Document:

EXHIBIT 10.3

                          SECURITIES PURCHASE AGREEMENT

      This SECURITIES  PURCHASE AGREEMENT  (including the Disclosure  Schedules,
this  "AGREEMENT"),  dated as of  January  3,  2005,  is made by and  among  SLS
International,  Inc.,  a  corporation  organized  under the laws of the State of
Delaware (the  "COMPANY"),  and each of the purchasers  (individually,  together
with its affiliated  transferees and/or affiliated assignees,  a "PURCHASER" and
collectively,  together  with their  affiliated  transferees  and/or  affiliated
assignees,  the  "PURCHASERS") set forth on the execution pages hereof (each, an
"EXECUTION PAGE" and collectively the "EXECUTION PAGES").

                                   BACKGROUND

      A. The  Company and the  Purchasers  are  executing  and  delivering  this
Agreement in reliance upon the exemption from securities  registration  afforded
by the provisions of Regulation D ("REGULATION D"), as promulgated by the United
States  Securities and Exchange  Commission (the "SEC") under the Securities Act
of 1933, as amended (the "SECURITIES ACT").

      B. Upon the terms and  conditions  stated in this  Agreement,  the Company
desires  to issue and sell to the  Purchasers,  and each  Purchaser  desires  to
purchase,  units (the  "UNITS"),  each Unit  consisting  of (i) one share of the
Company's Series C Convertible  Preferred Stock, par value $0.001 per share (the
"PREFERRED STOCK"), which Preferred Stock shall have the rights, preferences and
privileges set forth in the form of Certificate of Designation,  Preferences and
Rights attached hereto as Exhibit A (the "CERTIFICATE OF DESIGNATION") and shall
initially be convertible  into Four Hundred (400) shares of the Company's common
stock, par value $0.001 per share (the "COMMON STOCK"),  and (ii) a warrant,  in
the form attached  hereto as Exhibit B (the  "WARRANTS"),  to acquire  initially
Four Hundred (400) shares of Common Stock.  The shares of Common Stock  issuable
upon conversion of or otherwise  pursuant to the Preferred Stock are referred to
herein as the  "CONVERSION  SHARES" and the shares of Common Stock issuable upon
exercise of or otherwise  pursuant to the Warrants are referred to herein as the
"WARRANT  SHARES." The Preferred Stock, the Warrants,  the Conversion Shares and
the Warrant Shares are  collectively  referenced  herein as the "SECURITIES" and
each of them may individually be referred to herein as a "SECURITY."

      C.  Contemporaneously  with the execution and delivery of this  Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement,
in the form attached hereto as Exhibit C (the "REGISTRATION  RIGHTS AGREEMENT"),
pursuant to which the Company has agreed to provide certain  registration rights
under the Securities Act and the rules and regulations  promulgated  thereunder,
and  applicable  state  securities  laws.  This  Agreement,  the  Certificate of
Designation, the Warrants and the Registration Rights Agreement are collectively
referred to herein as the "TRANSACTION DOCUMENTS."

      NOW,  THEREFORE,  in  consideration  of the premises and mutual  covenants
contained  herein and other good and  valuable  consideration,  the  receipt and
sufficiency of which are hereby  acknowledged,  the Company and the  Purchasers,
intending to be legally bound, hereby agree as follows:

<PAGE>

1.    PURCHASE AND SALE OF SECURITIES.

      (a) Purchase and Sale of  Securities.  Subject to the terms and conditions
hereof,  at the Closing (as defined in Section  1(b) below),  the Company  shall
issue and sell to each Purchaser,  severally and not jointly, and each Purchaser
shall  purchase  from the Company,  such number of Units as is set forth on such
Purchaser's Execution Page, for a purchase price (the "PURCHASE PRICE") per Unit
equal to One Thousand Dollars ($1,000.00).

      (b) The Closing. Subject to the satisfaction (or waiver) of the conditions
set  forth  in  Sections  6  and  7  below,  the  closing  of  the  transactions
contemplated  hereby (the "CLOSING")  shall take place at the offices of Drinker
Biddle & Reath LLP at One Logan  Square,  18th & Cherry  Streets,  Philadelphia,
Pennsylvania 19103 at 10:00 a.m.,  Philadelphia,  Pennsylvania time, on the date
hereof,  or such  other  time or place as the  Company  and the  Purchasers  may
mutually agree (the "CLOSING DATE").

2.    PURCHASER'S REPRESENTATIONS AND WARRANTIES.

      Each Purchaser,  severally and not jointly, represents and warrants to the
Company as follows:

      (a) Purchase for Own  Account,  Etc.  Such  Purchaser  is  purchasing  the
Securities  for its own  account  for  investment  purposes  only and not with a
present view towards the public sale or distribution thereof, except pursuant to
sales that are exempt from the  registration  requirements of the Securities Act
and/or sales  registered  under the Securities  Act. Such Purchaser  understands
that it must bear the economic risk of this investment indefinitely,  unless the
Securities  are  registered  pursuant to the  Securities  Act and any applicable
state  securities  or blue sky laws or an exemption  from such  registration  is
available,  and that the Company has no present  intention  of  registering  the
resale of any such Securities  other than as  contemplated  by the  Registration
Rights Agreement. Notwithstanding anything in this Section 2(a) to the contrary,
by making the representations  herein, such Purchaser does not agree to hold the
Securities  for any minimum or other  specific  term and  reserves  the right to
dispose  of the  Securities  at any time in  accordance  with or  pursuant  to a
registration statement or an exemption from the registration  requirements under
the Securities Act.

      (b) Accredited Investor Status. Such Purchaser is an "Accredited Investor"
as that term is defined in Rule 501(a) of Regulation D.

      (c) Reliance on Exemptions. Such Purchaser understands that the Securities
are  being  offered  and  sold to  such  Purchaser  in  reliance  upon  specific
exemptions from the registration requirements of United States federal and state
securities  laws and that the Company is relying upon the truth and accuracy of,
and  such  Purchaser's   compliance  with,  the   representations,   warranties,
agreements,  acknowledgments  and  understandings  of such  Purchaser  set forth
herein  in  order to  determine  the  availability  of such  exemptions  and the
eligibility of such Purchaser to acquire the Securities.

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      (d)  Information.  Such  Purchaser  and its  counsel,  if any,  have  been
furnished all materials relating to the business, finances and operations of the
Company and  materials  relating to the offer and sale of the  Securities  which
have been specifically requested by such Purchaser or its counsel.  Neither such
inquiries nor any other investigation conducted by such Purchaser or its counsel
or any of its  representatives  shall modify,  amend or affect such  Purchaser's
right to rely on the  Company's  representations  and  warranties  contained  in
Section 3 below. Such Purchaser understands that such Purchaser's  investment in
the Securities involves a high degree of risk.

      (e) Governmental Review. Such Purchaser  understands that no United States
federal  or state  agency or any other  government  or  governmental  agency has
passed upon or made any recommendation or endorsement of the Securities.

      (f) Authorization; Enforcement. This Agreement and the Registration Rights
Agreement  have been duly and validly  authorized,  executed  and  delivered  on
behalf of such Purchaser and are valid and binding  agreements of such Purchaser
enforceable against it in accordance with their respective terms.

      Each  Purchaser's  representations  and warranties  made in this Section 2
(other than  Section  2(f)) are made solely for the  purpose of  permitting  the
Company  to make a  determination  that the  offer  and  sale of the  Securities
pursuant  to this  Agreement  comply  with  applicable  U.S.  federal  and state
securities laws and not for any other purpose.  Accordingly, the Company may not
rely on such  representations and warranties for any other purpose. No Purchaser
has made,  and does not  hereby  make,  any other  representation  or  warranty,
express  or  implied,  to  the  Company  in  connection  with  the  transactions
contemplated hereby.

3.    REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

      Except as set forth on a Disclosure Schedule executed and delivered by the
Company to each Purchaser (the "DISCLOSURE  SCHEDULE"),  the Company  represents
and warrants to each Purchaser as follows:

      (a) Organization and Qualification. The Company and each of its direct and
indirect subsidiaries  (collectively,  the "SUBSIDIARIES") is a corporation duly
organized and existing in good standing  under the laws of the  jurisdiction  in
which it is incorporated or organized,  and has the requisite corporate power to
own its  properties  and to carry on its  business as now being  conducted.  The
Company and each of its  Subsidiaries is duly qualified or licensed as a foreign
corporation  to do business  and is in good  standing in every  jurisdiction  in
which the nature of the  business  conducted by it makes such  qualification  or
license  necessary  and where the  failure so to qualify or be licensed or be in
good  standing  would have a  Material  Adverse  Effect.  For  purposes  of this
Agreement,  "MATERIAL ADVERSE EFFECT" means any effect which, individually or in
the  aggregate  with all  other  effects,  reasonably  would be  expected  to be
materially  adverse to (i) the  Securities,  (ii) the  ability of the Company to
perform its obligations under this Agreement or the other Transaction  Documents
or (iii) the business, operations, properties, prospects, financial condition or
results of operations of the Company and its Subsidiaries, taken as a whole.

                                     - 3 -
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      (b)  Authorization;   Enforcement.  (i)  The  Company  has  the  requisite
corporate  power and authority to enter into and perform its  obligations  under
this Agreement and the other Transaction Documents,  to issue and sell the Units
in  accordance  with the terms  hereof,  to issue  the  Conversion  Shares  upon
conversion  of the Preferred  Stock in accordance  with the terms thereof and to
issue the Warrant  Shares upon exercise of the Warrants in  accordance  with the
terms thereof;  (ii) the execution,  delivery and  performance of this Agreement
and the other Transaction Documents by the Company and the consummation by it of
the transactions contemplated hereby and thereby (including, without limitation,
the issuance of the Units and the issuance and  reservation  for issuance of the
Conversion Shares and Warrant Shares) have been duly authorized by the Company's
Board of Directors and no further consent or authorization  of the Company,  its
Board of Directors,  or any committee of the Board of Directors is required, and
(iii) this  Agreement  constitutes,  and,  upon  execution  and  delivery by the
Company of the other  Transaction  Documents,  such  Transaction  Documents will
constitute, valid and binding obligations of the Company enforceable against the
Company in  accordance  with their  terms.  Neither the  execution,  delivery or
performance by the Company of its obligations  under this Agreement or the other
Transaction   Documents,   nor  the  consummation  by  it  of  the  transactions
contemplated hereby or thereby (including,  without limitation,  the issuance of
the Units or the issuance or reservation  for issuance of the Conversion  Shares
or Warrant  Shares)  requires  any  consent or  authorization  of the  Company's
stockholders.

      (c)  Capitalization.  The  capitalization  of the  Company  as of the date
hereof,  including the authorized capital stock, the number of shares issued and
outstanding, the number of shares issuable and reserved for issuance pursuant to
the Company's stock option plans, the number of shares issuable and reserved for
issuance  pursuant  to  securities  (other  than  the  Preferred  Stock  and the
Warrants)  exercisable or exchangeable  for, or convertible  into, any shares of
capital  stock  and the  number  of  shares to be  reserved  for  issuance  upon
conversion of the  Preferred  Stock and exercise of the Warrants is set forth in
Section 3(c)(i) of the Disclosure  Schedule.  All of such outstanding  shares of
capital stock have been,  or upon  issuance in accordance  with the terms of any
such  exercisable,  exchangeable  or  convertible  securities  will be,  validly
issued, fully paid and non-assessable. No shares of capital stock of the Company
(including,  without  limitation,  the Conversion Shares and the Warrant Shares)
are subject to preemptive rights or any other similar rights of the stockholders
of the Company or any liens or  encumbrances.  Except for the  Securities and as
set forth in  Section  3(c)(ii)  of the  Disclosure  Schedule,  (i) there are no
outstanding  options,   warrants,  scrip,  rights  to  subscribe  to,  calls  or
commitments  of any  character  whatsoever  relating to, or securities or rights
convertible into or exercisable or exchangeable for, any shares of capital stock
of  the  Company  or  any  of  its  Subsidiaries,  or  contracts,   commitments,
understandings  or arrangements by which the Company or any of its  Subsidiaries
is or may  become  bound to issue  additional  shares  of  capital  stock of the
Company  or any of its  Subsidiaries,  nor are any  such  issuances,  contracts,
commitments,  understandings  or  arrangements  contemplated,  (ii) there are no
contracts,  commitments,  understandings or arrangements under which the Company
or any of its  Subsidiaries  is  obligated to register the sale of any of its or
their  securities  under the  Securities  Act  (except the  Registration  Rights
Agreement);  (iii) there are no  outstanding  securities or  instruments  of the
Company or any of its  Subsidiaries  which  contain  any  redemption  or similar
provisions,  and  there  are  no  contracts,   commitments,   understandings  or
arrangements  by which the Company or any of its  Subsidiaries  is or may become
bound to redeem or  otherwise  acquire any security of the Company or any of its
Subsidiaries;  and (iv) the Company does not have any  shareholder  rights plan,
"poison  pill" or other  anti-takeover  plans or similar  arrangements.  Section
3(c)(iii)  of the  Disclosure  Schedule  sets  forth  all of the  securities  or
instruments  issued  by the  Company  or any of its  Subsidiaries  that  contain
anti-dilution or similar provisions,  and, except as and to the extent set forth
thereon,  the  sale  and  issuance  of  the  Securities  will  not  trigger  any
anti-dilution adjustments to any such securities or instruments. The Company has
furnished to each Purchaser true and correct copies of the Company's Certificate
of   Incorporation   as  in  effect  on  the  date   hereof   ("CERTIFICATE   OF
INCORPORATION"),  the  Company's  Bylaws as in effect  on the date  hereof  (the
"BYLAWS"),  and  all  other  instruments  and  agreements  governing  securities
convertible  into or  exercisable  or  exchangeable  for  capital  stock  of the
Company,  all of which  instruments  and  agreements  are set  forth in  Section
3(c)(iv) of the Disclosure Schedule.  The Company or one of its Subsidiaries has
the  unrestricted  right  to  vote,  and  (subject  to  limitations  imposed  by
applicable  law)  to  receive   dividends  and  distributions  on,  all  capital
securities of its  Subsidiaries as owned by the Company or any such  Subsidiary.
The "Convertible Preferred Stock" reflected on the capitalization table attached
to Section 3(c)(i)of the Disclosure Schedule was issued at $2.50 per share prior
to the filing of the  certificate  of  designation  with respect  thereto.  Such
certificate  of  designation  has been  filed  prior to the  Closing  under this
Agreement.  Notwithstanding  any of the  foregoing,  the Company  represents and
warrants that the  Convertible  Preferred Stock has no rights,  preferences,  or
other  terms  other than  those set forth in the  certificate  designation  with
respect thereto as heretofore delivered to the Purchasers.

                                     - 4 -
<PAGE>

      (d) Issuance of Securities.  The Units (and the securities  comprising the
Units) are duly  authorized  and, upon issuance in accordance  with the terms of
this Agreement,  (i) will be validly issued,  fully paid and  non-assessable and
free from all taxes, liens, claims and encumbrances, (ii) will not be subject to
preemptive  rights,   rights  of  first  refusal  or  other  similar  rights  of
stockholders  of the  Company  or any other  person  and (iii)  will not  impose
personal  liability on the holder  thereof.  The  Conversion  Shares and Warrant
Shares are duly  authorized and reserved for issuance,  and, upon  conversion of
the Preferred  Stock and exercise of the Warrants in  accordance  with the terms
thereof,  (x) will be validly issued,  fully paid and  non-assessable,  and free
from all  taxes,  liens,  claims  and  encumbrances,  (y) will not be subject to
preemptive  rights,   rights  of  first  refusal  or  other  similar  rights  of
stockholders of the Company or any other person and (z) will not impose personal
liability upon the holder thereof.

      (e) No Conflicts;  Consents.  The execution,  delivery and  performance of
this  Agreement  and the other  Transaction  Documents  by the  Company  and the
consummation by the Company of the transactions  contemplated hereby and thereby
(including,  without limitation,  the issuance of the Units and the issuance and
reservation  for issuance of the Conversion  Shares and Warrant Shares) will not
(i) result in a violation of the Certificate of  Incorporation  or Bylaws,  (ii)
conflict with, or constitute a 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  (including,  without limitation,  the triggering of any
anti-dilution  provisions),  acceleration  or  cancellation  of, any  agreement,
indenture or  instrument  to which the Company or any of its  Subsidiaries  is a
party,  or (iii)  result in a violation  of any law,  rule,  regulation,  order,
judgment or decree  (including  United States federal and state securities laws,
rules  and  regulations  and  rules  and  regulations  of  any   self-regulatory
organizations  to which  either  the  Company  or its  securities  are  subject)
applicable to the Company or any of its Subsidiaries or by which any property or
asset of the Company or any of its  Subsidiaries  is bound or affected  (except,
with  respect  to  clauses  (ii)  and  (iii),  for  such  conflicts,   defaults,
terminations, amendments, accelerations, cancellations and violations that would
not, individually or in the aggregate,  have a Material Adverse Effect).  Except
(w) as may  be  required  under  the  Securities  Act  in  connection  with  the
performance  of  the  Company's   obligations  under  the  Registration   Rights
Agreement,  (x) for the filing of a Form D with the SEC,  (y) as may be required
for compliance  with applicable  state  securities or "blue sky" laws, or (z) as
otherwise set forth in Section 3(e) of the Disclosure  Schedule,  the Company is
not required to obtain any consent, approval, authorization or order of, or make
any  filing  or  registration  with,  any  court or  governmental  agency or any
regulatory or  self-regulatory  agency or other third party (including,  without
limitation,  pursuant  to any  Material  Contract  (as  defined in Section  3(g)
below)) in order for it to execute,  deliver or perform  any of its  obligations
under this Agreement or any of the other Transaction Documents.

                                     - 5 -
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      (f)  Compliance.  The Company is not in  violation of its  Certificate  of
Incorporation,  Bylaws or other organizational documents and no Subsidiary is in
violation of any of its organizational documents. Neither the Company nor any of
its  Subsidiaries  is in default (and no event has occurred  that with notice or
lapse  of time or both  would  put the  Company  or any of its  Subsidiaries  in
default)  under,  nor has there occurred any event giving others (with notice or
lapse of time or both) any rights of  termination,  amendment,  acceleration  or
cancellation of, any agreement,  indenture or instrument to which the Company or
any of its Subsidiaries is a party (including,  without limitation, the Material
Contracts),  except for actual or possible  violations,  defaults or rights that
would not, individually or in the aggregate, have a Material Adverse Effect. The
businesses  of the  Company  and its  Subsidiaries  are not being  conducted  in
violation of any law, ordinance or regulation of any governmental entity, except
for violations the sanctions for which either  individually  or in the aggregate
have not had and would not have a Material Adverse Effect.  Neither the Company,
nor any of its Subsidiaries, nor any director, officer, agent, employee or other
person acting on behalf of the Company or any  Subsidiary  has, in the course of
his  actions  for,  or on behalf of, the  Company  or any  Subsidiary,  used any
corporate  funds for any unlawful  contribution,  gift,  entertainment  or other
unlawful  expenses relating to political  activity,  made any direct or indirect
unlawful payment to any foreign or domestic government official or employee from
corporate  funds,  violated  or is in  violation  of any  provision  of the U.S.
Foreign  Corrupt  Practices  Act of 1977,  or made any  bribe,  rebate,  payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic
government  official or employee.  The Company and its Subsidiaries  possess all
certificates,  authorizations  and permits  issued by the  appropriate  federal,
state,  provincial or foreign  regulatory  authorities  that are material to the
conduct of its business, and neither the Company nor any of its Subsidiaries has
received any notice of proceeding  relating to the revocation or modification of
any such certificate, authorization or permit.

      (g) SEC  Documents,  Financial  Statements.  Since  August 15,  2000,  the
Company has timely  filed  (within  applicable  extension  periods) all reports,
schedules, forms, statements and other documents required to be filed by it with
the SEC pursuant to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "EXCHANGE  ACT") (all of the foregoing  filed prior to the
date hereof and all  exhibits  included  therein and  financial  statements  and
schedules  thereto and documents  incorporated  by reference  therein,  the "SEC
Documents").  The Company has made available to each Purchaser true and complete
copies of the SEC Documents that such  Purchaser has  requested,  and all of the
SEC Documents are otherwise  available at  www.sec.gov.  As of their  respective
dates, the SEC Documents complied in all material respects with the requirements
of the Exchange Act or the Securities Act, as the case may be, and the rules and
regulations of the SEC promulgated  thereunder  applicable to the SEC Documents,
and  none of the SEC  Documents,  at the  time  they  were  filed  with the SEC,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated  therein or necessary in order to make the statements
therein,  in  light  of the  circumstances  under  which  they  were  made,  not
misleading.  None of the  statements  made in any such SEC  Documents is, or has
been,  required to be amended or updated under  applicable  law (except for such
statements as have been amended or updated in  subsequent  filings made prior to
the date hereof). As of their respective dates, the financial  statements of the
Company  included  in the SEC  Documents  complied  as to  form in all  material
respects with  applicable  accounting  requirements  and the published rules and
regulations  of  the  SEC  applicable  with  respect  thereto.   Such  financial
statements  have  been  prepared  in  accordance  with U.S.  generally  accepted
accounting  principles  ("GAAP"),   consistently  applied,  during  the  periods
involved (except as may be otherwise  indicated in such financial  statements or
the notes thereto or, in the case of unaudited interim statements, to the extent
they may not include  footnotes or may be condensed or summary  statements)  and
fairly present in all material respects the consolidated  financial  position of
the Company and its  consolidated  Subsidiaries  as of the dates thereof and the
consolidated  results of their  operations  and cash flows for the periods  then
ended  (subject,  in the case of  unaudited  statements,  to normal,  immaterial
year-end audit adjustments).  Except as set forth in the financial statements of
the  Company  included  in the Select SEC  Documents  (as  defined  below) or as
otherwise disclosed in the Select SEC Documents, the Company has no liabilities,
contingent or  otherwise,  other than (i)  liabilities  incurred in the ordinary
course of business subsequent to the date of such financial  statements and (ii)
obligations  under contracts and commitments  incurred in the ordinary course of
business  and  not  required  under  GAAP  to be  reflected  in  such  financial
statements,  which  liabilities and  obligations  referred to in clauses (i) and
(ii),  individually  or in the  aggregate,  are not  material  to the  financial
condition or operating  results of the  Company.  To the extent  required by the
rules and  regulations of the SEC applicable  thereto,  the Select SEC Documents
contain a complete and accurate  list of all  material  undischarged  written or
oral contracts,  agreements, leases or other instruments to which the Company or
any  Subsidiary is a party or by which the Company or any Subsidiary is bound or
to which any of the  properties  or assets of the Company or any  Subsidiary  is
subject  (each,  a "MATERIAL  CONTRACT").  Except as set forth in the Select SEC
Documents,  none of the Company,  its  Subsidiaries or, to the best knowledge of
the Company,  any of the other parties  thereto is in breach or violation of any
Material  Contract,  which  breach or  violation  would have a Material  Adverse
Effect.  For  purposes  of this  Agreement,  "SELECT  SEC  DOCUMENTS"  means the
Company's  (A) Annual  Report on Form 10-KSB for the fiscal year ended  December
31, 2003 (the "2003 ANNUAL  REPORT"),  (B) Quarterly  Reports on Form 10-QSB for
the fiscal  quarters ended March 31, 2004, June 30, 2004 and September 30, 2004,
and (C) Current Reports on Form 8-K filed since September 30, 2004.

