EXHIBIT A

                             ON2 Technologies, Inc.

                   CERTIFICATE OF DESIGNATION OF PREFERENCES,
                             RIGHTS AND LIMITATIONS
                                       OF
                      SERIES D CONVERTIBLE PREFERRED STOCK

                         PURSUANT TO SECTION 151 OF THE
                        DELAWARE GENERAL CORPORATION LAW

        The undersigned, Douglas McIntyre and Tim Reusing, do hereby certify
that:

                1. They are the President and Secretary, respectively, of ON2
Technologies, Inc., a Delaware corporation (the "Corporation").

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

        WHEREAS, the Certificate of Incorporation of the Corporation provides
for a class of its authorized stock known as preferred stock, of comprised of
20,000,000 shares, $0.01 par value, issuable from time to time in one or more
series;

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

        WHEREAS, it is the desire of the Board of Directors of the Corporation,
pursuant to its authority as aforesaid, to fix the rights, preferences,
restrictions and other matters relating to a series of the preferred stock,
which shall consist of, except as otherwise set forth in the Purchase Agreement,
up to 4,000 shares of the preferred stock which the corporation has the
authority to issue, as follows:

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

                  Section 1. Definitions. Capitalized terms used and not
otherwise defined herein that are defined in the Purchase Agreement shall have
the meanings given such terms in the Purchase Agreement. For the purposes
hereof, the following terms shall have the following meanings:

                  "Bankruptcy Event" means any of the following events: (a) the
         Corporation or any Significant Subsidiary (as such term is defined in
         Rule 1.02(s) of Regulation S-X) thereof commences a case or other
         proceeding under any bankruptcy, reorganization, arrangement,
         adjustment of debt, relief of debtors, dissolution, insolvency or
         liquidation or similar law of any jurisdiction relating to the
         Corporation or any Significant Subsidiary thereof; (b) there is
         commenced against the Corporation or any Significant Subsidiary thereof
         any such case or proceeding that is not dismissed within 60 days after
         commencement; (c) the Corporation or any Significant Subsidiary thereof
         is adjudicated insolvent or bankrupt or any order of relief or other
         order approving any such case or proceeding is entered; (d) the
         Corporation or any Significant Subsidiary thereof suffers any
         appointment of any custodian or the like for it or any substantial part
         of its property that is not discharged or stayed within 60 days; (e)
         the Corporation or any Significant Subsidiary thereof makes a general
         assignment for the benefit of creditors; (f) the Corporation or any
         Significant Subsidiary thereof calls a meeting of its creditors with a
         view to arranging a composition, adjustment or restructuring of its
         debts; or (g) the Corporation or any Significant Subsidiary thereof, by
         any act or failure to act, expressly indicates its consent to, approval
         of or acquiescence in any of the foregoing or takes any corporate or
         other action for the purpose of effecting any of the foregoing.

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

                  "Closing 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
         Holder's obligations to pay the Subscription Amount and (ii) the
         Corporation's obligations to deliver the Securities have been satisfied
         or waived.


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<PAGE>

      "Commission" means the Securities and Exchange Commission.

      "Common Stock" means the Corporation's common stock, par value $0.01 per
share, and stock of any other class into which such shares may hereafter have
been reclassified or changed.

      "Common Stock Equivalents" means any securities of the Corporation 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.

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

      "Conversion Date" shall have the meaning set forth in Section 6(a).

      "Conversion Price" shall have the meaning set forth in Section 6(b).

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

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

      "Dividend Payment Date" shall have the meaning set forth in Section 3(a).

      "Dilutive Issuance" shall have the meaning set forth in Section 7(b)
hereof.

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

      "Equity Conditions" shall mean, during the period in question, (i) the
Corporation shall have duly honored all conversions scheduled to occur or
occurring by virtue of one or more Notices of Conversion, if any, (ii) all
liquidated damages and other amounts owing in respect of the Preferred Stock
shall have been paid; (iii) there is an effective Conversion Shares Registration
Statement pursuant to which the Holder is permitted to utilize the prospectus
thereunder to resell all of the shares issuable pursuant to the Transaction
Documents (and the Corporation believes, in good faith, that such effectiveness
will continue uninterrupted for the foreseeable future), (iv) the Common

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<PAGE>

Stock is trading on the Trading Market and all of the shares issuable pursuant
to the Transaction Documents are listed for trading on a Trading Market (and the
Corporation believes, in good faith, that trading of the Common Stock on a
Trading Market will continue uninterrupted for the foreseeable future), (v)
there is a sufficient number of authorized but unissued and otherwise unreserved
shares of Common Stock for the issuance of all of the shares issuable pursuant
to the Transaction Documents, (vi) there is then existing no Triggering Event or
event which, with the passage of time or the giving of notice, would constitute
a Triggering Event, (vii) all of the shares issued or issuable pursuant to the
transaction proposed would not violate the limitations set forth in Sections
6(c)(ii) and (d), and (viii) no public announcement of a pending or proposed
Fundamental Transaction, Change of Control Transaction or acquisition
transaction has occurred that has not been consummated.

      "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 Corporation pursuant to any
stock or option plan duly adopted by a majority of the non-employee members of
the Board of Directors of the Corporation 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 corporation in a business synergistic with the
business of the Corporation and in which the Corporation receives benefits in
addition to the investment of funds, but shall not include a transaction in
which the Corporation is issuing securities primarily for the purpose of raising
capital or to an entity whose primary business is investing in securities.

      "Fundamental Transaction" shall have the meaning set forth in Section
7(f)(iii) hereof.

      "Holder" shall have the meaning given such term in Section 2 hereof.

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

      "Monthly Conversion Price" shall have the meaning set forth in Section
8(a) hereof.

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<PAGE>

      "Monthly Redemption" shall mean the redemption of the shares of Preferred
Stock pursuant to Section 8(a) hereof.

      "Monthly Redemption Amount" shall mean, as to a Monthly Redemption,
$571,429 in the aggregate among all Holders.

      "Monthly Redemption Date" means the first Trading Day on the 24th month
following the Original Issue Date and on the first Trading Day on every third
month thereafter, ending upon the full redemption of the aggregate Stated Value.

