Document:

Warrant

EXHIBIT 10.3

THE EXERCISE OF THIS WARRANT HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE.  THIS WARRANT MAY ONLY BE EXERCISED PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) AND APPLICABLE SECURITIES LAWS.  AS A CONDITION PRECEDENT TO THE EXERCISE OF THIS WARRANT, THE COMPANY MAY REQUIRE SUCH CERTIFICATES AND OPINIONS OF COUNSEL AS IT REASONABLY DEEMS NECESSARY FROM THE PERSON EXERCISING THIS WARRANT TO ESTABLISH THE EXISTENCE OF SUCH EXEMPTIONS.

NEITHER THIS SECURITY NOR THE SECURITY INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, 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.

THIS WARRANT IS SUBJECT TO OTHER RESTRICTIONS ON TRANSFER AS SET FORTH IN A SECURITIES PURCHASE AGREEMENT, THE FORM OF WHICH IS AVAILABLE FROM THE COMPANY.

SERIES F COMMON STOCK PURCHASE WARRANT

To Purchase __________ Shares of Common Stock of

PANAMERICAN BANCORP

No. [    ] - ___________                                                                                  Date:____________                                                                                                                                                           

THIS SERIES F COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, _____________ (the “Holder”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the “Initial Exercise Date”) and on or prior to the close of business on August___, 2010 the fifth anniversary following the Initial Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from PanAmerican Bancorp., a Delaware corporation (the “Company”), ____ shares (the “Warrant Shares”) of Common Stock, par value $0.01 per share, of the Company (the “Common Stock”).  The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).

Section 1.

Definitions.  Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Securities Purchase Agreement (the “Purchase Agreement”), dated August __, 2005, among the Company and the purchasers signatory thereto.

Section 2.

Exercise.

(a)

Exercise of Warrant.  Exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company) of: (i) the Notice of Exercise Form annexed hereto duly completed and executed; (ii) the aggregate Exercise Price of the shares thereby purchased by wire transfer of immediately available United States funds or cashier’s check drawn on a United States bank (unless the Holder has elected to acquire the Warrant Shares pursuant to a Cashless Exercise (as defined in Section 2(c)(ii)); (iii) the surrender of this Warrant; and (iv) payment of all taxes required to be paid by the Holder, if any, pursuant to Section 2(e)(vi); and (iv) the receipt of such certificates and other documents as reasonably may be required by the Company to determine that the exercise complies with applicable securities laws.  The Trading Day on which the last of the foregoing deliveries is received by the Company is referred to as the “Exercise Date”; provided, however, that if the last of such deliveries is received after the close of trading on the Trading Market for the Common Stock, the Exercise Date shall be deemed to be the next Trading Day.  This Warrant shall be deemed to have been exercised,  the Warrant Shares shall be deemed to have been issued, and the Holder or any other person so designated to be named therein as the holder of the Warrant Shares shall be deemed to have become a holder of record of such shares for all purposes, as of the Exercise Date.

(b)

Exercise Price.  The exercise price for each Warrant Share issuable under this Warrant shall be $4.00 per share, subject to adjustment hereunder (the “Exercise Price”).

(c)

Payment of Exercise Price:  The Holder shall pay the aggregate Exercise Price using one of the following methods:

(i)

Cash Exercise.  The Holder shall pay the aggregate Exercise Price by wire transfer of immediately available United States funds or cashier’s check drawn on a United States bank.

(ii)

Cashless Exercise.  The Holder may satisfy its obligation to pay the aggregate Exercise Price through a “cashless exercise,” in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows:

	 	X = Y [(A-B)/A]

	where:

	 
	 	X = the number of Warrant Shares to be issued to the Holder.

	 	Y = the number of Warrant Shares with respect to which this Warrant is being exercised.

	 	 
	 	A = the average of the Closing Prices for the five Trading Days immediately prior to (but not including) the Exercise Date (the “Average Closing Price”).

	 	 
	 	B = the Exercise Price.

The foregoing is referred to as a “Cashless Exercise.”  No Cashless Exercise shall be permitted unless the Average Closing Price exceeds the Exercise Price and, if the Average Closing Price does not exceed the Exercise Price, the Company shall refuse to honor any purported exercise of this Warrant pursuant to a Cashless Exercise.  “Closing Price” means, for any Trading Day, the price determined as follows: (I) if the Common Stock is then listed or quoted on a Trading Market, the closing sale price per share (or, if no closing sale price is reported, the average of the closing bid and ask prices or, if more than one in either case, the average of the average closing bid and the average closing ask prices) on such date as reported in composite transactions for such Trading Market; (II) if the Common Stock is not listed then listed or quoted on a Trading Market, the last quoted bid price for the Common Stock in the over-the-counter market on the relevant date as reported by Pink Sheets LLC or any similar organization; or (III) in all other cases, the fair market value of a share of Common Stock as determined by the Board of Directors of the Company in good faith.  

(d)

Mechanics of Exercise. 

i.

Authorization of Warrant Shares.  The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).  The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant.  The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant.  The Company will take all such reasonable action as may be necessary to assure that such 

Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed.

ii.

Delivery of Certificates Upon Exercise.  Certificates for shares purchased hereunder shall be transmitted by the transfer agent of the Company to the Holder (A) by crediting the account of the Holder’s prime broker with the Depository Trust Company through its Deposit Withdrawal Agent Commission (“DWAC”) system, provided that (I) the Company is a participant in such system and (II) the DWAC system provides an adequate method of protecting against the transfer of the Warrant Shares in violation of the restrictions on transfer set forth herein, and (B) otherwise by depositing the certificate(s) representing the Warrant Shares with a nationally recognized overnight courier for delivery to the address specified by the Holder in the Notice of Exercise on the next Trading Day, in either event within 3 Trading Days of the Exercise Date (“Warrant Share Delivery Date”).  

iii.

Delivery of New Warrants Upon Exercise.  If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

iv.

Rescission Rights.  If the Company fails to cause its transfer agent to transmit to the Holder a certificate or certificates representing the Warrant Shares by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise; provided that it return any certificate representing any Warrant Shares received by it.

v.

No Fractional Shares or Scrip.  No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant.  As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price.

vi.

Charges, Taxes and Expenses.  Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when 

surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.

vii.

Closing of Books.  The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

viii.

Government Filings.  The Company shall assist and cooperate with the Holder, at the Holder’s expense, with respect to any governmental filings required to be made or any governmental approvals required to be obtained by the Holder prior to or in connection with any exercise of this Warrant (including, without limitation, making any filings required to be made by the Company; provided, however, filings required to be made by the Company under federal or state securities laws shall be governed by the Registration Rights Agreement).

(e)

Call Provision.  Subject to the provisions of this Section 2(e), if after the date of issuance of this Warrant the Closing Price for each of 20 consecutive Trading Days (the “Measurement Period”, which period shall not commence until beginning on or after the date that the Registration Statement filed pursuant to the Registration Rights Agreement is declared effective by the Securities and Exchange Commission) exceeds $5.60 (subject to adjustment as set forth herein) (the “Threshold Price”), then the Company may, within five Trading Days of the end of such period, call for redemption all or any portion of this Warrant for $0.50 per share (the “Call Price”) for which a Notice of Exercise has not yet been delivered (such right, a “Call”).  To exercise this right, the Company must deliver to the Holder an irrevocable written notice (a “Call Notice”), indicating therein the portion of unexercised portion of this Warrant to which such notice applies.  If the conditions set forth below for such Call are satisfied from the period from the date of the Call Notice through and including the Call Date (as defined below), then any portion of this Warrant subject to such Call Notice for which a Notice of Exercise shall not have been received by the Call Date will be cancelled at 5:00 p.m. (New York City time) on the 10th Trading Day after the date the Call Notice is sent to the Holder (such date, the “Call Date”).  Any unexercised portion of this Warrant to which the Call Notice does not pertain will be unaffected by such Call Notice.  In furtherance thereof, the Company covenants and agrees that it will honor all Notices of Exercise with respect to Warrant Shares subject to a Call Notice that are tendered through 5:00 p.m. (New York City time) on the Call Date.  The parties agree that any Notice of Exercise delivered following a Call Notice shall first reduce to zero the number of Warrant Shares subject to such Call Notice prior to reducing the remaining Warrant Shares available for purchase under this Warrant.  For example, if (x) this Warrant then permits the Holder to acquire 200 Warrant Shares, (y) a Call Notice pertains to 75 Warrant Shares, and (z) prior to 5:00 p.m. (New York City time) on the Call Date the Holder tenders a Notice of Exercise in respect of 50 Warrant Shares, then (1) on the Call Date the right under this Warrant to acquire 25 Warrant Shares will be automatically cancelled, (2) the Company, in the time and manner required under this Warrant, will have issued and delivered to the Holder 50 Warrant Shares in respect of the exercises following receipt of the Call Notice, and (3) the Holder may, until the Termination Date, exercise this Warrant for 125 Warrant Shares (subject to 

adjustment as herein provided and subject to subsequent Calls).  Subject again to the provisions of this Section 2(e), the Company may at ant time and from time to time exercise its Call right and deliver subsequent Call Notices for any portion of this Warrant for which the Holder shall not have delivered a Notice of Exercise.  The Company’s right to Call the Warrant shall be exercised ratably among the Holders based on the number of Warrants then held by each  Holder.