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      (h) Internal Accounting Controls. The Company and each of its Subsidiaries
maintains  a system  of  internal  accounting  controls  sufficient  to  provide
reasonable  assurance  that (i)  transactions  are executed in  accordance  with
management's general or specific authorizations,  (ii) transactions are recorded
as necessary to permit  preparation of financial  statements in conformity  with
GAAP and to maintain asset  accountability,  (iii) access to assets is permitted
only in accordance with management's general or specific authorization, and (iv)
the recorded  accountability  for assets is compared with the existing assets at
reasonable  intervals  and  appropriate  action  is taken  with  respect  to any
differences.  The Company has established disclosure controls and procedures (as
defined in Exchange  Act Rules  13a-14 and 15d-14) for the Company and  designed
such  disclosures  controls and  procedures to ensure that material  information
relating  to the  Company,  including  its  Subsidiaries,  is made  known to the
certifying  officers by others within those  entities,  particularly  during the
period in which the Company's  Annual Report on Form 10-KSB or Quarterly  Report
on Form 10-QSB, as the case may be, is being prepared.  The Company's certifying
officers  have  evaluated  the  effectiveness  of  the  Company's  controls  and
procedures  as of the filing  date of the 2003 Annual  Report and the  Company's
most  recently  filed  Quarterly  Report on Form  10-QSB  (each  such  date,  an
"EVALUATION DATE"). The Company presented in the 2003 Annual Report and its most
recently filed Quarterly Report on Form 10-QSB the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures based
on their evaluations as of the respective  Evaluation Date. Since the Evaluation
Date for the 2003 Annual Report,  there have been no significant  changes in the
Company's  internal  controls  (as  such  term  is  defined  in Item  307(b)  of
Regulation S-K under the Exchange Act) or, to the Company's knowledge,  in other
factors that could significantly affect the Company's internal controls.

                                     - 7 -
<PAGE>

      (i)  Absence  of  Certain  Changes.  Except as set forth in the Select SEC
Documents,  since December 31, 2003,  there has been no material  adverse change
and no material  adverse  development in the business,  properties,  operations,
prospects,  financial  condition or results of operations of the Company and its
Subsidiaries,  taken as a whole.  The Company has not taken any steps,  and does
not  currently  expect to take any steps,  to seek  protection  pursuant  to any
bankruptcy or receivership  law, nor does the Company or any of its Subsidiaries
have any  knowledge or reason to believe that its  creditors  intend to initiate
involuntary  bankruptcy  proceedings  with  respect to the Company or any of its
Subsidiaries.

      (j) Transactions  With  Affiliates.  Except as set forth in the Select SEC
Documents,  none of the officers,  directors, or employees of the Company or any
of its  Subsidiaries is presently a party to any transaction with the Company or
any of its Subsidiaries (other than for ordinary course services solely in their
capacity as officers, directors or employees), including any contract, agreement
or  other  arrangement  providing  for  the  furnishing  of  services  to or by,
providing  for rental of real or  personal  property  to or from,  or  otherwise
requiring  payments  to or from any such  officer,  director  or employee or any
corporation,  partnership,  trust or other  entity  in which  any such  officer,
director, or employee has an ownership interest of five percent or more or is an
officer, director, trustee or partner.

      (k)  Absence  of  Litigation.  Except  as  disclosed  in  the  Select  SEC
Documents, there is no action, suit, proceeding, inquiry or investigation before
or by any court, public board, government agency,  self-regulatory  organization
or body (including, without limitation, the SEC) pending or, to the knowledge of
the Company or any of its  Subsidiaries,  threatened  against or  affecting  the
Company,  any of its  Subsidiaries,  or any of  their  respective  directors  or
officers in their capacities as such. To the knowledge of the Company, there are
no facts  which,  if known by a potential  claimant or  governmental  authority,
could give rise to a claim or proceeding  which,  if asserted or conducted  with
results unfavorable to the Company or any of its Subsidiaries,  could reasonably
be expected to have a Material Adverse Effect.

                                     - 8 -
<PAGE>

      (l) Intellectual  Property.  Each of the Company and its Subsidiaries owns
or is duly  licensed  (and,  in such event,  has the  unfettered  right to grant
sublicenses)  to use all patents,  patent  applications,  trademarks,  trademark
applications,  trade names, service marks,  copyrights,  copyright applications,
licenses, inventions, discoveries, processes, scientific, technical, engineering
and marketing data, object and source codes (if any),  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 presently  conducted.  Section 3(l) of the Disclosure  Schedule sets
forth a list of all Intangibles owned and/or used by the Company in its business
that are registered,  subject to an application for  registration or material to
the conduct of the Company's business as presently  conducted.  To the knowledge
of the Company and its  Subsidiaries,  neither the Company nor any Subsidiary of
the Company  infringes or is in conflict with any right of any other person with
respect to any third  party  Intangibles.  Neither  the  Company  nor any of its
Subsidiaries  has  received  written  notice  of any  pending  conflict  with or
infringement upon such third party  Intangibles.  Neither the Company nor any of
its  Subsidiaries  has  entered  into  any  consent  agreement,  indemnification
agreement,  forbearance  to sue or  settlement  agreement  with  respect  to the
validity of the Company's or its Subsidiaries'  ownership of or right to use its
Intangibles  and, to the knowledge of the Company,  there is no reasonable basis
for any such claim to be  successful.  The  Intangibles  are valid  and,  to the
knowledge of the Company,  enforceable and no registration  relating thereto has
lapsed,  expired or been abandoned or canceled or is the subject of cancellation
or other adversarial proceedings,  and all applications therefor are pending and
in good  standing.  The  Company  and its  Subsidiaries  have  complied,  in all
material respects, with their respective contractual obligations relating to the
protection of the Intangibles used pursuant to licenses. To the knowledge of the
Company,  no person is infringing on or violating the Intangibles  owned or used
by the Company or its Subsidiaries.

      (m) Title. The Company and its Subsidiaries have good and marketable title
in fee  simple  to all real  property  and good  and  merchantable  title to all
personal  property,  in each case, that is owned by them and that is material to
the business of the Company and its Subsidiaries.  All such property is owned by
the Company and its Subsidiaries  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 its  Subsidiaries.  Any real property and facilities
held under  lease by the  Company  and its  Subsidiaries  are held by them under
valid,  subsisting  and  enforceable  leases  with  such  exceptions  as are not
material and do not  materially  interfere  with the use made and proposed to be
made of such property and buildings by the Company and its Subsidiaries.

      (n) Tax  Status.  Except as set forth in the  Select  SEC  Documents,  the
Company  and  each of its  Subsidiaries  has  made or filed  all  foreign,  U.S.
federal, state,  provincial and local income and all other tax returns,  reports
and declarations required by any jurisdiction to which it is subject (unless and
only to the extent that the Company and each of its  Subsidiaries  has set aside
on its books  provisions  reasonably  adequate for the payment of all unpaid and
unreported taxes) and has paid all taxes and other governmental  assessments and
charges  that are  material  in amount,  shown or  determined  to be due on such
returns,  reports and  declarations,  except those being contested in good faith
and has set aside on its books provisions reasonably adequate for the payment of
all taxes for periods  subsequent to the periods to which such returns,  reports
or declarations  apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any  jurisdiction,  and the officers of the
Company  know of no basis for any such claim.  The  Company  has not  executed a
waiver with respect to any statute of limitations  relating to the assessment or
collection of any foreign,  federal, state, provincial or local tax. None of the
Company's tax returns is presently being audited by any taxing authority.

                                     - 9 -
<PAGE>

      (o) Key  Employees.  Each of the Company's  directors and officers and any
Key Employee (as defined below) is currently serving the Company in the capacity
disclosed  in the Select SEC  Documents.  No Key Employee is in violation of any
material  term  of  any  employment  contract,  confidentiality,  disclosure  or
proprietary  information  agreement,  non-competition  agreement,  or any  other
contract or agreement or any restrictive covenant,  and the continued employment
of each Key Employee does not subject the Company or any of its  Subsidiaries to
any material  liability  with respect to any of the  foregoing  matters.  No Key
Employee  has,  to the  knowledge  of the  Company  and  its  Subsidiaries,  any
intention to terminate or limit his employment with, or services to, the Company
or  any of  its  Subsidiaries,  nor is any  such  Key  Employee  subject  to any
constraints which would cause such employee to be unable to devote his full time
and attention to such  employment or services.  For purposes of this  Agreement,
"KEY  EMPLOYEE"  means the  persons  listed in  Section  3(o) of the  Disclosure
Schedule and any  individual  who assumes or performs any of the duties of a Key
Employee.

      (p) Employee Relations. Neither the Company nor any of its Subsidiaries is
involved in any  material  union labor  dispute  nor,  to the  knowledge  of the
Company or any of its Subsidiaries,  is any such dispute threatened. The Company
and its Subsidiaries believe that their relations with their employees are good.
No  executive  officer  (as defined in Rule  501(f) of the  Securities  Act) has
notified the Company that such officer intends to leave the Company or otherwise
terminate  such  officer's  employment  with the  Company.  The  Company and its
Subsidiaries are in compliance with all federal,  state,  local and foreign laws
and  regulations  respecting  employment  and  employment  practices,  terms and
conditions  of  employment  and wages and hours,  except where  failure to be in
compliance  would not,  either  individually  or in the  aggregate,  result in a
Material Adverse Effect.

      (q) Insurance. The Company and each of its Subsidiaries has in force fire,
casualty,   product  liability  and  other  insurance  policies,  with  extended
coverage,  sufficient  in  amount  to allow it to  replace  any of its  material
properties  or assets which might be damaged or destroyed or sufficient to cover
liabilities to which the Company may reasonably  become subject,  and such types
and amounts of other insurance with respect to its business and  properties,  on
both a per  occurrence and an aggregate  basis,  as are  customarily  carried by
persons  engaged in the same or similar  business as the Company.  No default or
event has occurred that could give rise to a default under any such policy.

      (r) Environmental Matters.  There is no environmental  litigation or other
environmental  proceeding  pending or, to the knowledge of the Company or any of
its Subsidiaries,  threatened by any governmental regulatory authority or others
with respect to the current or any former  business of the Company or any of its
Subsidiaries  or any  partnership  or  joint  venture  currently  or at any time
affiliated with the Company or any of its Subsidiaries. No state of facts exists
as to  environmental  matters or Hazardous  Substances  (as defined  below) that
involves the  reasonable  likelihood of a material  capital  expenditure  by the
Company or any of its  Subsidiaries  that may otherwise have a Material  Adverse
Effect.  No Hazardous  Substances  have been treated,  stored or disposed of, or
otherwise  deposited,  in or on the properties owned or leased by the Company or
any of its  Subsidiaries or by any partnership or joint venture  currently or at
any time affiliated with the Company or any of its  Subsidiaries in violation of
any applicable  environmental laws. The environmental compliance programs of the
Company  and  each  of  its  Subsidiaries   comply  in  all  respects  with  all
environmental  laws,  whether  foreign,  federal,  state,  provincial  or local,
currently in effect.  For  purposes of this  Agreement,  "HAZARDOUS  SUBSTANCES"
means any  substance,  waste,  contaminant,  pollutant or material that has been
determined  by any  governmental  authority  to be  capable  of posing a risk of
injury to health, safety, property or the environment.

                                     - 10 -
<PAGE>

      (s) Solvency.  Based on the  financial  condition of the Company as of the
Closing Date,  (i) the Company's  fair saleable  value of its assets exceeds the
amount  that  will be  required  to be paid on or in  respect  of the  Company's
existing debts and other liabilities (including known contingent liabilities) as
they mature;  (ii) the Company's  assets do not  constitute  unreasonably  small
capital to carry on its  business for the current  fiscal year as now  conducted
and as proposed to be conducted  including its capital needs taking into account
the particular  capital  requirements of the business  conducted by the Company,
and projected capital requirements and capital  availability  thereof; and (iii)
the current  cash flow of the  Company,  together  with the proceeds the Company
would receive, were it to liquidate all of its assets, after taking into account
all anticipated  uses of the cash,  would be sufficient to pay all amounts on or
in respect of its debt when such  amounts are  required to be paid.  The Company
does not  intend to incur  debts  beyond  its  ability to pay such debts as they
mature  (taking  into account the timing and amounts of cash to be payable on or
in respect of its debt).

      (t)  Listing.  The Common  Stock is quoted on the Nasdaq  Over-the-Counter
Bulletin  Board  (the  "OTC").  The  Conversion  Shares and  Warrant  Shares are
eligible for quotation on the OTC (subject to official notice of issuance).

      (u) Form SB-2 or S-2 Eligibility.  The Company is eligible to register the
resale of its Common  Stock on a  registration  statement on either Form SB-2 or
Form S-2 under the  Securities  Act.  There exist no fact or  circumstance  that
would prohibit or delay the preparation  and filing of a registration  statement
on either Form SB-2 or Form S-2 with respect to the  Registrable  Securities (as
defined in the  Registration  Rights  Agreement).  The  Company  has no basis to
believe that its past or present independent public auditors will withhold their
consent to the inclusion,  or incorporation by reference, of their audit opinion
concerning  the  Company's  financial  statements  which  are  included  in  the
Registration  Statement required to be filed pursuant to the Registration Rights
Agreement.

      (v) Anti-Takeover Provisions.  The Company and its board of directors have
taken all necessary action, if any, in order to render  inapplicable any control
share acquisition, business combination, poison pill (including any distribution
under a rights  agreement) or other similar  anti-takeover  provision  under its
Certificate of Incorporation or the laws of the state of its incorporation which
is or could  become  applicable  to any of the  Purchasers  as a  result  of the
transactions contemplated by this Agreement,  including, without limitation, the
Company's  issuance of the Securities and any and all  Purchaser's  ownership of
the Securities.

                                     - 11 -
<PAGE>

      (w) Acknowledgment  Regarding the Purchasers'  Purchase of the Securities.
The Company  acknowledges and agrees that each Purchaser is acting solely in the
capacity of arm's length  purchaser with respect to this Agreement and the other
Transaction Documents and the transactions  contemplated hereby and thereby, and
that no  Purchaser  is (i) an officer or  director of the  Company,  (ii) to the
Company's knowledge, an "affiliate" of the Company (as defined in Rule 144 under
the Securities Act (including any successor  rule,  "RULE 144")) or (iii) to the
Company's  knowledge,  a "beneficial  owner" of more than 5% of the Common Stock
(as defined for purposes of Rule 13d-3 of the Exchange Act). The Company further
acknowledges  that no Purchaser is acting as a financial advisor or fiduciary of
the Company (or in any similar  capacity)  with respect to this Agreement or the
other  Transaction  Documents  and  the  transactions  contemplated  hereby  and
thereby,  and any advice given by any Purchaser or any of its representatives or
agents in connection with this Agreement or the other Transaction  Documents and
the transactions  contemplated  hereby and thereby is merely  incidental to such
Purchaser's  purchase of the Securities.  The Company further represents to each
Purchaser that the Company's decision to enter into this Agreement and the other
Transaction Documents has been based solely on the independent evaluation by the
Company and its representatives.

      (x) No General  Solicitation or Integrated  Offering.  Neither the Company
nor any distributor  participating  on the Company's  behalf in the transactions
contemplated  hereby (if any) nor any person acting for the Company, or any such
distributor,  has conducted any "general  solicitation" (as such term is defined
in Regulation  D) with respect to any of the  Securities  being offered  hereby.
Neither the Company nor any of its  affiliates,  nor any person acting on its or
their  behalf,  has  directly  or  indirectly  made any  offers  or sales of any
security or solicited any offers to buy any security  under  circumstances  that
would require  registration  of the  Securities  being offered  hereby under the
Securities  Act or cause this offering of  Securities to be integrated  with any
prior offering of securities of the Company for purposes of the Securities  Act,
which result of such integration would require registration under the Securities
Act, or any applicable stockholder approval provisions.

      (y) No  Brokers.  The  Company has taken no action that would give rise to
any claim by any  person for  brokerage  commissions,  finder's  fees or similar
payments  by any  Purchaser  relating  to  this  Agreement  or the  transactions
contemplated  hereby.  In connection with the transactions  contemplated by this
Agreement,  the Company has entered  into that  certain  Non-Exclusive  Finder's
Agreement,  dated as of November 30, 2004,  with the Shemano  Group,  Inc.  (the
"FINDER'S AGREEMENT"). The Company, and no Purchaser, is responsible for any and
all fees and compensation in connection with the Finder's Agreement.

      (z) Acknowledgment  Regarding Securities.  The number of Conversion Shares
issuable upon conversion of the Preferred Stock and the number of Warrant Shares
issuable  upon  exercise of the Warrants may increase in certain  circumstances.
The Company's directors and executive officers have studied and fully understand
the nature of the Securities being sold hereunder. The Company acknowledges that
its obligation to issue Conversion Shares upon conversion of the Preferred Stock
in accordance with the terms thereof and the Warrant Shares upon the exercise of
the Warrants in accordance with the terms thereof is absolute and unconditional,
regardless  of the  dilution  that  such  issuance  may  have  on the  ownership
interests of other stockholders and the availability of remedies provided for in
any of the  Transaction  Documents  relating  to a failure  or  refusal to issue
Conversion  Shares or Warrant  Shares.  Taking the foregoing  into account,  the
Company's Board of Directors has determined in its good-faith  business judgment
that the  issuance  of the Units  hereunder  and the  consummation  of the other
transactions  contemplated  hereby are in the best  interests of the Company and
its stockholders.

                                     - 12 -
<PAGE>

      (aa)  Disclosure.  All  information  relating to or concerning the Company
and/or any of its  Subsidiaries  set forth in this  Agreement or provided to the
Purchasers  pursuant to Section 2(d) hereof or otherwise in connection  with the
transactions  contemplated  hereby is true and correct in all material  respects
and the Company has not omitted to state any material fact necessary in order to
make the statements made herein or therein,  in light of the circumstances under
which they were made, not misleading.  No event or circumstance  has occurred or
exists  with  respect to the  Company or its  Subsidiaries  or their  respective
businesses, properties, prospects, operations or financial conditions, which has
not been publicly disclosed but, under applicable law, rule or regulation, would
be required to be disclosed by the Company in a registration  statement filed on
the date  hereof by the  Company  under the  Securities  Act with  respect  to a
primary issuance of the Company's securities.

4.    COVENANTS.

      (a)  Reasonable  Best  Efforts.  The  parties  shall use their  respective
reasonable  best efforts timely to satisfy each of the  conditions  described in
Sections 6 and 7 of this Agreement.

      (b) Form D; Blue Sky Laws.  The  Company  shall file with the SEC a Form D
with respect to the Securities as required under Regulation D and provide a copy
thereof to each Purchaser  promptly after such filing.  The Company shall, on or
before the  Closing  Date,  take such  action as the  Company  shall  reasonably
determine  is  necessary to qualify the  Securities  for sale to each  Purchaser
pursuant to this Agreement under applicable securities or "blue sky" laws of the
states of the United  States or obtain  exemption  therefrom,  and shall provide
evidence  of any  such  action  so taken  to each  Purchaser  on or prior to the
Closing Date. Within two business days after the Closing Date, the Company shall
file a Form 8-K with the SEC  concerning  this  Agreement  and the  transactions
contemplated hereby, which Form 8-K shall attach this Agreement and its Exhibits
as exhibits to such Form 8-K (the "8-K FILING").  From and after the 8-K Filing,
the Company hereby  acknowledges that no Purchaser shall be in possession of any
material  nonpublic   information   received  from  the  Company,   any  of  its
Subsidiaries or any of its respective officers, directors,  employees or agents,
that is not disclosed in the 8-K Filing.  The Company shall not, and shall cause
each of its  Subsidiaries  and  its  and  each  of  their  respective  officers,
directors,  employees and agents not to, provide any Purchaser with any material
nonpublic  information regarding the Company or any of its Subsidiaries from and
after the 8-K Filing  without the  express  written  consent of such  Purchaser;
provided,  however,  that if a Purchaser exercises its rights under Section 4(m)
hereof,  it shall be deemed to have given such express written  consent.  In the
event  of a  breach  of  the  foregoing  covenant  by  the  Company,  any of its
Subsidiaries or any of its or their respective  officers,  directors,  employees
and  agents,  in addition to any other  remedy  provided  herein or in the other
Transaction  Documents,  each  Purchaser  shall  have the right to make a public
disclosure,  in the form of a press release,  public advertisement or otherwise,
of such  material  nonpublic  information  without  the  prior  approval  by the
Company, its Subsidiaries or any of its or their respective officers, directors,
employees or agents.  No Purchaser shall have any liability to the Company,  its
Subsidiaries or any of its or their respective officers,  directors,  employees,
shareholders or agents for any such disclosure.  The Company shall issue a press
release announcing the transactions  contemplated by this Agreement,  subject to
the Purchasers' reasonable approval, by 9:00 p.m. Eastern time on the date after
the Closing.  Subject to the  foregoing,  neither the Company nor any  Purchaser
shall issue any press  releases or any other public  statements  with respect to
the transactions contemplated hereby; provided,  however, that the Company shall
be  entitled,  without the prior  approval of any  Purchaser,  to make any press
release or other  public  disclosure  with respect to such  transactions  (i) in
substantial  conformity with the 8-K Filing and contemporaneously  therewith and
(ii) as is required by applicable law and regulations (provided that in the case
of clause (i) each  Purchaser  shall be consulted  by the Company in  connection
with any such press release or other public disclosure prior to its release).

