Document:

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                                                                    Exhibit 10.1

                          SECURITIES PURCHASE AGREEMENT

         This Securities Purchase Agreement (this "Agreement") is dated as of
August 3, 2005, among Interactive Systems Worldwide Inc., a Delaware corporation
(the "Company"), and the purchasers identified on the signature pages hereto
(each, including its successors and assigns, a "Purchaser" and collectively the
"Purchasers").

         WHEREAS, subject to the terms and conditions set forth in this
Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act") and Rule 506 promulgated thereunder, the Company desires
to issue and sell to each Purchaser, and each Purchaser, severally and not
jointly, desires to purchase from the Company, securities of the Company as more
fully described in this Agreement.

         NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in
this Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and each Purchaser agrees
as follows:

                                    ARTICLE I
                           DEFINITIONS; INTERPRETATION

         1.1 Definitions. In addition to the terms defined elsewhere in this
Agreement: (a) capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the Certificate of Designation (as defined
herein), and (b) the following terms have the meanings indicated in this Section
1.1:

                  "Action" shall have the meaning ascribed to such term in
         Section 3.1(j).

                  "Affiliate" means any Person that, directly or indirectly
         through one or more intermediaries, controls or is controlled by or is
         under common control with a Person, as such terms are used in and
         construed under Rule 144 under the Securities Act.

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

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

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

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                  "Closing" means the closing of the purchase and sale of the
         Securities pursuant to Section 2.1.

                  "Closing Date" means the date hereof.

                  "Commission" means the Securities and Exchange Commission.

                  "Common Stock" means the common stock of the Company, par
         value $0.001 per share, and any securities into which such common stock
         shall hereinafter have been reclassified into.

                  "Company Counsel" means Friedman Kaplan Seiler & Adelman LLP
         with offices at 1633 Broadway, 46th Floor, New York, New York
         10019-6708.

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

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

                  "Effective Date" means the date that the initial Registration
         Statement filed by the Company pursuant to the Registration Rights
         Agreement is first declared effective by the Commission.

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

                  "Exempt Issuance" shall have the meaning ascribed to such term
         in Section 4.13 hereof.

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

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

                  "Indebtedness" shall have the meaning ascribed to such term in
         Section 3.1(s) hereof.

                  "Liens" shall have the meaning ascribed to such term in
         Section 3.1(a) hereof.

                  "Losses" means any and all losses, claims, damages,
         liabilities, settlement costs and expenses, including costs of
         preparation and reasonable attorneys' fees.

                  "Market Price" equals $3.59, subject to adjustment for reverse
         and forward stock splits, stock dividends, stock combinations and other
         similar transactions of the Common Stock that occur after the date of
         this Agreement.

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                  "Material Adverse Effect" shall have the meaning assigned to
         such term in Section 3.1(b) hereof.

                  "Person" means an individual or corporation, partnership,
         trust, incorporated or unincorporated association, joint venture,
         limited liability company, joint stock company, government (or an
         agency or subdivision thereof) or other entity of any kind.

                  "Preferred Stock" means the up to 4,000 shares of the
         Company's Series C 6% Convertible Preferred Stock issued hereunder
         having the rights, preferences and privileges set forth in the
         Certificate of Designation.

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

                  "Proceeding" means an action, claim, suit, investigation or
         proceeding (including an investigation or partial proceeding, such as a
         deposition), whether commenced or threatened.

                   "Registration Rights Agreement" means the Registration Rights
         Agreement, dated the Closing Date, among the Company and the
         Purchasers, in the form of Exhibit B.

                  "Registration Statement" means a registration statement
         meeting the requirements set forth in the Registration Rights Agreement
         and covering, among other things, the resale of the Underlying Shares
         by each Purchaser as provided for in the Registration Rights Agreement.

                  "Required Approvals" shall have the meaning ascribed to such
         term in Section 3.1(e) hereof.

                  "Required Minimum" means, as of any date, the maximum
         aggregate number of shares of Common Stock then issued or potentially
         issuable in the future pursuant to the Transaction Documents, including
         any Underlying Shares issuable upon exercise or conversion in full of
         all Warrants and shares of Preferred Stock, ignoring any conversion or
         exercise limits set forth therein, and assuming that any previously
         unconverted shares of Preferred Stock are held until the third
         anniversary of the Closing Date and all dividends are paid in shares of
         Common Stock until such third anniversary, subject to the limitation on
         the number of shares of Common Stock issuable hereunder set forth in
         Section 6(d) of the Certificate of Designation.

                  "Rule 144" means Rule 144 promulgated by the Commission
         pursuant to the Securities Act, as such Rule may be amended from time
         to time, or any similar rule or regulation hereafter adopted by the
         Commission having substantially the same effect as such Rule.

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

                  "Securities" means the Preferred Stock, the Warrants and the
         Underlying Shares.

                  "Securities Act" means the Securities Act of 1933, as amended.

                  "Shareholder Approval" means such approval as may be required
         by the applicable rules and regulations of the NASDAQ Small-Cap Market
         (or any successor entity) from the shareholders of the Company with
         respect to the transactions contemplated by the Transaction Documents,
         including the issuance of all of the Underlying Shares in excess of
         19.9% of the Company's issued and outstanding Common Stock on the
         Closing Date.

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

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

                  "Subscription Amount" means, as to each Purchaser, the
         aggregate amount to be paid for the Preferred Stock and Warrants
         purchased hereunder at the Closing as specified below such Purchaser's
         name on the signature page of this Agreement and next to the heading
         "Subscription Amount", in United States Dollars and in immediately
         available funds; but excluding the exercise price of the Warrants.

                  "Subsidiary" means the subsidiaries of the Company as set
         forth on Schedule 3.1(a) attached hereto, excluding the subsidiaries on
         such Schedule which have been designated as "inactive"; provided that,
         in the event they become active in the business or finances of the
         Company, they shall thereafter be included as a Subsidiary with respect
         to any provision where applicable.

                  "Trading Day" means any day during which the Principal Market
         shall be open for business.

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

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

                  "VWAP" means, for any date, the price determined by the first
         of the following clauses that applies: (a) if the Common Stock is then
         listed or quoted on a Principal Market, the daily volume weighted
         average price of the Common Stock for such date (or the nearest
         preceding date) on the Principal Market on which the Common Stock is
         then listed or quoted as reported by Bloomberg Financial L.P. (based on
         a Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time);
         (b) if the Common Stock is not then listed or quoted on a Trading
         Market and if prices for the Common Stock are then quoted on the OTC
         Bulletin Board, the volume weighted average price of the Common Stock
         for such date (or the nearest preceding date) on the OTC Bulletin
         Board; (c) if the Common Stock is not then listed or quoted on the OTC
         Bulletin Board and if prices for the Common Stock are then reported in
         the "Pink Sheets" published by Pink Sheets, LLC (or a similar
         organization or agency succeeding to its functions of reporting
         prices), the most recent bid price per share of the Common Stock so
         reported prior to the day in question; or (d) in all other cases, the
         fair market value of a share of Common Stock as determined by an
         independent appraiser selected in good faith by the Purchasers and
         reasonably acceptable to the Company.

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                  "Warrants" means collectively the Common Stock purchase
         warrants, in the form of Exhibit C delivered to the Purchasers at the
         Closing in accordance with Section 2.2 hereof.

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

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

                                   ARTICLE II
                                PURCHASE AND SALE

         2.1 Closing. On the Closing Date, and upon the terms and subject to the
conditions set forth herein, concurrent with the execution and delivery of this
Agreement by the parties hereto, the Company hereby sells, and the Purchasers
hereby purchase in the aggregate and in proportionate amounts, severally and not
jointly, 4,000 shares of Preferred Stock with an aggregated Stated Value equal
to such Purchaser's Subscription Amount and Warrants as determined by pursuant
to Section 2.2(a)(ii). The aggregate number of shares of Preferred Stock sold
hereunder shall be 4,000. At the Closing, each Purchaser shall deliver to the
Company via wire transfer to an account designated by the Company as provided in
Annex A immediately available funds equal to such Purchaser's Subscription
Amount and the Company shall deliver to each Purchaser, except as provided in
Section 2.2(a), (i) a certificate representing the shares of Preferred Stock
equal to such Purchaser's Subscription Amount divided by the Stated Value, (ii)
a Warrant exercisable for that number of Underlying Shares in respect of such
Purchaser's Warrant, as determined pursuant to Section 2.2(a)(ii) and (iii) the
other items set forth in Section 2.2 issuable by the Company at the Closing. The
Closing shall occur at the offices of FW, or such other location as the parties
shall mutually agree.

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         2.2 Conditions to Closing.

                  (a) At or prior to the Closing Date, unless otherwise
         indicated below, the Company shall deliver or cause to be delivered to
         each Purchaser the following:

                           (i) within 3 Trading Days after the Closing Date, a
                  certificate evidencing a number of shares of Preferred Stock
                  equal to such Purchaser's Subscription Amount divided by the
                  Stated Value, registered in the name of such Purchaser;

                           (ii) within 3 Trading Days after the Closing Date, a
                  Warrant registered in the name of such Purchaser to purchase
                  up to a number of shares of Common Stock equal to 50% of such
                  Purchaser's Subscription Amount divided by the Market Price,
                  with a term of 5 years from the Closing Date and an exercise
                  price equal to 110% of the Market Price immediately prior to
                  the date hereof;

                           (iii) the legal opinion of Company Counsel,
                  substantially in the form of Exhibit D attached hereto,
                  addressed to the Purchasers;

                           (iv) the Registration Rights Agreement duly executed
                  by the Company;

                           (v) the written voting agreements, in the form of
                  Exhibit E attached hereto, of all of the officers, directors
                  and shareholders holding more than 10% of the issued and
                  outstanding shares of Common Stock on the Closing Date to vote
                  all Common Stock owned by each of such officers, directors and
                  shareholders as of the record date for the annual meeting of
                  shareholders of the Company in favor of the Shareholder
                  Approval; and

                           (vi) this Agreement, duly executed by the Company.

