EXHIBIT 10.1

                          SECURITIES PURCHASE AGREEMENT

      This  Securities  Purchase  Agreement  (this  "Agreement")  is dated as of
October 27, 2005,  among  Spectre  Gaming,  Inc., a Minnesota  corporation  (the
"Company"),  and each purchaser  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 agree
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 Underlying
      Shares  issuable  upon  exercise or conversion in full of all Warrants and
      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 third  anniversary of the Closing Date
      and all  dividends  are paid in shares of Common  Stock  until  such third
      anniversary,  subject to the  limitation on the number of shares of Common
      Stock issuable  hereunder set forth in Section 6(c) of the  Certificate of
      Designation.

            "Additional  Warrants" means  collectively the Common Stock purchase
      warrants,  in  the  form  of  Exhibit  C  issuable  to the  Purchasers  in
      accordance  with Section 4.18 hereof,  which Warrants shall be exercisable
      immediately  upon their issuance and have a term of exercise equal to five
      years.

            "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.


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

            "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.

            "Closing  Price" means on any particular  date (a) the last reported
      closing  bid price per share of Common  Stock on such date on the  Trading
      Market (as reported by Bloomberg  L.P. at 4:15 PM (New York time),  or (b)
      if there is no such price on such date,  then the closing bid price on the
      Trading  Market on the date  nearest  preceding  such date (as reported by
      Bloomberg  L.P.  at 4:15 PM (New York time) for the  closing bid price for
      regular  session  trading on such day),  or (c) if the Common Stock is not
      then listed or quoted on the  Trading  Market and if prices for the Common
      Stock are then reported in the "pink sheets" published by the Pink Sheets,
      LLC (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) if the shares of Common  Stock are not then  publicly
      traded the fair market value of a share of Common Stock as determined by a
      qualified  independent  appraiser selected in good faith by the Purchasers
      of a majority  in  interest of the then  outstanding  Stated  Value of the
      Preferred Stock.

            "Commission" means the Securities and Exchange Commission.

            "Common  Stock"  means the common  stock of the  Company,  par value
      $0.01 per  share,  and any  other  class of  securities  into  which  such
      securities may hereafter have been reclassified or changed 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 exercisable or exchangeable for, or otherwise entitles
      the holder thereof to receive, Common Stock.

            "Company Counsel" means Maslon Edelman Borman & Brand, LLP.

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


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            "Corporate  Milestones"  means the date on which the  Company  shall
      have  deployed  (sold or leased) at least  1,000  "Amusement  with  Prize"
      machines  with AWP vendors  (which  number  shall not include any machines
      deployed on a loan or demonstration  basis) each of which produce at least
      an average of $10 in net profit per  machine  per day for the 30  calendar
      days preceding the date in question.

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

            "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.

            "Equity  Conditions" shall have the meaning ascribed to such term in
      the Certificate of Designation.

            "Evaluation  Date" shall have the  meaning  ascribed to such term in
      Section 3.1(r).

            "Exchange  Act"  means  the  Securities  Exchange  Act of  1934,  as
      amended, and the rules and regulations promulgated thereunder.

            "Exempt  Issuance"  means the issuance of (a) shares of Common Stock
      or options to employees, officers, directors or consultants 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  (provided  that any  such  issuance(s)  to
      consultants  shall not  exceed  150,000  shares of Common  Stock or Common
      Stock Equivalents in the aggregate in any 12 month period), (b) securities
      upon the exercise or exchange of or  conversion of any  Securities  issued
      hereunder and/or securities exercisable or exchangeable for or convertible
      into shares of Common  Stock  issued and  outstanding  on the date of this
      Agreement,  provided that such  securities have not been amended since the
      date of this  Agreement  to increase the number of such  securities  or to
      decrease  the  exercise,   exchange  or  conversion   price  of  any  such
      securities,  (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, and (d) for purposes of Sections 4.13 and 4.14
      only,  shares of Common Stock  issued  under the Pandora Note I,  provided
      that such note has not been  amended  since the date of this  Agreement to
      increase  the  number of such  securities  or to  decrease  the  exercise,
      exchange or conversion price of any such securities.

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


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

            "Intellectual  Property  Rights" shall have the meaning  ascribed to
      such term in Section 3.1(o).

            "Legend  Removal Date" shall have the meaning  ascribed to such term
      in Section 4.1(c).

            "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).

            "Maximum  Rate"  shall  have the  meaning  ascribed  to such term in
      Section 5.17.

            "Pandora" means Pandora Select Partners, L.P.

            "Pandora Note I" means that certain Secured  Convertible  Promissory
      Note dated May 20,  2004  issued by the Company in favor of Pandora in the
      original principal amount of $1.1 million.

            "Participation Maximum" shall have the meaning ascribed to such term
      in Section 4.13.

            "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 30,000  shares of the  Company's
      Variable  Rate  Series B  Convertible  Preferred  Stock  issued  hereunder
      (including shares which may be issued pursuant to Section 4.17) having the
      rights,  preferences  and  privileges  set  forth  in the  Certificate  of
      Designation.

            "Pre-Notice" shall have the meaning ascribed to such term in Section
      4.13.

            "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.

            "Purchaser  Party"  shall have the meaning  ascribed to such term in
      Section 4.11.