                                     - 13 -
<PAGE>

      (c) Reporting Status. So long as at least three thousand seven hundred and
fifty (3,750) shares of Series C Preferred Stock are outstanding and held by the
Purchasers  (together  with their  affiliates),  the Company  shall  timely file
(within applicable  extension periods) all reports required to be filed with the
SEC pursuant to the Exchange Act, and the Company shall not terminate its status
as an  issuer  required  to file  reports  under  the  Exchange  Act even if the
Exchange  Act  or  the  rules  and  regulations  thereunder  would  permit  such
termination.  In addition,  the Company shall take all actions necessary to meet
the "registrant eligibility"  requirements set forth in the general instructions
to either Form SB-2 or Form S-2 or any successor form thereto, to continue to be
eligible to register the resale of its Common Stock on a registration  statement
on either Form SB-2 or Form S-2 under the Securities Act.

      (d) Use of Proceeds.  The Company shall use the proceeds from the sale and
issuance of the Units for general corporate  purposes and working capital.  Such
proceeds  shall not be used to (i) pay  dividends;  (ii) pay for any increase in
executive  compensation,  loan  or  other  advance  to  any  officer,  employee,
shareholder,  director or other  affiliate of the  Company,  without the express
approval of the Board of  Directors  acting in  accordance  with past  practice;
(iii) purchase debt or equity securities of any entity (including  redeeming the
Company's own  securities),  except for (A) evidences of indebtedness  issued or
fully  guaranteed  by the United  States of America and having a maturity of not
more than one year from the date of  acquisition,  (B)  certificates of deposit,
notes,  acceptances and repurchase agreements having a maturity of not more than
one year from the date of  acquisition  issued by a bank organized in the United
States having capital,  surplus and undivided profits of at least  $500,000,000,
(C) the  highest-rated  commercial  paper having a maturity of not more than one
year from the date of acquisition,  and (D) "Money Market" fund shares, or money
market accounts fully insured by the Federal Deposit  Insurance  Corporation and
sponsored  by  banks  and  other  financial  institutions,   provided  that  the
investments consist principally of the types of investments described in clauses
(A), (B), or (C) above;  (iv) pay for any  perquisite to any officer,  employee,
shareholder,  director  or  other  affiliate  of the  Company;  or (v)  make any
investment not directly related to the current business of the Company.

      (e)  Financial  Information.  So long as at  least  three  thousand  seven
hundred and fifty (3,750) shares of Series C Preferred Stock are outstanding and
held by the Purchasers (together with their affiliates),  the Company shall send
(via  electronic  transmission  or  otherwise)  the  following  reports  to each
Purchaser:  (i) within  ten days  after the  filing  with the SEC, a copy of its
Annual Report on Form 10-KSB,  its Quarterly  Reports on Form 10-QSB,  its proxy
statements  and any Current  Reports on Form 8-K;  and (ii) within one day after
release,  copies  of all press  releases  issued  by the  Company  or any of its
Subsidiaries.

                                     - 14 -
<PAGE>

      (f)  Reservation  of Shares.  The Company  currently  has  authorized  and
reserved  for the purpose of issuance  sixteen  million  (16,000,000)  shares of
Common  Stock to provide  for the full  conversion  of the  Preferred  Stock and
issuance of the Conversion Shares in connection therewith,  the full exercise of
the Warrants and the issuance of the Warrant Shares in connection  therewith and
as otherwise  required by the Preferred Stock, the Warrants and the Registration
Rights Agreement (collectively,  the "ISSUANCE OBLIGATIONS").  In the event such
number of shares becomes insufficient to satisfy the Issuance  Obligations,  the
Company shall take all necessary action to authorize and reserve such additional
shares of Common Stock necessary to satisfy the Issuance Obligations.

      (g) Listing. So long as any of the Purchasers (or any of their affiliates)
beneficially owns any of the Securities, the Company shall maintain the trading,
listing or quotation,  as the case may be, of all Conversion  Shares and Warrant
Shares from time to time issuable upon  conversion of the Preferred and exercise
of the Warrants on each national securities exchange, automated quotation system
or electronic bulletin board on which shares of Common Stock are traded,  listed
or quoted.  The Company shall comply in all respects with the reporting,  filing
and other obligations  under the bylaws or rules of the National  Association of
Securities  Dealers,  Inc.  (the "NASD"),  such  exchanges,  or such  electronic
systems,  as applicable.  The Company shall  promptly  provide to each Purchaser
copies of any notices it receives  regarding  the continued  eligibility  of the
Common  Stock for trading,  listing  and/or  quotation,  as  applicable,  on any
securities  exchange or automated  quotation  system on which  securities of the
same class or series issued by the Company are then traded, listed or quoted, if
any.

      (h) Corporate Existence.  So long as at least three thousand seven hundred
and fifty (3,750) shares of Series C Preferred Stock are outstanding and held by
the Purchasers (together with their affiliates),  the Company shall maintain its
corporate existence, and in the event of a merger,  consolidation or sale of all
or substantially all of the Company's assets,  the Company shall ensure that the
surviving  or successor  entity in such  transaction  (i) assumes the  Company's
obligations  under this  Agreement and the other  Transaction  Documents and the
agreements  and  instruments  entered into in connection  herewith and therewith
regardless of whether or not the Company  would have had a sufficient  number of
shares of Common Stock  authorized and available for issuance in order to effect
the  conversion of all the Preferred  Stock and exercise in full of all Warrants
outstanding as of the date of such transaction and (ii) except in the event of a
merger,  consolidation of the Company into any other corporation, or the sale or
conveyance  of all or  substantially  all of the assets of the Company where the
consideration  consists solely of cash, is a  publicly-traded  corporation whose
common stock is listed for trading on the SmallCap Market,  the National Market,
the NYSE or the AMEX.

      (i) No  Integrated  Offerings.  The  Company  shall not make any offers or
sales of any  security  (other than the  Securities)  under  circumstances  that
requires or would require  registration of the Securities  being offered or sold
hereunder  under the  Securities Act or cause this offering of the Securities to
be integrated  with any other offering of securities by the Company for purposes
of  any  stockholder  approval  provision  applicable  to  the  Company  or  its
securities.

                                     - 15 -
<PAGE>

      (j) Legal  Compliance.  The Company  shall  conduct its  business  and the
business  of its  Subsidiaries  in  compliance  with  all  laws,  ordinances  or
regulations of governmental entities applicable to such businesses, except where
the failure to do so would not have a Material Adverse Effect.

      (k) Redemptions,  Dividends and Repayments of Indebtedness.  So long as at
least  three  thousand  seven  hundred  and  fifty  (3,750)  shares  of Series C
Preferred Stock are outstanding and held by the Purchasers  (together with their
affiliates), the Company shall not, without first obtaining the written approval
of the holders of a majority of the shares of Preferred  Stock then  outstanding
(which  approval  may be given or  withheld  by such  holders  in their sole and
absolute discretion),  repurchase, redeem or declare or pay any cash dividend or
distribution  on any shares of capital  stock of the  Company or repay or prepay
any indebtedness of the Company other than as expressly required pursuant to the
terms of such indebtedness as in effect on the date hereof.

      (l)  Information.  So long as at least three  thousand  seven  hundred and
fifty (3,750) shares of Series C Preferred Stock are outstanding and held by the
Purchasers  (together with their affiliates),  the Company shall furnish to each
such Purchaser:

            (i) concurrently  with the filing with the SEC of its annual reports
on Form 10-KSB,  a certificate  of the  President,  a Vice President or a senior
financial  officer of the Company stating that,  based upon such  examination or
investigation  and review of this  Agreement  as in the opinion of the signer is
necessary  to enable  the signer to express an  informed  opinion  with  respect
thereto,  neither the Company nor any of its  Subsidiaries is or has during such
period been in default in the  performance  or  observance  of any of the terms,
covenants or conditions  hereof,  or, if the Company or any of its  Subsidiaries
shall be or shall have been in default,  specifying all such  defaults,  and the
nature and period of  existence  thereof,  and what  action the  Company or such
Subsidiary has taken, is taking or proposes to take with respect thereto; and

            (ii) the  information  the Company  must deliver to any holder or to
any  prospective  transferee  of Securities in order to permit the sale or other
transfer of such Securities pursuant to Rule 144A of the SEC or any similar rule
then in effect.

The Company  shall keep at its  principal  executive  office a true copy of this
Agreement  (as at the time in effect),  and cause the same to be  available  for
inspection  at such  office  during  normal  business  hours  by any  holder  of
Securities or any  prospective  transferee of Securities  designated by a holder
thereof.

      (m) Inspection of Properties and Books. So long as at least three thousand
seven  hundred  and  fifty  (3,750)  shares  of  Series C  Preferred  Stock  are
outstanding and held by the Purchasers  (together with their  affiliates),  each
such  Purchaser  and  its   representatives   and  agents   (collectively,   the
"INSPECTORS")  shall have the right, at such Purchaser's  expense,  to visit and
inspect any of the properties of the Company and of its Subsidiaries, to examine
the books of account and records of the Company and of its Subsidiaries, to make
or be  provided  with copies and  extracts  therefrom,  to discuss the  affairs,
finances and  accounts of the Company and of its  Subsidiaries  with,  and to be
advised as to the same by, its and their  officers,  employees  and  independent
public   accountants  (and  by  this  provision  the  Company   authorizes  such
accountants  to discuss such affairs,  finances and  accounts,  whether or not a
representative  of the  Company is  present)  all at such  reasonable  times and
intervals and to such reasonable extent as the Purchasers may desire;  provided,
however,  that each  Inspector  shall hold in confidence  and shall not make any
disclosure  (except to such Purchaser) of any such information which the Company
determines  in good faith to be  confidential,  and of which  determination  the
Inspectors  are so notified,  unless (i) the  disclosure of such  information is
necessary  to avoid or correct a  misstatement  or omission in any  Registration
Statement filed pursuant to the Registration Rights Agreement,  (ii) the release
of such  information  is ordered  pursuant  to a subpoena  or other order from a
court or government body of competent  jurisdiction,  or (iii) such  information
has been made  generally  available  to the public other than by  disclosure  in
violation of this or any other  agreement.  Each Purchaser agrees that it shall,
upon learning that disclosure of such  information is sought in or by a court or
governmental body of competent  jurisdiction or through other means, give prompt
notice to the  Company  and allow the  Company,  at its  expense,  to  undertake
appropriate  action to prevent  disclosure  of, or to obtain a protective  order
for, the information deemed confidential.  Notwithstanding any of the foregoing,
nothing in this Agreement  (including,  without  limitation,  this Section 4(m))
shall limit or otherwise  affect any  Investor's  rights to inspect the books of
account  and  records  of  the  Company  and  of its  Subsidiaries  pursuant  to
applicable  law,  including,  without  limitation,  Section 220 of the  Delaware
General Corporation Law.

                                     - 16 -
<PAGE>

      (n)  Shareholders  Rights Plan.  No claim shall be made or enforced by the
Company or any other person that any  Purchaser is an  "Acquiring  Person" under
any  shareholders  rights  plan or  similar  plan or  arrangement  in  effect or
hereafter  adopted  by the  Company,  or that any  Purchaser  could be deemed to
trigger the provisions of any such plan or  arrangement,  by virtue of receiving
Securities under this Agreement or any other Transaction  Documents or under any
other agreement between the Company and the Purchasers.

      (o) Pledge of  Securities.  The Company  acknowledges  and agrees that the
Securities may be pledged by any Purchaser in connection with a bona fide margin
agreement  or  other  loan  or  financing  arrangement  that is  secured  by the
Securities.  The pledge of Securities shall not be deemed to be a transfer, sale
or assignment of the Securities hereunder, and no Purchaser shall be required to
provide the Company with any notice  thereof or  otherwise  make any delivery to
the Company pursuant to this Agreement or any other  Transaction  Document.  The
Company  shall  execute  and  deliver  such  documentation  as a pledgee  of the
Securities may reasonably  request in connection with a pledge of the Securities
to such pledgee by any Purchaser.

      (p) Variable  Securities.  So long as any  Purchaser  (or any  Purchaser's
affiliate)  beneficially  owns any of the  Securities,  the  Company  shall not,
without first obtaining the written approval of the holders of a majority of the
shares of  Preferred  Stock then  outstanding  (which  approval  may be given or
withheld by such holders in their sole and absolute  discretion),  issue or sell
any rights,  warrants or options to subscribe for or purchase  Common Stock,  or
any other securities directly or indirectly  convertible into or exchangeable or
exercisable for Common Stock, at an effective  conversion,  exchange or exercise
price  that  varies  or may vary  with the  market  price of the  Common  Stock,
including by way of one or more reset(s) to any fixed price.

                                     - 17 -
<PAGE>

      (q) Participation and Exchange Rights. Subject to the terms and conditions
specified in this Section 4(q), until the second anniversary of the date hereof,
each of the Purchasers (together with any of such Purchaser's affiliates to whom
such Purchaser has  transferred  or assigned any of the  Securities  and/or such
Purchaser's  rights and  benefits  under this  Agreement)  shall have a right to
participate  with respect to the issuance or possible  issuance of any equity or
equity-linked  securities or debt which is  convertible  into equity or in which
there is an equity  component (as the case may be,  "ADDITIONAL  SECURITIES") on
the same terms and conditions as offered by the Company to the other  purchasers
of such  Additional  Securities.  Each time the  Company  proposes  to offer any
Additional  Securities,  the Company  shall make an offering of such  Additional
Securities to each Purchaser in accordance with the following provisions:

            (i) The Company  shall deliver a notice (the  "ISSUANCE  NOTICE") to
each Purchaser, at least 30 days prior to the date on which it proposes to offer
such  Additional  Securities,  stating (a) its bona fide intention to offer such
Additional  Securities,  (b) the  number  of such  Additional  Securities  to be
offered,  (c) the price and terms,  if any, upon which it proposes to offer such
Additional  Securities,  (d) the  anticipated  closing  date of the sale of such
Additional Securities, and (e) any and all other material terms of such offer.

            (ii) By written notification received by the Company, within 20 days
after giving of the Issuance  Notice,  each  Purchaser  may elect to purchase or
obtain,  at the price and on the terms specified in the Issuance  Notice,  up to
that portion of such Additional  Securities which equals the proportion that the
number of Conversion  Shares and Warrant Shares that such Purchaser then owns or
has the right to acquire (upon conversion of the Preferred Stock and exercise of
the  Warrants)  bears to the  total  number  of  shares  of  Common  Stock  then
outstanding (on a fully-diluted  basis,  assuming full  conversion,  exercise or
exchange  of  all  convertible,  exercisable  or  exchangeable  securities  then
outstanding). The Company shall promptly, in writing, inform each Purchaser that
elects to purchase all of the  Additional  Securities  available to it (each,  a
"FULLY-EXERCISING  PURCHASER")  of all  other  Purchasers'  failure  to elect to
purchaser all of the Additional  Securities  available to such other Purchasers.
During the five-day  period  commencing  after such  information is given,  each
Fully-Exercising Purchaser shall be entitled to obtain that number of Additional
Securities equal to the proportion that (x) the amount of Additional  Securities
for which the other Purchasers were entitled to, but failed to, subscribe, bears
to (y) the  total  number of  Conversion  Shares  and  Warrant  Shares  that all
Fully-Exercising  Purchasers  then  own or  have  the  right  to  acquire  (upon
conversion  of the  Preferred  Stock and exercise of the  Warrants)  who wish to
purchase any of the unsubscribed shares.

            (iii) If all  Additional  Securities  which the holders of shares of
Series C Preferred Stock are entitled to purchase  pursuant to this Section 4(q)
are not elected to be  purchased  as  provided  in clause  (ii) above,  then the
Company may,  during the 75-day period  following  the  expiration of the period
provided in such clause (ii), offer the remaining  unsubscribed  portion of such
Additional  Securities  to any person or  persons at a price not less than,  and
upon  terms no more  favorable  to the  offeree  than,  those  specified  in the
Issuance Notice.  If the Company does not consummate the sale of such Additional
Securities within such period,  the right provided  hereunder shall be deemed to
be revived and such  Additional  Securities  shall not be offered or sold unless
first reoffered to each Purchaser in accordance herewith.

                                     - 18 -
<PAGE>

            (iv) Notwithstanding  anything in this Section 4(q) to the contrary,
the  participation  rights  granted in this Section 4(q) shall not be applicable
to: (A) the issuance of shares of Common  Stock upon the exercise or  conversion
of the  Company's  options,  warrants or  convertible  securities  disclosed  in
Section 3(c)(ii) of the Disclosure Schedule in accordance with the terms of such
options,  warrants or other securities as in effect on the date hereof, provided
that, in the case of each agreement  under the heading  "Pending  Agreements" in
Section 3(c)(ii) of the Disclosure Schedule,  such agreement includes either (A)
an exercise or conversion price of at least $2.50 per share or (B) a covenant by
the party acquiring securities thereunder obligating such party not to sell more
than 5,000 shares of Common Stock in any single trading day nor more than 25,000
shares of Common Stock in any  calendar  week,  in each case,  until the trading
price of the Common Stock is above $6.00 per share; (B) the grant or exercise of
options to purchase Common Stock,  with exercise prices not less than the market
price of the  Common  Stock on the date of  grant,  or the  grant of  restricted
shares of Common Stock,  in each case which are issued to  employees,  officers,
directors or consultants of the Company for the primary purpose of soliciting or
retaining their  employment or service pursuant to an equity  compensation  plan
and the  issuance  of shares  of  Common  Stock  upon the  exercise  of any such
options,  provided  that (I) such  plan and the  issuance  of  Common  Stock and
options are approved in accordance with reasonable judgment by a majority of the
Board of  Directors  of the  Company or a majority of the members of a committee
comprised  exclusively of independent,  non-employee  directors  established for
such purpose,  and (II) such plan is approved by the stockholders of the Company
if and to the extent  required from time to time under the  Securities  Act, the
Exchange Act, the rules and regulations of the Commission  thereunder and/or the
listing  standards  of any  national  exchange  or  quotation  service;  (C) the
issuance of securities pursuant to a bona fide underwritten public offering; (D)
the  issuance of the  Preferred  Stock and the  Warrants  pursuant  hereto,  the
Conversion  Shares upon conversion of the Preferred Stock and the Warrant Shares
upon  exercise of the  Warrants;  (E) the issuance of  securities in a bona fide
business  acquisition;  (F) the  issuance of  securities  in  connection  with a
strategic  business  partnership  within the  Company's  industry,  the  primary
purpose  of  which,  in the  reasonable  judgment  of  the  Company's  Board  of
Directors, is not to raise additional capital; or (G) the issuance of securities
pursuant to any equipment  financing from an Eligible  Lender (as defined in the
Certificate of Designation) approved by the Board of Directors and to the extent
not  otherwise   restricted  by  Article   XIII.(vii)  of  the   Certificate  of
Designation.

            (v) In the event  that any  Purchaser  exercises  its  participation
right under this Section 4(q),  such  Purchaser  shall be entitled to deliver to
the Company  shares of Series C Preferred  that such Purchaser then holds as the
consideration,  in whole or in part,  for the purchase of Additional  Securities
pursuant to this Section 4(q).

      (r) Expenses. At the Closing, the Company shall pay to Baystar Capital II,
L.P.  ("BAYSTAR")   reimbursement  for  the  out-of-pocket  expenses  reasonably
incurred by Baystar, its affiliates and its or their advisors in connection with
the negotiation,  preparation,  execution and delivery of this Agreement and the
other   Transaction   Documents  and  the   consummation  of  the   transactions
contemplated hereby and thereby,  including,  without limitation,  Baystar's and
its affiliates'  and advisors'  reasonable due diligence and attorneys' fees and
expenses,  up to a cap of  Sixty-Thousand  Dollars ($60,000) plus any additional
amounts as the Company may  hereafter  approve from time to time  (collectively,
the  "EXPENSES");  provided,  however,  that Baystar shall be permitted,  in its
discretion,  to deduct all of its Expenses  from the Purchase  Price  payable by
Baystar  hereunder.  Baystar  shall  deliver  to the  Company at or prior to the
Closing an invoice stating the amount of expenses due and payable by the Company
at the Closing pursuant to this Section 4(r).

                                     - 19 -
<PAGE>

      (s) Transactions  With Affiliates.  Except as set forth in Section 4(s) of
the  Disclosure  Schedule,  the  Company  will not,  and will  cause each of its
Subsidiaries  not to, enter into, amend or otherwise modify any transaction with
any officer, director or employee of the Company or any Subsidiary or any family
member of the foregoing (other than for ordinary course services solely in their
capacity as officers, directors or employees), including any contract, agreement
or  other  arrangement  providing  for  the  furnishing  of  services  to or by,
providing  for rental of real or  personal  property  to or from,  or  otherwise
requiring  payments to or from any such  officer,  director,  employee or family
member or any corporation,  partnership, trust or other entity in which any such
officer,  director,  employee or family member has an ownership interest of five
percent or more or is an officer, director, trustee or partner.