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

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

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

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

      "Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.

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

      "Subsidiary" shall have the meaning given to such term in the Purchase
Agreement.

      "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.

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<PAGE>

      "Transaction Documents" shall have the meaning set forth in the Purchase
Agreement.

      "Triggering Event" shall have the meaning set forth in Section 9(a).

      "Triggering Redemption Amount" for each share of Preferred Stock means the
sum of (i) the greater of (A) 130% of the Stated Value and (B) the product of
(a) the VWAP on the Trading Day immediately preceding the date of the Triggering
Event and (b) the Stated Value divided by the then Conversion Price, (ii) all
accrued but unpaid dividends thereon and (iii) all liquidated damages and other
amounts due in respect of the Preferred Stock.

      "VWAP" means, for any date, the price determined by the first of the
following clauses that applies: (a) if the Common Stock is then listed or quoted
on a 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 Corporation.

      Section 2. Designation, Amount and Par Value. The series of preferred
stock shall be designated as its Series D Convertible Preferred Stock (the
"Preferred Stock") and the number of shares so designated shall be 4,000 (which
shall not be subject to increase without the consent of all of the holders of
the Preferred Stock (each, a "Holder" and collectively, the "Holders")). Each
share of Preferred Stock shall have a par value of $0.01 per share and a stated
value equal to $1,000 (the "Stated Value"). Capitalized terms not otherwise
defined herein shall have the meaning given such terms in Section 1 hereof.


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<PAGE>

      Section 3. Dividends.

      a) Dividends in Cash or in Kind. Holders shall be entitled to receive and
the Corporation shall pay, cumulative dividends at the rate per share (as a
percentage of the Stated Value per share) of 8% per annum (subject to increase
pursuant to Section 9(b)), payable quarterly on March 1, June 1, September 1 and
December 1, beginning with the first such date after the Original Issue Date and
on any Conversion Date (except that, if such date is not a Trading Day, the
payment date shall be the next succeeding Trading Day)("Dividend Payment Date").
The form of dividend payments to each Holder shall be made in the following
order: (i) if funds are legally available for the payment of dividends and the
Equity Conditions have not been met, in cash only, (ii) if funds are legally
available for the payment of dividends and the Equity Conditions have been met,
at the sole election of the Corporation, in cash or shares of Common Stock which
shall be valued solely for such purpose at 93% of the average of the VWAPs for
the 20 consecutive Trading Days immediately prior to the Dividend Payment Date;
(iii) if funds are not legally available for the payment of dividends and the
Equity Conditions have been met, in shares of Common Stock which shall be valued
at 93% of the average of the VWAPs for the 20 consecutive Trading Days
immediately prior to the Dividend Payment Date; (iv) if funds are not legally
available for the payment of dividends and the Equity Conditions relating to
registration have been waived by such Holder, as to such Holder only, in
unregistered shares of Common Stock which shall be valued at 93% of the average
of the VWAPs for the 20 consecutive Trading Days immediately prior to the
Dividend Payment Date; and (v) if funds are not legally available for the
payment of dividends and the Equity Conditions have not been met, then, at the
election of such Holder, such dividends shall accrue to the next Dividend
Payment Date or shall be accreted to the outstanding Stated Value. The Holders
shall have the same rights and remedies with respect to the delivery of any such
shares as if such shares were being issued pursuant to Section 6. On the Closing
Date the Corporation shall have notified the Holders whether or not it may
lawfully pay cash dividends. The Corporation shall promptly notify the Holders
at any time the Corporation shall become able or unable, as the case may be, to
lawfully pay cash dividends. If at any time the Corporation has the right to pay
dividends in cash or Common Stock, the Corporation must provide the Holder with
at least 20 Trading Days' notice of its election to pay a regularly scheduled
dividend in Common Stock. Dividends on the Preferred Stock shall be calculated
on the basis of a 360-day year, shall accrue daily commencing on the Original
Issue Date, and shall be deemed to accrue from such date whether or not earned
or declared and whether or not there are profits, surplus or other funds of the
Corporation legally available for the payment of dividends. Except as otherwise
provided herein, if at any time the Corporation pays dividends partially in cash
and partially in shares, then such payment shall be distributed ratably among
the Holders based upon the number of shares of Preferred Stock held by each
Holder. Any dividends, whether paid in cash or shares, that are not paid within
three Trading Days following a Dividend Payment Date shall continue to accrue
and shall entail a late fee, which must be paid in cash, at the rate of 18% per
annum or the lesser rate permitted by applicable law (such fees to accrue daily,
from the Dividend Payment Date through and including the date of payment).

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<PAGE>

      b) So long as any Preferred Stock shall remain outstanding, neither the
Corporation nor any Subsidiary thereof shall redeem, purchase or otherwise
acquire directly or indirectly any Junior Securities. So long as any Preferred
Stock shall remain outstanding, neither the Corporation nor any Subsidiary
thereof shall directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in Section 6 or
dividends due and paid in the ordinary course on preferred stock of the
Corporation at such times when the Corporation is in compliance with its payment
and other obligations hereunder) upon, nor shall any distribution be made in
respect of, any Junior Securities so long as any dividends due on the Preferred
Stock remain unpaid, nor shall any monies be set aside for or applied to the
purchase or redemption (through a sinking fund or otherwise) of any Junior
Securities or shares pari passu with the Preferred Stock.

      c) The Corporation acknowledges and agrees that the capital of the
Corporation (as such term is used in Section 154 of the General Corporation Law
of Delaware) in respect of the Preferred Stock and any future issuances of the
Corporation's capital stock shall be equal to the aggregate par value of such
Preferred Stock or capital stock, as the case may be, and that, on or after the
date of the Purchase Agreement, it shall not increase the capital of the
Corporation with respect to any shares of the Corporation's capital stock issued
and outstanding on such date. The Corporation also acknowledges and agrees that
it shall not create any special reserves under Section 171 of the General
Corporation Law of Delaware without the prior written consent of each Holder.