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<PAGE>

            "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 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).

            "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.

            "Short Sales" shall include all "short sales" as defined in Rule 200
      of Regulation SHO under the Exchange Act.

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

            "Subscription  Amount"  shall  mean,  as  to  each  Purchaser,   the
      aggregate 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 (other than up to $1,030,000
      (plus  accrued but unpaid  interest  thereon) of which may be paid through
      the  cancellation of those certain  promissory  notes (the "Bridge Notes")
      dated on or about  September  30,  2005  issued by the  Company to certain
      Purchasers   and  up  to  $200,000  of  which  may  be  paid  through  the
      cancellation (or partial cancellation) of Pandora Note I).

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

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


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<PAGE>

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

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

            "Underlying  Shares"  means the  shares of Common  Stock  issued and
      issuable  upon  conversion of the  Preferred  Stock,  upon exercise of the
      Warrants  and issued and issuable in lieu of the cash payment of dividends
      on the Preferred  Stock in accordance with the terms of the Certificate of
      Designation.

            "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 Pink Sheets, LLC (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 form of  Exhibit C  delivered  to the  Purchasers  at the  Closing  in
      accordance with Section 2.2(a) hereof, which Warrants shall be exercisable
      immediately and have a term of exercise equal to five years.

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


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<PAGE>

                                   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
$10,000,000 of shares of Preferred  Stock with an aggregated  Stated Value equal
to such Purchaser's  Subscription  Amount and Warrants as determined pursuant to
Section 2.2(a). The aggregate number of shares of Preferred Stock sold hereunder
shall be up to 30,000  (including shares which may be issued pursuant to Section
4.17).  Each  Purchaser  shall  deliver to the  Company  via wire  transfer or a
certified check of immediately  available funds (and/or through the cancellation
of the  Bridge  Notes  and  Pandora  Note  I,  as  applicable)  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 Sections 2.2 and 2.3,
the  Closing  shall  occur at the  offices of FW, 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 each Purchaser the following:

                  (i) this Agreement duly executed by the Company;

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

                  (iii) 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;

                  (iv) a Warrant  registered  in the name of such  Purchaser  to
            purchase  up to a number of shares of Common  Stock equal to 100% of
            such  Purchaser's  Subscription  Amount  divided  by $1.60,  with an
            exercise price equal to $1.84, subject to adjustment therein; and

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

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

                  (i) this Agreement duly executed by such Purchaser;

                  (ii) such Purchaser's Subscription Amount as to the Closing by
            cancellation  of  Bridge  Notes,  the  Pandora  Note I  and/or  wire
            transfer to the account specified in writing by the Company; and


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                  (iii) 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) the  delivery  of  forbearance  agreements  from  each of
            Pandora and Whitebox Intermarket  Partners,  L.P.  ("Whitebox") with
            respect to obligations of the Company owed to such parties,  in form
            and substance satisfactory to the Purchasers;

                  (v)  the  delivery  of a  written  acknowledgment  from  Bally
            Gaming,  Inc. ("Bally"),  in form and substance  satisfactory to the
            Purchasers,  confirming  that the Company is in good standing  under
            its agreements with Bally;

                  (vi) the  delivery of a payoff and  release  letter from Crown
            Bank  of  Edina,   Minnesota  with  respect  to  that  certain  term
            promissory  note dated  June 21,  2005 of the  Company,  in form and
            substance satisfactory to the Purchasers;

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

                  (viii) "accredited investors",  within the meaning of Rule 501
            under the  Securities  Act,  that are  "friends  and  family" of the
            officers and directors of the Company shall have  subscribed  for at
            least $1.5 million of Preferred Stock and Warrants; and


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                  (ix) 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
            nor shall there have occurred any material outbreak or escalation of
            hostilities  or other  national  or  international  calamity of such
            magnitude in its effect on, or any material  adverse  change in, any
            financial market which, in each case, in the reasonable  judgment of
            each Purchaser,  makes it  impracticable  or inadvisable to purchase
            the Preferred Stock at the Closing.

                                   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.  The  Company and each of 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


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<PAGE>

      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 condition (financial or otherwise) 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 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  hereunder  and  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,  its board of directors
      or its stockholders in connection  therewith other than in connection with
      the  Required  Approvals.  Each  Transaction  Document  has  been (or upon
      delivery will have been) duly executed by the Company and, when  delivered
      in accordance with the terms hereof and thereof, 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 hereby and 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)  or other  understanding  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.


                                       10
<PAGE>

            (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  for  trading  thereon in the time and
      manner required  thereby and (iv) the filing of Form D with the Commission
      and  such  filings  as are  required  to be made  under  applicable  state
      securities laws (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  Underlying  Shares,  when issued in accordance  with the terms of the
      Transaction   Documents,   will  be   validly   issued,   fully  paid  and
      nonassessable,  free and clear of all Liens  imposed by the  Company.  The
      Company has reserved  from its duly  authorized  capital stock a number of
      shares of Common  Stock for  issuance  of the  Underlying  Shares at least
      equal to the Actual Minimum on the date hereof.

            (g)  Capitalization.  The  capitalization  of the  Company is as set
      forth on Schedule  3.1(g).  The  Company has not issued any capital  stock
      since its most  recently  filed  periodic  report under the Exchange  Act,
      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 exercisable 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  Securities.  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.


