EXHIBIT 4.2


                           RCG COMPANIES INCORPORATED

                   CERTIFICATE OF DESIGNATION OF PREFERENCES,
                             RIGHTS AND LIMITATIONS
                                       OF
                     SERIES A 6% CONVERTIBLE PREFERRED STOCK

                         PURSUANT TO SECTION 151 OF THE
                        DELAWARE GENERAL CORPORATION LAW

         The undersigned,  Michael Pruitt,  Chief Executive  Officer and Melinda
Morris Zanoni, Secretary, do hereby certify that:

         1. They are the President and Secretary, respectively, of RCG Companies
Incorporated, a Delaware corporation (the "Corporation").

         2.  The  Corporation  is  authorized  to  issue  10,000,000  shares  of
preferred stock, none of which have been issued.

         3.  The  following  resolutions  were  duly  adopted  by the  Board  of
Directors:

         WHEREAS,  the Certificate of Incorporation of the Corporation  provides
for a class of its  authorized  stock known as  preferred  stock,  comprised  of
10,000,000  shares,  $0.01 par value,  issuable from time to time in one or more
series;

         WHEREAS, the Board of Directors of the Corporation is authorized to fix
the dividend rights, dividend rate, voting rights, conversion rights, rights and
terms of redemption and liquidation preferences of any wholly unissued series of
preferred  stock and the  number  of  shares  constituting  any  Series  and the
designation thereof, of any of them; and

         WHEREAS, it is the desire of the Board of Directors of the Corporation,
pursuant  to its  authority  as  aforesaid,  to  fix  the  rights,  preferences,
restrictions  and other  matters  relating to a series of the  preferred  stock,
which shall consist of, except as otherwise set forth in the Purchase Agreement,
up to  6,000  shares  of the  preferred  stock  which  the  corporation  has the
authority to issue, as follows:

         NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby
provide for the issuance of a series of preferred  stock for cash or exchange of
other  securities,  rights or  property  and does hereby fix and  determine  the
rights,  preferences,  restrictions and other matters relating to such series of
preferred stock as follows:


<PAGE>

                            TERMS OF PREFERRED STOCK

         Section 1.  Designation,  Amount and  Ranking.  The series of preferred
stock shall be designated as its Series A 6%  Convertible  Preferred  Stock (the
"Preferred  Stock") and the number of shares so designated shall be 6,000 (which
shall not be subject to  increase  without  the consent of all of the holders of
the Preferred Stock (each, a "Holder" and  collectively,  the "Holders")).  Each
share of Preferred  Stock shall have a stated value equal to $1,000 (the "Stated
Value").  Capitalized  terms not otherwise defined herein shall have the meaning
given such terms in Section 8 hereof.

         Section 2. Dividends.

                  (a) Holders  shall be entitled to receive and the  Corporation
         shall pay, cumulative  dividends at the rate per share (as a percentage
         of the  Stated  Value  per  share)  of 6% per  annum  from  the date of
         issuance,  payable  quarterly  on  March  1,  June 1,  September  1 and
         December 1, beginning with December 1, 2004 and on any Conversion  Date
         pursuant to the terms  hereunder  (except  that,  if such date is not a
         Trading  Day,  the payment  date shall be the next  succeeding  Trading
         Day)("Dividend  Payment Date").  The form of dividend  payments to each
         Holder shall be made in the following  order:  (i) if funds are legally
         available for the payment of dividends and the Equity  Conditions  have
         not been met, in cash only, (ii) if funds are legally available for the
         payment of dividends  and the Equity  Conditions  have been met, at the
         sole  election of the  Corporation,  in cash or shares of Common  Stock
         which shall be valued  solely for such purpose at 90% of the average of
         the 5 VWAPs  immediately  prior to the Dividend  Payment Date; (iii) if
         funds are not legally  available  for the payment of dividends  and the
         Equity  Conditions have been met, in shares of Common Stock which shall
         be valued at 90% of the average of the 5 VWAPs immediately prior to the
         Dividend Payment Date; (iv) if funds are not legally  available for the
         payment of dividends and the Equity Conditions relating to registration
         have  been  waived  by  such  Holder,   as  to  such  Holder  only,  in
         unregistered shares of Common Stock which shall be valued at 90% of the
         average of the 5 VWAPs  immediately prior to the Dividend Payment Date;
         and (v) if funds are not legally available for the payment of dividends
         and the Equity  Conditions  have not been met, then, at the election of
         such Holder,  such dividends shall accrue to the next Dividend  Payment
         Date or shall be accreted to the outstanding  Stated Value. The Holders
         shall have the same rights and remedies with respect to the delivery of
         any such shares as if such shares were being issued pursuant to Section
         5. As of the Closing Date, the  Corporation  is lawfully  unable to pay
         dividends in cash. The Corporation shall promptly notify the Holders at
         any time the Corporation  shall become able or unable,  as the case may
         be, to lawfully pay cash dividends.  If at any time the Corporation has
         the right to pay  dividends in cash or Common  Stock,  the  Corporation
         must  provide the Holder with at least 15 Trading  Days'  notice of its
         election  to  pay a  regularly  scheduled  dividend  in  Common  Stock.
         Dividends on the Preferred  Stock shall be calculated on the basis of a
         360-day year, shall accrue daily commencing on the Original Issue Date,
         and shall be deemed to accrue  from such date  whether or not earned or
         declared and whether or not there are  profits,  surplus or other funds
         of the  Corporation  legally  available  for the payment of  dividends.
         Except as otherwise  provided  herein,  if at any time the  Corporation
         pays  dividends  partially in cash and  partially in shares,  then such


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<PAGE>

         payment shall be  distributed  ratably among the Holders based upon the
         number of shares of Preferred Stock held by each Holder. Any dividends,
         whether paid in cash or shares,  that are not paid within three Trading
         Days  following a Dividend  Payment  Date shall  continue to accrue and
         shall entail a late fee, which must be paid in cash, at the rate of 18%
         per annum or the lesser rate  permitted by applicable law (such fees to
         accrue daily,  from the Dividend Payment Date through and including the
         date of payment).

                   (b) So long as any Preferred Stock shall remain  outstanding,
         neither  the  Corporation  nor any  subsidiary  thereof  shall  redeem,
         purchase  or  otherwise  acquire  directly  or  indirectly  any  Junior
         Securities.  So long as any Preferred  Stock shall remain  outstanding,
         neither the  Corporation  nor any subsidiary  thereof shall directly or
         indirectly pay or declare any dividend or make any distribution  (other
         than a dividend or distribution described in Section 5 or dividends due
         and paid in the ordinary  course on preferred  stock of the Corporation
         at such times when the  Corporation  is in compliance  with its payment
         and other  obligations  hereunder)  upon, nor shall any distribution be
         made in  respect  of, any Junior  Securities  so long as any  dividends
         currently  due on the  Preferred  Stock  remain  unpaid,  nor shall any
         monies  be set aside  for or  applied  to the  purchase  or  redemption
         (through  a sinking  fund or  otherwise)  of any Junior  Securities  or
         shares pari passu with the Preferred Stock.

