Document:

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                                                                   Exhibit 10.13

                            CONVERTIBLE DEBENTURES

                                      AND

                          WARRANTS PURCHASE AGREEMENT

                                    Between

                                Data Race, Inc.

                                      and

                        the Investors Signatory Hereto

     CONVERTIBLE DEBENTURES AND WARRANTS PURCHASE AGREEMENT dated as of June 12,
2001 (the "Agreement"), between the Investors signatory hereto (each an
"Investor" and together the "Investors"), and Data Race, Inc., a corporation
organized and existing under the laws of the State of Texas (the "Company").

     WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investors,
and the Investors shall purchase, in the aggregate, (i) $1,000,000 principal
amount of the Convertible Debentures, and (ii) the Warrants; and

     WHEREAS, such investments will be made in reliance upon the provisions of
Section 4(2) ("Section 4(2)") and/or 4(6) ("Section 4(6)") of the United States
Securities Act of 1933, as amended (the "Securities Act") and/or Regulation D
("Regulation D") and the other rules and regulations promulgated thereunder,
and/or upon such other exemption from the registration requirements of the
Securities Act as may be available with respect to any or all of the investments
in securities to be made hereunder.

     NOW, THEREFORE, in consideration of the foregoing premises, and the
promises and covenants herein contained, the receipt and sufficiency of which
are hereby acknowledged by the parties hereto, the parties, intending to be
legally bound, hereby agree as follows:

                                   ARTICLE I

           Purchase and Sale of Convertible Debentures and Warrants

Section 1.1.   Investment.
               ----------

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     (a)  Upon the terms and subject to the conditions set forth herein, the
Company agrees to sell, and the Investors agree to purchase the Convertible
Debentures together with the Warrants at the Purchase Price on each Closing Date
as follows:

               (i)    First Closing. Upon execution and delivery of this
                      -------------
                      Agreement, the Investors shall purchase, severally and not
                      jointly, in the aggregate, $500,000 principal amount of
                      Convertible Debentures. Each Investor shall deliver to the
                      Escrow Agent immediately available funds in their
                      proportionate amount of the aggregate Purchase Price, as
                      set forth on the signature pages hereto, and the Company
                      shall deliver the Convertible Debentures evidencing said
                      principal sum and the Warrants to the Escrow Agent, in
                      each case to be held by the Escrow Agent pursuant to the
                      Escrow Agreement.

               (ii)   Second Closing. Within five (5) Trading Days of written
                      --------------
                      notice from the Company to the Investors that the
                      Registration Statement has been filed, the Investors shall
                      purchase, severally and not jointly, in the aggregate,
                      $500,000 principal amount of Convertible Debenture. Each
                      Investor shall deliver to the Escrow Agent immediately
                      available funds in their proportionate amount of the
                      Purchase Price, as set forth on the signature pages
                      hereto, and the Company shall deliver the Convertible
                      Debentures evidencing said principal sum to the Escrow
                      Agent, to be held by the Escrow Agent pursuant to the
                      Escrow Agreement.

               (iii)  Each Closing. Upon satisfaction of the conditions set
                      ------------
                      forth in Section 1.1(b), each Closing shall occur at the
                      offices of the Escrow Agent at which time the Escrow Agent
                      (x) shall release the applicable Convertible Debenture and
                      the Warrants to the Investors and (y) shall release the
                      Purchase Price (after all fees have been paid as set forth
                      in the Escrow Agreement), pursuant to the terms of the
                      Escrow Agreement.

     (b)  Each Closing is subject to the satisfaction or waiver by the party to
be benefited thereby of the following conditions:

               (i)    acceptance and execution by the Company and by the
                      Investors, of this Agreement and all Exhibits hereto;

               (ii)   delivery into escrow by each Investor of immediately
                      available funds in the applicable amount of the Purchase
                      Price as indicated and set forth on the signature pages
                      hereto;

               (iii)  all representations and warranties of the Investors
                      contained herein shall remain true and correct as of each
                      Closing Date;

               (iv)   all representations and warranties of the Company
                      contained herein shall remain true and correct as of each
                      Closing Date;

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               (v)    the Company shall have obtained all permits and
                      qualifications required by any state for the offer and
                      sale of the Convertible Debentures and the Warrants, or
                      shall have the availability of exemptions therefrom;

               (vi)   the sale and issuance of the Convertible Debentures and
                      the Warrants hereunder, and the proposed issuance by the
                      Company to the Investors of the Common Stock underlying
                      the Convertible Debentures and the Warrants upon the
                      conversion or exercise thereof shall be legally permitted
                      by all laws and regulations to which the Investors and the
                      Company are subject and there shall be no ruling, judgment
                      or writ of any court prohibiting the transactions
                      contemplated by this Agreement;

               (vii)  delivery of the applicable original fully executed
                      Convertible Debentures (as to each applicable Closing) and
                      Warrants certificates to the Escrow Agent (as to the first
                      Closing);

               (viii) delivery to the Escrow Agent of an opinion of Jackson
                      Walker L.L.P., counsel to the Company, in the form of
                      Exhibit D hereto (as to the first
                      ---------
                      Closing);

               (ix)   delivery to the Escrow Agent of the Irrevocable
                      Instructions to Transfer Agent in the form attached hereto
                      as Exhibit F (as to the first Closing); and
                         ---------

               (x)    delivery to the Escrow Agent of the Registration Rights
                      Agreement (as to the first Closing);

               (xi)   delivery to the Escrow Agent of the written agreements of
                      the Chairman of the Board and each other executive officer
                      of the Company addressed to the Investors, agreeing to
                      vote all shares of Common Stock over which they have
                      voting control in favor of a shareholder proposal
                      permitting the issuance of a number of Conversion Shares
                      in excess of 19.9% of the number of shares of Common Stock
                      issued and outstanding on the first Closing Date (as to
                      the first Closing);

               (xi)   there shall have been no Material Adverse Effect with
                      respect to the Company since the date of the first Closing
                      and the average daily trading volume of the Common Stock
                      on the Principal Market for the ten consecutive Trading
                      Days ending on the filing date of the Registration
                      Statement shall have been at least 100,000 shares (as to
                      the second Closing); and

               (xii)  the Company shall have filed with the SEC the Registration
                      Statement registering 200% of the Conversion Shares
                      issuable upon conversion of the Convertible Debentures to
                      be purchased hereunder and 100% of the Warrant Shares
                      shall have been filed under the Securities Act with the
                      SEC (as to the second Closing).

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Section 1.2.   Warrants. At the first Closing, the Company shall issue to the
               --------
Investors Warrants to purchase up to 1,000,000 shares of Common Stock, in the
aggregate. The Company shall issue the Warrants to the Investors pro rata among
all Investors in proportion to their respective initial purchases of the
Convertible Debentures pursuant to this Agreement. The exercise price of the
Warrants shall be equal to the Bid Price of the Common Stock on the Trading Day
immediately prior to the first Closing Date. The Warrants shall be exercisable
for a period of three (3) years beginning on the first Closing Date. The shares
of Common Stock underlying the Warrants shall be registered for resale on the
Registration Statement for resale by the Investors pursuant to the Registration
Rights Agreement.

Section 1.3.   Liquidated Damages. The parties hereto acknowledge that with
               ------------------
respect to the delivery of the Conversion Shares, time is of the essence and the
Company shall be liable for the liquidated damages set forth in the Convertible
Debentures. Additionally, the parties hereto acknowledge and agree that the sums
payable pursuant to this Agreement, the Registration Rights Agreement and the
Convertible Debentures shall constitute liquidated damages and not penalties.
The parties further acknowledge that a breach by either party of this Agreement
or exhibits hereto, (a) the amount of loss or damages likely to be incurred is
incapable or is difficult to precisely estimate, (b) the amounts specified in
such agreements bear a reasonable proportion and are not plainly or grossly
disproportionate to the probable loss likely to be incurred by the Investors in
connection with the failure of the Company to timely cause the registration of
the Registrable Securities or to deliver stock certificates upon any conversion,
and (c) the parties are sophisticated businesses and have been represented by
sophisticated and able legal and financial counsel and negotiated this Agreement
at arm's length.

                                  ARTICLE II

                Representations and Warranties of Each Investor

Each Investor, severally and not jointly, represents and warrants to the Company
that:

Section 2.1.   Organization. The Investor is duly organized, validly existing
               ------------
and in good standing under the laws of its jurisdiction of organization.

Section 2.2.   Intent. The Investor is entering into this Agreement for its own
               ------
account and not with a view to or for sale in connection with any distribution
of the Common Stock. The Investor has no present arrangement (whether or not
legally binding) at any time to sell the Convertible Debenture, and the Warrants
or any Conversion Shares or Warrant Shares to or through any person or entity;
provided, however, that by making the representations herein, the Investor does
--------  -------
not agree to hold such securities for any minimum or other specific term and
reserves the right to dispose of the Conversion Shares and Warrant Shares at any
time in accordance with federal and state securities laws applicable to such
disposition.

Section 2.3.   Sophisticated Investor. The Investor is a sophisticated investor
               ----------------------
(as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited investor
(as defined in Rule 501 of Regulation D), and Investor has such experience in
business and financial matters that it has the

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capacity to protect its own interests in connection with this transaction and is
capable of evaluating the merits and risks of an investment in the Convertible
Debentures, the Warrants and the underlying Common Stock. The Investor has been
represented by counsel of its choice. The Investor acknowledges that an
investment in the Convertible Debentures and the Warrants and the underlying
Common Stock is speculative and involves a high degree of risk.

Section 2.4.   Authority. This Agreement and each agreement attached as an
               ---------
Exhibit hereto which is required to be executed by the Investor has been duly
authorized and validly executed and delivered by the Investor and is a valid and
binding agreement of the Investor enforceable against it in accordance with its
terms, subject to applicable bankruptcy, insolvency, or similar laws relating
to, or affecting generally the enforcement of, creditors' rights and remedies or
by other equitable principles of general application.

Section 2.5.   Not an Affiliate. The Investor is not an officer, director or
               ----------------
"affiliate" (as that term is defined in Rule 405 of the Securities Act) of the
Company.

Section 2.6.   Absence of Conflicts. The execution and delivery of this
               --------------------
Agreement and each agreement which is attached as an Exhibit hereto and executed
by the Investor in connection herewith, and the consummation of the transactions
contemplated hereby and thereby, and compliance with the requirements hereof and
thereof by the Investor, will not violate any law, rule, regulation, order,
writ, judgment, injunction, decree or award binding on the Investor or (a)
violate any provision of any indenture, instrument or agreement to which the
Investor is a party or is subject, or by which the Investor or any of its assets
is bound; (b) conflict with or constitute a material default thereunder; (c)
result in the creation or imposition of any lien pursuant to the terms of any
such indenture, instrument or agreement, or constitute a breach of any fiduciary
duty owed by the Investor to any third party; or (d) require the approval of any
third-party (which has not been obtained) pursuant to any material contract,
agreement, instrument, relationship or legal obligation to which the Investor is
subject or to which any of its assets, operations or management may be subject.

Section 2.7.   Disclosure; Access to Information. The Investor has received all
               ---------------------------------
documents, records, books and other publicly available information pertaining to
Investor's investment in the Company that have been requested by the Investor.
The Company is subject to the periodic reporting requirements of the Exchange
Act, and the Investor has reviewed copies of all SEC Documents deemed relevant
by Investor.

Section 2.8.   Manner of Sale. At no time was Investor presented with or
               --------------
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.

                                  ARTICLE III

                 Representations and Warranties of the Company

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The Company represents and warrants to the Investors that, except as set forth
on the SEC Documents or on the Disclosure Schedule prepared by the Company and
attached hereto:

Section 3.1.   Organization of the Company. The Company is a corporation duly
               ---------------------------
incorporated and existing in good standing under the laws of the State of Texas
and has all requisite corporate authority to own its properties and to carry on
its business as now being conducted. The Company is duly qualified and is in
good standing as a foreign corporation to do business in every jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary, other than those in which the failure so to qualify
would not have a Material Adverse Effect.