                                       11
<PAGE>

            (h) SEC  Reports;  Financial  Statements.  The Company has filed all
      reports,  schedules,  forms, statements and other documents 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  and   documents   incorporated   by  reference   therein,   being
      collectively referred to herein as the "SEC Reports") on a timely basis or
      has  received a valid  extension  of such time of filing and has filed any
      such SEC Reports  prior to the  expiration  of any such  extension.  As of
      their respective  dates, the SEC Reports complied in all material respects
      with the  requirements  of the Securities Act and the Exchange Act and the
      rules and regulations of the Commission promulgated  thereunder,  and none
      of the SEC  Reports,  when  filed,  contained  any untrue  statement  of a
      material  fact or omitted to state a material  fact  required to be stated
      therein or necessary in order to make the statements therein, in the 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 position 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.


                                       12
<PAGE>

            (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.

            (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


                                       13
<PAGE>

      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  necessary or material for use in connection with
      their respective  businesses as described in the SEC Reports and which the
      failure to so have could have a Material Adverse Effect (collectively, the
      "Intellectual  Property  Rights").  Neither the Company nor any Subsidiary
      has received a written notice that the  Intellectual  Property Rights used
      by the Company or any Subsidiary  violates or infringes upon the rights of
      any  Person.  To the  knowledge  of the  Company,  all  such  Intellectual
      Property Rights are  enforceable and there is no existing  infringement by
      another Person of any of the Intellectual Property Rights of others.

            (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 knowledge of the Company,
      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


                                       14
<PAGE>

      to provide  reasonable  assurance  that (i)  transactions  are executed in
      accordance  with  management's  general or specific  authorizations,  (ii)
      transactions are recorded as necessary to permit  preparation of financial
      statements in conformity  with GAAP and to maintain asset  accountability,
      (iii) access to assets is permitted only in accordance  with  management's
      general or specific  authorization,  and (iv) the recorded  accountability
      for assets is compared with the existing  assets at  reasonable  intervals
      and  appropriate  action is taken  with  respect to any  differences.  The
      Company has established  disclosure controls and procedures (as defined in
      Exchange Act Rules  13a-15(e) and  15d-15(e)) for the Company and designed
      such   disclosure   controls  and   procedures  to  ensure  that  material
      information relating to the Company,  including its Subsidiaries,  is made
      known  to  the  certifying  officers  by  others  within  those  entities,
      particularly  during the period in which the Company's most recently filed
      periodic  report  under  the  Exchange  Act,  as the case may be, is being
      prepared.   The  Company's   certifying   officers   have   evaluated  the
      effectiveness  of the  Company's  controls and  procedures  as of the date
      prior to the filing date of the most recently filed periodic  report under
      the Exchange Act (such date, the "Evaluation Date"). The Company presented
      in its most  recently  filed  periodic  report  under the Exchange Act the
      conclusions of the  certifying  officers  about the  effectiveness  of the
      disclosure  controls and procedures  based on their  evaluations as of the
      Evaluation Date. Since the Evaluation Date, there have been no significant
      changes in the  Company's  internal  controls  (as such term is defined in
      Item 307(b) of Regulation S-K under the Exchange Act) or, to the knowledge
      of the  Company,  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 the Transaction
      Documents.  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  the  Transaction
      Documents.

            (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 Securities,  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.


                                       15
<PAGE>

            (v)  Registration  Rights.  Other  than each of the  Purchasers,  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(g) 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.

            (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   Articles  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 as a result of 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


                                       16
<PAGE>

      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 Trading Market on which any of the
      securities of the Company are listed or designated.

            (aa) Solvency. Based on the financial condition of the Company as of
      the Closing Date after giving  effect to the receipt by the Company of the
      proceeds from the sale of the Securities hereunder, (i) the Company's fair
      saleable  value of its assets  exceeds the amount that will be required to
      be paid  on or in  respect  of the  Company's  existing  debts  and  other
      liabilities (including known contingent  liabilities) as they mature; (ii)
      the Company's assets do not constitute unreasonably small capital to carry
      on its  business  for the  current  fiscal  year as now  conducted  and as
      proposed to be conducted  including  its capital needs taking into account
      the  particular  capital  requirements  of the  business  conducted by the
      Company,  and  projected  capital  requirements  and capital  availability
      thereof; and (iii) the current cash flow of the Company, together with the
      proceeds  the  Company  would  receive,  were it to  liquidate  all of its
      assets,  after taking into account all anticipated uses of the cash, would
      be  sufficient  to pay all  amounts on or in respect of its debt when such
      amounts  are  required to be paid.  The  Company  does not intend to incur
      debts  beyond its  ability to pay such debts as they mature  (taking  into
      account  the timing and  amounts of cash to be payable on or in respect of
      its debt).  The Company  has no  knowledge  of any facts or  circumstances
      which  lead  it to  believe  that  it  will  file  for  reorganization  or
      liquidation   under  the   bankruptcy  or   reorganization   laws  of  any
      jurisdiction  within one year from the Closing  Date.  The SEC Reports set
      forth as of the  dates  thereof  all  outstanding  secured  and  unsecured
      Indebtedness of the Company or any Subsidiary, or for which the Company or
      any  Subsidiary  has  commitments.  For the  purposes  of this  Agreement,
      "Indebtedness"  shall  mean  (a) any  liabilities  for  borrowed  money or
      amounts  owed in excess of  $50,000  (other  than trade  accounts  payable
      incurred  in  the  ordinary  course  of  business),  (b)  all  guaranties,
      endorsements and other  contingent  obligations in respect of Indebtedness
      of  others,  whether  or not the same are or  should be  reflected  in the
      Company's  balance  sheet (or the notes  thereto),  except  guaranties  by
      endorsement of negotiable instruments for deposit or collection or similar
      transactions in the ordinary course of business; and (c) the present value
      of any lease payments in excess of $50,000 due under leases required to be
      capitalized  in  accordance  with  GAAP.   Neither  the  Company  nor  any
      Subsidiary is in default with respect to any Indebtedness.