      (t)  Registration  Rights.  The Company shall not enter into any contract,
commitment,  understanding or arrangement  under which the Company or any of its
Subsidiaries  shall be  obligated  to  register  the sale of any of its or their
securities under the Securities Act prior to 30 days following the effectiveness
of the Registration  Statement.  Notwithstanding the foregoing,  the Company may
enter  into the  agreements  set forth in  Section  3(c)(ii)  of the  Disclosure
Schedule  under  the  heading  "Pending  Agreements",  provided  that  each such
agreement  includes either (i) an exercise or conversion price of at least $2.50
per  share or (ii) a  covenant  by the  party  acquiring  securities  thereunder
obligating  such party not to sell more than 5,000 shares of Common Stock in any
single  trading day nor more than 25,000  shares of Common Stock in any calendar
week,  in each case,  until the trading price of the Common Stock is above $6.00
per share.

5.    SECURITIES TRANSFER MATTERS.

      (a) Conversion  and Exercise.  Upon  conversion of the Preferred  Stock or
exercise of the Warrants by any person,  (i) if the DTC Transfer  Conditions (as
defined  below) are  satisfied,  the Company  shall cause its transfer  agent to
electronically  transmit all  Conversion  Shares and Warrant Shares by crediting
the account of such  person or its nominee  with the  Depository  Trust  Company
("DTC") through its Deposit  Withdrawal Agent Commission  system; or (ii) if the
DTC Transfer Conditions are not satisfied,  the Company shall issue and deliver,
or instruct its transfer  agent to issue and deliver,  certificates  (subject to
the  legend  and other  applicable  provisions  hereof  and the  Certificate  of
Designation  and  Warrants),  registered in the name of such person its nominee,
physical certificates  representing the Conversion Shares and Warrant Shares, as
applicable.  Even if the DTC  Transfer  Conditions  are  satisfied,  any  person
effecting a conversion of Preferred  Stock or  exercising  Warrants may instruct
the  Company to  deliver to such  person or its  nominee  physical  certificates
representing the Conversion Shares and Warrant Shares, as applicable, in lieu of
delivering  such shares by way of DTC Transfer.  For purposes of this Agreement,
"DTC  TRANSFER  CONDITIONS"  means  that  (A) the  Company's  transfer  agent is
participating in the DTC Fast Automated  Securities Transfer program and (B) the
certificates  for  the  Conversion  Shares  or  Warrant  Shares  required  to be
delivered  are not  required  to bear a legend  and the  person  effecting  such
conversion or exercise is not then required to return such  certificate  for the
placement of a legend thereon.

                                     - 20 -
<PAGE>

      (b)  Transfer or Resale.  Each  Purchaser  understands  that (i) except as
provided  in the  Registration  Rights  Agreement,  the  sale or  resale  of the
Securities have not been and are not being  registered  under the Securities Act
or any state securities  laws, and the Securities may not be transferred  unless
(A)  the  transfer  is  made  pursuant  to  and  as set  forth  in an  effective
registration statement under the Securities Act covering the Securities;  or (B)
such Purchaser  shall have delivered to the Company an opinion of counsel (which
opinion shall be in form,  substance and scope customary for opinions of counsel
in  comparable  transactions)  to the effect that the  Securities  to be sold or
transferred  may be sold or  transferred  pursuant  to an  exemption  from  such
registration;  or (C) sold under and in compliance with Rule 144; or (D) sold or
transferred  to an affiliate of such  Purchaser that agrees to sell or otherwise
transfer the Securities  only in accordance  with the provisions of this Section
5(b);  and (ii) neither the Company nor any other person is under any obligation
to register such  Securities  under the Securities  Act or any state  securities
laws (other than pursuant to the terms of the  Registration  Rights  Agreement).
Notwithstanding the foregoing or anything else contained herein to the contrary,
the  Securities  may be pledged as  collateral  in  connection  with a bona fide
margin account or other lending arrangement,  provided such pledge is consistent
with applicable laws, rules and regulations.

      (c) Legends.  Each Purchaser  understands that the Preferred Stock and the
Warrants and, until such time as the  Conversion  Shares and Warrant Shares have
been  registered  under the Securities Act (including  registration  pursuant to
Rule 416  thereunder) as contemplated by the  Registration  Rights  Agreement or
otherwise may be sold by such Purchaser under Rule 144(k),  the certificates for
the  Conversion  Shares  and  Warrant  Shares may bear a  restrictive  legend in
substantially the following form:

            The securities  represented by this certificate have not
            been  registered  under the  Securities  Act of 1933, as
            amended,  or the  securities  laws of any  state  of the
            United  States  or  in  any  other   jurisdiction.   The
            securities  represented hereby may not be offered,  sold
            or   transferred   in  the   absence  of  an   effective
            registration   statement   for  the   securities   under
            applicable  securities  laws  unless  offered,  sold  or
            transferred  pursuant to an available exemption from the
            registration requirements of those laws.

      The Company shall,  immediately prior to a registration statement covering
the  Securities  (including,  without  limitation,  the  Registration  Statement
contemplated by the Registration  Rights  Agreement)  being declared  effective,
deliver to its transfer agent an opinion letter of counsel,  opining that at any
time such registration  statement is effective,  the transfer agent shall issue,
in connection  with the issuance of the  Conversion  Shares and Warrant  Shares,
certificates  representing such Conversion Shares and Warrant Shares without the
restrictive legend above, provided such Conversion Shares and Warrant Shares are
to be sold pursuant to the prospectus contained in such registration  statement.
Upon receipt of such  opinion,  the Company  shall cause the  transfer  agent to
confirm,  for the benefit of the holders,  that no further opinion of counsel is
required  at the time of transfer  in order to issue such  shares  without  such
restrictive legend.

      The legend set forth above shall be removed and the Company  shall issue a
certificate  without such legend to the holder of any Security  upon which it is
stamped,  if, unless otherwise  required by state securities laws, (i) there has
been a sale of such  Security  that was  registered  under  the  Securities  Act
(including  registration  pursuant  to Rule 416  thereunder);  (ii) such  holder
provides the Company with an opinion of counsel,  in form,  substance  and scope
customary for opinions of counsel in comparable transactions, to the effect that
a public sale or transfer of such Security was completed without the requirement
of  registration  under the  Securities  Act; or (iii) such holder  provides the
Company with the written  advice of counsel that such Security can be sold under
Rule  144(k).  In the event the above  legend is removed  from any  Security and
thereafter the effectiveness of a registration  statement covering such Security
is suspended or the Company determines that a supplement or amendment thereto is
required by applicable  securities laws,  then, upon reasonable  advance written
notice to such  Purchaser,  the  Company may  require  that the above  legend be
placed on any such  Security  that cannot then be sold  pursuant to an effective
registration  statement or under Rule 144(k) and such Purchaser  shall cooperate
in the replacement of such legend.  Such legend shall thereafter be removed when
such Security may again be sold pursuant to an effective  registration statement
or under Rule 144(k).

                                     - 21 -
<PAGE>

      (d) Transfer Agent Instruction.  Upon compliance by any Purchaser with the
provisions of this Section 5 with respect to the transfer of any Securities, the
Company  shall  permit the transfer of such  Securities  and, in the case of the
transfer of Conversion Shares or Warrant Shares,  promptly instruct its transfer
agent to issue one or more  certificates (or effect a DTC Transfer) in such name
and in such denominations as specified by such Purchaser.  The Company shall not
give any  instructions  to its transfer  agent with  respect to the  Securities,
other than any permissible or required  instructions provided in this Section 5,
and the  Securities  shall  otherwise  be freely  transferable  on the books and
records of the Company as and to the extent provided in this Agreement.

6.    CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.

      The  obligation  of the Company  hereunder  to issue and sell the Units to
each  Purchaser  hereunder  is  subject  to the  satisfaction,  at or before the
Closing Date, of each of the following conditions as to such Purchaser, provided
that such conditions are for the Company's sole benefit and may be waived by the
Company at any time in its sole discretion:

      (a) Execution of Transaction Documents. Each Purchaser shall have executed
such  Purchaser's  Execution Page to this  Agreement and each other  Transaction
Document  to which  such  Purchaser  is a party  and  delivered  the same to the
Company.

      (b) Payment of Purchase  Price.  Each  Purchaser  shall have delivered the
full amount of such  Purchaser's  Purchase Price to the Company by wire transfer
in accordance with the Company's written wiring instructions.

      (c)  Representations  and  Warranties  True;  Covenants   Performed.   The
representations and warranties of each Purchaser shall be true and correct as of
the date  when  made and as of the  Closing  Date as  though  made at that  time
(except for  representations  and  warranties  that speak as of a specific date,
which representations and warranties shall be true and correct as of such date),
and such  Purchaser  shall  have  performed,  satisfied  and  complied  with the
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with by such Purchaser at or prior to the Closing Date.

                                     - 22 -
<PAGE>

      (d) No Legal Prohibition.  No statute, rule, regulation,  executive order,
decree,  ruling,  injunction,  action or  proceeding  shall  have been  enacted,
entered,  promulgated  or endorsed  by any court or  governmental  authority  of
competent jurisdiction or any self-regulatory organization having authority over
the matters contemplated hereby which restricts or prohibits the consummation of
any of the transactions contemplated by this Agreement.

7.    CONDITIONS TO THE PURCHASERS' OBLIGATIONS TO PURCHASE.

      The obligation of each Purchaser hereunder to purchase the Units for which
it is subscribing from the Company hereunder is subject to the satisfaction,  at
or before the Closing Date, of each of the following  conditions,  provided that
such conditions are for each Purchaser's  individual and sole benefit and may be
waived by any  Purchaser as to such  Purchaser  at any time in such  Purchaser's
sole discretion:

      (a) Execution of  Transaction  Documents.  The Company shall have executed
such Purchaser's  Execution Page to this Agreement and each Transaction Document
to which the Company is a party and delivered  executed originals of the same to
such Purchaser.

      (b) Filing of Certificate of  Designation.  The Certificate of Designation
shall have been filed and accepted for filing with the Secretary of State of the
State of Delaware and a copy thereof  certified by the Secretary of State of the
State of Delaware shall have been delivered to such Purchaser.

      (c)  Delivery of  Securities.  The Company  shall have  delivered  to such
Purchaser  duly  executed  certificates  representing  the  Preferred  Stock and
Warrants for the number of Units being purchased by such Purchaser (each in such
denominations  as such Purchaser shall request),  registered in such Purchaser's
name.

      (d)  Listing.  The Common Stock shall be quoted on the OTC, and trading in
the Common Stock shall not have been suspended by the SEC or the OTC.

      (e)  Representations  and  Warranties  True;  Covenants   Performed.   The
representations  and  warranties  of the Company shall be true and correct as of
the date  when  made and as of the  Closing  Date as  though  made at that  time
(except for  representations  and  warranties  that speak as of a specific date,
which  representations and warranties shall be true and correct as of such date)
and the Company shall have performed, satisfied and complied with the covenants,
agreements and conditions required by this Agreement to be performed,  satisfied
or complied with by the Company at or prior to the Closing Date.  Such Purchaser
shall have received a certificate,  executed by the Chief  Executive  Officer of
the Company after reasonable investigation,  dated as of the Closing Date to the
foregoing  effect and as to such other matters as may reasonably be requested by
such Purchaser.

      (f) No Legal Prohibition.  No statute, rule, regulation,  executive order,
decree,  ruling,  injunction,  action or  proceeding  shall  have been  enacted,
entered,  promulgated  or endorsed  by any court or  governmental  authority  of
competent jurisdiction or any self-regulatory organization having authority over
the matters  contemplated  hereby which restricts or prohibits the  consummation
of, any of the transactions contemplated by this Agreement.

                                     - 23 -
<PAGE>

      (g) Legal Opinion.  Such  Purchaser  shall have received an opinion of the
Company's counsel,  dated as of the Closing Date, in the form attached hereto as
Exhibit D.

      (h) No Material Adverse Change.  There shall have been no material adverse
changes  and no  material  adverse  developments  in the  business,  properties,
operations,  prospects,  financial  condition  or results of  operations  of the
Company and its Subsidiaries,  taken as a whole,  since the date hereof,  and no
information  that  is  materially  adverse  to the  Company  and of  which  such
Purchaser is not currently aware shall come to the attention of such Purchaser.

      (i)  Corporate  Approvals.  Such  Purchaser  shall have received a copy of
resolutions,  duly adopted by the Board of Directors of the Company, which shall
be in full  force  and  effect  at the  time  of the  Closing,  authorizing  the
execution,  delivery and  performance  by the Company of this  Agreement and the
other  Transaction  Documents  and  the  consummation  by  the  Company  of  the
transactions contemplated hereby and thereby, certified as such by the Secretary
or Assistant Secretary of the Company,  and such other documents they reasonably
request in connection with the Closing.

8.    [INTENTIONALLY OMITTED]

9.    GOVERNING LAW; MISCELLANEOUS.

      (a) Governing Law;  Jurisdiction.  This Agreement shall be governed by and
construed in  accordance  with the laws of the State of Delaware  applicable  to
contracts  made and to be performed  in the State of  Delaware.  The Company and
each Purchaser  irrevocably  consents to the  jurisdiction  of the United States
federal courts and the state courts  located in the County of New Castle,  State
of Delaware,  in any suit or proceeding based on or arising under this Agreement
and irrevocably  agree that all claims in respect of such suit or proceeding may
be determined in such courts. The Company and each Purchaser  irrevocably waives
the  defense  of an  inconvenient  forum  to the  maintenance  of  such  suit or
proceeding in such forum.  The Company and each  Purchaser  further  agrees that
service of process  upon it mailed by first  class mail shall be deemed in every
respect  effective  service of process  upon it in any such suit or  proceeding.
Nothing  herein shall affect the right of any  Purchaser or the Company to serve
process in any other manner  permitted  by law.  The Company and each  Purchaser
agrees that a final non-appealable judgment in any such suit or proceeding shall
be  conclusive  and  may be  enforced  in  other  jurisdictions  by suit on such
judgment or in any other lawful manner.

      (b)  Counterparts.   This  Agreement  may  be  executed  in  two  or  more
counterparts,  all of which shall be considered  one and the same  agreement and
shall  become  effective  when  counterparts  have been signed by each party and
delivered to the other party.  This Agreement,  once executed by a party, may be
delivered to the other  parties  hereto by facsimile  transmission  of a copy of
this Agreement  bearing the signature of the party so delivering this Agreement.
In the event any  signature is delivered  by facsimile  transmission,  the party
using such means of delivery shall cause the manually executed execution page(s)
hereof to be  physically  delivered  to the other party  within five days of the
execution hereof,  provided that the failure to so deliver any manually executed
execution  page  shall  not  affect  the  validity  or  enforceability  of  this
Agreement.

                                     - 24 -
<PAGE>

      (c) Construction.  Whenever the context  requires,  the gender of any word
used in this  Agreement  includes  the  masculine,  feminine or neuter,  and the
number of any word includes the singular or plural. Unless the context otherwise
requires, all references to articles and sections refer to articles and sections
of this  Agreement,  and all  references to schedules are to schedules  attached
hereto,  each of which is made a part hereof for all purposes.  The  descriptive
headings of the several articles and sections of this Agreement are inserted for
purposes of reference  only, and shall not affect the meaning or construction of
any of the provisions hereof.

      (d)  Severability.  If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or  enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.

      (e) Entire Agreement; Amendments and Waivers. This Agreement and the other
Transaction  Documents (including any schedules and exhibits hereto and thereto)
contain  the  entire  understanding  of  the  Purchasers,   the  Company,  their
affiliates  and  persons  acting on their  behalf  with  respect to the  matters
covered  herein and therein  and,  except as  specifically  set forth  herein or
therein, neither the Company nor any of the Purchasers makes any representation,
warranty,  covenant or undertaking with respect to such matters.  A provision of
this Agreement may be waived (either  generally or in a particular  instance and
either  prospectively or  retroactively) by the Purchasers only by an instrument
in  writing  signed  by the  holders  of a  majority  of the  shares of Series C
Preferred  Stock  outstanding  at the time of such waiver,  and any provision of
this  Agreement  may be amended  only an  instrument  in  writing  signed by the
Company and the holders of a majority of the shares of Series C Preferred  Stock
outstanding at the time of such amendment.  Any waiver or amendment  effected in
accordance  with  the  foregoing  shall  be  binding  upon  each  holder  of any
securities  purchased  under this Agreement at the time  outstanding  (including
securities into which such securities have been  converted),  each future holder
of all securities and the Company.  No consideration shall be offered or paid to
any person to amend or consent to a waiver or  modification  of any provision of
this Agreement  unless the same  consideration  is offered to all of the parties
hereto.

      (f) Notices. Any notices required or permitted to be given under the terms
of this Agreement  shall be in writing and sent by certified or registered  mail
(return receipt  requested) or delivered  personally,  by nationally  recognized
overnight carrier or by confirmed facsimile transmission, and shall be effective
five days after being placed in the mail, if mailed,  or upon receipt or refusal
of receipt,  if  delivered  personally  or by  nationally  recognized  overnight
carrier or confirmed facsimile  transmission,  in each case addressed to a party
as provided herein.  The initial addresses for such  communications  shall be as
follows,  and each party shall provide notice to the other parties of any change
in such party's address:

            (i)   If to the Company:

                  SLS International, Inc.
                  3119 South Scenic
                  Springfield, Missouri 65807
                  Telephone: (417) 883-4549
                  Facsimile:  (417) 883-2723
                  Attention:  President and Controller

                                     - 25 -
<PAGE>

                  with a copy simultaneously transmitted by like means
                  (which transmittal shall not constitute notice
                  hereunder) to:

                  Freeborn & Peters LLP
                  311 South Wacker Drive
                  Suite 3000
                  Chicago, IL 60606
                  Telephone: (312) 360-6312
                  Facsimile:  (312) 360-6597
                  Attention:  Jeffrey M. Mattson, Esq.

            (ii)  If to any  Purchaser,  to the  address  set forth  under  such
                  Purchaser's name on the Execution Page hereto executed by such
                  Purchaser.

      (g) Successors and Assigns. This Agreement shall be binding upon and inure
to the  benefit of the  parties  and their  successors  and  assigns.  Except as
provided  herein,  the Company shall not assign this  Agreement or any rights or
obligations  hereunder.  Any  Purchaser  may assign or transfer  the  Securities
pursuant to the terms of this Agreement and of such  Securities,  or assign such
Purchaser's rights hereunder to any other person or entity.

      (h) Third-Party Beneficiaries.  This Agreement is intended for the benefit
of the parties hereto and their respective permitted successors and assigns, and
is not for the benefit  of, nor may any  provision  hereof be  enforced  by, any
other  person;  provided,  however,  that  Section  4(r) may be  enforced by any
Purchaser's  affiliates  and its or their  advisors  to the  extent  the same is
entitled to reimbursement of Expenses pursuant thereto.

      (i) Survival.  The  representations  and warranties of the Company and the
agreements  and  covenants  set  forth in  Sections  3, 4, 5 and 9 hereof  shall
survive   the  Closing  in   perpetuity   notwithstanding   any  due   diligence
investigation  conducted by or on behalf of any  Purchaser,  provided,  however,
that the  representations and warranties of the Company in Sections 3(h) through
(u), inclusive, shall survive the Closing for three years. Moreover, none of the
representations  and warranties made by the Company herein shall act as a waiver
of any rights or remedies any Purchaser may have under  applicable U.S.  federal
or state securities laws.

      (j)  Publicity.  The  Company and each  Purchaser  shall have the right to
approve before  issuance any press releases,  SEC or, to the extent  applicable,
NASD filings,  or any other public  statements with respect to the  transactions
contemplated  hereby;  provided,  however,  that the Company  shall be entitled,
without the prior approval of the  Purchasers,  to make any press release or SEC
or, to the extent applicable,  NASD filings with respect to such transactions as
is required by applicable law and regulations  (although the Purchasers shall be
consulted by the Company in  connection  with any such press  release and filing
prior to its release and shall be provided  with a copy thereof and must provide
specific consent to the use of their name in connection therewith).

                                     - 26 -
<PAGE>

      (k) Further  Assurances.  Each party shall do and perform,  or cause to be
done and  performed,  all such  further acts and things,  and shall  execute and
deliver all such other agreements,  certificates,  instruments and documents, as
the other  party may  reasonably  request  in order to carry out the  intent and
accomplish  the  purposes  of  this  Agreement  and  the   consummation  of  the
transactions contemplated hereby.

      (l)  Indemnification.  In consideration of each Purchaser's  execution and
delivery of this Agreement and the other  Transaction  Documents and purchase of
the  Securities  hereunder,  and in  addition  to all  of  the  Company's  other
obligations under this Agreement and the other Transaction  Documents,  from and
after the  Closing,  the  Company  shall  defend,  protect,  indemnify  and hold
harmless each Purchaser and each other holder of the Securities and all of their
stockholders,  partners, members, officers,  directors,  employees and direct or
indirect   investors  and  any  of  the  foregoing   persons'  agents  or  other
representatives  (including,  without  limitation,  those retained in connection
with  the  transactions  contemplated  by  this  Agreement,   collectively,  the
"INDEMNITEES")  from and against any and all actions,  causes of action,  suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith  (irrespective of whether any such Indemnitee is a party to
the  action  for which  indemnification  hereunder  is  sought),  and  including
reasonable  attorneys' fees and disbursements  (the "INDEMNIFIED  LIABILITIES"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (i)
any  misrepresentation  or breach of any  representation or warranty made by the
Company  in  this  Agreement,  any  other  Transaction  Document  or  any  other
certificate, instrument or document contemplated hereby or thereby, (ii) subject
to Section 9(i) hereof,  any breach of any covenant,  agreement or obligation of
the Company contained in this Agreement,  any other Transaction  Document or any
other  certificate,  instrument  or document  contemplated  hereby or thereby or
(iii) any cause of action, suit, claim, order,  proceeding or process brought or
made against such  Indemnitee by a third party  (including  for these purposes a
derivative  action  brought  on behalf of the  Company)  and  arising  out of or
resulting from (A) the execution,  delivery,  performance or enforcement of this
Agreement,  any other Transaction Document or any other certificate,  instrument
or document  contemplated hereby or thereby,  (B) any transaction financed or to
be financed in whole or in part,  directly or  indirectly,  with the proceeds of
the  issuance  and  sale  of the  Securities,  (C) any  disclosure  made by such
Purchaser  pursuant to Section  4(b) or 4(m)  hereof,  or (D) the status of such
Purchaser  or holder of the  Securities  as an investor in the  Company.  To the
extent that the foregoing  undertaking by the Company may be  unenforceable  for
any reason,  the Company shall make the maximum  contribution to the payment and
satisfaction of each of the Indemnified  Liabilities  which is permissible under
applicable  law.  Except  as  otherwise  set forth  herein,  the  mechanics  and
procedures  with respect to the rights and  obligations  under this Section 9(l)
shall be the same as those set forth in Section 7(c) of the Registration  Rights
Agreement.