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

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                           (i) such Purchaser's Subscription Amount (via wire
                  transfer to an account designated by the Company in
                  immediately available funds equal to such Purchaser's
                  Subscription Amount);

                           (ii) this Agreement, duly executed by such Purchaser;

                           (iii) a waiver of such Purchaser, in the form
                  attached hereto as Exhibit F, waiving all anti-dilution
                  protection on any securities of the Company which may be
                  triggered by the payment of dividends on the Preferred Stock
                  or as payment of interest on the Company's 7.5% Convertible
                  Debentures due April 24, 2006; and

                           (iv) the Registration Rights Agreement duly executed
                  by such Purchaser.

                  (c) All representations and warranties of the other parties
         contained herein shall be true and correct as of the Closing Date.

                                   ARTICLE III
                         REPRESENTATIONS AND WARRANTIES

         3.1 Representations and Warranties of the Company. Except as set forth
in the disclosure schedules delivered to the Purchasers concurrently herewith
(the "Disclosure Schedules") which Disclosure Schedules shall be deemed a part
hereof, and other than with respect to Sections 3.1(g), 3.1(s), 3.1(u), 3.1(w),
3.1(dd), 3.1(ee), 3.1(gg), 3.1(hh), 3.1(ii), 3.1(jj) and 3.1(kk), except as set
forth in the Company's most recent Form 10-KSB, the Proxy Statement for the 2005
Annual Meeting of Shareholders, the forms 10-QSB for the quarters ended December
31, 2004 and March 31, 2005, and all press releases issued after the filing of
the Form 10-QSB for the quarter ended March 31, 2005 and prior to the Closing
Date, the Company hereby makes the representations and warranties set forth
below to each Purchaser.

                  (a) Subsidiaries. All of the subsidiaries of the Company are
         set forth on Schedule 3.1(a). The Company owns, directly or indirectly,
         all of the capital stock or other equity interests of each Subsidiary
         free and clear of any lien, charge, security interest, encumbrance,
         right of first refusal or other restriction (collectively, "Liens"),
         and all the issued and outstanding shares of capital stock of each
         Subsidiary are validly issued and are fully paid, non-assessable and
         free of preemptive and similar rights.

                  (b) Organization and Qualification. Each of the Company and
         the Subsidiaries is an entity, validly existing and in good standing
         under the laws of the jurisdiction of its incorporation or organization
         (as applicable), with the requisite power and authority to own and use
         its properties and assets and to carry on its business as currently
         conducted. Neither the Company nor any Subsidiary is in violation of
         any of the provisions of its respective certificate or articles of
         incorporation, bylaws or other organizational or charter documents.
         Each of the Company and the Subsidiaries is duly qualified to do
         business and is in good standing as a foreign corporation or other
         entity in each jurisdiction in which the nature of the business
         conducted or property owned by it makes such qualification necessary,
         except where the failure to be so qualified or in good standing, as the
         case may be, is not likely to, individually or in the aggregate: (i)
         adversely affect the legality, validity or enforceability of any
         Transaction Document, (ii) have or result in or be reasonably likely to
         have or result in a material adverse effect on the results of
         operations, assets, business or condition (financial or otherwise) of
         the Company and the Subsidiaries, taken as a whole, or (iii) adversely
         impair the Company's ability to perform on a timely basis its material
         obligations under any of the Transaction Documents (any of (i), (ii) or
         (iii), a "Material Adverse Effect").

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                  (c) Authorization; Enforcement. The Company has the requisite
         corporate power and authority to enter into and, subject to the
         Required Approvals, to consummate the transactions contemplated by each
         of the Transaction Documents and otherwise to carry out its obligations
         in all material respects hereunder or thereunder. The execution and
         delivery of each of the Transaction Documents by the Company and the
         consummation by it of the transactions contemplated hereby or thereby
         have been duly authorized by all necessary action on the part of the
         Company and no further consent or action is required by the Company
         other than Required Approvals. Each of the Transaction Documents has
         been (or upon delivery will be) duly executed by the Company and, when
         delivered in accordance with the terms hereof, will constitute the
         valid and binding obligation of the Company, enforceable against the
         Company in accordance with its terms, subject to applicable bankruptcy,
         insolvency, fraudulent conveyance, reorganization, moratorium and
         similar laws affecting creditors' rights and remedies generally and
         general principles of equity. Neither the Company nor any Subsidiary is
         in violation of any of the provisions of its respective certificate or
         articles of incorporation, by-laws or other organizational or charter
         documents.

                  (d) No Conflicts. The execution, delivery and performance of
         the Transaction Documents by the Company and the consummation by the
         Company of the transactions contemplated thereby do not and will not:
         (i) conflict with or violate any provision of the Company's or any
         Subsidiary's certificate or articles of incorporation, bylaws or other
         organizational or charter documents, or (ii) subject to obtaining the
         Required Approvals, 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,
         acceleration or cancellation (with or without notice, lapse of time or
         both) of, any agreement, credit facility, debt or other instrument
         (evidencing a Company or Subsidiary debt or otherwise) or other
         understanding to which the Company or any Subsidiary is a party or by
         which any property or asset of the Company or any Subsidiary is bound
         or affected, or (iii) assuming that the representations made by each of
         the Purchasers in Section 3.2 are true and correct, result in a
         violation of any law, rule, regulation, order, judgment, injunction,
         decree or other restriction of any court or governmental authority to
         which the Company or a Subsidiary is subject (including federal and
         state securities laws and regulations), or by which any property or
         asset of the Company or a Subsidiary is bound or affected; except in
         the case of each of clauses (ii) and (iii), such as could not,
         individually or in the aggregate, have or result in a Material Adverse
         Effect.

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                  (e) Filings, Consents and Approvals. Neither the Company nor
         any Subsidiary is required to obtain any consent, waiver, authorization
         or order of, give any notice to, or make any filing or registration
         with, any court or other federal, state, local or other governmental
         authority or other Person in connection with the execution, delivery
         and performance by the Company of the Transaction Documents, other than
         (i) the press release or filings required under Section 4.7, (ii) the
         filing with the Commission of the Registration Statement, (iii) the
         notice and/or application(s) to the Principal Market for the sale of
         the Preferred Stock and Warrants and the listing of the Underlying
         Shares for trading thereon in the time and manner required thereby,
         (iv) the filing of Form D with the Commission and applicable Blue Sky
         filings and (v) Shareholder Approval (collectively, the "Required
         Approvals").

                  (f) Issuance of the Securities. The Securities are duly
         authorized and the Underlying Shares, when issued and paid for in
         accordance with the applicable Transaction Documents, will be duly and
         validly issued, fully paid and non-assessable, free and clear of all
         Liens. The Company has reserved from its duly authorized capital stock
         a number of shares of Common Stock for issuance of the Underlying
         Shares at least equal to the Required Minimum on the Closing Date. The
         Company has not, and to the knowledge of the Company, no Affiliate of
         the Company has, sold, offered for sale or solicited offers to buy or
         otherwise negotiated in respect of any security (as defined in Section
         2 of the Securities Act) that would be integrated with the offer or
         sale of the Securities in a manner that would require the registration
         under the Securities Act of the sale of the Securities to the
         Purchasers, or that would be integrated with the offer or sale of the
         Securities for purposes of the rules and regulations of the Principal
         Market.

                  (g) Capitalization. The number of shares and type of all
         authorized, issued and outstanding capital stock of the Company is set
         forth in the Disclosure Schedules attached hereto. No securities of the
         Company are entitled to preemptive or similar rights, and no Person has
         any right of first refusal, preemptive right, right of participation,
         or any similar right to participate in the transactions contemplated by
         the Transaction Documents. Except as a result of the purchase and sale
         of the Securities, there are no outstanding options, warrants, script
         rights to subscribe to, calls or commitments of any character
         whatsoever relating to, or securities, rights or obligations
         convertible into or exchangeable for, or giving any Person any right to
         subscribe for or acquire, any shares of Common Stock, or contracts,
         commitments, understandings or arrangements by which the Company or any
         Subsidiary is or may become bound to issue additional shares of Common
         Stock, or securities or rights convertible or exchangeable into shares
         of Common Stock. The issuance and sale of the Securities will not
         obligate the Company to issue shares of Common Stock or other
         securities to any Person (other than the Purchasers) and will not
         result in a right of any holder of Company securities to adjust the
         exercise, conversion, exchange or reset price under such securities.