            (bb) Form SB-2 Eligibility.  The Company is eligible to register the
      resale of the  Underlying  Shares for resale by the Purchaser on Form SB-2
      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.


                                       17
<PAGE>

            (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 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.

            (ff)  Accountants.  The  Company's  accountants  are  set  forth  on
      Schedule  3.1(ff) of the  Disclosure  Schedule.  To the  knowledge  of the
      Company,  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,
      2005 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 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.


                                       18
<PAGE>

            (jj)   Acknowledgement   Regarding   Purchasers'  Trading  Activity.
      Anything  in  this   Agreement  or   elsewhere   herein  to  the  contrary
      notwithstanding  (except for Section 4.16 hereof),  it is  understood  and
      agreed by the Company (i) that none of the  Purchasers  have been asked to
      agree, nor has any Purchaser agreed, to desist from purchasing or selling,
      long and/or short,  securities of the Company, or "derivative"  securities
      based on securities  issued by the Company or to hold the  Securities  for
      any  specified  term;  (ii)  that  past or  future  open  market  or other
      transactions  by any Purchaser,  including Short Sales,  and  specifically
      including,  without limitation,  Short Sales or "derivative" transactions,
      before  or  after  the  closing  of  this  or  future  private   placement
      transactions,  may  negatively  impact the market  price of the  Company's
      publicly-traded securities;  (iii) that any Purchaser, and counter parties
      in  "derivative"  transactions  to which  any such  Purchaser  is a party,
      directly  or  indirectly,  presently  may have a "short"  position  in the
      Common Stock, and (iv) that each Purchaser shall not be deemed to have any
      affiliation  with or control  over any arm's length  counter-party  in any
      "derivative" transaction. The Company further understands and acknowledges
      that (a) one or more  Purchasers  may  engage  in  hedging  activities  at
      various  times  during the period  that the  Securities  are  outstanding,
      including,  without  limitation,  during the periods that the value of the
      Underlying  Shares  deliverable  with  respect  to  Securities  are  being
      determined and (b) such hedging activities (if any) could reduce the value
      of the existing stockholders' equity interests in the Company at and after
      the time that the  hedging  activities  are being  conducted.  The Company
      acknowledges that such aforementioned hedging activities do not constitute
      a breach of any of the Transaction Documents.

            (kk)  Manipulation  of  Price.  The  Company  has  not,  and  to its
      knowledge  no one  acting  on its  behalf  has,  (i)  taken,  directly  or
      indirectly, any action designed to cause or to result in the stabilization
      or  manipulation of the price of any security of the Company to facilitate
      the  sale  or  resale  of any of  the  Securities,  (ii)  sold,  bid  for,
      purchased,  or, paid any compensation for soliciting  purchases of, any of
      the  Securities  (other than for the  placement  agent's  placement of the
      Securities), or (iii) paid or agreed to pay to any person any compensation
      for soliciting another to purchase any other securities of the Company.

      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:

            (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  hereunder  and  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


                                       19
<PAGE>

      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) Own Account.  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 in violation
      of the  Securities  Act or any  applicable  state  securities  law, has no
      present  intention of distributing  any of such Securities in violation of
      the  Securities  Act or any  applicable  state  securities  law 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) in  violation  of the  Securities  Act or any
      applicable   state   securities  law.  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 converts any shares of Preferred Stock or exercises any Warrants,
      it will  be  either:  (i) an  "accredited  investor"  as  defined  in Rule
      501(a)(1),  (a)(2),  (a)(3),  (a)(7) or (a)(8) under the Securities Act 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.


                                       20
<PAGE>

            (f) Short Sales and Confidentiality  Prior To The Date Hereof. Other
      than  the  transaction  contemplated  hereunder,  such  Purchaser  has not
      directly or indirectly, nor has any Person acting on behalf of or pursuant
      to any  understanding  with  such  Purchaser,  executed  any  disposition,
      including Short Sales (but not including the location  and/or  reservation
      of borrowable  shares of Common  Stock),  in the securities of the Company
      during  the  period  commencing  from the time that such  Purchaser  first
      received a term sheet from the Company or any other Person  setting  forth
      the material terms of the  transactions  contemplated  hereunder until the
      date hereof ("Discussion  Time").  Notwithstanding  the foregoing,  in the
      case of a Purchaser that is a  multi-managed  investment  vehicle  whereby
      separate  portfolio  managers manage separate portions of such Purchaser's
      assets  and  the  portfolio  managers  have  no  direct  knowledge  of the
      investment  decisions  made  by  the  portfolio  managers  managing  other
      portions of such Purchaser's  assets,  the  representation set forth above
      shall  only apply with  respect  to the  portion of assets  managed by the
      portfolio  manager  that made the  investment  decision  to  purchase  the
      Securities covered by this Agreement. Other than to other Persons party to
      this Agreement,  such Purchaser has maintained the  confidentiality of all
      disclosures made to it in connection with this transaction  (including the
      existence and terms of this transaction).

