<PAGE>


EXHIBIT 10.32
                  SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE

                                    AGREEMENT




                          DATED AS OF NOVEMBER 29, 2001




                                      AMONG



                             A.B. WATLEY GROUP INC.




                                       AND





                       THE PURCHASERS LISTED ON EXHIBIT A







<PAGE>


                                TABLE OF CONTENTS
                                -----------------
<TABLE>
<CAPTION>
<S>       <C>              <C>                                                                                 <C>
                                                                                                              Page

ARTICLE I Purchase and Sale of Preferred
Stock............................................................................................................1

         Section 1.1       Purchase and Sale of Stock............................................................1
         Section 1.2       The Conversion Shares.................................................................1
         Section 1.3       Purchase Price and Closing............................................................1
         Section 1.4       Exchange of Series A Preferred Stock..................................................2
         Section 1.5       Warrants..............................................................................2

ARTICLE II Representations and Warranties........................................................................2

         Section 2.1       Representations and Warranties of the Company.........................................2
         Section 2.2       Representations and Warranties of the Purchasers.....................................12

ARTICLE III Covenants    14

         Section 3.1       Securities Compliance................................................................14
         Section 3.2       Registration and Listing.............................................................15
         Section 3.3       Inspection Rights....................................................................15
         Section 3.4       Compliance with Laws.................................................................15
         Section 3.5       Keeping of Records and Books of Account..............................................15
         Section 3.6       Reporting Requirements...............................................................15
         Section 3.7       Amendments...........................................................................16
         Section 3.8       Other Agreements.....................................................................16
         Section 3.9       Distributions........................................................................16
         Section 3.10      Status of Dividends..................................................................16
         Section 3.11      Intentionally Omitted................................................................17
         Section 3.12      Future Financings; Right of First Offer and Refusal..................................17
         Section 3.13      Reservation of Shares................................................................19
         Section 3.14      Transfer Agent Instructions..........................................................19

ARTICLE IV Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . .20

         Section 4.1       Conditions Precedent to the Obligation of the Company to Sell the Shares.............20
         Section 4.2       Conditions Precedent to the Obligation of the Purchasers to Purchase the Shares......20

ARTICLE V Intentionally Omitted.................................................................................22


ARTICLE VI Stock Certificate Legend.............................................................................22

         Section 6.1       Legend...............................................................................22
</TABLE>

                                      -i-
<PAGE>

<TABLE>
<CAPTION>

<S>       <C>              <C>                                                                                 <C>
ARTICLE VII Intentionally Omitted...............................................................................23


ARTICLE VIII Indemnification....................................................................................23

         Section 8.1       General Indemnity....................................................................23
         Section 8.2       Indemnification Procedure............................................................24

ARTICLE IX Miscellaneous....................................................................................... 25

         Section 9.1       Fees and Expenses....................................................................25
         Section 9.2       Specific Enforcement, Consent to Jurisdiction........................................25
         Section 9.3       Entire Agreement; Amendment..........................................................26
         Section 9.4       Notices..............................................................................26
         Section 9.5       Waivers..............................................................................27
         Section 9.6       Headings.............................................................................27
         Section 9.7       Successors and Assigns...............................................................27
         Section 9.8       No Third Party Beneficiaries.........................................................27
         Section 9.9       Governing Law........................................................................27
         Section 9.10      Survival.............................................................................27
         Section 9.11      Counterparts.........................................................................28
         Section 9.12      Publicity............................................................................28
         Section 9.13      Severability.........................................................................28
         Section 9.14      Further Assurances...................................................................28

</TABLE>

                                      -ii-
<PAGE>

             SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT

     This  SERIES  A  CONVERTIBLE   PREFERRED  STOCK  PURCHASE   AGREEMENT  (the
"Agreement")  is dated as of November  29, 2001 by and among A.B.  Watley  Group
Inc., a Delaware  corporation  (the  "Company"),  and each of the  Purchasers of
shares of Series A  Convertible  Preferred  Stock of the Company whose names are
set forth on Exhibit A hereto (individually, a "Purchaser" and collectively, the
"Purchasers").

         The parties hereto agree as follows:

                                   ARTICLE I

                      PURCHASE AND SALE OF PREFERRED STOCK

     Section  1.1  PURCHASE  AND SALE OF  STOCK.  Upon the  following  terms and
conditions,  the Company shall issue and sell to the  Purchasers and each of the
Purchasers  shall  purchase  from the  Company,  the  number  of  shares  of the
Company`s  Series A Convertible  Preferred  Stock, par value $.01 per share (the
"Preferred  Shares"),  at a purchase price of $10,000 per share,  set forth with
respect to such  Purchaser  on Exhibit A hereto.  Upon the  following  terms and
conditions,  the Purchasers shall be issued Series A Warrants,  in substantially
the form  attached  hereto  as  Exhibit  B (the  "Warrants"),  to  purchase  the
Company`s  Common  Stock,  par value $.001 per share (the "Common  Stock").  The
aggregate  purchase  price for the  Preferred  Shares and the Warrants  shall be
$6,300,000.  A portion of the aggregate  purchase  price shall be paid with that
certain  senior  subordinated  demand  promissory  note issued by the Company in
connection  with the Note and Warrant  Purchase  Agreement dated August 30, 2001
(the "August Note"),  in the amount set forth next to such  Purchaser`s  name on
SCHEDULE 1.1 attached  hereto.  The designation,  rights,  preferences and other
terms and provisions of the Series A Convertible  Preferred  Stock are set forth
in the  Certificate of Designation of the Relative Rights and Preferences of the
Series  A  Convertible  Preferred  Stock  attached  hereto  as  Exhibit  C  (the
"Certificate of Designation").  The Company and the Purchasers are executing and
delivering  this Agreement in accordance with and in reliance upon the exemption
from securities  registration  afforded by Rule 506 of Regulation D ("Regulation
D") as promulgated by the United States Securities and Exchange  Commission (the
"Commission")  under the  Securities  Act of 1933,  as amended (the  "Securities
Act") or Section 4(2) of the Securities Act.

     Section 1.2 THE  CONVERSION  SHARES.  The Company  has  authorized  and has
reserved and  covenants to continue to reserve,  free of  preemptive  rights and
other similar  contractual  rights of stockholders,  a sufficient  number of its
authorized but unissued  shares of its Common Stock, to effect the conversion of
the Preferred  Shares and exercise of the  Warrants.  Any shares of Common Stock
issuable upon  conversion  of the Preferred  Shares and exercise of the Warrants
(and such shares when issued) are herein referred to as the "Conversion  Shares"
and the "Warrant Shares",  respectively.  The Preferred  Shares,  the Conversion
Shares and the  Warrant  Shares are  sometimes  collectively  referred to as the
"Shares".

     Section 1.3  PURCHASE  PRICE AND CLOSING.  The Company  agrees to issue and
sell to the Purchasers and, in consideration of and in express reliance upon the
representations,  warranties, covenants, terms and conditions of this Agreement,


<PAGE>

the Purchasers,  severally but not jointly, agree to purchase that number of the
Preferred  Shares and  Warrants set forth  opposite  their  respective  names on
Exhibit A. The aggregate  purchase  price of the  Preferred  Shares and Warrants
being acquired by each Purchaser is set forth opposite such  Purchaser`s name on
Exhibit  A (for each such  purchaser,  the  "Purchase  Price"  and  collectively
referred to as the "Purchase Prices").  The Company acknowledges and agrees that
a portion of the Purchase  Price for the  Preferred  Shares and Warrants will be
paid to the Company  with the August  Note,  in the amount set forth on SCHEDULE
1.1  attached  hereto.  The closing of the  purchase  and sale of the  Preferred
Shares and Warrants to be acquired by the Purchasers from the Company under this
Agreement  shall take place at the offices of Jenkens & Gilchrist  Parker Chapin
LLP, The Chrysler Building,  405 Lexington Avenue, New York, New York 10174 (the
"Closing") at 10:00 a.m.,  New York time on (i) the date on which the last to be
fulfilled  or  waived  of the  conditions  set forth in  Article  IV hereof  and
applicable to such Closing  shall be fulfilled or waived in accordance  herewith
or (ii) at such other time and place or on such date as the  Purchasers  and the
Company may agree upon (the "Closing Date").

     Section 1.4 EXCHANGE OF AUGUST NOTE FOR SERIES A PREFERRED STOCK.  Prior to
or at the Closing, a certain Purchaser shall surrender to the Company its August
Note in exchange for stock certificates representing its pro rata portion of the
Preferred Shares.

     Section 1.5 WARRANTS. The Company agrees to issue to each of the Purchasers
Warrants to  purchase  the number of shares of Common  Stock set forth  opposite
such Purchaser`s name on Exhibit A hereto, such number of shares of Common Stock
determined as follows:  the Purchasers  shall receive a Warrant for the purchase
of  approximately  2,542 shares of Common  Stock for each  Preferred  Share.  In
addition,  Alan W.  Steinberg  Limited  Partnership  and  Riviera  Enid  Limited
Partnership  shall receive  Warrants for the purchase of 19,326 and 8,283 shares
of Common  Stock,  respectively.  Such  Warrants  shall expire on the  twentieth
(20th) day  following  the  effective  date of a  registration  statement of the
Company  registering the Common Stock underlying the Warrants.  The Warrants set
forth on Exhibit A shall  expire on the fifth (5th)  anniversary  of the date of
issuance.

                                   ARTICLE II

                         REPRESENTATIONS AND WARRANTIES

     Section 2.1  REPRESENTATIONS  AND  WARRANTIES  OF THE COMPANY.  The Company
hereby makes the following  representations  and  warranties to the  Purchasers,
except as set forth in the Company`s  disclosure  schedule  delivered  with this
Agreement as follows:

     (a)  ORGANIZATION,  GOOD  STANDING AND POWER.  The Company is a corporation
duly  incorporated,  validly existing and in good standing under the laws of the
State of  Delaware  and has the  requisite  corporate  power to own,  lease  and
operate its properties and assets and to conduct its business as it is now being
conducted. The Company does not have any subsidiaries except as set forth in the
Company`s  Form 10-KSB for the year ended  September  30,  2000,  including  the
accompanying  financial statements (the "Form 10-KSB"), or in the Company`s Form
10-Q for the fiscal quarters ended December 31, 2000, March 31, 2001 or June 30,
2001 (collectively,  the "Form 10-Q"), or on SCHEDULE 2.1(A) hereto. The Company

                                      -2-
<PAGE>

and each  such  subsidiary  is duly  qualified  as a foreign  corporation  to do
business and is in good  standing in every  jurisdiction  in which the nature of
the  business  conducted  or  property  owned  by it  makes  such  qualification
necessary  except for any  jurisdiction(s)  (alone or in the aggregate) in which
the failure to be so qualified will not have a Material Adverse Effect.  For the
purposes of this Agreement,  "Material  Adverse Effect" means any adverse effect
on the business,  operations,  properties,  prospects, or financial condition of
the  Company or its  subsidiaries  and which is material to such entity or other
entities  controlling  or  controlled  by such  entity  or  which is  likely  to
materially  hinder the  performance  by the  Company  of any of its  obligations
hereunder and under the other Transaction Documents (as defined below).

     (b)  AUTHORIZATION;  ENFORCEMENT.  The Company has the requisite  corporate
power and authority to enter into and perform this Agreement,  the  Registration
Rights  Agreement  attached  hereto  as  Exhibit  D  (the  "Registration  Rights
Agreement"),  the Irrevocable Transfer Agent Instructions (as defined in Section
3.14),  the  Certificate of  Designation,  and the Warrants  (collectively,  the
"Transaction  Documents")  and to issue and sell the Shares and the  Warrants in
accordance with the terms hereof. The execution, delivery and performance of the
Transaction  Documents  by  the  Company  and  the  consummation  by it  of  the
transactions  contemplated  hereby  and  thereby  have  been  duly  and  validly
authorized  by all  necessary  corporate  action,  and  no  further  consent  or
authorization  of the  Company  or its board of  directors  or  stockholders  is
required.  This  Agreement  has been duly executed and delivered by the Company.
The other  Transaction  Documents  will have been duly executed and delivered by
the Company at the Closing.  Each of the Transaction Documents  constitutes,  or
shall constitute when executed and delivered,  a 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,  conservatorship,   receivership  or
similar laws relating to, or affecting  generally the enforcement of, creditor`s
rights and remedies or by other equitable principles of general application.