                  (c) The Corporation  acknowledges  and agrees that the capital
         of the  Corporation (as such term is used in Section 151 of the General
         Corporation  Law of Delaware) in respect of the Preferred Stock and any
         future issuances of the  Corporation's  capital stock shall be equal to
         the aggregate par value of such Preferred  Stock or capital  stock,  as
         the case  may be,  and  that,  on or  after  the  date of the  Purchase
         Agreement,  it shall not increase the capital of the  Corporation  with
         respect to any shares of the  Corporation's  capital  stock  issued and
         outstanding on such date. The Corporation also  acknowledges and agrees
         that it shall not create any special  reserves under Section 171 of the
         General  Corporation Law of Delaware  without the prior written consent
         of each Holder.

         Section 3. Voting Rights.  Except as otherwise  provided  herein and as
otherwise  required by law,  the  Preferred  Stock shall have no voting  rights.
However,  so  long  as any  shares  of  Preferred  Stock  are  outstanding,  the
Corporation shall not, without the affirmative vote of the Holders of the shares
of the  Preferred  Stock then  outstanding,  (a) alter or change  adversely  the
powers,  preferences  or rights given to the  Preferred  Stock or alter or amend
this  Certificate  of  Designation,  (b)  authorize or create any class of stock
ranking as to dividends, redemption or distribution of assets upon a Liquidation
(as  defined  in  Section  4)  senior  to the  Preferred  Stock,  (c)  amend its
certificate  of  incorporation  or  other  charter  documents  so as  to  affect
adversely  any rights of the  Holders,  (d) increase  the  authorized  number of
shares of Preferred  Stock,  or (e) enter into any agreement with respect to the
foregoing.

         Section 4. Liquidation. Upon any liquidation, dissolution or winding-up
of the  Corporation,  whether  voluntary or involuntary (a  "Liquidation"),  the
Holders  shall be  entitled  to receive  out of the  assets of the  Corporation,
whether such assets are capital or surplus, for each share of Preferred Stock an
amount equal to the Stated Value per share plus any accrued and unpaid dividends


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<PAGE>

thereon  and any other  fees or  liquidated  damages  owing  thereon  before any
distribution  or payment shall be made to the holders of any Junior  Securities,
and if the assets of the  Corporation  shall be insufficient to pay in full such
amounts,  then the  entire  assets to be  distributed  to the  Holders  shall be
distributed among the Holders ratably in accordance with the respective  amounts
that would be payable on such shares if all amounts payable thereon were paid in
full. A Fundamental  Transaction or Change of Control  Transaction  shall not be
treated as a Liquidation.  The Corporation shall mail written notice of any such
Liquidation,  not less than 45 days prior to the payment date stated therein, to
each record Holder.

         Section 5. Conversion.

                  (a) (i)  Conversions  at  Option  of  Holder.  Each  share  of
                  Preferred  Stock  shall be  convertible  into  that  number of
                  shares of Common Stock (subject to the  limitations  set forth
                  in Section  5(a)(ii))  determined by dividing the Stated Value
                  of such  share of  Preferred  Stock by the Set  Price,  at the
                  option of the  Holder,  at any time and from time to time from
                  and  after the  Original  Issue  Date.  Holders  shall  effect
                  conversions  by  providing  the  Corporation  with the form of
                  conversion  notice  attached  hereto as Annex A (a "Conversion
                  Notice").  Each Conversion  Notice shall specify the number of
                  shares  of  Preferred  Stock to be  converted,  the  number of
                  shares of  Preferred  Stock owned prior to the  conversion  at
                  issue,   the  number  of  shares  of  Preferred   Stock  owned
                  subsequent  to the  conversion  at issue and the date on which
                  such conversion is to be effected, which date may not be prior
                  to the date the Holder delivers such Conversion  Notice to the
                  Corporation  by  facsimile  (the  "Conversion  Date").  If  no
                  Conversion  Date is  specified  in a  Conversion  Notice,  the
                  Conversion Date shall be the date that such Conversion  Notice
                  to  the  Corporation  is  deemed  delivered   hereunder.   The
                  calculations  and entries set forth in the  Conversion  Notice
                  shall  control in the  absence  of  manifest  or  mathematical
                  error.

                           (ii) Beneficial Ownership Limitation. The Corporation
                  shall not effect any  conversion of the Preferred  Stock,  and
                  the Holder  shall not have the right to convert any portion of
                  the Preferred  Stock to the extent that after giving effect to
                  such  conversion,  the  Holder  (together  with  the  Holder's
                  affiliates), as set forth on the applicable Conversion Notice,
                  would  beneficially  own in excess  of 4.99% of the  number of
                  shares  of the  Common  Stock  outstanding  immediately  after
                  giving  effect  to  such  conversion.   For  purposes  of  the
                  foregoing  sentence,  the  number of  shares  of Common  Stock
                  beneficially  owned by the  Holder  and its  affiliates  shall
                  include  the number of shares of Common  Stock  issuable  upon
                  conversion  of the  Preferred  Stock with respect to which the
                  determination  of such  sentence  is  being  made,  but  shall
                  exclude  the number of shares of Common  Stock  which would be
                  issuable upon (A)  conversion of the  remaining,  nonconverted
                  Stated  Value of  Preferred  Stock  beneficially  owned by the
                  Holder or any of its affiliates and (B) exercise or conversion
                  of the  unexercised  or  nonconverted  portion  of  any  other
                  securities of the Corporation (including the Warrants) subject
                  to a limitation  on  conversion  or exercise  analogous to the
                  limitation  contained herein  beneficially owned by the Holder
                  or any of its affiliates. Except as set forth in the preceding


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<PAGE>

                  sentence,  for purposes of this Section  5(a)(ii),  beneficial
                  ownership shall be calculated in accordance with Section 13(d)
                  of  the  Exchange  Act.  To the  extent  that  the  limitation
                  contained in this Section 5(a)(ii) applies,  the determination
                  of whether the Preferred  Stock is convertible (in relation to
                  other  securities  owned  by  the  Holder  together  with  any
                  affiliates)   and  of  which  shares  of  Preferred  Stock  is
                  convertible  shall be in the sole  discretion  of such Holder,
                  and the  submission of a Conversion  Notice shall be deemed to
                  be such  Holder's  determination  of  whether  the  shares  of
                  Preferred  Stock  may  be  converted  (in  relation  to  other
                  securities  owned by such  Holder)  and  which  shares  of the
                  Preferred Stock is  convertible,  in each case subject to such
                  aggregate  percentage  limitations.  To ensure compliance with
                  this  restriction,  the Holder will be deemed to  represent to
                  the Corporation each time it delivers a Conversion Notice that
                  such Conversion  Notice has not violated the  restrictions set
                  forth in this  paragraph  and the  Corporation  shall  have no
                  obligation   to  verify  or  confirm  the   accuracy  of  such
                  determination.  For  purposes  of this  Section  5(a)(ii),  in
                  determining the number of outstanding  shares of Common Stock,
                  the  Holder may rely on the  number of  outstanding  shares of
                  Common Stock as reflected in the most recent of the following:
                  (A) the  Corporation's  most recent Form 10-Q or Form 10-K, as
                  the case may be, (B) a more recent public  announcement by the
                  Corporation or (C) any other written notice by the Corporation
                  or the  Corporation's  transfer agent setting forth the number
                  of shares of Common  Stock  outstanding.  Upon the  written or
                  oral request of the Holder,  the Corporation  shall within two
                  Trading Days  confirm  orally and in writing to the Holder the
                  number  of shares of Common  Stock  then  outstanding.  In any
                  case, the number of  outstanding  shares of Common Stock shall
                  be  determined  after  giving  effect  to  the  conversion  or
                  exercise  of  securities  of the  Corporation,  including  the
                  Preferred  Stock,  by the Holder or its  affiliates  since the
                  date as of which such number of  outstanding  shares of Common
                  Stock was reported.