      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


                                       21
<PAGE>

            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.

      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 shall, upon their
      issuance or reissuance,  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  pursuant  to  Rule  144,  or  (iii)  if such
      Underlying 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


                                       22
<PAGE>

      Underlying  Shares,  or if such  Underlying  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 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 together with all required  paperwork  relating to Rule
      144, 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.
      Certificates for Securities  subject to legend removal  hereunder shall be
      transmitted  by the  transfer  agent of the Company to the  Purchasers  by
      crediting the account of the Purchaser's  prime broker with the Depository
      Trust Company System.

            (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 (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 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 second Trading Day following 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)  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


                                       23
<PAGE>

Documents,  including without  limitation its obligation to issue the Underlying
Shares pursuant to the Transaction Documents, are unconditional and absolute and
not  subject  to any  right  of  set  off,  counterclaim,  delay  or  reduction,
regardless  of the effect of any such dilution or any claim the Company may have
against any Purchaser and  regardless of the dilutive  effect that such issuance
may have on the ownership of the other stockholders of the Company.

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

      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 form of Notice of  Conversion  included in the
Certificate of Designation set forth the totality of the procedures  required of
the Purchasers in order to exercise the Warrants or convert the Preferred Stock.
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, except as set forth in Section 4.8 below, 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


                                       24
<PAGE>

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.

      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 and after the date hereof
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.  Notwithstanding  the
requirements in Section 4.6, in the event of a breach of the foregoing  covenant
by the  Company,  any of its  Subsidiaries,  or any of its or  their  respective
officers,  directors,  employees  and agents,  in  addition to any other  remedy
provided  herein or in the  Transaction  Documents,  a Purchaser  shall have the
right  to make a  public  disclosure,  in the  form of a press  release,  public
advertisement or otherwise, of such material,  nonpublic information without the
prior  approval  by the  Company,  its  Subsidiaries,  or  any  of its or  their
respective officers, directors, employees or agents. No Purchaser shall have any
liability to the Company,  its  Subsidiaries,  or any of its or their respective
officers, directors, employees, stockholders or agents for any such disclosure.

      4.9 Use of Proceeds.  The Company shall use the net proceeds from the sale
of the Securities  hereunder  specifically as set forth on Schedule 4.9 attached
hereto and not for the  satisfaction of any portion of the Company's debt (other
than as set forth thereon),  to redeem Common Stock or Common Stock  Equivalents
or to settle any outstanding litigation.

      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


                                       25
<PAGE>

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,  members,  partners,  employees  and agents
(each,  a  "Purchaser  Party")  harmless  from any and all losses,  liabilities,
obligations,  claims, contingencies,  damages, costs and expenses, including all
judgments,  amounts paid in settlements,  court costs and reasonable  attorneys'
fees and costs of  investigation  that any such  Purchaser  Party may  suffer or
incur  as  a  result  of  or   relating   to  (a)  any  breach  of  any  of  the
representations, warranties, covenants or agreements made by the Company in this
Agreement or in the other  Transaction  Documents  or (b) any action  instituted
against  a  Purchaser,  or any of them or their  respective  Affiliates,  by any
stockholder  of the  Company who is not an  Affiliate  of such  Purchaser,  with
respect to any of the  transactions  contemplated by the  Transaction  Documents
(unless such action is based upon a breach of such Purchaser's  representations,
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.


                                       26
<PAGE>

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

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

            (c) The Company  shall,  if  applicable:  (i) in the time and manner
      required by the Trading Market,  prepare and file with such Trading Market
      an additional  shares listing  application  covering a number of shares of
      Common  Stock at least  equal to the  Actual  Minimum  on the date of such
      application,  (ii) take all steps necessary to cause such shares of Common
      Stock to be approved for listing on the Trading Market as soon as possible
      thereafter,  (iii) provide to the Purchasers evidence of such listing, and
      (iv)  maintain the listing of such Common Stock on any date at least equal
      to the  Actual  Minimum  on such date on such  Trading  Market or  another
      Trading Market.

      4.13 Participation in Future Financing.

            (a)  From  the  date  hereof  until  the  date  that is 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 an amount of the Subsequent  Financing  equal to 100%
      of the Subsequent Financing (the "Participation Maximum").

            (b) At least 5 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.


