior to such  alteration or
change or continue to hold their shares of Series E Preferred Stock.


                                    ARTICLE 9
                                  MISCELLANEOUS

         SECTION 9.1 LOSS,  THEFT,  DESTRUCTION OF PREFERRED STOCK. Upon receipt
of evidence  satisfactory to the Corporation of the loss, theft,  destruction or
mutilation  of shares of Series E  Preferred  Stock and, in the case of any such
loss,  theft or  destruction,  upon receipt of indemnity or security  reasonably
satisfactory to the Corporation,  or, in the case of any such  mutilation,  upon
surrender and  cancellation  of the Series E Preferred  Stock,  the  Corporation
shall  make,  issue and  deliver,  in lieu of such lost,  stolen,  destroyed  or
mutilated  shares of Series E Preferred  Stock, new shares of Series E Preferred
Stock,  new  shares of Series E  Preferred  Stock of like  tenor.  The  Series E
Preferred  Stock  shall be held and owned upon the  express  condition  that the
provisions of this Section 10.1 are exclusive with respect to the replacement of
mutilated,  destroyed,  lost or stolen  shares of Series E  Preferred  Stock and
shall preclude any and all other rights and remedies  notwithstanding any law or
statute  existing  or  hereafter  enacted to the  contrary  with  respect to the
replacement of negotiable  instruments or other securities without the surrender
thereof.

         SECTION 9.2 WHO DEEMED  ABSOLUTE  OWNER.  The  Corporation may deem the
Person in whose name the Series E Preferred  Stock shall be registered  upon the
registry  books  of the p at its  principal  office  a  register  in  which  the
Corporation  shall provide for the registration of the Series E Preferred Stock.
Upon any  transfer  of the  Series E  Preferred  Stock  in  accordance  with the
provisions  hereof, the Corporation shall register such transfer on the Series E
Preferred Stock register.

               The  Corporation  may deem the  person in whose name the Series E
Preferred  Stock shall be registered  upon the registry books of the Corporation
to be, and may treat it as, the absolute  owner of the Series E Preferred  Stock
for the  purpose of  receiving  payment of  dividends  on the Series E Preferred
Stock and for all other purposes,  and the Corporation  shall not be affected by
any notice to the  contrary.  All such  payments and such  conversions  shall be
valid and effective to satisfy and  discharge  the  liability  upon the Series E
Preferred  Stock to the extent of the sum or sums so paid or the  conversion  or
conversions so made.

                                       14
<PAGE>

         SECTION 9.5 WITHHOLDING.  To the extent required by applicable law, the
Corporation  may  withhold  amounts  for or on account  of any taxes  imposed or
levied by or on behalf of any  taxing  authority  in the  United  States  having
jurisdiction  over the Corporation from any payments made pursuant to the Series
E Preferred Stock.

         SECTION 9.6  HEADINGS.  The  headings of the  Articles and Section s of
this  Certificate of Designations  are inserted for convenience  only and do not
constitute a part of this Certificate of Designations.

                                       15
<PAGE>

         IN WITNESS  WHEREOF,  the  Corporation  has caused this  Certificate of
Designations, Preferences and Rights to be signed by its duly authorized officer
on this 15th day of January, 1999.


                                       IMAGINON, INC.



                                        By: /S/ DAVID M. SCHWARTZ
                                            ------------------------------
                                            David M. Schwartz
                                            President



                                       16
<PAGE>

                           [FORM OF CONVERSION NOTICE]


TO:
   _______________________________________
   _______________________________________


      The undersigned owner of this Series E 4% Convertible Preferred Stock (the
"Series E Preferred Stock") issued by Imaginon,  Inc. (the "Corporation") hereby
irrevocably  exercises  its  option to convert  ________  shares of the Series E
Preferred  Stock  into  shares  of the  common  stock,  $.01 par  value,  of the
Corporation ("Common Stock"), in accordance with the terms of the Certificate of
Designations.  The undersigned  hereby  instructs the Corporation to convert the
number of shares of the Series E Preferred  Stock specified above into Shares of
Common Stock Issued at Conversion in accordance with the provisions of Article 6
of the  Certificate of  Designations.  The  undersigned  directs that the Common
Stock issuable and certificates therefor deliverable upon conversion, the Series
E Preferred Stock  recertificated,  if any, not being surrendered for conversion
hereby,  together  with any check in payment for  fractional  Common  Stock,  be
issued in the name of and delivered to the  undersigned  unless a different name
has been indicated below. All capitalized terms used and not defined herein have
the respective meanings assigned to them in the Certificate of Designations.


Dated:____________________________


__________________________________
Signature


      Fill in for registration of Series E Preferred Stock:


Please print name and address
(including zip code number):

________________________________________________________________________________

________________________________________________________________________________


                                       17