(f)

Limitation on Exercise.  Notwithstanding any provisions of this Warrant to the contrary, the number of shares of Common Stock that may be acquired by Holder upon any exercise of this Warrant shall be limited to the extent necessary to ensure that, following such exercise, the total number of shares of Common Stock then beneficially owned by Holder and its Affiliates and any other Persons whose beneficial ownership of Common Stock would be aggregated with the Holder’s for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), does not exceed 9.999% (the “Limiting Percentage”) of the total number of issued and outstanding shares of Common Stock (including for such purpose the shares of Common Stock issuable upon such exercise of this Warrant).  For such purposes, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations thereunder, it being acknowledged by Holder that the Company is not representing to Holder that such calculation is in compliance with Section 13(d) or Section 16 of the Exchange Act and Holder is solely responsible for any schedules or reports required to be filed in accordance therewith.  The Company’s obligation to issue shares of Common Stock in excess of the limitation referred to in this Section 2(f) shall be suspended (and shall not terminate or expire notwithstanding any contrary provisions hereof) until such time, if any, as such shares of Common Stock may be issued in compliance with such limitation. To the extent that the limitation contained in this Section 2(f) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder) and of which a portion of this Warrant is exercisable shall be in the sole discretion of such Holder, and the submission of a Notice of Exercise shall be deemed to be such Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by such Holder) and of which portion of this Warrant is exercisable, in each case subject to such aggregate percentage limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination.   By written notice to the Company at any time on or after the date hereof, Holder may waive the provisions of this Section 2(f) or increase or decrease such limitation percentage to any other percentage specified in such notice, but not exceeding 9.999%.  Any such waiver or increase will not be effective until the sixty-fifth day after such notice is delivered to the Company, unless such notice is issued by the Holder prior to or concurrently with the issuance of this Warrant, and will not be effective with respect to any subsequent transferee of the Warrant.

Section 3.

Certain Adjustments.

(a)

Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (A) pays a stock dividend or otherwise makes a distribution on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company pursuant to this Warrant or any other option, warrant or other right to acquire the Common Stock), (B) subdivides outstanding shares of Common Stock into a larger number of shares (including by way of a stock split), or (C) combines (including by way of 

reverse stock split) outstanding shares of Common Stock into a smaller number of shares, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination.

(b)

Adjustment of Number of Shares.  Upon each adjustment in the Exercise Price pursuant to Section 3(a), the number of shares of Common Stock issuable upon exercise hereof shall be adjusted, rounded up to the nearest whole share, to the product obtained by multiplying such number of shares purchasable immediately prior to such adjustment in the Exercise Price by a fraction, the numerator of which shall be the Exercise Price immediately prior to such adjustment and the denominator of which shall be the Exercise Price immediately thereafter.

(c)

Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. The number of shares of Common Stock outstanding at any given time shall not includes shares of Common Stock owned or held by or for the account of the Company as treasury shares.

(d)

Failure to Effect Event Requiring Adjustment.  If any event requiring an adjustment in the Exercise Price and the number of Warrant shares issuable hereunder is not paid or made, then the Exercise Price and number of shares issuable upon exercise of this Warrant shall again be adjusted to be the Exercise Price and number of shares which would then be in effect if such adjustment had not been made for such.

(e)

Notice to Holders.  Whenever the Exercise Price is adjusted pursuant to Section 3(a), the Company shall promptly mail to each Holder a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.

(f)

Organic Change. Any recapitalization, reorganization, reclassification, consolidation or merger to which the Company is a party, or sale of all or substantially all of the Company’s assets to another Person or other transaction that is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an “Organic Change.”  Prior to the consummation of any Organic Change, the Company will make appropriate provision to ensure that the Holder will thereafter have the right to acquire and receive, upon exercise of this Warrant, in lieu of or addition to (as the case may be) the Warrant Shares immediately theretofore acquirable and receivable upon the exercise of such holder’s Warrant, such stock, securities or assets as may be issued or payable with respect to or in exchange for the number of Warrant Shares immediately theretofore acquirable and receivable upon exercise of the Holder’s Warrant had such Organic Change not taken place.  In any such case, the Company will make appropriate provision with respect to the Holder’s rights and interests to ensure that the provisions of this Section 3(f) hereof will 

thereafter be applicable to the Warrant.  The Company will not effect any such Organic Change, unless prior to the consummation thereof, the successor entity (if other than the Company) resulting from consolidation or merger or the corporation purchasing such assets assumes by written instrument, the obligation to deliver to the Holder such stock, securities or assets as, in accordance with the foregoing provisions, Holder may be entitled to acquire.  The Company will give written notice to the Holder at least 20 days prior to the date on which the Company closes its books or takes a record for determining rights to vote with respect to any Organic Change, dissolution or liquidation.  The Company will also give written notice to the Holder at least 20 days prior to the date on which any Organic Change, dissolution or liquidation will take place.

(g)

Voluntary Adjustment By Company. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company.

Section 4.

Transfer of Warrant.

(a)

Transferability.  Subject to compliance with any applicable securities laws and the conditions set forth in Sections 4(d) and 5(a) hereof and to the provisions of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer.  Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled.  A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.  

(b)

New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney.  Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice.

(c)

Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time.  The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

(d)

Transfer Restrictions. If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effective registration statement under the Securities Act and under 

applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an “accredited investor” as defined in Regulation D promulgated under the Securities Act.

(e)

Legend.  The Warrant Shares issuable hereunder shall bear the following legend:

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION, OR THE SECURITIES COMMISSION OF ANY STATE, IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. 

Certificates evidencing the Warrant Shares shall not contain the legend set forth above:  (i) following any sale of such Warrant pursuant to an effective registration statement under the Securities Act or pursuant to Rule 144, or (ii) if such Warrant Shares are eligible for sale under Rule 144(k), provided that, in each case, the Holder provides a copy of such certificates or confirmations as the Company reasonably requests.

Section 5.

Miscellaneous.

(a)

Title to Warrant.  The Company shall register this Warrant, upon records to be maintained by the Company for that purpose, in the name of the record Holder hereof from time to time.  The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any notice to the Holder, and for all other purposes, absent actual written notice to the contrary and compliance with the applicable provisions concerning transfer of this Warrant.

(b)

No Rights as Shareholder Until Exercise.  This Warrant does not entitle the Holder to any voting rights or other rights as a shareholder of the Company prior to the Exercise Date and then only with respect to the Warrant Shares to be issued with respect threreto.  

(c)

Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

(d)

Saturdays, Sundays, Holidays, etc.  If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday.

(e)

Exchange of Warrant for Warrants of Different Denominations.  This Warrant is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for new Warrants of like tenor representing in the aggregate the right to purchase the number of Warrant Shares then purchasable hereunder, and each of such new Warrant will represent such portion of such rights as is designated by the Purchaser at the time of such surrender.  The date the Company initially issued this Warrant will be deemed to be the warrant issue date for such new Warrants regardless of the number of times new certificates representing the unexplored and unexercised rights formerly represented by this Warrant shall be issued.

(f)

Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the provisions of the Purchase Agreement.

(g)

Restrictions.  The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws.

(h)

No waiver.  No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder’s rights, powers or remedies; provided, however, that all rights hereunder shall terminate on the Termination Date.  

(i)

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 (I) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto prior to 4:00 p.m. (Eastern Time) on a Trading Day, (II) 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 4:00 p.m. (Eastern Time) on any Trading Day, (III) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (IV) upon actual receipt by the party to whom such notice is required to be given; provided, 

however, that any exercise of the Warrant shall be effective in the manner provided in Section 2(a).  The address for such notices and communications shall be (A) if to the Holder of this Warrant, at the registered address of such Holder as set forth in the Warrant register kept at the principal office of the Company or its Warrant registrar, if any, or (b) if to the Company, to it at the address set forth on the signature page hereto.

(j)

Limitation of Liability.  No provision hereof, in the absence of any affirmative action by Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

(k)

Remedies.  Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant.  The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate.

(l)

Successors and Assigns.  Subject to applicable securities laws and the other restrictions on transfer set forth herein, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder.  The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder.

(m)

Amendment.  This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.

(n)

Severability.  Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

(o)

Headings.  The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

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

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized.

Dated:  August __, 2005

 

	PANAMERICAN BANCORP

	By:__________________________________________

     Name:

     Title:

	Address for Notice:

_____________________________________________

_____________________________________________

_____________________________________________

	

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

Blank Rome LLP

1200 N. Federal Highway, Suite 417

Boca Raton, FL 33432

Attention: Bruce C. Rosetto, Esquire<PAGE>

                                                                     Exhibit 4.1

                       INTERACTIVE SYSTEMS WORLDWIDE INC.

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

                         PURSUANT TO SECTION 151 OF THE
                        DELAWARE GENERAL CORPORATION LAW

        The undersigned, Bernard Albanese and James McDade, do hereby certify
that:

                1. They are the President and Secretary, respectively, of
Interactive Systems Worldwide Inc., a Delaware corporation (the "Corporation").

                2. The Corporation is authorized to issue 2,000,000 shares of
preferred stock, 63,000 of which have been issued.

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

        WHEREAS, the Certificate of Incorporation of the Corporation provides
for a class of its authorized stock known as preferred stock, comprised of
2,000,000 shares, $0.001 par value, issuable from time to time in one or more
series;

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

        WHEREAS, it is the desire of the Board of Directors of the Corporation,
pursuant to its authority as aforesaid, to fix the rights, preferences,
restrictions and other matters relating to a series of the preferred stock,
which shall consist of, except as otherwise set forth in the Securities Purchase
Agreement, dated as of August 3, 2005 (the "Purchase Agreement") 4,000 shares of
the preferred stock which the Corporation has the authority to issue, as
follows:

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

                                       1
<PAGE>

                            TERMS OF PREFERRED STOCK

         Section 1. Definitions.

