EXHIBIT NO. 4.1

                          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.


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                  "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


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         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.

                   "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).


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<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.


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<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:


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                           (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;


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                           (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.


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                                   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


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         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.

                  (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


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         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.

                  (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


                                       10
<PAGE>


         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.

                  (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.


                                       11
<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


                                       12
<PAGE>


         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.

                  (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


                                       13
<PAGE>


         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.

                  (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.


                                       14
<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


                                       15
<PAGE>


         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.

                  (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.


                                       16
<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:


                                       17
<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.


                                       18
<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.


                                       19
<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.


                                       20
<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


                                       21
<PAGE>


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.

         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.


                                       22
<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


                                       23
<PAGE>


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.

         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.


                                       24
<PAGE>


                  (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.

         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.


                                       25
<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.


                                       26
<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.


                                       27
<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


                                       28
<PAGE>


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.

         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.


                                       29
<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


                                       30
<PAGE>


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.

         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]


                                       31
<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:/s/ Douglas A. McIntyre
   -----------------------
   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]





                                       32
<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]




                                       33