      Section 4. Voting Rights. Except as otherwise provided herein and as
otherwise required by law, the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, the
Corporation shall not, without the affirmative vote of the Holders of the shares
of the Preferred Stock then outstanding, (a) alter or change adversely the
powers, preferences or rights given to the Preferred Stock or alter or amend
this Certificate of Designation, (b) authorize or create any class of stock
ranking as to dividends, redemption or distribution of assets upon a Liquidation
(as defined in Section 5) senior to or otherwise pari passu with the Preferred
Stock, (c) amend its certificate of incorporation or other charter documents so
as to affect adversely any rights of the Holders, (d) increase the authorized
number of shares of Preferred Stock, or (e) enter into any agreement with
respect to the foregoing.

      Section 5. Liquidation. Upon any liquidation, dissolution or winding-up of
the Corporation, whether voluntary or involuntary (a "Liquidation"), the Holders
shall be entitled to receive out of the assets of the Corporation, whether such
assets are capital or surplus, for each share of Preferred Stock an amount equal
to the Stated Value per share plus any accrued and unpaid dividends thereon and
any other fees or liquidated damages owing thereon before any distribution or
payment shall be made to the holders of any Junior Securities, and if the assets
of the Corporation shall be insufficient to pay in full such amounts, then the
entire assets to be distributed to the Holders shall be distributed among the
Holders ratably in accordance with the respective amounts that would be payable
on such shares if all amounts payable thereon were paid in full. A Fundamental
Transaction or Change of Control Transaction shall not be treated as a
Liquidation. The Corporation shall mail written notice of any such Liquidation,
not less than 45 days prior to the payment date stated therein, to each record
Holder.

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<PAGE>

      Section 6. Conversion.

      a) Conversions at Option of Holder. Each share of Preferred Stock shall be
convertible into that number of shares of Common Stock (subject to the
limitations set forth in Sections 6(c)(i) and (d)) determined by dividing the
Stated Value of such share of Preferred Stock by the Conversion Price, at the
option of the Holder, at any time and from time to time from and after the
Original Issue Date. Holders shall effect conversions by providing the
Corporation with the form of conversion notice attached hereto as Annex A (a
"Notice of Conversion"). Each Notice of Conversion shall specify the number of
shares of Preferred Stock to be converted, the number of shares of Preferred
Stock owned prior to the conversion at issue, the number of shares of Preferred
Stock owned subsequent to the conversion at issue and the date on which such
conversion is to be effected, which date may not be prior to the date the Holder
delivers such Notice of Conversion to the Corporation by facsimile (the
"Conversion Date"). If no Conversion Date is specified in a Notice of
Conversion, the Conversion Date shall be the date that such Notice of Conversion
to the Corporation is deemed delivered hereunder. To effect conversions, as the
case may be, of shares of Preferred Stock, a Holder shall not be required to
surrender the certificate(s) representing such shares of Preferred Stock to the
Corporation unless all of the shares of Preferred Stock represented thereby are
so converted, in which case the Holder shall deliver the certificate
representing such share of Preferred Stock promptly following the Conversion
Date at issue. Shares of Preferred Stock converted into Common Stock or redeemed
in accordance with the terms hereof shall be canceled and may not be reissued.

      b) Conversion Price. The conversion price for the Preferred Stock shall
equal $0.70 (the "Conversion Price"), subject to adjustment herein.

      c) Holder's Restriction on Conversion.

            i. The Corporation shall not effect any conversion of the Preferred
Stock, and the Holder shall not have the right to convert any portion of the
Preferred Stock to the extent that after giving effect to such conversion, the
Holder (together with the Holder's affiliates), as set forth on the applicable
Notice of Conversion, would beneficially own in excess of 4.99% of the number of
shares of the Common Stock outstanding immediately after giving effect to such
conversion. For purposes of the foregoing sentence, the number of shares of
Common Stock beneficially owned by the Holder and its affiliates shall include
the number of shares of Common Stock issuable upon conversion of the Preferred
Stock with respect to which the determination of such sentence is being made,
but shall exclude the number of shares of Common Stock which would be issuable

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<PAGE>

upon (A) conversion of the remaining, nonconverted Stated Value of Preferred
Stock beneficially owned by the Holder or any of its affiliates and (B) exercise
or conversion of the unexercised or nonconverted portion of any other securities
of the Corporation (including the Warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein beneficially
owned by the Holder or any of its affiliates. Except as set forth in the
preceding sentence, for purposes of this Section 6(c)(i), beneficial ownership
shall be calculated in accordance with Section 13(d) of the Exchange Act. To the
extent that the limitation contained in this Section 6(c)(i) applies, the
determination of whether the Preferred Stock is convertible (in relation to
other securities owned by the Holder together with any affiliates) and of which
shares of Preferred Stock is convertible shall be in the sole discretion of such
Holder, and the submission of a Notice of Conversion shall be deemed to be such
Holder's determination of whether the shares of Preferred Stock may be converted
(in relation to other securities owned by such Holder) and which shares of the
Preferred Stock is convertible, in each case subject to such aggregate
percentage limitations. To ensure compliance with this restriction, the Holder
will be deemed to represent to the Corporation each time it delivers a Notice of
Conversion that such Notice of Conversion has not violated the restrictions set
forth in this paragraph and the Corporation shall have no obligation to verify
or confirm the accuracy of such determination. For purposes of this Section
6(c)(i), in determining the number of outstanding shares of Common Stock, the
Holder may rely on the number of outstanding shares of Common Stock as reflected
in the most recent of the following: (A) the Corporation's most recent Form
10-QSB or Form 10-KSB, as the case may be, (B) a more recent public announcement
by the Corporation or (C) any other notice by the Corporation or the
Corporation's transfer agent setting forth the number of shares of Common Stock
outstanding. Upon the written or oral request of the Holder, the Corporation
shall within three Trading Days confirm orally and in writing to the Holder the
number of shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to
the conversion or exercise of securities of the Corporation, including the
Preferred Stock, by the Holder or its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. The provisions of
this Section 6(c)(i) may be waived by the Holder upon, at the election of the
Holder, not less than 61 days' prior notice to the Corporation, and the
provisions of this Section 6(c)(i) shall continue to apply until such 61st day
(or such later date, as determined by the Holder, as may be specified in such
notice of waiver).

