SECURITIES PURCHASE AGREEMENT

      This  Securities  Purchase  Agreement  (this  "Agreement")  is dated as of
October 27, 2004, by and among ON2 Technologies, Inc., a Nevada corporation (the
"Company"),  and the purchasers  identified on the signature pages hereto (each,
including  its  successors  and assigns,  a  "Purchaser"  and  collectively  the
"Purchasers").

      WHEREAS,  subject to the terms and  conditions set forth in this Agreement
and  pursuant to Section  4(2) of the  Securities  Act of 1933,  as amended (the
"Securities  Act") and Rule 506 promulgated  thereunder,  the Company desires to
issue and sell to each Purchaser, and each Purchaser, severally and not jointly,
desires to purchase  from the Company,  securities  of the Company as more fully
described in this Agreement.

      NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement,  and for  other  good and  valuable  consideration  the  receipt  and
adequacy of which are hereby acknowledged, the Company and each Purchaser agrees
as follows:

                                    ARTICLE I
                                   DEFINITIONS

      1.1  Definitions.  In  addition  to the terms  defined  elsewhere  in this
Agreement:  (a) capitalized terms that are not otherwise defined herein have the
meanings  given to such terms in the  Certificate  of  Designation  (as  defined
herein), and (b) the following terms have the meanings indicated in this Section
1.1:

            "Action"  shall have the  meaning  ascribed  to such term in Section
      3.1(j).

            "Actual Minimum" means, as of any date, the maximum aggregate number
      of shares of Common  Stock  then  issued or  potentially  issuable  in the
      future pursuant to the Transaction Documents, including any Warrant Shares
      or Underlying  Shares  issuable  upon  conversion in full of all shares of
      Preferred  Stock,  ignoring any  conversion  or exercise  limits set forth
      therein, and assuming that any previously  unconverted shares of Preferred
      Stock  are held  until  the 42nd  month  after  the  Closing  Date and all
      dividends   are  paid  in  shares  of  Common   Stock   until  such  date,
      notwithstanding  any  limitations  on  conversion  in the  Certificate  of
      Designation.

            "Affiliate"  means any Person that,  directly or indirectly  through
      one or more  intermediaries,  controls  or is  controlled  by or is  under
      common  control  with a Person,  as such  terms are used in and  construed
      under Rule 144 under the Securities Act. With respect to a Purchaser,  any
      investment  fund or managed  account  that is  managed on a  discretionary
      basis by the same  investment  manager as such Purchaser will be deemed to
      be an Affiliate of such Purchaser.

            "Certificate of Designation" means the Certificate of Designation to
      be filed prior to the Closing by the Company  with the  Secretary of State
      of Delaware, in the form of Exhibit A attached hereto.
<PAGE>

            "Closing"  means  the  closing  of  the  purchase  and  sale  of the
      Securities pursuant to Section 2.1.

            "Closing  Date" means the  Trading  Day when all of the  Transaction
      Documents  have been  executed  and  delivered by the  applicable  parties
      thereto, and all conditions  precedent to (i) the Purchasers'  obligations
      to pay the  Subscription  Amount  and (ii) the  Company's  obligations  to
      deliver the Securities have been satisfied or waived.

            "Commission" means the Securities and Exchange Commission.

            "Common  Stock"  means the common  stock of the  Company,  par value
      $0.01 per share,  and any  securities  into which such common  stock shall
      hereinafter have been reclassified into.

            "Common Stock  Equivalents"  means any  securities of the Company or
      the Subsidiaries  which would entitle the holder thereof to acquire at any
      time Common  Stock,  including  without  limitation,  any debt,  preferred
      stock, rights,  options,  warrants or other instrument that is at any time
      convertible  into or  exchangeable  for, or otherwise  entitles the holder
      thereof to receive, Common Stock.

            "Company  Counsel" means  McGuireWoods  LLP, with offices located at
      1345 Avenue of the Americas, Seventh Floor, New York, New York 10105-0106.

            "Conversion  Price" shall have the meaning  ascribed to such term in
      the Certificate of Designation.

            "Disclosure  Schedules" shall have the meaning ascribed to such term
      in Section 3.1 hereof.

            "Effective  Date"  means  the  date  that the  initial  Registration
      Statement  filed  by  the  Company  pursuant  to the  Registration  Rights
      Agreement is first declared effective by the Commission.

            "Escrow  Agent"  shall  have the  meaning  set  forth in the  Escrow
      Agreement.

            "Escrow  Agreement" shall mean the Escrow Agreement in substantially
      the form of Exhibit G hereto executed and delivered contemporaneously with
      this Agreement.

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

            "Exempt  Issuance"  means the issuance of (a) shares of Common Stock
      or options to employees,  officers or directors of the Company pursuant to
      any stock or option plan duly  adopted by a majority  of the  non-employee
      members of the Board of  Directors  of the  Company  or a majority  of the
      members of a committee  of  non-employee  directors  established  for such
      purpose,  (b)  securities  upon  the  exercise  of or  conversion  of  any
      securities issued hereunder,  convertible securities,  options or warrants
      issued and outstanding on the date of this  Agreement,  provided that such
      securities  have not been  amended  since  the date of this  Agreement  to
      increase the number of such securities, and (c) securities issued pursuant
      to  acquisitions  or strategic  transactions,  provided any such  issuance
      shall only be to a Person which is, itself or through its subsidiaries, an
      operating  company  in a business  synergistic  with the  business  of the
      Company  and in which the  Company  receives  benefits  in addition to the
      investment  of funds,  but shall not  include a  transaction  in which the
      Company is issuing securities primarily for the purpose of raising capital
      or to an entity whose primary business is investing in securities.


                                       2
<PAGE>

            "FW"  means  Feldman  Weinstein  LLP  with  offices  located  at 420
      Lexington Avenue, Suite 2620, New York, New York 10170-0002.

            "GAAP"  shall  have the  meaning  ascribed  to such term in  Section
      3.1(h).

            "Liens" means a lien, charge, security interest,  encumbrance, right
      of first refusal, preemptive right or other restriction.

            "Material  Adverse  Effect" shall have the meaning  assigned to such
      term in Section 3.1(b).

            "Material  Permits" shall have the meaning  ascribed to such term in
      Section 3.1(m).

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

            "Preferred  Stock"  means the up to 4,000  shares  of the  Company's
      Series D Convertible Preferred Stock issued hereunder having the rights,
      preferences and privileges set forth in the Certificate of Designation.

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

            "Registration   Rights  Agreement"  means  the  Registration  Rights
      Agreement, dated the date hereof, among the Company and the Purchasers, in
      the form of Exhibit B attached hereto.

            "Registration  Statement" means a registration statement meeting the
      requirements set forth in the  Registration  Rights Agreement and covering
      the resale of the  Underlying  Shares and Warrant Shares by each Purchaser
      as provided for in the Registration Rights Agreement.

            "Required Approvals" shall have the meaning ascribed to such term in
      Section 3.1(e).


                                       3
<PAGE>

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

            "SEC  Reports"  shall  have the  meaning  ascribed  to such  term in
      Section 3.1(h).

            "Securities"  means the Preferred Stock,  the Warrants,  the Warrant
      Shares and the Underlying Shares.

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

            "Shareholder Approval" means such approval as may be required by the
      applicable  rules and  regulations of the Trading Market (or any successor
      entity)  from  the  shareholders  of  the  Company  with  respect  to  the
      transactions  contemplated  by the  Transaction  Documents,  including the
      issuance of all of the Underlying  Shares and the Warrant Shares in excess
      of 19.99% of the issued and outstanding Common Stock on the Closing Date.

            "Stated Value" means $1,000 per share of Preferred Stock.

            "Subscription  Amount" shall mean, as to each Purchaser,  the amount
      to be paid for the Preferred Stock purchased  hereunder as specified below
      such  Purchaser's name on the signature page of this Agreement and next to
      the  heading  "Subscription  Amount",  in  United  States  Dollars  and in
      immediately available funds.

            "Subsequent  Financing" shall have the meaning ascribed to such term
      in Section 4.13.

            "Subsidiary"  means any  subsidiary  of the  Company as set forth on
      Schedule 3.1(a).

            "Trading  Day" means a day on which the Common  Stock is traded on a
      Trading Market.

            "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 OTC Bulletin  Board,  the Nasdaq SmallCap  Market,  the American Stock
      Exchange, the New York Stock Exchange or the Nasdaq National Market.

            "Transaction  Documents"  means this  Agreement,  the Certificate of
      Designation,  the Warrants, the Escrow Agreement,  the Registration Rights
      Agreement  and any other  documents or  agreements  executed in connection
      with the transactions contemplated hereunder.


                                       4
<PAGE>

            "Underlying  Shares" means the shares of Common Stock  issuable upon
      conversion of the  Preferred  Stock and issued and issuable in lieu of the
      cash payment of dividends on 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 Trading Market, the daily volume weighted average price of the
      Common Stock for such date (or the nearest  preceding date) on the Trading
      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 Trading  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 (d) 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.

            "Warrants" means collectively the Common Stock purchase warrants, in
      the forms of Exhibit C and Exhibit D,  delivered to the  Purchasers at the
      Closing in accordance with Section 2.2(a) hereof.

            "Warrant  Shares"  means the shares of Common  Stock  issuable  upon
      exercise of the Warrants.

                                   ARTICLE II
                                PURCHASE AND SALE

      2.1  Closing.  On the  Closing  Date,  upon the terms and  subject  to the
conditions set forth herein,  concurrent with the execution and delivery of this
Agreement by the parties hereto,  the Company agrees to sell, and each Purchaser
agrees to purchase in the aggregate, severally and not jointly, up to $4,000,000
of shares of  Preferred  Stock with an  aggregated  Stated  Value  equal to such
Purchaser's  Subscription  Amount and  Warrants  as  determined  by  pursuant to
Section  2.2(a)(iii).  The  aggregate  number of shares of Preferred  Stock sold
hereunder shall be up to 4,000.  Each Purchaser shall deliver to the Company via
wire transfer or a certified check of immediately available funds equal to their
Subscription  Amount  and the  Company  shall  deliver to each  Purchaser  their
respective  shares of  Preferred  Stock and Warrants as  determined  pursuant to
Section  2.2(a) and the other  items set forth in Section  2.2  issuable  at the
Closing.  Upon  satisfaction  of the  conditions  set forth in Section  2.2, the
Closing shall occur at the offices of the Escrow Agent,  or such other  location
as the parties shall mutually agree.