Section 3.2.   Authority. (a) The Company has the requisite corporate power and
               ---------
corporate authority to conduct its business as now conducted, to enter into and
perform its obligations under this Agreement, the Registration Rights Agreement,
the Escrow Agreement and the Warrants, and to issue the Convertible Debentures,
the Conversion Shares, the Warrants and the Warrant Shares pursuant to their
respective terms, (b) the execution, issuance and delivery of this Agreement,
the Registration Rights Agreement, the Escrow Agreement, the Convertible
Debentures and the Warrants by the Company and the consummation by it of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action and no further consent or authorization of the Company or its
Board of Directors or stockholders is required, and (c) this Agreement, the
Registration Rights Agreement, the Escrow Agreement, the Warrants and the
Convertible Debentures have been duly executed and delivered by the Company and
at the Closing shall constitute valid and binding obligations of the Company
enforceable against the Company in accordance with their terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency, or similar
laws relating to, or affecting generally the enforcement of, creditors' rights
and remedies or by other equitable principles of general application. The
Company has duly and validly authorized and reserved for issuance shares of
Common Stock sufficient in number for the conversion of the Convertible
Debentures and the exercise of the Warrants. The Company understands and
acknowledges the potentially dilutive effect to the Common Stock of the issuance
of the Conversion Shares and Warrant Shares. The Company further acknowledges
that its obligation to issue Conversion Shares and Warrant Shares upon
conversion of the Convertible Debentures and Warrant Shares upon exercise of the
Warrants in accordance with this Agreement and the Convertible Debentures is
absolute and unconditional regardless of the dilutive effect that such issuance
may have on the ownership interests of other stockholders of the Company and
notwithstanding the commencement of any case under 11 U.S.C. (S) 101 et seq.
(the "Bankruptcy Code"). The Company shall not seek judicial relief from its
obligations hereunder except pursuant to the Bankruptcy Code. In the event the
Company is a debtor under the Bankruptcy Code, the Company hereby waives to the
fullest extent permitted any rights to relief it may have under 11 U.S.C. (S)
362 in respect of the conversion of the Convertible Debentures and the exercise
of the Warrants. The Company agrees, without cost or expense to the Investors,
to take or consent to any and all action necessary to effectuate relief under 11
U.S.C. (S) 362.

Section 3.3.   Capitalization. The authorized capital stock of the Company
               --------------
consists of 70,000,000 shares of Common Stock of which 29,986,153 shares are
issued and outstanding, and no shares of preferred stock are issued and
outstanding. There are no outstanding Capital Shares

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Equivalents nor any agreements or understandings pursuant to which any Capital
Shares Equivalents may become outstanding. The Company is not a party to any
agreement granting registration or anti-dilution rights to any person with
respect to any of its equity or debt securities. All of the outstanding shares
of Common Stock of the Company have been duly and validly authorized and issued
and are fully paid and non-assessable and have been issued pursuant to valid
exemptions from registration under the Securities Act and all applicable state
"blue sky" laws.

Section 3.4.   Common Stock. The Company has registered its Common Stock
               ------------
pursuant to Section 12(b) or (g) of the Exchange Act and is in full compliance
with all reporting requirements of the Exchange Act, and the Company is in
compliance with all requirements for the continued listing or quotation of its
Common Stock, and such Common Stock is currently listed or quoted on the
Principal Market. As of the date hereof, the Company has not received any notice
regarding, and to its knowledge there is no threat, of the termination or
discontinuance of the eligibility of the Common Stock for on the Principal
Market.

Section 3.5.   SEC Documents. The Company has made available to the Investors
               -------------
true and complete copies of the SEC Documents. The Company has not provided to
the Investors any information that, according to applicable law, rule or
regulation, should have been disclosed publicly prior to the date hereof by the
Company, but which has not been so disclosed. As of their respective dates, the
SEC Documents complied in all material respects with the requirements of the
Exchange Act, and rules and regulations of the SEC promulgated thereunder and
the SEC Documents did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company included
in the SEC Documents complied in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC or
other applicable rules and regulations with respect thereto at the time of such
inclusion. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except (a) as may be otherwise indicated in such financial
statements or the notes thereto or (b) in the case of unaudited interim
statements, to the extent they exclude footnotes or may be condensed or summary
statements) and fairly present in all material respects the financial position
of the Company as of the dates thereof and the results of operations and cash
flows for the periods then ended (subject, in the case of unaudited interim
statements, to normal year-end audit adjustments). Neither the Company nor any
of its subsidiaries has any material indebtedness, obligations or liabilities of
any kind (whether accrued, absolute, contingent or otherwise, and whether due or
to become due) that would have been required to be reflected in, reserved
against or otherwise described in the financial statements or in the notes
thereto in accordance with GAAP, which was not fully reflected in, reserved
against or otherwise described in the financial statements or the notes thereto
included in the SEC Documents or was not incurred in the ordinary course of
business consistent with the Company's past practices since the last date of
such financial statements.

Section 3.6.   Exemption from Registration; Valid Issuances. Subject to the
               --------------------------------------------
accuracy of the Investors' representations in Article II, the sale of the
Convertible Debentures and the

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Conversion Shares, the Warrants and Warrant Shares will not require registration
under the Securities Act and/or any applicable state securities law. When
validly converted in accordance with the terms of the Convertible Debentures,
the Conversion Shares, the Warrants and Warrant Shares will be duly and validly
issued, fully paid, and non-assessable. Neither the sales of the Convertible
Debentures, the Conversion Shares, the Warrants and Warrant Shares pursuant to,
nor the Company's performance of its obligations under, this Agreement, the
Registration Rights Agreement, the Escrow Agreement or the Convertible
Debentures and the Warrants will (a) result in the creation or imposition by the
Company of any liens, charges, claims or other encumbrances upon the Convertible
Debentures, the Warrants or the Conversion Shares and Warrant Shares or, except
as contemplated herein, any of the assets of the Company, or (b) entitle the
holders of Outstanding Capital Shares to preemptive or other rights to subscribe
for or acquire the Capital Shares or other securities of the Company. The
Convertible Debentures, the Warrants and the Conversion Shares and Warrant
Shares, shall not subject the Investors to personal liability to the Company or
its creditors by reason of the possession thereof.

Section 3.7.   No General Solicitation or Advertising in Regard to this
               --------------------------------------------------------
Transaction. Neither the Company nor any of its affiliates nor, to the knowledge
-----------
of the Company, any person acting on its or their behalf (a) has conducted or
will conduct any general solicitation (as that term is used in Rule 502(c) of
Regulation D) or general advertising with respect to the sale of the Convertible
Debentures or the Warrants, or (b) made any offers or sales of any security or
solicited any offers to buy any security under any circumstances that would
require registration of the Convertible Debentures or the Conversion Shares and
the Warrants and Warrant Shares, under the Securities Act.

Section 3.8.   No Conflicts. The execution, delivery and performance of this
               ------------
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby, including without limitation the issuance of and payment of
interest upon the Convertible Debentures, Warrants and the Conversion Shares and
Warrant Shares, do not and will not (a) result in a violation of the Company's
Articles of Incorporation or By-Laws or (b) conflict with, or constitute a
material default (or an event that with notice or lapse of time or both would
become a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any material agreement, indenture or
instrument, or any "lock-up" or similar provision of any underwriting or similar
agreement to which the Company is a party, or (iii) result in a violation of any
federal, state or local law, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations) applicable to the
Company or by which any material property or asset of the Company is bound or
affected, nor is the Company otherwise in violation of, conflict with or default
under any of the foregoing (except in each case for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not have, individually or in the aggregate, a Material Adverse Effect). The
business of the Company is not being conducted in violation of any law,
ordinance or regulation of any governmental entity, except for possible
violations that either singly or in the aggregate would not have a Material
Adverse Effect. The Company is not required under any federal, state or local
law, rule or regulation to obtain any consent, authorization or order of, or
make any filing or registration with, any court or governmental agency in order
for it to execute, deliver or perform any of its obligations under this
Agreement or issue and sell the Convertible Debentures or the Warrants in
accordance with the terms hereof (other than any SEC or state securities

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filings that may be required to be made by the Company subsequent to each
Closing, any registration statement that may be filed pursuant hereto); provided
that, for purposes of the representation made in this sentence, the Company is
assuming and relying upon the accuracy of the relevant representations and
agreements of the Investors herein.

Section 3.9.   No Material Adverse Change. Since the date of the financial
               --------------------------
statement contained in the Company's most recently filed Form 10-Q (or Form
10-QSB) or Form 10-K (or Form 10-KSB), no Material Adverse Effect has occurred
or exists with respect to the Company. No material supplier has given notice,
oral or written, that it intends to cease or reduce the volume of its business
with the Company from historical levels.

Section 3.10.  No Undisclosed Events or Circumstances. Since the date of the
               --------------------------------------
financial statement contained in the Company's most recently filed Form 10-Q (or
Form 10-QSB) or Form 10-K (or Form 10-KSB), no event or circumstance has
occurred or exists with respect to the Company or its businesses, properties,
prospects, operations or financial condition, that, under any applicable law,
rule or regulation, requires public disclosure or announcement prior to the date
hereof by the Company but which has not been so publicly announced or disclosed
in writing to the Investors.

Section 3.11.  No Integrated Offering. Except as set forth in the SEC Documents,
               ----------------------
and other than pursuant to an effective registration statement under the
Securities Act, or pursuant to the issuance or exercise of employee stock
options or in connection with certain acquisitions, or pursuant to its
discussion with the Investors in connection with the transactions contemplated
hereby, the Company has not issued, offered or sold the Convertible Debentures,
the Warrants or any shares of Common Stock (including for this purpose any
securities of the same or a similar class as the Convertible Debentures,
Warrants or Common Stock, or any securities convertible into a exchangeable or
exercisable for the Convertible Debentures or Common Stock or any such other
securities) within the six-month period next preceding the date hereof, and the
Company shall not permit any of its directors, officers or affiliates directly
or indirectly to take, any action (including, without limitation, any offering
or sale to any Person of the Convertible Debentures or shares of Common Stock),
so as to make unavailable the exemption from Securities Act registration being
relied upon by the Company for the offer and sale to Investors of the
Convertible Debentures (and the Conversion Shares) and the Warrants (and the
Warrant Shares) as contemplated by this Agreement.

Section 3.12.  Litigation and Other Proceedings. There are no lawsuits or
               --------------------------------
proceedings pending or, to the knowledge of the Company, threatened, against the
Company or any subsidiary, nor has the Company received any written or oral
notice of any such action, suit, proceeding or investigation, which could
reasonably be expected to have a Material Adverse Effect. No judgment, order,
writ, injunction or decree or award has been issued by or, to the knowledge of
the Company, requested of any court, arbitrator or governmental agency which
could result in a Material Adverse Effect.

Section 3.13.  No Misleading or Untrue Communication. The Company and, to the
               -------------------------------------
knowledge of the Company, any person representing the Company, or any other
person selling or offering to

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sell the Convertible Debentures or the Warrants in connection with the
transaction contemplated by this Agreement, have not made, at any time, any oral
communication in connection with the offer or sale of the same which contained
any untrue statement of a material fact or omitted to state any material fact
necessary in order to make the statements, in the light of the circumstances
under which they were made, not misleading.

Section 3.14.  Material Non-Public Information. The Company has not disclosed
               -------------------------------
to the Investors any material non-public information that (a) if disclosed,
would reasonably be expected to have a material effect on the price of the
Common Stock, or (b) according to applicable law, rule or regulation, should
have been disclosed publicly by the Company prior to the date hereof but which
has not been so disclosed.

Section 3.15.  Insurance. The Company and each subsidiary maintains property
               ---------
and casualty, general liability, workers' compensation, environmental hazard,
personal injury and other similar types of insurance, as necessary to conduct
its business, with financially sound and reputable insurers that is adequate,
consistent with industry standards and the Company's historical claims
experience. The Company has not received notice from, and has no knowledge of
any threat by, any insurer (that has issued any insurance policy to the Company)
that such insurer intends to deny coverage under or cancel, discontinue or not
renew any insurance policy presently in force.