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

         "Acquiring Corporation" shall have the meaning set forth in Section
7(d).

         "Acquiring Corporation Common Stock" shall have the meaning set forth
in Section 7(d).

         "Acquisition Closing" shall have the meaning set forth in Section 7(d).

         "Alternate Consideration" shall have the meaning set forth in Section
7(d).

         "Automatic Conversion Fundamental Transaction" shall have the meaning
set forth in Section 7(d).

         "Bankruptcy Event" means the Corporation or any of its Subsidiaries
(other than any inactive Subsidiary so designated on the Disclosure Schedule to
the Purchase Agreement, unless they have become active in the business or
finances of the Corporation) ("Subsidiary") shall commence, or there shall be
commenced against the Corporation or any such Subsidiary, a case under any
applicable bankruptcy or insolvency laws as now or hereafter in effect or any
successor thereto, or the Corporation commences any other similar proceeding
under any reorganization, arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency or liquidation or similar law of any jurisdiction
whether now or hereafter in effect relating to the Corporation or any Subsidiary
thereof or there is commenced against the Corporation or any Subsidiary thereof
any such bankruptcy, insolvency or other proceeding which remains undismissed
for a period of 60 days; or the Corporation or any Subsidiary thereof is
adjudicated insolvent or bankrupt; or any order of relief or other similar order
approving any such case or proceeding is entered; or the Corporation or any
Subsidiary thereof suffers any appointment of any custodian or the like for it
or any substantial part of its property which continues undischarged or unstayed
for a period of 60 days; or the Corporation or any Subsidiary thereof makes a
general assignment for the benefit of creditors; or the Corporation shall fail
to pay, or shall state that it is unable to pay, or shall be unable to pay, its
debts generally as they become due; or the Corporation or any Subsidiary thereof
shall call a meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or the Corporation or any Subsidiary
thereof shall by any act or failure to act expressly indicate its consent to,
approval of or acquiescence in any of the foregoing; or any corporate or other
action is taken by the Corporation or any Subsidiary thereof for the purpose of
effecting any of the foregoing.

                                       2
<PAGE>

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

         "Buy-In" shall have the meaning set forth in Section 6(e)(iii).

         "Capital Shares" means the Common Stock and any shares of any other
class of common stock or preferred stock, whether now or hereafter authorized,
having the right to participate in the distribution of earnings and assets of
the Corporation.

         "Capital Shares Equivalents" means any securities, rights or
obligations that are convertible into or exchangeable for or give any right to
subscribe for or purchase, directly or indirectly, any Capital Shares or any
warrants, options or other rights to subscribe for or purchase, directly or
indirectly, Capital Shares or any such convertible or exchangeable securities.

         "Change of Control Transaction" means the occurrence after the date
hereof of any of (i) an acquisition after the date hereof by an individual or
legal entity or "group" (as described in Rule 13d-5(b)(1) promulgated under the
Exchange Act) of effective control (whether through legal or beneficial
ownership of capital stock of the Corporation, by contract or otherwise) of in
excess of 40% of the voting securities of the Corporation other than by any of
the Holders and/or their Affiliates acting alone or with any other Person, or
(ii) a replacement at one time or within a one year period of more than one-half
of the members of the Corporation's board of directors which is not approved by
a majority of those individuals who are members of the board of directors on the
date hereof (or by those individuals who are serving as members of the board of
directors on any date whose nomination to the board of directors was approved by
a majority of the members of the board of directors who are members on the date
hereof), or (iii) the execution by the Corporation of an agreement to which the
Corporation is a party or by which it is bound, providing for any of the events
set forth above in (i) or (ii).

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

         "Commission" means the Securities and Exchange Commission.

         "Common Stock" means the Corporation's common stock, par value $0.001
per share, and stock of any other class into which such shares may hereafter
have been reclassified or changed.

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

                                       3
<PAGE>

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

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

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

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

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

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

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

         "Equity Conditions" shall mean, during the period in question, (i) the
Corporation is not in default in honoring all conversions and redemptions
scheduled to occur or occurring by virtue of one or more Notices of Conversion,
if any, (ii) all liquidated damages and other amounts owing in respect of the
Preferred Stock shall have been paid; (iii) there is an effective Registration
Statement pursuant to which the Holder is permitted to utilize the prospectus
thereunder to resell all of the shares of Common Stock issuable pursuant to the
Transaction Documents (and the Corporation has no knowledge that such
effectiveness will not continue for the foreseeable future) subject to the
provisions of Section 2(b) of the Registration Rights Agreement, (iv) the Common
Stock is trading on the Principal Market and all of the shares issuable pursuant
to the Transaction Documents are listed for trading on a Principal Market (and
the Corporation has no knowledge that trading of the Common Stock on a Principal
Market will not continue for the foreseeable future), (v) there is a sufficient
number of authorized but unissued and otherwise unreserved shares of Common
Stock for the issuance of all of the shares issuable pursuant to the Transaction
Documents, (vi) there is then existing no Event of Default or event which, with
the passage of time or the giving of notice, would constitute and Event of
Default and (vii) all of the shares issued and still owned by a Holder or
issuable pursuant to the Transaction Documents in full, ignoring for such
purposes any conversion or exercise limitation therein, would not violate the
limitations set forth in Sections 6(c) and 6(d) and (viii) no public
announcement of a pending or proposed Fundamental Transaction or material
acquisition transaction has occurred that has not been consummated.

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

                                       4
<PAGE>

         "Exempt Issuance" means (a) the granting, exercise or issuance of
Capital Shares or Capital Shares Equivalents to employees, officers, directors,
or consultants (provided that in the case of consultants, such issuance of
Capital Shares and/or grants of Capital Share Equivalents does not exceed, in
the aggregate, 200,000 Capital Shares or Capital Shares Equivalents convertible
into or exchangeable for 200,000 Capital Shares, per any 12 month period)
pursuant to any stock option plan agreement or arrangement duly adopted or
approved by a majority of the non-employee members of the Board of Directors of
the Corporation or a majority of the members of a committee of non-employee
directors established for such purpose, or (b) upon the conversion of any
Preferred Stock or any Warrant or security issued by the Corporation in
connection with the offer and sale of the Corporation's Securities pursuant to
the Purchase Agreement, or (c) the issuance of any Common Stock as payment of
interest with respect to any shares of Preferred Stock or for payment of
principal of, or interest on, the Corporation's 7.5% Convertible Debentures due
April 1, 2006 ("Prior Debentures") or the issuance of any Common Stock upon
conversion, or upon payment of any dividends on, the Corporations Series B
Preferred Stock ("Prior Preferred Stock") or (d) upon the exercise of or
conversion of any Capital Shares Equivalents (including the Prior Debentures and
the warrants issued by the Corporation in November, 2003 and the Prior Preferred
Stock and the warrants issued by the Corporation in November 2004), rights,
options or warrants issued and outstanding on the Original Issue Date, provided,
other than with respect to issuances of Common Stock in lieu of monthly cash
redemption payments to the holders of the Prior Debenture, such securities have
not been amended in order to reduce the exercise or conversion price thereof or
increase the number of shares issuable thereunder since the date of the Purchase
Agreement except as a result of the Purchase Agreement, or (e) issuance of
securities in connection with acquisitions, mergers, joint ventures, strategic
investments, or strategic partnering arrangements, the primary purpose of which
is not to raise capital.

         "Fundamental Transaction" shall have the meaning set forth in Section
7(d).

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

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

         "Liquidation" shall have the meaning given such term in Section 5.

         "New York Courts" shall have the meaning given such term in Section
11(d).

         "Notice of Conversion" shall have the meaning given such term in
Section 6(a).

                                       5
<PAGE>

         "Optional Redemption Amount" shall mean the sum of (i) 115% of the
aggregate Stated Value then outstanding, (ii) accrued but unpaid dividends and
(iii) all liquidated damages and other amounts due in respect of the Preferred
Stock.

         "Optional Redemption Notice" shall have the meaning set forth in
Section 8(b).

         "Optional Redemption Notice Date" shall have the meaning set forth in
Section 8(b).

         "Original Issue Date" shall mean the date of the Purchase Agreement.

         "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.

         "Principal Market" means any of 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 or the Nasdaq National Market and, with respect to Section 7(d) as to
Acquiring Corporation Common Stock, any of the aforementioned markets or
exchanges and the London Stock Exchange.

         "Prior Debenture" shall have the meaning given such term in the
definition of Exempt Issuance.

         "Prior Preferred Stock" shall have the meaning given such term in the
definition of Exempt Issuance.

         "Purchase Agreement" means the Securities Purchase Agreement, dated as
of August 3, 2005, to which the Corporation and the original Holders are
parties, as amended, modified or supplemented from time to time in accordance
with its terms.

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

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

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

                                       6
<PAGE>

         "Share Delivery Date" shall have the meaning given such term in Section
6(e).

         "Stated Value" shall have the meaning given such term in Section 2.

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

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

         "Trading Day" means a day on which the Principal Market shall be open
for business.

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

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

         "Triggering Redemption Amount" for each share of Preferred Stock means
the sum of (i) the greater of (A) 120% of the Stated Value and (B) the product
of (a) the average of the 5 VWAPs of Common Stock for the Trading Days
immediately preceding the date of the Triggering Event and (b) the Stated Value
divided by the then Conversion Price, (ii) all accrued but unpaid dividends
thereon and (iii) all liquidated damages and other amounts due in respect of the
Preferred Stock.