                           (iii)   Limitation  on  Number  of  Shares  Issuable.
                  Notwithstanding   anything   herein  to  the   contrary,   the
                  Corporation shall not issue to any Holder any shares of Common
                  Stock,  including  pursuant to any rights  herein,  including,
                  without  limitation,  any conversion  rights or right to issue
                  shares of Common Stock in payment of dividends,  to the extent
                  such  shares,  when  added to the  number  of shares of Common
                  Stock  previously  issued  upon  conversion  of any  shares of
                  Preferred  Stock  pursuant  to Section  5(a)(i)  would  exceed
                  3,875,188,  or such  greater  or  lesser  number  of shares of
                  Common Stock  permitted  pursuant to the corporate  governance
                  rules  of  the  Principal  Market  that  is at  the  time  the
                  principal  trading  exchange  or market for the Common  Stock,
                  based upon share volume, as confirmed in writing by counsel to
                  the  Corporation  (subject to  increase  or  decrease  only to
                  account for stock splits,  reverse splits and like adjustments
                  occurring  after the  Closing  Date) (the  "Maximum  Aggregate
                  Share   Amount"),   unless  the   Corporation   first  obtains
                  shareholder  approval  permitting such issuances in accordance
                  with the Principal Market rules ("Shareholder  Approval").  On
                  any given date,  each Holder shall be entitled to a portion of
                  the Maximum Aggregate Share Amount equal to the product of (y)
                  the  fraction  determined  by dividing the number of shares of


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                  Preferred  Stock  then held by such  Holder as of such date by
                  the aggregate  number of shares held by all Holders as of such
                  date and (z) the  difference  between  the  Maximum  Aggregate
                  Share Amount and the number of shares of Common Stock  issued,
                  in  the   aggregate   among  all  Holders,   pursuant  to  any
                  conversions of Preferred  Stock or exercises of Warrants prior
                  to such  date.  If at any time the  number of shares of Common
                  Stock which could,  notwithstanding  the  limitation set forth
                  herein,  be  issuable  and  sold  to all  Holders  during  the
                  following 12 months (assuming all dividends are paid in shares
                  of Common Stock during such period of determination based upon
                  the  VWAP at the  time of any such  determination)  equals  or
                  exceeds  the  Maximum   Aggregate   Share  Amount,   then  the
                  Corporation shall, subject to any requirements in the Purchase
                  Agreement  to act  sooner,  obtain  the  Shareholder  Approval
                  applicable to such issuance as soon as is possible, but in any
                  event not later  than the 90th day after the date in which the
                  Corporation determines (or is notified by any Holder) that the
                  Maximum  Aggregate  Share  Amount  could be exceeded and shall
                  continue to seek to obtain Shareholder  Approval every 90 days
                  until such Shareholder Approval is obtained.

                  (iv) Forced Conversion. Notwithstanding anything herein to the
                  contrary, if after the Effective Date the VWAP for each of any
                  10 consecutive  Trading Days  ("Threshold  Period"),  which 10
                  consecutive Trading Day period shall have commenced only after
                  the  Effective  Date,  exceeds 200% of the then  effective Set
                  Price (defined below),  the Company may, within 2 Trading Days
                  after  any such  Threshold  Period,  deliver  a notice  to all
                  Holders (a "Forced Conversion Notice" and the date such notice
                  is received by the  Holders,  the  "Forced  Conversion  Notice
                  Date") to cause the Holders to immediately convert all or part
                  of the then outstanding  shares of Preferred Stock pursuant to
                  Section 5 and the Holders  shall  surrender  (if all Preferred
                  Stock is converted) their respective shares of Preferred Stock
                  to the Company  for  conversion  within 5 Trading  Days of the
                  Forced  Conversion  Notice Date. The Company may only effect a
                  Forced  Conversion Notice if all of the Equity Conditions have
                  been met  during  the  Threshold  Period  through  the  Forced
                  Conversion Notice Date. Any Forced Conversion Notices shall be
                  applied  ratably to all of the Holders in  proportion  to each
                  Holders initial purchases of Preferred Stock hereunder.

                  (b)  (i)  Not  later  than  three   Trading  Days  after  each
                  Conversion Date (the "Share Delivery  Date"),  the Corporation
                  shall deliver to the Holder (A) a certificate or  certificates
                  which,  after the Effective Date, shall be free of restrictive
                  legends and trading restrictions (other than those required by
                  Section 4.1 of the Purchase Agreement) representing the number
                  of shares of Common Stock being  acquired upon the  conversion
                  of  shares of  Preferred  Stock,  and (B) a bank  check in the
                  amount of accrued and unpaid dividends (if the Corporation has
                  elected or is required to pay accrued dividends in cash and is
                  permitted to make such payment). After the Effective Date, the
                  Corporation  shall,  upon  request of the Holder,  deliver any
                  certificate  or  certificates  required to be delivered by the
                  Corporation  under this  Section  electronically  through  the
                  Depository Trust Corporation or another  established  clearing


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                  corporation  performing similar  functions.  If in the case of
                  any Conversion Notice such certificate or certificates are not
                  delivered  to or as directed by the  applicable  Holder by the
                  third Trading Day after the Conversion  Date, the Holder shall
                  be entitled to elect by written  notice to the  Corporation at
                  any time on or  before  its  receipt  of such  certificate  or
                  certificates thereafter,  to rescind such conversion, in which
                  event   the   Corporation   shall   immediately   return   the
                  certificates   representing  the  shares  of  Preferred  Stock
                  tendered for conversion.