Section 3.16.  Tax Matters.
               -----------

               (a)  The Company and each subsidiary has filed all Tax Returns,
     which it is required to file under applicable laws; all such Tax Returns
     are true and accurate and have been prepared in compliance with all
     applicable laws except as could not reasonably be expected to have a
     Material Adverse Effect; the Company has paid all Taxes due and owing by it
     or any subsidiary (whether or not such Taxes are required to be shown on a
     Tax Return) and have withheld and paid over to the appropriate taxing
     authorities all Taxes which it is required to withhold from amounts paid or
     owing to any employee, stockholder, creditor or other third parties; and
     since December 31, 2000, the charges, accruals and reserves for Taxes with
     respect to the Company (including any provisions for deferred income taxes)
     reflected on the books of the Company are adequate to cover any Tax
     liabilities of the Company if its current tax year were treated as ending
     on the date hereof.

               (b)  No claim has been made by a taxing authority in a
     jurisdiction where the Company does not file tax returns that the Company
     or any subsidiary is or may be subject to taxation by that jurisdiction.
     There are, to the Company's knowledge, no foreign, federal, state or local
     tax audits or administrative or judicial proceedings pending or being
     conducted with respect to the Company or any subsidiary; no information
     related to Tax matters has been requested by any foreign, federal, state or
     local taxing authority; and, except as disclosed above, no written notice
     indicating an intent to open an audit or other review has been received by
     the Company or any subsidiary from any foreign, federal, state or local
     taxing authority. There are no material unresolved questions or claims
     concerning the Company's Tax liability. The Company (ii) has not executed
     or entered into a closing agreement pursuant to (S) 7121 of the Internal
     Revenue

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     Code or any predecessor provision thereof or any similar provision of
     state, local or foreign law; or (ii) has not agreed to or is required to
     make any adjustments pursuant to (S) 481 (a) of the Internal Revenue Code
     or any similar provision of state, local or foreign law by reason of a
     change in accounting method initiated by the Company or any of its
     subsidiaries or has any knowledge that the IRS has proposed any such
     adjustment or change in accounting method, or has any application pending
     with any taxing authority requesting permission for any changes in
     accounting methods that relate to the business or operations of the
     Company. The Company has not been a United States real property holding
     corporation within the meaning of (S) 897(c)(2) of the Internal Revenue
     Code during the applicable period specified in (S) 897(c)(1)(A)(ii) of the
     Internal Revenue Code.

               (c)  The Company has not made an election under (S) 341(f) of the
     Internal Revenue Code. The Company is not liable for the Taxes of another
     person that is not a subsidiary of the Company under (i) Treas. Reg. (S)
     1.1502-6 (or comparable provisions of state, local or foreign law), (ii) as
     a transferee or successor, (iii) by contract or indemnity or (iv)
     otherwise. The Company is not a party to any tax sharing agreement. The
     Company has not made any payments, is not obligated to make payments nor is
     it a party to an agreement that could obligate it to make any payments that
     would not be deductible under (S) 280G of the Internal Revenue Code.

               (d)  For purposes of this Section 3.16:

                    "IRS" means the United States Internal Revenue Service.
                     ---

                    "Tax" or "Taxes" means federal, state, county, local,
                     ---      -----
                    foreign, or other income, gross receipts, ad valorem,
                    franchise, profits, sales or use, transfer, registration,
                    excise, utility, environmental, communications, real or
                    personal property, capital stock, license, payroll, wage or
                    other withholding, employment, social security, severance,
                    stamp, occupation, alternative or add-on minimum, estimated
                    and other taxes of any kind whatsoever (including, without
                    limitation, deficiencies, penalties, additions to tax, and
                    interest attributable thereto) whether disputed or not.

                    "Tax Return" means any return, information report or filing
                     ----------
                    with respect to Taxes, including any schedules attached
                    thereto and including any amendment thereof.

Section 3.17.  Property. Neither the Company nor any of its subsidiaries owns
               --------
any real property. Each of the Company and its subsidiaries has good and
marketable title to all personal property owned by it, free and clear of all
liens, encumbrances and defects except such as do not materially affect the
value of such property and do not materially interfere with the use made and
proposed to be made of such property by the Company; and to the Company's
knowledge any real property and buildings held under lease by the Company as
tenant are held by it under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the use made and
intended to be made of such property and buildings by the Company. The Company's
present facilities are adequate for the Company's reasonably foreseeable needs.

                                       11
<PAGE>

Section 3.18.  Intellectual Property. Each of the Company and its subsidiaries
               ---------------------
owns or possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, trademark applications, trade names, service marks,
copyrights, copyright applications, licenses, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and other similar rights and proprietary
knowledge (collectively, "Intangibles") necessary for the conduct of its
business as now being conducted. To the Company's knowledge, neither the Company
nor any of its subsidiaries is infringing upon or in conflict with any right of
any other person with respect to any Intangibles. No adverse claims have been
asserted by any person to the ownership or use of any Intangibles and the
Company has no knowledge of any basis for such claim.

Section 3.19.  Internal Controls and Procedures. The Company maintains books
               --------------------------------
and records and internal accounting controls which provide reasonable assurance
that (a) all transactions to which the Company or any subsidiary is a party or
by which its properties are bound are executed with management's authorization;
(b) the recorded accounting of the Company's consolidated assets is compared
with existing assets at regular intervals; (c) access to the Company's
consolidated assets is permitted only in accordance with management's
authorization; and (d) all transactions to which the Company or any subsidiary
is a party or by which its properties are bound are recorded as necessary to
permit preparation of the financial statements of the Company in accordance with
U.S. generally accepted accounting principles.

Section 3.20.  Payments and Contributions. Neither the Company, any subsidiary,
               --------------------------
nor any of its directors, officers or, to its knowledge, other employees has (a)
used any Company funds for any unlawful contribution, endorsement, gift,
entertainment or other unlawful expense relating to political activity; (b) made
any direct or indirect unlawful payment of Company funds to any foreign or
domestic government official or employee; (c) violated or is in violation of any
provision of the Foreign Corrupt Practices Act of 1977, as amended; or (d) made
any bribe, rebate, payoff, influence payment, kickback or other similar payment
to any person with respect to Company matters.

Section 3.21.  Permits and Licenses. The Company holds all necessary permits
               --------------------
and licenses to conduct its business as presently conducted. All of such permits
and licenses are in full force and effect and the Company is not in material
violation of any thereof.

Section 3.22.  No Misrepresentation. The representations and warranties of the
               --------------------
Company contained in this Agreement, any schedule, annex or exhibit hereto and
any agreement, instrument or certificate furnished by the Company to the
Investors pursuant to this Agreement, do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.

Section 3.23.  Related Party Transactions. The Company is not a party to any
               --------------------------
agreement or transaction with any of its officers, directors, greater than 5%
shareholders or any "Affiliate" (as defined in SEC Rule 405) of any of said
persons that would require disclosure under Item 404 of Regulation S-B that will
not be disclosed in the next Form 10-K (or Form 10-KSB), as amended.

                                       12
<PAGE>

                                  ARTICLE IV

                          Covenants of the Investors

     Each Investor, severally and not jointly, covenants with the Company that:

Section 4.1.   Compliance with Law. The Investor's trading activities with
               -------------------
respect to the Conversion Shares and Warrant Shares will be in compliance with
all applicable state and federal securities laws, rules and regulations and
rules and regulations of the Principal Market on which the Company's Common
Stock is listed.

                                   ARTICLE V

                           Covenants of the Company

Section 5.1.   Registration Rights. The Company shall cause the Registration
               -------------------
Rights Agreement to remain in full force and effect and the Company shall comply
in all material respects with the terms thereof.

Section 5.2.   Reservation of Common Stock. On any date hereafter, in the event
               ---------------------------
the number of Shares reserved, as to any Investor, is less than 200% of the
Conversion Shares necessary to convert all of such Investor's Convertible
Debenture, based on the then Conversion Price, and Warrant Shares to exercise
all of such Investor's Warrant (the "Trigger Amount"), then the Company shall
have seven (7) calendar days from such date to increase the number of shares
reserved as to such Investor above the Trigger Amount, unless to do so the
Company must authorize additional shares, in which case the Company shall have
sixty (60) calendar days from such date to increase the number of shares
authorized and reserved as to such Investor above the Trigger Amount. The
Company agrees to present a proposal for shareholder approval to permit the
Company to issue a number of Conversion Shares and Warrant Shares which is in
excess of 19.9% of the number of the Company's issued and outstanding shares of
Common Stock on the first Closing Date ("NASD Limit"), at the earlier of (i) the
next annual meeting of shareholders, or (ii) a special meeting of the
shareholders to be held within 60 calendar days of the date the number of
Conversion Shares the Investors may convert into at the then Conversion Price
(notwithstanding any limitations herein or in the Convertible Debenture) becomes
greater than 85% of the NASD Limit, with the recommendation of the Board of
Directors that such proposal be approved, unless at the date of such meeting,
less than 1% of the principal amount of the Preferred Stock remain issued and
outstanding, in which event the Company may withdraw such proposal from a vote
by the shareholders. Unless the Company obtains a waiver from all of the
Investors, if such proposal is required to be voted on and is not approved at
the next annual meeting of the shareholders or if such special meeting is not
held within the required time period and such proposal is not approved at the
special meeting, the Company shall either, at the election of a majority in
interest of the Investors, (i) voluntarily de-list its Common Stock from

                                       13
<PAGE>

any Principal Market which requires such approval, or (ii) redeem the
Convertible Debentures in accordance with Section 5 of the Convertible
Debentures.

Section 5.3.   Listing of Common Stock. The Company hereby agrees to maintain
               -----------------------
the listing of the Common Stock on a Principal Market, and as soon as reasonably
practicable following the Closing to list the Conversion Shares and the Warrant
Shares on the Principal Market. The Company further agrees, if the Company
applies to have the Common Stock traded on any other Principal Market, it will
include in such application the Conversion Shares and the Warrant Shares, and
will take such other action as is necessary or desirable in the opinion of the
Investors to cause the Conversion Shares and Warrant Shares to be listed on such
other Principal Market as promptly as possible. The Company will take all action
to continue the listing and trading of its Common Stock on a Principal Market
and will comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the Principal Market and shall provide
Investors with copies of any correspondence to or from such Principal Market
which questions or threatens delisting of the Common Stock, within three (3)
Trading Days of the Company's receipt thereof, until the Investors have disposed
of all of their Registrable Securities.

Section 5.4.   Exchange Act Registration. The Company will cause its Common
               -------------------------
Stock to continue to be registered under Section 12(b) or (g) of the Exchange
Act, will use its best efforts to comply in all respects with its reporting and
filing obligations under the Exchange Act, and will not take any action or file
any document (whether or not permitted by the Exchange Act or the rules
thereunder) to terminate or suspend such registration or to terminate or suspend
its reporting and filing obligations under said Act until the Investors have
disposed of all of their Registrable Securities.

Section 5.5.   Legends. The certificates evidencing the Securities shall be free
               -------
of legends, except as set forth in Article VIII. If the Transfer Agent or the
Investor's broker-dealer requires an opinion of counsel from the Company's
counsel pursuant to the Instructions to Transfer Agent attached hereto to issue
new certificates free of a legend to an Investor and Company's counsel fails to
deliver such opinion to the Transfer Agent within two (2) Trading Days from
receipt by Company's counsel of such a request from the Transfer Agent or the
Investor's broker-dealer, then the Company will pay such Investor, pro rata on a
weekly basis, as liquidated damages for such failure and not as a penalty, ten
percent (10%) per week of the market value of the Common Stock which would be
issuable upon conversion of such Investor's Convertible Debenture upon on any
date of determination for each week until such opinion is provided,
notwithstanding the fact that the Company has instructed the Transfer Agent to
accept such an opinion from such Investor's counsel.

Section 5.6.   Corporate Existence; Conflicting Agreements. The Company will
               -------------------------------------------
take all steps necessary to preserve and continue the corporate existence of the
Company. The Company shall not enter into any agreement, the terms of which
agreement would restrict or impair the right or ability of the Company to
perform any of its obligations under this Agreement or any of the other
agreements attached as exhibits hereto.

                                       14
<PAGE>

Section 5.7.   Consolidation; Merger. The Company shall not, without the prior
               ---------------------
written consent of the Investors, at any time after the date hereof, effect any
merger or consolidation of the Company with or into, or a transfer more than 50%
of the assets of the Company to, another entity (a "Consolidation Event").