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                  (h) SEC Reports; Financial Statements. The Company has filed
         all reports required to be filed by it under the Exchange Act,
         including pursuant to Section 13(a) or 15(d) thereof, for the two years
         preceding the Closing Date (or such shorter period as the Company was
         required by law to file such material) (the foregoing materials being
         collectively referred to herein as the "SEC Reports") on a timely basis
         or has received a valid extension of such time of filing and has filed
         any such SEC Reports prior to the expiration of any such extension. The
         Company has identified and made available to the Purchasers a copy of
         all SEC Reports filed within the 10 days preceding the Closing Date. As
         of their respective dates, the SEC Reports complied in all material
         respects with the requirements of the Securities Act and the Exchange
         Act and the rules and regulations of the Commission promulgated
         thereunder, and none of the SEC Reports, when filed, contained any
         untrue statement of a material fact or omitted to state a material fact
         required to be stated therein or necessary in order to make the
         statements therein, in light of the circumstances under which they were
         made, not misleading. The financial statements of the Company included
         in the SEC Reports, as at their respective dates and for the periods
         shown therein, comply in all material respects with applicable
         accounting requirements and the rules and regulations of the Commission
         with respect thereto as in effect at the time of filing. Such financial
         statements have been prepared in accordance with generally accepted
         accounting principles applied on a consistent basis during the periods
         involved ("GAAP"), except as may be otherwise specified in such
         financial statements or the notes thereto, and fairly present in all
         material respects the financial position of the Company and its
         consolidated subsidiaries as of and for the dates thereof and the
         results of operations and cash flows for the periods then ended,
         subject, in the case of unaudited statements, to normal, year-end audit
         adjustments.

                  (i) Material Changes. Since the date of the latest audited
         financial statements included within the SEC Reports, except as
         specifically disclosed in the SEC Reports or pursuant to the terms of
         the Series B Preferred Stock of the Company or the Company's 7.5%
         Convertible Debentures due April 24, 2006: (i) there has been no event,
         occurrence or development that has had or that is likely to result in a
         Material Adverse Effect, (ii) the Company has not incurred any
         liabilities (contingent or otherwise) other than (A) trade payables and
         accrued expenses incurred in the ordinary course of business consistent
         with past practice and (B) liabilities not required to be reflected in
         the Company's financial statements pursuant to GAAP or required to be
         disclosed in filings made with the Commission, (iii) the Company has
         not altered its accounting principles or the identity of its auditors,
         (iv) the Company has not declared or made any dividend or distribution
         of cash or other property to its stockholders or purchased, redeemed or
         made any agreements to purchase or redeem any shares of its capital
         stock, and (v) the Company has not issued any equity securities to any
         officer, director or Affiliate, except pursuant to existing Company
         stock option or similar plans.

                  (j) Litigation. There is no action, suit, inquiry, notice of
         violation, proceeding or investigation pending or, to the knowledge of
         the Company, threatened against or affecting the Company, any
         Subsidiary or any of their respective properties before or by any
         court, arbitrator, governmental or administrative agency or regulatory
         authority (federal, state, county, local or foreign) (collectively, an
         "Action") which: (i) adversely affects or challenges the legality,
         validity or enforceability of any of the Transaction Documents or the
         Securities or (ii) is likely, if there were an unfavorable decision,
         individually or in the aggregate, to have or reasonably be expected to
         result in a Material Adverse Effect. Neither the Company nor any
         Subsidiary, nor any director or officer thereof, is or has been the
         subject of any Action involving a claim of violation of or liability
         under federal or state securities laws or a claim of breach of
         fiduciary duty. The Company does not have pending before the Commission
         any request for confidential treatment of information. There has not
         been, and to the knowledge of the Company, there is not pending or
         contemplated, any investigation by the Commission involving the Company
         or any current or former director or officer of the Company. The
         Commission has not issued any stop order or other order suspending the
         effectiveness of any registration statement filed by the Company or any
         Subsidiary under the Exchange Act or the Securities Act.

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                  (k) Compliance. Neither the Company nor any Subsidiary: (i) is
         in default under or in violation of (and no event has occurred that has
         not been waived that, with notice or lapse of time or both, would
         result in a default by the Company or any Subsidiary under), nor has
         the Company or any Subsidiary received notice of a claim that it is in
         default under or that it is in violation of, any indenture, loan or
         credit agreement or any other agreement or instrument to which it is a
         party or by which it or any of its properties is bound (whether or not
         such default or violation has been waived), (ii) is in violation of any
         order of any court, arbitrator or governmental body, or (iii) is or has
         been in violation of any statute, rule or regulation of any
         governmental authority, except in each case as could not, individually
         or in the aggregate, have or result in a Material Adverse Effect.

                  (l) Labor Relations. No material labor dispute exists or, to
         the knowledge of the Company, is imminent with respect to any of the
         employees of the Company.

                  (m) Regulatory Permits. The Company and the Subsidiaries
         possess all certificates, authorizations and permits issued by the
         appropriate federal, state, local or foreign regulatory authorities
         necessary to conduct their respective businesses as described in the
         SEC Reports, except where the failure to possess such permits could
         not, individually or in the aggregate, have or reasonably be expected
         to result in a Material Adverse Effect ("Material Permits"), and
         neither the Company nor any Subsidiary has received any notice of
         proceedings relating to the revocation or modification of any Material
         Permit.

                  (n) Title to Assets. The Company and the Subsidiaries have
         good and marketable title in fee simple to all real property owned by
         them that is material to the business of the Company and the
         Subsidiaries and good and marketable title in all personal property
         owned by them that is material to the business of the Company and the
         Subsidiaries, in each case free and clear of all Liens, except for
         Liens as do not materially affect the value of such property and do not
         materially interfere with the use made and proposed to be made of such
         property by the Company and the Subsidiaries. Any real property and
         facilities held under lease by the Company and the Subsidiaries are
         held under valid, subsisting and enforceable leases of which the
         Company and the Subsidiaries are in compliance in all material
         respects.

                                      -11-
<PAGE>

                  (o) Patents and Trademarks. The Company and the Subsidiaries
         have, or have rights to use, all patents, patent applications,
         trademarks, trademark applications, service marks, trade names,
         copyrights, licenses and other similar rights necessary or material for
         use in connection with their respective businesses as described in the
         SEC Reports and which the failure to so have could have a Material
         Adverse Effect (collectively, the "Intellectual Property Rights").
         Neither the Company nor any Subsidiary has received a written notice
         that the Intellectual Property Rights used by the Company or any
         Subsidiary violates or infringes upon the rights of any Person. The
         Company does not have any knowledge that any such Intellectual Property
         Rights that are material to the business of the Company are
         unenforceable.

                  (p) Insurance. The Company and the Subsidiaries are insured by
         insurers of recognized financial responsibility against such losses and
         risks and in such amounts as are prudent and customary in the
         businesses in which the Company and the Subsidiaries are engaged. To
         the best of Company's knowledge, such insurance contracts and policies
         are accurate and complete. Neither the Company nor any Subsidiary has
         any reason to believe it will not be able to renew its existing
         insurance coverage as and when such coverage expires or to obtain
         similar coverage from similar insurers as may be necessary to continue
         its business without a significant increase in cost (other than such
         increases in cost that are customary or generally applicable to the
         Company or any Subsidiary and other similarly situated companies
         (including public companies)).

                  (q) Transactions With Affiliates and Employees. Except as
         required to be set forth in the SEC Reports, none of the officers or
         directors of the Company and, to the knowledge of the Company, none of
         the employees of the Company, is presently a party to any transaction
         with the Company or any Subsidiary (other than for services as
         employees, officers and directors), including any contract, agreement
         or other arrangement providing for the furnishing of services to or by,
         providing for rental of real or personal property to or from, or
         otherwise requiring payments to or from any officer, director or such
         employee or, to the knowledge of the Company, any entity in which any
         officer, director, or any such employee has a substantial interest or
         is an officer, director, trustee or partner.

                  (r) Sarbanes-Oxley; Internal Accounting Controls. The Company
         is in material compliance with all provisions of the Sarbanes-Oxley Act
         of 2002 which are applicable to it as of the Closing Date. The Company
         and the Subsidiaries maintain a system of internal accounting controls
         sufficient to provide reasonable assurance that (i) transactions are
         executed in accordance with management's general or specific
         authorizations, (ii) transactions are recorded as necessary to permit
         preparation of financial statements in conformity with GAAP and to
         maintain asset accountability, (iii) access to assets is permitted only
         in accordance with management's general or specific authorization, and
         (iv) the recorded accountability for assets is compared with the
         existing assets at reasonable intervals and appropriate action is taken
         with respect to any differences. The Company has established disclosure
         controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
         15d-15(e)) for the Company and designed such disclosure controls and
         procedures to ensure that material information relating to the Company,
         including its consolidated Subsidiaries, is made known to the
         certifying officers by others within those entities, particularly
         during the period in which the Company's most recently filed periodic
         report under the Exchange Act is being prepared. The Company's
         certifying officers have evaluated the effectiveness of the Company's
         disclosure controls and procedures as of the end of the period covered
         by its most recently filed periodic report under the Exchange Act (such
         date, the "Evaluation Date"). The Company presented in its most
         recently filed periodic report under the Exchange Act the conclusions
         of the certifying officers about the effectiveness of the disclosure
         controls and procedures based on their evaluations as of the Evaluation
         Date. Since the Evaluation Date, there have been no significant changes
         in the Company's internal control over financial reporting during the
         period covered by the Company's most recently filed periodic report
         that has materially affected, or is reasonably likely to materially
         affect the Company's internal control over financial reporting.