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

                                     - 27 -
<PAGE>

      (n) Joint  Participation  in Drafting.  Each party to this  Agreement  has
participated  in the  negotiation  and drafting of this  Agreement and the other
Transaction  Documents.  As such,  the language used herein and therein shall be
deemed to be the language  chosen by the parties  hereto to express their mutual
intent, and no rule of strict  construction will be applied against any party to
this Agreement.

      (o)  Remedies.  No  provision of this  Agreement or any other  Transaction
Document  providing  for any remedy to a Purchaser  shall limit any other remedy
which  would  otherwise  be  available  to such  Purchaser  at law, in equity or
otherwise.  Nothing in this  Agreement or any other  Transaction  Document shall
limit any rights any  Purchaser may have under any  applicable  federal or state
securities laws with respect to the investment  contemplated hereby. The Company
acknowledges  that  a  breach  by it of its  obligations  hereunder  will  cause
irreparable  harm to the  Purchasers  by vitiating the intent and purpose of the
transactions contemplated hereby. Accordingly, the Company acknowledges that the
remedy  at law for a breach of its  obligations  hereunder  (including,  but not
limited to, its obligations pursuant to Section 5 hereof) will be inadequate and
agrees,  in the event of a breach or  threatened  breach by the  Company  of the
provisions of this  Agreement  (including,  but not limited to, its  obligations
pursuant  to  Section 5  hereof),  that each  Purchaser  shall be  entitled,  in
addition to all other  available  remedies,  to an  injunction  restraining  any
breach and requiring immediate issuance and transfer of the Securities,  without
the necessity of showing  economic  loss and without any bond or other  security
being required.

      (p)  Knowledge.  As used in this  Agreement,  the term  "knowledge" of any
person or entity  shall  mean and  include  (i) actual  knowledge  and (ii) that
knowledge which a reasonably  prudent business person could have obtained in the
management  of his  or  her  business  affairs  after  making  due  inquiry  and
exercising  due diligence  which a prudent  business  person should have made or
exercised, as applicable, with respect thereto.

      (q) Exculpation Among Purchasers;  No "Group". Each Purchaser acknowledges
that it has independently evaluated the merits of the transactions  contemplated
by this Agreement and the other Transaction Documents, that it has independently
determined to enter into the transactions  contemplated hereby and thereby, that
it is not relying on any advice from or evaluation by any other  Purchaser,  and
that it is not acting in concert with any other Purchaser in making its purchase
of securities  hereunder or in  monitoring  its  investment in the Company.  The
Purchasers and, to its knowledge, the Company agree that the Purchasers have not
taken any actions that would deem such Purchasers to be members of a "group" for
purposes of Section  13(d) of the  Exchange  Act,  and the  Purchasers  have not
agreed  to act  together  for the  purpose  of  acquiring,  holding,  voting  or
disposing  of  equity   securities  of  the  Company.   Each  Purchaser  further
acknowledges  that Baystar has retained  Drinker  Biddle & Reath LLP ("DB&R") to
act as its counsel in  connection  with the  transactions  contemplated  by this
Agreement  and the other  Transaction  Documents  and that DB&R has not acted as
counsel for any of the other Purchasers in connection  therewith and none of the
other Purchasers have the status of a client of DB&R for conflict of interest or
other purposes as a result thereof. [Signature Pages Follow]

                                     - 28 -
<PAGE>

      IN WITNESS WHEREOF, the undersigned  Purchaser and the Company have caused
this Agreement to be duly executed as of the date first above written.

SLS INTERNATIONAL, INC.

By:
    ----------------------------------------------------------
Name:
Title:

PURCHASER:

--------------------------------------------------------------
BAYSTAR CAPITAL II, L.P.

By:
    ----------------------------------------------------------
Name:
Title:

ADDRESS:

Baystar Capital II, L.P.
80 E. Sir Francis Drake
Suite 2B
Larkspur, CA 94939
Telephone: (415) 834-4600
Facsimile:  (415) 834-4601
Attention:  Steven M. Lamar
Residence:  California

SUBSCRIPTION AMOUNT:

Number of Units:                    6,000
Purchase Price Per Unit:            $1,000
Aggregate Purchase Price:           $6,000,000

            [SIGNATURE PAGE 1 OF 4 TO SECURITIES PURCHASE AGREEMENT]

<PAGE>

PURCHASER:

--------------------------------------------------------------
PSO TRADING IV, LLC

By:
    ----------------------------------------------------------
Name:
Title:

ADDRESS:

PSO Trading IV, LLC
68 Carman Avenue
Cedarhurst, New York 11516
Telephone: (516) 791-3800
Facsimile:  (516) 791-0060
Attention:  Abraham Pfeiffer
Residence:  New York

SUBSCRIPTION AMOUNT:

Number of Units:                    2,000
Purchase Price Per Unit:            $1,000
Aggregate Purchase Price:           $2,000,000

            [SIGNATURE PAGE 2 OF 4 TO SECURITIES PURCHASE AGREEMENT]

                                     - 2 -
<PAGE>

      IN WITNESS WHEREOF, the undersigned  Purchaser and the Company have caused
this Agreement to be duly executed as of the date first above written.

SLS INTERNATIONAL, INC.

By:
    ----------------------------------------------------------
Name:
Title:

PURCHASER:

--------------------------------------------------------------
HFTP INVESTMENT L.L.C.

By: Promethean Asset Management L.L.C.
Its: Investment Manager

By:
    ----------------------------------------------------------
Name:
Title:

ADDRESS:

HFTP Investment L.L.C.
c/o Promethean Asset Management L.L.C.
750 Lexington Avenue, 22nd Floor
New York, New York 10022
Attention:  Robert J. Brantman
Telephone:  (212) 702-5200
Facsimile:  (212) 758-9620
Residence:  Delaware

SUBSCRIPTION AMOUNT:

Number of Units:                    3,750
Purchase Price Per Unit:            $1,000
Aggregate Purchase Price:           $3,750,000

            [SIGNATURE PAGE 3 OF 4 TO SECURITIES PURCHASE AGREEMENT]

                                     - 3 -
<PAGE>

IN WITNESS WHEREOF,  the undersigned  Purchaser and the Company have caused this
Agreement to be duly executed as of the date first above written.

SLS INTERNATIONAL, INC.

By:
    ----------------------------------------------------------
Name:
Title:

PURCHASER:

--------------------------------------------------------------
ROYAL BANK OF CANADA
By: RBC Capital Markets Corporation
Its: Agent

By:
    ----------------------------------------------------------
Name:
Title:

ADDRESS:
Royal Bank of Canada
c/o RBC Capital Markets Corporation
One Liberty Plaza
165 Broadway
New York, NY 10006-1404
Attn:  Steve Lin (Structured Products, 2nd Floor)

SUBSCRIPTION AMOUNT:
Number of Units:                    3,250
Purchase Price Per Unit:            $1,000
Aggregate Purchase Price:           $3,250,000

            [SIGNATURE PAGE 4 OF 4 TO SECURITIES PURCHASE AGREEMENT]

                                     - 4 -
<PAGE>

                              DISCLOSURE SCHEDULES

      Attached  are  the  Disclosure   Schedules  to  the  Securities   Purchase
Agreement,  dated as of  January  3,  2005 (the  "Agreement"),  by and among SLS
International,  Inc., a Delaware  corporation (the  "Company"),  and each of the
purchasers  (individually,  together  with  its  affiliated  transferees  and/or
affiliated  assignees,  a  "Purchaser"  and  collectively,  together  with their
affiliated transferees and/or affiliated assignees,  the "Purchasers") set forth
on the execution pages of the Agreement.  Capitalized terms used but not defined
herein shall have the meanings ascribed to such terms in the Agreement.

      The Schedules are not intended to  constitute,  and shall not be construed
as constituting, independent representations or warranties of the Company except
as and to the extent provided herein or in the Agreement.

      No  disclosure  in the  schedules  relating  to  any  possible  breach  or
violation of any agreement, law or regulation shall be construed as an admission
or indication that any such breach or violation exists or has actually occurred.

      Matters reflected in the schedules are not necessarily  limited to matters
required by the  Agreement  to be reflected in the  schedules.  Such  additional
matters are set forth for informational purposes only.

<PAGE>

                                  SECTION 3(a)

                         Organization and Qualification

      The Company owns 100% of the capital stock of Evenstar Mergersub,  Inc., a
Nevada corporation.

<PAGE>

                                  SECTION 3(c)

                                 Capitalization

Section 3(c)(i) - Authorized and Outstanding Securities

See attached capitalization table and options register.

Shares owned by John Gott and Richard  Norton are  encumbered  by the  following
agreements:

1.    Consent Order of Missouri  Securities  Division and the Company in Exhibit
      99(iv) to Post-Effective Amendment No. 1 filed May 30, 2001

2.    Promotional Shares Lock-In Agreement dated April 16, 2001 in Exhibit 99(v)
      to Post-Effective  Amendment No. 1 to Registration  Statement to Form SB-2
      filed May 30, 2001;

3.    Modification  to Consent  Order of Missouri  Securities  Division  and the
      Company in Exhibit 99.1 to  Post-Effective  Amendment No. 2 filed February
      9, 2004.

Section 3(c)(ii) - Registration Rights

All registration  rights have been satisfied except as provided in the following
documents:

1.    Non-exclusive  Finder's  Agreement,  dated  December  8,  2004,  effective
      November 30, 2004 between the Company and The Shemano Group, Inc.

      o     Number of Shares: 4% warrant of the gross Offering funds received in
            the Offering (as defined in the Finder's Agreement)

      o     Conversion  Price  or  Exercise  Price:   lesser  of  $2.50  or  the
            conversion price of any Equity or Equity-Related Securities sold

      o     Registration Rights: same as Warrants

      o     Timing of Registration Obligation: same as Warrants

2.    Consulting Service Agreement,  dated December 8, 2004, between the Company
      and W. Curtis Hargis Co.

      o     Number  of  shares:  options  to  purchase  100,000  shares  of  the
            Company's  Common  Stock  (SITI)  upon  contract  signing  with  the
            Retailer  plus options to purchase 1 share of the  Company's  Common
            Stock  (SITI) for each $100 of sales,  provided  that the  aggregate
            number of  shares  entitled  to  purchase  shall in no event  exceed
            500,000 shares

<PAGE>

      o     Exercise  Price:  equal the five-day  average  trading  price of the
            Company's common stock prior to the signing of the contract with the
            Retailer  and the  option for all sales  shall be issued  quarterly,
            within 60 days of the close of each quarter

      o     Registration Rights: piggyback registration rights

      o     Timing of Registration  Obligation:  Reasonable  efforts to promptly
            register

3.    Consulting  Agreement  with 3CD  Consulting , LLC, dated November 18, 2004
      between the Company and 3CD Consulting, LLC

      o     Number of Shares: 1,000,000 options to purchase the Company's shares

      o     Option  Price:  $2.00 per share for a period of three years from the
            signing date of this agreement

      o     Registration Rights: piggyback registration rights

      o     Timing  of  Registration  Obligation:  at  the  time  of  the  first
            registration or filing of securities by the Company

      Rescission Rights

1.    As  disclosed  in  the  SEC  Documents,  the  Company  intends  to  make a
      rescission  offer to  warrant  holders  who  exercised  Class A or Class B
      Warrants  during the period  from May 1, 2002  through May 10,  2004.  The
      Company is doing this because the registration statement filed with the US
      Securities  and Exchange  Commission to register the common stock issuable
      upon exercise of the warrants may not have been  "current"  because it had
      not been amended to include the Company's  most recent  audited  financial
      statements.  The former warrant  holders will be entitled to rescind their
      purchases.  Once  made,  the  rescission  offer is open  for 30 days.  The
      rescission  offer would  require the Company to purchase  warrants back at
      their original exercise price, $.50 for the Class A warrants and $3.00 for
      the Class B warrants,  at each warrant holder's option. The current market
      price is well above the $.50 exercise  price of the Class A warrants so no
      adjustment to the  financial  statements  for the year ended  December 31,
      2003 and the nine months ended  September  30, 2004 have been made for the
      rescission  offer.  The current  market price is below the $3.00  exercise
      price of the Class B  warrants.  22,600  Class B warrants  were  exercised
      during the rescission offer period, so the rescission offer would not have
      a  material  liability  effect  on  the  Company's  financial  statements.
      Therefore,  no adjustment has been made. If all warrant  holders  accepted
      the rescission offer, the Company would be required to pay $1,340,700 plus
      interest, which amount would be reduced to the extent of the proceeds from
      any sales of the underlying  common stock by the former  warrant  holders.
      Acceptance of the  rescission  offer by all former  warrant  holders could
      have a material adverse effect of these financial statements.

<PAGE>

2.    The Company may make a  rescission  offer to some current and past holders
      of its Convertible Preferred Stock.

Pending Agreements (to be entered by the Company)

1.    As reflected on the  capitalization  table,  the Company  intends to enter
      into an agreement to issue  300,000  shares of common stock and options to
      purchase  up to 700,000  shares of common  stock to New AV  Ventures.  The
      Company   intends  to  grant  New  AV  Ventures   Registration   piggyback
      registration rights in such agreement.

2.    As reflected on the  capitalization  table,  the Company  intends to enter
      into (or has  entered  into) an  agreement  to issue  options to  purchase
      1,000,000 shares of common stock to 3CD Consulting or Cap Briant.

Section  3(c)(iii) - Anti-Dilution  Rights (none of which will be "triggered" by
the sale and issuance of the Securities):

Series B Preferred
Class C Warrants
2000 Stock Option Plan
Global Drumz - Warrant and Stock Option described below
Kenny Securities - Warrant described below
Beth Broday- Option Agreement described below
Steerpike (Overseas) Ltd. - Warrant and Option Agreement described below
Ryan Schinman - Option Agreement described below

None of the above  agreements  or  securities  have been  amended  or  otherwise
modified from the copies of the same heretofore provided to the Purchasers.

Section 3(c)(iv) - Certificate of  Incorporation,  Bylaws and Other  Instruments
and  Agreements   governing  the  Company's   securities   convertible  into  or
exercisable or exchangeable for the Company's capital stock

1.    Amendment and Restatement of Certificate of Incorporation  dated August 7,
      2000

2.    Amendment to By-laws (Article VIII)

3.    Certificate  of  Designations   of  Series  B  Convertible   Participating
      Preferred Stock dated April 1, 2004

4.    Certificate of Designations of Convertible  Preferred Stock dated December
      21, 2004

5.    Class C Warrants

6.    2000 Stock Purchase and Option Plan

<PAGE>

7.    Form of Option under the 2000 Stock Purchase and Option Plan

8.    Option  Agreement,  dated as of May 19,  2003,  between  the  Company  and
      Steerpike (Overseas) Ltd

9.    Option Agreement,  dated as of May 19, 2003,  between the Company and Beth
      Broday

10.   Consulting  Services  Agreement,  dated  November  10,  2003,  between the
      Company and William F. Fischbach

11.   Option  Agreement,  dated June 2, 2004,  between  the  Company  and Global
      Drumz, Inc.

12.   Warrant,  dated  March 23,  2004,  issued by the Company in favor of Kenny
      Securities Corp.

13.   Redeemable Warrant,  dated June 2, 2004, issued by the Company in favor of
      Global Drumz, Inc.

14.   Stock Option Agreement, dated February 9, 2004, between SLS International,
      Inc., and Ryan Schinman

15.   Non-exclusive  Finder's  Agreement,  dated  December  8,  2004,  effective
      November 30, 2004 between the Company and The Shemano Group, Inc.

16.   Consulting Service Agreement,  dated December 8, 2004, between the Company
      and W. Curtis Hargis Co.

<PAGE>

SCHEDULE 3(C) TO THE SECURITIES PURCHASE AGREEMENT BETWEEN SLS INTERNATIONAL,
INC. AND EACH OF THE PURCHASERS SET FORTH ON THE EXECUTION PAGES THEREOF.

<TABLE>
-----------------------------------------------------------------------------------------------------------------------------
SLS INTERNATIONAL CAPITALIZATION TABLE AS OF 1/4/05
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                                 FULLY DILUTED
                                                                                                (ASSUMING FULL
        SHARES ISSUED - DETAIL                        AUTHORIZED   ISSUED/GRANTED  OUTSTANDING     EXERCISE)      OWNERSHIP %
-----------------------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>            <C>           <C>           <C>                 <C>
COMMON STOCK, $.001 PAR VALUE PER SHARE                75,000,000                   41,751,080    41,751,080          55.81%

WARRANTS TO PURCHASE COMMON
Class C - Exercise Price of $7.00 / share                             2,721,000      2,721,000     2,721,000           3.64%
Kenney Securities - Exercise Price of $2.00 / share                     125,000        125,000       125,000           0.17%
Global Drumz - Exercise Price of $7.00 / share                        1,000,000      1,000,000     1,000,000           1.34%
Shemano - Exercise Price of $2.50 / share /1                            600,000        600,000       600,000           0.80%
The Purchasers /2                                                     6,000,000      6,000,000     6,000,000           8.02%

OPTIONS TO PURCHASE COMMON
2000 Stock Option Plan /3                                             2,000,000      1,270,000     2,000,000           2.67%
Global Drumz - Exercise Price of $2.00 / share                        1,000,000      1,000,000     1,000,000           1.34%
Steerpike - Exercise Price of $0.25 / share                           1,000,000        740,000       740,000           0.99%
Broday - Exercise Price of $0.25 / share                                100,000        100,000       100,000           0.13%
Hargis /4                                                               500,000        500,000       500,000           0.67%
Fischbach /5                                                            800,000        800,000       800,000           1.07%
New AV Ventures /6                                                    1,000,000      1,000,000     1,000,000           1.34%
3CD - Exercise Price of $2.00 / share /7                              1,000,000      1,000,000     1,000,000           1.34%

PREFERRED STOCK - TOTAL                                 5,000,000
Convertible Preferred /8                                2,000,000     1,891,473        350,873     3,508,730           4.69%

Series B /9                                             1,000,000       272,100        196,050     1,960,500           2.62%
Series C /2                                                25,000        15,000         15,000     6,000,000           8.02%

Conversion Shares - The Purchasers /2                                                              4,000,000           5.35%

NUMBER OF FULLY DILUTED COMMON SHARES                                               59,169,003    74,806,310         100.00%
-----------------------------------------------------------------------------------------------------------------------------

<CAPTION>
        SHARES ISSUED - DETAIL                        ANTI-DILUTION   REGISTRATION RIGHTS /10
------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>             <C>
COMMON STOCK, $.001 PAR VALUE PER SHARE

WARRANTS TO PURCHASE COMMON
Class C - Exercise Price of $7.00 / share              Yes /A          Already registered
Kenney Securities - Exercise Price of $2.00 / share    Yes /A          Already registered
Global Drumz - Exercise Price of $7.00 / share         Yes /A          Already registered
Shemano - Exercise Price of $2.50 / share /1           Yes /A          Yes - piggyback
The Purchasers /2                                      Yes /A          Yes

OPTIONS TO PURCHASE COMMON
2000 Stock Option Plan /3                              Discretionary   Already registered
Global Drumz - Exercise Price of $2.00 / share         Yes /B          Already registered
Steerpike - Exercise Price of $0.25 / share            Yes /B          Already registered
Broday - Exercise Price of $0.25 / share               Yes /A          Already registered
Hargis /4                                              No              Yes
Fischbach /5                                           No              Piggyback for 100,000 shares
New AV Ventures /6                                     No              Piggyback for 300,000 shares
3CD - Exercise Price of $2.00 / share /7               No              Piggyback

PREFERRED STOCK - TOTAL
Convertible Preferred /8                                               No. But, Conversion Shares eligible for resale under Rule 144

Series B /9                                                            Conversion shares registered
Series C /2                                                            Yes - demand on conversion shares

Conversion Shares - The Purchasers /2                                  Yes

NUMBER OF FULLY DILUTED COMMON SHARES
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

General Note: The options and warrants listed above consitute "Purchase Rights"
under each of the Certificate of Designation and Warrant (each as defined in the
Securities Purchase Agreement).

<PAGE>

1/ To be issued upon closing of transaction with the Purchasers. In addition to
these warrants that are to be issued upon the closing of the transaction, in the
event that the Purchasers exercise all or part of the Warrants that they receive
at the closing, The Shemano Group will receive warrants to purchase an
additional 40,000 shares of Common Stock for each additional $1,000,000 raised.
Assuming the full exercise of its Warrants by the Purchasers, the Company would
be required to issue to The Shemano Group warrants to purchase an additional
1,440,000 shares of Common Stock at an exercise price of $2.50 per share.

2/ To be issued upon closing the transaction with the Purchasers. Assumes the
sale of 15,000 Units at $1,000 per Unit for a total of $15,000,000 and that such
Units provide for the purchase, in the aggregate of 15,000 shares of Series C
Preferred Stock and warrants to purchase 6,000,000 shares of Common Stock. Each
share of Series C Preferred originally convertible into 400 shares of Common
Stock. The Company has reserved 4,000,000 shares of its Common Stock for
issuance as "Premium" on the Series C Preferred or in the event of adjustments
to the conversion price of the Series C Preferred, or to the exercise price of
the Warrants, to be issued to the Purchasers at the closing.

3/ Includes options issued to Ryan Schinman to purchase up to 400,000 shares of
Common Stock. Pursuant to an agreement with Mr. Schinman, Mr. Schinman received
50,000 options at signing @ $2.91 per share and earns options to purchase an
additional 10,000 shares each month that the Company's Consulting Agreement with
Platinum Rye LLC is in force, up to 400,000 shares total.