            ii. The Corporation shall not effect any conversion of this
Preferred Stock pursuant to Section 6(a) or otherwise, to the extent that after
giving effect to such conversion, the Holder (together with the Holder's
affiliates), as set forth on the applicable Notice of Conversion, would
beneficially own in excess of 9.99% of the number of shares of the Common Stock
outstanding immediately after giving effect to such conversion. For purposes of
the foregoing sentence, the number of shares of Common Stock beneficially owned
by the Holder and its affiliates shall include the number of shares of Common

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Stock issuable upon conversion of this Preferred Stock with respect to which the
determination of such sentence is being made, but shall exclude the number of
shares of Common Stock which would be issuable upon (A) conversion of the
remaining, nonconverted portion of this Preferred Stock beneficially owned by
the Holder or any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Corporation
(including, without limitation, any other shares of Preferred Stock or the
Warrants) subject to a limitation on conversion or exercise analogous to the
limitation contained herein beneficially owned by the Holder or any of its
affiliates. Except as set forth in the preceding sentence, for purposes of this
Section 6(c)(ii), beneficial ownership shall be calculated in accordance with
Section 13(d) of the Exchange Act. To the extent that the limitation contained
in this section applies, the determination of whether this Preferred Stock is
convertible (in relation to other securities owned by the Holder) and of which a
portion of this Preferred Stock is convertible shall be in the sole discretion
of such Holder. To ensure compliance with this restriction, the Holder will be
deemed to represent to the Corporation each time it delivers a Notice of
Conversion that such Notice of Conversion has not violated the restrictions set
forth in this paragraph and the Corporation shall have no obligation to verify
or confirm the accuracy of such determination. For purposes of this Section
6(c)(ii), in determining the number of outstanding shares of Common Stock, the
Holder may rely on the number of outstanding shares of Common Stock as reflected
in (x) the Corporation's most recent Form 10-QSB or Form 10-KSB, as the case may
be, (y) a more recent public announcement by the Corporation or (z) any other
notice by the Corporation or the Corporation's Transfer Agent setting forth the
number of shares of Common Stock outstanding. Upon the written or oral request
of the Holder, the Corporation shall within two Trading Days confirm orally and
in writing to the Holder the number of shares of Common Stock then outstanding.
In any case, the number of outstanding shares of Common Stock shall be
determined after giving effect to the conversion or exercise of securities of
the Corporation, including this Preferred Stock, by the Holder or its affiliates
since the date as of which such number of outstanding shares of Common Stock was
reported. -

      d) Limitation on Number of Shares Issuable. Notwithstanding anything
herein to the contrary, the Corporation shall not issue to any Holder any shares
of Common Stock, including pursuant to any rights herein, including, without
limitation, any conversion rights or right to issue shares of Common Stock in
payment of dividends, to the extent such shares, when added to the number of
shares of Common Stock issued (A) upon conversion of any shares of Preferred
Stock pursuant to Section 6(a) and (B) upon exercise of those certain warrants
issued pursuant to that certain Securities Purchase Agreement would exceed
15,520,721 shares of Common Stock, 19.999% of the Corporation's outstanding


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Common Stock, immediately prior to the Closing Date, or such greater number of
shares of Common Stock permitted pursuant to the corporate governance rules of
the Trading Market that is at the time the principal trading exchange or market
for the Common Stock, based upon share volume, as confirmed in writing by
counsel to the Corporation (the "Maximum Aggregate Share Amount"), unless the
Corporation first obtains shareholder approval permitting such issuances in
accordance with the Trading Market rules ("Shareholder Approval"). Each Holder
shall be entitled to a portion of the Maximum Aggregate Share Amount equal to
the quotient obtained by dividing (x) such the number of shares of Preferred
Stock initially purchased by such Holder by (y) the aggregate number of shares
purchased by all Holders. Such portions shall be adjusted upward ratably in the
event all of the shares of Preferred Stock of any Holder are no longer
outstanding. If at any time the number of shares of Common Stock which could,
notwithstanding the limitation set forth herein, be issuable and sold to all
Holders during the following 12 months (assuming all dividends are paid in
shares of Common Stock during such period of determination based upon the VWAP
at the time of any such determination) equals or exceeds the Maximum Aggregate
Share Amount, then the Corporation shall, subject to any requirements in the
Purchase Agreement to act sooner, obtain the Shareholder Approval applicable to
such issuance as soon as is possible, but in any event not later than the 75th
day after the date in which the Corporation determines (or is notified by any
Holder) that the Maximum Aggregate Share Amount could be exceeded and shall
continue to seek to obtain Shareholder Approval every 75 days until such
Shareholder Approval is obtained.

      e) Mechanics of Conversion

            iii. Delivery of Certificate Upon Conversion. Not later than three
Trading Days after each Conversion Date (the "Share Delivery Date"), the
Corporation shall deliver to the Holder (A) a certificate or certificates which,
after the Effective Date, shall be free of restrictive legends and trading
restrictions (other than those required by the Purchase Agreement) representing
the number of shares of Common Stock being acquired upon the conversion of
shares of Preferred Stock, and (B) a bank check in the amount of accrued and
unpaid dividends (if the Corporation has elected or is required to pay accrued
dividends in cash). After the Effective Date, the Corporation shall, upon
request of the Holder, deliver any certificate or certificates required to be
delivered by the Corporation under this Section electronically through the
Depository Trust Corporation or another established clearing corporation
performing similar functions. If in the case of any Notice of Conversion such
certificate or certificates are not delivered to or as directed by the
applicable Holder by the fifth Trading Day after the Conversion Date, the Holder
shall be entitled to elect by written notice to the Corporation at any time on
or before its receipt of such certificate or certificates thereafter, to rescind
such conversion, in which event the Corporation shall immediately return the
certificates representing the shares of Preferred Stock tendered for conversion.