     (c)  CAPITALIZATION.  The  authorized  capital stock of the Company and the
shares thereof  currently issued and outstanding as of November __, 2001 are set
forth on SCHEDULE 2.1(C) hereto.  All of the outstanding shares of the Company`s
Common Stock and Series A Convertible Preferred Stock have been duly and validly
authorized.  Except as set forth in this Agreement and the  Registration  Rights
Agreement and as set forth in the Form 10-KSB,  Form 10-Q or on SCHEDULE  2.1(C)
hereto,  no  shares  of  Common  Stock  are  entitled  to  preemptive  rights or
registration  rights  and there are no  outstanding  options,  warrants,  scrip,
rights to subscribe to, call or commitments of any character whatsoever relating
to, or securities or rights convertible into, any shares of capital stock of the
Company. Furthermore, except as set forth in this Agreement and the Registration
Rights  Agreement and as set forth in the Form 10-KSB,  Form 10-Q or on SCHEDULE
2.1(C), there are no contracts, commitments,  understandings, or arrangements by
which the  Company  is or may  become  bound to issue  additional  shares of the
capital stock of the Company or options,  securities or rights  convertible into
shares  of  capital  stock  of  the  Company.   Except  for  customary  transfer
restrictions  contained  in  agreements  entered into by the Company in order to
sell  restricted  securities or as provided in the Form 10-KSB,  Form 10-Q or on
SCHEDULE 2.1 (C) hereto,  the Company is not a party to any  agreement  granting
registration  or  anti-dilution  rights to any person with respect to any of its
equity  or  debt  securities.  The  Company  is not a  party  to,  and it has no

                                      -3-
<PAGE>

knowledge of, any agreement  restricting the voting or transfer of any shares of
the capital stock of the Company.  Except as set forth in the Form 10-KSB,  Form
10-Q or on SCHEDULE  2.1(C)  hereto,  the offer and sale of all  capital  stock,
convertible securities, rights, warrants, or options of the Company issued prior
to the Closing  complied with all applicable  Federal and state securities laws,
and no  stockholder  has a right of rescission or claim for damages with respect
thereto which would have a Material Adverse Effect. The Company has furnished or
made  available  to the  Purchasers  true and  correct  copies of the  Company`s
Certificate of Incorporation,  as amended,  as in effect on the date hereof (the
"Certificate"),  and the  Company`s  Bylaws as in effect on the date hereof (the
"Bylaws").

     (d) ISSUANCE OF SHARES.  The Preferred Shares and the Warrants to be issued
at the Closing have been duly authorized by all necessary  corporate  action and
the  Preferred  Shares,  when paid for or issued  in  accordance  with the terms
hereof,  shall be validly issued and outstanding,  fully paid and  nonassessable
and  entitled  to the rights and  preferences  set forth in the  Certificate  of
Designation.  When the  Conversion  Shares and the Warrant  Shares are issued in
accordance  with  the  terms  of  the  Preferred  Shares  as  set  forth  in the
Certificate of Designation and the Warrants,  respectively,  such shares will be
duly  authorized  by all  necessary  corporate  action  and  validly  issued and
outstanding, fully paid and nonassessable,  and the holders shall be entitled to
all rights accorded to a holder of Common Stock.

     (e) NO  CONFLICTS.  Except as  disclosed  in SCHEDULE  2.1(E)  hereto,  the
execution,  delivery and performance of the Transaction Documents by the Company
and the consummation by the Company of the transactions  contemplated herein and
therein  do not  and  will  not  (i)  violate  any  provision  of the  Company`s
Certificate or Bylaws,  (ii) conflict with, or constitute a default (or an event
which with  notice or lapse of time or both would  become a default)  under,  or
give  to  others  any  rights  of   termination,   amendment,   acceleration  or
cancellation of, any agreement,  mortgage, deed of trust, indenture, note, bond,
license,  lease  agreement,  instrument  or obligation to which the Company is a
party or by which it or its  properties  or assets  are bound,  (iii)  create or
impose a lien, mortgage,  security interest, charge or encumbrance of any nature
on any property of the Company  under any  agreement or any  commitment to which
the  Company is a party or by which the  Company is bound or by which any of its
respective  properties or assets are bound, or (iv) result in a violation of any
federal,  state, local or foreign statute, rule, regulation,  order, judgment or
decree (including Federal and state securities laws and regulations)  applicable
to the Company or any of its  subsidiaries  or by which any property or asset of
the Company or any of its  subsidiaries  are bound or affected,  except,  in all
cases other than  violations  pursuant  to clauses (i) and (iv) above,  for such
conflicts, defaults, terminations, amendments, accelerations,  cancellations and
violations  as would  not,  individually  or in the  aggregate,  have a Material
Adverse  Effect.  The business of the Company and its  subsidiaries is not being
conducted  in  violation  of  any  laws,   ordinances  or   regulations  of  any
governmental  entity,  except for possible violations which singularly or in the
aggregate do not and will not have a Material Adverse Effect. The Company is not
required  under  Federal,  state or local law,  rule or regulation to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency in order for it to execute,  deliver or perform any
of its  obligations  under  the  Transaction  Documents,  or issue  and sell the
Preferred Shares, the Warrants,  the Conversion Shares and the Warrant Shares in
accordance with the terms hereof or thereof (other than any filings which may be

                                      -4-
<PAGE>

required  to be made by the  Company  with the  Commission  or state  securities
administrators  subsequent to the Closing, any registration  statement which may
be filed pursuant hereto,  and the Certificate of  Designation);  PROVIDED that,
for  purposes  of the  representation  made in this  sentence,  the  Company  is
assuming  and relying  upon the  accuracy of the  relevant  representations  and
agreements of the Purchasers herein.

     (f) COMMISSION  DOCUMENTS,  FINANCIAL  STATEMENTS.  The Common Stock of the
Company  is  registered  pursuant  to Section  12(b) or 12(g) of the  Securities
Exchange Act of 1934, as amended (the "Exchange Act"),  and, except as disclosed
in the Form 10-KSB, Form 10-Q or on SCHEDULE 2.1(F) hereto, since June 30, 2001,
the Company has timely filed all reports, schedules, forms, statements and other
documents  required  to be  filed  by it with  the  Commission  pursuant  to the
reporting requirements of the Exchange Act, including material filed pursuant to
Section  13(a) or  15(d) of the  Exchange  Act (all of the  foregoing  including
filings  incorporated  by  reference  therein  being  referred  to herein as the
"Commission Documents").  The Company has delivered or made available to each of
the Purchasers true and complete  copies of the Commission  Documents filed with
the  Commission  since  June 30,  2001.  The  Company  has not  provided  to the
Purchasers  any material  non-public  information  or other  information  which,
according  to  applicable  law,  rule or  regulation,  was required to have been
disclosed  publicly by the Company  but which has not been so  disclosed,  other
than with respect to the  transactions  contemplated  by this  Agreement.  As of
their  respective  dates,  the Form  10-KSB  and the Form 10-Q  complied  in all
material  respects with the  requirements  of the Exchange Act and the rules and
regulations of the Commission  promulgated  thereunder and other federal,  state
and local laws, rules and regulations  applicable to such documents,  and, as of
their respective  dates, none of the Form 10-KSB and the Form 10-Q 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.  The
financial  statements of the Company included in the Commission Documents comply
as to form in all material respects with applicable accounting  requirements and
the published rules and regulations of the Commission or other  applicable rules
and  regulations  with respect  thereto.  Such  financial  statements  have been
prepared in accordance with generally accepted  accounting  principles  ("GAAP")
applied on a consistent  basis during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto or (ii) in
the case of  unaudited  interim  statements,  to the extent they may not include
footnotes or may be condensed or summary statements),  and fairly present in all
material respects the financial  position of the Company and its subsidiaries as
of 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
year-end audit adjustments).

     (g) SUBSIDIARIES. The Form 10-KSB, Form 10-Q or SCHEDULE 2.1(G) hereto sets
forth  each  subsidiary  of  the  Company,   showing  the  jurisdiction  of  its
incorporation  or  organization  and showing  the  percentage  of each  person`s
ownership of the outstanding  stock or other interests of such  subsidiary.  For
the purposes of this Agreement, "subsidiary" shall mean any corporation or other
entity  of  which at  least a  majority  of the  securities  or other  ownership
interest  having  ordinary  voting power  (absolutely or  contingently)  for the
election of directors or other persons  performing  similar functions are at the
time  owned  directly  or  indirectly  by the  Company  and/or  any of its other

                                      -5-
<PAGE>

subsidiaries.  All of the outstanding shares of capital stock of each subsidiary
have  been  duly  authorized  and  validly  issued,   and  are  fully  paid  and
nonassessable.  There are no outstanding preemptive, conversion or other rights,
options,  warrants  or  agreements  granted  or  issued by or  binding  upon any
subsidiary for the purchase or acquisition of any shares of capital stock of any
subsidiary  or  any  other  securities  convertible  into,  exchangeable  for or
evidencing the rights to subscribe for any shares of such capital stock. Neither
the Company  nor any  subsidiary  is subject to any  obligation  (contingent  or
otherwise)  to  repurchase  or  otherwise  acquire  or retire  any shares of the
capital stock of any subsidiary or any convertible securities,  rights, warrants
or options of the type described in the preceding sentence.  Neither the Company
nor any  subsidiary  is  party  to,  nor has any  knowledge  of,  any  agreement
restricting  the voting or transfer  of any shares of the  capital  stock of any
subsidiary.

     (h) NO MATERIAL ADVERSE CHANGE. Since June 30, 2001, the date through which
the most recent  quarterly  report of the Company on Form 10-Q has been prepared
and filed with the  Commission,  a copy of which is included  in the  Commission
Documents,  the Company has not  experienced  or suffered any  Material  Adverse
Effect, except as disclosed on SCHEDULE 2.1(H) hereto.

     (i) NO  UNDISCLOSED  LIABILITIES.  Except as  disclosed in the Form 10-KSB,
Form 10-Q or on  SCHEDULE  2.1(I)  hereto,  neither  the  Company nor any of its
subsidiaries  has  any  liabilities,  obligations,  claims  or  losses  (whether
liquidated or unliquidated,  secured or unsecured, absolute, accrued, contingent
or otherwise)  other than those incurred in the ordinary course of the Company`s
or its  subsidiaries  respective  businesses  since  June 30,  2001  and  which,
individually  or in the aggregate,  do not or would not have a Material  Adverse
Effect on the Company or its subsidiaries.

     (j) NO UNDISCLOSED  EVENTS OR  CIRCUMSTANCES.  No event or circumstance has
occurred or exists  with  respect to the  Company or its  subsidiaries  or their
respective businesses, properties, prospects, operations or financial condition,
which,  under applicable law, rule or regulation,  requires public disclosure or
announcement  by the  Company but which has not been so  publicly  announced  or
disclosed.

     (k) INDEBTEDNESS. The Form 10-KSB, Form 10-Q or SCHEDULE 2.1(K) hereto sets
forth as of the date hereof all outstanding  secured and unsecured  Indebtedness
of the Company or any subsidiary, or for which the Company or any subsidiary has
commitments.  For the purposes of this Agreement,  "Indebtedness" shall mean (a)
any  liabilities for borrowed money or amounts owed in excess of $100,000 (other
than trade accounts  payable  incurred in the ordinary course of business),  (b)
all  guaranties,  endorsements  and other  contingent  obligations in respect of
Indebtedness  of others,  whether or not the same are or should be  reflected in
the  Company`s  balance  sheet  (or the notes  thereto),  except  guaranties  by
endorsement  of  negotiable  instruments  for deposit or  collection  or similar
transactions  in the ordinary  course of business;  and (c) the present value of
any lease  payments  in excess of  $100,000  due  under  leases  required  to be
capitalized in accordance  with GAAP.  Neither the Company nor any subsidiary is
in default with respect to any Indebtedness.


                                      -6-
<PAGE>

     (l) TITLE TO ASSETS.  Each of the Company and the subsidiaries has good and
marketable  title to all of its  real and  personal  property  reflected  in the
Commission Documents, free and clear of any mortgages,  pledges, charges, liens,
security interests or other encumbrances, except for those indicated in the Form
10-KSB, Form 10-Q or on SCHEDULE 2.1(L) hereto or such that,  individually or in
the aggregate, do not cause a Material Adverse Effect on the Company`s financial
condition or operating  results.  All said leases of the Company and each of its
subsidiaries are valid and subsisting and in full force and effect.

     (m)  ACTIONS  PENDING.  There is no  action,  suit,  claim,  investigation,
arbitration,  alternate  dispute  resolution  proceeding or any other proceeding
pending or, to the knowledge of the Company,  threatened  against the Company or
any  subsidiary  which  questions  the validity of this  Agreement or any of the
other Transaction  Documents or the transactions  contemplated hereby or thereby
or any action  taken or to be taken  pursuant  hereto or thereto.  Except as set
forth in the Form 10-KSB,  Form 10-Q or on SCHEDULE  2.1(M) hereto,  there is no
action, suit, claim,  investigation,  arbitration,  alternate dispute resolution
proceeding or any other proceeding  pending or, to the knowledge of the Company,
threatened,  against or involving  the Company,  any  subsidiary or any of their
respective  properties or assets.  Except as set forth in the Form 10-KSB,  Form
10-Q or SCHEDULE  2.1(M)  hereto,  there are no outstanding  orders,  judgments,
injunctions,  awards or decrees  of any court,  arbitrator  or  governmental  or
regulatory  body  against  the  Company or any  subsidiary  or any  officers  or
directors of the Company or subsidiary in their capacities as such.

     (n) COMPLIANCE  WITH LAW. The business of the Company and the  subsidiaries
has been and is presently  being  conducted in  accordance  with all  applicable
federal,  state and local governmental laws, rules,  regulations and ordinances,
except as set forth in the Form 10-KSB,  Form 10-Q, on SCHEDULE 2.1(N) hereto or
such that,  individually  or in the aggregate,  do not cause a Material  Adverse
Effect.  The Company and each of its subsidiaries have all franchises,  permits,
licenses,  consents and other  governmental  or  regulatory  authorizations  and
approvals necessary for the conduct of its business as now being conducted by it
unless the failure to possess such franchises,  permits, licenses,  consents and
other governmental or regulatory  authorizations and approvals,  individually or
in the aggregate,  could not  reasonably be expected to have a Material  Adverse
Effect.