                                      -12-
<PAGE>

                  (s) Solvency/Indebtedness. To the knowledge of the Company,
         based on the financial condition of the Company as of the Closing Date
         and assuming that the transactions contemplated by the Transaction
         Documents occur as of the Closing Date: (i) the fair saleable value of
         the Company's 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 publicly proposed to be conducted including its capital needs
         taking into account the particular capital requirements of the business
         conducted by the Company, and projected capital requirements and
         capital availability thereof; and (iii) the current cash flow of the
         Company, together with the proceeds the Company would receive, were it
         to liquidate all of its assets, after taking into account all
         anticipated uses of the cash, would be sufficient to pay all amounts on
         or in respect of its debt when such amounts are required to be paid.
         The Company does not intend to incur debts beyond its ability to pay
         such debts as they mature (taking into account the timing and amounts
         of cash to be payable on or in respect of its debt). The Company has no
         knowledge of any facts or circumstances which lead it to believe that
         it will file for reorganization or liquidation under the bankruptcy or
         reorganization laws of any jurisdiction within one year from the
         Closing Date. The SEC Reports set forth as of the dates thereof all
         outstanding secured and unsecured Indebtedness (as defined below) of
         the Company or any Subsidiary, or for which the Company or any
         Subsidiary has commitments. For the purposes of this Agreement,
         "Indebtedness" shall mean (a) any liabilities for borrowed money or
         amounts owed in excess of $50,000 (other than trade accounts payable
         incurred in the ordinary course of business), (b) all guaranties,
         endorsements and other contingent obligations, except guaranties by
         endorsement of negotiable instruments for deposit or collection in the
         ordinary course of business, and (c) the present value of any lease
         payments in excess of $50,000 due under leases required to be
         capitalized in accordance with GAAP. Neither the Company nor any
         Subsidiary is in default with respect to any Indebtedness.

                                      -13-
<PAGE>

                  (t) Certain Fees. No brokerage or finder's fees or commissions
         are or will be payable by the Company to any broker, financial adviser
         or consultant, finder, placement agent, investment banker, bank or
         other Person with respect to the transactions contemplated by this
         Agreement, and the Company has not taken any action that would cause
         any Purchaser to be liable for any such fees or commissions. The
         Company agrees that the Purchasers shall have no obligation with
         respect to any fees or with respect to any claims made by or on behalf
         of any Person for fees of the type contemplated by this Section with
         the transactions contemplated by this Agreement.

                  (u) Private Placement. Assuming the accuracy of the
         representations and warranties of the Purchasers set forth in Sections
         3.2(b)-(f), the offer, issuance and sale of the Securities to the
         Purchasers as contemplated hereby are exempt from the registration
         requirements of the Securities Act. The issuance and sale of the
         Securities hereunder does not contravene the rules and regulations of
         the Principal Market, except that shareholder approval is required for
         the Company to issue in excess of 2,154,277 shares of Common Stock
         under the Transaction Documents.

                  (v) Listing and Maintenance Requirements. The Company has not,
         in the 12 months preceding the Closing Date, received notice from any
         Principal Market on which the Common Stock is or has been listed or
         quoted to the effect that the Company is not in compliance with the
         listing or maintenance requirements of such Principal Market. The
         Company is, and has no reason to believe that it will not in the
         foreseeable future continue to be, in compliance with all such listing
         and maintenance requirements.

                  (w) Registration Rights. Other than as set forth in the
         Registration Rights Agreement, the Company has not granted or agreed to
         grant to any Person any rights (including "piggy-back" registration
         rights) to have any securities of the Company registered with the
         Commission or any other governmental authority that have not been
         satisfied.

                  (x) Application of Takeover Protections. The Company and its
         Board of Directors have taken all necessary action, if any, in order to
         render inapplicable any control share acquisition, business
         combination, poison pill (including any distribution under a rights
         agreement) or other similar anti-takeover provision under the Company's
         Certificate of Incorporation (or similar charter documents) or the laws
         of its state of incorporation that is or could become applicable to the
         Purchasers as a result of the Purchasers and the Company fulfilling
         their obligations or exercising their rights under the Transaction
         Documents, including as a result of the Company's issuance of the
         Securities and the Purchasers' ownership of the Securities.

                                      -14-
<PAGE>

                  (y) Investment Company. The Company is not, and is not an
         Affiliate of, and immediately after receipt of payment for the
         Securities, will not be or be an Affiliate of, an "investment company"
         within the meaning of the Investment Company Act of 1940, as amended.
         The Company shall conduct its business in a manner so that it will not
         become subject to the Investment Company Act.

                   (z) Disclosure. The Company confirms that neither it nor any
         other Person acting on its behalf has provided any of the Purchasers or
         their agents or counsel with any information that constitutes or might
         constitute material, nonpublic information, other than the fact that
         the existence of this financing was confidential. The Company
         understands and confirms that the Purchasers will rely on the foregoing
         representations in effecting transactions in securities of the Company.
         All disclosure provided to the Purchasers regarding the Company, its
         business and the transactions contemplated hereby, including the
         Schedules to this Agreement, furnished by or on behalf of the Company
         with respect to the representations and warranties made herein are true
         and correct with respect to such representations and warranties and do
         not contain any untrue statement of a material fact or omit to state
         any material fact necessary in order to make the statements made
         therein, in light of the circumstances under which they were made, not
         misleading. The Company acknowledges and agrees that no Purchaser makes
         or has made any representations or warranties with respect to the
         transactions contemplated hereby other than those specifically set
         forth in Section 3.2 hereof.

                  (aa) Tax Status. The Company and each of its Subsidiaries has
         made or filed all federal, state and foreign 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 or accrued for 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 the statute of limitations relating to the assessment or
         collection of any foreign, federal, statue or local tax. None of the
         Company's tax returns is presently being audited by any taxing
         authority.

                  (bb) Acknowledgment Regarding Purchasers' Purchase of
         Securities. The Company acknowledges and agrees that the Purchasers are
         acting solely in the capacity of arm's length purchasers with respect
         to this Agreement and the transactions contemplated hereby. The Company
         further acknowledges that no Purchaser is acting as a financial adviser
         or fiduciary of the Company (or in any similar capacity) with respect
         to this Agreement and the transactions contemplated hereby and any
         statement made to the Company by any Purchaser or any of their
         respective representatives or agents in connection with this Agreement
         and the transactions contemplated hereby is not advice or a
         recommendation and is merely incidental to the Purchasers' purchase of
         the Securities. The Company further represents to each Purchaser that
         the Company's decision to enter into this Agreement has been based
         solely on the independent evaluation of the Company and its
         representatives.

                                      -15-
<PAGE>

                  (cc) No General Solicitation or Advertising in Regard to this
         Transaction. Neither the Company nor, to the knowledge of the Company,
         any of its directors or officers (i) has conducted or will conduct any
         general solicitation (as that term is used in Rule 502(c) of Regulation
         D) or general advertising with respect to the sale of the Preferred
         Stock or the Warrants, or (ii) made any offers or sales of any security
         or solicited any offers to buy any security under any circumstances
         that would require registration of the Preferred Stock, the Underlying
         Shares or the Warrants under the Securities Act or made any "directed
         selling efforts" as defined in Rule 902 of Regulation S.

                  (dd) No Disagreements with Accountants. There are no
         disagreements of any kind presently existing, or reasonably anticipated
         by the Company to arise, between the accountants formerly or presently
         employed by the Company and the Company is current with respect to any
         fees owed to its accountants.

                  (ee) Form S-3 Eligibility. The Company is eligible to register
         the resale of the Underlying Shares for resale by the Purchaser on Form
         S-3 promulgated under the Securities Act.

                  (ff) No Integrated Offering. Neither the Company, nor any of
         its Affiliates, nor any Person acting on its or their behalf has,
         directly or indirectly, made any offers or sales of any security or
         solicited any offers to buy any security, under circumstances that
         would cause this offering of the Securities to be integrated with prior
         offerings by the Company for purposes of the Securities Act or which
         could violate any applicable shareholder approval provisions, including
         under the rules and regulations of the Principal Market.

                  (gg) Foreign Corrupt Practices. Neither the Company, nor to
         the knowledge of the Company, any agent or other person acting on
         behalf of the Company, has (i) directly or indirectly, used any funds
         for unlawful contributions, gifts, entertainment or other unlawful
         expenses related to foreign or domestic political activity, (ii) made
         any unlawful payment to foreign or domestic government officials or
         employees or to any foreign or domestic political parties or campaigns
         from corporate funds, (iii) failed to disclose fully any contribution
         made by the Company (or made by any person acting on its behalf of
         which the Company is aware) which is in violation of law, or (iv)
         violated in any material respect any provision of the Foreign Corrupt
         Practices Act of 1977, as amended.

                  (hh) Accountants. The Company's accountants are set forth on
         Schedule 3.1(hh) of the Disclosure Schedule. To the knowledge of the
         Company, such accountants, who the Company expects will express their
         opinion with respect to the financial statements to be included in the
         Company's Annual Report on Form 10-KSB for the year ending September
         30, 2005 are a registered public accounting firm as required by the
         Securities Act.

                                      -16-
<PAGE>

                  (ii) Seniority. As of the Closing Date, no indebtedness or
         other equity of the Company is senior to the Preferred Stock in right
         of payment, whether with respect to interest or upon liquidation or
         dissolution, or otherwise, other than indebtedness secured by purchase
         money security interests (which is senior only as to underlying assets
         covered thereby) and capital lease obligations (which is senior only as
         to the property covered thereby).