                                       27
<PAGE>

            (c)  Any  Purchaser  desiring  to  participate  in  such  Subsequent
      Financing  must  provide  written  notice to the Company by not later than
      5:30 p.m.  (New York City  time) on the 5th  Trading  Day after all of the
      Purchasers  have received the Pre-Notice  that the Purchaser is willing to
      participate in the  Subsequent  Financing,  the amount of the  Purchaser's
      participation,  and that the Purchaser has such funds ready,  willing, and
      available  for  investment  on the  terms  set  forth  in  the  Subsequent
      Financing Notice. If the Company receives no notice from a Purchaser as of
      such 5th Trading Day, such Purchaser  shall be deemed to have notified the
      Company that it does not elect to participate.

            (d) If by 5:30  p.m.  (New York City  time) on the 5th  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.

            (e) If by 5:30  p.m.  (New York City  time) on the 5th  Trading  Day
      after all of the  Purchasers  have  received the  Pre-Notice,  the Company
      receives  responses  to a  Subsequent  Financing  Notice  from  Purchasers
      seeking to purchase  more than the aggregate  amount of the  Participation
      Maximum,  each such Purchaser shall have the right to purchase the greater
      of (a) their Pro Rata  Portion  (as  defined  below) of the  Participation
      Maximum and (b) the difference  between the Participation  Maximum and the
      aggregate  amount  of  participation  by all other  Purchasers.  "Pro Rata
      Portion"  is the  ratio  of (x)  the  Subscription  Amount  of  Securities
      purchased  on the  Closing  Date by a Purchaser  participating  under this
      Section  4.13 and (y) the sum of the  aggregate  Subscription  Amounts  of
      Securities  purchased on the Closing Date by all Purchasers  participating
      under this Section 4.13.

            (f) 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 90 Trading  Days  after the date of the  initial
      Subsequent Financing Notice.

            (g) Notwithstanding the foregoing, this Section 4.13 shall not apply
      in respect of an Exempt Issuance.

      4.14 Subsequent Equity Sales.

            (a) From the date  hereof  until 90 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 (i)  trading  in the  Common  Stock is
      suspended by any Trading Market, or (ii) 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.


                                       28
<PAGE>

            (b) From the date hereof until such time as no  Purchaser  holds any
      of the  Securities,  the Company  shall be  prohibited  from  effecting or
      entering into an agreement to effect any Subsequent  Financing involving a
      "Variable Rate  Transaction".  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 or (ii) enters
      into any  agreement,  including,  but not  limited  to, an equity  line of
      credit,  whereby the Company may sell  securities  at a future  determined
      price.

            (c) Notwithstanding the foregoing, this Section 4.14 shall not apply
      in respect of an Exempt Issuance, except that no Variable Rate 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 for the Company to treat 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.

      4.16 Short Sales and Confidentiality After The Date Hereof. Each Purchaser
severally and not jointly with the other  Purchasers  covenants  that neither it
nor any affiliates acting on its behalf or pursuant to any understanding with it
will  execute any Short Sales during the period  after the  Discussion  Time and
ending at the time that the  transactions  contemplated  by this  Agreement  are
first publicly announced as described in Section 4.6. Each Purchaser,  severally
and not jointly with the other Purchasers, covenants that until such time as the
transactions  contemplated  by this  Agreement  are  publicly  disclosed  by the
Company  as  described  in  Section  4.6,  such  Purchaser  will  maintain,  the
confidentiality   of  all  disclosures  made  to  it  in  connection  with  this
transaction  (including  the  existence  and  terms of this  transaction).  Each
Purchaser understands and acknowledges, severally and not jointly with any other
Purchaser,  that the  Commission  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 Securities 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


                                       29
<PAGE>

Finance.  Notwithstanding the foregoing,  no Purchaser makes any representation,
warranty  or  covenant  hereby  that it will not  engage  in Short  Sales in the
securities of the Company after the time that the  transactions  contemplated by
this  Agreement  are first  publicly  announced  as  described  in Section  4.6.
Notwithstanding   the  foregoing,   in  the  case  of  a  Purchaser  that  is  a
multi-managed  investment  vehicle whereby  separate  portfolio  managers manage
separate portions of such Purchaser's  assets and the portfolio managers have no
direct  knowledge of the  investment  decisions  made by the portfolio  managers
managing other portions of such Purchaser's assets, the covenant set forth above
shall only apply with respect to the portion of assets  managed by the portfolio
manager that made the investment  decision to purchase the Securities covered by
this Agreement.