     (o) TAXES. Except as set forth in the Form 10-KSB, Form 10-Q or on SCHEDULE
2.1(O) hereto, the Company and each of the subsidiaries has accurately  prepared
and filed all federal,  state and other tax returns  required by law to be filed
by it, has paid or made  provisions for the payment of all taxes shown to be due
and all  additional  assessments,  and  adequate  provisions  have  been and are
reflected in the financial  statements of the Company and the  subsidiaries  for
all current  taxes and other  charges to which the Company or any  subsidiary is
subject and which are not  currently  due and  payable.  Except as  disclosed on
SCHEDULE 2.1(O) hereto, none of the federal income tax returns of the Company or
any subsidiary have been audited by the Internal  Revenue  Service.  The Company
has no knowledge of any  additional  assessments,  adjustments or contingent tax
liability (whether federal or state) of any nature  whatsoever,  whether pending
or threatened  against the Company or any subsidiary for any period,  nor of any
basis for any such assessment, adjustment or contingency.


                                      -7-
<PAGE>

     (p)  CERTAIN  FEES.  Except as set forth in this  Agreement  or on SCHEDULE
2.1(P)  hereto,  no brokers,  finders or financial  advisory fees or commissions
will be payable by the Company or any  subsidiary or any Purchaser  with respect
to the transactions contemplated by this Agreement.

     (q)  DISCLOSURE.  To the  best of the  Company`s  knowledge,  neither  this
Agreement  or the  Schedules  hereto nor any other  documents,  certificates  or
instruments  furnished to the  Purchasers  by or on behalf of the Company or any
subsidiary in connection  with the  transactions  contemplated by this Agreement
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements  made herein or therein,  in the light
of the  circumstances  under  which  they  were  made  herein  or  therein,  not
misleading.

     (r) OPERATION OF BUSINESS. The Company and each of the subsidiaries owns or
possesses all patents, trademarks,  domain names (whether or not registered) and
any patentable improvements or copyrightable derivative works thereof,  websites
and intellectual  property rights relating thereto,  service marks, trade names,
copyrights,  licenses and  authorizations as set forth in the Form 10-KSB,  Form
10-Q  and on  SCHEDULE  2.1(R)  hereto,  and  all  rights  with  respect  to the
foregoing,  which are necessary for the conduct of its business as now conducted
without any conflict with the rights of others.

     (s) ENVIRONMENTAL COMPLIANCE. The Company and each of its subsidiaries have
obtained  all  material  approvals,   authorization,   certificates,   consents,
licenses, orders and permits or other similar authorizations of all governmental
authorities, or from any other person, that are required under any Environmental
Laws. The Form 10-KSB or Form 10-Q sets forth all material permits, licenses and
other  authorizations  issued under any Environmental Laws to the Company or its
subsidiaries.  "Environmental  Laws" shall mean all applicable  laws relating to
the  protection  of  the  environment   including,   without   limitation,   all
requirements  pertaining  to  reporting,  licensing,  permitting,   controlling,
investigating  or  remediating  emissions,  discharges,  releases or  threatened
releases of hazardous substances, chemical substances, pollutants,  contaminants
or toxic substances,  materials or wastes,  whether solid,  liquid or gaseous in
nature,  into the air,  surface  water,  groundwater or land, or relating to the
manufacture,   processing,  distribution,  use,  treatment,  storage,  disposal,
transport or handling of hazardous substances, chemical substances,  pollutants,
contaminants or toxic substances,  material or wastes,  whether solid, liquid or
gaseous in nature. The Company has all necessary governmental approvals required
under all Environmental  Laws and used in its business or in the business of any
of its  subsidiaries.  The  Company  and  each of its  subsidiaries  are also in
compliance  with all other  limitations,  restrictions,  conditions,  standards,
requirements,   schedules   and   timetables   required  or  imposed  under  all
Environmental  Laws.  Except for such instances as would not  individually or in
the  aggregate  have a  Material  Adverse  Effect,  there are no past or present
events, conditions,  circumstances,  incidents, actions or omissions relating to
or in any way  affecting  the Company or its  subsidiaries  that  violate or may
violate any  Environmental  Law after the Closing  Date or that may give rise to
any environmental  liability,  or otherwise form the basis of any claim, action,
demand,  suit,  proceeding,  hearing,  study  or  investigation  (i)  under  any
Environmental  Law, or (ii) based on or related to the manufacture,  processing,
distribution,  use, treatment, storage (including without limitation underground
storage tanks),  disposal,  transport or handling,  or the emission,  discharge,
release  or  threatened  release  of  any  hazardous  substance.  "Environmental

                                      -8-
<PAGE>

Liabilities"  means all  liabilities of a person  (whether such  liabilities are
owed by such person to  governmental  authorities,  third  parties or otherwise)
whether  currently in existence or arising hereafter which arise under or relate
to any Environmental Law.

     (t) BOOKS AND  RECORDS;  INTERNAL  ACCOUNTING  CONTROLS.  The  records  and
documents of the Company and its subsidiaries accurately reflect in all material
respects  the  information  relating  to the  business  of the  Company  and the
subsidiaries, the location and collection of their assets, and the nature of all
transactions  giving  rise to the  obligations  or  accounts  receivable  of the
Company or any subsidiary.  The Company and each of its subsidiaries  maintain a
system of  internal  accounting  controls  sufficient,  in the  judgment  of the
Company`s  board  of  directors,   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  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.

     (u) MATERIAL AGREEMENTS.  Except as set forth in the Form 10-KSB, Form 10-Q
or on SCHEDULE 2.1(U) hereto,  neither the Company nor any subsidiary is a party
to any written or oral contract, instrument, agreement, commitment,  obligation,
plan or  arrangement,  a copy of which  would be  required  to be filed with the
Commission as an exhibit to a  registration  statement on Form S-3 or applicable
form (collectively, "Material Agreements") if the Company or any subsidiary were
registering  securities  under the  Securities  Act. The Company and each of its
subsidiaries has in all material respects performed all the obligations required
to be performed by them to date under the foregoing agreements, have received no
notice of default and, to the best of the Company`s knowledge are not in default
under any Material  Agreement  now in effect,  the result of which could cause a
Material  Adverse Effect.  No written or oral contract,  instrument,  agreement,
commitment,  obligation, plan or arrangement of the Company or of any subsidiary
limits or shall  limit the  payment  of  dividends  on the  Company`s  Preferred
Shares, other Preferred Stock, if any, or its Common Stock.

     (v) TRANSACTIONS  WITH AFFILIATES.  Except as set forth in the Form 10-KSB,
Form 10-Q or on SCHEDULE 2.1(V) hereto, there are no loans, leases,  agreements,
contracts,  royalty  agreements,  management  contracts or arrangements or other
continuing  transactions between (a) the Company, any subsidiary or any of their
respective  customers or  suppliers on the one hand,  and (b) on the other hand,
any officer,  employee,  consultant  or director of the  Company,  or any of its
subsidiaries,  or any person  owning  any  capital  stock of the  Company or any
subsidiary  or any member of the  immediate  family of such  officer,  employee,
consultant,   director  or  stockholder  or  any  corporation  or  other  entity
controlled by such officer, employee, consultant,  director or stockholder, or a
member of the immediate family of such officer, employee,  consultant,  director
or stockholder.

     (w) SECURITIES ACT OF 1933. Based in material part upon the representations
herein of the  Purchasers,  the  Company has  complied  and will comply with all
applicable  federal  and state  securities  laws in  connection  with the offer,

                                      -9-
<PAGE>

issuance and sale of the Shares and the Warrants hereunder.  Neither the Company
nor anyone acting on its behalf, directly or indirectly,  has sold or will sell,
offer to sell or  solicit  offers  to buy any of the  Shares,  the  Warrants  or
similar  securities  to, or solicit  offers with respect  thereto from, or enter
into any preliminary  conversations  or negotiations  relating thereto with, any
person,  or has taken or will take any  action so as to bring the  issuance  and
sale of any of the Shares and the Warrants under the registration  provisions of
the Securities Act and applicable state securities laws, and neither the Company
nor any of its  affiliates,  nor any person acting on its or their  behalf,  has
engaged 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 any of the Shares and the Warrants.

     (x) GOVERNMENTAL APPROVALS.  Except as set forth in the Form 10-KSB or Form
10-Q, and except for the filing of any notice prior or subsequent to the Closing
Date that may be required under applicable state and/or Federal  securities laws
(which if required, shall be filed on a timely basis), including the filing of a
registration  statement  or  statements  pursuant  to  the  Registration  Rights
Agreement,  and the filing of the Certificate of Designation  with the Secretary
of State  for the  State  of  Delaware,  no  authorization,  consent,  approval,
license,  exemption of, filing or  registration  with any court or  governmental
department,  commission,  board, bureau, agency or instrumentality,  domestic or
foreign,  is or will be necessary  for, or in connection  with, the execution or
delivery of the Preferred Shares and the Warrants, or for the performance by the
Company of its obligations under the Transaction Documents.

     (y)  EMPLOYEES.  Neither the Company nor any  subsidiary has any collective
bargaining  arrangements or agreements covering any of its employees,  except as
set forth in the Form 10-KSB, Form 10-Q or on SCHEDULE 2.1(Y) hereto.  Except as
set forth in the Form 10-KSB,  Form 10-Q or on SCHEDULE  2.1(Y) hereto,  neither
the Company nor any subsidiary has any employment contract,  agreement regarding
proprietary information,  non-competition agreement, non-solicitation agreement,
confidentiality   agreement,  or  any  other  similar  contract  or  restrictive
covenant,  relating to the right of any officer,  employee or  consultant  to be
employed or engaged by the Company or such  subsidiary.  Since June 30, 2001, no
officer,  consultant  or key  employee  of the Company or any  subsidiary  whose
termination,  either  individually  or in the  aggregate,  could have a Material
Adverse  Effect,  has  terminated  or, to the knowledge of the Company,  has any
present  intention of terminating  his or her employment or engagement  with the
Company or any subsidiary.

     (z) ABSENCE OF CERTAIN  DEVELOPMENTS.  Except as  provided in Form  10-KSB,
10-Q or in SCHEDULE 2.1(Z) hereto,  since June 30, 2001, neither the Company nor
any subsidiary has:

          (i) issued  any  stock,  bonds or other  corporate  securities  or any
rights, options or warrants with respect thereto;

          (ii)  borrowed  any  amount  or  incurred  or  become  subject  to any
liabilities  (absolute or contingent) except current liabilities incurred in the
ordinary  course of business  which are  comparable  in nature and amount to the
current  liabilities  incurred in the  ordinary  course of  business  during the

                                      -10-
<PAGE>

comparable  portion of its prior fiscal year, as adjusted to reflect the current
nature and volume of the Company`s or such subsidiary`s business;

          (iii)  discharged  or satisfied  any lien or  encumbrance  or paid any
obligation or liability (absolute or contingent), other than current liabilities
paid in the ordinary course of business;

          (iv)  declared  or made any payment or  distribution  of cash or other
property to stockholders with respect to its stock, or purchased or redeemed, or
made any agreements so to purchase or redeem, any shares of its capital stock;

          (v) sold,  assigned  or  transferred  any other  tangible  assets,  or
canceled any debts or claims, except in the ordinary course of business;

          (vi) sold,  assigned or  transferred  any patent  rights,  trademarks,
trade  names,   copyrights,   trade  secrets  or  other  intangible   assets  or
intellectual   property  rights,  or  disclosed  any  proprietary   confidential
information to any person except to customers in the ordinary course of business
or to the Purchasers or their representatives;

          (vii) suffered any substantial losses or waived any rights of material
value,  whether or not in the ordinary course of business,  or suffered the loss
of any material amount of prospective business;

          (viii)  made  any  changes  in  employee  compensation  except  in the
ordinary course of business and consistent with past practices;

          (ix) made capital  expenditures or commitments therefor that aggregate
in excess of $100,000;

          (x)  entered  into any other  transaction  other than in the  ordinary
course of business, or entered into any other material  transaction,  whether or
not in the ordinary course of business;

          (xi) made charitable contributions or pledges in excess of $25,000;

          (xii)  suffered any material  damage,  destruction  or casualty  loss,
whether or not covered by insurance;

          (xiii)  experienced any material  problems with labor or management in
connection with the terms and conditions of their employment;

          (xiv)  effected any two or more events of the foregoing  kind which in
the aggregate would be material to the Company or its subsidiaries; or

          (xv) entered into an agreement,  written or otherwise,  to take any of
the foregoing actions.


                                      -11-
<PAGE>

     (aa) USE OF PROCEEDS.  The proceeds from the sale of the  Preferred  Shares
will be used by the Company for working capital and general corporate purposes.

     (bb) PUBLIC UTILITY HOLDING COMPANY ACT AND INVESTMENT  COMPANY ACT STATUS.
The  Company is not a "holding  company" or a "public  utility  company" as such
terms are defined in the Public Utility Holding Company Act of 1935, as amended.
The Company is not, and as a result of and immediately upon the Closing will not
be,  an  "investment  company"  or a  company  "controlled"  by  an  "investment
company," within the meaning of the Investment Company Act of 1940, as amended.