                  (jj) Acknowledgement Regarding Purchasers' Trading Activity.
         Anything in this Agreement or elsewhere herein to the contrary
         notwithstanding (except for Section 4.17 and 3.2(g) hereof), it is
         understood and agreed by the Company (i) that none of the Purchasers
         have been asked to agree, nor has any Purchaser agreed, to desist from
         purchasing or selling, long and/or short, securities of the Company, or
         "derivative" securities based on securities issued by the Company or to
         hold the Securities for any specified term; (ii) that past or future
         open market or other transactions by any Purchaser, including Short
         Sales, and specifically including, without limitation, Short Sales or
         "derivative" transactions, before or after the closing of this or
         future private placement transactions, may negatively impact the market
         price of the Company's publicly-traded securities; (iii) that any
         Purchaser, and counter parties in "derivative" transactions to which
         any such Purchaser is a party, directly or indirectly, presently may
         have a "short" position in the Common Stock, and (iv) that each
         Purchaser shall not be deemed to have any affiliation with or control
         over any arm's length counter-party in any "derivative" transaction.
         The Company further understands and acknowledges that (a) one or more
         Purchasers may engage in hedging activities at various times during the
         period that the Securities are outstanding, including, without
         limitation, during the periods that the value of the Underlying Shares
         deliverable with respect to Securities are being determined and (b)
         such hedging activities (if any) could reduce the value of the existing
         stockholders' equity interests in the Company at and after the time
         that the hedging activities are being conducted. The Company
         acknowledges that such aforementioned hedging activities do not
         constitute a breach of any of the Transaction Documents. The Company
         shall not be deemed to have made this representation with respect to
         any transaction that is willfully and knowingly affected, directly or
         indirectly, in violation of federal or state securities laws.

                  (kk) Manipulation of Price. The Company has not, and to its
         knowledge no one acting on its behalf has, (i) taken, directly or
         indirectly, any action designed to cause or to result in the
         stabilization or manipulation of the price of any security of the
         Company to facilitate the sale or resale of any of the Securities, (ii)
         sold, bid for, purchased, or, paid any compensation for soliciting
         purchases of, any of the Securities (other than for the placement
         agent's placement of the Securities), or (iii) paid or agreed to pay to
         any person any compensation for soliciting another to purchase any
         other securities of the Company; provided, however, that the Company
         shall not be deemed to have made this representation with respect to
         actions taken directly or indirectly by any of the Purchasers with
         respect to the purchase and sale of the Securities.

                                      -17-
<PAGE>

         3.2 Representations and Warranties of the Purchasers. Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants to the
Company as follows:

                  (a) Organization; Authority. Such Purchaser is an entity duly
         organized, validly existing and in good standing under the laws of the
         jurisdiction of its organization with the requisite corporate or
         partnership power and authority to enter into and to consummate the
         transactions contemplated by the Transaction Documents and otherwise to
         carry out its obligations thereunder. The purchase by such Purchaser of
         the Securities hereunder has been duly authorized by all necessary
         action on the part of such Purchaser. Each of this Agreement and the
         Registration Rights Agreement has been duly executed by such Purchaser,
         and when delivered by such Purchaser in accordance with the terms
         hereof, will constitute the valid and legally binding obligation of
         such Purchaser, enforceable against it in accordance with its terms
         except (i) as limited by applicable bankruptcy, insolvency,
         reorganization, moratorium and other laws of general application
         affecting enforcement of creditors' rights generally and (ii) as
         limited by laws relating to the availability of specific performance,
         injunctive relief or other equitable remedies.

                  (b) Investment Intent. Such Purchaser understands and
         acknowledges that none of the Securities have been registered under the
         Securities Act. Such Purchaser is acquiring the Securities as principal
         for its own account and not with a view to or for distributing or
         reselling such Securities or any part thereof, without prejudice,
         however, to such Purchaser's right, subject to the provisions of this
         Agreement, at all times to sell or otherwise dispose of all or any part
         of such Securities pursuant to an effective registration statement
         under the Securities Act or under an exemption from such registration
         and in compliance with applicable federal and state securities laws.
         Nothing contained herein shall be deemed a representation or warranty
         by such Purchaser to hold Securities for any period of time. Such
         Purchaser is acquiring the Securities hereunder in the ordinary course
         of its business. Such Purchaser does not have any agreement or
         understanding, directly or indirectly, with any Person to distribute
         any of the Securities.

                  (c) Purchaser Status. At the time such Purchaser was offered
         the Securities, it was, and at the Closing Date it is, and on each date
         on which it exercises any Warrants or converts any shares of Preferred
         Stock, or receives payment of dividends on such shares of Preferred
         Stock, it will be, an "accredited investor" as defined in Rule 501(a)
         under the Securities Act. Such Purchaser has not been formed solely for
         the purpose of acquiring the Securities. Such Purchaser is not a
         registered broker-dealer under Section 15 of the Exchange Act. Such
         Purchaser represents and warrants that the Company is not acting as a
         fiduciary or financial or investment adviser for the Purchaser.

                  (d) Experience of such Purchaser. Such Purchaser, either alone
         or together with its representatives, has such knowledge,
         sophistication and experience in business and financial matters so as
         to be capable of evaluating the merits and risks of the prospective
         investment in the Securities, and has so evaluated the merits and risks
         of such investment. Such Purchaser is able to bear the economic risk of
         an investment in the Securities and, at the present time, is able to
         afford a complete loss of such investment. Such Purchaser is not
         relying (for purposes of making any investment decision or otherwise)
         upon any advice, counsel or, other than as set forth in the Transaction
         Documents, representations (written or oral) of the Company.

                                      -18-
<PAGE>

                  (e) General Solicitation; Investigation. Such Purchaser is not
         purchasing the Securities as a result of any advertisement, article,
         notice or other communication regarding the Securities published in any
         newspaper, magazine or similar media or broadcast over television or
         radio or presented at any seminar or any other general solicitation or
         general advertisement. Such Purchaser (i) has consulted with its own
         legal, regulatory, tax, business, investment, financial and accounting
         advisers in connection herewith to the extent it has deemed necessary,
         (ii) has had a reasonable opportunity to ask questions of, and receive
         answers from, officers and representatives of the Company concerning
         its financial condition and results of operations and the purchase of
         the Securities, and any such questions have been answered to its
         satisfaction, (iii) has had the opportunity to review all publicly
         available records and filings concerning the Company (including the SEC
         Reports) and has carefully reviewed such records and filings that it
         considers relevant to making an investment decision, and (iv) has made
         its own investment decisions based upon its own judgment, due diligence
         and advice from such advisers as it has deemed necessary and not upon
         any view expressed by the Company. Each Purchaser acknowledges that it
         has reviewed all of the SEC Reports that it has deemed necessary and
         appropriate to review for purposes of making any investment decision or
         otherwise.

                  (f) Reliance by the Company. Such Purchaser understands and
         acknowledges that the Company will rely upon the truth and accuracy of
         the foregoing acknowledgments, representations, warranties and
         agreements, and agrees that if any of the foregoing acknowledgments,
         representations, warranties or agreements cease to be accurate, it
         shall promptly notify the Company.

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

                                      -19-
<PAGE>

                                   ARTICLE IV
                         OTHER AGREEMENTS OF THE PARTIES

         4.1 Transfer Restrictions.

                  (a) The Securities may only be disposed of in compliance with
         state and federal securities laws. In connection with any transfer of
         Securities other than (i) pursuant to an effective registration
         statement or Rule 144, (ii) to the Company or to an Affiliate of a
         Purchaser or (iii) or in connection with a pledge as contemplated in
         Section 4.1(b), the Company may require the transferor thereof to
         provide to the Company an opinion of counsel selected by the transferor
         and reasonably acceptable to the Company, the form and substance of
         which opinion shall be reasonably satisfactory to the Company, to the
         effect that such transfer does not require registration of such
         transferred Securities under the Securities Act. As a condition of
         transfer, any such transferee shall agree in writing to be bound by the
         terms of this Agreement and shall have the rights of a Purchaser under
         this Agreement and the Registration Rights Agreement.

                  (b) Each Purchaser agrees to the imprinting, so long as is
         required by this Section 4.1(b), of the following legend on any
         certificate evidencing Securities:

         [NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE
         SECURITIES ARE [EXERCISABLE] [CONVERTIBLE]] HAVE BEEN REGISTERED WITH
         THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
         ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
         SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
         ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
         REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
         AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
         REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
         APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF
         COUNSEL TO THE TRANSFEROR REASONABLY ACCEPTABLE TO THE COMPANY TO SUCH
         EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
         COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF
         THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
         ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

                                      -20-
<PAGE>

                  The Company acknowledges and agrees that a Purchaser may from
         time to time pledge pursuant to a bona fide margin agreement or grant a
         security interest in some or all of the Securities to a financial
         institution that is an "accredited investor" as defined in Rule 501(a)
         under the Securities Act and, if required under the terms of such
         arrangement, such Purchaser may transfer pledged or secured Securities
         to the pledgees or secured parties. Such pledge or transfer would not
         be subject to approval of the Company and no legal opinion of legal
         counsel of the pledgee, secured party or pledgor shall be required in
         connection therewith. Further, no notice shall be required of such
         pledge. At the appropriate Purchaser's expense, the Company will
         execute and deliver such reasonable documentation as a pledgee or
         secured party of Securities may reasonably request in connection with a
         pledge or transfer of the Securities, including the preparation and
         filing of any required prospectus supplement under Rule 424(b)(3) of
         the Securities Act or other applicable provision of the Securities Act
         to appropriately amend the list of Selling Stockholders thereunder. Any
         such pledgee shall otherwise be bound by the provisions of this
         Agreement.