Section 5.8.   Issuance of Convertible Debentures and Warrants. The sale of the
               -----------------------------------------------
Convertible Debentures, the Warrants and the issuance of the Conversion Shares
upon conversion and Warrant Shares upon the exercise of the Warrants of the
Convertible Debentures shall be made in accordance with the provisions and
requirements of Section 4(2), 4(6) or Regulation D and any applicable state
securities law. The Company shall make any necessary SEC and "blue sky" filings
as may be required to be made by the Company in connection with the sale of the
Securities to the Investors, and shall provide a copy thereof to the Investors
promptly after such filing.

Section 5.9.   Future Financing. The Company agrees that it will enter into an
               ----------------
equity line of credit agreement arranged through Hadrian Investments Limited
within 10 calendar days from the date hereof (the "Equity Line"). At the
election of each Investor, the Company agrees to use 50% of the net proceeds
from any other sale for cash of its securities (including the Equity Line), to
redeem all of the Convertible Debentures held by the Investors pursuant to
Section 5 of the Convertible Debentures. The Company agrees that it will not
enter into any other sale of its securities or any Capital Shares Equivalents at
a discount to the then-current bid price (or a convertible or exchangeable
security without a floor price at or above the Set Price (as defined in the
Convertible Debenture) or a security that may be reset or adjusted without a
floor price at or above the Set Price) until the earlier to occur of (a) 180
days after the Effective Date, or (b) 3 years from second Closing Date.
Notwithstanding anything to the contrary herein, the Company shall be further
precluded from entering into any other such financing during a period that an
Investor has delivered a Conversion Notice and the Company has not delivered to
such Investor the Conversion Shares (without legend if possible) and is late in
such delivery. The foregoing shall not prevent or limit the Company from
engaging in any sale of securities (i) pursuant to the exercise of options
granted or to be granted under an option, restricted stock or other plan for
employees, directors, or consultants of the Company or any of its subsidiaries
which plan has been approved by the Company's Board of Directors, (ii) pursuant
to any compensatory plan for a full-time employee or key consultant, (iii) in
connection with a strategic partnership or other business transaction, the
principal purpose of which is not simply to raise money, (iv) pursuant to any
option, warrant or convertible security existing as of the date hereof, (v)
pursuant to a public offering underwritten by an established investment bank
(not including an equity line of credit type agreement), (vi) pursuant to
existing consulting or investment advisory agreements, the principal purpose of
which is not simply to raise money, (vii) pursuant to a stock split, or (viii)
with the prior written consent of a majority in interest of the Investors, or
their assigns as the case may be. Further, the Purchaser shall have a right of
first refusal to participate upon the same terms and conditions offered to any
third party in any subsequent financings entered into by the Company pursuant to
sub-section 5.9(viii) hereto from the date hereof until 180 calendar days after
the Effective Date. Such right of first refusal must be exercised in writing
within five (5) Trading Days of the Purchaser's receipt of notice of the
proposed terms of such financing or the right to participate in such financing
shall be waived.

                                       15
<PAGE>

Section 5.10.  Pro-Rata Redemption. Upon any redemption of any of the
               -------------------
Convertible Debentures, the Company shall offer such redemption pro-rata among
all Investors in proportion to their respective current holdings of such
securities pursuant to this Agreement.

                                  ARTICLE VI

                           Survival; Indemnification

Section 6.1.   Survival. The representations, warranties and covenants made by
               --------
each of the Company and each Investor in this Agreement, the annexes, schedules
and exhibits hereto and in each instrument, agreement and certificate entered
into and delivered by them pursuant to this Agreement, shall survive each
Closing and the consummation of the transactions contemplated hereby for a
period of 3 years beginning on the second Closing Date. In the event of a breach
or violation of any of such representations, warranties or covenants, the party
to whom such representations, warranties or covenants have been made shall have
all rights and remedies for such breach or violation available to it under the
provisions of this Agreement, irrespective of any investigation made by or on
behalf of such party on or prior to either Closing Date, unless such party had
actual knowledge of such breach or violation prior to such Closing Date.

Section 6.2.   Indemnity.
               ---------

               (a)    The Company hereby agrees to indemnify and hold harmless
     the Investors, their respective Affiliates and their respective officers,
     directors, partners and members (collectively, the "Investor Indemnitees"),
     from and against any and all Damages, and agrees to reimburse the Investor
     Indemnitees for all reasonable out-of-pocket expenses (including the
     reasonable fees and expenses of legal counsel), in each case promptly as
     incurred by the Investor Indemnitees and to the extent arising out of or in
     connection with:

               (i)    any misrepresentation, omission of fact or breach of any
                      of the Company's representations or warranties contained
                      in this Agreement, the annexes, schedules or exhibits
                      hereto or any instrument, agreement or certificate entered
                      into or delivered by the Company pursuant to this
                      Agreement; or

               (ii)   any failure by the Company to perform in any material
                      respect any of its material covenants, agreements,
                      undertakings or obligations set forth in this Agreement,
                      the annexes, schedules or exhibits hereto or any
                      instrument, agreement or certificate entered into or
                      delivered by the Company pursuant to this Agreement; or

               (iii)  any action instituted against the Investors, or any of
                      them or their respective Affiliates, by any stockholder of
                      the Company who is not an Affiliate of an Investor, with
                      respect to any of the transactions contemplated by this
                      Agreement.

                                       16
<PAGE>

               (b)    Each Investor, severally and not jointly, hereby agrees to
     indemnify and hold harmless the Company, its Affiliates and their
     respective officers, directors, partners and members (collectively, the
     "Company Indemnitees"), from and against any and all Damages, and agrees to
     reimburse the Company Indemnitees for all reasonable out-of-pocket expenses
     (including the reasonable fees and expenses of legal counsel), in each case
     promptly as incurred by the Company Indemnitees and to the extent arising
     out of or in connection with any misrepresentation, omission of fact, or
     breach of any of the Investor's representations or warranties contained in
     this Agreement, the annexes, schedules or exhibits hereto or any
     instrument, agreement or certificate entered into or delivered by the
     Investor pursuant to this Agreement. Notwithstanding anything to the
     contrary herein, the Investors shall be liable under this Section 6.2(b)
     for only that amount as does not exceed the net proceeds to such Investors
     as a result of the sale of Registrable Securities pursuant to the
     Registration Statement.

Section 6.3.   Notice. Promptly after receipt by any party hereto seeking
               ------
indemnification pursuant to Section 6.2 (an "Indemnified Party") of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a "Claim"), the Indemnified Party
promptly shall notify the party from whom indemnification pursuant to Section
6.2 is being sought (the "Indemnifying Party") of the commencement thereof; but
the omission to so notify the Indemnifying Party shall not relieve it from any
liability that it otherwise may have to the Indemnified Party, except to the
extent that the Indemnifying Party is actually prejudiced by such omission or
delay. In connection with any Claim as to which both the Indemnifying Party and
the Indemnified Party are parties, the Indemnifying Party shall be entitled to
assume the defense thereof. Notwithstanding the assumption of the defense of any
Claim by the Indemnifying Party, the Indemnified Party shall have the right to
employ separate legal counsel and to participate in the defense of such Claim,
and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs
and expenses of such separate legal counsel to the Indemnified Party if (and
only if): (a) the Indemnifying Party shall have agreed to pay such fees, out-of-
pocket costs and expenses, (b) the Indemnified Party reasonably shall have
concluded that representation of the Indemnified Party and the Indemnifying
Party by the same legal counsel would not be appropriate due to actual or, as
reasonably determined by legal counsel to the Indemnified Party, potentially
differing interests between such parties in the conduct of the defense of such
Claim, or if there may be legal defenses available to the Indemnified Party that
are in addition to or disparate from those available to the Indemnifying Party,
or (c) the Indemnifying Party shall have failed to employ legal counsel
reasonably satisfactory to the Indemnified Party within a reasonable period of
time after notice of the commencement of such Claim. If the Indemnified Party
employs separate legal counsel in circumstances other than as described in
clauses (a), (b) or (c) above, the fees, costs and expenses of such legal
counsel shall be borne exclusively by the Indemnified Party. Except as provided
above, the Indemnifying Party shall not, in connection with any Claim in the
same jurisdiction, be liable for the fees and expenses of more than one firm of
legal counsel for the Indemnified Party (together with appropriate local
counsel). The Indemnifying Party shall not, without the prior written consent of
the Indemnified Party (which consent shall not unreasonably be withheld), settle
or compromise any Claim or consent to the entry of any judgment that does not
include an unconditional release of the Indemnified Party from all liabilities
with respect to such Claim or judgment.

                                       17
<PAGE>

     All fees and expenses of the Indemnified Party (including reasonable costs
of defense and investigation in a manner not inconsistent with this Section and
all reasonable attorneys' fees and expenses) shall be paid to the Indemnified
Party, as incurred, within ten (10) Trading Days of written notice thereof to
the Indemnifying Party (regardless of whether it is ultimately determined that
an indemnified party is not entitled to indemnification hereunder; provided,
that the Indemnifying Party may require such Indemnified Party to undertake to
reimburse all such fees and expenses to the extent it is finally judicially
determined that such Indemnified Party is not entitled to indemnification
hereunder).

Section 6.4.   Direct Claims. In the event one party hereunder should have a
               -------------
claim for indemnification that does not involve a claim or demand being asserted
by a third party, the Indemnified Party promptly shall deliver notice of such
claim to the Indemnifying Party. If the Indemnifying Party disputes the claim,
such dispute shall be resolved by mutual agreement of the Indemnified Party and
the Indemnifying Party or in accordance with Article IX. Judgment upon any award
rendered by any arbitrators may be entered in any court having competent
jurisdiction thereof.

                                  ARTICLE VII

                             Due Diligence Review

Section 7.1.   Due Diligence Review. Subject to Section 7.2, the Company shall
               --------------------
make available for inspection and review by the Investors, advisors to and
representatives of the Investors (who may or may not be affiliated with the
Investors and who are reasonably acceptable to the Company), any underwriter
participating in any disposition of the Registrable Securities on behalf of the
Investors pursuant to the Registration Statement, any such registration
statement or amendment or supplement thereto or any blue sky, Nasdaq or other
filing, all SEC Documents and other proposed filings with the SEC, and all other
publicly available corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the Company's
officers, directors and employees to supply all such publicly available
information reasonably requested by the Investors or any such representative,
advisor or underwriter in connection with such Registration Statement
(including, without limitation, in response to all questions and other inquiries
reasonably made or submitted by any of them), prior to and from time to time
after the filing and effectiveness of the Registration Statement for the sole
purpose of enabling the Investors and such representatives, advisors and
underwriters and their respective accountants and attorneys to conduct initial
and ongoing due diligence with respect to the Company and the accuracy of the
Registration Statement.

Section 7.2.   Non-Disclosure of Non-Public Information.
               ----------------------------------------

               (a)  From and after the filing of the Registration Statement, the
     Company shall not disclose material non-public information to the
     Investors, advisors to or representatives of the Investors unless prior to
     disclosure of such information the Company identifies such information as
     being non-public information and provides the

                                       18
<PAGE>

     Investors, such advisors and representatives with the opportunity to accept
     or refuse to accept such non-public information for review. Other than
     disclosure of any comment letters received from the SEC staff with respect
     to the Registration Statement, the Company may, as a condition to
     disclosing any non-public information hereunder, require the Investors'
     advisors and representatives to enter into a confidentiality agreement in
     form and content reasonably satisfactory to the Company and the Investors.

               (b)  The Company will promptly notify the advisors and
     representatives of the Investors and, if any, underwriters, of any event or
     the existence of any circumstance (without any obligation to disclose the
     specific event or circumstance) of which it becomes aware, constituting
     material non-public information (whether or not requested of the Company
     specifically or generally during the course of due diligence by such
     persons or entities), which, if not disclosed in the prospectus included in
     the Registration Statement, would cause such prospectus to include a
     material misstatement or to omit a material fact required to be stated
     therein in order to make the statements, therein in light of the
     circumstances in which they were made, not misleading. Nothing contained in
     this Section 7.2 shall be construed to mean that such persons or entities
     other than the Investors (without the written consent of the Investors
     prior to disclosure of such information as set forth in Section 7.2(a)) may
     not obtain non-public information in the course of conducting due diligence
     in accordance with the terms of this Agreement and nothing herein shall
     prevent any such persons or entities from notifying the Company of their
     opinion that based on such due diligence by such persons or entities, that
     the Registration Statement contains an untrue statement of a material fact
     or omits a material fact required to be stated in the Registration
     Statement or necessary to make the statements contained therein, in light
     of the circumstances in which they were made, not misleading.