     (cc) ERISA.  No liability to the Pension Benefit  Guaranty  Corporation has
been incurred with respect to any Plan by the Company or any of its subsidiaries
which is or would be materially adverse to the Company and its subsidiaries. The
execution and delivery of this Agreement and the issue and sale of the Preferred
Shares will not involve any transaction  which is subject to the prohibitions of
Section 406 of ERISA or in connection with which a tax could be imposed pursuant
to Section 4975 of the Internal  Revenue Code of 1986,  as amended (the "Code"),
provided  that,  if any of the  Purchasers,  or any person or entity that owns a
beneficial  interest in any of the Purchasers,  is an "employee  pension benefit
plan"  (within the meaning of Section  3(2) of ERISA) with  respect to which the
Company is a "party in interest" (within the meaning of Section 3(14) of ERISA),
the requirements of Sections  407(d)(5) and 408(e) of ERISA, if applicable,  are
met. As used in this  Section  2.1(cc),  the term "Plan" shall mean an "employee
pension  benefit  plan" (as defined in Section 3 of ERISA)  which is or has been
established or maintained,  or to which  contributions are or have been made, by
the  Company  or any  subsidiary  or by any trade or  business,  whether  or not
incorporated,  which,  together  with the  Company or any  subsidiary,  is under
common control, as described in Section 414(b) or (c) of the Code.

     (dd) DILUTIVE EFFECT.  The Company  understands and  acknowledges  that the
number of Conversion Shares issuable upon conversion of the Preferred Shares and
the Warrant  Shares  issuable  upon  exercise of the Warrants  will  increase in
certain  circumstances.  The Company further acknowledges that its obligation to
issue  Conversion  Shares upon conversion of the Preferred  Shares in accordance
with this Agreement and the  Certificate of Designation  and its  obligations to
issue the Warrant  Shares upon the exercise of the Warrants in  accordance  with
this Agreement and the Warrants,  is, in each case,  absolute and  unconditional
regardless  of the dilutive  effect that such issuance may have on the ownership
interest of other stockholders of the Company.

     Section 2.2 REPRESENTATIONS  AND WARRANTIES OF THE PURCHASERS.  Each of the
Purchasers  hereby makes the  following  representations  and  warranties to the
Company  with  respect  solely  to  itself  and not with  respect  to any  other
Purchaser:

     (a)  ORGANIZATION  AND STANDING OF THE  PURCHASERS.  If the Purchaser is an
entity,  such  Purchaser  is a  corporation,  partnership  or limited  liability
company duly  incorporated or organized,  validly  existing and in good standing
under the laws of the jurisdiction of its incorporation or organization.

                                      -12-
<PAGE>

     (b)  AUTHORIZATION  AND POWER.  The Purchaser  has the requisite  power and
authority to enter into and perform this Agreement and to purchase the Preferred
Shares being sold to it hereunder.  The execution,  delivery and  performance of
this Agreement and the  Registration  Rights Agreement by such Purchaser and the
consummation by it of the transactions contemplated hereby and thereby have been
duly  authorized  by all  necessary  corporate,  limited  liability  company  or
partnership  action (if the Purchaser is an entity),  and no further  consent or
authorization  of  such  Purchaser  or its  board  of  directors,  stockholders,
managers,  members or partners,  as the case may be, is  required.  Each of this
Agreement  and the  Registration  Rights  Agreement  has been  duly  authorized,
executed and delivered by such Purchaser.

     (c) NO CONFLICTS. The execution, delivery and performance of this Agreement
and the Registration  Rights Agreement and the consummation by such Purchaser of
the transactions  contemplated  hereby and thereby or relating hereto do not and
will not (i) result in a violation  of such  Purchaser`s  charter  documents  or
bylaws or (ii)  conflict  with,  or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to others
any  rights of  termination,  amendment,  acceleration  or  cancellation  of any
agreement, indenture or instrument to which such Purchaser is a party, or result
in a violation of any law, rule, or regulation, or any order, judgment or decree
of any  court  or  governmental  agency  applicable  to  such  Purchaser  or its
properties  (except for such  conflicts,  defaults and  violations as would not,
individually  or in the  aggregate,  have a  material  adverse  effect  on  such
Purchaser). Such Purchaser is not required to obtain any consent,  authorization
or order of, or make any filing or registration  with, any court or governmental
agency in order for it to  execute,  deliver or perform  any of its  obligations
under this  Agreement or the  Registration  Rights  Agreement or to purchase the
Preferred  Shares or acquire the Warrants in  accordance  with the terms hereof,
provided that for purposes of the  representation  made in this  sentence,  such
Purchaser   is  assuming   and  relying   upon  the  accuracy  of  the  relevant
representations and agreements of the Company herein.

     (d) ACQUISITION  FOR INVESTMENT.  Such Purchaser is acquiring the Preferred
Shares and the Warrants solely for its own account for the purpose of investment
and  not  with a view to or for  sale  in  connection  with  distribution.  Such
Purchaser does not have a present  intention to sell the Preferred Shares or the
Warrants,  nor a  present  arrangement  (whether  or  not  legally  binding)  or
intention to effect any  distribution of the Preferred Shares or the Warrants to
or  through  any  person  or  entity;  PROVIDED,  HOWEVER,  that by  making  the
representations  herein and subject to Section 2.2(f) below, such Purchaser does
not agree to hold the Shares or the Warrants  for any minimum or other  specific
term and reserves the right to dispose of the Shares or the Warrants at any time
in  accordance  with  Federal  and  state  securities  laws  applicable  to such
disposition.  Such Purchaser  acknowledges that it is able to bear the financial
risks associated with an investment in the Preferred Shares and the Warrants and
that it has been  given  full  access to such  records  of the  Company  and the
subsidiaries  and to the  officers  of the  Company  and  the  subsidiaries  and
received such  information as it has deemed  necessary or appropriate to conduct
its due diligence investigation.

     (e) ACCREDITED  PURCHASERS.  Such Purchaser is an "accredited  investor" as
defined in Regulation D promulgated under the Securities Act.


                                      -13-
<PAGE>

     (f) RULE 144.  Such  Purchaser  understands  that the  Shares  must be held
indefinitely  unless such Shares are  registered  under the Securities Act or an
exemption from registration is available.  Such Purchaser acknowledges that such
Purchaser  is  familiar  with  Rule  144 of the  rules  and  regulations  of the
Commission, as amended, promulgated pursuant to the Securities Act ("Rule 144"),
and that such person has been advised  that Rule 144 permits  resales only under
certain  circumstances.  Such Purchaser understands that to the extent that Rule
144 is not  available,  such Purchaser will be unable to sell any Shares without
either  registration  under  the  Securities  Act or the  existence  of  another
exemption from such registration requirement.

     (g) GENERAL.  Such Purchaser  understands that the Shares are being offered
and  sold  in  reliance  on a  transactional  exemption  from  the  registration
requirement of Federal and state securities laws and the Company is relying upon
the  truth  and  accuracy  of  the  representations,   warranties,   agreements,
acknowledgments  and  understandings of such Purchaser set forth herein in order
to determine the  applicability  of such  exemptions and the suitability of such
Purchaser to acquire the Shares.

     (h)  RESIDENCE.  Such  Purchaser`s  permanent  domicile  is as set forth in
Exhibit A.

                                  ARTICLE III

                                    COVENANTS

     The  Company  covenants  with  each of the  Purchasers  as  follows,  which
covenants are for the benefit of the  Purchasers and their  permitted  assignees
(as defined herein).

     Section 3.1 SECURITIES COMPLIANCE.

     (a) The Company shall notify the Commission in accordance  with their rules
and  regulations,  of the  transactions  contemplated  by any of the Transaction
Documents,  including  filing a Form D with  respect  to the  Preferred  Shares,
Warrants,  Conversion  Shares and Warrant Shares as required under Regulation D,
and shall take all other necessary action and proceedings as may be required and
permitted  by  applicable  law,  rule and  regulation,  for the  legal and valid
issuance of the Preferred  Shares,  the Warrants,  the Conversion Shares and the
Warrant Shares to the Purchasers or subsequent holders.

     (b)  The   Company  is  relying   upon  the  truth  and   accuracy  of  the
representations,  warranties, agreements,  acknowledgments and understandings of
such  Purchasers  set forth herein in order to determine  the  applicability  of
Federal  and  state  securities  laws  exemptions  and the  suitability  of such
Purchasers to acquire the Preferred Shares.

     (c) Reserved.

     (d) Unless  waived by a  Purchaser  by means of  providing  sixty (60) days
notice to the  Company,  the  Company  covenants  and agrees  that the number of
Conversion  Shares  issuable upon  conversion  of the  Preferred  Shares and the
number of  Warrant  Shares  issuable  upon any  exercise  of such  Warrant  by a

                                      -14-
<PAGE>

Purchaser  shall not exceed the number of such shares that, when aggregated with
all other  shares of Common  Stock then  owned by a  Purchaser  beneficially  or
deemed  beneficially  owned by a Purchaser,  would result in a Purchaser  owning
more than 4.95% of all of such Common Stock as would be outstanding on such date
of  conversion  or such  date of  exercise  of the  Warrant,  as  determined  in
accordance with Section 16 of the Exchange Act and the  regulations  promulgated
thereunder.

     Section 3.2  REGISTRATION  AND  LISTING.  The Company will cause its Common
Stock to continue to be registered under Sections 12(b) or 12(g) of the Exchange
Act, will comply in all respects with its reporting and filing obligations under
the Exchange Act, will comply with all requirements  related to any registration
statement filed pursuant to this Agreement or the Registration Rights Agreement,
and will not take any action or file any document  (whether or not  permitted by
the Securities Act or the rules promulgated  thereunder) to terminate or suspend
such   registration  or  to  terminate  or  suspend  its  reporting  and  filing
obligations  under the  Exchange  Act or  Securities  Act,  except as  permitted
herein.  The Company  will take all action  necessary to continue the listing or
trading of its Common Stock on Nasdaq or any successor market.

     Section 3.3  INSPECTION  RIGHTS.  The Company shall  permit,  during normal
business hours and upon reasonable request and reasonable notice, each Purchaser
or any employees,  agents or representatives  thereof, so long as such Purchaser
shall  be  obligated  hereunder  to  purchase  the  Preferred  Shares  or  shall
beneficially own any Preferred  Shares, or shall own Conversion Shares which, in
the aggregate,  represent more than 2% of the total combined voting power of all
voting  securities then  outstanding,  for purposes  reasonably  related to such
Purchaser`s  interests as a stockholder to examine and make reasonable copies of
and extracts from the records and books of account of, and visit and inspect the
properties,  assets,  operations and business of the Company and any subsidiary,
and to discuss  the  affairs,  finances  and  accounts  of the  Company  and any
subsidiary with any of its officers, consultants, directors, and key employees.

     Section 3.4 COMPLIANCE WITH LAWS. The Company shall comply,  and cause each
subsidiary to comply,  with all applicable laws, rules,  regulations and orders,
noncompliance with which could have a Material Adverse Effect.

     Section 3.5 KEEPING OF RECORDS AND BOOKS OF ACCOUNT. The Company shall keep
and cause each  subsidiary  to keep  adequate  records and books of account,  in
which  complete  entries  will be  made in  accordance  with  GAAP  consistently
applied,   reflecting  all  financial   transactions  of  the  Company  and  its
subsidiaries,  and in which,  for each  fiscal  year,  all proper  reserves  for
depreciation, depletion, obsolescence,  amortization, taxes, bad debts and other
purposes in connection with its business shall be made.

     Section  3.6  REPORTING  REQUIREMENTS.  If the  Company  ceases to file its
periodic reports with the Commission,  or if the Commission  ceases making these
periodic  reports  available via the Internet  without charge,  then the Company
shall furnish the following to each Purchaser so long as such Purchaser shall be
obligated  hereunder to purchase the Preferred Shares or shall  beneficially own
any Preferred  Shares,  or shall own Conversion  Shares which, in the aggregate,
represent  more  than  2% of the  total  combined  voting  power  of all  voting

                                      -15-
<PAGE>

securities then outstanding:

     (a)  Quarterly  Reports  filed with the  Commission on Form 10-Q as soon as
available, and in any event within forty-five (45) days after the end of each of
the first three fiscal quarters of the Company;

     (b)  Annual  Reports  filed  with the  Commission  on Form  10-K as soon as
available, and in any event within ninety (90) days after the end of each fiscal
year of the Company; and

     (c) Copies of all notices and information,  including,  without limitation,
notices and proxy statements in connection with any meetings,  that are provided
to holders of shares of Common  Stock,  contemporaneously  with the  delivery of
such notices or information to such holders of Common Stock.

     Section 3.7 AMENDMENTS.  The Company shall not amend or waive any provision
of the Certificate or Bylaws of the Company, or Registration Rights Agreement in
any way that would  adversely  affect  the  liquidation  preferences,  dividends
rights,  conversion rights, voting rights or redemption rights of the holders of
the Preferred Shares.

     Section  3.8  OTHER  AGREEMENTS.  The  Company  shall  not  enter  into any
agreement  in which the terms of such  agreement  would  restrict  or impair the
right  or  ability  to  perform  of the  Company  or any  subsidiary  under  any
Transaction Document or the Certificate of Designation.

     Section  3.9  DISTRIBUTIONS.  So long as any  Preferred  Shares or Warrants
remain outstanding,  the Company agrees that it shall not (i) declare or pay any
dividends  or make any  distributions  to any  holder(s) of Common Stock or (ii)
purchase or  otherwise  acquire for value,  directly or  indirectly,  any Common
Stock or other equity security of the Company.