                  (c) Certificates evidencing the Underlying Shares shall not
         contain any legend (including the legend set forth in Section 4.1(b)
         hereof): (i) while a registration statement (including the Registration
         Statement) covering the resale of such security is effective under the
         Securities Act, or (ii) following any sale of such Underlying Shares
         pursuant to Rule 144, or (iii) if such Underlying Shares are eligible
         for sale under Rule 144(k), or (iv) if such legend is not required
         under applicable requirements of the Securities Act (including judicial
         interpretations and pronouncements issued by the staff of the
         Commission); provided, however, in connection with the issuance of the
         Underlying Shares, each Purchaser, severally and not jointly with the
         other Purchasers, hereby agrees to adhere to and abide by all
         prospectus delivery requirements under the Securities Act and rules and
         regulations of the Commission. The Company shall cause its counsel to
         issue direction to the Company's transfer agent promptly after the
         Effective Date if required by the Company's transfer agent to effect
         the removal of the legend hereunder. If all or any shares of Preferred
         Stock or any portion of a Warrant is converted or exercised (as
         applicable) at a time when there is an effective registration statement
         to cover the resale of the Underlying Shares, or if such Underlying
         Shares may be sold under Rule 144(k), or if such legend is not
         otherwise required under applicable requirements of the Securities Act
         (including judicial interpretations thereof) then such Underlying
         Shares shall be issued free of all legends. The Company agrees that
         following the Effective Date or at such time as such legend is no
         longer required under this Section 4.1(c), it will, no later than seven
         Trading Days following the delivery by a Purchaser to the Company or
         the Company's transfer agent of a certificate representing Underlying
         Shares issued with a restrictive legend (such seventh Trading Day, the
         "Legend Removal Date"), deliver or cause to be delivered to such
         Purchaser a certificate representing such shares that is free from all
         restrictive and other legends. The Company may not make any notation on
         its records or give instructions to any transfer agent of the Company
         that enlarge the restrictions on transfer set forth in this Section.

                                      -21-
<PAGE>

                  (d) In addition to such Purchaser's other available remedies,
         the Company shall pay to a Purchaser, in cash, as liquidated damages
         and not as a penalty, for each $5,000 of Underlying Shares (based on
         the VWAP of the Common Stock on the date such Securities are submitted
         to the Company's transfer agent) delivered for removal of the
         restrictive legend and subject to this Section 4.1(c), $25 per Trading
         Day (increasing to $50 per Trading Day 3 Trading Days after such
         damages have begun to accrue) for each Trading Day after the fourth
         Trading Day following the Legend Removal Date until such certificate is
         delivered without a legend. Nothing herein shall limit such Purchaser's
         right to pursue actual damages for the Company's failure to deliver
         certificates representing any Securities as required by the Transaction
         Documents, and such Purchaser shall have the right to pursue all
         remedies available to it at law or in equity including, without
         limitation, a decree of specific performance and/or injunctive relief.

         4.2 Acknowledgment of Dilution. The Company acknowledges that the
issuance of the Securities may result in dilution of the outstanding shares of
Common Stock, which dilution may be substantial under certain market conditions.
The Company further acknowledges that its obligations under the Transaction
Documents, including its obligation to issue the Underlying Shares pursuant to
the Transaction Documents, are unconditional and absolute and not subject to any
right of set off, counterclaim, delay or reduction, regardless of the effect of
any such dilution or any claim the Company may have against any Purchaser and
regardless of the dilutive effect that such issuance may have on the ownership
of the other stockholders of the Company.

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

         4.4 Integration. The Company shall not, and shall use commercially
reasonable efforts to ensure that no Affiliate of the Company shall, sell, offer
for sale or solicit offers to buy or otherwise negotiate in respect of any
security (as defined in Section 2 of the Securities Act) that would be
integrated with the offer or sale of the Securities in a manner that would
require the registration under the Securities Act of the sale of the Securities
to the Purchasers, or that would be integrated with the offer or sale of the
Securities for purposes of the rules and regulations of any Principal Market.

                                      -22-
<PAGE>

         4.5 Reservation and Listing of Securities.

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

                  (b) If, on any date, the number of authorized but unissued
         (and otherwise unreserved) shares of Common Stock is less than the
         Required Minimum on such date, then the Company shall use commercially
         reasonable efforts to amend the Company's certificate or articles of
         incorporation to increase the number of authorized but unissued shares
         of Common Stock to at least the Required Minimum at such time, as soon
         as possible and in any event not later than the 75th day after such
         date.

                  (c) The Company shall, if applicable: (i) in the time and
         manner required by the Principal Market, prepare and file with the
         Principal Market an additional shares listing application covering a
         number of shares of Common Stock at least equal to the Required Minimum
         on the date of such application, (ii) take all steps reasonably
         necessary to cause such shares of Common Stock to be approved for
         listing on the Principal Market as soon as possible thereafter, (iii)
         provide to the Purchasers evidence of such listing, and (iv) maintain
         the listing of such Common Stock on any date at least equal to the
         Required Minimum on such date on the Principal Market or another
         Principal Market. In addition, the Company shall seek Shareholder
         Approval at the earliest practical date, but in no event later than
         their next annual meeting of shareholders which shall be prior to April
         1, 2006, with the recommendation of the Company's Board of Directors
         that such proposal be approved, and the Company shall solicit proxies
         from its shareholders in connection therewith in the same manner as all
         other management proposals in such proxy statement and all management
         appointed proxyholders shall vote their proxies in favor of such
         proposal.

         4.6 Conversion and Exercise Procedures. The form of Notice of Exercise
included in the Warrants and the form of Notice of Conversion included in the
Certificate of Designation set forth the totality of the procedures required of
the Purchasers in order to exercise the Warrants or convert the Preferred Stock.
No additional legal opinion or other information or instructions shall be
required of the Purchasers to exercise their Warrants or convert their Preferred
Stock. The Company shall honor exercises of the Warrants and conversions of the
Preferred Stock and shall deliver Underlying Shares in accordance with the
terms, conditions and time periods set forth in the Transaction Documents.

         4.7 Securities Laws Disclosure; Publicity. The Company shall, by 8:30
a.m. Eastern time on the Trading Day following the date of this Agreement, issue
a press release disclosing all material terms of the transactions contemplated
hereby and, by 8:30 a.m. Eastern time on the second Trading Day following the
date of this Agreement, file a Current Report on Form 8-K reasonably acceptable
to each Purchaser disclosing all material terms of the transactions contemplated
hereby and attaching all Transaction Documents thereto. The Company and the
Purchasers shall consult with each other in issuing any press releases with
respect to the transactions contemplated hereby and neither the Company nor any
Purchaser shall issue any such press release or otherwise make any such public
statement without the prior consent of the Company, with respect to any press
release of any Purchaser, or without the prior consent of each Purchaser with
respect to any press release of the Company, which consent shall not
unreasonably be withheld or delayed, except if such disclosure is required by
law or regulation of the Principal Market, in which case the disclosing party
shall promptly provide the other party with prior notice of such public
statement or communication. Notwithstanding the foregoing, except as required by
law, other than in any registration statement filed pursuant to the Registration
Rights Agreement and filings related thereto, the Company shall not publicly
disclose the name of any Purchaser, or include the name of any Purchaser in any
filing with the Commission or any regulatory agency or Principal Market, without
the prior written consent of such Purchaser. In the event that such disclosure
is required by law or Principal Market regulations, the Company shall provide
each Purchaser with prior notice of such disclosure. Any consent requested
pursuant to this Section 4.7 by the Company or any Purchaser shall be deemed to
have been given unless objection is provided within one day of the date
requested.

                                      -23-
<PAGE>

         4.8 Non-Public Information. The Company covenants and agrees that
neither it nor any other Person acting on its behalf will provide any Purchaser
or its agents or counsel with any information that the Company believes
constitutes material non-public information, unless prior thereto such Purchaser
shall have executed a written agreement regarding the confidentiality and use of
such information. The Company understands and confirms that each Purchaser shall
be relying on the foregoing representations in effecting transactions in
securities of the Company.

         4.9 Use of Proceeds. The Company shall use the net proceeds from the
sale of the Securities hereunder for working capital purposes and not for the
satisfaction of any portion of the Company's debt (other than payment of trade
payables, capital lease obligations, accrued expenses in the ordinary course of
the Company's business and prior practices and the payment of principal and
interest on the Company 7.5% Convertible Debentures due April 24, 2006 and
dividends on the Preferred Stock and Series B Preferred Stock, provided when
such payments become due and payable, the Company is contractually restricted by
such debentures or the Certificate of Designation from making such payments, as
applicable, in shares of Common Stock), to redeem any Company equity or
equity-equivalent securities or to settle any outstanding litigation, or to be
used for operating purposes in the State of Nevada.