         "Triggering Redemption Payment Date" shall have the meaning set forth
in Section 9(b).

         "VWAP" means, for any date, the price determined by the first of the
following clauses that applies: (a) if the Common Stock is then listed or quoted
on a Principal Market, the daily volume weighted average price of the Common
Stock for such date (or the nearest preceding date) on the Principal Market on
which the Common Stock is then listed or quoted as reported by Bloomberg
Financial L.P. (based on a Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m.
Eastern Time); (b) if the Common Stock is not then listed or quoted on a
Principal Market and if prices for the Common Stock are then quoted on the OTC
Bulletin Board, the volume weighted average price of the Common Stock for such
date (or the nearest preceding date) on the OTC Bulletin Board; (c) if the
Common Stock is not then listed or quoted on the OTC Bulletin Board and if
prices for the Common Stock are then reported in the "Pink Sheets" published by
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 prior to the day in question; 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 a majority in interest of the
Holders and reasonably acceptable to the Corporation.

                                       7
<PAGE>

         (b) Interpretation. Unless the context otherwise requires, the terms
defined in this Section 1 shall have the meanings herein specified for all
purposes of this Certificate of Designation or the Purchase Agreement,
applicable to both the singular and plural forms of any of the terms defined
herein. When a reference is made in this Certificate of Designation to a
Section, such reference shall be to a Section of this Certificate of Designation
unless otherwise indicated. Whenever the words "include," "includes" or
"including" are used in this Certificate of Designation, they shall be deemed to
be followed by the words "without limitation." The use of any gender herein
shall be deemed to include the neuter, masculine and feminine genders wherever
necessary or appropriate. When any matter is disclosed (a) in any Transaction
Document (including any exhibit or schedule thereto), (b) any place in the
Disclosure Schedule, or (c) except with respect to Sections 3.1(g), 3.1(s),
3.1(u), 3.1(w), 3.1(dd), 3.1(ee), 3.1(gg), 3.1(hh), 3.1(ii), 3.1(jj) and 3.1(kk)
of the Purchase Agreement and with respect to Section 6(b) and Section 6(c) of
the Registration Rights Agreement, in the Corporation's most recent Form 10-KSB,
the Proxy Statement for the 2005 Annual Meeting of Shareholders, the forms
10-QSB for the quarters ended December 31, 2004 and March 31, 2005, and all
press releases issued after the filing of the Form 10-QSB for the quarter ended
March 31, 2005 and prior to the Closing Date, such matter shall be deemed to
have been disclosed to all of the Purchasers for all purposes pursuant to all of
the Transaction Documents. If any period of time for the performance under the
Transaction Documents ends on a day that is not a Trading Day, such period of
time shall be automatically extended to end at the end of the next succeeding
Trading Day.

         Section 2. Designation, Amount and Par Value. The series of preferred
stock shall be designated as its Series C 6% Convertible Preferred Stock (the
"Preferred Stock") and the number of shares so designated shall be 4,000 (which
shall not be subject to increase without the consent of all of the holders of
the Preferred Stock (each, a "Holder" and collectively, the "Holders")). Each
share of Preferred Stock shall have a par value of $0.001 per share and a stated
value equal to $1,000 (the "Stated Value"). Capitalized terms not otherwise
defined herein shall have the meaning given such terms in Section 1 hereof.

         Section 3. Dividends.

                                       8
<PAGE>

         a) Holders shall be entitled to receive and the Corporation shall pay,
cumulative dividends at the rate per share (as a percentage of the Stated Value
per share) of 6% per annum (subject to increase pursuant to Section 9(b)),
payable quarterly on January 1, April 1, July 1 and October 1, beginning with
the first such date after the Original Issue Date and on any Conversion Date as
to the Stated Value of the shares being converted (except that, if such date is
not a Trading Day, the payment date shall be the next succeeding Trading
Day)(each such date, a "Dividend Payment Date"). The form of dividend payments
to each Holder shall be made in the following order: (i) if funds are legally
available for the payment of dividends and the Equity Conditions have not been
met, in cash only, (ii) if funds are legally available for the payment of
dividends and the Equity Conditions have been met, at the sole election of the
Corporation, in cash or shares of Common Stock which shall be valued solely for
such purpose at 90% of the average of the 20 VWAPs immediately prior to the
Dividend Payment Date; (iii) if funds are not legally available for the payment
of dividends and the Equity Conditions have been met, in shares of Common Stock
which shall be valued at 90% of the average of the 20 VWAPs immediately prior to
the Dividend Payment Date; (iv) if funds are not legally available for the
payment of dividends and the Equity Conditions relating to registration have
been waived by such Holder, as to such Holder only, in unregistered shares of
Common Stock which shall be valued at 90% of the average of the 20 VWAPs
immediately prior to the Dividend Payment Date; and (v) if funds are not legally
available for the payment of dividends and the Equity Conditions have not been
met, then, at the election of such Holder, such dividends shall accrue to the
next Dividend Payment Date or shall be accreted to the outstanding Stated Value.
The Holders shall have the same rights and remedies with respect to the delivery
of any such shares as if such shares were being issued pursuant to Section 6.
Within 3 Trading Days after the Closing Date the Corporation shall have notified
the Holders whether or not it may lawfully pay cash dividends. The Corporation
shall promptly notify the Holders at any time the Corporation shall become able
or unable, as the case may be, to lawfully pay cash dividends. If at any time
the Corporation has the right to pay dividends in cash or Common Stock, the
Corporation must provide the Holder with at least 20 Trading Days' notice of its
election to pay a regularly scheduled dividend in Common Stock (the Corporation
may indicate in such notice that such election shall continue for subsequent
dividend payments until revised by the Corporation). Dividends on the Preferred
Stock shall be calculated on the basis of a 360-day year, shall accrue daily
commencing on the Original Issue Date, and shall be deemed to accrue from such
date whether or not earned or declared and whether or not there are profits,
surplus or other funds of the Corporation legally available for the payment of
dividends. Except as otherwise provided herein, if at any time the Corporation
pays dividends partially in cash and partially in shares, then such payment
shall be distributed ratably among the Holders based upon the number of shares
of Preferred Stock held by each Holder. Any dividends, whether paid in cash or
shares, that are not paid within three Trading Days following a Dividend Payment
Date shall continue to accrue and shall entail a late fee, which must be paid in
cash, at the rate of 12% per annum or the lesser rate permitted by applicable
law (such fees to accrue daily, from the Dividend Payment Date through and
including the date of payment).

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

                                       9
<PAGE>

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

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

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

                                       10
<PAGE>

         Section 6. Conversion.

         a) Conversions at Option of Holder. Each share of Preferred Stock shall
be convertible into that number of shares of Common Stock (subject to the
limitations set forth in Sections 6(c) and (d)) determined by dividing the
Stated Value of such share of Preferred Stock by the Conversion Price, at the
option of the Holder, at any time and from time to time from and after the
Original Issue Date. Holders shall effect conversions by delivering to the
Corporation the form of conversion notice attached hereto as Annex A (a "Notice
of Conversion"). Each Notice of Conversion shall specify the number of shares of
Preferred Stock to be converted, which shall not be less than $50,000 Stated
Value of Preferred Stock unless less than $50,000 of Stated Value of such
Holder's Preferred Stock remains outstanding, in which case it shall be for the
full amount outstanding, the number of shares of Preferred Stock owned prior to
the conversion at issue, the number of shares of Preferred Stock owned
subsequent to the conversion at issue and the date on which such conversion is
to be effected, which date may not be prior to the date the Holder delivers such
Notice of Conversion to the Corporation by facsimile and shall not be more than
10 Trading Days after the delivery of the Notice of Conversion (the "Conversion
Date"). If no Conversion Date is specified in a Notice of Conversion, the
Conversion Date shall be the date that such Notice of Conversion to the
Corporation is deemed delivered hereunder. To effect conversions of shares of
Preferred Stock, a Holder shall not be required to physically surrender the
certificate(s) representing such shares of Preferred Stock to the Corporation
unless all of the shares of Preferred Stock represented thereby are so
converted, in which case the Holder shall deliver the certificate representing
such share of Preferred Stock promptly following the Conversion Date at issue.
Shares of Preferred Stock converted into Common Stock or redeemed in accordance
with the terms hereof shall be canceled and may not be reissued.

         b) Conversion Price. The conversion price for the Preferred Stock shall
equal $3.75 (the "Conversion Price"), subject to adjustment herein.