                                       12
<PAGE>

            iv. Obligation Absolute; Partial Liquidated Damages. The
Corporation's obligations to issue and deliver the Conversion Shares upon
conversion of Preferred Stock in accordance with the terms hereof are absolute
and unconditional, irrespective of any action or inaction by the Holder to
enforce the same, any waiver or consent with respect to any provision hereof,
the recovery of any judgment against any Person or any action to enforce the
same, or any setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the Holder or any other Person of any obligation to
the Corporation or any violation or alleged violation of law by the Holder or
any other person, and irrespective of any other circumstance which might
otherwise limit such obligation of the Corporation to the Holder in connection
with the issuance of such Conversion Shares. In the event a Holder shall elect
to convert any or all of the Stated Value of its Preferred Stock, the
Corporation may not refuse conversion based on any claim that such Holder or any
one associated or affiliated with the Holder of has been engaged in any
violation of law, agreement or for any other reason, unless, an injunction from
a court, on notice, restraining and or enjoining conversion of all or part of
this Preferred Stock shall have been sought and obtained and the Corporation
posts a surety bond for the benefit of the Holder in the amount of 150% of the
Stated Value of Preferred Stock outstanding, which is subject to the injunction,
which bond shall remain in effect until the completion of arbitration/litigation
of the dispute and the proceeds of which shall be payable to such Holder to the
extent it obtains judgment. In the absence of an injunction precluding the same,
the Corporation shall issue Conversion Shares or, if applicable, cash, upon a
properly noticed conversion. If the Corporation fails to deliver to the Holder
such certificate or certificates pursuant to Section 6(e)(i) within two Trading
Days of the Share Delivery Date applicable to such conversion, the Corporation
shall pay to such Holder, in cash, as liquidated damages and not as a penalty,
for each $5,000 of Stated Value of Preferred Stock being converted, $50 per
Trading Day (increasing to $100 per Trading Day after 3 Trading Days and
increasing to $200 per Trading Day 6 Trading Days after such damages begin to
accrue) for each Trading Day after the Share Delivery Date until such
certificates are delivered. Nothing herein shall limit a Holder's right to
pursue actual damages for the Corporation's failure to deliver certificates
representing shares of Common Stock upon conversion within the period specified
herein and such Holder shall have the right to pursue all remedies available to
it hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief.

            v. Compensation for Buy-In on Failure to Timely Deliver Certificates
Upon Conversion. If the Corporation fails to deliver to the Holder such
certificate or certificates pursuant to Section 6(e)(i) by a Share Delivery
Date, and if after such Share Delivery Date the Holder purchases (in an open


                                       13
<PAGE>

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

            vi. Reservation of Shares Issuable Upon Conversion. The Corporation
covenants that it will at all times reserve and keep available out of its
authorized and unissued shares of Common Stock solely for the purpose of
issuance upon conversion of the Preferred Stock and payment of dividends on the
Preferred Stock, each as herein provided, free from preemptive rights or any
other actual contingent purchase rights of persons other than the Holders, not
less than such number of shares of the Common Stock as shall (subject to any
additional requirements of the Corporation as to reservation of such shares set
forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 7) upon the conversion of all
outstanding shares of Preferred Stock. The Corporation covenants that all shares
of Common Stock that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid, nonassessable and, if the Conversion Shares
Registration Statement is then effective under the Securities Act, registered
for public sale in accordance with such Conversion Shares Registration
Statement.

            vii. Fractional Shares. Upon a conversion hereunder, the Corporation
shall not be required to issue stock certificates representing fractions of
shares of the Common Stock, but may if otherwise permitted, make a cash payment
in respect of any final fraction of a share based on the VWAP at such time. If
the Corporation elects not, or is unable, to make such a cash payment, the
Holder shall be entitled to receive, in lieu of the final fraction of a share,
one whole share of Common Stock.


                                       14
<PAGE>

            viii. Transfer Taxes. The issuance of certificates for shares of the
Common Stock on conversion of the Preferred Stock shall be made without charge
to the Holders thereof for any documentary stamp or similar taxes that may be
payable in respect of the issue or delivery of such certificate, provided that
the Corporation shall not be required to pay any tax that may be payable in
respect of any transfer involved in the issuance and delivery of any such
certificate upon conversion in a name other than that of the Holder of such
shares of Preferred Stock so converted and the Corporation shall not be required
to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Corporation the amount of
such tax or shall have established to the satisfaction of the Corporation that
such tax has been paid.

      Section 7. Certain Adjustments.

      a) Stock Dividends and Stock Splits. If the Corporation, at any time while
the Preferred Stock is outstanding: (A) shall pay a stock dividend or otherwise
make a distribution or distributions on shares of its Common Stock or any other
equity or equity equivalent securities payable in shares of Common Stock (which,
for avoidance of doubt, shall not include any shares of Common Stock issued by
the Corporation pursuant to this Preferred Sock), (B) subdivide outstanding
shares of Common Stock into a larger number of shares, (C) combine (including by
way of reverse stock split) outstanding shares of Common Stock into a smaller
number of shares, or (D) issue by reclassification of shares of the Common Stock
any shares of capital stock of the Corporation, then the Conversion Price shall
be multiplied by a fraction of which the numerator shall be the number of shares
of Common Stock (excluding treasury shares, if any) outstanding before such
event and of which the denominator shall be the number of shares of Common Stock
outstanding after such event. Any adjustment made pursuant to this Section shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.

      b) Subsequent Equity Sales. If the Corporation or any Subsidiary thereof,
as applicable, at any time while Preferred Stock is outstanding, shall offer,
sell, grant any option to purchase or offer, sell or grant any right to reprice
its securities, or otherwise dispose of or issue (or announce any offer, sale,
grant or any option to purchase or other disposition) any Common Stock or Common
Stock Equivalents entitling any Person to acquire shares of Common Stock, at an
effective price per share less than the then Conversion Price ("Dilutive