      2.2 Deliveries.

            a)    On the Closing Date,  the Company shall deliver or cause to be
                  delivered to the Escrow  Agent with respect to each  Purchaser
                  the following:

                  (i)   this Agreement duly executed by the Company;

                  (ii)  a certificate evidencing a number of shares of Preferred
                        Stock  equal  to such  Purchaser's  Subscription  Amount
                        divided by the Stated  Value,  registered in the name of
                        such Purchaser;

                  (iii) a Warrant  registered  in the name of such  Purchaser to
                        purchase up to a number of shares of Common  Stock equal
                        to 50% of such Purchaser's  Subscription  Amount divided
                        by  $0.668,  with an  exercise  price  equal  to  $0.65,
                        subject to adjustment  therein,  and which Warrant shall
                        be exercisable  immediately  and have a term of exercise
                        equal to one year (the "Series A Warrant"),  in the form
                        of Exhibit C attached hereto;

                  (iv)  a Warrant  registered  in the name of such  Purchaser to
                        purchase up to a number of shares of Common  Stock equal
                        to 50% of such Purchaser's  Subscription  Amount divided
                        by  $0.668,  with an  exercise  price  equal  to  $0.76,
                        subject to  adjustment  therein,  which Warrant shall be
                        exercisable  immediately  and  have a term  of  exercise
                        equal to five years  (the  "Series B  Warrant"),  in the
                        form of Exhibit D attached hereto;

                  (v)   the  Registration  Rights Agreement duly executed by the
                        Company;

                  (vi)  a legal  opinion  of  Company  Counsel,  in the  form of
                        Exhibit E attached hereto;

                  (vii) the written voting  agreement,  in the form of Exhibit F
                        attached  hereto,  of all of the officers and  directors
                        holding  more  than 10% of the  issued  and  outstanding
                        shares  of Common  Stock on the date  hereof to vote all
                        Common  Stock  owned  by  each  of  such   officers  and
                        directors  as of the record date for the annual  meeting
                        of  shareholders  of the Company in favor of Shareholder
                        Approval; and

                 (viii) the Escrow Agreement duly executed by the Company.

            b)    On the Closing Date,  each Purchaser shall deliver or cause to
                  be delivered to the Escrow Agent the following:

                  (i)   this Agreement duly executed by such Purchaser;

                  (ii)  such Purchaser's Subscription Amount by wire transfer to
                        the account as specified in writing by the Company;


                                       5
<PAGE>

                  (iii) the Escrow  Agreement  duly executed by such  Purchaser;
                        and

                  (iv)  the Registration  Rights Agreement duly executed by such
                        Purchaser.

2.3   Closing Conditions.

      a)    The  obligations  of the Company  hereunder in  connection  with the
            Closing are subject to the following conditions being met:

            (i)   the  accuracy in all  material  respects  when made and on the
                  Closing  Date of the  representations  and  warranties  of the
                  Purchasers contained herein;

            (ii)  all  obligations,  covenants and  agreements of the Purchasers
                  required to be performed at or prior to the Closing Date shall
                  have been performed; and

            (iii) the  delivery  by the  Purchasers  of the  items  set forth in
                  Section 2.2(b) of this Agreement.

      b)    The respective obligations of the Purchasers hereunder in connection
            with the Closing are subject to the following conditions being met:

            (i)   the accuracy in all  material  respects on the Closing Date of
                  the  representations  and warranties of the Company  contained
                  herein;

            (ii)  all  obligations,  covenants  and  agreements  of the  Company
                  required to be performed at or prior to the Closing Date shall
                  have been performed;

            (iii) the  delivery by the Company of the items set forth in Section
                  2.2(a) of this Agreement;

            (iv)  there shall have been no Material  Adverse Effect with respect
                  to the Company since the date hereof; and

            (v)   From the date  hereof  to the  Closing  Date,  trading  in the
                  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 time prior to the Closing
                  Date, trading in securities generally as reported by Bloomberg
                  Financial Markets shall not have been suspended or limited, or
                  minimum  prices shall not have been  established on securities
                  whose trades are reported by such  service,  or on any Trading
                  Market,  nor shall a  banking  moratorium  have been  declared
                  either by the United States or New York State authorities.


                                       6
<PAGE>

                                   ARTICLE III
                         REPRESENTATIONS AND WARRANTIES

      3.1  Representations  and  Warranties of the Company.  Except as set forth
under the  corresponding  section of the disclosure  schedules  delivered to the
Purchasers  concurrently herewith (the "Disclosure  Schedules") which Disclosure
Schedules  shall  be  deemed  a  part  hereof,  the  Company  hereby  makes  the
representations and warranties set forth below to each Purchaser.

            (a) Subsidiaries. All of the direct and indirect subsidiaries of the
      Company are set forth on Schedule  3.1(a).  The Company owns,  directly or
      indirectly,  all of the capital  stock or other  equity  interests of each
      Subsidiary free and clear of any Liens, and all the issued and outstanding
      shares of capital  stock of each  Subsidiary  are  validly  issued and are
      fully paid,  non-assessable  and free of preemptive  and similar rights to
      subscribe for or purchase securities.  If the Company has no subsidiaries,
      then references in the Transaction  Documents to the Subsidiaries  will be
      disregarded.

            (b)  Organization  and  Qualification.  Each of the  Company and the
      Subsidiaries  is an  entity  duly  incorporated  or  otherwise  organized,
      validly  existing and in good standing under the laws of the  jurisdiction
      of its  incorporation or organization (as applicable),  with the requisite
      power and authority to own and use its  properties and assets and to carry
      on its  business  as  currently  conducted.  Neither  the  Company nor any
      Subsidiary  is in  violation  or default of any of the  provisions  of its
      respective  certificate  or  articles  of  incorporation,  bylaws or other
      organizational  or  charter  documents.   Each  of  the  Company  and  the
      Subsidiaries is duly qualified to conduct business and is in good standing
      as a foreign corporation or other entity in each jurisdiction in which the
      nature  of the  business  conducted  or  property  owned by it makes  such
      qualification necessary, except where the failure to be so qualified or in
      good  standing,  as the  case may be,  could  not  have or  reasonably  be
      expected  to  result in (i) a  material  adverse  effect on the  legality,
      validity or  enforceability of any Transaction  Document,  (ii) a material
      adverse effect on the results of operations,  assets, business,  prospects
      or  financial  condition of the Company and the  Subsidiaries,  taken as a
      whole,  or (iii) a material  adverse  effect on the  Company's  ability to
      perform in any material  respect on a timely basis its  obligations  under
      any Transaction  Document (any of (i), (ii) or (iii), a "Material  Adverse
      Effect") and to its  knowledge no  Proceeding  has been  instituted in any
      such jurisdiction  revoking,  limiting or curtailing or seeking to revoke,
      limit or curtail such power and authority or qualification.

            (c)  Authorization;  Enforcement.  The  Company  has  the  requisite
      corporate  power  and  authority  to  enter  into  and to  consummate  the
      transactions  contemplated  by  each  of  the  Transaction  Documents  and
      otherwise  to carry out its  obligations  thereunder.  The  execution  and
      delivery  of each of the  Transaction  Documents  by the  Company  and the
      consummation by it of the transactions contemplated thereby have been duly
      authorized  by all  necessary  action  on the part of the  Company  and no
      further  action is required by the Company in connection  therewith  other
      than in connection with the Required Approvals.  Each Transaction Document
      has been (or upon  delivery  will have been) duly  executed by the Company
      and, when delivered in accordance  with the terms hereof,  will constitute
      the valid and binding  obligation of the Company  enforceable  against the
      Company in  accordance  with its terms except (i) as limited by applicable
      bankruptcy,  insolvency,  reorganization,  moratorium  and  other  laws of
      general application  affecting  enforcement of creditors' rights generally
      and (ii) as limited  by laws  relating  to the  availability  of  specific
      performance, injunctive relief or other equitable remedies.


                                       7
<PAGE>

            (d) No Conflicts.  The  execution,  delivery and  performance of the
      Transaction  Documents by the Company and the  consummation by the Company
      of the other  transactions  contemplated  thereby do not and will not: (i)
      conflict   with  or  violate  any   provision  of  the  Company's  or  any
      Subsidiary's  certificate  or articles of  incorporation,  bylaws or other
      organizational or charter documents,  or (ii) conflict with, or constitute
      a default  (or an event  that with  notice or lapse of time or both  would
      become a default)  under,  result in the  creation of any Lien upon any of
      the  properties  or assets of the  Company or any  Subsidiary,  or give to
      others any rights of termination,  amendment, acceleration or cancellation
      (with or without notice, lapse of time or both) of, any agreement,  credit
      facility,  debt or other  instrument  (evidencing  a Company or Subsidiary
      debt or otherwise) to which the Company or any Subsidiary is a party or by
      which any property or asset of the Company or any  Subsidiary  is bound or
      affected,  or (iii)  subject to the Required  Approvals,  conflict with or
      result in a  violation  of any law,  rule,  regulation,  order,  judgment,
      injunction,  decree  or other  restriction  of any  court or  governmental
      authority  to which the  Company or a  Subsidiary  is  subject  (including
      federal  and  state  securities  laws and  regulations),  or by which  any
      property or asset of the  Company or a  Subsidiary  is bound or  affected;
      except in the case of each of clauses  (ii) and  (iii),  such as could not
      have or reasonably be expected to result in a Material Adverse Effect.

            (e) Filings,  Consents and Approvals. The Company is not required to
      obtain any consent, waiver, authorization or order of, give any notice to,
      or make any  filing or  registration  with,  any  court or other  federal,
      state, local or other governmental authority or other Person in connection
      with  the  execution,  delivery  and  performance  by the  Company  of the
      Transaction Documents, other than (i) filings required pursuant to Section
      4.6, (ii) the filing with the  Commission of the  Registration  Statement,
      (iii) the notice and/or  application(s) to each applicable  Trading Market
      for the  issuance  and sale of the  Preferred  Stock and  Warrants and the
      listing of the Underlying Shares and Warrant Shares for trading thereon in
      the time and manner required  thereby,  (iv) the filing of Form D with the
      Commission  and such filings as are  required to be made under  applicable
      state securities laws and (vi)  Shareholder  Approval  (collectively,  the
      "Required Approvals").

            (f) Issuance of the  Securities.  The Securities are duly authorized
      and,  when  issued  and  paid  for  in  accordance   with  the  applicable
      Transaction  Documents,  will be duly and validly  issued,  fully paid and
      nonassessable,  free and clear of all Liens  imposed by the Company  other
      than restrictions on transfer  provided for in the Transaction  Documents.
      The Company has reserved from its duly  authorized  capital stock a number
      of  shares  of  Common  Stock  for  issuance  of the  Warrant  Shares  and
      Underlying Shares at least equal to the Actual Minimum on the date hereof.
      The Company has not, and to the knowledge of the Company,  no Affiliate of
      the  Company  has sold,  offered  for sale or  solicited  offers to buy or
      otherwise  negotiated  in respect of any security (as defined in Section 2
      of the Securities  Act) that would be integrated with the offer or sale of
      the Securities in a manner that would require the  registration  under the
      Securities  Act of the sale of the Securities to the  Purchasers,  or that
      would be integrated  with the offer or sale of the Securities for purposes
      of the rules and regulations of any Trading Market.