         c) Beneficial Ownership Limitation. The Corporation shall not effect
any conversion or issuance of Common Stock of shares of Preferred Stock and a
Holder shall not have the right to convert any shares of Preferred Stock,
pursuant to Section 6(a) or otherwise, to the extent that after giving effect to
such conversion or issuance, such Holder (together with such Holder's
Affiliates) would beneficially own in excess of 4.99% of the number of shares of
the Common Stock outstanding immediately after giving effect to such conversion
or issuance. For purposes of the foregoing sentence, the number of shares of
Common Stock beneficially owned by such Holder and its Affiliates shall include
the number of shares of Common Stock issuable upon conversion of the shares of
Preferred Stock or otherwise issuable pursuant to this Certificate of
Designation with respect to which the determination of such sentence is being
made, but shall exclude the number of shares of Common Stock which would be
issuable upon (A) conversion of the remaining, nonconverted Stated Value of
Preferred Stock beneficially owned by the Holder or any of its Affiliates or
otherwise issuable pursuant to the outstanding shares of Preferred Stock not
subject to such issuance beneficially owned by such Holder or any of its
Affiliates and (B) exercise or conversion of the unexercised or nonconverted
portion of any other securities of the Corporation (including any other
debentures, warrants, preferred stock or the Warrants) subject to a limitation
on conversion or exercise analogous to the limitation contained herein
beneficially owned by such Holder or any of its Affiliates. Except as set forth
in the preceding sentence, for purposes of this Section 6(b), beneficial
ownership shall be calculated in accordance with Section 13(d) of the Exchange
Act and the rules and regulations promulgated thereunder. (To the extent that
the limitation contained in this Section 6(b) applies, the determination of
whether Preferred Stock is convertible (in relation to other securities owned by
such Holder together with any Affiliates) and of which shares of Preferred Stock
are convertible shall be in the sole discretion of such Holder, and the
submission of a Notice of Conversion shall be deemed to be such Holder's
determination of whether the Preferred Stock may be converted (in relation to
other securities owned by such Holder) and which shares of Preferred Stock are
convertible, in each case subject to such aggregate percentage limitations. To
ensure compliance with this restriction, each Holder shall be deemed to
represent to the Corporation each time it delivers a Notice of Conversion that
such Notice of Conversion has not violated the restrictions set forth in this
paragraph and the Corporation shall have no obligation to verify or confirm the
accuracy of such determination. For purposes of this Section 6(b), in
determining the number of outstanding shares of Common Stock, the Holder may
rely on the number of outstanding shares of Common Stock as reflected in the
most recent of the following: (x) the Corporation's most recent Form 10-QSB or
Form 10-KSB, as the case may be, (y) a more recent public announcement by the
Corporation or (z) any other notice by the Corporation or the Corporation's
transfer agent setting forth the number of shares of Common Stock outstanding.
Upon the written or oral request of a Holder, the Corporation shall within two
Trading Days confirm orally and in writing to such Holder the number of shares
of Common Stock then outstanding. In any case, the number of outstanding shares
of Common Stock shall be determined after giving effect to the conversion or
exercise of securities of the Corporation, including the Preferred Stock, by a
Holder or its Affiliates since the date as of which such number of outstanding
shares of Common Stock was reported. The provisions of this Section 6(b) may be
waived by any Holder upon, at the election of such Holder, not less than 61
days' prior notice to the Corporation, and the provisions of this Section 6(b)
shall continue to apply until such 61st day (or such later date, as determined
by such Holder, as may be specified in such notice of waiver). The provisions of
this paragraph shall be implemented in a manner otherwise than in strict
conformity with the terms of this Section 6(c) to correct this paragraph (or any
portion hereof) which may be defective or inconsistent with the intended 4.99%
beneficial ownership limitation herein contained or to make changes or
supplements necessary or desirable to properly give effect to such 4.99%
limitation. The limitations contained in this paragraph shall apply to a
successor holder of Preferred Stock. The holders of Common Stock of the
Corporation shall be third party beneficiaries of this Section 6(c) and the
Corporation may not waive this Section 6(c) without the consent of holders of a
majority of its Common Stock.

                                       11
<PAGE>

         d) Limitation on Number of Shares Issuable. Unless the Corporation
first obtains Shareholder Approval, the Corporation may not issue upon
conversion of the Preferred Stock, a number of shares of Common Stock, which,
when, aggregated with any shares of Common Stock issued prior to such Conversion
Date (A) upon conversion of or as payment of dividends on the Preferred Stock
and (B) upon exercise of those certain warrants issued pursuant to that certain
Purchase Agreement, would exceed 19.999% of the number of shares of Common Stock
outstanding on the Trading Day immediately preceding the Original Issue Date, or
such greater number of shares of Common Stock permitted pursuant to the
corporate governance rules of the Nasdaq SmallCap Market or such other exchange
or market, that is at the time the principal trading exchange or market for the
Common Stock, based upon share volume, as confirmed in writing by counsel to the
Corporation (the "Maximum Aggregate Share Amount"). Each Holder shall be
entitled to a portion of the Maximum Aggregate Share Amount equal to the
quotient obtained by dividing (x) such the number of shares of Preferred Stock
initially purchased by such Holder by (y) the aggregate number of shares
purchased by all Holders. Such portions shall be adjusted upward ratably in the
event all of the shares of Preferred Stock of any Holder are no longer
outstanding. If at any time the number of shares of Common Stock which could,
notwithstanding the limitation set forth herein, be issuable and sold to all
Holders during the following 12 months (assuming all dividends are paid in
shares of Common Stock during such period of determination based upon the VWAP
at the time of any such determination) equals or exceeds the Maximum Aggregate
Share Amount, then the Corporation shall, subject to any requirements in the
Purchase Agreement to act sooner, use commercially reasonable efforts to obtain
the Shareholder Approval applicable to such issuance as soon as is possible, but
in any event not later than the 75th day after the date in which the Corporation
determines (or is notified by any Holder) that the Maximum Aggregate Share
Amount could be exceeded and shall continue to seek to obtain Shareholder
Approval every 75 days until such Shareholder Approval is obtained.

         e) Mechanics of Conversion

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

                                       12
<PAGE>

                  ii. Obligation Absolute; Partial Liquidated Damages. The
         Corporation's obligations to issue and deliver the Conversion Shares
         upon conversion of Preferred Stock in accordance with the terms hereof
         are absolute and unconditional, irrespective of any action or inaction
         by the Holder to enforce the same, any waiver or consent with respect
         to any provision hereof, the recovery of any judgment against any
         Person or any action to enforce the same, or any setoff, counterclaim,
         recoupment, limitation or termination, or any breach or alleged breach
         by the Holder or any other Person of any obligation to the Corporation,
         and irrespective of any other circumstance which might otherwise limit
         such obligation of the Corporation to the Holder in connection with the
         issuance of such Conversion Shares; provided, however, such delivery
         shall not operate as a waiver by the Corporation of any such action the
         Corporation may have against the Holder. In the event a Holder shall
         elect to convert any or all of the Stated Value of its Preferred Stock,
         the Corporation may not refuse conversion based on any claim that such
         Holder or any one associated or affiliated with the Holder of has been
         engaged in any violation of law, agreement or for any other reason,
         unless, an injunction from a court, on notice, restraining and or
         enjoining conversion of all or part of this Preferred Stock shall have
         been sought and obtained. In the event any such injunction is issued,
         all time periods applicable to the Corporation relating to conversion
         of Preferred Stock shall be tolled until such injunction is removed. In
         the absence of an injunction precluding the same, the Corporation shall
         issue Conversion Shares or, if applicable, cash, upon a properly
         noticed conversion. If the Corporation fails to deliver to the Holder
         such certificate or certificates pursuant to Section 6(e)(i) on or
         before the Share Delivery Date applicable to such conversion, the
         Corporation shall pay to such Holder, in cash, as liquidated damages
         and not as a penalty, for each $5,000 of Stated Value of Preferred
         Stock being converted, $25 per Trading Day (increasing to $50 per
         Trading Day after 3 Trading Days after such damages begin to accrue and
         increasing to $100 per Trading Day 6 Trading Days after such damages
         begin to accrue) for each Trading Day after the Share Delivery Date
         until such certificates are delivered. Nothing herein shall limit a
         Holder's right to pursue actual damages for the Corporation's failure
         to deliver certificates representing shares of Common Stock upon
         conversion within the period specified herein and such Holder shall
         have the right to pursue all remedies available to it hereunder, at law
         or in equity including, without limitation, a decree of specific
         performance and/or injunctive relief.

                                       13
<PAGE>
                  iii. Compensation for Buy-In on Failure to Timely Deliver
         Certificates Upon Conversion. If the Corporation fails to deliver to
         the Holder such certificate or certificates pursuant to Section 6(e)(i)
         by the applicable Share Delivery Date, and if after such Share Delivery
         Date the Holder is required by its brokerage firm to purchase (in an
         open market transaction or otherwise) Common Stock to deliver in
         satisfaction of a sale by such Holder of the Conversion Shares which
         the Holder anticipated receiving, and was entitled to receive, upon the
         conversion relating to such Share Delivery Date (a "Buy-In"), then the
         Corporation shall pay in cash to the Holder the amount by which (x) the
         Holder's total purchase price (including brokerage commissions, if any)
         for the Common Stock so purchased exceeds (y) the product of (1) the
         aggregate number of shares of Common Stock that such Holder was
         entitled to receive from the conversion at issue multiplied by (2) the
         actual sale price of the Common Stock at the time of the sale
         (including brokerage commissions, if any) at which the sell order
         giving rise to such purchase obligation was executed. For example, if
         the Holder purchases Common Stock having a total purchase price of
         $11,000 to cover a Buy-In with respect to an attempted conversion of
         shares of Preferred Stock with respect to which the aggregate sale
         price (including brokerage commissions, if any) giving rise to such
         purchase obligation is $10,000, the Corporation shall be required to
         pay the Holder $1,000. The Holder shall provide the Corporation written
         notice indicating the amounts payable to the Holder in respect of the
         Buy-In, together with documentary evidence of the actual Buy-In and
         other evidence reasonably requested by the Corporation. Nothing herein
         shall limit a Holder's right to pursue any other remedies available to
         it hereunder, at law or in equity including, without limitation, a
         decree of specific performance and/or injunctive relief with respect to
         the Corporation's failure to timely deliver certificates representing
         shares of Common Stock upon conversion of the shares of Preferred Stock
         as required pursuant to the terms hereof. Notwithstanding anything
         contained herein to the contrary, if a Holder requires the Corporation
         to make a payment in respect of a Buy-In for the failure to timely
         deliver certificates hereunder and the Corporation timely pays in full
         such payment, the Corporation shall not be required to pay such Holder
         liquidated damages under Section 6(e)(ii) in respect of the
         certificates resulting in such Buy-In.