                                 ARTICLE VIII

                     Legends; Transfer Agent Instructions

Section 8.1.   Legends. Unless otherwise provided below, each certificate
               -------
representing Registrable Securities will bear the following legend or equivalent
(the "Legend"):

     THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
     THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
     OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN
     EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH
     OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
     PARTICIPATION HEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
     ENCUMBERED, OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE
     REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR

                                       19
<PAGE>

     PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM SUCH REGISTRATION.

Section 8.2.   Transfer Agent Instructions. Upon the execution and delivery
               ---------------------------
hereof, the Company is issuing to the transfer agent for its Common Stock (and
to any substitute or replacement transfer agent for its Common Stock upon the
Company's appointment of any such substitute or replacement transfer agent)
instructions substantially in the form of Exhibit F hereto. Such instructions
                                          ---------
shall be irrevocable by the Company from and after the date hereof or from and
after the issuance thereof to any such substitute or replacement transfer agent,
as the case may be. After the Effective Date, in lieu of delivering physical
certificates representing the Common Stock issuable upon the conversion of, or
in lieu of interest payments on, the Convertible Debentures, the Company shall
cause its transfer agent to electronically transmit the Conversion Shares by
crediting the account of the Investor's prime broker with the Depository Trust
Company ("DTC") Fast Automated Securities Transfer program through its Deposit
Withdrawal Agent Commission ("DWAC") system no later than the applicable date of
delivery.

Section 8.3.   No Other Legend or Stock Transfer Restrictions. No legend other
               ----------------------------------------------
than the one specified in Section 8.1 has been or shall be placed on the share
certificates representing the Registrable Securities and no instructions or
"stop transfer orders," "stock transfer restrictions," or other restrictions
have been or shall be given to the Company's transfer agent with respect thereto
other than as expressly set forth in this Article VIII.

Section 8.4.   Investors' Compliance. Nothing in this Article shall affect in
               ---------------------
any way each Investor's obligations to comply with all applicable securities
laws upon resale of the Common Stock.

Section 8.5.   Rule 144. Subject to the applicable securities laws, the Company
               --------
acknowledges and agrees that, for the purpose of calculating the holding period
of the Shares under Rule 144, the Conversion Shares shall be deemed to have been
acquired on the applicable Closing Date.

                                  ARTICLE IX

                                 Choice of Law

Section 9.1.   Governing Law. This Agreement shall be governed by and construed
               -------------
in accordance with the laws of the State of New York applicable to contracts
made in New York by persons domiciled in New York City and without regard to its
principles of conflicts of laws. The Company and each of the Investors agree to
submit themselves to the in personam jurisdiction of the state and federal
courts situated within the Southern District of the State of New York with
regard to any controversy arising out of or relating to this Agreement. The non-
prevailing party to any dispute hereunder shall pay the expenses of the
prevailing party, including reasonable attorneys' fees, in connection with any
such dispute.

                                       20
<PAGE>

Section 9.2.   Specific Enforcement. The Company acknowledges and agrees that
               --------------------
irreparable damage would occur in the event that any of the provisions of this
Agreement or any of the exhibits hereto were not performed in accordance with
their specific terms or were otherwise breached, notwithstanding any reasons the
Company may have to the contrary in the future, including claims of solvency or
that the Investor is not put at risk absent performance by the Company. It is
accordingly agreed that the Investors shall be entitled to an injunction or
injunctions to prevent or cure breaches of the provisions of this Agreement and
to enforce specifically the terms and provisions hereof or thereof, this being
in addition to any other remedy to which any of them may be entitled by law or
equity. The prevailing party in such injunctive action shall be entitled to its
reasonable attorneys' fees in connection with any such specific performance.

                                   ARTICLE X

                                  Assignment

Section 10.1.  Assignment. Neither this Agreement nor any rights of the Company
               ----------
hereunder may be assigned by the Company to any other person. The provisions of
this Agreement shall inure to the benefit of, and be enforceable by, any
permitted transferee of any of the Convertible Debentures and Warrants purchased
or acquired by any Investor hereunder with respect to the Convertible Debentures
and Warrants held by such person.

                                  ARTICLE XI

                                    Notices

Section 11.1.  Notices. All notices, demands, requests, consents, approvals, and
               -------
other communications required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (a) hand delivered, (b) deposited in
the mail, registered or certified, return receipt requested, postage prepaid,
(c) delivered by reputable air courier service with charges prepaid, or (d)
transmitted by facsimile, addressed as set forth below or to such other address
as such party shall have specified most recently by written notice. Any notice
or other communication required or permitted to be given hereunder shall be
deemed effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the first business day
following the date of sending by reputable courier service, fully prepaid,
addressed to such address, or (c) upon actual receipt of such mailing, if
mailed. The addresses for such communications shall be:

If to the Company:           6509 Windcrest, Suite 120
                             Plano, Texas 75024

                                       21
<PAGE>

                             Attn: Michael McDonnell
                             Tel: (972) 265-4000
                             Fax:  (210) 558-1929

With copies to:              Jackson Walker L.L.P.
(which shall not constitute  901 Main Street, Suite 6000
notice)                      Dallas, Texas 75202
                             Attn: James S. Ryan, III
                             Tel:  (214) 953-5801
                             Fax:  (214) 953-5822

if to the Investors:         As set forth on the signature pages hereto

with a copy to:              Robert Charron, Esq.
(which shall not constitute  Epstein Becker & Green, P.C.
notice)                      250 Park Avenue
                             New York, New York
                             Tel.:  (212) 351-4500
                             Fax:  (212) 661-0989

Either party hereto may from time to time change its address or facsimile number
for notices under this Section 11.1 by giving written notice of such changed
address or facsimile number to the other party hereto as provided in this
Section 11.1.

                                  ARTICLE XII

                                 Miscellaneous

Section 12.1.  Counterparts/ Facsimile/ Amendments. This Agreement may be
               -----------------------------------
executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except for the
Convertible Debentures or Warrants or as otherwise stated herein, in lieu of the
original documents, a facsimile transmission or copy of the original documents
shall be as effective and enforceable as the original. This Agreement may be
amended only by a writing executed by all parties.

Section 12.2.  Entire Agreement. This Agreement, the agreements attached as
               ----------------
Exhibits hereto, which include, but are not limited to the Convertible
Debentures, and Warrants the Escrow Agreement, and the Registration Rights
Agreement, set forth the entire agreement and understanding of the parties
relating to the subject matter hereof and supersedes all prior and
contemporaneous agreements, negotiations and understandings between the parties,
both oral and written relating to the subject matter hereof. The terms and
conditions of all Exhibits to this Agreement are incorporated herein by this
reference and shall constitute part of this Agreement as is fully set forth
herein.

                                       22
<PAGE>

Section 12.3.  Severability. In the event that any provision of this Agreement
               ------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that such severability shall be ineffective if
it materially changes the economic benefit of this Agreement to any party.

Section 12.4.  Headings. The headings used in this Agreement are used for
               --------
convenience only and are not to be considered in construing or interpreting this
Agreement.

Section 12.5.  Number and Gender. There may be one or more Investors parties to
               -----------------
this Agreement, which Investors may be natural persons or entities. All
references to plural Investors shall apply equally to a single Investor if there
is only one Investor, and all references to an Investor as "it" shall apply
equally to a natural person.

Section 12.6.  Reporting Entity for the Common Stock. The reporting entity
               -------------------------------------
relied upon for the determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this Agreement shall
be Bloomberg Financial, L.P. or any successor thereto. The written mutual
consent of the Investors and the Company shall be required to employ any other
reporting entity.

Section 12.7.  Replacement of Certificates. Upon (a) receipt of evidence
               ---------------------------
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of a certificate representing the Convertible Debentures or any
Conversion Shares or Warrants or any Warrant Shares and (b) in the case of any
such loss, theft or destruction of such certificate, upon delivery of an
indemnity agreement or security reasonably satisfactory in form to the Company
or as may be required by the Company's Transfer Agent or (c) in the case of any
such mutilation, on surrender and cancellation of such certificate, the Company
at its expense will execute and deliver, in lieu thereof, a new certificate of
like tenor.

Section 12.8.  Fees and Expenses. Each of the Company and the Investors agrees
               -----------------
to pay its own expenses incident to the performance of its obligations
hereunder, except that the Company shall pay the fees, expenses and
disbursements of the Investors as set forth in the Escrow Agreement.

Section 12.9.  Finder's and Broker's Fees. Each of the parties hereto represents
               --------------------------
that it has had no dealings in connection with this transaction with any finder
or broker who will demand payment of any fee or commission from the other party
except as set forth in the Escrow Agreement. The Company on the one hand, and
the Investors, on the other hand, agree to indemnify the other against and hold
the other harmless from any and all liabilities to any person claiming brokerage
commissions or finder's fees on account of services purported to have been
rendered on behalf of the indemnifying party in connection with this Agreement
or the transactions contemplated hereby.

Section 12.10.  Publicity. The Company agrees that it will not issue any press
                ---------
release or other public announcement, except as required by law, of the
transactions contemplated by this Agreement without the prior consent of the
Investors, which shall not be unreasonably withheld nor delayed by more than two
(2) Trading Days from their receipt of such proposed release. No release shall
name the Investors or any of their respective affiliates, representatives,
members,

                                       23
<PAGE>

agents, associates, employees, consultants, companies, subsidiaries, businesses
and/or entities or agents without their express consent.

                                 ARTICLE XIII

                              Certain Definitions

Section 13.1.  "Bid Price" shall mean the closing bid price (as reported by
                ---------
Bloomberg Financial L.P.) of the Common Stock on the Principal Market on the
date in question (and, if no closing bid price is reported, the closing price as
so reported, and if neither the closing bid price nor the closing price is so
reported, the last reported price of the Common Stock as determined by an
independent evaluator mutually agreed to by the parties).

Section 13.2.  "Capital Shares" shall mean the Common Stock and any shares of
                --------------
any other class of common stock whether now or hereafter authorized, having the
right to participate in the distribution of earnings and assets of the Company.

Section 13.3.  "Capital Shares Equivalents" shall mean any securities, rights,
                --------------------------
or obligations that are convertible into or exchangeable for or give any right
to subscribe for any Capital Shares of the Company or any warrants, options or
other rights to subscribe for or purchase Capital Shares or any such convertible
or exchangeable securities.

Section 13.4.  "Closing" shall mean the closings of the purchase and sale of the
                -------
Convertible Debentures and Warrants pursuant to Section 1.1.

Section 13.5.  "Closing Dates" shall mean the dates on which all conditions to
                -------------
the Closings have been satisfied (as defined in Section 1.1(b) hereto) and the
Closings shall have occurred.

Section 13.6.  "Common Stock" shall mean the Company's common stock, no par
                ------------
value per share.

Section 13.7.  "Conversion Shares" shall mean the shares of Common Stock
                -----------------
issuable upon conversion of the Convertible Debentures and any shares issuable
as interest upon the Convertible Debentures.

Section 13.8.  "Convertible Debenture(s)" shall mean the 6% Convertible
                ------------------------
Debenture(s) issued hereunder and due 3 years from their date of issuance, in
the form of Exhibit A hereto.
            ---------

Section 13.9.  "Damages" shall mean any loss, claim, damage, judgment, penalty,
                -------
deficiency, liability, costs and expenses (including, without limitation,
reasonable attorneys' fees and disbursements and reasonable costs and expenses
of expert witnesses and investigation).

                                       24
<PAGE>

Section 13.10. "Effective Date" shall mean the date on which the SEC first
                --------------
declares effective a Registration Statement registering the resale of the
Registrable Securities as set forth in the Registration Rights Agreement.

Section 13.11. "Escrow Agent" shall have the meaning set forth in the Escrow
                ------------
Agreement.

Section 13.12.  "Escrow Agreement" shall mean the Escrow Agreement in
                 ----------------
substantially the form of Exhibit C hereto executed and delivered
                          ---------
contemporaneously with this Agreement.

Section 13.13. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
                ------------
amended, and the rules and regulations promulgated thereunder.