                                       8
<PAGE>

            (g)  Capitalization.   The  capitalization  of  the  Company  is  as
      described  in the  Company's  most recent  periodic  report filed with the
      Commission. The Company has not issued any capital stock since such filing
      other than  pursuant to the exercise of employee  stock  options under the
      Company's  stock option  plans,  the issuance of shares of Common Stock to
      employees  pursuant to the  Company's  employee  stock  purchase  plan and
      pursuant  to the  conversion  or  exercise  of  outstanding  Common  Stock
      Equivalents.  No Person has any right of first refusal,  preemptive right,
      right  of  participation,  or any  similar  right  to  participate  in the
      transactions contemplated by the Transaction Documents. Except as a result
      of the  purchase  and sale of the  Securities,  there  are no  outstanding
      options,  warrants, script rights to subscribe to, calls or commitments of
      any character whatsoever relating to, or securities, rights or obligations
      convertible  into or  exchangeable  for, or giving any Person any right to
      subscribe  for or  acquire,  any  shares of Common  Stock,  or  contracts,
      commitments,  understandings  or  arrangements by which the Company or any
      Subsidiary  is or may become  bound to issue  additional  shares of Common
      Stock or Common Stock Equivalents. The issuance and sale of the Securities
      will not  obligate  the Company to issue  shares of Common  Stock or other
      securities to any Person (other than the  Purchasers)  and will not result
      in a right of any holder of  Company  securities  to adjust the  exercise,
      conversion,  exchange  or reset price  under such  securities.  All of the
      outstanding  shares of capital  stock of the Company  are validly  issued,
      fully paid and  nonassessable,  have been  issued in  compliance  with all
      federal and state securities laws, and none of such outstanding shares was
      issued  in  violation  of any  preemptive  rights  or  similar  rights  to
      subscribe for or purchase securities. No further approval or authorization
      of any  stockholder,  the Board of  Directors  of the Company or others is
      required for the issuance and sale of the shares of Preferred Stock. There
      are  no  stockholders  agreements,  voting  agreements  or  other  similar
      agreements  with  respect  to the  Company's  capital  stock to which  the
      Company is a party or, to the  knowledge of the Company,  between or among
      any of the Company's stockholders.

            (h) SEC  Reports;  Financial  Statements.  The Company has filed all
      reports  required  to be  filed  by it under  the  Securities  Act and the
      Exchange Act,  including  pursuant to Section 13(a) or 15(d) thereof,  for
      the two years  preceding  the date hereof (or such  shorter  period as the
      Company  was  required  by law  to  file  such  material)  (the  foregoing
      materials,  including the exhibits thereto, being collectively referred to
      herein as the "SEC  Reports")  on a timely  basis or has  received a valid
      extension of such time of filing and has filed any such SEC Reports  prior
      to the expiration of any such extension. As of their respective dates, the
      SEC Reports complied in all material respects with the requirements of the
      Securities  Act and the Exchange Act and the rules and  regulations of the
      Commission  promulgated  thereunder,  and  none of the SEC  Reports,  when
      filed,  contained  any untrue  statement of a material  fact or omitted to
      state a material fact required to be stated  therein or necessary in order
      to make the statements  therein, in light of the circumstances under which
      they were made, not  misleading.  The financial  statements of the Company
      included  in  the  SEC  Reports  comply  in  all  material  respects  with
      applicable  accounting  requirements  and the rules and regulations of the
      Commission with respect  thereto as in effect at the time of filing.  Such
      financial  statements  have been prepared in accordance with United States
      generally  accepted  accounting  principles  applied on a consistent basis
      during the periods involved ("GAAP"), except as may be otherwise specified
      in  such  financial  statements  or the  notes  thereto  and  except  that
      unaudited  financial  statements may not contain all footnotes required by
      GAAP, and fairly present in all material respects the financial  condition
      of the Company and its  consolidated  subsidiaries as of and for the dates
      thereof and the results of operations  and cash flows for the periods then
      ended,  subject,  in  the  case  of  unaudited   statements,   to  normal,
      immaterial, year-end audit adjustments.


                                       9
<PAGE>

            (i) Material Changes. Since the date of the latest audited financial
      statements  included  within  the  SEC  Reports,  except  as  specifically
      disclosed in the SEC Reports,  (i) there has been no event,  occurrence or
      development that has had or that could reasonably be expected to result in
      a  Material  Adverse  Effect,  (ii)  the  Company  has  not  incurred  any
      liabilities  (contingent  or otherwise)  other than (A) trade payables and
      accrued  expenses  incurred in the ordinary course of business  consistent
      with past practice and (B) liabilities not required to be reflected in the
      Company's  financial  statements  pursuant  to  GAAP  or  required  to  be
      disclosed in filings made with the  Commission,  (iii) the Company has not
      altered its method of  accounting,  (iv) the  Company has not  declared or
      made  any  dividend  or  distribution  of cash or  other  property  to its
      stockholders or purchased,  redeemed or made any agreements to purchase or
      redeem any shares of its capital  stock and (v) the Company has not issued
      any equity  securities  to any  officer,  director  or  Affiliate,  except
      pursuant to existing Company stock option plans. The Company does not have
      pending before the Commission  any request for  confidential  treatment of
      information.

            (j)  Litigation.  There  is no  action,  suit,  inquiry,  notice  of
      violation, proceeding or investigation pending or, to the knowledge of the
      Company,  threatened  against or affecting the Company,  any Subsidiary or
      any of their  respective  properties  before or by any court,  arbitrator,
      governmental or administrative  agency or regulatory  authority  (federal,
      state,  county,  local or foreign)  (collectively,  an "Action") which (i)
      adversely  affects or challenges the legality,  validity or enforceability
      of any of the  Transaction  Documents or the Securities or (ii) could,  if
      there were an  unfavorable  decision,  have or  reasonably  be expected to
      result  in  a  Material  Adverse  Effect.  Neither  the  Company  nor  any
      Subsidiary,  nor any  director  or  officer  thereof,  is or has  been the
      subject of any Action involving a claim of violation of or liability under
      federal or state  securities  laws or a claim of breach of fiduciary duty.
      There has not been,  and to the  knowledge  of the  Company,  there is not
      pending or contemplated, any investigation by the Commission involving the
      Company or any current or former  director or officer of the Company.  The
      Commission  has not issued any stop order or other  order  suspending  the
      effectiveness  of any  registration  statement filed by the Company or any
      Subsidiary under the Exchange Act or the Securities Act.


                                       10
<PAGE>

            (k) Labor  Relations.  No material  labor dispute  exists or, to the
      knowledge of the Company, is imminent with respect to any of the employees
      of the Company which could  reasonably be expected to result in a Material
      Adverse Effect.

            (l)  Compliance.  Neither the Company nor any  Subsidiary  (i) is in
      default  under or in violation of (and no event has occurred  that has not
      been waived that, with notice or lapse of time or both,  would result in a
      default by the Company or any  Subsidiary  under),  nor has the Company or
      any Subsidiary  received  notice of a claim that it is in default under or
      that it is in violation of, any indenture, loan or credit agreement or any
      other agreement or instrument to which it is a party or by which it or any
      of its  properties is bound  (whether or not such default or violation has
      been waived),  (ii) is in violation of any order of any court,  arbitrator
      or governmental body, or (iii) is or has been in violation of any statute,
      rule  or  regulation  of any  governmental  authority,  including  without
      limitation all foreign,  federal,  state and local laws  applicable to its
      business except in each case as could not have a Material Adverse Effect.

            (m) Regulatory Permits. The Company and the Subsidiaries possess all
      certificates,   authorizations  and  permits  issued  by  the  appropriate
      federal,  state,  local or foreign  regulatory  authorities  necessary  to
      conduct  their  respective  businesses  as  described  in the SEC Reports,
      except  where  the  failure  to  possess  such  permits  could not have or
      reasonably be expected to result in a Material  Adverse Effect  ("Material
      Permits"),  and neither the Company nor any  Subsidiary  has  received any
      notice of proceedings  relating to the revocation or  modification  of any
      Material Permit.

            (n) Title to Assets.  The Company and the Subsidiaries have good and
      marketable  title in fee simple to all real property owned by them that is
      material to the business of the Company and the  Subsidiaries and good and
      marketable  title in all personal  property owned by them that is material
      to the business of the Company and the Subsidiaries, in each case free and
      clear of all Liens, except for Liens as do not materially affect the value
      of such  property and do not  materially  interfere  with the use made and
      proposed to be made of such  property by the Company and the  Subsidiaries
      and Liens for the payment of federal, state or other taxes, the payment of
      which is neither  delinquent  nor subject to penalties.  Any real property
      and facilities  held under lease by the Company and the  Subsidiaries  are
      held by them under valid,  subsisting and enforceable  leases of which the
      Company and the Subsidiaries are in compliance.

            (o) Patents and Trademarks.  The Company and the Subsidiaries  have,
      or have  rights to use,  all  patents,  patent  applications,  trademarks,
      trademark applications,  service marks, trade names, copyrights,  licenses
      and  other  similar  rights  that are  necessary  or  material  for use in
      connection  with  their  respective  businesses  as  described  in the SEC
      Reports  and which the  failure to so have  could have a Material  Adverse
      Effect  (collectively,  the "Intellectual  Property Rights").  Neither the
      Company  nor any  Subsidiary  has  received  a  written  notice  that  the
      Intellectual  Property  Rights  used  by the  Company  or  any  Subsidiary
      violates or infringes  upon the rights of any Person.  To the knowledge of
      the Company,  all such  Intellectual  Property  Rights are enforceable and
      there  is no  existing  infringement  by  another  Person  of  any  of the
      Intellectual Property Rights.


                                       11
<PAGE>

            (p)  Insurance.  The  Company  and the  Subsidiaries  are insured by
      insurers of recognized  financial  responsibility  against such losses and
      risks and in such amounts as are prudent and  customary in the  businesses
      in which the Company and the Subsidiaries  are engaged,  including but not
      limited to,  directors and officers  insurance  coverage at least equal to
      the aggregate  Subscription  Amount.  To the best of Company's  knowledge,
      such insurance  contracts and policies are accurate and complete.  Neither
      the Company nor any  Subsidiary has any reason to believe that it will not
      be able to renew its existing insurance coverage as and when such coverage
      expires or to obtain  similar  coverage  from  similar  insurers as may be
      necessary to continue its business without a significant increase in cost.

            (q) Transactions With Affiliates and Employees.  Except as set forth
      in the SEC Reports,  none of the officers or directors of the Company and,
      to the  knowledge of the Company,  none of the employees of the Company is
      presently a party to any  transaction  with the Company or any  Subsidiary
      (other than for services as employees, officers and directors),  including
      any contract,  agreement or other arrangement providing for the furnishing
      of services to or by, providing for rental of real or personal property to
      or from, or otherwise requiring payments to or from any officer,  director
      or such employee or, to the knowledge of the Company,  any entity in which
      any officer,  director, or any such employee has a substantial interest or
      is an officer,  director,  trustee or  partner,  in each case in excess of
      $60,000  other  than (i) for  payment  of  salary or  consulting  fees for
      services  rendered,  (ii) reimbursement for expenses incurred on behalf of
      the Company and (iii) for other employee benefits,  including stock option
      agreements under any stock option plan of the Company.