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

                                       14
<PAGE>

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

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

         Section 7. Certain Adjustments.

         a) Stock Dividends and Stock Splits. If the Corporation, at any time
while the Preferred Stock is outstanding: (A) shall pay a stock dividend or
otherwise make a distribution or distributions on shares of its Common Stock or
any other equity or equity equivalent securities payable in shares of Common
Stock (which, for avoidance of doubt, shall not include any shares of Common
Stock issued by the Corporation pursuant to this Preferred Stock or the Prior
Preferred Stock, including as payment of the dividend thereon, or the Prior
Debentures, including as payment of the interest or principal thereon), (B)
subdivide its outstanding shares of Common Stock into a larger number of shares,
(C) combine (including by way of reverse stock split) outstanding shares of
Common Stock into a smaller number of shares, or (D) issue by reclassification
of shares of the Common Stock any shares of capital stock of the Corporation,
then the Conversion Price shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding before such event and of which the denominator shall
be the number of shares of Common Stock (excluding treasury shares, if any)
outstanding after such event. Any adjustment made pursuant to this Section 7(a)
shall become effective immediately after the record date for the determination
of stockholders entitled to receive such dividend or distribution and shall
become effective immediately after the effective date in the case of a
subdivision, combination or re-classification.

                                       15
<PAGE>

         b) Subsequent Equity Sales. If the Corporation or any Subsidiary
thereof, as applicable, at any time while Preferred Stock is outstanding, issues
or sells, or is deemed to have issued or sold, any Common Stock or Capital
Shares Equivalents entitling any Person to acquire shares of Common Stock, at an
effective price per share less than the then Conversion Price (such lower price,
the "Base Conversion Price" and such issuances collectively, a "Dilutive
Issuance"), as adjusted hereunder (if the holder of the Common Stock or Capital
Shares Equivalents so issued shall at any time, whether by operation of purchase
price adjustments, reset provisions (but excluding customary anti-dilution
protection), floating conversion, exercise or exchange prices or otherwise, or
due to warrants, options or rights per share which is issued in connection with
such issuance, be entitled to receive shares of Common Stock at an effective
price per share which is less than the Conversion Price, such issuance shall be
deemed to have occurred for less than the Conversion Price), then the Conversion
Price shall be reduced to equal the Base Conversion Price. The Corporation shall
notify the Holder in writing, no later than 3 Trading Days following the
issuance of any Common Stock or Capital Shares Equivalents subject to this
section, indicating therein the applicable issuance price, or of applicable
reset price, exchange price, conversion price and other pricing terms (such
notice the "Dilutive Issuance Notice"). For purposes of clarification, whether
or not the Corporation provides a Dilutive Issuance Notice pursuant to this
Section 7(b), upon the occurrence of any Dilutive Issuance, after the date of
such Dilutive Issuance the Holder is entitled to receive a number of Conversion
Shares based upon the Base Conversion Price regardless of whether the Holder
accurately refers to the Base Conversion Price in the Notice of Conversion.
Notwithstanding the foregoing, to the extent Conversion Shares (or securities
convertible into or exchangeable for shares of Common Stock) are not delivered,
upon 5 Trading Days prior written notice to the Holder, the Conversion Price
shall be readjusted after the expiration of such rights, options, or warrants
(but only with respect to Preferred Stock exercised after such expiration), to
the Conversion Price which would then be in effect had the adjustments made upon
the issuance of such rights, options or warrants been made upon the basis of
delivery of only the number of shares of Conversion Shares (or securities
convertible into or exchangeable for such Conversion Shares) actually issued. In
case any subscription price may be paid in a consideration part or all of which
shall be in a form other than cash, the value of such consideration shall be as
determined in good faith by the Board of Directors of the Corporation, whose
determination shall be conclusive absent manifest error.

                                       16
<PAGE>

         c) Pro Rata Distributions. If the Corporation, at any time while
Preferred Stock is outstanding, shall distribute to all holders of Common Stock
(and not to Holders) evidences of its indebtedness or assets (including cash and
cash dividends) or rights or warrants to subscribe for or purchase any security,
then in each such case the Conversion Price shall be adjusted by multiplying
such Conversion Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the VWAP determined as of the record
date mentioned above, and of which the numerator shall be such VWAP on such
record date less the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed applicable to one
outstanding share of the Common Stock as determined by the Board of Directors in
good faith. In either case the adjustments shall be described in a statement
provided to the Holders of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of Common Stock.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.
Notwithstanding the foregoing, to the extent Conversion Shares (or securities
convertible into or exchangeable for shares of Common Stock) are not delivered,
upon 5 Trading Days prior written notice to the Holder, the Conversion Price
shall be readjusted after the expiration of such rights, options, or warrants
(but only with respect to Preferred Stock exercised after such expiration), to
the Conversion Price which would then be in effect had the adjustments made upon
the issuance of such rights, options or warrants been made upon the basis of
delivery of only the number of shares of Conversion Shares (or securities
convertible into or exchangeable for such Conversion Shares) actually issued. In
case any subscription price may be paid in a consideration part or all of which
shall be in a form other than cash, the value of such consideration shall be as
determined in good faith by the Board of Directors of the Corporation, whose
determination shall be conclusive absent manifest error.

         d) Fundamental Transaction. If, at any time while this Preferred Stock
is outstanding, (A) the Corporation effects any merger or consolidation of the
Corporation with or into another Person in which the Corporation is not the
surviving entity, (B) the Corporation effects any sale of all or substantially
all of its assets in one or a series of related transactions, (C) any tender
offer or exchange offer (whether by the Corporation or another Person) is
completed pursuant to which holders of Common Stock are permitted to tender or
exchange their shares for other securities, cash or property, or (D) the
Corporation effects any reclassification of the Common Stock or any compulsory
share exchange pursuant to which the Common Stock is effectively converted into
or exchanged for other securities, cash or property (in any such case, a
"Fundamental Transaction"), then upon any subsequent conversion of this
Preferred Stock, the Holder shall have the right to receive, for each Conversion
Share that would have been issuable upon such conversion absent such Fundamental
Transaction, the same kind and amount of securities, cash or property as it
would have been entitled to receive upon the occurrence of such Fundamental
Transaction if it had been, immediately prior to such Fundamental Transaction,
the holder of one share of Common Stock (the "Alternate Consideration"). For
purposes of any such conversion, the determination of the Conversion Price shall
be appropriately adjusted to apply to such Alternate Consideration based on the
amount of Alternate Consideration issuable in respect of one share of Common
Stock in such Fundamental Transaction, and the Corporation shall apportion the
Conversion Price among the Alternate Consideration in a reasonable manner
reflecting the relative value of any different components of the Alternate
Consideration. If holders of Common Stock are given any choice as to the
securities, cash or property to be received in a Fundamental Transaction, then
the Holder shall be given the same choice as to the Alternate Consideration it
receives upon any conversion of this Preferred Stock following such Fundamental
Transaction. To the extent necessary to effectuate the foregoing provisions, any
successor to the Corporation or surviving entity in such Fundamental Transaction
shall file a new Certificate of Designation with the same terms and conditions
and issue to the Holder new preferred stock consistent with the foregoing
provisions and evidencing the Holder's right to convert such preferred stock
into Alternate Consideration. The terms of any agreement pursuant to which a
Fundamental Transaction is effected shall include terms requiring any such
successor or surviving entity to comply with the provisions of this Section 7(d)
and ensuring that this Preferred Stock (or any such replacement security) will
be similarly adjusted upon any subsequent transaction analogous to a Fundamental
Transaction. Notwithstanding anything herein to the contrary, if (i) the
Corporation effects any Fundamental Transaction with another corporation in
which the Corporation is not the surviving entity (such corporation, the
"Acquiring Corporation") pursuant to which the shareholders of the Corporation
receive free trading shares of common stock of the Acquiring Corporation
("Acquiring Corporation Common Stock") and (ii) the daily trading volume of the
Acquiring Corporation Common Stock on a Principal Market equals or exceeds
$500,000 for each of the 20 Trading Days immediately prior to the date on which
definitive agreements relating to such Fundamental Transaction have been signed
(such date, the "Acquisition Signing", such period, "Threshold Period" and a
transaction meeting the conditions set forth in clauses (i) and (ii) above, an
"Automatic Conversion Fundamental Transaction")), then, on the date such
Fundamental Acquisition closes ("Fundamental Acquisition Closing"), each share
of outstanding Preferred Stock shall automatically convert into a number of
shares of free trading Acquiring Corporation Common Stock equal to 110% the
Stated Value divided by the average of the daily volume weighted average price
of the Acquiring Corporation Common Stock during the 20 Trading Days immediately
prior to the date of the Fundamental Acquisition Closing (or the nearest
preceding date). The daily volume weighted average price of the Acquiring
Corporation Common Stock shall be determined on the Principal Market on which
the Acquiring Corporation 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). Prior to the date of the Fundamental Acquisition
Closing, the Holders shall have the right to voluntarily convert their shares of
Preferred Stock into Conversion Shares pursuant to Section 4(a).