Section 13.14. "Legend" shall mean the legend set forth in Section 8.1.
                ------

Section 13.15. "Material Adverse Effect" shall mean any effect on the business,
                -----------------------
operations, properties, stock price or financial condition of the Company that
is material and adverse to the Company and its subsidiaries and affiliates,
and/or any condition, circumstance, or situation that would prohibit or
otherwise interfere with the ability of the Company to enter into and perform
any of its obligations under this Agreement, the Registration Rights Agreement,
the Convertible Debentures, the Warrants or the Escrow Agreement in any material
respect.

Section 13.16. "Maturity Date" shall mean the date on which the outstanding
                -------------
principle amount and any accrued but unpaid interest of the Convertible
Debentures are due and payable as set forth in the Convertible Debenture.

Section 13.17. "Outstanding" when used with reference to shares of Common Stock
                -----------
or Capital Shares (collectively the "Shares"), shall mean, at any date as of
which the number of such Shares is to be determined, all issued and outstanding
Shares, and shall include all such Shares issuable in respect of outstanding
scrip or any certificates representing fractional interests in such Shares;
provided, however, that "Outstanding" shall not mean any such Shares then
--------  -------
directly or indirectly owned or held by or for the account of the Company.

Section 13.18. "Person" shall mean an individual, a corporation, a partnership,
                ------
a limited liability company, an association, a trust or other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.

Section 13.19. "Principal Market" shall initially mean the NASDAQ National
                ----------------
Market and shall also include the American Stock Exchange, the New York Stock
Exchange, the NASDAQ Small-Cap Market and the OTC Bulletin Board, whichever is
at the time the principal trading exchange or market for the Common Stock, based
upon share volume.

Section 13.20. "Purchase Price" shall mean the face principal amount of the
                --------------
Convertible Debentures.

                                       25
<PAGE>

Section 13.21. "Registrable Securities" shall mean 200% of the Conversion
                ----------------------
Shares and the Warrant Shares until the earlier of the date that (i) the
Registration Statement has been declared effective by the SEC, and all
Conversion Shares and Warrant Shares have been disposed of pursuant to the
Registration Statement, (ii) all Conversion Shares and Warrant Shares have been
sold under circumstances under which all of the applicable conditions of Rule
144 (or any similar provision then in force) under the Securities Act ("Rule
144") are met, (iii) all Conversion Shares and Warrant Shares have been
otherwise transferred to holders who may trade such shares without restriction
under the Securities Act, and the Company has delivered a new certificate or
other evidence of ownership for such securities not bearing a restrictive legend
or (iv) such time as, in the opinion of counsel to the Company, all Conversion
Shares and Warrant Shares may be sold without any time, volume or manner
limitations pursuant to Rule 144(k) (or any similar provision then in effect)
under the Securities Act.

Section 13.22. "Registration Rights Agreement" shall mean the agreement
                -----------------------------
regarding the filing of the Registration Statement for the resale of the
Registrable Securities, entered into between the Company and the Investors, on
the date hereof in the form annexed hereto as Exhibit B.
                                              ---------

Section 13.23. "Registration Statement" shall mean a registration statement on
                ----------------------
Form S-3 (if use of such form is then available to the Company pursuant to the
rules of the SEC and, if not, on such other form promulgated by the SEC for
which the Company then qualifies and which counsel for the Company shall deem
appropriate, and which form shall be available for the resale by the Investors
of the Registrable Securities to be registered thereunder in accordance with the
provisions of this Agreement, the Registration Rights Agreement and in
accordance with the intended method of distribution of such securities), for the
registration of the resale by the Investors of the Registrable Securities under
the Securities Act.

Section 13.24. "Regulation D" shall have the meaning set forth in the recitals
                ------------
of this Agreement.

Section 13.25. "SEC" shall mean the Securities and Exchange Commission.
                ---

Section 13.26. "SEC Documents" shall mean the Company's latest Form 10-K or
                -------------
10-KSB as of the time in question, all Forms 10-Q or 10-QSB and 8-K filed
thereafter, all registration statements filed as of the time in question, and
the Proxy Statement for its latest fiscal year as of the time in question until
such time as the Company no longer has an obligation to maintain the
effectiveness of a Registration Statement as set forth in the Registration
Rights Agreement.

Section 13.27. "Section 4(2)" and "Section 4(6)" shall have the meanings set
                -------------------------------
forth in the recitals of this Agreement.

Section 13.28. "Securities Act" shall have the meaning as set forth in the
                --------------
recitals of this Agreement.

Section 13.29. "Shares" shall have the meaning set forth in the definition of
                ------
"Outstanding" herein.

                                       26
<PAGE>

Section 13.30. "Trading Day" shall mean any day during which the Principal
                -----------
Market shall be open for business.

Section 13.31. "Warrants" shall mean the Warrants set forth in Section 1.2,
                --------
substantially in the form of Exhibit E hereto, to be issued to the Investors
pro-rata hereunder.

Section 13.32. "Warrant Shares" shall mean all shares of Common Stock or other
                --------------
securities issued or issuable pursuant to exercise of the Warrants.

             [THE REMAINDER OF THIS PAGE IS INTENTIONALLY BLANK.]

                                       27
<PAGE>

  [SIGNATURE PAGE OF CONVERTIBLE DEBENTURES AND WARRANTS PURCHASE AGREEMENT]

          IN WITNESS WHEREOF, the parties hereto have caused this Purchase
Agreement to be executed by the undersigned, thereunto duly authorized, as this
__ day of June, 2001.

                                   DATA RACE, INC.

                                   By:
                                      -----------------------------------
                                       Michael McDonnell, President & CEO

                                   INVESTORS:

Address:                           ALPHA CAPITAL AG
Lettstrasse 32
Furstentum 9490
Vaduz, Liechtenstein               By:
Fax: 011-423 232 3196                 ----------------------------------------
                                       Konrad Ackermann, Authorized Signatory

Purchase Price:
--------------
First Closing: $_________ principal amount and ________ Warrant Shares
Second Closing: $_________ principal amount and ________ Warrant Shares

Address:                           STONESTREET L.P.
C/o Canaccord Capital Corporation
320 Bay Street, Suite 1300
Toronto, Ontario, Canada           By:
M5H 4A6                               ----------------------------------------
                                       Michael Finkelstein, Authorized Signatory

Purchase Price:
First Closing: $_________ principal amount and ________ Warrant Shares
Second Closing: $_________ principal amount and ________ Warrant Shares

                                       28<PAGE>

                                                                   Exhibit 10.14

                                                                       EXHIBIT B

                         REGISTRATION RIGHTS AGREEMENT

          THIS REGISTRATION RIGHTS AGREEMENT, dated as of June 12, 2001, between
the investor or investors signatory hereto (each an "Investor" and together the
"Investors"), and Data Race, Inc., a Texas corporation (the "Company").

          WHEREAS, simultaneously with the execution and delivery of this
Agreement, the Investors are purchasing from the Company, pursuant to the
Convertible Debentures and Warrants Purchase Agreement dated the date hereof
(the "Purchase Agreement") (capitalized terms not defined herein shall have the
meanings ascribed to them in the Purchase Agreement), $1,000,000, in the
aggregate, principal amount of the Company's 6% Convertible Debentures and
Warrants; and

          WHEREAS, the Company desires to grant to the Investors the
registration rights set forth herein with respect to the Conversion Shares of
Common Stock issuable upon conversion of, or as interest upon, the Convertible
Debentures, shares of Common Stock issuable upon exercise of the Warrants
purchased pursuant to the Purchase Agreement and shares issuable in the event of
a registration default pursuant to Section 3(f) (the "Securities").

          NOW, THEREFORE, the parties hereto mutually agree as follows:

          Section 1.  Registrable Securities.  As used herein the term
                      ----------------------
"Registrable Security" means 200% of the Securities until (i) the Registration
Statement has been declared effective by the Securities and Exchange Commission
(the "Commission"), and all Securities have been disposed of pursuant to the
Registration Statement, (ii) all Securities have been sold under circumstances
under which all of the applicable conditions of Rule 144 (or any similar
provision then in force) under the Securities Act ("Rule 144") are met, or (iii)
such time as, in the opinion of counsel to the Company reasonably satisfactory
to the Investors and upon delivery to the Investors of such executed opinion,
all Securities may be sold without any time, volume or manner limitations
pursuant to Rule 144(k) (or any similar provision then in effect) under the
Securities Act.  In the event of any merger, reorganization, consolidation,
recapitalization or other change in corporate structure affecting the Common
Stock, such adjustment shall be deemed to be made in the definition of
"Registrable Security" as is appropriate in order to prevent any dilution or
enlargement of the rights granted pursuant to this Agreement.

          Section 2.  Restrictions on Transfer.  Each Investor acknowledges and
                      ------------------------
understands that prior to the registration of the Securities as provided herein,
the Securities are "restricted securities" as defined in Rule 144 promulgated
under the Securities Act.  Each Investor understands that no disposition or
transfer of the Securities may be made by Investor in the absence of (i) an
opinion of counsel to the Investor, in form and substance reasonably
satisfactory to the Company, that such transfer may be made without registration
under the Securities Act or (ii) such registration.
<PAGE>

          With a view to making available to the Investors the benefits of Rule
144 under the Securities Act or any other similar rule or regulation of the
Commission that may at any time permit the Investors to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees to:

          (a) comply with the provisions of paragraph (c)(1) of Rule 144;

          (b) file with the Commission in a timely manner all reports and other
     documents required to be filed with the Commission pursuant to Section 13
     or 15(d) under the Exchange Act by companies subject to either of such
     sections, irrespective of whether the Company is then subject to such
     reporting requirements; and

          (c) Upon request by the Transfer Agent, the Company shall provide the
     Transfer Agent an opinion of counsel, which opinion shall be reasonably
     acceptable to the Transfer Agent, that the Investor has complied with the
     applicable conditions of Rule 144 ( or any similar provision then in force)
     under the Securities Act.

          Section 3.  Registration Rights With Respect to the Securities.
                      --------------------------------------------------

          (a)  The Company agrees that it will prepare and file with the
     Commission, within 10 calendar days after the first Closing Date, a pre-
     effective amendment to the recently filed registration statement on Form S-
     3, File No. 333-57166 or another registration statement (on Form S-3, or
     other appropriate registration statement form) under the Securities Act (as
     applicable, the "Registration Statement"), at the sole expense of the
     Company (except as provided in Section 3(c) hereof), in respect of the
     Investors, so as to permit the resale of the Securities under the Act by
     the Investors as selling stockholders and not as underwriters.

          (b)  The Company shall cause such Registration Statement to become
     effective within 75 calendar days after the first Closing Date, or, if
     earlier, within 5 days of SEC clearance to request acceleration of
     effectiveness. The number of shares designated in the Registration
     Statement to be registered shall include all the Warrant Shares, 100% of
     the already converted Conversion Shares held by any Investor on the filing
     date and at least 200% of the greater of the number of shares which would
     be issuable upon the conversion of the principal amount of the Convertible
     Debentures issued and to be issued at the Conversion Price in effect (i) on
     the first Closing Date, or (ii) on the date of the filing of the
     Registration Statement, and such number of shares as the Company deems
     prudent for the purpose of issuing shares of Common Stock as interest on
     the Convertible Debentures, and shall include appropriate language
     regarding reliance upon Rule 416 to the extent permitted by the Commission.
     The Company will notify the Investors and its transfer agent of the
     effectiveness of the Registration Statement within 1 Trading Day of such
     event. After the Effective Date, within 15 days after the day on which the
     number of Securities registered for resale by the Investors,
     notwithstanding the limitation o conversion herein and in the Purchase
     Agreement, is less than 125% of the number of Securities (calculated at the
     Conversion Price on such date) held by the Investors on such

                                       2
<PAGE>

     date (the "Further Registration Date"), the Company shall file a further
     registration statement registering a number of shares of Common Stock to
     the extent that at least 200% of the shares which would be required to be
     issued upon the conversion of the remaining Convertible Debentures at the
     Conversion Price on the date of the filing of such further registration
     statement are registered and shall prosecute such additional registration
     statement to effectiveness within 60 calendar days of the date of the
     Further Registration Date. Each Investor shall have the right to convert
     all or any of its Convertible Debenture into up to a number of registered
     shares of Common Stock equal to such Investor's fraction of the aggregate
     Purchase Price multiplied by the initially registered and, if applicable,
     subsequently registered Securities; provided, however, in no event shall
                                         --------  -------
     this provision limit each Investor's right to convert its Convertible
     Debenture into unregistered Common Stock.