            (r) Sarbanes-Oxley;  Internal Accounting Controls. The Company is in
      material  compliance with all provisions of the Sarbanes-Oxley Act of 2002
      which are  applicable  to it as of the Closing  Date.  The Company and the
      Subsidiaries  maintain a system of internal accounting controls sufficient
      to provide  reasonable  assurance  that (i)  transactions  are executed in
      accordance  with  management's  general or specific  authorizations,  (ii)
      transactions are recorded as necessary to permit  preparation of financial
      statements in conformity  with GAAP 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.  The
      Company has established  disclosure controls and procedures (as defined in
      Exchange Act Rules  13a-15(e) and  15d-15(e)) for the Company and designed
      such   disclosure   controls  and   procedures  to  ensure  that  material
      information relating to the Company,  including its Subsidiaries,  is made
      known  to  the  certifying  officers  by  others  within  those  entities,
      particularly  during the period in which the Company's most recently filed
      periodic  report  under  the  Exchange  Act,  as the case may be, is being
      prepared.   The  Company's   certifying   officers   have   evaluated  the
      effectiveness  of the  Company's  controls and  procedures  as of the date
      prior to the filing date of the most recently filed periodic  report under
      the Exchange Act (such date, the "Evaluation Date"). The Company presented
      in its most  recently  filed  periodic  report  under the Exchange Act the
      conclusions of the  certifying  officers  about the  effectiveness  of the
      disclosure  controls and procedures  based on their  evaluations as of the
      Evaluation Date. Since the Evaluation Date, there have been no significant
      changes in the  Company's  internal  controls  (as such term is defined in
      Item 307(b) of Regulation S-K under the Exchange Act) or, to the Company's
      knowledge,  in other factors that could significantly affect the Company's
      internal controls.


                                       12
<PAGE>

            (s) Certain Fees. No brokerage or finder's fees or  commissions  are
      or will be payable  by the  Company to any  broker,  financial  advisor or
      consultant,  finder,  placement agent,  investment  banker,  bank or other
      Person with respect to the  transactions  contemplated  by this Agreement.
      The Purchasers  shall have no obligation  with respect to any fees or with
      respect to any claims made by or on behalf of other  Persons for fees of a
      type  contemplated  in this Section that may be due in connection with the
      transactions contemplated by this Agreement.

            (t) Private  Placement.  Assuming  the  accuracy  of the  Purchasers
      representations  and warranties set forth in Section 3.2, no  registration
      under  the  Securities  Act is  required  for the  offer  and  sale of the
      Securities by the Company to the Purchasers as  contemplated  hereby.  The
      issuance and sale of the  Securities  hereunder  does not  contravene  the
      rules and regulations of the Trading Market.

            (u) Investment Company.  The Company is not, and is not an Affiliate
      of, and  immediately  after receipt of payment for the shares of Preferred
      Stock,  will not be or be an Affiliate of, an "investment  company" within
      the meaning of the Investment Company Act of 1940, as amended. The Company
      shall conduct its business in a manner so that it will not become  subject
      to the Investment Company Act.

            (v)  Registration  Rights.  No  Person  has any  right to cause  the
      Company  to  effect  the  registration  under  the  Securities  Act of any
      securities of the Company.

            (w) Listing and Maintenance Requirements. The Company's Common Stock
      is  registered  pursuant to Section  12(b) of the  Exchange  Act,  and the
      Company  has taken no action  designed  to, or which to its  knowledge  is
      likely to have the effect of,  terminating the  registration of the Common
      Stock under the Exchange Act nor has the Company received any notification
      that the Commission is contemplating  terminating such  registration.  The
      Company  has not, in the 12 months  preceding  the date  hereof,  received
      notice  from any Trading  Market on which the Common  Stock is or has been
      listed or quoted to the effect that the Company is not in compliance  with
      the  listing or  maintenance  requirements  of such  Trading  Market.  The
      Company  is,  and  has no  reason  to  believe  that  it  will  not in the
      foreseeable future continue to be, in compliance with all such listing and
      maintenance requirements.


                                       13
<PAGE>

            (x) Application of Takeover  Protections.  The Company and its Board
      of Directors have taken all necessary  action,  if any, in order to render
      inapplicable any control share acquisition,  business combination,  poison
      pill  (including  any  distribution  under a  rights  agreement)  or other
      similar  anti-takeover   provision  under  the  Company's  Certificate  of
      Incorporation  (or similar charter  documents) or the laws of its state of
      incorporation  that is or could become  applicable to the  Purchasers as a
      result of the Purchasers and the Company  fulfilling their  obligations or
      exercising their rights under the Transaction Documents, including without
      limitation the Company's  issuance of the  Securities and the  Purchasers'
      ownership of the Securities.

            (y) Disclosure.  The Company  confirms that neither it nor any other
      Person  acting on its behalf has provided any of the  Purchasers  or their
      agents  or  counsel  with  any  information   that  constitutes  or  might
      constitute material,  nonpublic  information.  The Company understands and
      confirms that the  Purchasers  will rely on the foregoing  representations
      and covenants in effecting  transactions in securities of the Company. All
      disclosure provided to the Purchasers  regarding the Company, its business
      and  the  transactions   contemplated  hereby,  including  the  Disclosure
      Schedules to this Agreement, furnished by or on behalf of the Company with
      respect to the  representations  and  warranties  made herein are true and
      correct with respect to such  representations  and  warranties  and do not
      contain  any  untrue  statement  of a  material  fact or omit to state any
      material fact necessary in order to make the statements  made therein,  in
      light of the circumstances under which they were made, not misleading. The
      Company  acknowledges  and agrees that no Purchaser  makes or has made any
      representations   or   warranties   with   respect  to  the   transactions
      contemplated hereby other than those specifically set forth in Section 3.2
      hereof.

            (z) No Integrated Offering. Assuming the accuracy of the Purchasers'
      representations  and  warranties  set forth in Section  3.2,  neither  the
      Company, nor any of its affiliates,  nor any Person acting on its or their
      behalf  has,  directly  or  indirectly,  made any  offers  or sales of any
      security or solicited any offers to buy any security,  under circumstances
      that would cause this offering of the  Securities  to be  integrated  with
      prior  offerings by the Company for purposes of the  Securities Act or any
      applicable shareholder approval provisions, including, without limitation,
      under the rules and  regulations  of any exchange or  automated  quotation
      system  on which  any of the  securities  of the  Company  are  listed  or
      designated.

            (aa) Solvency. Based on the financial condition of the Company as of
      the Closing Date after giving  effect to the receipt by the Company of the
      proceeds from the sale of the Securities hereunder, (i) the Company's fair
      saleable  value of its assets  exceeds the amount that will be required to
      be paid  on or in  respect  of the  Company's  existing  debts  and  other
      liabilities (including known contingent  liabilities) as they mature; (ii)
      the Company's assets do not constitute unreasonably small capital to carry
      on its  business  for the  current  fiscal  year as now  conducted  and as
      proposed to be conducted  including  its capital needs taking into account
      the  particular  capital  requirements  of the  business  conducted by the
      Company,  and  projected  capital  requirements  and capital  availability
      thereof; and (iii) the current cash flow of the Company, together with the
      proceeds  the  Company  would  receive,  were it to  liquidate  all of its
      assets,  after taking into account all anticipated uses of the cash, would
      be  sufficient  to pay all  amounts on or in respect of its debt when such
      amounts  are  required to be paid.  The  Company  does not intend to incur
      debts  beyond its  ability to pay such debts as they mature  (taking  into
      account  the timing and  amounts of cash to be payable on or in respect of
      its debt).  The Company  has no  knowledge  of any facts or  circumstances
      which  lead  it to  believe  that  it  will  file  for  reorganization  or
      liquidation   under  the   bankruptcy  or   reorganization   laws  of  any
      jurisdiction  within one year from the Closing  Date.  The SEC Reports set
      forth as of the  dates  thereof  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  $50,000  (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 $50,000 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.


                                       14
<PAGE>

            (bb) Form S-3  Eligibility.  The Company is eligible to register the
      resale of the  Underlying  Shares and the Warrant Shares for resale by the
      Purchaser on Form S-3 promulgated under the Securities Act.

            (cc) Tax Status.  Except for matters that would not, individually or
      in the  aggregate,  have or reasonably be expected to result in a Material
      Adverse  Effect,  the Company and each  Subsidiary has filed all necessary
      federal,  state and foreign  income and franchise tax returns and has paid
      or  accrued  all  taxes  shown  as due  thereon,  and the  Company  has no
      knowledge  of a tax  deficiency  which  has been  asserted  or  threatened
      against the Company or any Subsidiary.

            (dd) No General  Solicitation.  Neither  the  Company nor any person
      acting on behalf of the Company has offered or sold any of the  Securities
      by any form of general  solicitation or general  advertising.  The Company
      has offered the  Securities  for sale only to the  Purchasers  and certain
      other  "accredited  investors"  within  the  meaning of Rule 501 under the
      Securities Act.

            (ee) Foreign  Corrupt  Practices.  Neither the  Company,  nor to the
      knowledge  of the Company,  any agent or other person  acting on behalf of
      the Company,  has (i) directly or  indirectly,  used any corrupt funds for
      unlawful  contributions,  gifts,  entertainment or other unlawful expenses
      related to foreign or domestic political activity,  (ii) made any unlawful
      payment to foreign or domestic government officials or employees or to any
      foreign or domestic  political  parties or campaigns from corporate funds,
      (iii) failed to disclose  fully any  contribution  made by the Company (or
      made by any  person  acting on its  behalf of which the  Company is aware)
      which is in violation of law, or (iv) violated in any material respect any
      provision of the Foreign Corrupt Practices Act of 1977, as amended.


                                       15
<PAGE>

            (ff)  Accountants.  The  Company's  accountants  are  set  forth  on
      Schedule 3.1(ff) of the Disclosure  Schedule.  To the Company's knowledge,
      such accountants,  who the Company expects will express their opinion with
      respect to the financial statements to be included in the Company's Annual
      Report  on Form  10-KSB  for the  year  ending  December  31,  2004  are a
      registered public accounting firm as required by the Securities Act.

            (gg)  Seniority.  As of the Closing Date, no  indebtedness  or other
      equity  of the  Company  is  senior  to the  Preferred  Stock  in right of
      payment,   whether  with  respect  to  interest  or  upon  liquidation  or
      dissolution,  or otherwise,  other than  indebtedness  secured by purchase
      money  security  interests  (which is senior only as to underlying  assets
      covered thereby) and capital lease obligations (which is senior only as to
      the property covered thereby).

            (hh) No  Disagreements  with  Accountants and Lawyers.  There are no
      disagreements of any kind presently existing, or reasonably anticipated by
      the Company to arise,  between  the  accountants  and lawyers  formerly or
      presently  employed by the Company which  individually or in the aggregate
      could  reasonably  be expected to result in a Material  Adverse  Effect or
      result in a delay in the effectiveness of the Registration Statement,  and
      the Company is current  with  respect to any fees owed to its  accountants
      and lawyers.

            (ii) Acknowledgment  Regarding  Purchasers'  Purchase of Securities.
      The Company  acknowledges and agrees that each of the Purchasers is acting
      solely in the  capacity of an arm's length  purchaser  with respect to the
      Transaction  Documents  and  the  transactions  contemplated  hereby.  The
      Company  further  acknowledges  that no Purchaser is acting as a financial
      advisor or  fiduciary  of the Company (or in any  similar  capacity)  with
      respect to this Agreement and the transactions contemplated hereby and any
      advice given by any Purchaser or any of their  respective  representatives
      or  agents  in  connection  with  this  Agreement  and  the   transactions
      contemplated  hereby is merely  incidental to the Purchasers'  purchase of
      the Securities.  The Company further represents to each Purchaser that the
      Company's  decision to enter into this  Agreement has been based solely on
      the independent evaluation of the transactions  contemplated hereby by the
      Company and its representatives.