                           (ii)  The  Corporation's  obligations  to  issue  and
                  deliver the  Conversion  Shares upon  conversion  of Preferred
                  Stock in  accordance  with the terms  hereof are  absolute and
                  unconditional,  irrespective  of any action or inaction by the
                  Holder to enforce the same, any waiver or consent with respect
                  to any provision hereof,  the recovery of any judgment against
                  any Person or any action to enforce  the same,  or any setoff,
                  counterclaim,  recoupment,  limitation or termination,  or any
                  breach or alleged  breach by the Holder or any other Person of
                  any obligation to the  Corporation or any violation or alleged
                  violation  of law by the  Holder  or  any  other  person,  and
                  irrespective of any other  circumstance  which might otherwise
                  limit  such  obligation  of the  Corporation  to the Holder in
                  connection with the issuance of such Conversion Shares. In the
                  event a Holder shall elect to convert any or all of the Stated
                  Value of its  Preferred  Stock,  the  Company  may not  refuse
                  conversion  based on any  claim  that  such  Holder or any one
                  associated or  affiliated  with the Holder of has been engaged
                  in any  violation of law,  agreement or for any other  reason,
                  unless, an injunction from a court, on notice, restraining and
                  or enjoining conversion of all or part of this Debenture shall
                  have been sought and obtained  and the Company  posts a surety
                  bond for the  benefit  of the  Holder in the amount of 150% of
                  the Stated  Value of  Preferred  Stock  outstanding,  which is
                  subject to the  injunction,  which bond shall remain in effect
                  until the completion of  arbitration/litigation of the dispute
                  and the  proceeds  of which shall be payable to such Holder to
                  the  extent  it  obtains  judgment.   In  the  absence  of  an
                  injunction  precluding  the  same,  the  Company  shall  issue
                  Conversion  Shares or, if  applicable,  cash,  upon a properly
                  noticed conversion. If the Corporation fails to deliver to the
                  Holder such  certificate or  certificates  pursuant to Section
                  5(b)(i)  by  the  Share  Delivery  Date   applicable  to  such
                  conversion, the Corporation shall pay to such Holder, in cash,
                  as liquidated damages and not as a penalty, for each $5,000 of
                  Stated  Value of  Preferred  Stock  being  converted,  $50 per
                  Trading  Day  (increasing  to $100  per  Trading  Day  after 3
                  Trading Days and  increasing to $200 per Trading Day 6 Trading


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<PAGE>

                  Days after such damages  begin to accrue) for each Trading Day
                  after the Share  Delivery  Date  until such  certificates  are
                  delivered.  Nothing  herein  shall  limit a Holder's  right to
                  pursue actual damages for the Corporation's failure to deliver
                  certificates   representing   shares  of  Common   Stock  upon
                  conversion  within the period specified herein and such Holder
                  shall have the right to pursue all  remedies  available  to it
                  hereunder, at law or in equity including,  without limitation,
                  a decree of specific performance and/or injunctive relief.

                           (iii)  If the  Corporation  fails to  deliver  to the
                  Holder such  certificate or  certificates  pursuant to Section
                  5(b)(i)  by a Share  Delivery  Date,  and if after  such Share
                  Delivery  Date  the  Holder   purchases  (in  an  open  market
                  transaction   or   otherwise)   Common  Stock  to  deliver  in
                  satisfaction of a sale by such Holder of the Conversion Shares
                  which the Holder was entitled to receive  upon the  conversion
                  relating to such Share  Delivery Date (a  "Buy-In"),  then the
                  Corporation  shall  pay in cash to the  Holder  the  amount by
                  which  (x)  the  Holder's  total  purchase  price   (including
                  brokerage  commissions,  if  any)  for  the  Common  Stock  so
                  purchased  exceeds (y) the product of (1) the aggregate number
                  of shares of Common  Stock that such  Holder was  entitled  to
                  receive from the  conversion  at issue  multiplied  by (2) the
                  price at which the sell  order  giving  rise to such  purchase
                  obligation was executed.  For example, if the Holder purchases
                  Common Stock having a total purchase price of $11,000 to cover
                  a Buy-In with respect to an attempted  conversion of shares of
                  Preferred Stock with respect to which the aggregate sale price
                  giving rise to such  purchase  obligation  is  $10,000,  under
                  clause  (A)  of  the   immediately   preceding   sentence  the
                  Corporation  shall be required to pay the Holder  $1,000.  The
                  Holder shall provide the Corporation written notice indicating
                  the  amounts  payable to the Holder in respect of the  Buy-In,
                  together  with  applicable  confirmations  and other  evidence
                  reasonably requested by the Corporation.  Nothing herein shall
                  limit a Holder's right to pursue any other remedies  available
                  to it  hereunder,  at  law  or in  equity  including,  without
                  limitation, a decree of specific performance and/or injunctive
                  relief  with  respect to the  Corporation's  failure to timely
                  deliver certificates  representing shares of Common Stock upon
                  conversion  of the  shares  of  Preferred  Stock  as  required
                  pursuant to the terms hereof.

                  (c) (i) The  conversion  price  shall  equal  $0.94  (the "Set
                  Price"), subject to adjustment below.

                           (ii)  if the  Corporation,  at  any  time  while  the
                  Preferred Stock is outstanding: (A) shall pay a stock dividend
                  or otherwise make a distribution or distributions on shares of
                  its  Common  Stock or any other  equity  or equity  equivalent
                  securities  payable in shares of Common  Stock,  (B) subdivide
                  outstanding  shares of Common  Stock  into a larger  number of
                  shares,  (C) combine (including by way of reverse stock split)
                  outstanding  shares of Common  Stock into a smaller  number of
                  shares,  or (D)  issue by  reclassification  of  shares of the
                  Common Stock any shares of capital  stock of the  Corporation,
                  then the Set Price shall be  multiplied by a fraction of which
                  the  numerator  shall be the number of shares of Common  Stock


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                  Outstanding  before  such  event and of which the  denominator
                  shall be the  number of shares  of  Common  Stock  Outstanding
                  after such event. Any adjustment made pursuant to this Section
                  shall become effective  immediately  after the record date for
                  the  determination  of  stockholders  entitled to receive such
                  dividend   or   distribution   and  shall   become   effective
                  immediately  after  the  effective  date  in  the  case  of  a
                  subdivision, combination or reclassification.

                           (iii)  if the  Corporation,  at any  time  while  the
                  Preferred Stock is outstanding, shall issue rights, options or
                  warrants to all  holders of Common  Stock (and not to Holders)
                  entitling  them to subscribe for or purchase  shares of Common
                  Stock at a price  per share  less than the VWAP at the  record
                  date mentioned  below,  then the Set Price shall be multiplied
                  by a fraction, of which the denominator shall be the number of
                  shares of the Common Stock Outstanding on the date of issuance
                  of such  rights or  warrants  plus the  number  of  additional
                  shares of Common Stock offered for  subscription  or purchase,
                  and of which the  numerator  shall be the  number of shares of
                  the Common Stock  Outstanding  on the date of issuance of such
                  rights  or  warrants  plus the  number  of  shares  which  the
                  aggregate  offering  price of the  total  number  of shares so
                  offered  (assuming  receipt by the  Corporation in full of all
                  consideration payable upon exercise of such rights, options or
                  warrants) would purchase at such VWAP.  Such adjustment  shall
                  be made whenever such rights or warrants are issued, and shall
                  become  effective  immediately  after the record  date for the
                  determination of stockholders entitled to receive such rights,
                  options or warrants.