     Section 3.10 STATUS OF DIVIDENDS. The Company covenants and agrees that (i)
no Federal  income tax return or claim for refund of Federal income tax or other
submission to the Internal Revenue Service (the "Service") will adversely affect
the Preferred  Shares,  any other series of its Preferred  Stock,  or the Common
Stock,  and any deduction  shall not operate to jeopardize the  availability  to
Purchasers of the dividends  received deduction provided by Section 243(a)(1) of
the  Code or any  successor  provision  with  the  exception  of such  purported
dividends  being  construed  as a return of  stockholder`s  capital  because  of
insufficient  earnings and profits,  (ii) in no report to shareholders or to any
governmental  body having  jurisdiction  over the Company or  otherwise  will it
treat the Preferred  Shares other than as equity  capital or the dividends  paid
thereon other than as dividends paid on equity capital unless  required to do so
by a governmental  body having  jurisdiction over the accounts of the Company or
by a change in generally accepted accounting  principles required as a result of
action by an authoritative  accounting  standards  setting body, and (iii) other
than pursuant to this Agreement or the Certificate of Designation,  it will take
no  action  which  would  result in the  dividends  paid by the  Company  on the
Preferred  Shares out of the  Company`s  current  or  accumulated  earnings  and

                                      -16-
<PAGE>

profits  being  ineligible  for the  dividends  received  deduction  provided by
Section  243(a)(1) of the Code.  The preceding  sentence  shall not be deemed to
prevent  the  Company  from  designating  the  Preferred  Stock as  "Convertible
Preferred Stock" in its annual and quarterly financial  statements in accordance
with its  prior  practice  concerning  other  series of  preferred  stock of the
Company.  Notwithstanding  the  foregoing,  the Company shall not be required to
restate or modify its tax returns for periods  prior to the Closing Date. In the
event that the Purchasers have  reasonable  cause to believe that dividends paid
by the  Company  on  the  Preferred  Shares  out of  the  Company`s  current  or
accumulated  earnings  and  profits  will not be  treated  as  eligible  for the
dividends  received  deduction provided by Section 243(a)(1) of the Code, or any
successor  provision,  the  Company  will,  at  the  reasonable  request  of the
Purchasers of 51% of the outstanding  Preferred Shares, join with the Purchasers
in the  submission to the Service of a request for a ruling that  dividends paid
on the Shares  will be so  eligible  for  Federal  income tax  purposes,  at the
Purchasers` expense. In addition, the Company will reasonably cooperate with the
Purchasers  (at  Purchasers`  expense)  in  any  litigation,   appeal  or  other
proceeding  challenging or contesting any ruling,  technical advice,  finding or
determination  that  earnings  and profits are not  eligible  for the  dividends
received  deduction  provided by Section 243(a)(1) of the Code, or any successor
provision  to the extent that the  position to be taken in any such  litigation,
appeal,  or other  proceeding  is not  contrary to any  provision of the Code or
incurred in connection  with any such  submission,  litigation,  appeal or other
proceeding.  Notwithstanding  the foregoing,  nothing herein  contained shall be
deemed to preclude  the Company from  claiming a deduction  with respect to such
dividends  if (i) the  Code  shall  hereafter  be  amended,  or  final  Treasury
regulations  thereunder are issued or modified, to provide that dividends on the
Preferred  Shares or  Conversion  Shares  should not be treated as dividends for
Federal income tax purposes or that a deduction with respect to all or a portion
of the dividends on the Shares is allowable for Federal income tax purposes,  or
(ii) in the absence of such an amendment,  issuance or modification  and after a
submission of a request for ruling or technical  advice,  the service shall rule
or advise that  dividends on the shares  should not be treated as dividends  for
Federal income tax purposes. If the Service determines that the Preferred Shares
or Conversion Shares constitute debt, the Company may file protective claims for
refund.

     Section 3.11 INTENTIONALLY OMITTED.

     Section  3.12  FUTURE  FINANCINGS;  RIGHT OF FIRST OFFER AND  REFUSAL.  (a)
During  the period  commencing  on the  Closing  Date and ending on the one year
anniversary after the Effectiveness Date (as defined in the Registration  Rights
Agreement), the Company covenants and agrees that it will not, without the prior
written consent of the Purchasers,  enter into any subsequent  offer or sale to,
or  exchange  with (or  other  type of  distribution  to),  any  third  party (a
"Subsequent  Financing"),   of  Common  Stock  or  any  securities  convertible,
exercisable  or  exchangeable  into  Common  Stock,  including  convertible  and
non-convertible debt securities (collectively, the "Financing Securities") other
than a  Permitted  Financing  (as  defined  hereinafter).  For  purposes of this
Agreement,  "Permitted  Financing" shall mean any transaction  involving (i) the
issuance of any Financing  Securities (other than for cash) in connection with a
Major   Transaction   (as  defined  in  Section  8(c)  of  the   Certificate  of
Designation),  (ii) the issuance of any Financing  Securities in connection with
acquisitions  of the common  stock or assets of  unaffiliated  entities in arm`s
length  transactions in which the Company  receives  securities or assets of the
entities, provided, however, that if any such securities received by the Company

                                      -17-
<PAGE>

or any securities held by the entities or attached to the assets received by the
Company,  rank senior to or pari passu with the Preferred Shares,  the aggregate
value of such securities in all such  transactions may not exceed  $5,000,000 in
the aggregate,  (iii) the issuance of Common Stock or the issuance of options to
purchase  Common Stock as such is related to any employee stock  ownership plan,
(iv) the issuance of Common Stock in an underwritten public offering, or (v) any
transaction  where the first use of proceeds from such transaction would be used
to redeem all of the  Preferred  Shares in  accordance  with Section 8(h) of the
Certificate of Designation.

     (b) Notwithstanding  anything in the foregoing to the contrary, the Company
covenants and agrees that so long as any Preferred Shares are  outstanding,  the
Company will not, without the prior written consent of 75% of the holders of the
outstanding  Preferred  Shares,  enter into any subsequent  offer or sale to, or
exchange  with (or other  type of  distribution  to),  any third  party,  of any
Financing  Securities  whether or not  convertible or  exchangeable  into Common
Stock,  ranking  senior or pari passu to the Preferred  Shares,  except that the
Company may enter into a Permitted Financing.

     (c) During  the period  commencing  on the  Closing  Date and ending on the
first (1st)  anniversary of the  Effectiveness  Date, the Company  covenants and
agrees to promptly  notify (in no event later than five (5) days after making or
receiving an applicable  offer) in writing (a "Rights Notice") the Purchasers of
the terms and conditions of any proposed Subsequent Financing. The Rights Notice
shall describe,  in reasonable detail, the proposed  Subsequent  Financing,  the
proposed closing date of the Subsequent Financing,  which shall be within thirty
(30)  calendar  days  from the date of the  Rights  Notice,  including,  without
limitation,  all of the terms and  conditions  thereof.  The Rights Notice shall
provide the  Purchasers  an option  (the  "Rights  Option")  during the ten (10)
trading days  following  delivery of the Rights Notice (the "Option  Period") to
inform the  Company  whether the  Purchasers  will  purchase  all or part of the
securities  being  offered in such  Subsequent  Financing on the same,  absolute
terms and conditions as contemplated  by such  Subsequent  Financing (the "First
Refusal Rights"). Delivery of any Rights Notice constitutes a representation and
warranty by the Company that there are no other material  terms and  conditions,
arrangements,  agreements or otherwise  except for those disclosed in the Rights
Notice,  to provide  additional  compensation to any party  participating in any
proposed  Subsequent  Financing,  including,  but  not  limited  to,  additional
compensation  based on  changes  in the  Purchase  Price or any type of reset or
adjustment of a purchase or conversion price or to issue  additional  securities
at any time after the closing  date of a  Subsequent  Financing.  If the Company
does not receive  notice of exercise  of the Rights  Option from the  Purchasers
within  the  Option  Period,  the  Company  shall  have the  right to close  the
Subsequent Financing on the scheduled closing date with a third party;  PROVIDED
that  all of the  terms  and  conditions  of the  closing  are the same as those
provided to the Purchasers in the Rights Notice.  If the closing of the proposed
Subsequent   Financing  does  not  occur  on  that  date,  any  closing  of  the
contemplated  Subsequent  Financing or any other  Subsequent  Financing shall be
subject  to all of the  provisions  of this  Section  3.12,  including,  without
limitation,  the delivery of a new Rights Notice. The provisions of this Section
3.12(c) shall not apply to issuances of Financing  Securities in connection with
strategic  partnerships,  a merger or  consolidation of the Company with or into
any other  corporation or corporations and firm commitment  underwritten  public
offerings.

                                      -18-
<PAGE>

     (d) During  the period  commencing  on the  Closing  Date and ending on the
second (2nd)  anniversary  of the Closing Date,  if the Company  enters into any
Subsequent  Financing  on terms  more  favorable  than the terms  governing  the
Preferred Shares,  then the Purchasers in their sole discretion may exchange the
Preferred  Shares together with accrued but unpaid  dividends  (which  dividends
shall be payable,  at the sole option of the Purchasers,  in cash or in the form
of the  new  securities  to be  issued  in the  Subsequent  Financing)  for  the
securities  issued or to be  issued in the  Subsequent  Financing.  The  Company
covenants and agrees to promptly  notify in writing the  Purchasers of the terms
and conditions of any such proposed Subsequent Financing.

     Section 3.13 RESERVATION OF SHARES.  So long as any of the Preferred Shares
or Warrants remain  outstanding,  the Company shall take all action necessary to
at all times have authorized,  and reserved for the purpose of issuance, no less
than 150% of the  aggregate  number of shares of Common  Stock needed to provide
for the  issuance of the  Conversion  Shares and,  except as provided in Section
3(f) of the Warrant, the Warrant Shares.

     Section  3.14  TRANSFER  AGENT   INSTRUCTIONS.   The  Company  shall  issue
irrevocable  instructions  to its transfer  agent,  and any subsequent  transfer
agent,  to issue  certificates,  registered in the name of each Purchaser or its
respective nominee(s),  for the Conversion Shares and the Warrant Shares in such
amounts as  specified  from time to time by each  Purchaser  to the Company upon
conversion  of the  Preferred  Shares or exercise of the Warrants in the form of
Exhibit E attached hereto (the "Irrevocable Transfer Agent Instructions"). Prior
to  registration  of the  Conversion  Shares and the  Warrant  Shares  under the
Securities  Act,  all  such  certificates  shall  bear  the  restrictive  legend
specified  in  Section  6.1 of this  Agreement.  The  Company  warrants  that no
instruction other than the Irrevocable  Transfer Agent Instructions  referred to
in this Section 3.14 will be given by the Company to its transfer agent and that
the 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 Registration
Rights  Agreement.  Nothing in this  Section  3.14 shall  affect in any way each
Purchaser`s  obligations  and agreements set forth in Section 6.1 to comply with
all  applicable  prospectus  delivery  requirements,  if any, upon resale of the
Shares.  If a Purchaser  provides the Company  with an opinion of counsel,  in a
generally  acceptable  form,  to the effect that a public  sale,  assignment  or
transfer of the Shares may be made without registration under the Securities Act
or the Purchaser provides the Company with reasonable assurances that the 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 Conversion Shares
and the Warrant  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  under this Section 3.14 will cause  irreparable
harm to the  Purchasers by vitiating  the intent and purpose of the  transaction
contemplated  hereby.  Accordingly,  the Company acknowledges that the remedy at
law for a breach of its  obligations  under this Section 3.14 will be inadequate
and agrees,  in the event of a breach or threatened breach by the Company of the
provisions  of this Section  3.14,  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.


                                      -19-
<PAGE>

                                   ARTICLE IV

                                   CONDITIONS

     Section 4.1  CONDITIONS  PRECEDENT TO THE OBLIGATION OF THE COMPANY TO SELL
THE  SHARES.  The  obligation  hereunder  of the  Company  to issue and sell the
Preferred  Shares  and  the  Warrants  to  the  Purchasers  is  subject  to  the
satisfaction or waiver, at or before the Closing,  of each of the conditions set
forth below.  These  conditions  are for the  Company`s  sole benefit and may be
waived by the Company at any time in its sole discretion.

     (a)  ACCURACY  OF EACH  PURCHASER`S  REPRESENTATIONS  AND  WARRANTIES.  The
representations  and warranties of each  Purchaser  shall be true and correct in
all  material  respects as of the date when made and as of the  Closing  Date as
though made at that time,  except for  representations  and warranties  that are
expressly made as of a particular  date,  which shall be true and correct in all
material respects as of such date.

     (b)  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 prior to the Closing.

     (c) 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.

     Section 4.2  CONDITIONS  PRECEDENT TO THE  OBLIGATION OF THE  PURCHASERS TO
PURCHASE THE SHARES.  The obligation  hereunder of each Purchaser to acquire and
pay for the Preferred  Shares and the Warrants is subject to the satisfaction or
waiver,  at or before the Closing,  of each of the  conditions  set forth below.
These conditions are for each Purchaser`s sole benefit and may be waived by such
Purchaser at any time in its sole discretion.

     (a) ACCURACY OF THE COMPANY`S  REPRESENTATIONS AND WARRANTIES.  Each of the
representations  and  warranties of the Company shall be true and correct in all
material  respects as of the date when made and as of the Closing Date as though
made at that time (except for  representations and warranties that speak as of a
particular date), which shall be true and correct in all material respects as of
such date.

     (b) 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 prior to the Closing.