                                       15
<PAGE>

Issuance"), as adjusted hereunder (if the holder of the Common Stock or Common
Stock Equivalents so issued shall at any time, whether by operation of purchase
price adjustments, reset provisions, floating conversion, exercise or exchange
prices or otherwise, or due to warrants, options or rights per share which is
issued in connection with such issuance, be entitled to receive shares of Common
Stock at an effective price per share which is less than the Conversion Price,
such issuance shall be deemed to have occurred for less than the Conversion
Price), then the Conversion Price shall be reduced by multiplying the Conversion
Price by a fraction, the numerator of which is the number of shares of Common
Stock issued and outstanding immediately prior to the Dilutive Issuance plus the
number of shares of Common Stock which the offering price for such Dilutive
Issuance would purchase at the then Conversion Price, and the denominator of
which shall be the sum of the number of shares of Common Stock issued and
outstanding immediately prior to the Dilutive Issuance plus the number of shares
of Common Stock so issued or issuable in connection with the Dilutive Issuance.
Such adjustment shall be made whenever such Common Stock or Common Stock
Equivalents are issued. The Corporation shall notify the Holder in writing, no
later than the Business Day following the issuance of any Common Stock or Common
Stock Equivalents subject to this section, indicating therein the applicable
issuance price, or of applicable reset price, exchange price, conversion price
and other pricing terms (such notice the "Dilutive Issuance Notice"). For
purposes of clarification, whether or not the Corporation provides a Dilutive
Issuance Notice pursuant to this Section 7(b), upon the occurrence of any
Dilutive Issuance, after the date of such Dilutive Issuance the Holder is
entitled to receive a number of Conversion Shares based upon the Base Conversion
Price regardless of whether the Holder accurately refers to the Base Conversion
Price in the Notice of Conversion.

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

      d) Pro Rata Distributions. If the Corporation, at any time while Preferred
Stock is outstanding, shall distribute to all holders of Common Stock (and not
to Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security, then in each such case the Conversion
Price shall be determined by multiplying such Conversion Price in effect


                                       16
<PAGE>

immediately prior to the record date fixed for determination of stockholders
entitled to receive such distribution by a fraction of which the denominator
shall be the VWAP determined as of the record date mentioned above, and of which
the numerator shall be such VWAP on such record date less the then fair market
value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of the Common
Stock as determined by the Board of Directors in good faith. In either case the
adjustments shall be described in a statement provided to the Holders of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.

      e) Calculations. All calculations under this Section 7 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be. The
number of shares of Common Stock outstanding at any given time shall not include
shares owned or held by or for the account of the Corporation, and the
description of any such shares of Common Stock shall be considered on issue or
sale of Common Stock. For purposes of this Section 7, the number of shares of
Common Stock deemed to be issued and outstanding as of a given date shall be the
sum of the number of shares of Common Stock (excluding treasury shares, if any)
issued and outstanding.

      f) Notice to Holders.

            i. Adjustment to Conversion Price. Whenever the Conversion Price is
adjusted pursuant to any of this Section 7, the Corporation shall promptly mail
to each Holder a notice setting forth the Conversion Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment. If
the Corporation issues a variable rate security, despite the prohibition thereon
in the Purchase Agreement, the Corporation shall be deemed to have issued Common
Stock or Common Stock Equivalents at the lowest possible conversion or exercise
price at which such securities may be converted or exercised in the case of a
Variable Rate Transaction (as defined in the Purchase Agreement), or the lowest
possible adjustment price in the case of an MFN Transaction (as defined in the
Purchase Agreement).

            ii. Notice to Allow Conversion by Holder. If (A) the Corporation
shall declare a dividend (or any other distribution) on the Common Stock; (B)
the Corporation shall declare a special nonrecurring cash dividend on or a
redemption of the Common Stock; (C) the Corporation shall authorize the granting
to all holders of the Common Stock rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of any rights; (D) the
approval of any stockholders of the Corporation shall be required in connection
with any reclassification of the Common Stock, any consolidation or merger to
which the Corporation is a party, any sale or transfer of all or substantially
all of the assets of the Corporation, of any compulsory share exchange whereby
the Common Stock is converted into other securities, cash or property; (E) the
Corporation shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Corporation; then, in each case,
the Corporation shall cause to be filed at each office or agency maintained for
the purpose of conversion of the Preferred Stock, and shall cause to be mailed
to the Holders at their last addresses as they shall appear upon the stock books
of the Corporation, at least 20 calendar days prior to the applicable record or


                                       17
<PAGE>

effective date hereinafter specified, a notice stating (x) the date on which a
record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of the Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be determined or
(y) the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and the
date as of which it is expected that holders of the Common Stock of record shall
be entitled to exchange their shares of the Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange; provided, that the failure to mail such notice
or any defect therein or in the mailing thereof shall not affect the validity of
the corporate action required to be specified in such notice. Holders are
entitled to convert the Conversion Amount of Preferred Stock during the 20-day
period commencing the date of such notice to the effective date of the event
triggering such notice.

            iii. Fundamental Transaction. If, at any time while this Preferred
Stock is outstanding, (A) the Corporation effects any merger or consolidation of
the Corporation with or into another Person, (B) the Corporation effects any
sale of all or substantially all of its assets in one or a series of related
transactions, (C) any tender offer or exchange offer (whether by the Corporation
or another Person) is completed pursuant to which holders of Common Stock are
permitted to tender or exchange their shares for other securities, cash or
property, or (D) the Corporation effects any reclassification of the Common
Stock or any compulsory share exchange pursuant to which the Common Stock is
effectively converted into or exchanged for other securities, cash or property
(in any such case, a "Fundamental Transaction"), then upon any subsequent
conversion of this Preferred Stock, the Holder shall have the right to receive,
for each Conversion Share that would have been issuable upon such conversion
absent such Fundamental Transaction, the same kind and amount of securities,
cash or property as it would have been entitled to receive upon the occurrence
of such Fundamental Transaction if it had been, immediately prior to such
Fundamental Transaction, the holder of one share of Common Stock (the "Alternate
Consideration"). For purposes of any such conversion, the determination of the
Conversion Price shall be appropriately adjusted to apply to such Alternate
Consideration based on the amount of Alternate Consideration issuable in respect
of one share of Common Stock in such Fundamental Transaction, and the
Corporation shall apportion the Conversion Price among the Alternate
Consideration in a reasonable manner reflecting the relative value of any
different components of the Alternate Consideration. If holders of Common Stock
are given any choice as to the securities, cash or property to be received in a
Fundamental Transaction, then the Holder shall be given the same choice as to
the Alternate Consideration it receives upon any conversion of this Preferred
Stock following such Fundamental Transaction. To the extent necessary to
effectuate the foregoing provisions, any successor to the Corporation or
surviving entity in such Fundamental Transaction shall file a new Certificate of
Designations with the same terms and conditions and issue to the Holder new
preferred stock consistent with the foregoing provisions and evidencing the
Holder's right to convert such preferred stock into Alternate Consideration. The
terms of any agreement pursuant to which a Fundamental Transaction is effected
shall include terms requiring any such successor or surviving entity to comply
with the provisions of this paragraph (f)(iii) and insuring that this Preferred
Stock (or any such replacement security) will be similarly adjusted upon any
subsequent transaction analogous to a Fundamental Transaction.