                           (iv) if the Corporation or any subsidiary  thereof at
                  any time  while  any of the  Preferred  Stock is  outstanding,
                  shall sell, grant any option or warrant to purchase or sell or
                  grant  any  right to  reprice  its  securities,  or  otherwise
                  dispose of or issue any  Common  Stock or any equity or equity
                  equivalent  securities  (including  any equity,  debt or other
                  instrument   that  is  at  any  time  over  the  life  thereof
                  convertible   into   or   exchangeable   for   Common   Stock)
                  (collectively,   "Common  Stock  Equivalents")  entitling  any
                  Person to  acquire  shares of Common  Stock,  at an  effective
                  price  per  share  less  than  the  Set  Price  (a   "Dilutive
                  Issuance"), as adjusted hereunder (if the holder of the Common
                  Stock or Common Stock  Equivalent so issued shall at any time,
                  whether by  operation  of purchase  price  adjustments,  reset
                  provisions,  floating conversion,  exercise or exchange prices
                  or otherwise, or due to warrants,  options or rights per share
                  which are issued in connection with such issuance, be entitled
                  to receive  shares of Common  Stock at a price per share which
                  is less than the Set Price,  such issuance  shall be deemed to
                  have occurred for less than the Set Price), then the Set Price
                  shall be reduced to equal the effective  conversion,  exchange
                  or  purchase  price  for such  Common  Stock or  Common  Stock
                  Equivalents (including any reset provisions thereof) at issue.
                  Such  adjustment  shall be made  whenever such Common Stock or
                  Common Stock  Equivalents are issued.  The  Corporation  shall
                  notify the Holder in writing, no later than the second Trading
                  Day following the issuance of any Common Stock or Common Stock
                  Equivalent  subject to this  section,  indicating  therein the
                  applicable  issuance  price,  or of  applicable  reset  price,


                                       9
<PAGE>

                  exchange price,  conversion price and other pricing terms. For
                  purposes  of this  subsection,  a Dilutive  Issuance  shall be
                  deemed to have  occurred  when  binding  agreements  have been
                  closed by the Corporation and any purchaser therein.

                           (v)  if  the  Corporation,  at  any  time  while  the
                  Preferred  Stock  is  outstanding,  shall  distribute  to  all
                  holders of Common Stock (and not to Holders)  evidences of its
                  indebtedness  or assets or rights or warrants to subscribe for
                  or purchase  any  security  other than the Common Stock (which
                  shall be subject to Section 5(c)(iii),  then in each such case
                  the Set Price shall be adjusted by  multiplying  the Set Price
                  in  effect  immediately  prior to the  record  date  fixed for
                  determination   of  stockholders   entitled  to  receive  such
                  distribution by a fraction of which the  denominator  shall be
                  the VWAP determined as of the record date mentioned above, and
                  of which the numerator  shall be such VWAP on such record date
                  less the then per share fair market  value at such record date
                  of the portion of such assets or evidence of  indebtedness  so
                  distributed  applicable to one outstanding share of the Common
                  Stock as  determined  by the Board of Directors in good faith.
                  In  either  case  the  adjustments  shall  be  described  in a
                  statement  provided to the Holders of the portion of assets or
                  evidences of indebtedness so distributed or such  subscription
                  rights   applicable  to  one  share  of  Common  Stock.   Such
                  adjustment  shall be made  whenever any such  distribution  is
                  made and shall become effective  immediately  after the record
                  date mentioned above.

                           (vi) All  calculations  under this Section 5(c) shall
                  be made to the nearest cent or the nearest 1/100th of a share,
                  as the case may be.  The  number of  shares  of  Common  Stock
                  outstanding  at any given time shall not include  shares owned
                  or held  by or for the  account  of the  Corporation,  and the
                  disposition of any such shares shall be considered an issue or
                  sale of Common Stock.  For purposes of this Section 5(c),  the
                  number of shares of Common Stock deemed to be outstanding (the
                  "Common  Stock  Outstanding")  as of a given date shall be the
                  sum of  the  number  of  shares  of  Common  Stock  (excluding
                  treasury shares, if any) issued and outstanding.

                           (vii)   Notwithstanding   anything  to  the  contrary
                  herein,  no adjustment  shall be made  hereunder in connection
                  with an Exempt Issuance.

                           (viii) Whenever the Set Price is adjusted pursuant to
                  this Section the Corporation  shall promptly,  but in no event
                  more  than  2  Trading  Days  after  the  occurrence  of  such
                  adjustment,  mail to each Holder,  a notice  setting forth the
                  Set Price  after such  adjustment  and  setting  forth a brief
                  statement of the facts requiring such adjustment.

         Section 6.   [INTENTIONALLY OMMITED]

         Section 7.   Redemption Upon Triggering Events.


                                       10
<PAGE>

                   (a) Upon the  occurrence of a Triggering  Event,  each Holder
         shall (in addition to all other  rights it may have  hereunder or under
         applicable law) have the right,  exercisable at the sole option of such
         Holder, to require the Corporation to redeem all of the Preferred Stock
         then held by such Holder for a redemption  price, in cash, equal to the
         Triggering Redemption Amount. The Triggering Redemption Amount shall be
         due and payable  within 5 Trading  Days of the date on which the notice
         for the payment  therefor  is  provided  by a Holder  (the  "Triggering
         Redemption  Payment  Date").  If  the  Corporation  fails  to  pay  the
         Triggering Redemption Amount hereunder in full pursuant to this Section
         on the date such amount is due in  accordance  with this  Section,  the
         Corporation  will pay  interest  thereon at a rate of 18% per annum (or
         such lesser amount  permitted by applicable  law),  accruing daily from
         such  date  until  the  Triggering  Redemption  Amount,  plus  all such
         interest  thereon,  is paid in full.  For purposes of this  Section,  a
         share of Preferred  Stock is outstanding  until such date as the Holder
         shall have received the Triggering  Redemption  Amount plus all accrued
         but unpaid dividends and all accrued but unpaid  liquidated  damages in
         cash.

                  (b) "Triggering  Event" means any one or more of the following
         events  (whatever  the reason  and  whether  it shall be  voluntary  or
         involuntary  or  effected  by  operation  of  law  or  pursuant  to any
         judgment,  decree  or  order  of any  court,  or  any  order,  rule  or
         regulation of any administrative or governmental body):

                           (i) the failure of a Conversion  Shares  Registration
                  Statement  to be declared  effective by the  Commission  on or
                  prior to the 180th day after the Original Issue Date;

                           (ii)  if,  during  the  Effectiveness   Period,   the
                  effectiveness of the Conversion Shares Registration  Statement
                  lapses  for  any  reason  for  more  than an  aggregate  of 60
                  calendar days (which need not be consecutive  days) during any
                  12 month  period,  or the  Holder  shall not be  permitted  to
                  resell  Registrable  Securities  under the  Conversion  Shares
                  Registration Statement other than as a result of any action or
                  inaction of a Holder for more than an aggregate of 60 calendar
                  days (which need not be consecutive  days) during any 12 month
                  period;

                           (iii)  the   Corporation   shall   fail  to   deliver
                  certificates  representing  Conversion  Shares issuable upon a
                  conversion  hereunder that comply with the  provisions  hereof
                  prior to the 10th  Trading Day after such shares are  required
                  to be delivered  hereunder,  or the Corporation  shall provide
                  written  notice  to any  Holder,  including  by way of  public
                  announcement, at any time, of its intention not to comply with
                  requests for  conversion  of any shares of Preferred  Stock in
                  accordance with the terms hereof;

                           (iv)  one  of  the   Events   (as   defined   in  the
                  Registration Rights Agreement) described in subsections (i) or
                  (ii) of  Section  2(b) of the  Registration  Rights  Agreement
                  shall not have been cured to the  satisfaction  of the Holders
                  prior to the  expiration  of 15 days from the  Event  Date (as
                  defined in the Registration Rights Agreement) relating thereto
                  (other than an Event  resulting from a failure of a Conversion