4/ In December 2003, the Company entered into a Consulting Agreement with W.
Curtis Hargis Co. that allows W. Curtis Hargis Co. to earn options to purchase
up to 500,000 shares of Common Stock. Options to purchase the first 100,000
shares will be issued upon the Company entering a contract with "Retailer" and
will have an exercise price equal to the average trading price for the five days
prior to the signing of the Contract with the "Retailer" and the balance of the
400,000 options, if earned, will be based on the same price as the original
100,000 options.

5/ In November 2003, the Company entered into a contract with Bill Fischbach
that allows him to earn options to purchase up to 800,000 shares of Common Stock
with an exercise price equal to the closing bid price for the Common Stock on
the day immediately preceding the date the options are issued. This contract has
a three year term.

6/ The company expects to enter into a Consulting Agreement in January 2005 with
New AV Ventures. Pursuant to this Agreement, New AV Ventures will receive
300,000 restricted shares of Common Stock and options to purchase up to 700,000
shares of Common Stock at market prices based upon sales of the Company's
products to Commercial and Multi Level Residential properties.

7/ To be issued under a Consulting Agreement that the Company expects to enter
with 3CD Consulting.

8/ Originally issues 1,891,473 shares; 1,540,600 shares converted into Common
Stock per terms of the Convertible Preferred; each share converts into 10 shares
of Common Stock.

9/ Originally issues 272,100 shares; 76,050 shares converted into Common Stock
per terms of the Series B Preferred; each share converts into 10 shares of
Common Stock.

10/ All of the underlying shares, except those associated with the following
warrants and options, have been registered: The Shemano Group, Fishback, Hargis,
3CD and New AV Ventures.

A/ General protections for increases or decreases in shares or issuances and, in
some cases, if there are issuances without consideration.

B/ Includes price-based down-round anti-dilution protection, none of which will
be "triggered" by the sale and isuance of the Securities at the Closing.

<PAGE>

                                  SECTION 3(e)

                                      None.

<PAGE>

                                  SECTION 3(g)

                       SEC Documents, Financial Statements

The following SEC Documents were not timely filed:

1.    The Annual Report on Form 10-KSB for the year ended  December 31, 2002 was
      filed on May 21, 2003.

2.    The  Quarterly  Report on Form 10-QSB for the quarter ended March 31, 2003
      was filed on June 16, 2003.

3.    The  Quarterly  Report on Form 10-QSB for the quarter ended March 31, 2001
      was filed on May 30, 2001.

4.    Current  Reports  on Form  8-K may  not  have  been  timely  filed  in all
      instances.

The  Company  has not filed  Forms 8-K with  respect to the  following  material
agreements:

1.    Beth  Broday  Option  Agreement  (to be filed  with a Form 8-K  announcing
      closing of the transactions contemplated by the Agreement)

2.    Non-Exclusive  Finder's  Agreement,  dated  December  8,  2004,  effective
      November 30, 2004, between SLS International,  Inc. and The Shemano Group,
      Inc. (to be filed with a Form 8-K announcing  closing of the  transactions
      contemplated by the Agreement)

Other Contracts and Agreements

The Company may not have filed the following agreements with the SEC:

1.    The Company owes William G. Sterk  $25,000  pursuant to a Promissory  Note
      dated December 21, 2000

2.    The Company is the lessee under a Commercial Lease Agreement  (Equipment),
      dated October 10, 2003 (Lease No.  LA22554),  with Keiser  Equipment  Co.,
      Inc. The lease has an initial term of 60 months.

<PAGE>

                                  SECTION 3(h)

                          Internal Accounting Controls

      Without in any way limiting the  representations  and warranties set forth
in Section 3(g) of the  Agreement:  The Company is not yet subject to all of the
requirements of the Sarbanes-Oxley Act with respect to its internal controls and
disclosure  controls and procedures.  The Company (together with two consultants
hired  by  the  Company)  is in the  process  of  assessing  such  controls  and
procedures.  The Company  agrees that it will complete such  assessment  and the
implementation  of any necessary changes to such controls and procedures in time
to comply with the  requirements  with respect to such  controls and  procedures
under the  Sarbanes-Oxley  Act, as such  requirements  become  applicable to the
Company.

<PAGE>

                                  SECTION 3(i)

                           Absence of Certain Changes

      None.

<PAGE>

                                  SECTION 3(j)

                          Transactions With Affiliates

      On December 4, 2004,  the Company and Bull Creek Ranch LLC entered  into a
Lease  Agreement.  John Gott,  the  President,  Chief  Executive  Officer  and a
Director of the Company, is a Manager and a Member owning a 50% interest in Bull
Creek  Ranch LLC.  As a result,  Mr.  Gott has a material  interest in the Lease
Agreement.

      Beginning  in 2004,  the Company has been paying  $2,500 per month to Mike
Maples,  a member of the Company's  board of  directors,  to oversee the work by
outside  consultants  performed in connection with the Company's  Sarbanes-Oxley
Act compliance efforts.

<PAGE>

                                  SECTION 3(k)

                              Absence of Litigation

1.    The  Company  entered  into a Stock  Purchase  Option  Agreement  with the
      stockholders  of SA Sound,  B.V.  and SA USA on  February 6, 2004 (the "SA
      Sound Agreement").  In connection with this agreement,  the Company placed
      50,000  Euros  (approx.  $66,500 at current  exchange  rates) (the "Option
      Price") into escrow to purchase the option. The agreement provided for the
      following potential outcomes with regard to the Option Price:

      a.    If the Company  proceeded to purchase  the 2  companies,  the Option
            Price would be credited towards the final purchase price.

      b.    If the Company  discovered any material adverse facts in its ensuing
            diligence  review  of the 2  companies,  it would be  entitled  to a
            return of the Option Price if it made a request to the escrow agent.

      c.    If the  option  agreement  expired  and no  action  was taken by the
            Company  pursuant to #2 above, the stockholders of SA Sound B.V. and
            SA USA would receive the Option Price.

      In the  Company's  diligence  review of the 2 companies,  it found what it
      determined  to be many  material  adverse  facts,  such  that the  Company
      decided not to proceed with the  purchase of the 2 companies.  The Company
      timely demanded the return of the Option Price from the escrow agent.  The
      escrow  agent  (who was also an  interested  party  and  attorney  for the
      selling  companies)  refused  to return the money.  The  Company  sued the
      escrow agent in New York, the jurisdiction listed in the option agreement,
      and the case is now  pending  a  decision  with  regard  to the  Company's
      request for summary judgment.  The Company has no outstanding  obligations
      under the SA Agreement,  including,  without limitation, any obligation to
      issue any securities in the future.

3.    See Section  3(c) of the  Agreement  with  respect to the  issuance of the
      Company's Convertible Preferred Stock.

4.    See  Section  3(c) of  these  Disclosure  Schedules  with  respect  to the
      rescission rights under the heading "Rescission rights."

<PAGE>

                                  SECTION 3(l)

                              Intellectual Property

U.S. Patents

1.    Patent number US 6,794,932 B1

2.    Patent number US 6,563,377 B2

<PAGE>

                                  SECTION 3(m)

                                      Title

      The  Company's   lease  of  its  current   location  at  3119  S.  Scenic,
Springfield,  Missouri has expired and the Company  continues to lease the space
as a month-to-month tenant.

<PAGE>

                                  SECTION 3(o)

                                  Key Employee

      John M. Gott

<PAGE>

                                  SECTION 4(s)

                          Transactions with Affiliates

      On December 4, 2004,  the Company and Bull Creek Ranch LLC (the  "Lessor")
entered into a Lease  Agreement and Lease  Addendum.  John Gott,  the President,
Chief Executive Officer and a Director of the Company, is a Manager and a Member
owning a 50%  interest  in the  Lessor.  As a result,  Mr.  Gott has a  material
interest in the Lease Agreement.

      By the Lease  Addendum,  the Lessor  granted  the  Company  the right,  at
Company's option, to lease the remaining Premises at the same price and upon the
same terms and conditions of any bona fide offer for the lease thereof which the
Lessor  shall at any time  during  the  primary  term of the  Lease be ready and
willing to accept.

      Pursuant to the Lease and the Lease  Addendum,  the  Company  also has the
right to purchase the leased property at anytime during the original term of the
Lease. If the Company  exercises this option during the first year of the Lease,
the purchase price for such purchase  shall be  $3,500,000.00.  Thereafter,  the
purchase price shall increase by 5% of the $3,500,000.00  price each year of the
Lease term.

      The  Purchasers  agree that the  exercise  by the  Company of its right to
extend the Lease or to purchase the leased  property shall not be a violation of
Section 4(s) or require the prior consent of the Purchasers.EXHIBIT 10.4

                          REGISTRATION RIGHTS AGREEMENT

         This  REGISTRATION  RIGHTS  AGREEMENT (this  "AGREEMENT"),  dated as of
January 3, 2005,  is made by and among SLS  International,  Inc., a  corporation
organized  under  the laws of the State of  Delaware  (the  "COMPANY"),  and the
undersigned (together with their affiliates, the "INITIAL INVESTORS").

                                   BACKGROUND

         A. In connection  with that certain  Securities  Purchase  Agreement of
even date  herewith  by and among the Company  and the  Initial  Investors  (the
"SECURITIES  PURCHASE  AGREEMENT"),  the Company has agreed,  upon the terms and
subject to the conditions  contained  therein,  to issue and sell to the Initial
Investors (i) shares of the Company's Series C Convertible  Preferred Stock, par
value $0.001 per share (the "PREFERRED STOCK"), that are convertible into shares
of the Company's  common stock, par value $0.001 per share (the "COMMON STOCK"),
upon the terms and subject to the  limitations  and  conditions set forth in the
Certificate  of  Designation,  Rights  and  Preferences  with  respect  to  such
Preferred  Stock as originally  filed on December 29, 2004 and including any and
all amendments and certificates of correction  thereto through and including the
Issuance  Date,  as  such  term  is  defined   therein  (the   "CERTIFICATE   OF
DESIGNATION"),  and (ii) warrants (the  "WARRANTS")  to acquire shares of Common
Stock.  The shares of Common  Stock  issuable  upon  conversion  of or otherwise
pursuant  to  the  Preferred   Stock  and/or  the   Certificate  of  Designation
(including,  without  limitation,  the  shares of  Common  Stock  issuable  upon
conversion  of shares  of  Preferred  Stock  issued as  payment  of the  Premium
pursuant to Article IV of the Certificate of Designation) are referred to herein
as the "CONVERSION SHARES" and the shares of Common Stock issuable upon exercise
of or otherwise  pursuant to the Warrants are referred to herein as the "WARRANT
SHARES." This Agreement,  the  Certificate of Designation,  the Warrants and the
Securities  Purchase  Agreement  are  collectively  referred  to  herein  as the
"TRANSACTION DOCUMENTS."

         B.  To  induce  the  Initial  Investors  to  execute  and  deliver  the
Securities Purchase Agreement,  and to consummate the transactions  contemplated
thereby, the Company has agreed to provide certain registration rights under the
Securities Act of 1933, as amended, and the rules and regulations thereunder, or
any  similar  successor  statute  (collectively,   the  "SECURITIES  ACT"),  and
applicable state securities laws.

         NOW,  THEREFORE,  in  consideration  of the  premises  and  the  mutual
covenants  contained  herein  and other  good and  valuable  consideration,  the
receipt and  sufficiency of which are hereby  acknowledged,  the Company and the
Initial Investors, intending to be legally bound, hereby agree as follows:

1.       DEFINITIONS.

         (a) As used in this  Agreement,  the  following  terms  shall  have the
following meanings:

<PAGE>

                  (i) "INVESTORS" means the Initial Investors and any affiliated
transferees or affiliated  assignees who agree to become bound by the provisions
of this Agreement in accordance with Section 9 hereof.

                  (ii) "REGISTER,"  "REGISTERED," and "REGISTRATION"  refer to a
registration  effected  by  preparing  and filing a  Registration  Statement  or
Statements in compliance  with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering  securities on a
continuous  basis ("RULE 415"), and the declaration or ordering of effectiveness
of such  Registration  Statement by the United  States  Securities  and Exchange
Commission (the "SEC").

                  (iii)  "REGISTRABLE   SECURITIES"  means  (a)  the  Conversion
Shares,  (b) the Warrant  Shares,  and (c) any shares of capital stock issued or
issuable,  from  time  to  time,  as a  distribution  on or in  exchange  for or
otherwise with respect to any of the foregoing  (including  the Preferred  Stock
and the  Warrants),  whether  as  Premium  (as  defined  in the  Certificate  of
Designation), default payments, on account of anti-dilution or other adjustments
or otherwise.

                  (iv) "REGISTRATION  STATEMENT" means a registration  statement
of  the  Company  that  covers  the  Registrable  Securities  pursuant  to  this
Agreement,  including  the  prospectus,  any and  all  pre-  and  post-effective
amendments  and any and all  supplements  and  exhibits  thereto and any and all
documents incorporated by reference therein.

         (b)  Capitalized  terms used herein and not  otherwise  defined  herein
shall  have  the  respective  meanings  set  forth  in the  Securities  Purchase
Agreement.

2.       REGISTRATION.

         (a) Mandatory Registration. The Company shall prepare promptly and file
with the SEC as soon as  practicable,  but in no event later than the  thirtieth
(30th) day  following  the date  hereof  (the  "FILING  DATE"),  a  Registration
Statement on Form SB-2 (or, if Form SB-2 is not then available,  on such form of
Registration  Statement as is then available to effect a registration  of all of
the  Registrable  Securities,  subject to the consent of the Initial  Investors)
covering  the  resale  of at  least  sixteen  million  (16,000,000)  Registrable
Securities.  The Registration Statement filed hereunder, to the extent allowable
under the Securities Act and the Rules  promulgated  thereunder  (including Rule
416),   shall  state  that  such   Registration   Statement   also  covers  such
indeterminate number of additional shares of Common Stock as may become issuable
upon  conversion of the Preferred  Stock and exercise of the Warrants to prevent
dilution  resulting  from stock splits,  stock  dividends or other  transactions
pursuant to the terms of the Preferred  Stock and the Warrants.  The Registrable
Securities  included on the Registration  Statement shall be allocated among the
Investors  as set forth in  Section  11(k)  hereof.  Drafts of the  Registration
Statement  (and each  amendment  or  supplement  thereto,  and each  request for
acceleration of effectiveness  thereof) shall be provided to (and subject to the
reasonable  approval  of) the  Initial  Investors  and  their  counsel  (to such
counsel,  if any, in accordance  with Section 11(b) hereof and at such counsel's
address  set  forth on each  Initial  Investor's  signature  page  hereto  or as
otherwise  may be provided  after the date hereof)  prior to its filing or other
submission.

                                       2
<PAGE>

         (b) Payments by the Company.  The Company shall use its reasonable best
efforts to cause the  Registration  Statement  required to be filed  pursuant to
Section 2(a) hereof to become effective as soon as practicable,  but in no event
later than the ninetieth  (90th) day  following the date hereof.  At the time of
effectiveness,  the Company shall ensure that such Registration Statement covers
all of the  Registrable  Securities,  including,  if  necessary,  by  filing  an
amendment prior to the effective date of the Registration  Statement to increase
the  number  of  Registrable   Securities  covered  thereby.   If  (i)  (A)  the
Registration  Statement  required to be filed pursuant to Section 2(a) hereof is
not filed with the SEC prior to the Filing Date or declared effective by the SEC
on  or  before  the  ninetieth   (90th)  day  following  the  date  hereof  (the
"REGISTRATION  DEADLINE") or (B) any Registration Statement required to be filed
pursuant  to Section  3(b)  hereof is not  declared  effective  by the SEC on or
before the sixtieth  (60th) day following the  applicable  Registration  Trigger
Date (as defined in Section 3(b) below), or (ii) if, after any such Registration
Statement  has  been  declared  effective  by  the  SEC,  sales  of  any  of the
Registrable  Securities  required to be covered by such  Registration  Statement
(including  any  Registrable  Securities  required to be registered  pursuant to
Section 3(b) hereof) cannot be made pursuant to such Registration  Statement (by
reason of a stop  order or the  Company's  failure  to update  the  Registration
Statement or for any other reason outside the control of the Investors) or (iii)
the Common Stock is not traded, listed or included for quotation, as applicable,
on the Nasdaq  Over-the-Counter  Bulletin Board (the "OTC"), the Nasdaq SmallCap
Market (the  "SMALLCAP  MARKET"),  the Nasdaq  National  Market  (the  "NATIONAL
MARKET"),  the New York Stock Exchange (the "NYSE"), the American Stock Exchange
(the  "AMEX")  or some  other  national  securities  exchange  or  automated  or
electronic  quotation  system  at  any  time  after  the  Registration  Deadline
hereunder,  then the Company will make payments to each Investor in such amounts
and at such  times as shall  be  determined  pursuant  to this  Section  2(b) as
partial  relief for the damages to the  Investors by reason of any such delay in
or reduction of their ability to sell the Registrable  Securities  (which remedy
shall not be exclusive of any other remedies available at law or in equity). The
Company  shall pay to each  Investor  an amount  equal to the product of (x) the
number  of shares of  Preferred  Stock  then  outstanding  (including,  for this
purpose,  any shares of Preferred Stock that have been converted into Conversion
Shares then held by such  Investor as if such shares of Preferred  Stock had not
been so converted) multiplied by the per share purchase price, multiplied by (y)
one  hundredth  (.01),  for each  thirty  (30) day period (or  portion  thereof)
beginning the  ninetieth  (90th) day after the date hereof and ending on the one
hundred and  eightieth  (180th) day after the date  hereof,  and two  hundredths
(.02) for each thirty (30) day period  beginning  the one hundred and  eightieth
(180th) day after the date hereof (or portion thereof) (A) after the Filing Date
and prior to the date the Registration  Statement is filed with the SEC pursuant
to Section 2(a), (B) after the  Registration  Deadline and prior to the date the
Registration  Statement filed pursuant to Section 2(a) is declared  effective by
the SEC, provided,  however, that in the event the SEC commences a review of the
Registration  Statement,  the amount  payable to each Investor  pursuant to this
Section  2(b)(x)(B)  shall  begin  accruing  on the one  hundred  and  twentieth
(120th),  and not the ninetieth (90th), day after the date hereof, (C) after the
sixtieth (60th) day following a Registration  Trigger Date and prior to the date
the  Registration  Statement  filed  pursuant to Section 3(b) hereof is declared
effective by the SEC, and (D) during which sales of any  Registrable  Securities
cannot  be  made  pursuant  to  any  such   Registration   Statement  after  the
Registration  Statement has been  declared  effective or the Common Stock is not
traded,  listed or  included  for  quotation,  as  applicable,  on the OTC,  the
SmallCap  Market,  the  National  Market,  NYSE,  AMEX,  or some other  national

                                       3
<PAGE>

securities  exchange or  automated or  electronic  quotation  system;  provided,
however,  that, for purpose of calculating  the payment amount owed to any given
Investor,  there  shall be excluded  from each such period any delays  which are
solely  attributable  to changes  required by such Investor in the  Registration
Statement  with respect to  information  relating to such  Investor,  including,
without  limitation,  changes  to the  plan  of  distribution  (other  than  any
corrections of Company mistakes with respect to information  previously provided
by such Investor).  All such amounts required to be paid hereunder shall be paid
in cash  within  five days after the end of each  period that gives rise to such
obligation,  provided that, if any such period extends for more than thirty (30)
days, interim payments shall be made for each such 30 day period.

         (c) Piggy-Back  Registrations.  If, at any time prior to the expiration
of the Registration  Period (as defined in Section 3(a) below) the Company shall
file with the SEC a Registration  Statement  relating to an offering for its own
account or the account of others under the  Securities  Act of any of its equity
securities  (other  than  on Form  S-4 or Form  S-8 or  their  then  equivalents
relating  to equity  securities  to be  issued  solely  in  connection  with any
acquisition  of  any  entity  or  business  or  equity  securities  issuable  in
connection with stock option or other employee benefit plans), the Company shall
send to each  Investor  written  notice of such filing,  and if,  within 15 days
after the date of such notice,  such Investor  shall so request in writing,  the
Company  shall  include in such  Registration  Statement  all or any part of the
Registrable Securities such Investor requests to be registered.  Notwithstanding
the foregoing,  in the event that, in connection  with any  underwritten  public
offering,  the managing  underwriter(s) thereof shall impose a limitation on the
number of  shares of Common  Stock  which may be  included  in the  Registration
Statement because, in such underwriter(s)' judgment,  marketing or other factors
dictate such limitation is necessary to facilitate public distribution, then the
Company shall be obligated to include in such  Registration  Statement only such
limited  portion  of the  Registrable  Securities  with  respect  to which  such
Investor has  requested  inclusion  hereunder as the  underwriter  shall permit;
provided,  however,  that (i) the  Company  shall not  exclude  any  Registrable
Securities unless the Company has first excluded all outstanding securities, the
holders of which are not contractually  entitled to inclusion of such securities
in such  Registration  Statement or are not  contractually  entitled to pro rata
inclusion  with the  Registrable  Securities,  (ii) after  giving  effect to the
immediately  preceding  proviso,  any such exclusion of  Registrable  Securities
shall be made pro rata  among  the  Investors  seeking  to  include  Registrable
Securities and the holders of other securities  having the contractual  right to
inclusion of their securities in such Registration Statement by reason of demand
registration  rights,  in proportion to the number of Registrable  Securities or
other securities, as applicable,  sought to be included by each such Investor or
other holder, and (iii) no such reduction shall reduce the amount of Registrable
Securities  included in the registration  below  twenty-five  (25%) of the total
amount of securities included in such registration.  No right to registration of
Registrable  Securities  under this Section 2(c) shall be construed to limit any
registration  required  under Section 2(a) hereof.  If an offering in connection
with which an Investor is entitled to registration under this Section 2(c) is an
underwritten  offering,  then each Investor  whose  Registrable  Securities  are
included in such  Registration  Statement shall,  unless otherwise agreed by the
Company,  offer and sell such Registrable Securities in an underwritten offering
using the same  underwriter or  underwriters  and,  subject to the provisions of
this Agreement, on the same terms and conditions as other shares of Common Stock
included in such underwritten offering.