      The Purchaser  acknowledges  and agrees that the Company does not make and
has not made any  representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in this Section 3.1.

      3.2  Representations  and  Warranties of the  Purchasers.  Each  Purchaser
hereby, for itself and for no other Purchaser, represents and warrants as of the
date hereof and as of the Closing Date to the Company as follows:


                                       16
<PAGE>

            (a)  Organization;  Authority.  Such  Purchaser  is an  entity  duly
      organized,  validly  existing and in good  standing  under the laws of the
      jurisdiction of its organization with full right, corporate or partnership
      power and  authority  to enter  into and to  consummate  the  transactions
      contemplated by the  Transaction  Documents and otherwise to carry out its
      obligations  thereunder.  The execution,  delivery and performance by such
      Purchaser of the  transactions  contemplated  by this  Agreement have been
      duly  authorized by all necessary  corporate or similar action on the part
      of such Purchaser.  Each  Transaction  Document to which it is a party has
      been duly executed by such Purchaser, and when delivered by such Purchaser
      in accordance with the terms hereof, will constitute the valid and legally
      binding obligation of such Purchaser, enforceable against it in accordance
      with its terms, except (i) as limited by general equitable  principles and
      applicable bankruptcy,  insolvency,  reorganization,  moratorium and other
      laws of general  application  affecting  enforcement of creditors'  rights
      generally,  (ii)  as  limited  by laws  relating  to the  availability  of
      specific  performance,  injunctive relief or other equitable  remedies and
      (iii)  insofar  as  indemnification  and  contribution  provisions  may be
      limited by applicable law.

            (b) Purchaser  Representation.  Such Purchaser  understands that the
      Securities are "restricted  securities" and have not been registered under
      the Securities Act or any applicable state securities law and is acquiring
      the  Securities as principal for its own account and not with a view to or
      for distributing or reselling such Securities or any part thereof,  has no
      present  intention  of  distributing  any of  such  Securities  and has no
      arrangement  or  understanding   with  any  other  persons  regarding  the
      distribution  of such  Securities  (this  representation  and warranty not
      limiting such  Purchaser's  right to sell the  Securities  pursuant to the
      Registration  Statement or otherwise in compliance with applicable federal
      and state  securities  laws).  Such  Purchaser is acquiring the Securities
      hereunder in the ordinary course of its business.  Such Purchaser does not
      have any  agreement or  understanding,  directly or  indirectly,  with any
      Person to distribute any of the Securities.

            (c)  Purchaser  Status.  At the time such  Purchaser was offered the
      Securities,  it was,  and at the date  hereof  it is,  and on each date on
      which it exercises any  Warrants,  it will be either:  (i) an  "accredited
      investor"  as defined  under the  Securities  Act and/or (ii) a "qualified
      institutional  buyer" as defined in Rule 144A(a) under the Securities Act.
      Such Purchaser is not required to be registered as a  broker-dealer  under
      Section 15 of the Exchange Act.

            (d) Experience of Such Purchaser.  Such  Purchaser,  either alone or
      together with its representatives,  has such knowledge, sophistication and
      experience  in  business  and  financial  matters  so as to be  capable of
      evaluating  the  merits  and risks of the  prospective  investment  in the
      Securities,  and has so evaluated the merits and risks of such investment.
      Such  Purchaser is able to bear the economic  risk of an investment in the
      Securities  and, at the present time, is able to afford a complete loss of
      such investment.

            (e) General  Solicitation.  Such  Purchaser  is not  purchasing  the
      Securities  as a result  of any  advertisement,  article,  notice or other
      communication   regarding  the  Securities  published  in  any  newspaper,
      magazine  or  similar  media  or  broadcast  over  television  or radio or
      presented  at any  seminar or any other  general  solicitation  or general
      advertisement.


                                       17
<PAGE>

            (f) Short Sale.  Each Purchaser  represents that after the date that
      such Purchaser  learned of the terms of this  transaction and prior to the
      date hereof, neither it nor any Person over which the Purchaser has direct
      control,  have made any net short  sales of, or granted any option for the
      purchase of or entered  into any hedging or similar  transaction  with the
      same economic effect as a net short sale, in the Common Stock.

      The Company  acknowledges  and agrees that each Purchaser does not make or
has not made any  representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in this Section 3.2.

                                   ARTICLE IV
                         OTHER AGREEMENTS OF THE PARTIES

      4.1 Transfer Restrictions.

            (a) The Securities may only be disposed of in compliance  with state
      and federal securities laws. In connection with any transfer of Securities
      other than pursuant to an effective registration statement or Rule 144, to
      the Company or to an  affiliate  of a Purchaser  or in  connection  with a
      pledge as  contemplated  in Section  4.1(b),  the  Company may require the
      transferor  thereof  to  provide  to the  Company  an  opinion  of counsel
      selected by the transferor and reasonably  acceptable to the Company,  the
      form and substance of which opinion  shall be reasonably  satisfactory  to
      the  Company,   to  the  effect  that  such   transfer  does  not  require
      registration of such transferred Securities under the Securities Act. As a
      condition of transfer,  any such  transferee  shall agree in writing to be
      bound by the  terms of this  Agreement  and  shall  have the  rights  of a
      Purchaser under this Agreement and the Registration Rights Agreement.

            (b) The Purchasers  agree to the imprinting,  so long as is required
      by this  Section  4.1(b),  of a  legend  on any of the  Securities  in the
      following form:

      [NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES
      ARE [EXERCISABLE]  [CONVERTIBLE]] HAVE BEEN REGISTERED WITH THE SECURITIES
      AND  EXCHANGE  COMMISSION  OR THE  SECURITIES  COMMISSION  OF ANY STATE IN
      RELIANCE UPON AN EXEMPTION FROM  REGISTRATION  UNDER THE SECURITIES ACT OF
      1933, AS AMENDED (THE  "SECURITIES  ACT"),  AND,  ACCORDINGLY,  MAY NOT BE
      OFFERED OR SOLD EXCEPT  PURSUANT TO AN  EFFECTIVE  REGISTRATION  STATEMENT
      UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN
      A  TRANSACTION  NOT  SUBJECT  TO,  THE  REGISTRATION  REQUIREMENTS  OF THE
      SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE  STATE SECURITIES LAWS AS
      EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE  TRANSFEROR TO SUCH EFFECT,
      THE  SUBSTANCE  OF WHICH SHALL BE  REASONABLY  ACCEPTABLE  TO THE COMPANY.
      THESE  SECURITIES  AND THE  SECURITIES  ISSUABLE  UPON  EXERCISE  OF THESE
      SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
      OTHER LOAN SECURED BY SUCH SECURITIES.


                                       18
<PAGE>

            The Company  acknowledges  and agrees that a Purchaser may from time
      to time pledge pursuant to a bona fide margin  agreement with a registered
      broker-dealer  or  grant  a  security  interest  in  some  or  all  of the
      Securities to a financial  institution that is an "accredited investor" as
      defined in Rule 501(a) under the Securities Act and who agrees to be bound
      by the provisions of this Agreement and the Registration  Rights Agreement
      and, if required under the terms of such  arrangement,  such Purchaser may
      transfer pledged or secured Securities to the pledgees or secured parties.
      Such a pledge or transfer  would not be subject to approval of the Company
      and no legal  opinion of legal  counsel of the pledgee,  secured  party or
      pledgor  shall be required in  connection  therewith.  Further,  no notice
      shall be required of such pledge. At the appropriate  Purchaser's expense,
      the Company will execute and deliver such  reasonable  documentation  as a
      pledgee  or  secured  party  of  Securities  may  reasonably   request  in
      connection with a pledge or transfer of the Securities,  including, if the
      Securities are subject to registration pursuant to the Registration Rights
      Agreement,   the  preparation  and  filing  of  any  required   prospectus
      supplement  under  Rule  424(b)(3)  under  the  Securities  Act  or  other
      applicable provision of the Securities Act to appropriately amend the list
      of Selling Stockholders thereunder.

            (c) Certificates evidencing the Underlying Shares and Warrant Shares
      shall not  contain any legend  (including  the legend set forth in Section
      4.1(b)  hereof):  (i)  while  a  registration   statement  (including  the
      Registration  Statement) covering the resale of such security is effective
      under the Securities  Act, or (ii)  following any sale of such  Underlying
      Shares  and  Warrant  Shares  pursuant  to  Rule  144,  or  (iii)  if such
      Underlying  Shares and  Warrant  Shares are  eligible  for sale under Rule
      144(k),   or  (iv)  if  such  legend  is  not  required  under  applicable
      requirements of the Securities Act (including judicial interpretations and
      pronouncements  issued by the staff of the Commission).  The Company shall
      cause its counsel to issue a legal opinion to the Company's transfer agent
      promptly  after the Effective  Date if required by the Company's  transfer
      agent to effect the removal of the legend hereunder.  If all or any shares
      of  Preferred  Stock or any portion of a Warrant is converted or exercised
      (as  applicable)  at a  time  when  there  is  an  effective  registration
      statement to cover the resale of the Underlying Shares and Warrant Shares,
      or if such  Underlying  Shares and  Warrant  Shares may be sold under Rule
      144(k)  or if such  legend  is not  otherwise  required  under  applicable
      requirements  of the Securities Act  (including  judicial  interpretations
      thereof) then such  Underlying  Shares and Warrant  Shares shall be issued
      free of all legends.  The Company agrees that following the Effective Date
      or at such time as such legend is no longer  required  under this  Section
      4.1(c),  it will, no later than three Trading Days  following the delivery
      by a  Purchaser  to the  Company  or the  Company's  transfer  agent  of a
      certificate   representing   Underlying  Shares  and  Warrant  Shares,  as
      applicable,  issued with a restrictive legend (such third Trading Day, the
      "Legend Removal Date"), deliver or cause to be delivered to such Purchaser
      a certificate  representing  such shares that is free from all restrictive
      and other legends. The Company may not make any notation on its records or
      give  instructions  to any transfer  agent of the Company that enlarge the
      restrictions on transfer set forth in this Section.


                                       19
<PAGE>

            (d) In addition to such Purchaser's  other available  remedies,  the
      Company shall pay to a Purchaser,  in cash, as partial  liquidated damages
      and not as a penalty,  for each  $1,000 of  Underlying  Shares and Warrant
      Shares (based on the VWAP of the Common Stock on the date such  Securities
      are submitted to the Company's  transfer  agent)  delivered for removal of
      the restrictive legend and subject to this Section 4.1(c), $10 per Trading
      Day  (increasing  to $20 per Trading Day 5 Trading Days after such damages
      have begun to accrue) for each  Trading Day after the Legend  Removal Date
      until such certificate is delivered without a legend. Nothing herein shall
      limit such  Purchaser's  right to pursue actual  damages for the Company's
      failure to deliver certificates representing any Securities as required by
      the  Transaction  Documents,  and such  Purchaser  shall have the right to
      pursue all remedies available to it at law or in equity including, without
      limitation, a decree of specific performance and/or injunctive relief.