                                       11
<PAGE>

                  Shares Registration  Statement to be declared effective by the
                  Commission  on or prior to the 180th  day  after the  Original
                  Issue Date, which shall be covered by Section 7(b)(i));

                           (v) the Corporation  shall fail for any reason to pay
                  in full the amount of cash due  pursuant to a Buy-In  within 5
                  Trading Days after notice  therefor is delivered  hereunder or
                  shall  fail to pay all  amounts  owed on  account  of an Event
                  within five days of the date due;

                           (vi) the  Corporation  shall fail to have available a
                  sufficient  number  of  authorized  and  unreserved  shares of
                  Common  Stock  to  issue  to  such  Holder  upon a  conversion
                  hereunder  unless the  Corporation  has complied  with Section
                  4.10(b) of the Purchase Agreement;

                           (vii)  the  Corporation  shall  fail  to  observe  or
                  perform any other  material  covenant,  agreement  or warranty
                  contained   in,  or   otherwise   commit  any  breach  of  the
                  Transaction  Documents,  and such  material  failure or breach
                  shall  not,  if subject  to the  possibility  of a cure by the
                  Corporation,  have been remedied within 30 calendar days after
                  the date on which  written  notice of such  failure  or breach
                  shall have been given;

                           (ix) the  Company  shall be a party to any  Change of
                  Control  Transaction or the Corporation shall redeem more than
                  a de minimis number of Junior Securities;

                           (x) there shall have occurred a Bankruptcy Event;

                           (xi) any breach of the  agreements  delivered  to the
                  initial Holders at the Closing  pursuant to Section  2.2(a)(v)
                  of the Purchase Agreement; or

                           (xi) the  Common  Stock  shall  fail to be  listed or
                  quoted  for  trading  on a  Trading  Market  for  more  than 5
                  consecutive Trading Days.

         Section 8.  Definitions.  For the purposes hereof,  the following terms
shall have the following meanings:

                  "Bankruptcy  Event" means any of the following events: (a) the
         Corporation or any  Significant  Subsidiary (as such term is defined in
         Rule  1.02(s) of  Regulation  S-X)  thereof  commences  a case or other
         proceeding   under   any   bankruptcy,   reorganization,   arrangement,
         adjustment  of debt,  relief of  debtors,  dissolution,  insolvency  or
         liquidation  or  similar  law  of  any  jurisdiction  relating  to  the
         Corporation  or  any  Significant  Subsidiary  thereof;  (b)  there  is
         commenced against the Corporation or any Significant Subsidiary thereof
         any such case or proceeding that is not dismissed  within 60 days after
         commencement; (c) the Corporation or any Significant Subsidiary thereof
         is  adjudicated  insolvent  or bankrupt or any order of relief or other
         order  approving  any  such  case or  proceeding  is  entered;  (d) the
         Corporation  or  any   Significant   Subsidiary   thereof  suffers  any


                                       12
<PAGE>

         appointment of any custodian or the like for it or any substantial part
         of its property that is not  discharged  or stayed within 60 days;  (e)
         the Corporation or any Significant  Subsidiary  thereof makes a general
         assignment  for the benefit of creditors;  (f) the  Corporation  or any
         Significant  Subsidiary thereof calls a meeting of its creditors with a
         view to arranging a  composition,  adjustment or  restructuring  of its
         debts; or (g) the Corporation or any Significant Subsidiary thereof, by
         any act or failure to act, expressly indicates its consent to, approval
         of or  acquiescence  in any of the  foregoing or takes any corporate or
         other action for the purpose of effecting any of the foregoing.

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

                  "Closing"  means  closing  of the  purchase  and  sale  of the
         Preferred Stock.

                  "Commission" means the Securities and Exchange Commission.

                  "Common Stock" means the Corporation's common stock, par value
         $0.04 per share,  and stock of any other  class into which such  shares
         may hereafter have been reclassified or changed.

                  "Common Stock Outstanding" shall have the meaning set forth in
         Section 5(c)(vi).

                  "Conversion  Amount"  means  the sum of the  Stated  Value  at
         issue.

                  "Conversion  Date" shall have the meaning set forth in Section
         5(b)(i).

                  "Conversion Shares" means, collectively,  the shares of Common
         Stock into  which the  shares of  Preferred  Stock are  convertible  in
         accordance with the terms hereof.

                  "Conversion   Shares    Registration    Statement"   means   a
         registration  statement that meets the requirements of the Registration
         Rights  Agreement and registers the resale of all Conversion  Shares by
         the Holder, who shall be named as a "selling  stockholder"  thereunder,
         all as provided in the Registration Rights Agreement.

                  "Dividend  Payment  Date"  shall have the meaning set forth in
         Section 2(a).


                                       13
<PAGE>

                  "Effective  Date"  means the date that the  Conversion  Shares
         Registration Statement is declared effective by the Commission.

                  "Equity  Conditions"  Unless  waived  by  a  Holder  as  to  a
         particular event (which waiver shall apply only to such Holder),  as of
         such  event  date,  the  following  conditions  have been met:  (i) the
         Corporation shall have duly honored or cured all conversions  scheduled
         to occur or  occurring  prior to such date,  (ii) there is an effective
         Conversion Shares Registration  Statement pursuant to which the Holders
         are permitted to utilize the prospectus thereunder to resell all of the
         Conversion  Shares  issued  to the  Holders  and all of the  Conversion
         Shares as are  issuable to the Holders upon  conversion  in full of the
         Preferred Stock or the Conversion Shares are available for resale under
         Rule 144(k) (and the  Corporation  believes,  in good faith,  that such
         effectiveness will continue  uninterrupted for the foreseeable future),
         (iii) the Common Stock is listed for trading on the Trading Market (and
         the  Corporation  believes,  in good faith,  that trading of the Common
         Stock  on the  Trading  Market  will  continue  uninterrupted  for  the
         foreseeable  future),  (iv) all  liquidated  damages and other  amounts
         owing including  dividends in respect of the Preferred Stock shall have
         been paid or will,  concurrently  with the  issuance of the  Conversion
         Shares, be paid in cash; (v) there is a sufficient number of authorized
         but unissued and  otherwise  unreserved  shares of Common Stock for the
         issuance  of all the  Conversion  Shares as are  issuable to the Holder
         upon  conversion  in full of the  Preferred  Stock;  (vi) no Triggering
         Event has  occurred  and is  continuing;  (vii)  all of the  Conversion
         Shares  issuable to the Holder upon conversion in full of the Preferred
         Stock will not violate the limitations  set forth in Sections  5(a)(ii)
         or  5(a)(iii);  and  (viii) no  public  announcement  of a  pending  or
         proposed  Fundamental  Transaction or Change of Control Transaction has
         occurred that has not been consummated.

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

                  "Forced Conversion Notice" shall have the meaning set forth in
         Section 5(a)(iv).

                  "Forced  Conversion  Notice  Date"  shall have the meaning set
         forth in Section 5(a)(iv).