     (c) NO SUSPENSION,  ETC. From the date hereof to the Closing Date,  trading
in the Company`s  Common Stock shall not have been  suspended by the  Commission
(except  for any  suspension  of trading of  limited  duration  agreed to by the
Company, which suspension shall be terminated prior to the Closing), and, at any

                                      -20-
<PAGE>

time prior to the  Closing,  trading in  securities  generally  as  reported  by
Bloomberg  Financial  Markets  ("Bloomberg")  shall not have been  suspended  or
limited,  or minimum prices shall not have been  established on securities whose
trades are reported by Bloomberg, or on the New York Stock Exchange, nor shall a
banking  moratorium  have been declared  either by the United States or New York
State  authorities,  nor shall  there have  occurred  any  material  outbreak or
escalation of hostilities or other national or international  calamity or crisis
of such  magnitude  in its  effect  on, or any  material  adverse  change in any
financial  market which, in each case, in the judgment of such Purchaser,  makes
it impracticable or inadvisable to purchase the Preferred Shares.

     (d) 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.

     (e) NO PROCEEDINGS OR LITIGATION.  No action, suit or proceeding before any
arbitrator  or any  governmental  authority  shall have been  commenced,  and no
investigation by any governmental authority shall have been threatened,  against
the Company or any subsidiary,  or any of the officers,  directors or affiliates
of the  Company or any  subsidiary  seeking to  restrain,  prevent or change the
transactions  contemplated by this  Agreement,  or seeking damages in connection
with such transactions.

     (f)  CERTIFICATE  OF DESIGNATION  OF RIGHTS AND  PREFERENCES.  Prior to the
Closing, the Certificate of Designation in the form of Exhibit C attached hereto
shall have been filed with the Secretary of State of Delaware.

     (g) OPINION OF COUNSEL,  ETC. At the  Closing,  the  Purchasers  shall have
received an opinion of counsel to the Company, dated the date of the Closing, in
the form of Exhibit F hereto,  and such other  certificates and documents as the
Purchasers or its counsel shall reasonably require incident to the Closing.

     (h) REGISTRATION RIGHTS AGREEMENT.  At the Closing,  the Company shall have
executed and delivered the Registration Rights Agreement to each Purchaser.

     (i)  CERTIFICATES.  The Company  shall have  executed and  delivered to the
Purchasers the  certificates  (in such  denominations  as such  Purchaser  shall
request) for the Preferred  Shares and Warrants being acquired by such Purchaser
at the Closing.

     (j)  RESOLUTIONS.  The board of directors of the Company shall have adopted
resolutions consistent with Section 2.1(b) above in a form reasonably acceptable
to such Purchaser (the "Resolutions").


     (k)  RESERVATION OF SHARES.  As of the Closing Date, the Company shall have
reserved out of its authorized and unissued Common Stock, solely for the purpose
of effecting  the  conversion  of the  Preferred  Shares and the exercise of the
Warrants,  a number  of shares of  Common  Stock  equal to at least  150% of the

                                      -21-
<PAGE>

aggregate number of Conversion  Shares issuable upon conversion of the Preferred
Shares outstanding on the Closing Date and the number of Warrant Shares issuable
upon  exercise of the number of Warrants  assuming such Warrants were granted on
the Closing Date (after giving  effect to the Preferred  Shares and the Warrants
to be issued on the Closing  Date and  assuming  all such  Preferred  Shares and
Warrants were fully  convertible or  exercisable on such date  regardless of any
limitation on the timing or amount of such conversions or exercises).

     (l)  TRANSFER   AGENT   INSTRUCTIONS.   The   Irrevocable   Transfer  Agent
Instructions,  in the  form of  Exhibit  E  attached  hereto,  shall  have  been
delivered to and acknowledged in writing by the Company`s transfer agent.

     (m)  SECRETARY`S  CERTIFICATE.  The Company  shall have  delivered  to such
Purchaser a secretary`s certificate, dated as of the Closing Date, as to (i) the
Resolutions,  (ii) the  Certificate,  (iii) the Bylaws,  (iv) the Certificate of
Designation,  each as in  effect  at the  Closing,  and (v)  the  authority  and
incumbency of the officers of the Company  executing the  Transaction  Documents
and any other  documents  required  to be executed or  delivered  in  connection
therewith.

     (n)  OFFICER`S  CERTIFICATE.  The  Company  shall  have  delivered  to  the
Purchasers a certificate of an executive officer of the Company, dated as of the
Closing  Date,  confirming  the  accuracy  of  the  Company`s   representations,
warranties and covenants as of the Closing Date and confirming the compliance by
the Company with the  conditions  precedent  set forth in this Section 4.2 as of
the Closing Date.

     (o)  PAYMENT  OF LEGAL  FEES.  The  Company  shall  have  paid all fees and
expenses  owing by the Company to counsel to the  Purchasers in connection  with
all  prior  transactions,   including,   without  limitation,  the  transactions
contemplated hereby and the August Note.

                                   ARTICLE V

                              INTENTIONALLY OMITTED
                                   ARTICLE VI

                            STOCK CERTIFICATE LEGEND

     Section 6.1 LEGEND. Each certificate  representing the Preferred Shares and
the Warrants,  and, if appropriate,  securities issued upon conversion  thereof,
shall be stamped  or  otherwise  imprinted  with a legend  substantially  in the
following  form  (in  addition  to  any  legend  required  by  applicable  state
securities or "blue sky" laws):

           THE   SECURITIES   REPRESENTED   BY   THIS   CERTIFICATE   (THE
           "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
           OF  1933,  AS  AMENDED  (THE  "SECURITIES  ACT")  OR ANY  STATE
           SECURITIES  LAWS AND MAY NOT BE SOLD,  TRANSFERRED OR OTHERWISE

                                      -22-
<PAGE>

           DISPOSED  OF UNLESS  REGISTERED  UNDER THE  SECURITIES  ACT AND
           UNDER APPLICABLE STATE SECURITIES LAWS OR A.B. WATLEY GROUP
           INC. SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT
           REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND
           UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT
           REQUIRED.

     The Company agrees to reissue certificates  representing the Shares without
the legend set forth above if at such time,  prior to making any transfer of any
Shares or Shares,  such holder  thereof shall give written notice to the Company
describing  the manner and terms of such transfer and removal as the Company may
reasonably  request.  Such proposed transfer will not be effected until: (a) the
Company  has  notified  such  holder  that  either (i) in the opinion of Company
counsel,  the  registration  of such  Shares  under  the  Securities  Act is not
required in  connection  with such  proposed  transfer;  or (ii) a  registration
statement  under the Securities Act covering such proposed  disposition has been
filed by the Company  with the  Commission  and has become  effective  under the
Securities Act; and (b) the Company has notified such holder that either: (i) in
the opinion of Company  counsel,  the  registration or  qualification  under the
securities  or "blue sky" laws of any state is not required in  connection  with
such proposed  disposition,  or (ii) compliance with applicable state securities
or "blue sky" laws has been  effected.  The Company will use its best efforts to
respond to any such  notice from a holder  within ten (10) days.  In the case of
any proposed  transfer  under this  Section 6, the Company  will use  reasonable
efforts to comply with any such applicable  state securities or "blue sky" laws,
but shall in no event be required,  in  connection  therewith,  to qualify to do
business in any state where it is not then  qualified or to take any action that
would subject it to tax or to the general  service of process in any state where
it is not then subject.  The  restrictions on transfer  contained in Section 6.1
shall be in addition to, and not by way of limitation of, any other restrictions
on transfer contained in any other section of this Agreement.

                                  ARTICLE VII

                             INTENTIONALLY OMITTED.
                                  ARTICLE VIII

                                 INDEMNIFICATION

     Section 8.1 GENERAL  INDEMNITY.  The Company  agrees to indemnify  and hold
harmless  the  Purchasers  and  any  finder  (and  their  respective  directors,
officers,  affiliates,  agents, successors and assigns) from and against any and
all losses, liabilities,  deficiencies,  costs, damages and expenses (including,
without  limitation,  reasonable  attorneys`  fees,  charges and  disbursements)
incurred by the  Purchasers  as a result of any  inaccuracy  in or breach of the
representations,  warranties  or  covenants  made by the  Company  herein.  Each
Purchaser  severally  but not jointly  agrees to indemnify and hold harmless the
Company and its directors,  officers, affiliates, agents, successors and assigns
from and against any and all losses, liabilities,  deficiencies,  costs, damages

                                      -23-
<PAGE>

and expenses (including, without limitation, reasonable attorneys` fees, charges
and  disbursements)  incurred by the Company as result of any  inaccuracy  in or
breach of the  representations,  warranties or covenants  made by such Purchaser
herein.

     Section   8.2   INDEMNIFICATION    PROCEDURE.   Any   party   entitled   to
indemnification  under this  Article  VIII (an  "indemnified  party")  will give
written notice to the  indemnifying  party of any matters giving rise to a claim
for  indemnification;  provided,  that the  failure  of any  party  entitled  to
indemnification  hereunder  to give notice as provided  herein shall not relieve
the indemnifying  party of its obligations under this Article VIII except to the
extent that the  indemnifying  party is actually  prejudiced  by such failure to
give  notice.  In case any  action,  proceeding  or claim is brought  against an
indemnified party in respect of which  indemnification is sought hereunder,  the
indemnifying  party  shall be  entitled  to  participate  in and,  unless in the
reasonable  judgment of the indemnified  party a conflict of interest between it
and the indemnifying party may exist with respect of such action,  proceeding or
claim, to assume the defense thereof with counsel reasonably satisfactory to the
indemnified  party.  In  the  event  that  the  indemnifying  party  advises  an
indemnified  party  that  it  will  contest  such a  claim  for  indemnification
hereunder,  or fails,  within thirty (30) days of receipt of any indemnification
notice to notify, in writing,  such person of its election to defend,  settle or
compromise,  at its sole cost and expense,  any action,  proceeding or claim (or
discontinues its defense at any time after it commences such defense),  then the
indemnified party may, at its option,  defend, settle or otherwise compromise or
pay such action or claim. In any event,  unless and until the indemnifying party
elects in writing to assume  and does so assume the  defense of any such  claim,
proceeding or action, the indemnified  party`s costs and expenses arising out of
the defense,  settlement or  compromise of any such action,  claim or proceeding
shall be losses subject to  indemnification  hereunder.  The  indemnified  party
shall  cooperate  fully  with  the  indemnifying  party in  connection  with any
negotiation or defense of any such action or claim by the indemnifying party and
shall furnish to the indemnifying party all information  reasonably available to
the indemnified  party which relates to such action or claim.  The  indemnifying
party shall keep the  indemnified  party  fully  apprised at all times as to the
status of the defense or any settlement  negotiations  with respect thereto.  If
the  indemnifying  party  elects to defend  any such  action or claim,  then the
indemnified  party shall be entitled to participate in such defense with counsel
of its choice at its sole cost and expense.  The indemnifying party shall not be
liable for any settlement of any action,  claim or proceeding  effected  without
its prior written consent.  Notwithstanding anything in this Article VIII to the
contrary,  the  indemnifying  party shall not,  without the indemnified  party`s
prior written consent, settle or compromise any claim or consent to entry of any
judgment  in  respect  thereof  which  imposes  any  future  obligation  on  the
indemnified party or which does not include,  as an unconditional  term thereof,
the  giving by the  claimant  or the  plaintiff  to the  indemnified  party of a
release  from all  liability  in  respect  of such  claim.  The  indemnification
required by this Article  VIII shall be made by periodic  payments of the amount
thereof  during the course of  investigation  or defense,  as and when bills are
received or expense,  loss,  damage or  liability  is  incurred,  so long as the
indemnified party  irrevocably  agrees to refund such moneys if it is ultimately
determined by a court of competent jurisdiction that such party was not entitled
to  indemnification.  The  indemnity  agreements  contained  herein  shall be in
addition to (a) any cause of action or similar rights of the  indemnified  party
against  the  indemnifying   party  or  others,  and  (b)  any  liabilities  the
indemnifying party may be subject to pursuant to the law.


                                      -24-
<PAGE>

                                   ARTICLE IX

                                  MISCELLANEOUS

     Section  9.1 FEES AND  EXPENSES.  Except  as  otherwise  set  forth in this
Agreement,  the Registration Rights Agreement or the Certificate of Designation,
each party shall pay the fees and expenses of its advisors, counsel, accountants
and other  experts,  if any,  and all other  expenses,  incurred  by such  party
incident to the negotiation, preparation, execution, delivery and performance of
this  Agreement,  provided that the Company  shall pay, at the Closing,  (i) all
actual   attorneys`   fees  and  expenses   (exclusive  of   disbursements   and
out-of-pocket  expenses)  incurred by the Purchasers up to $50,000 in connection
with the preparation, negotiation, execution and delivery of this Agreement, the
Registration Rights Agreement and the transactions  contemplated  thereunder and
(ii)  consulting  fees and fees in connection  with the preparation of documents
incurred by the  Purchasers in  connection  with the  preparation,  negotiation,
execution and delivery of this Agreement,  the Registration Rights Agreement and
the transactions contemplated thereunder. In addition, the Company shall pay all
reasonable  fees and expenses  incurred by the Purchasers in connection with the
filing and declaration of  effectiveness  by the Commission of the  Registration
Statement (as defined in the  Registration  Rights  Agreement),  any amendments,
modifications  or  waivers  of this  Agreement  or any of the other  Transaction
Documents,  or incurred in connection  with the enforcement of this Agreement or
any of the other  Transaction  Documents,  including,  without  limitation,  all
reasonable  attorneys`  fees and  expenses.  The Company  shall pay all stamp or
other  similar  taxes and  duties  levied in  connection  with  issuance  of the
Preferred Shares pursuant hereto.

     Section 9.2 SPECIFIC ENFORCEMENT,  CONSENT TO JURISDICTION.