                                       17
<PAGE>
         e) Exempt Issuance. Notwithstanding the foregoing, no adjustment will
be made under this Section 7 in respect of an Exempt Issuance.

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

         g) Notice to Holders.

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

                  ii. Notice to Allow Conversion by Holder. If (A) the
         Corporation shall declare a dividend (or any other distribution) on the
         Common Stock; (B) the Corporation shall declare a special nonrecurring
         cash dividend on or a redemption of the Common Stock; (C) the
         Corporation shall authorize the granting to all holders of the Common
         Stock rights or warrants to subscribe for or purchase any shares of
         capital stock of any class or of any rights; (D) the approval of any
         stockholders of the Corporation shall be required in connection with
         any reclassification of the Common Stock, any consolidation or merger
         to which the Corporation is a party, any sale or transfer of all or
         substantially all of the assets of the Corporation, of any compulsory
         share exchange whereby the Common Stock is converted into other
         securities, cash or property; (E) the Corporation shall authorize the
         voluntary or involuntary dissolution, liquidation or winding up of the
         affairs of the Corporation; then, in each case, the Corporation shall
         cause to be filed at each office or agency maintained for the purpose
         of conversion of the Preferred Stock, and shall cause to be mailed to
         the Holders at their last addresses as they shall appear upon the stock
         books of the Corporation, at least 10 calendar days prior to the
         applicable record or effective date hereinafter specified, a notice
         stating (x) the date on which a record is to be taken for the purpose
         of such dividend, distribution, redemption, rights or warrants, or if a
         record is not to be taken, the date as of which the holders of the
         Common Stock of record to be entitled to such dividend, distributions,
         redemption, rights or warrants are to be determined or (y) the date on
         which such reclassification, consolidation, merger, sale, transfer or
         share exchange is expected to become effective or close, and the date
         as of which it is expected that holders of the Common Stock of record
         shall be entitled to exchange their shares of the Common Stock for
         securities, cash or other property deliverable upon such
         reclassification, consolidation, merger, sale, transfer or share
         exchange; provided, that the failure to mail such notice or any defect
         therein or in the mailing thereof shall not affect the validity of the
         corporate action required to be specified in such notice. Holders are
         entitled to convert the Conversion Amount of Preferred Stock during the
         10-day period commencing the date of such notice to the effective date
         of the event triggering such notice.

                                       18
<PAGE>

         Section 8. Forced Conversion and Optional Redemption.

         a) Forced Conversion. Notwithstanding anything herein to the contrary,
if after the one year anniversary of the Original Issue Date the VWAP for each
of any 20 consecutive Trading Days ("Threshold Period"), which 20 consecutive
Trading Day period shall have commenced only after such anniversary date,
exceeds 200% of the then Conversion Price (as adjusted from time to time as
provided herein), the Corporation may, within 3 Trading Days after any such
Threshold Period, deliver a notice to the Holder (a "Forced Conversion Notice"
and the date such notice is received by the Holder, the "Forced Conversion
Notice Date") to cause the Holders to immediately convert all or part of the
then outstanding Stated Value of Preferred Stock certificates pursuant to
Section 6(a) and the Holders shall surrender (if all of their Preferred Stock is
converted) their Preferred Stock to the Corporation for conversion within 5
Trading Days of the Forced Conversion Notice Date. The Corporation may only
effect a Forced Conversion Notice if during the Threshold Period and until the
3rd Trading Day following the Forced Conversion Notice Date, all of the Equity
Conditions shall have been met. If any of the Equity Conditions shall cease to
be satisfied at any time during the required period, then the Forced Conversion
Notice shall be null and void, ab initio. Any Forced Conversions hereunder shall
be applied ratably to all Holders based on their initial purchases of Preferred
Stock.

         b) Optional Redemption at Election of Corporation. Subject to the
provisions of this Section 8, at any time after the 12-month anniversary of the
Effective Date, the Corporation may deliver a notice to the Holders (an
"Optional Redemption Notice" and the date such notice is deemed delivered
hereunder, the "Optional Redemption Notice Date") of its irrevocable election to
redeem some or all of the then outstanding shares of Preferred Stock, for an
amount, in cash, equal to the Optional Redemption Amount on the 20th Trading Day
following the Optional Redemption Notice Date (such date, the "Optional
Redemption Date" and such redemption, the "Optional Redemption"). The Optional
Redemption Amount is due in full on the Optional Redemption Date. The
Corporation may only effect an Optional Redemption if during the period
commencing on the Optional Redemption Notice Date through to the date the
Optional Redemption Amount is paid in full and all shares issuable upon
conversion are issued, each of the Equity Conditions shall have been met. If any
of the Equity Conditions shall cease to be satisfied at any time during the
required period, then a Holder may elect to nullify the Optional Redemption
Notice received by it by notice to the Corporation within 3 Trading Days after
the first day on which any such Equity Condition has not been met (provided that
if, by a provision of the Transaction Documents the Corporation is obligated to
notify the Holders of the non-existence of an Equity Condition, such notice
period shall be extended to the third Trading Day after proper notice from the
Corporation) in which case the Optional Redemption Notice shall be null and
void, ab initio. The Corporation covenants and agrees that it will honor all
Notice of Conversions tendered from the time of delivery of the Optional
Redemption Notice through the date all amounts owing thereon are due and paid in
full.

                                       19
<PAGE>

         c) Redemption Procedure. The payment of cash pursuant to an Optional
Redemption shall be made on the Optional Redemption Date. If any portion of the
cash payment for an Optional Redemption shall not be paid by the Corporation by
the respective due date, interest shall accrue thereon at the rate of 18% per
annum (or the maximum rate permitted by applicable law, whichever is less) until
the payment of the Optional Redemption Amount, plus all amounts owing thereon is
paid in full. Alternatively, if any portion of the Optional Redemption Amount
remains unpaid after such date, the Holders subject to such redemption may
elect, by written notice to the Corporation given at any time thereafter, to
invalidate ab initio such redemption, notwithstanding anything herein contained
to the contrary, and, with respect the failure to honor the Optional Redemption,
the Corporation shall have no further right to exercise such Optional
Redemption. Notwithstanding anything to the contrary in this Section 8, the
Corporation's election to exercise an Optional Redemption shall be applied among
the Holders of Preferred Stock ratably. The Holders may elect to convert the
Stated Value of Preferred Stock outstanding pursuant to Section 6 prior to
actual payment in cash for any redemption under this Section 8 by fax delivery
of a Notice of Conversion to the Corporation.

         Section 9. Redemption Upon Triggering Events.

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

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

                                       20
<PAGE>

                  ii. if, during the Effectiveness Period, the effectiveness of
         the Registration Statement lapses for any reason for more than an
         aggregate of 25 Trading Days (which need not be consecutive days)
         during any 12 month period, or the Holder shall not be permitted to
         resell Registrable Securities under the Registration Statement for more
         than an aggregate of 25 Trading Days (which need not be consecutive
         days) during any 12 month period; provided, however, that in the event
         that the Corporation is negotiating a merger, consolidation,
         acquisition or sale of all or substantially all of its assets or a
         similar transaction and in the written opinion of counsel to the
         Corporation, the Registration Statement, would be required to be
         amended to include information concerning such transactions or the
         parties thereto that is not available or may not be publicly disclosed
         at the time, the Corporation shall be permitted an additional 20
         consecutive Trading Days during any 12 month period relating to such an
         event;

                  iii. the Corporation shall fail to deliver certificates
         representing Conversion Shares issuable upon a conversion hereunder
         that comply with the provisions hereof on or prior to the 5th Trading
         Day after such shares are required to be delivered hereunder, or the
         Corporation shall provide written notice to any Holder, including by
         way of public announcement, at any time, of its intention not to comply
         with requests for conversion of any shares of Preferred Stock in
         accordance with the terms hereof, which default is not cured if
         possible to cure within 3 Trading Days of the notice of such default
         sent by the Holder;

                  iv. one of the Events (as defined in the Registration Rights
         Agreement) described in subsections (i), (ii) or (iii) of Section 2(b)
         of the Registration Rights Agreement shall not have been cured to the
         reasonable satisfaction of the Holders prior to the expiration of 30
         days from the Event Date (as defined in the Registration Rights
         Agreement) relating thereto;

                  v. the Corporation shall fail for any reason to pay in full
         the amount of cash due pursuant to a Buy-In within 10 Trading Days
         after notice therefor is delivered hereunder;

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

                  vii. the Corporation shall fail to observe or perform any
         other covenant, agreement or warranty contained in, or otherwise commit
         any material breach of the Transaction Documents, and such failure or
         breach shall not, if subject to the possibility of a cure by the
         Corporation, have been remedied within 10 Trading Days after the date
         on which written notice of such failure or breach shall have been
         given;

                                       21
<PAGE>

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

                  ix. the Corporation shall be party to a Change of Control
         Transaction, Fundamental Transaction (other than an Automatic
         Conversion Fundamental Transaction) or shall agree to sell or dispose
         of all or in excess of 33% of its assets in one or more transactions
         (whether or not such sale would constitute a Change of Control
         Transaction) or shall redeem or repurchase its outstanding shares of
         Common Stock or other equity securities of the Corporation for an
         aggregate purchase price in excess of $250,000 (other than redemption
         of Conversion Shares and repurchases of shares of Common Stock or other
         equity securities of departing officers and directors of the
         Corporation; provided no repurchase shall exceed $100,000 for any
         officer or director);

                  x. there shall have occurred a Bankruptcy Event;

                  xi. the Common Stock shall fail to be listed or quoted for
         trading on a Principal Market for more than 10 consecutive Trading
         Days; or

                  xii. the Common Stock shall fail to be listed or quoted for
         trading on a Principal Market for more than 10 Trading Days, which need
         not be consecutive Trading Days, and the Corporation shall not promptly
         have the Common Stock quoted on the OTC Bulletin Board or shall not use
         commercially reasonable efforts to have the Common Stock re-listed or
         re-quoted on the Principal Market or listed or quoted on another
         Principal Market as soon as reasonably practicable.