                  "Fundamental  Transaction" means the occurrence after the date
         hereof  of  any  of  (a)  the   Corporation   effects   any  merger  or
         consolidation of the Corporation with or into another Person,  in which
         it is not the  surviving  entity,  or the  Corporation's  then existing
         shareholders  will own less than 51% of the surviving  entity,  (b) the
         Corporation  effects any sale of all or substantially all of its assets
         in one or a series of related  transactions,  (c) any  tender  offer or
         exchange  offer  (whether  by the  Corporation  or  another  Person) is
         completed  pursuant to which  holders of Common Stock are  permitted to
         tender or exchange their shares for other securities, cash or property,
         the result of which to the Corporation's  shareholders at such time own
         less than 51% of the shares of Common Stock of the Corporation,  or (d)
         the Corporation effects any reclassification of the Common Stock or any
         compulsory  share  exchange  pursuant  to  which  the  Common  Stock is
         effectively  converted into or exchanged for other securities,  cash or
         property.


                                       14
<PAGE>

                  "Holder"  shall have the meaning  given such term in Section 1
         hereof.

                  "Junior  Securities"  means  the  Common  Stock  and all other
         equity or equity  equivalent  securities of the Corporation  other than
         those  securities  that are (a)  outstanding on the Original Issue Date
         and (b) which are explicitly senior in rights or liquidation preference
         to the Preferred Stock.

                  "Original  Issue  Date"  shall  mean  the  date  of the  first
         issuance of any shares of the Preferred Stock  regardless of the number
         of transfers of any particular shares of Preferred Stock and regardless
         of the  number of  certificates  which may be issued to  evidence  such
         Preferred Stock.

                  "Person" means a corporation,  an association,  a partnership,
         an organization,  a business, an individual,  a government or political
         subdivision thereof or a governmental agency.

                  "Purchase  Agreement" means the Securities Purchase Agreement,
         dated as of the Original Issue Date, to which the  Corporation  and the
         original Holders are parties, as amended, modified or supplemented from
         time to time in accordance with its terms.

                  "Registration  Rights Agreement" means the Registration Rights
         Agreement,   dated  as  of  the  Original  Issue  Date,  to  which  the
         Corporation and the original Holders are parties, as amended,  modified
         or supplemented from time to time in accordance with its terms.

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

                  "Set  Price"  shall  have the  meaning  set  forth in  Section
         5(c)(i).

                  "Trading  Day"  shall mean any day  during  which the  Trading
         Market shall be open for business.

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

                   "Transaction Documents" shall mean the Purchase Agreement and
         all  agreements  entered into in  connection  therewith,  including the
         Registration Rights Agreement and the Warrants.

                  "Triggering Event" shall have the meaning set forth in Section
         7(b).

                  "Triggering  Redemption  Amount"  for each share of  Preferred
         Stock means the sum of (i) the greater of (A) 120% of the Stated  Value
         and (B) the  product  of (a) the VWAP on the  Trading  Day  immediately


                                       15
<PAGE>

         preceding  the date of the  Triggering  Event and (b) the Stated  Value
         divided by the then Set Price,  (ii) all accrued  but unpaid  dividends
         thereon  and (iii) all  liquidated  damages  and other  amounts  due in
         respect of the Preferred Stock

                  "VWAP" means,  for any date, the price determined by the first
         of the following clauses that applies:  (a) if the Common Stock is then
         listed or quoted  on a  Principal  Market,  the daily  volume  weighted
         average  price  of the  Common  Stock  for such  date  (or the  nearest
         preceding  date) on the  Principal  Market on which the Common Stock is
         then listed or quoted as reported by Bloomberg Financial L.P. (based on
         a Trading Day from 9:30 a.m.  Eastern Time to 4:02 p.m.  Eastern Time);
         (b) if the  Common  Stock is not then  listed or quoted on a  Principal
         Market and if prices for the  Common  Stock are then  quoted on the OTC
         Bulletin Board,  the volume weighted  average price of the Common Stock
         for  such  date (or the  nearest  preceding  date) on the OTC  Bulletin
         Board;  (c) if the Common Stock is not then listed or quoted on the OTC
         Bulletin  Board and if prices for the Common Stock are then reported in
         the  "Pink  Sheets"   published  by  the  National   Quotation   Bureau
         Incorporated  (or a similar  organization  or agency  succeeding to its
         functions of reporting prices),  the most recent bid price per share of
         the  Common  Stock so  reported;  or (c) in all other  cases,  the fair
         market value of a share of Common Stock as determined by an independent
         appraiser  selected  in good  faith by the  Purchasers  and  reasonably
         acceptable to the Company.

         Section  9.  Fundamental  Transactions.  If a  Fundamental  Transaction
occurs,  then upon any subsequent  conversion of shares of Preferred  Stock, the
Holder  shall have the right to receive,  for each  Conversion  Share that would
have been issuable upon such conversion absent such Fundamental Transaction, the
same kind and  amount of  securities,  cash or  property  as it would  have been
entitled to receive upon the  occurrence of such  Fundamental  Transaction if it
had been, immediately prior to such Fundamental  Transaction,  the holder of one
share of Common Stock (the "Alternate Consideration").  For purposes of any such
conversion,  the determination of the Set Price shall be appropriately  adjusted
to apply  to such  Alternate  Consideration  based on the  amount  of  Alternate
Consideration  issuable  in  respect  of one  share  of  Common  Stock  in  such
Fundamental Transaction, and the Corporation shall apportion the Set Price among
the Alternate Consideration in a reasonable manner reflecting the relative value
of any different components of the Alternate Consideration. If holders of Common
Stock are given any choice as to the securities, cash or property to be received
in a Fundamental Transaction,  then the Holder shall be given the same choice as
to the  Alternate  Consideration  it receives  upon any  conversion of shares of
Preferred Stock following such Fundamental Transaction.  To the extent necessary
to effectuate  the foregoing  provisions,  any successor to the  Corporation  or
surviving entity in such Fundamental  Transaction  shall issue to the Holder new
preferred  stock  consistent  with the foregoing  provisions  and evidencing the
Holder's right to convert such preferred stock into Alternate Consideration. The
terms of any agreement  pursuant to which a Fundamental  Transaction is effected
shall include terms  requiring any such successor or surviving  entity to comply
with the provisions of this Section 9 and insuring that the Preferred  Stock (or
any such  replacement  security) will be similarly  adjusted upon any subsequent
transaction analogous to a Fundamental Transaction.

Section 10.  Miscellaneous.


                                       16
<PAGE>

                  (a) If (i) the  Corporation  shall  declare a dividend (or any
         other  distribution)  on the Common Stock,  (ii) the Corporation  shall
         declare a special  nonrecurring cash dividend on or a redemption of the
         Common Stock, (iii) the Corporation shall authorize the granting to all
         holders of Common Stock rights or warrants to subscribe for or purchase
         any shares of  capital  stock of any class or of any  rights,  (iv) the
         approval of any  stockholders of the  Corporation  shall be required in
         connection  with any  Fundamental  Transaction  or  Change  of  Control
         Transaction,  or (v) the  Corporation  shall authorize the voluntary or
         involuntary  dissolution,  liquidation  or winding up of the affairs of
         the  Corporation;  then the  Corporation  shall file a press release or
         Current  Report on Form 8-K to disclose such  occurrence and notify the
         Holders at their last  addresses  as they shall  appear  upon the stock
         books  of the  Corporation,  at  least 20  calendar  days  prior to the
         applicable  record or effective date  hereinafter  specified,  a notice
         stating  (x) the date on which a record is to be taken for the  purpose
         of such dividend, distribution, redemption, rights or warrants, or if a
         record is not to be taken,  the date as of which the  holders of Common
         Stock  of  record  to be  entitled  to  such  dividend,  distributions,
         redemption,  rights or warrants are to be determined or (y) the date on
         which any such Fundamental Transaction or Change of Control Transaction
         is expected to become  effective or close,  and the date as of which it
         is expected that holders of Common Stock of record shall be entitled to
         exchange  their Common  Stock for  securities,  cash or other  property
         deliverable upon any such Fundamental  Transaction or Change of Control
         Transaction.  Subject to the applicable  laws,  Holders are entitled to
         convert the  Conversion  Amount of  Preferred  Stock  during the 20-day
         period  commencing the date of such notice to the effective date of the
         event triggering such notice.