                                       18
<PAGE>

            iv. Exempt Issuance. Notwithstanding the foregoing, no adjustment
will be made under this Section 7 in respect of an Exempt Issuance.

      Section 8. Redemption.

      a) Monthly Redemption. At any time after the 24 month anniversary of the
Original Issue Date, on each Monthly Redemption Date, the Corporation shall
redeem each Holder's Pro Rata Portion of the Monthly Redemption Amount plus
accrued but unpaid dividends, the sum of all liquidated damages and any other
amounts then owing to such Holder in respect of the shares of Preferred Stock
held by such Holder. For purposes of this subsection 8(a) only, "Pro Rata
Portion" is the ration of (x) the number of shares of Preferred Stock held by
such Holder on the Original Issue Date and (y) the sum of the aggregate shares
of Preferred Stock issued to all Holders. If any Holder shall no longer hold
shares of Preferred Stock, then the Pro Rata Portion shall be recalculated to
exclude such Holder's shares from clause (y) above and the Monthly Redemption
Amount shall be allocated pro-rata among the remaining Holders. The Monthly
Redemption Amount due on each Monthly Redemption Date shall, except as provided
in this Section, be paid in cash. As to any Monthly Redemption and upon 20
Trading Days' prior written irrevocable notice, in lieu of a cash redemption
payment the Corporation may elect to pay 100% of a Monthly Redemption in
Conversion Shares based on a conversion price equal to 95% of the average of the
20 VWAPs immediately prior to the applicable Monthly Redemption Date (subject to
adjustment for any stock dividend, stock split, stock combination or other
similar event affecting the Common Stock during such 20 Trading Day period) (the
"Monthly Conversion Price"); provided, however, that the Corporation may not pay
the Monthly Redemption Amount in Conversion Shares unless, on the Monthly
Redemption Date and during the 20 Trading Day period immediately prior thereto,
the Equity Conditions have been satisfied. The Holders may convert, pursuant to
Section 6(a), any shares of Preferred Stock subject to a Monthly Redemption at
any time prior to the date that the Monthly Redemption Amount and all amounts
owing thereon are due and paid in full. Any shares of Preferred Stock converted
during any 20 day period until the date the Monthly Redemption Amount is paid
shall be first applied to the shares of Preferred Stock subject to the Monthly
Redemption and such Holder's cash payment of the Monthly Redemption Amount on
such Monthly Redemption Date shall be reduced accordingly. The Corporation
covenants and agrees that it will honor all Notice of Conversions tendered up
until such amounts are paid in full.


                                       19
<PAGE>

      b) Redemption Procedure. The payment of cash and/or issuance of Common
Stock, as the case may be, pursuant to a Monthly Redemption shall be made on the
Monthly Redemption Date. If any portion of the cash payment for a Monthly
Redemption shall not be paid by the Corporation by the respective due date,
interest shall accrue thereon at the rate of 18% per annum (or the maximum rate
permitted by applicable law, whichever is less) until the payment of the Monthly
Redemption Amount plus all amounts owing thereon is paid in full. Alternatively,
if any portion of the Monthly Redemption Amount remains unpaid after such date,
the Holders subject to such redemption may elect, by written notice to the
Corporation given at any time thereafter, to invalidate ab initio such
redemption, notwithstanding anything herein contained to the contrary.
Notwithstanding anything to the contrary in this Section 8, the Corporation's
determination to redeem in cash or shares of Common Stock shall be applied
ratably among the Holders based upon the shares of Preferred Stock initially
purchased by each Holder, adjusted upward ratably in the event all of the shares
of Preferred Stock of any Holder are no longer outstanding. The Holder may elect
to convert the outstanding shares of Preferred Stock pursuant to Section 6 prior
to actual payment in cash for any redemption under this Section 8 by fax
delivery of a Notice of Conversion to the Corporation.

      Section 9. Redemption Upon Triggering Events.

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

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

            ii. if, during the Effectiveness Period, the effectiveness of the
Conversion Shares Registration Statement lapses for any reason for more than an
aggregate of 25 calendar days (which need not be consecutive days) during any 12
month period, or the Holder shall not be permitted to resell Registrable
Securities under the Conversion Shares Registration Statement for more than an
aggregate of 25 calendar days (which need not be consecutive days) during any 12
month period;


                                       20
<PAGE>

            iii. the Corporation shall fail to deliver certificates representing
Conversion Shares issuable upon a conversion hereunder that comply with the
provisions hereof prior to the 5th Trading Day after such shares are required to
be delivered hereunder, or the Corporation shall provide written notice to any
Holder, including by way of public announcement, at any time, of its intention
not to comply with requests for conversion of any shares of Preferred Stock in
accordance with the terms hereof;

            iv. one of the Events (as defined in the Registration Rights
Agreement) described in subsections (i), (ii) or (iii) of Section 2(b) of the
Registration Rights Agreement shall not have been cured to the satisfaction of
the Holders prior to the expiration of 30 days from the Event Date (as defined
in the Registration Rights Agreement) relating thereto (other than an Event
resulting from a failure of a Conversion Shares Registration Statement to be
declared effective by the Commission on or prior to the 180th day after the
Original Issue Date, which shall be covered by Section 9(a)(i));

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

            vi. the Corporation shall fail to have available a sufficient number
of authorized and unreserved shares of Common Stock to issue to such Holder upon
a conversion hereunder;

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

            viii. the Corporation shall redeem more than a de minimis number of
Junior Securities;

            ix. any breach of the agreements delivered to the initial Holders at
the Closing pursuant to Section 2.2(a)(vii) of the Purchase Agreement;

            x. the Corporation shall be party to a Change of Control
Transaction;


                                       21
<PAGE>

            xi. there shall have occurred a Bankruptcy Event; or

            xii. the Common Stock shall fail to be listed or quoted for trading
on a Trading Market and shall not again be eligible for and quoted or listed for
trading thereon within 5 Trading Days.