          (c) The Company will maintain the Registration Statement or post-
     effective amendment filed under this Section 3 effective under the
     Securities Act until the earlier of (i) the date that none of the
     Securities covered by such Registration Statement are or may become issued
     and outstanding, (ii) the date that all of the Securities have been sold
     pursuant to such Registration Statement, (iii) the date the Investors
     receive an opinion of counsel to the Company, which counsel shall be
     reasonably acceptable to the Investors, that the Securities may be sold
     under the provisions of Rule 144 without limitation as to volume, (iv) all
     Securities have been otherwise transferred to persons who may trade such
     shares without restriction under the Securities Act, and the Company has
     delivered a new certificate or other evidence of ownership for such
     securities not bearing a restrictive legend, or (v) three (3) years from
     the Effective Date.

          (d) All fees, disbursements and out-of-pocket expenses and costs
     incurred by the Company in connection with the preparation and filing of
     the Registration Statement hereunder and in complying with applicable
     securities and Blue Sky laws (including, without limitation, all attorneys'
     fees of the Company) shall be borne by the Company. The Investors shall
     bear the cost of underwriting and/or brokerage discounts, fees and
     commissions, if any, applicable to the Securities being registered and the
     fees and expenses of their counsel. The Investors and their counsel shall
     have a reasonable period, not to exceed 5 Trading Days, to review the
     proposed Registration Statement or any amendment thereto, prior to filing
     with the Commission, and the Company shall provide each Investor with
     copies of any comment letters received from the Commission with respect
     thereto within 2 Trading Days of receipt thereof. The Company shall qualify
     any of the securities for sale in such states as any Investor reasonably
     designates and shall furnish indemnification in the manner provided in
     Section 6 hereof. However, the Company shall not be required to qualify in
     any state which will require an escrow or other restriction relating to the
     Company and/or the sellers, or which will require the Company to qualify to
     do business in such state or require the Company to file therein any
     general consent to service of process. The Company at its expense will
     supply the Investors with copies of the applicable Registration Statement
     and the prospectus included therein and other related documents in such
     quantities as may be reasonably requested by the Investors.

                                       3
<PAGE>

          (e) The Company shall not be required by this Section 3 to include an
     Investor's Registrable Securities in any Registration Statement which is to
     be filed if, in the opinion of counsel for both the Investor and the
     Company (or, should they not agree, in the opinion of another counsel
     experienced in securities law matters acceptable to counsel for the
     Investor and the Company) the proposed offering or other transfer as to
     which such registration is requested is exempt from applicable federal and
     state securities laws and would result in all purchasers or transferees
     obtaining securities which are not "restricted securities", as defined in
     Rule 144 under the Securities Act.

          (f) In the event that (i) the Registration Statement is not filed by
     the Company in a timely manner as set forth in Section 3(a), (ii) the
     Registration Statement is not declared effective by the Commission within
     the period of time set forth in Section 3(b) herein, or within five (5)
     days of clearance by the Commission to request effectiveness, (iii) such
     Registration Statement is not maintained as effective by the Company for
     the period set forth in Section 3(c) above, or (iv) the additional
     registration statement referred to in Section 3(b) is not filed within 15
     calendar days or declared effective within 60 calendar days as set forth
     therein (each a "Registration Default") then the Company will pay each
     Investor (pro-rata on a monthly basis), for each Registration Default then
     in effect, as liquidated damages and not as a penalty, during any period in
     which a Registration Default is occurring, two percent (2%) per month of
     (i) the then outstanding principal amount of the Convertible Debentures,
     and (ii) the value of any outstanding Warrants (valued at the difference
     between the average closing bid price during the applicable month and the
     Exercise Price multiplied by the number of Warrant Shares the Warrants are
     exercisable into), held by such Investor until such corresponding
     Registration Default no longer exists ("Liquidated Damages"). Such payment
     of the Liquidated Damages shall be made to the Investors in cash, or, at
     the option of the Company, in registered shares of Common Stock (based on
     the Conversion Price (as defined in the Convertible Debenture)) on the
     Trading Day prior to the date of payment) on the last day of each month
     during which a Registration Default occurred or was continuing, without
     demand therefor by the Investor; provided, however, that the payment of
                                      --------  -------
     the Liquidated Damages shall not relieve the Company from its obligations
     to register the Securities pursuant to this Section.

          If the Company does not remit the payment to the Investors as set
     forth above, the Company will pay the Investors reasonable costs of
     collection, including attorneys' fees, in addition to the Liquidated
     Damages and interest of 15% per annum on any liquidated damage payments not
     made in a timely manner as set forth above. The registration of the
     Securities pursuant to this provision shall not affect or limit the
     Investors' other rights or remedies as set forth in this Agreement.

          (g) The Company shall be precluded from including in any registration
     statement which it is required to file pursuant to this Section 3 any other
     securities apart from the Registrable Securities, without the prior written
     consent of a majority in interest of the Investors.

                                       4
<PAGE>

          (h) If at any time or from time to time after the effective date of
     any Registration Statement, the Company notifies the Investors in writing
     of the existence of a Potential Material Event (as defined in Section 3(i)
     below), the Investors shall not offer or sell any Securities or engage in
     any other transaction involving or relating to Securities, from the time of
     the giving of notice with respect to a Potential Material Event until the
     Investors receive written notice from the Company that such Potential
     Material Event either has been disclosed to the public or no longer
     constitutes a Potential Material Event; provided, however, that the Company
                                             --------  -------
     may not so suspend the right to such holders of Securities for more than
     twenty (20) calendar days in the aggregate during any twelve month period,
     during the period the Registration Statement is required to be in effect,
     and if such period is exceeded, such event shall be a Registration Default
     and subject to liquidated damages as set forth in Section 3(f) hereof.  The
     Company must give the Investors notice in writing prior to the first day of
     the blackout period immediately upon knowledge that such a blackout period
     will occur and such notice must be acknowledged in writing by the
     Investors.  Failure to provide the Investors with such notice shall
     constitute a Registration Default during the entire applicable period that
     the Registration Statement is suspended.  Compliance by the Company with
     this Section 3(h) will not result in or be deemed a breach of any of the
     Company's obligations set forth in the Purchase Agreement not to disclose
     non-public information to the Investors.

          (i) "Potential Material Event" means any of the following: (a) the
     possession by the Company of material information not ripe for disclosure
     in a registration statement, as determined in good faith by the Chief
     Executive Officer or the Board of Directors of the Company that disclosure
     of such information in a Registration Statement would be detrimental to the
     business and affairs of the Company; or (b) any material engagement or
     activity by the Company which would, in the good faith determination of the
     Chief Executive Officer or the Board of Directors of the Company, be
     adversely affected by disclosure in a registration statement at such time,
     which determination shall be accompanied by a good faith determination by
     the Chief Executive Officer or the Board of Directors of the Company that
     the applicable Registration Statement would be materially misleading absent
     the inclusion of such information.

          Section 4.  Cooperation with Company.  The Investors will cooperate
                      ------------------------
with the Company in all respects in connection with this Agreement, including
timely supplying all information reasonably requested by the Company (which
shall include all information regarding the Investors and proposed manner of
sale of the Registrable Securities required to be disclosed in any Registration
Statement) and executing and returning all documents reasonably requested in
connection with the registration and sale of the Registrable Securities and
entering into and performing their obligations under any underwriting agreement,
if the offering is an underwritten offering, in usual and customary form, with
the managing underwriter or underwriters of such underwritten offering.  Nothing
in this Agreement shall obligate any Investor to consent to be named as an
underwriter in any Registration Statement.  The obligation of the Company to
register the Registrable Securities shall be absolute and unconditional as to
those Securities which the Commission will permit to be registered without
naming the Investors as underwriters.

                                       5
<PAGE>

Any delay or delays caused by the Investors by failure to cooperate as required
hereunder shall not constitute a Registration Default.

          Section 5.  Registration Procedures.  If and whenever the Company is
                      -----------------------
required by any of the provisions of this Agreement to effect the registration
of any of the Registrable Securities under the Act, the Company shall (except as
otherwise provided in this Agreement), as expeditiously as possible, subject to
the Investors' assistance and cooperation as reasonably required with respect to
each Registration Statement:

          (a) (i) prepare and file with the Commission such amendments and
     supplements to the Registration Statement and the prospectus used in
     connection therewith as may be necessary to keep such Registration
     Statement effective and to comply with the provisions of the Act with
     respect to the sale or other disposition of all Registrable Securities
     covered by such Registration Statement whenever the Investors shall desire
     to sell or otherwise dispose of the same (including prospectus supplements
     with respect to the sales of Registrable Securities from time to time in
     connection with a registration statement pursuant to Rule 415 promulgated
     under the Act) and (ii) take all lawful action such that each of (A) the
     Registration Statement and any amendment thereto does not, when it becomes
     effective, contain an untrue statement of a material fact or omit to state
     a material fact required to be stated therein or necessary to make the
     statements therein, in light of the circumstances under which they were
     made, not misleading and (B) the prospectus forming part of the
     Registration Statement, and any amendment or supplement thereto, does not
     at any time during the Registration Period include an untrue statement of a
     material fact or omit to state a material fact required to be stated
     therein or necessary to make the statements therein, in light of the
     circumstances under which they were made, not misleading;

          (b) (i) prior to the filing with the Commission of any Registration
     Statement (including any amendments thereto) and the distribution or
     delivery of any prospectus (including any supplements thereto), provide
     draft copies thereof to the Investors as required by Section 3(d) and
     reflect in such documents all such comments as the Investors (and their
     counsel) reasonably may propose respecting the Selling Shareholders and
     Plan of Distribution sections (or equivalents); (ii) furnish to each
     Investor such numbers of copies of a prospectus including a preliminary
     prospectus or any amendment or supplement to any prospectus, as applicable,
     in conformity with the requirements of the Act, and such other documents,
     as such Investor may reasonably request in order to facilitate the public
     sale or other disposition of the Registrable Securities owned by such
     Investor; and (iii) provide to each Investor copies of any comments and
     communications from the Commission relating to the Registration Statement,
     if lawful to do so;

          (c) register and qualify the Registrable Securities covered by the
     Registration Statement under such other securities or blue sky laws of such
     jurisdictions as the Investors shall reasonably request (subject to the
     limitations set forth in Section 3(d) above), and do any and all other acts
     and things which may be necessary or advisable to enable each Investor to
     consummate the public sale or other disposition in such jurisdiction of the
     Registrable Securities owned by such Investor;

                                       6
<PAGE>

          (d) list such Registrable Securities on the Principal Market, if the
     listing of such Registrable Securities is then permitted under the rules of
     such Principal Market;

          (e) notify each Investor at any time when a prospectus relating
     thereto covered by the Registration Statement is required to be delivered
     under the Act, of the happening of any event of which it has knowledge as a
     result of which the prospectus included in the Registration Statement, as
     then in effect, includes an untrue statement of a material fact or omits to
     state a material fact required to be stated therein or necessary to make
     the statements therein not misleading in the light of the circumstances
     then existing, subject to Section 3(h), and the Company shall prepare and
     file a curative amendment under Section 5(a) as quickly as commercially
     possible and during such period, the Investors shall not make any sales of
     Registrable Securities pursuant to the Registration Statement and during
     such period; provided, however, any period during which the Investors are
                  --------  -------
     precluded from making sales of the Registrable Securities shall be included
     in the 20 calendar day period in Section 3(h) and any such days herein
     which exceed, or cause the Company to exceed, such 20 calendar day period
     shall be deemed a Registration Default and the Company shall be subject to
     Liquidated Damages as set forth in Section 3(f).