                  (b) The  Corporation  covenants  that  it  will  at all  times
         reserve and keep available out of its authorized and unissued shares of
         Common  Stock  solely for the purpose of issuance  upon  conversion  of
         Preferred Stock,  each as herein provided,  free from preemptive rights
         or any other actual  contingent  purchase  rights of persons other than
         the  Holders,  not less than such  number of shares of Common  Stock as
         shall be issuable  upon the  conversion  of all  outstanding  shares of
         Preferred  Stock.  The Corporation  covenants that all shares of Common
         Stock that shall be so issuable shall,  upon issue, be duly and validly
         authorized, issued and fully paid and nonassessable.

                  (c) Upon a conversion  hereunder the Corporation  shall not be
         required to issue stock certificates  representing  fractions of shares
         of Common Stock, but may if otherwise permitted, make a cash payment in
         respect  of any  final  fraction  of a share  based on the VWAP at such
         time.  If any  fraction of a  Conversion  Share  would,  except for the
         provisions  of this Section,  be issuable upon a conversion  hereunder,
         the  Corporation  shall  pay an  amount  in  cash  equal  to  the  VWAP
         immediately  prior  to the  applicable  conversion  multiplied  by such
         fraction.

                  (d)  The  issuance  of   certificates   for  Common  Stock  on
         conversion  of  Preferred  Stock  shall be made  without  charge to the
         Holders thereof for any documentary  stamp or similar taxes that may be
         payable  in  respect  of the  issue or  delivery  of such  certificate,
         provided that the Corporation shall not be required to pay any tax that
         may be payable in respect of any transfer  involved in the issuance and


                                       17
<PAGE>

         delivery of any such  certificate  upon conversion in a name other than
         that of the Holder of such shares of Preferred Stock so converted.

                  (e) To effect  conversions  of shares of  Preferred  Stock,  a
         Holder   shall  not  be  required  to  surrender   the   certificate(s)
         representing  such shares of Preferred Stock to the Corporation  unless
         all of  the  shares  of  Preferred  Stock  represented  thereby  are so
         converted,  in which  case the Holder  shall  deliver  the  certificate
         representing  such share of  Preferred  Stock  promptly  following  the
         Conversion  Date at issue.  Shares of Preferred  Stock  converted  into
         Common Stock or redeemed in  accordance  with the terms hereof shall be
         canceled and may not be reissued.

                  (f). Any and all notices or other communications or deliveries
         to be  provided  by the  Holders  of  the  Preferred  Stock  hereunder,
         including,  without  limitation,  any  Conversion  Notice,  shall be in
         writing and delivered personally,  by facsimile or sent by a nationally
         recognized overnight courier service, addressed to the attention of the
         Chief Financial Officer of the Corporation  addressed to WILLIAM HODGE,
         FAX NUMBER: (704) 366 5056 or to such other address or facsimile number
         as shall be specified in writing by the  Corporation  for such purpose.
         Any and  all  notices  or  other  communications  or  deliveries  to be
         provided by the Corporation hereunder shall be in writing and delivered
         personally,  by facsimile or sent by a nationally  recognized overnight
         courier  service,  addressed to each Holder at the facsimile  telephone
         number  or  address  of  such  Holder  appearing  on the  books  of the
         Corporation,  which  address  shall  initially  be the  address of such
         Holder set forth on the signature pages of the Purchase  Agreement,  or
         such other address as the  Corporation or a Holder may designate by ten
         days advance written notice to the other parties hereto.  Any notice or
         other  communication or deliveries  hereunder shall be deemed given and
         effective  on the  earliest  of (i) the date of  transmission,  if such
         notice or  communication  is delivered  via  facsimile at the facsimile
         telephone number specified in this Section prior to 5:00 p.m. (New York
         City time) (with confirmation of transmission), (ii) the date after the
         date of transmission,  if such notice or communication is delivered via
         facsimile at the facsimile  telephone  number specified in this Section
         later than 5:00 p.m.  (New York City time) on any date and earlier than
         11:59  p.m.  (New York City time) on such date  (with  confirmation  of
         transmission),  (iii) five days after having been sent by registered or
         certified mail, return receipt requested, postage prepaid, (iv) one day
         after deposit with a nationally  recognized  overnight courier service,
         specifying next day delivery,  with written verification of service, or
         (v) upon actual receipt by the party to whom such notice is required to
         be given.

(g)      For purposes  hereof,  a share of Preferred Stock is outstanding  until
         such date as the  Holder  shall have  received  the  Conversion  Shares
         issuable to it in accordance with this Certificate of Designations.

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


                                       18
<PAGE>

RESOLVED,  FURTHER, that the Chairman, the president or any vice-president,  and
the secretary or any assistant secretary,  of the Corporation be and they hereby
are  authorized and directed to prepare and file a Certificate of Designation of
Preferences,  Rights and Limitations in accordance with the foregoing resolution
and the provisions of Delaware law.

        IN WITNESS WHEREOF,  the undersigned have executed this Certificate this
___ day of September 2004.

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



                                       19
<PAGE>

                                     ANNEX A

                              NOTICE OF CONVERSION

     (To be Executed by the Registered Holder in order to convert shares of
                                Preferred Stock)

The  undersigned  hereby  elects to convert the number of shares of  Convertible
Preferred Stock indicated  below,  into shares of common stock,  par value $0.04
per share  (the  "Common  Stock"),  of RCG  Companies  Incorporated,  a Delaware
corporation (the  "Corporation"),  according to the conditions hereof, as of the
date  written  below.  If shares are to be issued in the name of a person  other
than  undersigned,  the  undersigned  will pay all transfer  taxes  payable with
respect  thereto and is delivering  herewith such  certificates  and opinions as
reasonably requested by the Corporation in accordance therewith.  No fee will be
charged to the Holder for any  conversion,  except for such transfer  taxes,  if
any.

Conversion calculations:

       Date to Effect Conversion

       --------------------------------------------
       Number of shares of Preferred Stock owned prior to Conversion

       --------------------------------------------
       Number of shares of Preferred Stock to be Converted

       --------------------------------------------
       Stated Value of shares of Preferred Stock to be Converted

       --------------------------------------------
       Number of shares of Common Stock to be Issued

       --------------------------------------------
       Applicable Set Price

       --------------------------------------------
       Number of shares of Preferred Stock subsequent to Conversion

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


                                              [HOLDER]

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


                                       20