      4.17 Additional Investment Option.

            (a) From the  Effective  Date until the 9 month  anniversary  of the
      Effective Date ("Company Exercise  Period"),  if on any Trading Day during
      such period (i) the Company duly  satisfies the Corporate  Milestones  and
      provides written confirmation in the form of a Secretary's  Certificate of
      the Company and a duly authorized  representative of each AWP vendor where
      the  Company's  "Amusement  with  Prize"  machines  have been  deployed in
      satisfaction  of such  Corporate  Milestones to each  Purchaser,  (ii) the
      Company  has  hired  a  full-time  chief  financial  officer  with  senior
      financial  management  experience with other publicly traded companies and
      (iii)  for a period  of 20  Trading  Days  prior to such day  through  the
      closing date of the Company  Option (as defined  below),  the daily volume
      for the Common Stock on the Trading  Market  exceeds  $100,000 per Trading
      Day with a VWAP for each such  Trading Day equal to or greater  than $2.00
      per share  (subject to adjustment for forward and reverse stock splits and
      the like),  each Purchaser shall be required to purchase,  in the ratio of
      such Purchaser's  Subscription Amount on the Closing Date to the aggregate
      Subscription  Amounts of all  Purchasers on the Closing Date (such amount,
      the Purchaser's  "Pro Rata Share"),  additional  shares of Preferred Stock
      and  Warrants,  for an aggregate  purchase  price of up to the  difference
      between $10,000,000 and the aggregate  Subscription Amounts hereunder (the
      "Company  Option").  Any Company Option shall close within 10 Trading Days
      of notice to each  Purchaser  by the  Company  that the  Company  has duly
      satisfied the Corporate Milestones and that the Company elects to exercise
      its Company Option  hereunder.  The  Purchasers  shall not be obligated to
      purchase  such  securities   issuable  pursuant  to  the  Company  Option,
      notwithstanding  this right,  if a Material  Adverse  Effect has  occurred
      during the period from the Closing Date to the date of such exercise or if
      such  Purchaser   reasonably  believes  that,  based  on  the  information
      contained in the  disclosure  schedules,  a Material  Adverse  Effect will
      occur or, if from the  commencement  of the Company  Exercise Period until
      the additional  investment is closed, the Equity Conditions (as defined in
      the  Certificate  of  Designation)  are not  satisfied as to the Preferred
      Stock and Warrants.

            (b) From the Effective  Date until the 15 month  anniversary  of the
      Effective Date (the "Initial Purchaser  Exercise Period"),  each Purchaser
      may, in its sole discretion, purchase additional shares of Preferred Stock
      and Warrants,  in an amount up to such  Purchaser's Pro Rata Share, for an
      aggregate  purchase  price  of up to the  initial  aggregate  Subscription
      Amounts hereunder (the "Initial Purchaser Option").  Any Initial Purchaser
      Option shall close within 10 Trading Days of notice to the Company by each
      Purchaser  that such  Purchaser  elects to exercise its Initial  Purchaser
      Option hereunder.


                                       30
<PAGE>

            (c) On the  first  Trading  Day of the 15 month  anniversary  of the
      Effective  Date,  in the event that some  Purchasers  do not  exercise the
      Initial  Purchaser Option pursuant to Section  4.17(b),  the Company shall
      offer the remaining shares of Preferred Stock and Warrants issuable for an
      aggregate Subscription Amount equal to the aggregate amount of the Initial
      Purchaser  Option less any amounts  purchased by the Purchasers  under the
      Company  Option to each  Purchaser  that  exercised its Initial  Purchaser
      Option (the "Subsequent Purchaser Option"). Such Purchaser shall then have
      the option to purchase  additional  shares of Preferred Stock and Warrants
      for  an  amount  greater  than  such   Purchaser's   Pro  Rata  Share.  If
      participating  Purchasers  elect to  purchase  more  than  the  Subsequent
      Purchaser  Option,  then each  Purchaser  shall have the right to purchase
      their pro-rata share based on the ratio of such  Purchaser's  Subscription
      Amount on the Closing Date to the  aggregate  Subscription  Amounts of all
      participating  Purchasers on the Closing Date.  Any  Subsequent  Purchaser
      Option  shall  be  exercised  within  5  Trading  Days  of  the  12  month
      anniversary  of the Effective  Date and shall close within 10 Trading Days
      of notice to the Company by each Purchaser  that such Purchaser  elects to
      exercise its Subsequent Purchaser Option hereunder.

            (d) In order to  effectuate  a purchase  and sale of the  additional
      shares of Preferred  Stock and  Warrants,  the Company and each  Purchaser
      shall  enter into the  following  agreements:  (x) a  securities  purchase
      agreement identical to this Agreement,  mutatis mutandis and shall include
      updated  disclosure  schedules  and (y) a  registration  rights  agreement
      identical to the Registration Rights Agreement, mutatis mutandis and shall
      include updated disclosure schedules.

      4.18  Additional  Warrants.  If a Purchaser  owns any shares of  Preferred
Stock on the 36 month  anniversary of the Closing Date (the "Additional  Warrant
Issuance Date"), the Company shall issue such Purchaser  Additional  Warrants to
purchase  up to a number of shares of Common  Stock  equal to 100% of the Stated
Value of the Preferred  Stock then held by such Purchaser  divided by the lesser
of then applicable Conversion Price or the average of the Closing Prices for the
five Trading Days  immediately  prior to the Additional  Warrant  Issuance Date,
with an exercise price equal to the lesser of (i) the then applicable Conversion
Price,  (ii) the then  applicable  exercise  price of any Warrants  held by such
Purchaser or (iii) 50% of the average of the Closing Prices for the five Trading
Days  immediately  prior to the Additional  Warrant  Issuance  Date,  subject to
adjustment therein.  Upon the issuance of any such Additional  Warrants,  on the
Additional  Warrant  Issuance Date,  the Company and each Purchaser  shall enter
into a  registration  rights  agreement  identical  to the  Registration  Rights
Agreement, mutatis mutandis and shall include updated disclosure schedules.