            (e)  Each  Purchaser,  severally  and not  jointly  with  the  other
      Purchasers,  agrees  that  the  removal  of the  restrictive  legend  from
      certificates  representing  Securities as set forth in this Section 4.1 is
      predicated  upon the Company's  reliance that the Purchaser  will sell any
      Securities  pursuant  to  either  the  registration  requirements  of  the
      Securities Act, including any applicable prospectus delivery requirements,
      or an exemption therefrom.

            (f) From the  date  hereof  until  the one year  anniversary  of the
      Effective Date, the Company shall not undertake a reverse or forward stock
      split or  reclassification  of the Common Stock  without the prior written
      consent of the Purchasers  holding a majority in interest of the shares of
      Preferred Stock.

      4.2 Acknowledgment of Dilution. The Company acknowledges that the issuance
of the  Securities  may result in dilution of the  outstanding  shares of Common
Stock,  which dilution may be substantial under certain market  conditions.  The
Company  further   acknowledges  that  its  obligations  under  the  Transaction
Documents,  including without  limitation its obligation to issue the Underlying
Shares  and the  Warrant  Shares  pursuant  to the  Transaction  Documents,  are
unconditional   and   absolute  and  not  subject  to  any  right  of  set  off,
counterclaim,  delay or reduction, regardless of the effect of any such dilution
or any claim the Company may have against any  Purchaser  and  regardless of the
dilutive  effect  that  such  issuance  may have on the  ownership  of the other
stockholders of the Company.

      4.3 Furnishing of Information.  As long as any Purchaser owns  Securities,
the Company  covenants to timely file (or obtain  extensions in respect  thereof
and file within the applicable grace period) all reports required to be filed by
the Company  after the date hereof  pursuant to the Exchange Act. As long as any
Purchaser  owns  Securities,  if the  Company is not  required  to file  reports
pursuant to the Exchange Act, it will prepare and furnish to the  Purchasers and
make publicly  available in accordance  with Rule 144(c) such  information as is
required for the Purchasers to sell the  Securities  under Rule 144. The Company
further  covenants  that it will  take  such  further  action  as any  holder of
Securities may reasonably request,  all to the extent required from time to time
to enable such Person to sell such  Securities  without  registration  under the
Securities Act within the limitation of the exemptions provided by Rule 144.


                                       20
<PAGE>

      4.4  Integration.  The Company  shall not sell,  offer for sale or solicit
offers to buy or  otherwise  negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the  Securities  in a manner that would  require the  registration  under the
Securities  Act of the sale of the Securities to the Purchasers or that would be
integrated  with the offer or sale of the  Securities  for purposes of the rules
and regulations of any Trading Market.

      4.5  Conversion  and Exercise  Procedures.  The form of Notice of Exercise
included  in  the  Warrants  and  the  Notice  of  Conversion  included  in  the
Certificate of Designations set forth the totality of the procedures required of
the Purchasers in order to exercise the Warrants or convert the Preferred Stock.
Other than as may be required by applicable  law or by the rules  promulgated by
the Commission, no additional legal opinion or other information or instructions
shall be required of the  Purchasers to exercise their Warrants or convert their
Preferred  Stock.  The  Company  shall  honor  exercises  of  the  Warrants  and
conversions  of the  Preferred  Stock and  shall  deliver  Underlying  Shares in
accordance  with  the  terms,  conditions  and  time  periods  set  forth in the
Transaction Documents.

      4.6 Securities Laws Disclosure; Publicity. The Company shall, by 8:30 a.m.
Eastern  time on the  Trading Day  following  the date  hereof,  issue a Current
Report on Form 8-K,  reasonably  acceptable  to each  Purchaser  disclosing  the
material terms of the  transactions  contemplated  hereby,  and shall attach the
Transaction Documents thereto. The Company and each Purchaser shall consult with
each other in issuing any other press releases with respect to the  transactions
contemplated  hereby,  and neither the Company nor any Purchaser shall issue any
such press release or otherwise make any such public statement without the prior
consent of the Company,  with respect to any press release of any Purchaser,  or
without the prior consent of each  Purchaser,  with respect to any press release
of the Company, which consent shall not unreasonably be withheld, except if such
disclosure is required by law, in which case the disclosing party shall promptly
provide  the  other  party  with  prior  notice  of  such  public  statement  or
communication.  Notwithstanding  the  foregoing,  the Company shall not publicly
disclose the name of any Purchaser,  or include the name of any Purchaser in any
filing with the Commission or any regulatory  agency or Trading Market,  without
the prior written consent of such  Purchaser,  except (i) as required by federal
securities law in connection with the registration statement contemplated by the
Registration Rights Agreement and (ii) to the extent such disclosure is required
by law or Trading  Market  regulations,  in which case the Company shall provide
the Purchasers  with prior notice of such  disclosure  permitted under subclause
(i) or (ii).

      4.7  Shareholder  Rights  Plan.  No claim will be made or  enforced by the
Company or, to the knowledge of the Company, any other Person that any Purchaser
is an "Acquiring  Person" under any  shareholder  rights plan or similar plan or
arrangement in effect or hereafter adopted by the Company, or that any Purchaser
could be deemed to trigger the  provisions of any such plan or  arrangement,  by
virtue of  receiving  Securities  under the  Transaction  Documents or under any
other  agreement  between  the  Company and the  Purchasers.  The Company  shall
conduct  its  business  in a manner so that it will not  become  subject  to the
Investment Company Act.


                                       21
<PAGE>

      4.8 Non-Public Information.  The Company covenants and agrees that neither
it nor any other Person  acting on its behalf will provide any  Purchaser or its
agents or counsel with any  information  that the Company  believes  constitutes
material non-public information,  unless prior thereto such Purchaser shall have
executed  a written  agreement  regarding  the  confidentiality  and use of such
information.  The Company  understands and confirms that each Purchaser shall be
relying on the foregoing representations in effecting transactions in securities
of the Company.

      4.9 Use of Proceeds.  Except as set forth on Schedule 4.9 attached hereto,
the Company shall use the net proceeds from the sale of the Securities hereunder
for working capital  purposes and not for the satisfaction of any portion of the
Company's debt (other than payment of trade  payables in the ordinary  course of
the Company's  business and prior  practices),  to redeem any Company  equity or
equity-equivalent  securities or to settle any outstanding litigation.  Prior to
the receipt of  Shareholder  Approval,  the Company shall not declare or pay any
cash dividend on its shares of Common Stock while any shares of Preferred  Stock
remain outstanding.

      4.10  Reimbursement.  If any Purchaser becomes involved in any capacity in
any  Proceeding  by or against  any Person who is a  stockholder  of the Company
(except as a result of sales, pledges,  margin sales and similar transactions by
such Purchaser to or with any current  stockholder),  solely as a result of such
Purchaser's acquisition of the Securities under this Agreement, the Company will
reimburse such Purchaser for its reasonable legal and other expenses  (including
the cost of any  investigation  preparation and travel in connection  therewith)
incurred  in  connection   therewith,   as  such  expenses  are  incurred.   The
reimbursement  obligations  of the  Company  under  this  paragraph  shall be in
addition to any  liability  which the Company may otherwise  have,  shall extend
upon the same terms and  conditions to any  Affiliates of the Purchasers who are
actually  named in such  action,  proceeding  or  investigation,  and  partners,
directors,  agents,  employees and controlling persons (if any), as the case may
be, of the  Purchasers  and any such  Affiliate,  and shall be binding  upon and
inure  to  the  benefit  of  any   successors,   assigns,   heirs  and  personal
representatives  of the Company,  the  Purchasers and any such Affiliate and any
such Person.  The Company also agrees that neither the  Purchasers  nor any such
Affiliates,  partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any Person asserting claims on behalf of or
in right of the Company  solely as a result of acquiring  the  Securities  under
this Agreement.

      4.11  Indemnification  of  Purchasers.  Subject to the  provisions of this
Section  4.11,  the Company will  indemnify  and hold the  Purchasers  and their
directors,  officers,  shareholders,  partners,  employees and agents  (each,  a
"Purchaser Party") harmless from any and all losses,  liabilities,  obligations,
claims,  contingencies,  damages,  costs and expenses,  including all judgments,
amounts paid in  settlements,  court costs and  reasonable  attorneys'  fees and
costs of  investigation  that any such Purchaser  Party may suffer or incur as a
result  of or  relating  to (a)  any  breach  of  any  of  the  representations,
warranties,  covenants or agreements made by the Company in this Agreement or in
the  other  Transaction  Documents  or  (b)  any  action  instituted  against  a
Purchaser, or any of them or their respective Affiliates,  by any stockholder of
the Company who is not an  Affiliate of such  Purchaser,  with respect to any of
the transactions  contemplated by the Transaction  Documents (unless such action
is  based  upon a  breach  of such  Purchaser's  representation,  warranties  or
covenants  under the Transaction  Documents or any agreements or  understandings
such  Purchaser  may have with any such  stockholder  or any  violations  by the
Purchaser of state or federal  securities  laws or any conduct by such Purchaser
which constitutes fraud,  gross negligence,  willful misconduct or malfeasance).
If any action shall be brought  against any Purchaser  Party in respect of which
indemnity may be sought pursuant to this  Agreement,  such Purchaser Party shall
promptly notify the Company in writing,  and the Company shall have the right to
assume the defense thereof with counsel of its own choosing. Any Purchaser Party
shall  have  the  right to  employ  separate  counsel  in any  such  action  and
participate  in the defense  thereof,  but the fees and expenses of such counsel
shall be at the expense of such  Purchaser  Party  except to the extent that (i)
the  employment  thereof  has been  specifically  authorized  by the  Company in
writing, (ii) the Company has failed after a reasonable period of time to assume
such  defense  and to employ  counsel or (iii) in such  action  there is, in the
reasonable opinion of such separate counsel, a material conflict on any material
issue  between the  position of the Company and the  position of such  Purchaser
Party.  The  Company  will not be  liable  to any  Purchaser  Party  under  this
Agreement  (i) for any  settlement  by a Purchaser  Party  effected  without the
Company's prior written  consent,  which shall not be  unreasonably  withheld or
delayed;  or (ii) to the  extent,  but only to the  extent  that a loss,  claim,
damage or liability is  attributable  to any Purchaser  Party's breach of any of
the representations,  warranties, covenants or agreements made by the Purchasers
in this Agreement or in the other Transaction Documents.


                                       22
<PAGE>

      4.12 Reservation and Listing of Securities.

            (a) The Company  shall  maintain a reserve from its duly  authorized
      shares of Common Stock for issuance pursuant to the Transaction  Documents
      in such amount as may be required to fulfill its obligations in full under
      the Transaction Documents.