         b) Upon the occurrence of a Triggering Event, each Holder shall (in
addition to all other rights it may have hereunder or under applicable law) have
the right, exercisable at the sole option of such Holder, to require the
Corporation to, (i) with respect to the Triggering Events set forth in Sections
9(a)(iii), (v), (ix) (as to such transactions approved by the Board of Directors
of the Corporation), (x)(as to voluntary filings only) and (xii), redeem all of
the Preferred Stock then held by such Holder for a redemption price, in cash,
equal to the Triggering Redemption Amount; or, (ii) at the option of the Holder
and with respect to the Triggering Events set forth in Sections 9(a)(i), (ii),
(iv), (vi), (vii), (viii), (ix) (as to such transactions not approved by the
Board of Directors of the Corporation), (x)(as to involuntary filings only) and
(xi), either (A) redeem all of the Preferred Stock then held by such Holder for
a redemption price, in shares of Common Stock, equal to a number of shares of
Common Stock equal to the Triggering Redemption Amount divided by 90% of the
average of the 10 VWAPs immediately prior to the date of election hereunder or
(B) increase the dividend on all of the outstanding Preferred Stock held by such
Holder to equal 12% per annum thereafter. The Triggering Redemption Amount, in
cash or in shares, if the Corporation elects clauses (i) or (ii)(B) above, shall
be due and payable or issuable, as the case may be, within 10 Trading Days of
the date on which the notice for the payment therefor is provided by a Holder
(the "Triggering Redemption Payment Date"). If the Corporation fails to pay the
Triggering Redemption Amount hereunder in full pursuant to this Section on the
date such amount is due in accordance with this Section (whether in cash or
shares of Common Stock), the Corporation will pay interest thereon at a rate of
15% per annum (or such lesser amount permitted by applicable law), accruing
daily from such date until the Triggering Redemption Amount, plus all such
interest thereon, is paid in full. For purposes of this Section, a share of
Preferred Stock is outstanding until such date as the Holder shall have received
Conversion Shares upon a conversion (or attempted conversion) thereof that meets
the requirements hereof or has been paid the Triggering Redemption Amount plus
all accrued but unpaid dividends and all accrued but unpaid liquidated damages
in cash.

                                       22
<PAGE>

         Section 10. Negative Covenants. The Corporation will not and will not
permit any of its Subsidiaries to directly or indirectly:

         a) so long as at least 40% of the shares of Preferred Stock issued on
the Closing Date are outstanding, other than, up to, in the aggregate $500,000
of new Indebtedness, enter into, create, incur, assume, guarantee or suffer to
exist any indebtedness for borrowed money of any kind, including but not limited
to, a guarantee, on or with respect to any of its property or assets now owned
or hereafter acquired or any interest therein or any income or profits
therefrom;

         b) so long as at least 40% of the shares of Preferred Stock issued on
the Closing Date are outstanding, enter into, create, incur, assume or suffer to
exist any liens of any kind, on or with respect to any of its property or assets
now owned or hereafter acquired or any interest therein or any income or profits
therefrom;

         c) so long as any shares of Preferred Stock are outstanding, amend its
certificate of incorporation, bylaws or other charter documents so as to
materially and adversely affect any rights of any Holder;

         d) so long as any shares of Preferred Stock are outstanding, repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a de
minimis number of shares of its Common Stock or Common Stock Equivalents other
than as to the Conversion Shares to the extent permitted or required under the
Transaction Documents or as otherwise permitted by the Transaction Documents;

         e) so long as any shares of Preferred Stock are outstanding, enter into
any agreement with respect to any of the foregoing; or

         f) so long as any shares of Preferred Stock are outstanding, pay cash
dividends or distributions on any equity securities of the Corporation, other
than the Preferred Stock or the Corporation's Prior Preferred Stock.

                                       23
<PAGE>

         Section 11. Miscellaneous.

         a) Notices. Any and all notices or other communications or deliveries
to be provided by the Holders hereunder, including, without limitation, any
Notice of Conversion, shall be in writing and delivered personally, by
facsimile, sent by a nationally recognized overnight courier service, addressed
to the Corporation, at the address set forth above, facsimile number (973)
256-8211, ATTN: CHIEF FINANCIAL OFFICER or such other addresses or facsimile
numbers as the Corporation may specify for such purposes by notice to the
Holders delivered in accordance with this Section 4(g), WITH COPIES THEREOF
(WHICH COPIES SHALL BE REQUIRED TO BE DELIVERED FOR SUCH NOTICE TO BE EFFECTIVE)
TO EACH OF (1) FRIEDMAN KAPLAN SEILER & ADELMAN LLP, 1633 BROADWAY, 46TH FLOOR,
NEW YORK, NY 10019-6708, ATTENTION: RICHARD M. HOFFMAN, ESQ., FACSIMILE NUMBER
(212) 833-1250, AND GLOBAL INTERACTIVE GAMING LTD., CENTRE POINT TOWER, 103 NEW
OXFORD STREET, LONDON WC1A 100, ATTENTION: STEVEN SALMON, FACSIMILE NUMBER
+44-207-663-8951. Any and all notices or other communications or deliveries to
be provided by the Corporation hereunder shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service addressed to each Holder at the facsimile telephone number or address of
such Holder appearing on the books of the Corporation, or if no such facsimile
telephone number or address appears, at the principal place of business of the
Holder. Any notice or other communication or deliveries hereunder shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 5:30 p.m. (New York City
time) on a Trading Day and an electronic confirmation of delivery is received by
the sender, (ii) the next Trading Day after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile telephone
number specified in this Section on a day that is not a Trading Day or later
than 5:30 p.m. (New York City time) on any Trading Day, (iii) three Trading Days
following the date of mailing, if sent by nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such notice is
required to be given. The address for such notices and communications are those
set forth on the signature pages hereof, or such other address as may be
designated in writing hereafter, in the same manner, by such Person.

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

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

                                       24
<PAGE>

         d) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Certificate of Designation shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York, without regard to the principles of conflicts of law
thereof. Each party agrees that all legal proceedings concerning the
interpretations, enforcement and defense of the transactions contemplated by
this Certificate of Designation 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, borough of
Manhattan (the "New York Courts"). Each party hereby irrevocably submits to the
exclusive jurisdiction of the New York Courts for the adjudication of any
dispute hereunder or in connection herewith or with any transaction contemplated
hereby or discussed herein (including with respect to the enforcement of any of
the Transaction Documents), and hereby irrevocably waives, and agrees not to
assert in any suit, action or proceeding, any claim that it is not personally
subject to the jurisdiction of any such court, or that the New York Courts are
an improper or inconvenient venue for such proceeding. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Certificate
of Designation and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
The parties hereto hereby irrevocably waive, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal proceeding
arising out of or relating to this Certificate of Designation or the
transactions contemplated hereby. If either party shall commence an action or
proceeding to enforce any provisions of this Certificate of Designation, then
the prevailing party in such action or proceeding shall be reimbursed by the
other party for its attorneys fees and other costs and expenses incurred with
the investigation, preparation and prosecution of such action or proceeding.

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

                                       25
<PAGE>

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

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

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

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

                                       26
<PAGE>

RESOLVED, FURTHER, that the Chief Executive Officer, President, Chief Financial
Officer and Secretary of the Corporation be, and each of them acting
individually hereby is, authorized and empowered in the name and on behalf of
the Corporation, to prepare and file a Certificate of Designation of
Preferences, Rights and Limitations in accordance with the foregoing resolution
and provisions of Delaware law.

            IN WITNESS WHEREOF, the undersigned have executed this Certificate
this 3rd day of August, 2005.

/s/ Bernard Albanese                            /s/ James McDade
Name: Bernard Albanese                          Name: James McDade
Title: President                                Title: Chief Financial Officer

                                       27
<PAGE>

                                     ANNEX A

                              NOTICE OF CONVERSION

       (TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT SHARES
                               OF PREFERRED STOCK)

The undersigned hereby elects to convert the number of shares of Series C 6%
Convertible Preferred Stock indicated below, into shares of common stock, par
value $.001 per share (the "Common Stock"), of Interactive Systems Worldwide
Inc., a Delaware corporation (the "Corporation"), according to the conditions
hereof, as of the date written below. If shares are to be issued in the name of
a person other than undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates and
opinions as reasonably requested by the Corporation in accordance therewith. No
fee will be charged to the Holder for any conversion, except for such transfer
taxes, if any.

Conversion calculations:

       Date to Effect Conversion: _____________________________________________

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

       Number of shares of Preferred Stock to be Converted: ___________________

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

       Number of shares of Common Stock to be Issued: _________________________

       Applicable Conversion Price:____________________________________________

       Number of shares of Preferred Stock subsequent to Conversion: __________

                                                     [HOLDER]

                                                     By:_______________________
                                                          Name:
                                                          Title:

                                       28

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