         4.10 Anti-Takeover. Provided that no Triggering Event (as defined in
the Certificate of Designation) is then in existence, each of the Purchasers
agrees that, other than pursuant to the Transaction Documents, it will not
propose to the Company, its security holders or any other Person, any
transaction between such Purchaser or any other Person and the Company or
involving any of the Company's securities, unless the Company shall have
requested in writing that such Purchaser make such a proposal. Provided that no
Event of Default is then in existence and other than pursuant to the
transactions contemplated by the Transaction Documents or Series B Preferred
Stock or any warrant issued to any Purchaser, such Purchaser will not acquire,
or assist (by means of providing financing therefor or otherwise), advise or
encourage any other persons in acquiring, directly or indirectly, an interest
in, or control of, more than 9.9% of the Company or any of the Company's
securities, businesses or assets for a period of three years from the Closing
Date unless the Company shall have consented in advance in writing to such
acquisition. Such Purchaser also agrees that the Company shall be entitled to
equitable relief, including an injunction, in the event of any breach of the
provisions of this Section 4.10 and that such Purchaser shall not oppose the
granting of such relief.

                                      -24-
<PAGE>

         4.11 Indemnification.

                           (a) The Company will indemnify and hold the
         Purchasers and their directors, officers, shareholders, partners,
         employees and agents (each, a "Purchaser Party") harmless from any and
         all losses, liabilities, obligations, claims, contingencies, damages,
         costs and expenses, including all judgments, amounts paid in
         settlements, court costs and reasonable attorneys' fees and costs of
         investigation that any such Purchaser Party may suffer or incur as a
         result of or relating to: (a) any misrepresentation, breach or
         inaccuracy, or any allegation by a third party that, if true, would
         constitute a breach or inaccuracy, of any of the representations,
         warranties, covenants or agreements made by the Company in this
         Agreement or in the other Transaction Documents; or (b) any cause of
         action, suit or claim brought or made against such Purchaser Party and
         arising solely out of or solely resulting from the execution, delivery,
         performance or enforcement of this Agreement or any of the other
         Transaction Documents and without causation by any other activity,
         obligation, condition or liability pertaining to such Purchaser Party
         and not to the transactions contemplated by this Agreement. The Company
         will reimburse such Purchaser Party for its reasonable legal and other
         expenses (including the cost of any investigation, preparation and
         travel) incurred in connection therewith promptly after it is finally
         judicially determined that such Purchaser Party is entitled to
         indemnification hereunder.

                           (b) Each Purchaser, severally and not jointly with
         the other Purchasers, will indemnify and hold the Company, its
         directors, officers, shareholders, employees and agents (each a
         "Company Party") harmless from any and all losses, liabilities,
         obligations, claims, contingencies, damages, costs and expenses,
         including all judgments, amounts paid in settlements, court costs and
         reasonable attorneys' fees and costs of investigation that any such
         Company Party may suffer or incur as a result of or relating to any
         misrepresentation, breach or inaccuracy would constitute a breach or
         inaccuracy, of any of the representations, warranties, covenants or
         agreements made by such Purchaser in this Agreement or in the other
         Transaction Documents. Such Purchaser will reimburse the Company Party
         for its reasonable legal and other expenses (including the cost of any
         investigation, preparation and travel) incurred in connection therewith
         promptly after it is finally judicially determined that the Company
         Party is entitled to indemnification hereunder. Notwithstanding
         anything herein to the contrary, no Purchaser shall be liable hereunder
         for an amount in excess of such Purchaser's Subscription Amount at the
         Closing.

                           (c) If any Proceeding shall be brought or asserted
         against any Person entitled to indemnity hereunder (an "Indemnified
         Party"), such Indemnified Party shall promptly notify the Person from
         whom indemnity is sought (the "Indemnifying Party") in writing, and the
         Indemnifying Party shall assume the defense thereof, including the
         employment of counsel reasonably satisfactory to the Indemnified Party
         and the payment of all fees and expenses incurred in connection with
         defense thereof; provided, that the failure of any Indemnified Party to
         give such notice shall not relieve the Indemnifying Party of its
         obligations or liabilities pursuant to this Agreement, except (and
         only) to the extent that such failure shall have prejudiced the
         Indemnifying Party.

                                      -25-
<PAGE>

                           (d) An Indemnified Party shall have the right to
         employ separate counsel in any such Proceeding and to participate in
         the defense thereof, but the fees and expenses of such counsel shall be
         at the expense of such Indemnified Party or Parties unless: (1) the
         Indemnifying Party has agreed in writing to pay such fees and expenses;
         (2) the Indemnifying Party shall have failed promptly to assume the
         defense of such Proceeding and to employ counsel reasonably
         satisfactory to such Indemnified Party in any such Proceeding; or (3)
         the named parties to any such Proceeding (including any impleaded
         parties) include both such Indemnified Party and the Indemnifying
         Party, and such Indemnified Party shall have been advised by counsel
         that a material conflict of interest is likely to exist if the same
         counsel were to represent such Indemnified Party and the Indemnifying
         Party (in which case, if such Indemnified Party notifies the
         Indemnifying Party in writing that it elects to employ separate counsel
         at the expense of the Indemnifying Party, the Indemnifying Party shall
         not have the right to assume the defense thereof and the expense of one
         such counsel for each Indemnified Party shall be at the expense of the
         Indemnifying Party). The Indemnifying Party shall not be liable for any
         settlement of any such Proceeding effected without its written consent,
         which consent shall not be unreasonably withheld or delayed. No
         Indemnifying Party shall, without the prior written consent of the
         Indemnified Party, effect any settlement of any pending Proceeding in
         respect of which any Indemnified Party is a party, unless such
         settlement includes an unconditional release of such Indemnified Party
         from all liability on claims that are the subject matter of such
         Proceeding.

         4.12 Shareholders Rights Plan. In the event that a shareholders rights
plan is adopted by the Company, no claim will be made or enforced by the Company
or any other Person that any Purchaser is an "Acquiring Person" under the plan
or in any way could be deemed to trigger the provisions of such plan by virtue
of receiving Securities under the Transaction Documents.

         4.13 Future Financings. From the Closing Date until 90 days after the
Effective Date, other than as contemplated by this Agreement, neither the
Company nor any Subsidiary shall issue or sell any Capital Shares or Capital
Shares Equivalents. Notwithstanding anything herein to the contrary, the 90 day
period set forth in this Section 4.13 shall be extended for the number of
Trading Days during such period in which (y) trading in the Common Stock is
suspended by any Principal Market, or (z) following the Effective Date, the
Registration Statement is not effective or the prospectus included in the
Registration Statement may not be used by the Purchasers for the resale of the
Underlying Shares. Notwithstanding anything to the contrary herein, this Section
4.13 shall not apply to the following (a) the granting or issuance of shares of
Common Stock or options (or exercise thereof) to or by employees, officers,
directors, and consultants (provided that in the case of consultants, such
issuance of Capital Shares and grants of Capital Share Equivalents does not
exceed, in the aggregate, 200,000 Capital Shares or Capital Shares Equivalents
convertible into or exchangeable for 200,000 Capital Shares per any 12 month
period) of the Company pursuant to any stock option plan or employee incentive
plan or agreement duly adopted or approved by a majority of the non-employee
members of the Board of Directors of the Company or a majority of the members of
a committee of non-employee directors established for such purpose, or (b) the
exercise of the Preferred Stock or any other security issued by the Company in
connection with the offer and sale of this Company's securities pursuant to the
Transaction Documents, or (c) the exercise of or conversion of any Capital
Shares Equivalents issued and outstanding on the Closing Date, provided that
such securities have not been amended since the Closing Date in order to reduce
the effective exercise price, increase the number of shares issuable or
accelerate the date on which such Capital Share Equivalents may be exercised, or
(d) the issuance of Capital Shares or Capital Shares Equivalents in connection
with acquisitions, strategic investments or strategic partnering arrangements,
the primary purpose of which is not to raise capital, or subsequent exercise of
any such Capital Share Equivalents ((a)-(d), each, an "Exempt Issuance"). In
addition to the limitations set forth herein, from the Closing Date until such
time as the Purchasers no longer hold any of the Securities, the Company shall
be prohibited from effecting or entering into an agreement to effect any
Subsequent Financing (as defined in Section 4.14) involving a "Variable Rate
Transaction" or an "MFN Transaction" (each as defined below). The term "Variable
Rate Transaction" shall mean a transaction in which the Company issues or sells
(i) any debt or equity securities that are convertible into, exchangeable or
exercisable for, or include the right to receive additional shares of, Common
Stock either (A) at a conversion, exercise or exchange rate or other price that
is based upon and/or varies with the trading prices of or quotations for the
shares of Common Stock at any time after the initial issuance of such debt or
equity securities, or (B) with a conversion, exercise or exchange price that is
subject to being reset at some future date after the initial issuance of such
debt or equity security or upon the occurrence of specified or contingent events
directly or indirectly related to the business of the Company or the market for
the Common Stock. The term "MFN Transaction" shall mean a transaction in which
the Company issues or sells any securities in a capital raising transaction or
series of related transactions which grants to an investor the right to exchange
their securities for securities issued in future transactions of the Company on
terms more favorable than those granted to such investor in their original
offering. In addition, unless Shareholder Approval has been obtained and deemed
effective in accordance with Section 4.5(c), the Company shall not make any
issuance whatsoever of Capital Shares or Capital Shares Equivalents which would
cause any adjustment of the Conversion Price (other than pursuant to Section
7(a) of the Certificate of Designation) to the extent the holders of the
Preferred Stock would not be permitted, pursuant to Section 6(d) of the
Certificate of Designation, to convert their respective outstanding Preferred
Stock and exercise their respective Warrants in full, ignoring for such purposes
any conversion or exercise limitations therein. Additionally, unless Shareholder
Approval has been obtained and deemed effective, the Company shall not make any
issuance whatsoever of Common Stock or Common Stock Equivalents which would
cause any adjustment of the Conversion Price to the extent the holders of
Preferred Stock would not be permitted, pursuant to Section 6(d) of the
Certificate of Designation, to convert their respective outstanding Debentures
and exercise their respective Warrants in full, ignoring for such purposes the
conversion or exercise limitations therein. Any Purchaser shall be entitled to
obtain injunctive relief against the Company to preclude any such issuance,
which remedy shall be in addition to any right to collect damages.