            (b) If, on any date,  the number of  authorized  but  unissued  (and
      otherwise  unreserved) shares of Common Stock is less than 130% of (i) the
      Actual  Minimum  on such  date,  minus (ii) the number of shares of Common
      Stock previously  issued pursuant to the Transaction  Documents,  then the
      Board of  Directors  of the  Company  shall  use  commercially  reasonable
      efforts to amend the Company's certificate or articles of incorporation to
      increase the number of authorized  but unissued  shares of Common Stock to
      at least the Actual  Minimum  at such time  (minus the number of shares of
      Common Stock previously issued pursuant to the Transaction Documents),  as
      soon as  possible  and in any event not later than the 75th day after such
      date;  provided  that  the  Company  will not be  required  at any time to
      authorize  a number of shares of Common  Stock  greater  than the  maximum
      remaining  number of shares of Common Stock that could  possibly be issued
      after such time pursuant to the Transaction Documents.

            (c) The Company  shall,  if  applicable:  (i) in the time and manner
      required by the Trading Market,  prepare and file with such Trading Market
      an additional  shares listing  application  covering a number of shares of
      Common  Stock at least  equal to the  Actual  Minimum  on the date of such
      application,  (ii) take all steps necessary to cause such shares of Common
      Stock to be approved for listing on the Trading Market as soon as possible
      thereafter,  (iii) provide to the Purchasers evidence of such listing, and
      (iv)  maintain the listing of such Common Stock on any date at least equal
      to the  Actual  Minimum  on such date on such  Trading  Market or  another
      Trading Market.  In addition,  the Company shall hold a special meeting of
      shareholders  (which may also be at the annual meeting of shareholders) at
      the earliest  practical date after the date the number of shares of Common
      Stock issuable  pursuant to this  Agreement  exceeds 15% of the issued and
      outstanding  shares of Common Stock on the Closing Date for the purpose of
      obtaining Shareholder  Approval,  with the recommendation of the Company's
      Board of Directors  that such proposal be approved,  and the Company shall
      solicit proxies from its shareholders in connection  therewith in the same
      manner as all other  management  proposals in such proxy statement and all
      management-appointed  proxyholders  shall vote  their  proxies in favor of
      such proposal.


                                       23
<PAGE>

      4.13 Participation in Future Financing.  From the date hereof until the 12
month  anniversary of the Effective  Date,  upon any financing by the Company or
any of  its  Subsidiaries  of  Common  Stock  or  Common  Stock  Equivalents  (a
"Subsequent  Financing"),  each Purchaser shall have the right to participate in
up to 100% of the Subsequent Financing (the "Participation  Maximum").  At least
10 Trading Days prior to the closing of the  Subsequent  Financing,  the Company
shall  deliver to each  Purchaser a written  notice of its intention to effect a
Subsequent Financing  ("Pre-Notice"),  which Pre-Notice shall ask such Purchaser
if it wants to review the details of such financing (such  additional  notice, a
"Subsequent Financing Notice"). Upon the request of a Purchaser, and only upon a
request by such Purchaser,  for a Subsequent Financing Notice, the Company shall
promptly,  but no later  than 1  Trading  Day  after  such  request,  deliver  a
Subsequent  Financing Notice to such Purchaser.  The Subsequent Financing Notice
shall  describe  in  reasonable  detail the  proposed  terms of such  Subsequent
Financing,  the amount of proceeds intended to be raised thereunder,  the Person
with whom such Subsequent Financing is proposed to be effected,  and attached to
which shall be a term sheet or similar document relating thereto.  Any Purchaser
electing to participate in the Subsequent  Financing  shall be prepared to close
on such financing  within 5 Trading Days pursuant to the terms of the Subsequent
Financing  Notice.  If by 5:30 p.m. (New York City time) on the 10th Trading Day
after all of the Purchasers have received the Pre-Notice,  notifications  by the
Purchasers of their  willingness to participate in the Subsequent  Financing (or
to cause their  designees to  participate)  is, in the aggregate,  less than the
total  amount of the  Subsequent  Financing,  then the  Company  may  effect the
remaining  portion of such Subsequent  Financing on the terms and to the Persons
set forth in the Subsequent  Financing Notice. If the Company receives no notice
from a Purchaser as of such 10th Trading Day, such Purchaser  shall be deemed to
have  notified  the Company that it does not elect to  participate.  The Company
must provide the Purchasers with a second Subsequent  Financing Notice,  and the
Purchasers  will again have the right of  participation  set forth above in this
Section  4.13, if the  Subsequent  Financing  subject to the initial  Subsequent
Financing  Notice is not  consummated  for any  reason on the terms set forth in
such  Subsequent  Financing  Notice within 60 Trading Days after the date of the
initial Subsequent Financing Notice. In the event the Company receives responses
to Subsequent  Financing  Notices from Purchasers  seeking to purchase more than
the aggregate amount of the Subsequent Financing, each such Purchaser shall have
the  right to  purchase  their  Pro  Rata  Portion  (as  defined  below)  of the
Participation  Maximum.  "Pro Rata Portion" is the ratio of (x) the Subscription
Amount of Securities  purchased by a participating  Purchaser and (y) the sum of
the   aggregate   Subscription   Amount   of   all   participating   Purchasers.
Notwithstanding  the foregoing,  this Section 4.13 shall not apply in respect of
an Exempt Issuance.


                                       24
<PAGE>

      4.14 Subsequent  Equity Sales.  From the date hereof until 90 Trading Days
after the Effective  Date,  neither the Company nor any  Subsidiary  shall issue
shares of Common Stock or Common Stock Equivalents;  provided,  however,  the 90
day period set forth in this  Section  4.14 shall be extended  for the number of
Trading  Days during  such  period in which (y)  trading in the Common  Stock is
suspended by any Trading  Market,  or (z)  following  the  Effective  Date,  the
Registration  Statement  is not  effective  or the  prospectus  included  in the
Registration  Statement may not be used by the  Purchasers for the resale of the
Underlying  Shares and Warrant Shares.  In addition to the limitations set forth
herein, from the date hereof until such time as no Purchaser holds any more than
25%  of  the  Securities  initially  issued  hereunder,  the  Company  shall  be
prohibited from effecting or entering into an agreement to effect any Subsequent
Financing  involving a "Variable Rate Transaction" or an "MFN Transaction" (each
as defined below). The term "Variable Rate Transaction" shall mean a transaction
in which the Company issues or sells (i) any debt or equity  securities that are
convertible  into,  exchangeable  or  exercisable  for,  or include the right to
receive  additional shares of Common Stock either (A) at a conversion,  exercise
or  exchange  rate or other  price that is based  upon  and/or  varies  with the
trading prices of or quotations for the shares of Common Stock at any time after
the  initial  issuance  of  such  debt  or  equity  securities,  or  (B)  with a
conversion,  exercise or  exchange  price that is subject to being reset at some
future date after the initial  issuance of such debt or equity  security or upon
the occurrence of specified or contingent events directly or indirectly  related
to the business of the Company or the market for the Common Stock. The term "MFN
Transaction"  shall mean a transaction  in which the Company issues or sells any
securities in a capital  raising  transaction or series of related  transactions
which  grants to an investor the right to receive  additional  shares based upon
future transactions of the Company on terms more favorable than those granted to
such investor in such offering; provided, however, this prohibition shall not be
interpreted  to preclude the Company  from  granting an investor  standard  full
ratchet  or  weighted  average  anti-dilution  protections  for a  warrant  or a
convertible  instrument.  In  addition,  unless  Shareholder  Approval  has been
obtained  and  deemed  effective,  the  Company  shall  not  make  any  issuance
whatsoever  of Common  Stock or Common Stock  Equivalents  which would cause any
adjustment of the Conversion  Price to the extent the holders of Preferred Stock
would not be permitted, pursuant to Section 7 of the Certificate of Designation,
to convert  their  respective  outstanding  Preferred  Stock and exercise  their
respective  Warrants in full,  ignoring  for such  purposes  any  conversion  or
exercise  limitations  therein.  Any  Purchaser  shall  be  entitled  to  obtain
injunctive  relief  against  the Company to preclude  any such  issuance,  which
remedy shall be in addition to any right to collect damages. Notwithstanding the
foregoing,  this Section 4.14 shall not apply in respect of an Exempt  Issuance,
except that no Variable Rate  Transaction or MFN Transaction  shall be an Exempt
Issuance.

      4.15 Equal Treatment of Purchasers.  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.   For
clarification  purposes,  this provision constitutes a separate right granted to
each Purchaser by the Company and negotiated  separately by each Purchaser,  and
is intended to treat for the Company the  Purchasers as a class and shall not in
any way be  construed  as the  Purchasers  acting in  concert or as a group with
respect to the purchase, disposition or voting of Securities or otherwise.


                                       25
<PAGE>

      4.16 No Net Short  Position.  Each  Purchaser  agrees,  severally  and not
jointly with any other Purchasers, that they or any Person acting at the request
or direction of Purchaser,  will not enter into any Short Sales (as  hereinafter
defined)  from the period  commencing on the Closing Date and ending on the date
that such  Purchaser no longer holds any Preferred  Stock.  For purposes of this
Section 4.14, a "Short Sale" by any Purchaser  shall mean a sale of Common Stock
by such Purchaser that is marked as a short sale and that is made at a time when
there is no  equivalent  offsetting  long  position in Common Stock held by such
Purchaser. For purposes of determining whether there is an equivalent offsetting
long position in Common Stock held by the Purchaser, Underlying Shares that have
not yet been converted  pursuant to the  Certificate of Designation  and Warrant
Shares that have not yet been exercised pursuant to the Warrants shall be deemed
to be held long by the Purchaser,  and the amount of shares of Common Stock held
in a long position  shall be all  unconverted  Underlying  Shares  (ignoring any
conversion  limitations  therein) and unexercised  Warrant Shares  (ignoring any
exercise limitations included therein) held by such Purchaser on such date, plus
any shares of Common Stock otherwise then held by such Purchaser.  Additionally,
each Purchaser understands and acknowledges,  severally and not jointly with any
other  Purchaser,  that the SEC  currently  takes the position  that coverage of
short  sales of  shares  of the  Common  Stock  "against  the box"  prior to the
Effective Date of the Registration Statement with the Shares purchased hereunder
is a  violation  of Section 5 of the  Securities  Act,  as set forth in Item 65,
Section  5 under  Section  A, of the  Manual  of  Publicly  Available  Telephone
Interpretations,  dated July  1997,  compiled  by the  Office of Chief  Counsel,
Division of Corporation Finance.  Accordingly,  each Purchaser hereby agrees not
to use any of the  Underlying  Shares or Warrant Shares to cover any short sales
made prior to the Effective Date.

                                    ARTICLE V
                                  MISCELLANEOUS

      5.1  Termination.  This Agreement may be terminated by any  Purchaser,  by
written notice to the other parties,  if the Closing has not been consummated on
or before November 15, 2004;  provided that no such  termination will affect the
right of any party to sue for any breach by the other party (or parties).

      5.2 Fees and Expenses.  Except as expressly  set forth in the  Transaction
Documents  to the  contrary,  each party shall pay the fees and  expenses of its
advisers, counsel, accountants and other experts, if any, and all other expenses
incurred by such party  incident  to the  negotiation,  preparation,  execution,
delivery and performance of this  Agreement.  The Company shall pay all transfer
agent fees, stamp taxes and other taxes and duties levied in connection with the
issuance of any Securities.