          (f) as promptly as practicable after becoming aware of such event,
     notify each Investor who holds Registrable Securities being sold (or, in
     the event of an underwritten offering, the managing underwriters) of the
     issuance by the Commission of any stop order or other suspension of the
     effectiveness of the Registration Statement at the earliest possible time
     and take all lawful action to effect the withdrawal, recession or removal
     of such stop order or other suspension;

          (g) cooperate with the Investors to facilitate the timely preparation
     and delivery of certificates for the Registrable Securities to be offered
     pursuant to the Registration Statement and enable such certificates for the
     Registrable Securities to be in such denominations or amounts, as the case
     may be, as the Investors reasonably may request and registered in such
     names as the Investors may request; and, within 3 Trading Days after a
     Registration Statement which includes Registrable Securities is declared
     effective by the Commission, deliver and cause legal counsel selected by
     the Company to deliver to the transfer agent for the Registrable Securities
     (with copies to the Investors) an appropriate instruction and, to the
     extent necessary, an opinion of such counsel;

          (h) take all such other lawful actions reasonably necessary to
     expedite and facilitate the disposition by the Investors of their
     Registrable Securities in accordance with the intended methods therefor
     provided in the prospectus which are customary for issuers to perform under
     the circumstances;

          (i) in the event of an underwritten offering, promptly include or
     incorporate in a prospectus supplement or post-effective amendment to the
     Registration Statement such information as the managers reasonably agree
     should be included therein and to which the Company does not reasonably
     object and make all required filings of such

                                       7
<PAGE>

     prospectus supplement or post-effective amendment as soon as practicable
     after it is notified of the matters to be included or incorporated in such
     Prospectus supplement or post-effective amendment; and

          (j) maintain a transfer agent and registrar for its Common Stock.

          Section 6.  Indemnification.
                      ---------------

          (a) To the maximum extent permitted by law, the Company agrees to
     indemnify and hold harmless the Investors and each person, if any, who
     controls an Investor within the meaning of the Securities Act (each a
     "Distributing Investor") against any losses, claims, damages or
     liabilities, joint or several (which shall, for all purposes of this
     Agreement, include, but not be limited to, all reasonable costs of defense
     and investigation and all reasonable attorneys' fees and expenses), to
     which the Distributing Investor may become subject, under the Securities
     Act or otherwise, insofar as such losses, claims, damages or liabilities
     (or actions in respect thereof) arise out of or are based upon any untrue
     statement or alleged untrue statement of any material fact contained in any
     Registration Statement, or any related final prospectus or amendment or
     supplement thereto, or arise out of or are based upon the omission or
     alleged omission to state therein a material fact required to be stated
     therein or necessary to make the statements therein not misleading;
     provided, however, that the Company will not be liable in any such case to
     the extent, and only to the extent, that any such loss, claim, damage or
     liability arises out of or is based upon an untrue statement or alleged
     untrue statement or omission or alleged omission made in such Registration
     Statement, preliminary prospectus, final prospectus or amendment  or
     supplement thereto in reliance upon, and in conformity with, written
     information furnished to the Company by the Distributing Investor, its
     counsel, affiliates or any underwriter, specifically for use in the
     preparation thereof or (ii) by such Investor's failure to deliver to the
     purchaser a copy of the most recent prospectus (including any amendments or
     supplements thereto.  This indemnity agreement will be in addition to any
     liability, which the Company may otherwise have.

          (b) To the maximum extent permitted by law, each Distributing Investor
     agrees that it will indemnify and hold harmless the Company, and each
     officer and director of the Company or person, if any, who controls the
     Company within the meaning of the Securities Act, against any losses,
     claims, damages or liabilities (which shall, for all purposes of this
     Agreement, include, but not be limited to, all reasonable costs of defense
     and investigation and all reasonable attorneys' fees and expenses) to which
     the Company or any such officer, director or controlling person may become
     subject under the Securities Act or otherwise, insofar as such losses,
     claims, damages or liabilities (or actions in respect thereof) arise out of
     or are based upon any untrue statement or alleged untrue statement of any
     material fact contained in any Registration Statement, or any related final
     prospectus or amendment or supplement thereto, or arise out of or are based
     upon the omission or the alleged omission to state therein a material fact
     required to be stated therein or necessary to make the statements therein
     not misleading, but in each case only to the extent that such untrue
     statement or alleged untrue statement or omission

                                       8
<PAGE>

     or alleged omission was made in such Registration Statement, final
     prospectus or amendment or supplement thereto in reliance upon, and in
     conformity with, written information furnished to the Company by such
     Distributing Investor, its counsel, affiliates or any underwriter,
     specifically for use in the preparation thereof. This indemnity agreement
     will be in addition to any liability, which the Distributing Investor may
     otherwise have. Notwithstanding anything to the contrary herein, the
     Distributing Investor shall be liable under this Section 6(b) for only that
     amount as does not exceed the net proceeds to such Distributing Investor as
     a result of the sale of Registrable Securities pursuant to the Registration
     Statement.

          (c) Promptly after receipt by an indemnified party under this Section
     6 of notice of the commencement of any action against such indemnified
     party, such indemnified party will, if a claim in respect thereof is to be
     made against the indemnifying party under this Section 6, notify the
     indemnifying party in writing of the commencement thereof; but the omission
     so to notify the indemnifying party will not relieve the indemnifying party
     from any liability which it may have to any indemnified party except to the
     extent the failure of the indemnified party to provide such written
     notification actually prejudices the ability of the indemnifying party to
     defend such action. In case any such action is brought against any
     indemnified party, and it notifies the indemnifying party of the
     commencement thereof, the indemnifying party will be entitled to
     participate in, and, to the extent that it may wish, jointly with any other
     indemnifying party similarly notified, assume the defense thereof, subject
     to the provisions herein stated and after notice from the indemnifying
     party to such indemnified party of its election so to assume the defense
     thereof, the indemnifying party will not be liable to such indemnified
     party under this Section 6 for any legal or other expenses subsequently
     incurred by such indemnified party in connection with the defense thereof
     other than reasonable costs of investigation, unless the indemnifying party
     shall not pursue the action to its final conclusion. The indemnified
     parties as a group shall have the right to employ one separate counsel in
     any such action and to participate in the defense thereof, but the fees and
     expenses of such counsel shall not be at the expense of the indemnifying
     party if the indemnifying party has assumed the defense of the action with
     counsel reasonably satisfactory to the indemnified party unless (i) the
     employment of such counsel has been specifically authorized in writing by
     the indemnifying party, or (ii) the named parties to any such action
     (including any impleaded parties) include both the indemnified party and
     the indemnifying party and the indemnified party shall have been advised by
     its counsel that there may be one or more legal defenses available to the
     indemnifying party different from or in conflict with any legal defenses
     which may be available to the indemnified party or any other indemnified
     party (in which case the indemnifying party shall not have the right to
     assume the defense of such action on behalf of such indemnified party, it
     being understood, however, that the indemnifying party shall, in connection
     with any one such action or separate but substantially similar or related
     actions in the same jurisdiction arising out of the same general
     allegations or circumstances, be liable only for the reasonable fees and
     expenses of one separate firm of attorneys for the indemnified party, which
     firm shall be designated in writing by the indemnified party). No
     settlement of any action against an indemnified party shall be made without
     the prior written consent of the indemnified party, which consent shall not

                                       9
<PAGE>

     be unreasonably withheld so long as such settlement includes a full release
     of claims against the indemnified party.

          All fees and expenses of the indemnified party (including reasonable
     costs of defense and investigation in a manner not inconsistent with this
     Section and all reasonable attorneys' fees and expenses) shall be paid to
     the indemnified party, as incurred, within ten (10) Trading Days of written
     notice thereof to the indemnifying party; provided, that the indemnifying
     party may require such indemnified party to undertake to reimburse all such
     fees and expenses to the extent it is finally judicially determined that
     such indemnified party is not entitled to indemnification hereunder.

          Section 7.  Contribution.  In order to provide for just and equitable
                      ------------
contribution under the Securities Act in any case in which (i) the indemnified
party makes a claim for indemnification pursuant to Section 6 hereof but is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of Section 6 hereof provide
for indemnification in such case, or (ii) contribution under the Securities Act
may be required on the part of any indemnified party, then the Company and the
applicable Distributing Investor shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (which shall, for
all purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all reasonable attorneys' fees and
expenses), in either such case (after contribution from others) on the basis of
relative fault as well as any other relevant equitable considerations.  The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company on the one hand or the applicable Distributing Investor on the other
hand, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.   The Company and
the Distributing Investor agree that it would not be just and equitable if
contribution pursuant to this Section 7 were determined by pro rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 7.  The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this Section 7
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.

          Notwithstanding any other provision of this Section 7, in no event
shall any (i) Investor be required to undertake liability to any person under
this Section 7 for any amounts in excess of the dollar amount of the proceeds
received by such Investor from the sale of such Investor's Registrable
Securities (after deducting any fees, discounts and commissions applicable
thereto) pursuant to any Registration Statement under which such Registrable
Securities are registered under the Securities Act and (ii) underwriter be
required to undertake liability to any person hereunder for any amounts in
excess of the aggregate discount, commission or other

                                       10
<PAGE>

compensation payable to such underwriter with respect to the Registrable
Securities underwritten by it and distributed pursuant to such Registration
Statement.

          Section 8.  Notices.  All notices, demands, requests, consents,
                      -------
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) hand delivered,
(ii) deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by facsimile, addressed as set forth in the
Purchase Agreement or to such other address as such party shall have specified
most recently by written notice.  Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the first business day following the date of sending
by reputable courier service, fully prepaid, addressed to such address, or (c)
upon actual receipt of such mailing, if mailed.  Either party hereto may from
time to time change its address or facsimile number for notices under this
Section 8 by giving at least ten (10) days' prior written notice of such changed
address or facsimile number to the other party hereto.

          Section 9.  Assignment.  This Agreement is binding upon and inures to
                      ----------
the benefit of the parties hereto and their respective heirs, successors and
permitted assigns. The rights granted the Investors under this Agreement may be
assigned to any purchaser of substantially all of the Registrable Securities (or
the rights thereto) from an Investor, as otherwise permitted by the Purchase
Agreement.

          Section 10.  Additional Covenants of the Company.  The Company agrees
                       -----------------------------------
that, for so long as it shall be required to maintain the effectiveness of the
Registration Statement, it shall file all reports and information required to be
filed by it with the Commission in a timely manner and take all such other
action so as to maintain such eligibility for the use of such form.

          Section 11.  Counterparts/Facsimile.  This Agreement may be executed
                       ----------------------
in two or more counterparts, each of which shall constitute an original, but all
of which, when together shall constitute but one and the same instrument, and
shall become effective when one or more counterparts have been signed by each
party hereto and delivered to the other parties.  In lieu of the original, a
facsimile transmission or copy of the original shall be as effective and
enforceable as the original.

          Section 12.  Remedies.  The remedies provided in this Agreement are
                       --------
cumulative and not exclusive of any remedies provided by law.  If any term,
provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction to be invalid, illegal, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions set forth herein
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated, and the parties hereto shall use their best efforts to find and
employ an alternative

                                       11
<PAGE>

means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction.

          Section 13.  Conflicting Agreements.  The Company shall not enter into
                       ----------------------
any agreement with respect to its securities that is inconsistent with the
rights granted to the holders of Registrable Securities in this Agreement or
otherwise prevents the Company from complying with all of its obligations
hereunder.

          Section 14.  Headings.  The headings in this Agreement are for
                       --------
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.

          Section 15.  Governing Law.  This Agreement shall be governed by and
                       -------------
construed in accordance with the laws of the State of New York applicable to
contracts made in New York by persons domiciled in New York City and without
regard to its principles of conflicts of laws.  The Company and each of the
Investors agree to submit themselves to the in personam jurisdiction of the
state and federal courts situated within the Southern District of the State of
New York with regard to any controversy arising out of or relating to this
Agreement. The non-prevailing party to any dispute hereunder shall pay the
expenses of the prevailing party, including reasonable attorneys' fees, in
connection with any such dispute.

            [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]

                                       12
<PAGE>

               [SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]

IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights
Agreement to be duly executed, on this __ day of June, 2001.

                              DATA RACE, INC.

                              By:______________________________________
                                  Michael McDonnell, President & CEO

                              INVESTORS:

                              ALPHA CAPITAL AG

                              By:_____________________________________
                                  Konrad Ackermann, Authorized Signatory

                              STONESTREET L.P.

                              By:______________________________________
                                   Michael Finkelstein, Authorized Signatory

                                       13

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