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

      Section 10. Miscellaneous.

      a) Notices. Any and all notices or other communications or deliveries to
be provided by the Holders hereunder, including, without limitation, any Notice
of Conversion, shall be in writing and delivered personally, by facsimile, sent
by a nationally recognized overnight courier service, addressed to the
Corporation, at the address set forth above, facsimile number 1 (646) 292 3534,
Attn: President or such other address or facsimile number as the Corporation may
specify for such purposes by notice to the Holders delivered in accordance with
this Section. Any and all notices or other communications or deliveries to be
provided by the Corporation hereunder shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service addressed to each Holder at the facsimile telephone number or address of
such Holder appearing on the books of the Corporation, or if no such facsimile
telephone number or address appears, at the principal place of business of the
Holder. Any notice or other communication or deliveries hereunder shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 5:30 p.m. (New York City
time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 5:30 p.m. (New York City time) on any date
and earlier than 11:59 p.m. (New York City time) on such date, (iii) the second
Business Day following the date of mailing, if sent by nationally recognized
overnight courier service, or (iv) upon actual receipt by the party to whom such
notice is required to be given.


                                       22
<PAGE>

      b) Absolute Obligation. Except as expressly provided herein, no provision
of this Certificate of Designation shall alter or impair the obligation of the
Corporation, which is absolute and unconditional, to pay the liquidated damages
(if any) on, the shares of Preferred Stock at the time, place, and rate, and in
the coin or currency, herein prescribed.

      c) Lost or Mutilated Preferred Stock Certificate. If a Holder's Preferred
Stock certificate shall be mutilated, lost, stolen or destroyed, the Corporation
shall execute and deliver, in exchange and substitution for and upon
cancellation of a mutilated certificate, or in lieu of or in substitution for a
lost, stolen or destroyed certificate, a new certificate for the shares of
Preferred Stock so mutilated, lost, stolen or destroyed but only upon receipt of
evidence of such loss, theft or destruction of such certificate, and of the
ownership hereof, and indemnity, if requested, all reasonably satisfactory to
the Corporation.

      d) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Certificate of Designation 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 any
of the Transaction Documents (whether brought against a party hereto or its
respective affiliates, directors, officers, shareholders, employees or agents)
shall be commenced in the state and federal courts sitting in the City of New
York, Borough of Manhattan (the "New York Courts"). Each party hereto hereby
irrevocably submits to the exclusive jurisdiction of the New York Courts 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, or such
New York Courts are 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
Certificate of Designation and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner
permitted by law. Each party hereto hereby irrevocably waives, to the fullest
extent permitted by applicable law, any and all right to trial by jury in any
legal proceeding arising out of or relating to this Certificate of Designation
or the transactions contemplated hereby. If either party shall commence an
action or proceeding to enforce any provisions of this Certificate of
Designation, 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.


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<PAGE>

      e) Waiver. Any waiver by the Corporation or the Holder of a breach of any
provision of this Certificate of Designation shall not operate as or be
construed to be a waiver of any other breach of such provision or of any breach
of any other provision of this Certificate of Designation. The failure of the
Corporation or the Holder to insist upon strict adherence to any term of this
Certificate of Designation on one or more occasions shall not be considered a
waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Certificate of Designation. Any
waiver must be in writing.

      f) Severability. If any provision of this Certificate of Designation is
invalid, illegal or unenforceable, the balance of this Certificate of
Designation shall remain in effect, and if any provision is inapplicable to any
person or circumstance, it shall nevertheless remain applicable to all other
persons and circumstances. If it shall be found that any interest or other
amount deemed interest due hereunder violates applicable laws governing usury,
the applicable rate of interest due hereunder shall automatically be lowered to
equal the maximum permitted rate of interest.

      g) Next Business Day. Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day.

      h) Headings. The headings contained herein are for convenience only, do
not constitute a part of this Certificate of Designation and shall not be deemed
to limit or affect any of the provisions hereof.

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


                                       24
<PAGE>

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

        IN WITNESS WHEREOF, the undersigned have executed this Certificate this
27th day of October 2004.

--------------------------                              ------------------------
Name:   Douglas A. McIntyre                             Name:  Timothy Reusing
Title:  President                                              Title: Secretary


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<PAGE>

                                     ANNEX A

                              NOTICE OF CONVERSION

(To be Executed by the Registered Holder in order to Convert Shares of Preferred
Stock)

The undersigned hereby elects to convert the number of shares of Series D
Convertible Preferred Stock indicated below, into shares of common stock, par
value $0.01 per share (the "Common Stock"), of ON2 Technologies, Inc., a
Delaware corporation (the "Corporation"), according to the conditions hereof, as
of the date written below. If shares are to be issued in the name of a person
other than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Corporation in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if
any.

Conversion calculations:

   Date to Effect Conversion: _____________________________________________

   Number of shares of Preferred Stock owned prior to Conversion: ______________

   Number of shares of Preferred Stock to be Converted: ________________________

   Stated Value of shares of Preferred Stock to be Converted: __________________

   Number of shares of Common Stock to be Issued: ___________________________

   Applicable Conversion Price:

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

   Number of shares of Preferred Stock subsequent to Conversion: _______________


                                 [HOLDER]

                                 By:___________________________________
                                    Name:
                                    Title:


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