     (a) The Company and the Purchasers  acknowledge and agree that  irreparable
damage would occur in the event that any of the  provisions  of this  Agreement,
the  Certificate of Designation or the  Registration  Rights  Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is  accordingly  agreed that the parties  shall be entitled to an  injunction or
injunctions  to prevent or cure breaches of the  provisions of this Agreement or
the  Registration  Rights  Agreement and to enforce  specifically  the terms and
provisions  hereof or thereof,  this being in  addition  to any other  remedy to
which any of them may be entitled by law or equity.

     (b) Each of the Company and the Purchasers (i) hereby  irrevocably  submits
to the exclusive jurisdiction of the United States District Court sitting in the
Southern District of New York and the courts of the State of New York located in
New York county for the purposes of any suit,  action or proceeding  arising out
of or relating to this  Agreement or any of the other  Transaction  Documents or
the  transactions  contemplated  hereby or thereby and (ii) hereby  waives,  and
agrees not to assert in any such suit,  action or proceeding,  any claim that it
is not  personally  subject to the  jurisdiction  of such court,  that the suit,
action or  proceeding is brought in an  inconvenient  forum or that the venue of
the  suit,  action  or  proceeding  is  improper.  Each of the  Company  and the
Purchasers  consents  to  process  being  served  in any such  suit,  action  or
proceeding  by mailing a copy thereof to such party at the address in effect for
notices to it under this Agreement and agrees that such service shall constitute
good and  sufficient  service of process  and  notice  thereof.  Nothing in this

                                      -25-
<PAGE>

Section 9.2 shall affect or limit any right to serve process in any other manner
permitted by law.

     Section 9.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the entire
understanding  of the parties  with respect to the matters  covered  hereby and,
except as specifically set forth herein or in the Transaction Documents, neither
the  Company  nor any of the  Purchasers  makes any  representations,  warranty,
covenant or  undertaking  with  respect to such matters and they  supersede  all
prior  understandings and agreements with respect to said subject matter, all of
which are merged herein. No provision of this Agreement may be waived or amended
other than by a written  instrument  signed by the Company and the holders of at
least  two-thirds  (2/3)  of  the  Preferred  Shares  then  outstanding,  and no
provision hereof may be waived other than by an a written  instrument  signed by
the party against whom enforcement of any such amendment or waiver is sought. No
such amendment shall be effective to the extent that it applies to less than all
of the holders of the Preferred Shares then outstanding.  No consideration shall
be offered or paid to any person to amend or consent to a waiver or modification
of  any  provision  of  any  of  the  Transaction   Documents  unless  the  same
consideration is also offered to all of the parties to the Transaction Documents
or holders of Preferred Shares, as the case may be.

     Section  9.4  NOTICES.  Any  notice,  demand,   request,  waiver  or  other
communication  required or permitted to be given  hereunder  shall be in writing
and shall be effective (a) upon hand  delivery,  by telex (with  correct  answer
back received),  telecopy or facsimile at the address or number designated below
(if delivered on a business day during normal  business  hours where such notice
is to be  received),  or the first  business  day  following  such  delivery (if
delivered  other than on a business day during normal  business hours 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 shall be:


         If to the Company:            A.B. Watley Group Inc.
                                       40 Wall Street
                                       New York, New York 10005
                                       Attention:  Joseph M. Ramos, Jr., Chief
                                                    Financial Officer
                                       Telephone No.:  (212) 422-1664
                                       Facsimile No.:  (212) 422-1724

         with copies to:               Hartman & Craven LLP
                                       460 Park Avenue
                                       New York, New York 10022
                                       Attention:  Joel I. Frank, Esq.
                                       Telephone No.:  (212) 753-7500
                                       Facsimile No:   (212) 223-9911

         If                            to  any  Purchaser:   At  the
                                       address of such Purchaser set
                                       forth  on  Exhibit  A to this

                                      -26-
<PAGE>

                                       Agreement,   with  copies  to
                                       Purchaser`s  counsel  as  set
                                       forth  on  Exhibit  A  or  as
                                       specified  in writing by such
                                       Purchaser with copies to:

                                       Christopher S. Auguste, Esq.
                                       Jenkens & Gilchrist Parker Chapin LLP
                                       The Chrysler Building
                                       405 Lexington Avenue
                                       New York, New York 10174
                                       Telephone No.:  (212) 704-6000
                                       Facsimile No.:  (212) 704-6288

     Any party  hereto may from time to time  change its  address for notices by
giving at least ten (10) days  written  notice of such  changed  address  to the
other party hereto.

     Section 9.5 WAIVERS.  No waiver by any party 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 provisions, condition
or requirement  hereof, nor shall any delay or omission of any party to exercise
any right hereunder in any manner impair the exercise of any such right accruing
to it thereafter.

     Section 9.6 HEADINGS. The article,  section and subsection headings in this
Agreement  are for  convenience  only and  shall not  constitute  a part of this
Agreement  for any other  purpose and shall not be deemed to limit or affect any
of the provisions hereof.

     Section 9.7  SUCCESSORS AND ASSIGNS.  This Agreement  shall be binding upon
and inure to the benefit of the parties and their successors and assigns.  After
the Closing, the assignment by a party to this Agreement of any rights hereunder
shall not affect the obligations of such party under this Agreement.

     Section 9.8 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.

     Section  9.9  GOVERNING  LAW.  This  Agreement  shall  be  governed  by and
construed in accordance with the internal laws of the State of New York, without
giving  effect  to the  choice  of law  provisions.  This  Agreement  shall  not
interpreted  or construed  with any  presumption  against the party causing this
Agreement to be drafted.

     Section 9.10 SURVIVAL.  The  representations  and warranties of the Company
and  the  Purchasers  contained  in  Sections  2.1(o)  and  (s)  should  survive
indefinitely  and those  contained in Article II, with the exception of Sections
2.1(o) and (s), shall survive the execution and delivery  hereof and the Closing
until the date three (3) years from the Closing  Date,  and the  agreements  and
covenants set forth in Articles I, III, V, VIII and IX of this  Agreement  shall
survive the execution and delivery  hereof and the Closing  hereunder  until the
Purchasers in the aggregate beneficially own (determined in accordance with Rule
13d-3 under the Exchange Act) less than 2% of the total combined voting power of
all voting securities then outstanding,  provided,  that Sections 3.1, 3.2, 3.4,
3.5,  3.7,  3.8,  3.9,  3.10,  3.12,  3.13 and 3.14 shall not  expire  until the

                                      -27-
<PAGE>

Registration  Statement  required  by  Section  2  of  the  Registration  Rights
Agreement is no longer  required to be effective  under the terms and conditions
of Registration Rights Agreement.

     Section 9.11 COUNTERPARTS.  This Agreement may be executed in any number of
counterparts,  all of which taken  together  shall  constitute  one and the same
instrument and shall become effective when counterparts have been signed by each
party and delivered to the other parties  hereto,  it being  understood that all
parties  need not sign the same  counterpart.  In the  event  any  signature  is
delivered  by  facsimile  transmission,  the party  using such means of delivery
shall cause four additional executed signature pages to be physically  delivered
to the other parties within five days of the execution and delivery hereof.

     Section 9.12 PUBLICITY.  The Company agrees that it will not disclose,  and
will not include in any public announcement,  the name of the Purchasers without
the consent of the  Purchasers  unless and until such  disclosure is required by
law or applicable regulation, and then only to the extent of such requirement.

     Section  9.13   SEVERABILITY.   The  provisions  of  this  Agreement,   the
Certificate of Designation and the  Registration  Rights Agreement are severable
and, in the event that any court of competent  jurisdiction shall determine that
any one or more of the  provisions or part of the  provisions  contained in this
Agreement,  the Certificate of Designation or the Registration  Rights Agreement
shall,  for any reason,  be held to be invalid,  illegal or unenforceable in any
respect,  such invalidity,  illegality or unenforceability  shall not affect any
other  provision or part of a provision of this  Agreement,  the  Certificate of
Designation or the Registration Rights Agreement shall be reformed and construed
as if such  invalid  or  illegal  or  unenforceable  provision,  or part of such
provision,  had never been contained  herein,  so that such provisions  would be
valid, legal and enforceable to the maximum extent possible.

     Section 9.14 FURTHER ASSURANCES. From and after the date of this Agreement,
upon the request of any  Purchaser or the  Company,  each of the Company and the
Purchasers  shall  execute  and deliver  such  instrument,  documents  and other
writings as may be  reasonably  necessary  or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement, the Preferred
Shares, the Conversion Shares, the Warrants, the Warrant Shares, the Certificate
of Designation, and the Registration Rights Agreement.


                                      -28-
<PAGE>



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


                                       A.B. WATLEY GROUP INC.


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

                                       SDS MERCHANT FUND, L.P.


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


                                       DMG LEGACY INTERNATIONAL LTD.


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

                                       DMG LEGACY INSTITUTIONAL FUND
                                            LLC


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

                                       DMG LEGACY FUND LLC


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





                                      -29-
<PAGE>

                                       ALAN W. STEINBERG LIMITED PARTNERSHIP


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

                                       RIVIERA ENID LIMITED PARTNERSHIP


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


                                      -30-
<PAGE>


                                EXHIBIT A to the
             SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
                           FOR A.B. WATLEY GROUP INC.
<TABLE>
<CAPTION>


NAMES AND ADDRESSES                   NUMBER OF PREFERRED SHARES     DOLLAR AMOUNT         VALUE OF AUGUST
OF PURCHASERS                         & WARRANTS PURCHASED           OF INVESTMENT         NOTE EXCHANGED
-------------                         --------------------           -------------         --------------

<S>                                   <C>                            <C>                   <C>
SDS Merchant Fund, L.P.               Preferred Shares: 345          $3,450,000             $2,791,709
a Delaware limited partnership        Warrants: 876,990
c/o SDS Capital Partners
One Sound Shore Drive
Greenwich, CT 06830
Attention: Steve Derby
Fax no.: (203) 629-0345

DMG Legacy International Ltd.         Preferred Shares: 141          $1,410,000             $0
a British Virgin Islands company      Warrants: 358,422
c/o DMG Advisors LLC
One Sound Shore Drive
Greenwich, CT 06830
Attention: General Counsel
Fax no.: (203) 629-0345

DMG Legacy Institutional Fund LLC     Preferred Shares: 84           $840,000               $0
a Delaware limited liability company  Warrants: 213,528
c/o DMG Advisors LLC
One Sound Shore Drive
Greenwich, CT 06830
Attention: General Counsel
Fax no.: (203) 629-0345

DMG Legacy Fund LLC                   Preferred Shares: 10           $100,000               $0
a Delaware limited liability company  Warrants: 25,420
c/o DMG Advisors LLC
One Sound Shore Drive
Greenwich, CT 06830
Attention: General Counsel
Fax no.: (203) 629-0345

Alan W. Steinberg Limited             Preferred Shares: 35           $350,000               $0
  Partnership                         Warrants: 88,970
a New York Limited Partnership
1501 Venera Avenue, Suite 205
Coral Gables, FL 33146
Attention: Gary Frohman
Fax no.: (305) 667-5632

Riviera Enid Limited Partnership      Preferred Shares: 15           $150,000           $0
a Florida Limited Partnership         Warrants: 38,130
1501 Venera Avenue, Suite 205
Coral Gables, FL 33146
Attention: Gary Frohman
Fax no.: (305) 667-5632
</TABLE>



                                      -31-
<PAGE>



                                EXHIBIT B TO THE
           SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
                             A.B. WATLEY GROUP INC.


                            FORM OF SERIES A WARRANT


                                      -32-
<PAGE>



                                EXHIBIT C TO THE
           SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
                             A.B. WATLEY GROUP INC.


                       FORM OF CERTIFICATE OF DESIGNATION


                                      -32-
<PAGE>



                                EXHIBIT D TO THE
           SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
                             A.B. WATLEY GROUP INC.


                      FORM OF REGISTRATION RIGHTS AGREEMENT


                                      -33-
<PAGE>



                                EXHIBIT E TO THE
           SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
                             A.B. WATLEY GROUP INC.


                 FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS

                             A.B. WATLEY GROUP INC.