                                       4
<PAGE>

         (d)  Eligibility  for Form  SB-2 or S-2.  The  Company  represents  and
warrants that it meets the requirements for the use of Form SB-2 or Form S-2 for
registration  of the sale by the Initial  Investor and any other Investor of the
Registrable  Securities  and the Company  shall file all reports and  statements
required  to be filed by the  Company  with the SEC in a timely  manner so as to
thereafter maintain such eligibility for the use of such form.

3.       OBLIGATIONS OF THE COMPANY.

         In connection with the registration of the Registrable Securities,  the
Company shall have the following obligations:

         (a) The Company shall respond  promptly to any and all comments made by
the  staff  of the  SEC to  any  Registration  Statement  required  to be  filed
hereunder,  and shall  submit to the SEC,  before the close of  business  on the
second business day immediately  following the business day on which the Company
learns  (either by telephone or in writing) that no review of such  Registration
Statement  will be made by the SEC or that the  staff of the SEC has no  further
comments  on such  Registration  Statement,  as the case may be, a  request  for
acceleration of the effectiveness of such  Registration  Statement to a time and
date as soon as practicable  (unless the Company has determined,  upon advice of
counsel,  that an  amendment  to such  Registration  Statement is required to be
filed prior to effectiveness, in which case the Company shall use its reasonable
best efforts to amend the  Registration  Statement  and cause the SEC to declare
the Registration  Statement,  as so amended,  effective as soon as practicable).
The Company shall keep such Registration  Statement  effective  pursuant to Rule
415 at all times  until such date as is the earlier of (i) the date on which all
of the  Registrable  Securities have been sold and (ii) the date on which all of
the  Registrable  Securities  may be  immediately  sold  to the  public  without
registration or restriction  pursuant to Rule 144(k) under the Securities Act or
any  successor  provision  (the  "REGISTRATION   PERIOD"),   which  Registration
Statement  (including  any amendments or  supplements  thereto and  prospectuses
contained therein and all documents incorporated by reference therein) (A) shall
comply in all material  respects with the requirements of the Securities Act and
the rules and  regulations of the SEC  promulgated  thereunder and (B) shall 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 not
misleading.  The  financial  statements  of the  Company  included  in any  such
Registration  Statement or incorporated by reference therein (x) shall comply as
to form in all material respects with the applicable accounting requirements and
the published rules and regulations of the SEC applicable with respect  thereto,
(y) shall be prepared in  accordance  with U.S.  generally  accepted  accounting
principles,  consistently  applied during the periods involved (except as may be
otherwise indicated in such financial statements or the notes thereto or, in the
case of  unaudited  interim  statements,  to the  extent  they  may not  include
footnotes or may be condensed on summary  statements)  and (z) fairly present in
all material respects the consolidated financial position of the Company and its
consolidated  subsidiaries as of the dates thereof and the consolidated  results
of their  operations and cash flows for the periods then ended (subject,  in the
case of unaudited statements, to immaterial year-end adjustments).

         (b) The Company shall (i) prepare and file with the SEC such amendments
(including  post-effective  amendments)  and  supplements  to  any  Registration
Statement  required to be filed  hereunder and the prospectus used in connection
with  any  such  Registration  Statement  as  may  be  necessary  to  keep  such

                                       5
<PAGE>

Registration  Statement  effective at all times during the Registration  Period,
and (ii)  during the  Registration  Period,  comply with the  provisions  of the
Securities Act with respect to the disposition of all Registrable  Securities of
the Company covered by any such Registration Statement until such time as all of
such  Registrable  Securities  have  been  disposed  of in  accordance  with the
intended methods of disposition by the seller or sellers thereof as set forth in
such Registration Statement. In the event the number of shares available under a
Registration  Statement  filed  pursuant to this Agreement is, for any three (3)
consecutive  trading  days (the last of such  three (3)  trading  days being the
"REGISTRATION  TRIGGER  DATE"),  insufficient  to cover  all of the  Registrable
Securities  then issued or  issuable  upon  conversion  of the  Preferred  Stock
(without  giving  effect  to any  limitations  on  conversion  contained  in the
Certificate of Designation) and exercise of the Warrants  (without giving effect
to any  limitations on exercise  contained in the  Warrants),  the Company shall
provide each Investor  written notice of such  Registration  Trigger Date within
three business days thereafter and shall amend the  Registration  Statement,  or
file a new  Registration  Statement (on the short form  available  therefor,  if
applicable), or both, so as to cover all of the Registrable Securities issued or
issuable upon  conversion of the Preferred  Stock (without  giving effect to any
limitations  on  conversion  contained in the  Certificate  of  Designation)  or
exercise of the Warrants  (without  giving effect to any limitations on exercise
contained in the Warrants) as of the Registration Trigger Date, in each case, as
soon as  practicable,  but in any event  within 20 days  after the  Registration
Trigger Date. The Company shall cause such amendment(s)  and/or new Registration
Statement(s)  to become  effective as soon as  practicable  following the filing
thereof.  In the event the Company fails to obtain the effectiveness of any such
Registration  Statement  within 60 days after a Registration  Trigger Date, each
Investor shall  thereafter  have the option,  exercisable in whole or in part at
any time and from time to time by delivery of a written notice to the Company (a
"MANDATORY  REDEMPTION NOTICE"),  to require the Company to redeem for cash such
number of the Investor's  shares of the Preferred  Stock at a price per share of
Preferred Stock equal to the Redemption Amount (as defined in the Certificate of
Designation)  such  that,  following  such  redemption,   the  total  number  of
Registrable Securities included on the Registration Statement for resale by such
Investor  is at  least  equal to all of the  Registrable  Securities  issued  or
issuable upon  conversion of such  Investor's  Preferred  Stock (without  giving
effect  to  any  limitations  on  conversion  contained  in the  Certificate  of
Designation) and exercise of such Investor's  Warrants (without giving effect to
any limitation on exercise  contained in the Warrants).  If the Company fails to
redeem any of such  Preferred  Stock within five business days after its receipt
of a Mandatory  Redemption  Notice,  then such Investor shall be entitled to the
remedies provided in Article VIII.C of the Certificate of Designation.

         (c) The  Company  shall  furnish  to each  Investor  whose  Registrable
Securities are included in a Registration  Statement and such  Investor's  legal
counsel (i) promptly after the same is prepared and publicly distributed,  filed
with  the  SEC or  received  by the  Company,  as  applicable,  one  copy of the
Registration  Statement and any amendment thereto,  each preliminary  prospectus
and prospectus and each amendment or supplement thereto, and, in the case of the
Registration  Statement  required  to be filed  pursuant to Section  2(a),  each
letter written by or on behalf of the Company to the SEC or the staff of the SEC

                                       6
<PAGE>

(including,  without limitation,  any request to accelerate the effectiveness of
the   Registration   Statement   or  amendment   thereto),   and  each  item  of
correspondence  from the SEC or the staff of the SEC,  in each case  relating to
the  Registration  Statement  (other  than any  portion  thereof  that  contains
information for which the Company has sought  confidential  treatment),  (ii) on
the  date  of  effectiveness  of the  Registration  Statement  or any  amendment
thereto, a notice stating that the Registration  Statement or amendment has been
declared effective, and (iii) such number of copies of a prospectus, including a
preliminary  prospectus,  all  amendments and  supplements  thereto and all such
other  documents as such Investor may reasonably  request in order to facilitate
the disposition of the Registrable Securities owned by such Investor.

         (d) The Company shall use its  reasonable  best efforts to (i) register
and qualify the Registrable  Securities  covered by any  Registration  Statement
under such other  securities  or "blue  sky" laws of such  jurisdictions  in the
United States as each Investor who holds  Registrable  Securities  being offered
reasonably  requests,   (ii)  prepare  and  file  in  those  jurisdictions  such
amendments  (including  post-effective   amendments)  and  supplements  to  such
registrations   and   qualifications   as  may  be  necessary  to  maintain  the
effectiveness  thereof  during the  Registration  Period,  (iii) take such other
actions as may be necessary to maintain such registrations and qualifications in
effect at all times  during  the  Registration  Period,  and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable  Securities
for sale in such jurisdictions; provided, however, that the Company shall not be
required in connection  therewith or as a condition thereto to (A) qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this Section 3(d),  (B) subject  itself to general  taxation in any such
jurisdiction,  (C) file a general  consent  to  service  of  process in any such
jurisdiction,  (D) provide any undertakings that cause the Company undue expense
or burden, or (E) make any change in its Certificate of Incorporation or Bylaws,
which in each  case the  Board of  Directors  of the  Company  determines  to be
contrary to the best interests of the Company and its stockholders.

         (e) As promptly as practicable  after becoming aware of such event, the
Company  shall (i) notify  each  Investor  by  telephone  and  facsimile  of the
happening  of any event,  as a result of which the  prospectus  included  in any
Registration Statement that includes Registrable Securities of such Investor, 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,  and (ii) promptly  prepare a supplement or
amendment to such  Registration  Statement  to correct such untrue  statement or
omission,  and deliver such number of copies of such  supplement or amendment to
each Investor as such Investor may reasonably request.

         (f) The Company  shall use its  reasonable  best efforts (i) to prevent
the  issuance  of any stop order or other  suspension  of  effectiveness  of any
Registration  Statement that includes  Registrable  Securities,  and, if such an
order is  issued,  to  obtain  the  withdrawal  of such  order  at the  earliest
practicable  moment  (including in each case by amending or  supplementing  such
Registration Statement),  and (ii) to notify each Investor who holds Registrable
Securities  being  sold  (or,  in the  event of an  underwritten  offering,  the
managing  underwriters) of the issuance of such order and the resolution thereof
(and if such  Registration  Statement is supplemented  or amended,  deliver such
number  of copies of such  supplement  or  amendment  to each  Investor  as such
Investor may reasonably request).

         (g) The Company shall permit a single firm of counsel designated by the
Initial  Investors  to review any  Registration  Statement  required to be filed
hereunder and all amendments and supplements thereto a reasonable period of time
prior to its filing with the SEC,  and not file any  document in a form to which
such counsel reasonably objects.

                                       7
<PAGE>

         (h) The Company shall make generally  available to its security holders
as soon as  practicable,  but in no event  later than 90 days after the close of
the period covered  thereby,  an earnings  statement (in form complying with the
provisions of Rule 158 under the Securities Act) covering a twelve-month  period
beginning  not later than the first day of the  Company's  fiscal  quarter  next
following the effective date of the Registration Statement.  The Company will be
deemed to have  complied with its  obligations  under this Section 3(h) upon the
Company's filing, on an appropriate form, the appropriate  report of the Company
as required by the  Securities  Exchange Act of 1934, as amended,  and the rules
and regulations thereunder, or any similar successor statute (collectively,  the
"EXCHANGE ACT").

         (i) The Company shall hold in confidence and not make any disclosure of
information concerning an Investor provided to the Company unless (i) disclosure
of such  information  is necessary  to comply with  federal or state  securities
laws, (ii) the disclosure of such information is necessary to avoid or correct a
misstatement  or omission  in any  Registration  Statement  that  includes  such
Investor's  Registrable  Securities,  (iii) the release of such  information  is
ordered pursuant to a subpoena or other order from a court or governmental  body
of  competent  jurisdiction,  (iv)  such  information  has been  made  generally
available  to the public  other than by  disclosure  in violation of this or any
other  agreement,  or (v) such  Investor  consents  in  writing  to the form and
content of any such disclosure. The Company shall, upon learning that disclosure
of any  information  concerning  an  Investor  is  sought  in or by a  court  or
governmental body of competent  jurisdiction or through other means, give prompt
written notice to such Investor prior to making such  disclosure,  and cooperate
with the Investor,  at the Investor's  expense,  in taking appropriate action to
prevent disclosure of, or to obtain a protective order for, such information.

         (j) The Company shall use its reasonable best efforts to promptly cause
all of the Registrable  Securities  covered by any Registration  Statement to be
traded,  listed or designated  for  quotation,  as  applicable,  on the OTC, the
SmallCap Market,  the National Market,  the NYSE, the AMEX or any other national
securities  exchange or automated  or  electronic  quotation  system and on each
additional  national  securities  exchange or automated or electronic  quotation
system on which securities of the same class or series issued by the Company are
then listed or quoted,  if any, if the listing or quotation of such  Registrable
Securities  is then  permitted  under the rules of such exchange or automated or
electronic  quotation system, and in any event,  without limiting the generality
of the  foregoing,  to arrange  for or  maintain  at least two market  makers to
register with the National Association of Securities Dealers,  Inc. (the "NASD")
as such with respect to the Registrable Securities.

         (k) The Company shall provide a transfer agent and registrar, which may
be a single entity, for the Registrable  Securities not later than the effective
date of the Registration Statement required to be filed pursuant to Section 2(a)
hereof.

         (l) The Company shall cooperate with any Investor who holds Registrable
Securities being offered and the managing  underwriter or underwriters,  if any,
to facilitate the timely  preparation and delivery of certificates  (not bearing
any  restrictive  legends)  representing  Registrable  Securities  to be sold or
offered pursuant to any Registration  Statement and enable such  certificates to
be in such denominations or amounts,  as the case may be, and registered in such
names, as such Investor or the managing underwriter or underwriters, if any, may

                                       8
<PAGE>

reasonably  request.  Without  limiting the generality of the foregoing,  within
three business days after any Registration  Statement that includes  Registrable
Securities  is declared  effective  by the SEC,  the  Company  shall cause legal
counsel  selected  by the  Company  to  deliver  to the  transfer  agent for the
Registrable Securities (with copies to any Investor whose Registrable Securities
are included in such Registration Statement),  an opinion of such counsel in the
form attached hereto as Exhibit A.

         (m) At the  reasonable  request  of any  Investor,  the  Company  shall
prepare  and  file  with  the  SEC  such  amendments  (including  post-effective
amendments) and supplements to any Registration  Statement  required to be filed
hereunder and the prospectus used in connection with such Registration Statement
as may be  necessary  in order to change the plan of  distribution  set forth in
such Registration Statement.

         (n) The Company  shall  comply with all  applicable  laws  related to a
Registration  Statement and offering and sale of securities  and all  applicable
rules and  regulations  of  governmental  authorities  in  connection  therewith
(including,  without limitation, the Securities Act and the Exchange Act and the
rules and regulations thereunder promulgated by the SEC.)

         (o) From and after the date of this  Agreement,  the Company shall not,
and shall not agree to,  allow the holders of any  securities  of the Company to
include any of their  securities  which are not  Registrable  Securities  in the
Registration  Statement  required to be filed  pursuant to Section  2(a) or 3(b)
hereof  without  the  consent of the  holders of a majority  in  interest of the
Registrable Securities,  except that the Company may include in the Registration
Statement the  securities  identified  as  "Securities  Subject to  Registration
Rights" in Section 3(c) of the  Disclosure  Schedule  attached to the Securities
Purchase Agreement.

         (p) The  Company  shall  make  available  for  inspection  by (i)  each
Investor, (ii) any underwriter  participating in any disposition pursuant to any
Registration Statement,  (iii) one firm of attorneys and one firm of accountants
or other  agents  retained  by the  Investors,  and  (iv) one firm of  attorneys
retained by all such underwriters (collectively, the "INSPECTORS") all pertinent
financial and other records, and pertinent corporate documents and properties of
the  Company  (collectively,  the  "RECORDS"),  as  shall be  reasonably  deemed
necessary  by each  Inspector  to enable  such  Inspector  to  exercise  its due
diligence  responsibility,  and  cause the  Company's  officers,  directors  and
employees to supply all information  which any Inspector may reasonably  request
for purposes of such due diligence; provided, however, that each Inspector shall
hold in confidence and shall not make any disclosure  (except to an Investor) of
any Record or other information which the Company determines in good faith to be
confidential,  and of which determination the Inspectors are so notified, unless
(A)  the  disclosure  of such  Records  is  necessary  to  avoid  or  correct  a
misstatement or omission in any Registration Statement,  (B) the release of such
Records  is  ordered  pursuant  to a  subpoena  or other  order  from a court or
government  body  of  competent  jurisdiction,  or (C) the  information  in such
Records has been made generally available to the public other than by disclosure
in violation of this or any other  agreement.  Nothing herein shall be deemed to
limit any Investor's ability to sell Registrable  Securities in a manner that is
otherwise consistent with applicable laws and regulations.

         (q) In the case of an underwritten  public offering,  at the request of
any Investor,  the Company shall furnish,  on the date of  effectiveness  of the
Registration  Statement  (i) an  opinion,  dated as of such date,  from  counsel

                                       9
<PAGE>

representing  the Company  addressed to any such Investor and in form, scope and
substance as is customarily given in an underwritten  public offering and (ii) a
letter,  dated  such  date,  from the  Company's  independent  certified  public
accountants  in form  and  substance  as is  customarily  given  by  independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and any such Investor.

4.       OBLIGATIONS OF THE INVESTORS.

         In connection with the registration of the Registrable Securities, each
Investor shall have the following obligations:

         (a) It shall be a condition precedent to the obligations of the Company
to effect  the  registration  pursuant  to this  Agreement  with  respect to the
Registrable Securities of a particular Investor that such Investor shall furnish
to the Company such information  regarding  itself,  the Registrable  Securities
held by it and the intended method of disposition of the Registrable  Securities
held by it as shall be reasonably  required to effect the  registration  of such
Registrable  Securities and shall execute such documents in connection with such
registration as the Company may reasonably  request.  At least five trading days
prior to the first anticipated  filing date of the Registration  Statement,  the
Company shall notify each Investor of the information the Company  requires from
each such Investor.

         (b) Each Investor,  by such  Investor's  acceptance of the  Registrable
Securities,  agrees to cooperate with the Company as reasonably requested by the
Company  in  connection  with the  preparation  and  filing of any  Registration
Statement required to be filed hereunder,  unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from such Registration Statement.

         (c) Upon receipt of any notice from the Company of the happening of any
event  of the  kind  described  in  Section  3(e) or 3(f)  with  respect  to any
Registration  Statement including  Registrable  Securities,  each Investor shall
immediately  discontinue  disposition of Registrable Securities pursuant to such
Registration  Statement  until  such  Investor's  receipt  of the  copies of the
supplemented  or amended  prospectus  contemplated by Sections 3(e) and 3(f), as
applicable,  and, if so directed by the Company,  such Investor shall deliver to
the  Company  (at the expense of the  Company)  or destroy  (and  deliver to the
Company a certificate of destruction)  all copies in such Investor's  possession
of the prospectus  covering such Registrable  Securities  current at the time of
receipt  of such  notice.  Notwithstanding  the  foregoing  or  anything  to the
contrary in this Agreement,  but subject to compliance with applicable laws, the
Company shall cause the transfer agent for the Registrable Securities to deliver
unlegended  shares of Common Stock to a transferee  of an Investor in accordance
with the terms of the Preferred  Stock and Warrants in connection  with any sale
of  Registrable  Securities  with respect to which any such Investor has entered
into a contract  for sale prior to receipt of such notice and for which any such
Investor has not yet settled.

         (d)  No  Investor  may  participate  in any  underwritten  distribution
hereunder  unless such Investor (i) agrees to sell such  Investor's  Registrable
Securities on the basis provided in any  underwriting  arrangements in usual and
customary  form  entered into by the Company,  (ii)  completes  and executes all

                                       10
<PAGE>

questionnaires,  powers of attorney,  indemnities,  underwriting  agreements and
other  documents  reasonably  required  under  the  terms  of such  underwriting
arrangements,  (iii)  agrees  to pay  its pro  rata  share  of all  underwriting
discounts  and  commissions  and any expenses in excess of those  payable by the
Company  pursuant to Section 5 below, and (iv) complies with all applicable laws
in connection  therewith.  Notwithstanding  anything in this Section 4(d) to the
contrary, this Section 4(d) is not intended to limit any Investor's rights under
Sections 2(a) or 3(b) hereof.

5.       EXPENSES OF REGISTRATION.

         All reasonable  out-of-pocket  expenses  incurred by the Company and/or
the  Investors  in  connection  with  registrations,  filings or  qualifications
pursuant  to  Sections  2  and  3  above  (including,  without  limitation,  all
registration,  listing and qualification fees, printers and accounting fees, the
fees and disbursements of counsel for the Company and the fees and disbursements
of one counsel  selected by the Investors,  and any  underwriting  discounts and
commissions) shall be borne by the Company.  In addition,  the Company shall pay
(on an as-incurred basis) each Investor's costs and expenses (including, without
limitation,  legal fees)  incurred in  connection  with the  enforcement  of the
rights of such Investor hereunder.