      5.3  Entire  Agreement.  The  Transaction  Documents,  together  with  the
exhibits and schedules thereto,  contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.


                                       26
<PAGE>

      5.4 Notices.  Any and all notices or other  communications  or  deliveries
required or permitted to be provided  hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of  transmission,  if
such notice or  communication is delivered via facsimile at the facsimile number
set forth on the signature  pages  attached  hereto prior to 5:30 p.m. (New York
City  time)  on a  Trading  Day,  (b) the next  Trading  Day  after  the date of
transmission,  if such notice or communication is delivered via facsimile at the
facsimile  number set forth on the signature pages attached hereto on a day that
is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading
Day, (c) the second  Trading Day following the date of mailing,  if sent by U.S.
nationally  recognized  overnight courier service, or (d) upon actual receipt by
the party to whom such  notice is  required  to be given.  The  address for such
notices and communications shall be as set forth on the signature pages attached
hereto.

      5.5 Amendments;  Waivers.  No provision of this Agreement may be waived or
amended except in a written instrument  signed, in the case of an amendment,  by
the Company and each Purchaser or, in the case of a waiver, by the party against
whom  enforcement  of any such waiver is sought.  No waiver of any default  with
respect to any provision,  condition or  requirement of this Agreement  shall be
deemed to be a  continuing  waiver in the  future or a waiver of any  subsequent
default or a waiver of any other provision, condition or requirement hereof, nor
shall any delay or omission of either party to exercise  any right  hereunder in
any manner impair the exercise of any such right.

      5.6  Construction.  The headings herein are for  convenience  only, do not
constitute a part of this  Agreement  and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent,  and no
rules of strict construction will be applied against any party.

      5.7 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their  successors and permitted  assigns.  The
Company may not assign this  Agreement  or any rights or  obligations  hereunder
without the prior written  consent of each  Purchaser.  Any Purchaser may assign
any or all of its  rights  under  this  Agreement  to any  Person  to whom  such
Purchaser  assigns or transfers any Securities,  provided such transferee agrees
in  writing to be bound,  with  respect to the  transferred  Securities,  by the
provisions hereof that apply to the "Purchasers."

      5.8 No  Third-Party  Beneficiaries.  This  Agreement  is intended  for the
benefit of the parties  hereto and their  respective  successors  and  permitted
assigns and is not for the benefit of, nor may any provision  hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.9.

      5.9 Governing Law. All questions  concerning the  construction,  validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance  with the internal laws of the State of
New York,  without  regard to the  principles of conflicts of law thereof.  Each
party  agrees  that  all  legal  proceedings   concerning  the  interpretations,
enforcement and defense of the  transactions  contemplated by this Agreement and
any other Transaction  Documents  (whether brought against a party hereto or its
respective affiliates,  directors, officers, shareholders,  employees or agents)
shall be commenced  exclusively  in the state and federal  courts sitting in the
City of New  York.  Each  party  hereby  irrevocably  submits  to the  exclusive
jurisdiction  of the state and federal  courts  sitting in the City of New York,
borough  of  Manhattan  for the  adjudication  of any  dispute  hereunder  or in
connection  herewith or with any  transaction  contemplated  hereby or discussed
herein  (including  with respect to the  enforcement  of any of the  Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any suit,
action  or  proceeding,  any  claim  that it is not  personally  subject  to the
jurisdiction of any such court, that such suit, action or proceeding is improper
or inconvenient venue for such proceeding.  Each party hereby irrevocably waives
personal  service of process and  consents to process  being  served in any such
suit, action or proceeding by mailing a copy thereof via registered or certified
mail or  overnight  delivery  (with  evidence of  delivery) 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 contained herein shall be deemed to limit in any way any right
to serve  process in any manner  permitted by law. The parties  hereby waive all
rights  to a trial  by jury.  If  either  party  shall  commence  an  action  or
proceeding to enforce any  provisions  of the  Transaction  Documents,  then the
prevailing  party in such action or proceeding  shall be reimbursed by the other
party for its  attorneys'  fees and other costs and expenses  incurred  with the
investigation, preparation and prosecution of such action or proceeding.


                                       27
<PAGE>

      5.10 Survival.  The representations and warranties  contained herein shall
survive  the  Closing  and  the  delivery,  exercise  and/or  conversion  of the
Securities, as applicable for the applicable statue of limitations.

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

      5.12  Severability.  If any  provision  of  this  Agreement  is held to be
invalid or unenforceable in any respect,  the validity and enforceability of the
remaining  terms  and  provisions  of  this  Agreement  shall  not in any way be
affected or impaired  thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor,  and upon so
agreeing, shall incorporate such substitute provision in this Agreement.

      5.13  Rescission and  Withdrawal  Right.  Notwithstanding  anything to the
contrary  contained in (and  without  limiting  any similar  provisions  of) the
Transaction  Documents,  whenever  any  Purchaser  exercises a right,  election,
demand or option  under a  Transaction  Document and the Company does not timely
perform its related  obligations within the periods therein provided,  then such
Purchaser may rescind or withdraw, in its sole discretion from time to time upon
written notice to the Company, any relevant notice,  demand or election in whole
or in part  without  prejudice  to its  future  actions  and  rights;  provided,
however,  in the case of a rescission of a conversion of the Preferred  Stock or
exercise of a Warrant,  the Purchaser  shall be required to return any shares of
Common Stock subject to any such rescinded conversion or exercise notice.


                                       28
<PAGE>

      5.14   Replacement  of  Securities.   If  any  certificate  or  instrument
evidencing any Securities is mutilated,  lost, stolen or destroyed,  the Company
shall  issue or cause to be issued in  exchange  and  substitution  for and upon
cancellation thereof, or in lieu of and substitution therefor, a new certificate
or instrument,  but only upon receipt of evidence reasonably satisfactory to the
Company  of such  loss,  theft  or  destruction  and  customary  and  reasonable
indemnity,  if requested.  The  applicants  for a new  certificate or instrument
under  such  circumstances  shall  also  pay any  reasonable  third-party  costs
associated with the issuance of such replacement Securities.

      5.15  Remedies.  In  addition to being  entitled  to  exercise  all rights
provided herein or granted by law,  including  recovery of damages,  each of the
Purchasers  and the Company will be entitled to specific  performance  under the
Transaction  Documents.  The  parties  agree that  monetary  damages  may not be
adequate  compensation  for  any  loss  incurred  by  reason  of any  breach  of
obligations  described in the  foregoing  sentence and hereby agrees to waive in
any action for specific  performance  of any such  obligation the defense that a
remedy at law would be adequate.

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

      5.17 Usury. To the extent it may lawfully do so, the Company hereby agrees
not to insist upon or plead or in any manner  whatsoever  claim, and will resist
any and all efforts to be compelled  to take the benefit or advantage  of, usury
laws wherever enacted, now or at any time hereafter in force, in connection with
any claim, action or proceeding that may be brought by any Purchaser in order to
enforce any right or remedy under any Transaction Document.  Notwithstanding any
provision to the contrary contained in any Transaction Document, it is expressly
agreed  and  provided  that  the  total  liability  of  the  Company  under  the
Transaction  Documents  for payments in the nature of interest  shall not exceed
the maximum lawful rate authorized  under  applicable law (the "Maximum  Rate"),
and, without  limiting the foregoing,  in no event shall any rate of interest or
default  interest,  or both of them,  when aggregated with any other sums in the
nature  of  interest  that  the  Company  may  be  obligated  to pay  under  the
Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum
contract  rate of  interest  allowed by law and  applicable  to the  Transaction
Documents is  increased  or  decreased  by statute or any official  governmental
action subsequent to the date hereof,  the new maximum contract rate of interest
allowed by law will be the Maximum Rate applicable to the Transaction  Documents
from the  effective  date  forward,  unless such  application  is  precluded  by
applicable law. If under any circumstances whatsoever, interest in excess of the
Maximum  Rate  is  paid  by  the  Company  to  any  Purchaser  with  respect  to
indebtedness  evidenced  by the  Transaction  Documents,  such  excess  shall be
applied  by  such  Purchaser  to  the  unpaid  principal  balance  of  any  such
indebtedness  or be refunded to the Company,  the manner of handling such excess
to be at such Purchaser's election.


                                       29
<PAGE>

      5.18  Independent  Nature  of  Purchasers'  Obligations  and  Rights.  The
obligations of each Purchaser under any Transaction Document are several and not
joint with the  obligations of any other  Purchaser,  and no Purchaser  shall be
responsible  in any way for the  performance  of the  obligations  of any  other
Purchaser under any Transaction  Document.  Nothing  contained  herein or in any
Transaction  Document,  and no action taken by any Purchaser  pursuant  thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint  venture  or any other kind of entity,  or create a  presumption  that the
Purchasers  are in any way acting in concert or as a group with  respect to such
obligations or the transactions  contemplated by the Transaction Documents. Each
Purchaser  shall be  entitled to  independently  protect and enforce its rights,
including without limitation, the rights arising out of this Agreement or out of
the other  Transaction  Documents,  and it shall not be necessary  for any other
Purchaser  to be  joined  as an  additional  party  in any  proceeding  for such
purpose.  Each Purchaser has been  represented by its own separate legal counsel
in their review and  negotiation of the  Transaction  Documents.  For reasons of
administrative  convenience only,  Purchasers and their respective  counsel have
chosen to communicate  with the Company through FW. FW does not represent all of
the  Purchasers  but only  Midsummer  Capital,  LLC.  The Company has elected to
provide all  Purchasers  with the same terms and  Transaction  Documents for the
convenience of the Company and not because it was required or requested to do so
by the Purchasers.

      5.19  Liquidated  Damages.  The Company's  obligations  to pay any partial
liquidated  damages or other amounts owing under the Transaction  Documents is a
continuing  obligation of the Company and shall not  terminate  until all unpaid
partial liquidated damages and other amounts have been paid  notwithstanding the
fact that the instrument or security  pursuant to which such partial  liquidated
damages or other amounts are due and payable shall have been canceled.

                            [SIGNATURE PAGE FOLLOWS]


                                       30
<PAGE>

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


ON2 TECHNOLOGIES, INC.                                Address for Notice:

By:______________________________________
   Name:
   Title:


With a copy to (which shall not constitute notice):

McGuireWoods LLP
1345 Avenue of the Americas
Seventh Floor
New York, New York 10105-0106
Attention:  Louis W. Zehil, Esq.


                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                      SIGNATURE PAGE FOR PURCHASER FOLLOWS]


                                       31
<PAGE>

        [PURCHASER SIGNATURE PAGES TO ON2 SECURITIES PURCHASE AGREEMENT]

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


Name of Investing Entity: __________________________
Signature of Authorized Signatory of Investing Entity: _________________________
Name of Authorized Signatory: _________________________
Title of Authorized Signatory: __________________________
Email Address of Authorized Signatory:________________________________

Address for Notice of Investing Entity:



Address for Delivery of Securities for Investing Entity (if not same as above):



Subscription Amount:
Shares of Preferred Stock:
Warrant Shares:
EIN Number:  [PROVIDE THIS UNDER SEPARATE COVER]


                                       32