                                                    as of November __, 2001


American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Attn:  _____________


LADIES AND GENTLEMEN:

     Reference  is made to that certain  Series A  Convertible  Preferred  Stock
Purchase  Agreement,  dated as of November  __, 2001,  by and among A.B.  Watley
Group Inc., a Delaware  corporation  (the  "COMPANY"),  and the purchasers named
therein  (collectively,  the  "PURCHASERS")  pursuant  to which the  Company  is
issuing to the Purchasers  shares of its Series A Convertible  Preferred  Stock,
par value $.01 per share (the "PREFERRED SHARES"), and warrants (the "WARRANTS")
to purchase shares of the Company`s common stock, par value $.001 per share (the
"COMMON  STOCK"),  in connection with the sale and issuance of Preferred  Shares
and  Warrants  to the  Purchasers.  This letter  shall serve as our  irrevocable
authorization  and direction to you (provided that you are the transfer agent of
the Company at such time) to issue shares of Common Stock upon conversion of the
Preferred  Shares (the  "CONVERSION  SHARES") and exercise of the Warrants  (the
"WARRANT SHARES") to or upon the order of a Purchaser from time to time upon (i)
surrender to you of a properly completed and duly executed  Conversion Notice or
Exercise  Notice,  as the case may be, in the form attached  hereto as Exhibit I
and Exhibit II,  respectively,  (ii) in the case of the  conversion of Preferred
Shares, a copy of the certificates (with the original certificates  delivered to
the Company)  representing  Preferred  Shares being converted or, in the case of
Warrants being  exercised,  a copy of the Warrants  (with the original  Warrants
delivered to the Company) being exercised (or, in each case, an  indemnification
undertaking with respect to such share  certificates or the warrants in the case
of their loss, theft or destruction),  and (iii) delivery of a treasury order or
other  appropriate  order  duly  executed  by a duly  authorized  officer of the
Company. So long as you have previously  received (x) written  confirmation from
counsel to the Company that a  registration  statement  covering  resales of the
Conversion Shares or Warrant Shares, as applicable,  has been declared effective
by the Securities and Exchange  Commission  (the "SEC") under the Securities Act
of 1933, as amended (the "1933 ACT"), and no subsequent notice by the Company or
its counsel of the suspension or termination of its effectiveness and (y) a copy
of such registration statement,  and if the Purchaser represents in writing that
the  Conversion  Shares or the  Warrant  Shares,  as the case may be,  were sold
pursuant to the  Registration  Statement,  then  certificates  representing  the
Conversion Shares and the Warrant Shares, as the case may be, shall not bear any
legend restricting  transfer of the Conversion Shares and the Warrant Shares, as
the  case  may be,  thereby  and  should  not be  subject  to any  stop-transfer
restriction.  Provided,  however,  that if you have not previously  received (i)
written  confirmation from counsel to the Company that a registration  statement


                                      -34-
<PAGE>

covering resales of the Conversion Shares or Warrant Shares, as applicable,  has
been  declared  effective by the SEC under the 1933 Act, and (ii) a copy of such
registration statement,  then the certificates for the Conversion Shares and the
Warrant Shares shall bear the following legend:

                     "THE SECURITIES  REPRESENTED BY THIS  CERTIFICATE HAVE
            NOT BEEN  REGISTERED  UNDER  THE  SECURITIES  ACT OF  1933,  AS
            AMENDED (THE  "SECURITIES  ACT"), OR ANY STATE  SECURITIES LAWS
            AND MAY NOT BE  SOLD,  TRANSFERRED  OR  OTHERWISE  DISPOSED  OF
            UNLESS  REGISTERED UNDER THE SECURITIES ACT OR APPLICABLE STATE
            SECURITIES  LAWS, OR A.B. WATLEY GROUP INC. SHALL HAVE RECEIVED
            AN OPINION OF ITS COUNSEL THAT  REGISTRATION OF SUCH SECURITIES
            UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE
            STATE SECURITIES LAWS IS NOT REQUIRED."

and,  provided  further,  that the  Company  may from time to time notify you to
place  stop-transfer  restrictions on the certificates for the Conversion Shares
and the  Warrant  Shares  in the event a  registration  statement  covering  the
Conversion Shares and the Warrant Shares is subject to amendment for events then
current.

     A  form  of  written  confirmation  from  counsel  to  the  Company  that a
registration statement covering resales of the Conversion Shares and the Warrant
Shares has been  declared  effective  by the SEC under the 1933 Act is  attached
hereto as Exhibit III.

     Please  execute  this letter in the space  indicated  to  acknowledge  your
agreement  to act in  accordance  with these  instructions.  Should you have any
questions concerning this matter, please contact me at ___________.

                                       Very truly yours,

                                       A.B. WATLEY GROUP INC.


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

ACKNOWLEDGED AND AGREED:

AMERICAN STOCK TRANSFER & TRUST COMPANY

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


                                      -35-
<PAGE>



                                    EXHIBIT I
                                    ---------

                             A.B. WATLEY GROUP INC.
                                CONVERSION NOTICE

Reference is made to the  Certificate of Designation of the Relative  Rights and
Preferences  of the Series A  Preferred  Stock of A.B.  Watley  Group Inc.  (the
"Certificate  of   Designation").   In  accordance  with  and  pursuant  to  the
Certificate of Designation,  the undersigned hereby elects to convert the number
of shares of Series A Preferred  Stock, par value $.01 per share (the "Preferred
Shares"),  of A.B. Watley Group Inc., a Delaware  corporation  (the  "Company"),
indicated  below into  shares of Common  Stock,  par value  $.001 per share (the
"Common  Stock"),  of  the  Company,  by  tendering  the  stock   certificate(s)
representing  the share(s) of Preferred  Shares  specified  below as of the date
specified below.

         Date of Conversion:
                                                     --------------------------

         Number of Preferred Shares to be converted:
                                                     --------------------------

         Stock certificate no(s). of Preferred Shares to be converted:
                                                                       --------

     The shares of Common  Stock  have been sold  pursuant  to the  Registration
Statement (as defined in the Registration Rights Agreement): YES ____ NO____

Please confirm the following information:

         Conversion Price:
                                                     --------------------------

         Number of shares of Common Stock
         to be issued:
                                                     --------------------------

Please  issue the  Common  Stock  into  which  the  Preferred  Shares  are 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:


                                 PRICES ATTACHED



                                      -36-
<PAGE>



                                   EXHIBIT II

                             FORM OF EXERCISE NOTICE

                                  EXERCISE FORM

                             A.B. WATLEY GROUP INC.



The  undersigned  _______________,  pursuant  to the  provisions  of the  within
Warrant,  hereby elects to purchase _____ shares of Common Stock of A.B.  Watley
Group Inc. covered by the within Warrant.

Dated: _________________            Signature        ___________________________

                                    Address          _____________________

                                                     _____________________


                                   ASSIGNMENT

FOR VALUE RECEIVED,  _________________  hereby sells, assigns and transfers unto
__________________  the within Warrant and all rights evidenced thereby and does
irrevocably constitute and appoint _____________, attorney, to transfer the said
Warrant on the books of the within named corporation.

Dated: _________________            Signature        ___________________________

                                            Address  _____________________

                                                     _____________________


                               PARTIAL ASSIGNMENT

FOR VALUE RECEIVED,  _________________  hereby sells, assigns and transfers unto
__________________  the right to  purchase  _________  shares of  Warrant  Stock
evidenced  by the within  Warrant  together  with all rights  therein,  and does
irrevocably  constitute and appoint  ___________________,  attorney, to transfer
that part of the said Warrant on the books of the within named corporation.

Dated: _________________            Signature        ___________________________

                                            Address  _____________________

                                                     _____________________

                           FOR USE BY THE ISSUER ONLY:

This Warrant No. W-_____  canceled (or  transferred or exchanged) this _____ day
of  ___________,  _____,  shares of Common Stock issued  therefor in the name of
_______________,  Warrant No.  W-_____ issued for ____ shares of Common Stock in
the name of _______________.


                                      -36-
<PAGE>



                                   EXHIBIT III
                                   -----------

                         FORM OF NOTICE OF EFFECTIVENESS
                            OF REGISTRATION STATEMENT


American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Attn:  _____________

                  Re:      A.B. WATLEY GROUP INC.
                           ---------------------

Ladies and Gentlemen:

     We are counsel to A.B.  Watley  Group  Inc.,  a Delaware  corporation  (the
"COMPANY"),  and have  represented  the Company in connection  with that certain
Series  A  Convertible   Preferred  Stock  Purchase   Agreement  (the  "PURCHASE
AGREEMENT"),  dated as of November  __,  2001,  by and among the Company and the
purchasers named therein (collectively,  the "PURCHASERS") pursuant to which the
Company  issued to the Purchasers  shares of its Series A Convertible  Preferred
Stock,  par value $.01 per share (the  "PREFERRED  SHARES"),  and warrants  (the
"WARRANTS") to purchase  shares of the Company`s  common stock,  par value $.001
per share (the "COMMON STOCK").  Pursuant to the Purchase Agreement, the Company
has also entered into a Registration  Rights  Agreement with the Purchasers (the
"REGISTRATION  RIGHTS  AGREEMENT"),  dated as of November __, 2001,  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  Preferred  Shares and
exercise of the  Warrants,  under the  Securities  Act of 1933,  as amended (the
"1933 ACT"). In connection with the Company`s obligations under the Registration
Rights Agreement,  on  ________________,  2001, 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 resale
of the Registrable  Securities  which names each of the present  Purchasers 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  accordingly,  the
Registrable  Securities  are available for resale under the 1933 Act pursuant to
the Registration Statement.

                                             Very truly yours,

                                             [COMPANY COUNSEL]


                                             By:
                                                -------------------------------


cc:      [LIST NAMES OF PURCHASERS]

                                      -37-
<PAGE>




                                EXHIBIT F TO THE
           SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
                             A.B. WATLEY GROUP INC.


                           FORM OF OPINION OF COUNSEL


     1. The Company is a corporation duly incorporated,  validly existing and in
good  standing  under the laws of the state of  Delaware  and has the  requisite
corporate  power to own,  lease and operate its  properties  and assets,  and to
carry on its business as presently conducted. The Company is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted or property owned by it makes such
qualification necessary.

     2. The Company has the  requisite  corporate  power and  authority to enter
into and perform its obligations  under the  Transaction  Documents and to issue
the Preferred  Stock, the Warrants and the Common Stock issuable upon conversion
of the Preferred Stock and exercise of the Warrants. The execution, delivery and
performance  of  each  of the  Transaction  Documents  by the  Company  and  the
consummation by it of the transactions  contemplated  thereby have been duly and
validly  authorized by all necessary  corporate action and no further consent or
authorization  of the  Company  or its board of  directors  or  stockholders  is
required.  Each  of the  Transaction  Documents  have  been  duly  executed  and
delivered,  and the Preferred  Stock and the Warrants  have been duly  executed,
issued  and  delivered  by the  Company  and each of the  Transaction  Documents
constitutes a legal,  valid and binding  obligation  of the Company  enforceable
against the Company in accordance  with its respective  terms.  The Common Stock
issuable upon conversion of the Preferred Stock and exercise of the Warrants are
not subject to any preemptive rights under the Certificate of Incorporation,  as
amended, or the Bylaws.

     3. The Preferred Stock and the Warrants have been duly authorized and, when
delivered against payment in full as provided in the Purchase Agreement, will be
validly  issued,  fully  paid and  nonassessable.  The  shares of  Common  Stock
issuable upon  conversion  of the Preferred  Stock and exercise of the Warrants,
have been duly  authorized  and reserved for issuance,  and, when delivered upon
conversion  or  against  payment  in  full as  provided  in the  Certificate  of
Designation and the Warrants, as applicable,  will be validly issued, fully paid
and nonassessable.

     4. The execution, delivery and performance of and compliance with the terms
of the  Transaction  Documents  and the  issuance of the  Preferred  Stock,  the
Warrants and the Common Stock  issuable upon  conversion of the Preferred  Stock
and exercise of the Warrants do not (i) violate any provision of the Certificate
of  Incorporation,  as amended,  or Bylaws,  (ii) conflict with, or constitute a
default (or an event  which with notice or lapse of time or both would  become a
default)  under,  or  give to  others  any  rights  of  termination,  amendment,
acceleration  or  cancellation  of, any material  agreement,  mortgage,  deed of
trust, indenture, note, bond, license, lease agreement, instrument or obligation
to which the Company is a party and which is known to us, (iii) create or impose
a lien, charge or encumbrance on any property of the Company under any agreement
or any  commitment  known to us to which the  Company is a party or by which the
Company  is bound or by which any of its  respective  properties  or assets  are
bound,  or (iv) result in a violation  of any federal,  state,  local or foreign
statute,  rule,  regulation,  order,  judgment,  injunction or decree (including
Federal and state securities laws and regulations)  applicable to the Company or
by which any property or asset of the Company is bound or affected,  except,  in
all  cases  other  than  violations  pursuant  to  clause  (i)  above,  for such
conflicts, default, terminations,  amendments,  acceleration,  cancellations and
violations  as would  not,  individually  or in the  aggregate,  have a Material
Adverse Effect.


                                      -38-
<PAGE>

     5. No consent, approval or authorization of or designation,  declaration or
filing with any  governmental  authority  on the part of the Company is required
under  Federal,  state or local law, rule or  regulation in connection  with the
valid execution and delivery of the Transaction Documents, or the offer, sale or
issuance of the Preferred  Stock, the Warrants or the Common Stock issuable upon
conversion  of the Preferred  Stock and exercise of the Warrants  other than the
Certificate of Designation and the Registration Statement.

     6. There is no action, suit, claim, investigation or proceeding pending or,
to our knowledge, threatened against the Company which questions the validity of
this Agreement or the transactions contemplated hereby or any action taken or to
be  taken  pursuant  hereto  or  thereto.  There  is  no  action,  suit,  claim,
investigation or proceeding pending, or to our knowledge, threatened, against or
involving the Company or any of its properties or assets and which, if adversely
determined,  is reasonably likely to result in a Material Adverse Effect.  There
are no  outstanding  orders,  judgments,  injunctions,  awards or decrees of any
court,  arbitrator or governmental or regulatory body against the Company or any
officers or directors of the Company in their capacities as such.

     7. The offer, issuance and sale of the Preferred Stock and the Warrants and
the  offer,  issuance  and sale of the  shares of  Common  Stock  issuable  upon
conversion of the Preferred  Stock and exercise of the Warrants  pursuant to the
Purchase  Agreement,  the  Certificate  of  Designation  and  the  Warrants,  as
applicable, are exempt from the registration requirements of the Securities Act.

     8. The Company is not, and as a result of and immediately upon Closing will
not be, an  "investment  company" or a company  "controlled"  by an  "investment
company," within the meaning of the Investment Company Act of 1940, as amended.


                                        Very truly yours,


                                        HARTMAN & CRAVEN LLP


                                      -39-


<PAGE>