      4.19 Pandora and Whitebox  Notes.  The Company agrees that it will reserve
$75,000 of the gross proceeds hereunder (the "Pandora II and Whitebox Reserves")
to make  regularly  scheduled  interest  payments  under those  certain  secured
promissory  notes dated September 10, 2004, in the original  principal amount of


                                       31
<PAGE>

$750,000  each,  owed to each of  Pandora  and  Whitebox  (the  "Pandora  II and
Whitebox  Notes").  To the  extent it does not have other  cash  available,  the
Company agrees that it will make regularly scheduled interest payments under the
aforementioned  notes with the Pandora II and Whitebox Reserves.  Beginning with
the first day of the 7th calendar month  following the date hereof,  the Pandora
II and Whitebox  Reserves shall be  proportionally  released to the Company on a
monthly basis to the extent the Company has made  regularly  scheduled  interest
payments  under the Pandora and Whitebox II Notes without  utilizing the Pandora
II and Whitebox Reserves.

      4.20 Certain  Inventory.  The Company  agrees that it will sell all of its
current  inventory  of Class II and Class III  gaming  machines  (which  carry a
balance of  approximately  $2,000,000  as of the date of  Company's  most recent
balance sheet) to an unaffiliated Person on or before March 31, 2006.

                                    ARTICLE V
                                  MISCELLANEOUS

      5.1 Termination.  This Agreement may be terminated by any Purchaser, as to
such Purchaser's obligations hereunder only and without any effect whatsoever on
the obligations between the Company and the other Purchasers,  by written notice
to the other  parties,  if the  Closing  has not been  consummated  on or before
October 31, 2005;  provided,  however,  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. At the Closing, the Company has agreed to reimburse
Omicron Master Trust ("Omicron") the sum of $40,000, for its actual, reasonable,
out-of-pocket  legal fees and  expenses,  $20,000 of which  shall have been paid
prior  to the  Closing.  Accordingly,  in lieu of the  foregoing  payments,  the
aggregate  amount that Omicron is to pay for the Securities at the Closing shall
be reduced by $20,000 in lieu thereof.  The Company shall deliver,  prior to the
Closing, a completed and executed copy of the Closing Statement, attached hereto
as Annex A. 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 delivery 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.

      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


                                       32
<PAGE>

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 2nd 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  Headings.  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 4.11.

      5.9 Governing Law. All questions  concerning the  construction,  validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance  with the internal laws of the State of
New York,  without  regard to the  principles of conflicts of law thereof.  Each
party  agrees  that  all  legal  proceedings   concerning  the  interpretations,
enforcement and defense of the  transactions  contemplated by this Agreement and
any other Transaction  Documents  (whether brought against a party hereto or its
respective affiliates,  directors, officers, shareholders,  employees or agents)
shall be commenced  exclusively  in the state and federal  courts sitting in the
City of New  York.  Each  party  hereby  irrevocably  submits  to the  exclusive
jurisdiction  of the state and federal  courts  sitting in the City of New York,
borough  of  Manhattan  for the  adjudication  of any  dispute  hereunder  or in
connection  herewith or with any  transaction  contemplated  hereby or discussed


                                       33
<PAGE>

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.


                                       34
<PAGE>

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

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

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

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


                                       35
<PAGE>

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

      5.20  Construction.  The  parties  agree  that each of them  and/or  their
respective counsel has reviewed and had an opportunity to revise the Transaction
Documents and, therefore, the normal rule of construction to the effect that any
ambiguities are to be resolved  against the drafting party shall not be employed
in the interpretation of the Transaction Documents or any amendments hereto.


                            [SIGNATURE PAGE FOLLOWS]


                                       36
<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.


SPECTRE GAMING, INC.                       Address for Notice:
                                           -------------------

By:___________________________             Attention:  Chief Financial Officer
   Name:                                   800 Nicollet Mall, Suite 2690
   Title:                                  Minneapolis, MN  55402


With a copy to (which shall not constitute notice):
Maslon Edelman Borman & Brand, LLP
Attention:  Paul D. Chestovich
3300 Wells Fargo Centre
90 South Seventh Street
Minneapolis, MN  55402



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



                                       37
<PAGE>

        [PURCHASER SIGNATURE PAGES TO SGMG 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 Purchaser: __________________________
Signature of Authorized Signatory of Purchaser: __________________________
Name of Authorized Signatory: _________________________
Title of Authorized Signatory: __________________________
Email Address of Purchaser:________________________________

Address for Notice of Purchaser:



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



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

                           [SIGNATURE PAGES CONTINUE]



                                       38
<PAGE>

                                                                         ANNEX A

                                CLOSING STATEMENT

Pursuant to the attached  Securities  Purchase  Agreement,  dated as of the date
hereto,  the purchasers  shall purchase up to $10,000,000 of Preferred Stock and
Warrants from Spectre Gaming, Inc., a Minnesota  corporation.  All funds will be
wired  into an escrow  account  maintained  by Wells  Fargo.  All funds  will be
disbursed in accordance with this Closing Statement.

DISBURSEMENT DATE:    October ___, 2005

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

I.   PURCHASE PRICE

                    GROSS PROCEEDS TO BE RECEIVED IN ESCROW           $

II.  DISBURSEMENTS

                                                                      $
                                                                      $
                                                                      $
                                                                      $
                                                                      $

TOTAL AMOUNT DISBURSED:                                               $



WIRE INSTRUCTIONS:


To: _____________________________________





To: _____________________________________




                                       39