6.       INDEMNIFICATION.

         In the event any Registrable  Securities are included in a Registration
Statement under this Agreement:

         (a) To the extent permitted by law, the Company shall  indemnify,  hold
harmless and defend (i) each Investor who holds such Registrable Securities, and
(ii)  the  directors,   officers,   partners,   members,  employees  and  agents
(including,  without  limitation,  legal counsel) of each such Investor and each
person, if any, who controls each such Investor within the meaning of Section 15
of the  Securities  Act or Section 20 of the  Exchange  Act (each,  an "INVESTOR
INDEMNIFIED  PERSON"),  against any joint or several  losses,  claims,  damages,
liabilities  or expenses  (collectively,  together with actions,  proceedings or
inquiries by any regulatory or self-regulatory  organization,  whether commenced
or  threatened,  in respect  thereof,  "CLAIMS") to which any of them may become
subject  insofar as such Claims  arise out of or are based upon:  (A) any untrue
statement  or alleged  untrue  statement  of a material  fact in a  Registration
Statement or the omission or alleged  omission to state  therein a material fact
required  to  be  stated  or  necessary  to  make  the  statements  therein  not
misleading,  (B) any untrue  statement or alleged untrue statement of a material
fact contained in any preliminary prospectus if used prior to the effective date
of such Registration Statement, or contained in the final prospectus (as amended
or  supplemented,  if the  Company  files any  amendment  thereof or  supplement
thereto with the SEC) or the omission or alleged  omission to state  therein any
material fact  necessary to make the  statements  made therein,  in light of the
circumstances  under which the statements therein were made, not misleading,  or
(C) any violation or alleged violation by the Company of the Securities Act, the
Exchange  Act or  any  other  law  (including,  without  limitation,  any  state
securities  law),  rule  or  regulation  relating  to the  offer  or sale of the
Registrable  Securities  (the matters in the foregoing  clauses (A) through (C),
collectively,  "VIOLATIONS").  Subject to the  restrictions set forth in Section
6(c) with respect to the number of legal  counsel,  the Company shall  reimburse
each  Investor  and each other  Investor  Indemnified  Person,  promptly as such

                                       11
<PAGE>

expenses are incurred and are due and payable,  for any reasonable legal fees or
other reasonable  expenses incurred by them in connection with  investigating or
defending  any such Claim.  Notwithstanding  anything to the contrary  contained
herein, the indemnification  agreement contained in this Section 6(a): (x) shall
not apply to a Claim  arising out of or based upon a Violation  which  occurs in
reliance upon and in  conformity  with  information  furnished in writing to the
Company  by  such  Investor   Indemnified   Person  expressly  for  use  in  the
Registration  Statement or any such amendment thereof or supplement thereto; (y)
shall not apply to amounts paid in settlement of any Claim if such settlement is
effected  without the prior written consent of the Company,  which consent shall
not  be  unreasonably   withheld;  and  (z)  with  respect  to  any  preliminary
prospectus, shall not inure to the benefit of any Investor Indemnified Person if
the untrue  statement or omission of material fact contained in the  preliminary
prospectus was corrected on a timely basis in the prospectus, as then amended or
supplemented,  if such  corrected  prospectus  was timely made  available by the
Company pursuant to Section 3(c) hereof, and the Investor Indemnified Person was
promptly advised in writing not to use the incorrect prospectus prior to the use
giving rise to a Violation and such Investor Indemnified Person, notwithstanding
such  advice,  used it.  Such  indemnity  shall  remain in full force and effect
regardless of any investigation made by or on behalf of the Investor Indemnified
Person and shall  survive the  transfer  of the  Registrable  Securities  by the
Investors pursuant to Section 9 hereof.

         (b) In connection with any Registration  Statement in which an Investor
is  participating,  (i) each such  Investor  shall,  severally  and not jointly,
indemnify,  hold harmless and defend,  to the same extent and in the same manner
set forth in Section  6(a),  the  Company,  each of its  directors,  each of its
officers who signs the Registration Statement, its employees and each person, if
any, who controls the Company within the meaning of Section 15 of the Securities
Act or  Section  20 of the  Exchange  Act,  and any  other  stockholder  selling
securities  pursuant to the  Registration  Statement or any of its  directors or
officers or any person who controls such  stockholder  within the meaning of the
Securities  Act  or  the  Exchange  Act  and  its  agents  (including,   without
limitation,  its legal counsel) (each, a "COMPANY INDEMNIFIED PERSON"),  against
any Claims to which any of them may become subject  insofar as such Claims arise
out of or are based upon any Violation,  in each case to the extent (and only to
the extent) that such Violation  occurs in reliance upon and in conformity  with
written information  furnished to the Company by such Investor expressly for use
in  connection  with  such  Registration  Statement;  and  (ii)  subject  to the
restrictions  set forth in Section  6(c),  such  Investor  shall  reimburse  the
Company Indemnified Persons,  promptly as such expenses are incurred and are due
and payable, for any legal fees or other reasonable expenses incurred by them in
connection with  investigating or defending any such Claim;  provided,  however,
that the  indemnification  obligations  contained in this Section 6(b) shall not
apply to amounts paid in settlement of any Claim if such  settlement is effected
without the prior written  consent of such Investor,  which consent shall not be
unreasonably withheld; and provided,  further, that the Investor shall be liable
under this Agreement  (including  this Section 6(b) and Section 7) for only that
amount as does not exceed the net proceeds actually received by such Investor as
a result of the sale of  Registrable  Securities  pursuant to such  Registration
Statement.  Such indemnity  shall remain in full force and effect  regardless of
any investigation  made by or on behalf of such Company  Indemnified  Person and

                                       12
<PAGE>

shall  survive  the  transfer  of the  Registrable  Securities  by the  Investor
pursuant to Section 9 hereof. Notwithstanding anything to the contrary contained
herein,  the  indemnification  obligations  contained  in this Section 6(b) with
respect  to any  preliminary  prospectus  shall not inure to the  benefit of any
Company  Indemnified Person if the untrue statement or omission of material fact
contained in the  preliminary  prospectus was corrected on a timely basis in the
prospectus, as then amended or supplemented.

         (c) Promptly  after  receipt by any party  entitled to  indemnification
under this Section 6 of notice of the commencement of any action  (including any
governmental  action),  such  indemnified  party  shall,  if a Claim in  respect
thereof is to made against any indemnifying  party under this Section 6, deliver
to the indemnifying party a written notice of the commencement  thereof, and the
indemnifying  party shall have the right to  participate  in, and, to the extent
the indemnifying  party so desires,  jointly with any other  indemnifying  party
similarly  noticed,  to assume  control  of the  defense  thereof  with  counsel
mutually  satisfactory  to the  indemnifying  party and the  indemnified  party;
provided,  however, that such indemnifying party shall not be entitled to assume
such  defense  and an  indemnified  party shall have the right to retain its own
counsel with the fees and expenses to be paid by the indemnifying  party, if, in
the  reasonable  opinion of counsel  retained  by the  indemnifying  party,  the
representation  by such counsel of the  indemnified  party and the  indemnifying
party would be  inappropriate  due to actual or potential  conflicts of interest
between such indemnified  party and any other party  represented by such counsel
in such proceeding or the actual or potential  defendants in, or targets of, any
such action include both the indemnified  party and the  indemnifying  party and
any  such  indemnified  party  reasonably  determines  that  there  may be legal
defenses  available to such  indemnified  party that are in conflict  with those
available to such indemnifying  party. The indemnifying party shall pay for only
one separate legal counsel for the indemnified  parties,  and such legal counsel
shall be selected by Investors holding a majority in interest of the Registrable
Securities included in the Registration Statement to which the Claim relates (if
the parties  entitled to  indemnification  hereunder  are  Investor  Indemnified
Persons) or by the Company (if the parties entitled to indemnification hereunder
are Company Indemnified  Persons).  The failure to deliver written notice to the
indemnifying  party within a  reasonable  time of the  commencement  of any such
action  shall  not  relieve  such  indemnifying  party of any  liability  to the
indemnified  party  under  this  Section  6,  except  to  the  extent  that  the
indemnifying party is actually  prejudiced in its ability to defend such action.
The  indemnification  required  by  this  Section  6 shall  be made by  periodic
payments  of the  amount  thereof  during  the  course of the  investigation  or
defense,  as such expense,  loss, damage or liability is incurred and is due and
payable.

7.       CONTRIBUTION.

         To  the  extent  any   indemnification  by  an  indemnifying  party  is
prohibited  or limited by law,  the  indemnifying  party  shall make the maximum
contribution  with respect to any amounts for which it would otherwise be liable
under  Section 6 to the fullest  extent  permitted by law as is  appropriate  to
reflect the relative fault of the  indemnifying  party, on the one hand, and the
indemnified  party, on the other hand, with respect to the Violation giving rise
to the applicable Claim;  provided,  however,  that (a) no contribution shall be
made  under  circumstances  where the  maker  would  not have  been  liable  for
indemnification  under the fault standards set forth in Section 6, (b) no person
guilty of fraudulent  misrepresentation  (within the meaning of Section 11(f) of
the  Securities  Act)  shall be  entitled  to  contribution  from any  seller of
Registrable Securities who was not guilty of such fraudulent  misrepresentation,
and (c) contribution  (together with any  indemnification  or other  obligations
under this Agreement) by any seller of Registrable  Securities  shall be limited
in amount to the net amount of proceeds received by such seller from the sale of
such Registrable Securities.

                                       13
<PAGE>

8.       REPORTS UNDER THE EXCHANGE ACT.

         With a view to making  available to the  Investors the benefits of Rule
144 promulgated under the Securities Act or any other similar rule or regulation
of the SEC 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) file with the SEC in a timely  manner  and make and keep  available
all reports and other documents required of the Company under the Securities Act
and the Exchange Act so long as the Company remains subject to such requirements
and the filing and  availability of such reports and other documents is required
for the applicable provisions of Rule 144; and

         (b) furnish to each  Investor so long as such Investor  (together  with
its  affiliates)  holds at least 25% of the Series C Preferred  Stock,  promptly
upon request,  (i) a written  statement by the Company that it has complied with
the reporting requirements of Rule 144, the Securities Act and the Exchange Act,
and (ii) such other  information  as may be reasonably  requested to permit such
Investor to sell such securities under Rule 144 without registration.

9.       ASSIGNMENT OF REGISTRATION RIGHTS.

         The rights of the Investors hereunder,  including the right to have the
Company register  Registrable  Securities  pursuant to this Agreement,  shall be
automatically  assignable  by  each  Investor  to any  transferee  of all or any
portion of the Preferred Stock,  the Warrants or the Registrable  Securities if:
(a) the  Investor  agrees in writing with the  transferee  or assignee to assign
such rights, and a copy of such agreement is furnished to the Company after such
assignment, (b) the Company is furnished with written notice of (i) the name and
address of such transferee or assignee,  and (ii) the securities with respect to
which such registration rights are being transferred or assigned,  (c) following
such transfer or assignment,  the further  disposition of such securities by the
transferee or assignee is restricted  under the  Securities  Act and  applicable
state  securities laws, (d) the transferee or assignee agrees in writing for the
benefit of the Company to be bound by all of the  provisions  contained  herein,
and (e) such  transfer  shall have been made in accordance  with the  applicable
requirements  of  the  Securities   Purchase   Agreement,   the  Certificate  of
Designation and the Warrants,  as applicable.  In addition,  and notwithstanding
anything to the contrary  contained in this Agreement,  the Securities  Purchase
Agreement,  the  Certificate of Designation or the Warrants,  the Securities (as
defined in the Securities Purchase Agreement) may be pledged,  and all rights of
the Investor under this Agreement or any other agreement or document  related to
the transactions contemplated hereby may be assigned, without further consent of
the Company,  to a bona fide pledgee in connection with an Investor's  margin or
brokerage account.

10.      AMENDMENT OF REGISTRATION RIGHTS.

         Provisions of this Agreement may be amended and the observance  thereof
may  be  waived  (either  generally  or  in a  particular  instance  and  either
retroactively or prospectively),  only with written consent of the Company, each
of the  Initial  Investors  (to the extent  each such  Initial  Investor  or its
affiliates still owns Preferred Stock,  Warrants or Registrable  Securities) and
the Investor(s)  who hold a majority in interest of the  Registrable  Securities

                                       14
<PAGE>

or, in the case of a waiver,  with the written consent of the party charged with
the enforcement of any such provision;  provided, however, that (a) no amendment
hereto which restricts the ability of an Investor to elect not to participate in
an underwritten  offering shall be effective against any Investor which does not
consent in writing to such amendment;  (b) no consideration  shall be paid to an
Investor by the  Company in  connection  with an  amendment  hereto  unless each
Investor  similarly  affected  by such  amendment  receives a pro rata amount of
consideration  from the Company;  and (c) unless an Investor  otherwise  agrees,
each  amendment  hereto must similarly  affect each  Investor.  Any amendment or
waiver  effected in  accordance  with this Section 10 shall be binding upon each
Investor and the Company.

11.      MISCELLANEOUS.

         (a) A  person  or  entity  is  deemed  to be a  holder  of  Registrable
Securities  whenever  such  person or entity  owns of  record  such  Registrable
Securities.  If  the  Company  receives  conflicting  instructions,  notices  or
elections  from  two or more  persons  or  entities  with  respect  to the  same
Registrable  Securities,  the Company shall act upon the basis of  instructions,
notice  or  election  received  from the  registered  owner of such  Registrable
Securities.

         (b) Any notices  required or  permitted  to be given under the terms of
this  Agreement  shall be in writing and sent by  certified or  registered  mail
(return receipt  requested) or delivered  personally,  by nationally  recognized
overnight carrier or by confirmed facsimile transmission, and shall be effective
five days after being placed in the mail, if mailed,  or upon receipt or refusal
of receipt,  if  delivered  personally  or by  nationally  recognized  overnight
carrier or confirmed facsimile  transmission,  in each case addressed to a party
as provided herein.  The initial addresses for such  communications  shall be as
follows,  and each party shall provide notice to the other parties of any change
in such party's address:

                  (i)      If to the Company:

                           SLS International, Inc.
                           3119 South Scenic
                           Springfield, Missouri 65807
                           Telephone: (417) 883-4549
                           Facsimile:  (417) 883-2723
                           Attention:  President and Controller

                           with a copy simultaneously  transmitted by like means
                           (which   transmittal   shall  not  constitute  notice
                           hereunder) to:

                           Freeborn & Peters LLP
                           311 South Wacker Drive
                           Suite 3000
                           Chicago, IL 60606
                           Telephone: (312) 360-6312
                           Facsimile:  (312) 360-6597
                           Attention:  Jeffrey M. Mattson, Esq.

                                       15
<PAGE>

                  (ii) If to any Initial Investor,  to such address as set forth
         on such Initial  Investor's  execution page to the Securities  Purchase
         Agreement,  and,  if to any other  Investor,  to such  address  as such
         Investor shall have provided in writing to the Company.

         (c)  Failure of any party to  exercise  any right or remedy  under this
Agreement or otherwise,  or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.

         (d) This  Agreement  shall be governed by and  construed in  accordance
with the laws of the State of Delaware  applicable  to contracts  made and to be
performed  in the  State of  Delaware.  Each of the  Company  and the  Investors
irrevocably consents to the jurisdiction of the United States federal courts and
the state courts  located in the County of New Castle,  State of Delaware in any
suit or  proceeding  based on or arising under this  Agreement  and  irrevocably
agrees that all claims in respect of such suit or  proceeding  may be determined
in such courts.  Each of the Company and the  Investors  irrevocably  waives the
defense of an inconvenient  forum to the maintenance of such suit or proceeding.
Each of the Company and the  Investors  further  agrees that  service of process
upon it, mailed by first class mail shall be deemed in every  respect  effective
service of process upon it in any such suit or proceeding in such forum. Nothing
herein shall affect the right of the Company or any Investor to serve process in
any other manner  permitted by law. Each of the Company and the Investors agrees
that a final  non-appealable  judgment in any such suit or  proceeding  shall be
conclusive and may be enforced in other  jurisdictions  by suit on such judgment
or in any other lawful manner.

         (e) This Agreement and the other Transaction  Documents  (including any
schedules and exhibits hereto and thereto) constitute the entire agreement among
the parties hereto with respect to the subject matter hereof and thereof.  There
are no restrictions,  promises, warranties or undertakings, other than those set
forth  or  referred  to  herein  and  therein.  This  Agreement  and  the  other
Transaction  Documents  supersede all prior agreements and understandings  among
the parties hereto with respect to the subject matter hereof and thereof.

         (f) Subject to the  requirements  of Section 9 hereof,  this  Agreement
shall inure to the benefit of and be binding upon the  successors and assigns of
each of the parties hereto.

         (g) The headings in this  Agreement  are for  convenience  of reference
only and shall not limit or otherwise affect the meaning hereof.

         (h) This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which shall  constitute one and the
same agreement.  This Agreement,  once executed by a party,  may be delivered to
the other party hereto by  facsimile  transmission  of a copy of this  Agreement
bearing the signature of the party so delivering this Agreement.

         (i) Each party shall do and perform, or cause to be done and performed,
all such further acts and things,  and shall  execute and deliver all such other
agreements,  certificates,  instruments  and  documents,  as the other party may
reasonably  request in order to carry out the intent and accomplish the purposes
of this Agreement and the consummation of the transactions contemplated hereby.

                                       16
<PAGE>

         (j) Unless otherwise expressly provided herein, all consents, approvals
and other  determinations to be made by the Investors pursuant to this Agreement
shall be made by the Investors holding a majority in interest of the Registrable
Securities  (determined as if all Preferred Stock and Warrants then  outstanding
had been converted  into or exercised for  Registrable  Securities)  held by all
Investors. No consideration shall be offered or paid to any Investor to amend or
consent to a waiver or  modification  of any provision of this Agreement  unless
the same consideration is offered to all of the Investors.

         (k) The  initial  number  of  Registrable  Securities  included  on any
Registration Statement filed pursuant to Section 2(a) or 3(b), and each increase
to the number of Registrable Securities included thereon, shall be allocated pro
rata among the Investors  based on the number of Registrable  Securities held by
each Investor at the time of such establishment or increase, as the case may be.
In the event an Investor  shall sell or otherwise  transfer any of such holder's
Registrable Securities, each transferee shall be allocated a pro rata portion of
the number of Registrable  Securities  included on a Registration  Statement for
such transferor. Any shares of Common Stock included on a Registration Statement
and which  remain  allocated  to any  person or entity  which  does not hold any
Registrable  Securities shall be allocated to the remaining Investors,  pro rata
based on the  number  of  shares  of  Registrable  Securities  then held by such
Investors. For the avoidance of doubt, the number of Registrable Securities held
by any Investor shall be determined as if all Preferred  Stock and Warrants then
outstanding were converted into or exercised for Registrable Securities.

         (l) Each party to this Agreement has  participated  in the  negotiation
and  drafting of this  Agreement.  As such,  the  language  used herein shall be
deemed to be the language  chosen by the parties  hereto to express their mutual
intent, and no rule of strict  construction will be applied against any party to
this Agreement.

         (m) For purposes of this  Agreement,  the term "business day" means any
day other than a Saturday or Sunday or a day on which  banking  institutions  in
the  State  of New  York are  authorized  or  obligated  by law,  regulation  or
executive order to close,  and the term "trading day" means any day on which the
principal national securities exchange, automated or electronic quotation system
or other trading market where the Common Stock is then listed, quoted or traded,
is open for trading.

                  [REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]

                                       17
<PAGE>

         IN WITNESS  WHEREOF,  the undersigned  Initial Investor and the Company
have  caused  this  Agreement  to be duly  executed  as of the date first  above
written.

SLS INTERNATIONAL, INC.

By:
    -------------------------------------------------
Name:
Title:

INITIAL INVESTORS:

-----------------------------------------------------
                   BAYSTAR CAPITAL II, L.P.

By:
  ---------------------------------------------------
Name:
Title:

Counsel:
Drinker Biddle & Reath LLP
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103-6996
Telephone: (215) 988-2880
Facsimile:  (215) 988-2757
Attention:  Stephen T. Burdumy, Esq.

<PAGE>

IN WITNESS WHEREOF, the undersigned Initial Investor and the Company have caused
this Agreement to be duly executed as of the date first above written.

--------------------------------------------
               PSO TRADING IV, LLC

By:
   -----------------------------------------
Name:
Title:

                                       2
<PAGE>

IN WITNESS WHEREOF, the undersigned Initial Investor and the Company have caused
this Agreement to be duly executed as of the date first above written.

--------------------------------------------
      ROYAL BANK OF CANADA

By:  RBC Capital Markets Corporation
Its:  Agent

By:
    ----------------------------------------
Name:
Title:

By:
    ----------------------------------------
Name:
Title:

                                       3
<PAGE>

         IN WITNESS  WHEREOF,  the undersigned  Initial Investor and the Company
have  caused  this  Agreement  to be duly  executed  as of the date first  above
written.

---------------------------------------------
         HFTP INVESTMENT L.L.C.

By: Promethean Asset Management L.L.C.
Its: Investment Manager

By:
    -----------------------------------------
Name:
Title:

                                       4

<PAGE>
                                                                      EXHIBIT A

[Date]

[Transfer Agent]

RE:      SLS INTERNATIONAL, INC.

Ladies and Gentlemen:

We are counsel to SLS  International,  Inc., a corporation  organized  under the
laws of the State of Delaware (the "COMPANY"),  and we understand that [Names of
Investors]  (the "HOLDERS") have purchased from the Company (i) shares of Series
C Convertible  Preferred Stock that are convertible into shares of the Company's
common stock, par value [$___] per share (the "COMMON STOCK"), and (ii) warrants
to acquire shares of Common Stock.  Pursuant to a Registration Rights Agreement,
dated as of  January  3,  2005,  by and among the  Company  and the  signatories
thereto  (the  "REGISTRATION  RIGHTS  AGREEMENT"),  the Company  agreed with the
Holders,  among other things,  to register the  Registrable  Securities (as that
term is defined in the Registration  Rights  Agreement) under the Securities Act
of 1933,  as amended  (the  "SECURITIES  ACT"),  upon the terms  provided in the
Registration  Rights  Agreement.  In connection  with the Company's  obligations
under the  Registration  Rights  Agreement,  on  [_____________  ___, ____], the
Company   filed  a   Registration   Statement  on  Form  S-___  (File  No.  333-
_____________)  (the "REGISTRATION  STATEMENT") with the Securities and Exchange
Commission (the "SEC") relating to the Registrable  Securities,  which names the
Holder as a selling  stockholder  thereunder.  The  Registration  Statement  was
declared effective by the SEC on _____________, ____.

In connection with the foregoing, we advise you that a member of the SEC's staff
has advised us by telephone that the SEC has entered into an order declaring the
Registration   Statement   effective  under  the  Securities  Act  at  [time  of
effectiveness]  on  [date of  effectiveness],  and we have no  knowledge,  after
telephonic  inquiry  of a  member  of the  SEC's  staff,  that  any  stop  order
suspending its  effectiveness  has been issued or that any  proceedings for that
purpose are pending before, or threatened by, the SEC.

Based on the foregoing,  we are of the opinion that the  Registrable  Securities
are  currently  available  for resale under the  Securities  Act pursuant to the
Registration Statement.

Very truly yours,

[NAME OF COUNSEL]

cc:   [Name of Investor]

                                       5

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00076-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00076-of-00352.parquet"}]]