                                      -26-
<PAGE>

         4.14 Participation in Future Financing. From the date hereof until a
Purchaser no longer holds any shares of Preferred Stock, upon any financing by
the Company or any of its Subsidiaries of Capital Shares or Capital Shares
Equivalents (a "Subsequent Financing"), such Purchaser shall have the right to
participate in up to 25% of the Subsequent Financing (the "Participation
Maximum"). At least 3 Trading Days prior to the closing of the Subsequent
Financing, the Company shall deliver to each Purchaser a written notice of its
intention to effect a Subsequent Financing ("Pre-Notice"), which Pre-Notice
shall ask such Purchaser if it wants to review the details of such financing
(such additional notice, a "Subsequent Financing Notice"). Upon the request of a
Purchaser, and only upon a request by such Purchaser, for a Subsequent Financing
Notice, the Company shall promptly, but no later than 1 Trading Day after such
request, deliver a Subsequent Financing Notice to such Purchaser. The Subsequent
Financing Notice shall describe in reasonable detail the proposed terms of such
Subsequent Financing, the amount of proceeds intended to be raised thereunder
and attached to which shall be a term sheet or similar document relating thereto
(which may be redacted to protect any confidential information). If by 5:30 p.m.
(New York City time) on the 3rd Trading Day after all of the Purchasers have
received the Pre-Notice, notifications by the Purchasers of their willingness to
participate in the Subsequent Financing (or to cause their designees to
participate) is, in the aggregate, less than the total amount of the Subsequent
Financing, then the Company may effect the remaining portion of such Subsequent
Financing on the terms set forth in the Subsequent Financing Notice. If the
Company receives no notice from a Purchaser as of such 3rd Trading Day, such
Purchaser shall be deemed to have notified the Company that it does not elect to
participate. The Company must provide the Purchasers with a second Subsequent
Financing Notice, and the Purchasers will again have the right of participation
set forth above in this Section 4.14, if the Subsequent Financing subject to the
initial Subsequent Financing Notice is not consummated for any reason on
substantially the terms set forth in such Subsequent Financing Notice within 60
Trading Days after the date of the initial Subsequent Financing Notice. In the
event the Company receives responses to Subsequent Financing Notices from
Purchasers seeking to purchase more than the aggregate amount of the
Participation Maximum, each such Purchaser shall have the right to purchase
their Pro Rata Portion (as defined below) of the Participation Maximum. "Pro
Rata Portion" is the ratio of (x) the Subscription Amount of Securities
purchased by a participating Purchaser and (y) the sum of the aggregate
Subscription Amount of all participating Purchasers. Notwithstanding anything to
the contrary herein, this Section 4.14 shall not apply to any Exempt Issuance.

         4.15 Equal Treatment of Purchasers. No consideration shall be offered
or paid to any person to amend or consent to a waiver or modification of any
provision of any of the Transaction Documents unless the same consideration is
also offered to all of the parties to the Transaction Documents. For
clarification purposes, this provision constitutes a separate right granted to
each Purchaser by the Company and negotiated separately by each Purchaser, and
is intended to treat for the Company the Preferred Stock holders as a class and
shall not in any way be construed as the Purchasers acting in concert or as a
group with respect to the purchase, disposition or voting of Securities or
otherwise.

         4.16 Voting Agreement. Each of the Purchasers agrees to vote all Common
Stock owned by such Purchaser as of the record date for the annual meeting of
shareholders of the Company in favor of the Shareholder Approval. For
clarification purposes, this provision constitutes a separate obligation of each
Purchaser and is intended to treat such holders as a class and shall not in any
way be construed as such holders acting in concert or as a group with respect to
the purchase, disposition or voting of Securities or otherwise.

                                      -27-
<PAGE>

         4.17 Short Sales and Confidentiality After The Date Hereof. Each
Purchaser severally and not jointly with the other Purchasers covenants that
neither it nor any Affiliates acting on its behalf or pursuant to any
understanding with it will execute any Short Sales or any "derivative"
transaction with the economic effect of a disposition during the period after
the Discussion Time and ending at the time that the transactions contemplated by
this Agreement are first publicly announced as described in Section 4.7. Each
Purchaser, severally and not jointly with the other Purchasers, covenants that
until such time as the transactions contemplated by this Agreement are publicly
disclosed by the Company as described in Section 4.7, such Purchaser will
maintain, the confidentiality of all disclosures made to it in connection with
this transaction (including the existence and terms of this transaction). Each
Purchaser understands and acknowledges, severally and not jointly with any other
Purchaser, that the Commission currently takes the position that coverage of
short sales of shares of the Common Stock "against the box" prior to the
Effective Date of the Registration Statement with the Securities is a violation
of Section 5 of the Securities Act, as set forth in Item 65, Section 5 under
Section A, of the Manual of Publicly Available Telephone Interpretations, dated
July 1997, compiled by the Office of Chief Counsel, Division of Corporation
Finance. Accordingly, each Purchaser, severally and not jointly with the other
Purchasers, hereby agrees not to use any of the Underlying Shares to cover any
Short Sales made after the date hereof and prior to the Effective Date. In
addition, each Purchaser, severally and not jointly with the other Purchasers,
hereby agrees that it will comply with all rules and regulations contained in
Regulation M promulgated under the Exchange Act with respect to the purchase and
resale of the Underlying Shares. Notwithstanding the foregoing, no Purchaser
makes any representation, warranty or covenant hereby that it will not engage in
Short Sales in the securities of the Company after the time that the
transactions contemplated by this Agreement are first publicly announced as
described in Section 4.7. Notwithstanding the foregoing, in the case of a
Purchaser that is a multi-managed investment vehicle whereby separate portfolio
managers manage separate portions of such Purchaser's assets and the portfolio
managers have no knowledge of the investment decisions made by the portfolio
managers managing other portions of such Purchaser's assets, the covenant set
forth above shall only apply with respect to the portion of assets managed by
the portfolio manager that made the investment decision to purchase the
Securities covered by this Agreement.

         4.18 Conversion of Series B Preferred Stock. On or prior to the 45th
calendar day after the date hereof, each Purchaser convert all of its Series B
Preferred Stock of the Company into Common Stock pursuant to the terms of the
certificate of designation of the Series B Preferred Stock of the Company. If
any Series B Preferred Stock is not converted by such date, it shall be deemed
to have been converted and the Company shall issue the Common Stock in
conversion thereof and the Series B Preferred Stock shall be cancelled.

                                      -28-
<PAGE>

                                    ARTICLE V
                                  MISCELLANEOUS

         5.1 Fees and Expenses. At the Closing, the Company has agreed to
reimburse Omicron Master Trust ("Omicron") up to $40,000 ($20,000 of which has
been advanced to Omicron prior to the Closing Date and is non-refundable) for
its actual, reasonable, out-of-pocket legal fees and expenses. Accordingly, in
lieu of the foregoing payments, the Company, on the Closing Date, will direct
that the aggregate amount that Omicron is to pay for the Preferred Stock and
Warrants at the Closing, be reduced by $20,000. The Company shall deliver, prior
to the Closing, a completed and executed copy of the Closing Statement, attached
hereto as Annex A. Except as expressly set forth in the Transaction Documents to
the contrary, each party shall pay the fees and expenses of its advisers,
counsel, accountants and other experts, if any, and all other expenses incurred
by such party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement. The Company shall pay all transfer agent fees,
stamp taxes and other taxes and duties levied in connection with the issuance of
any Securities.

         5.2 Entire Agreement. The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.

         5.3 Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
specified on the signature page attached hereto prior to 5:30 p.m. (New York
City time) on a Trading Day and an electronic confirmation of delivery is
received by the sender, (b) the next Trading Day after the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
number specified in this Section on a day that is not a Trading Day or later
than 5:30 p.m. (New York City time) on any Trading Day, (c) three Trading Days
following the date of mailing, if sent by U.S. nationally recognized overnight
courier service, or (d) upon actual receipt by the party to whom such notice is
required to be given. The addresses for such notices and communications are
those set forth on the signature pages hereof, or such other address as may be
designated in writing hereafter, in the same manner, by such Person.

         5.4 Amendments; Waivers. No provision of this Agreement may be waived
or amended except in a written instrument signed, in the case of an amendment,
by the Company and Purchasers holding Preferred Stock or Warrants issuable into
at least 66.66% of the Underlying Shares issuable in full, in the aggregate,
pursuant to all shares of Preferred Stock and Warrants then outstanding
(ignoring for such calculation any limitations on conversion or exercise
therein) or in the case of a waiver, by the party against whom enforcement of
any such waiver is sought. No waiver of any default with respect to any
provision, condition or requirement of this Agreement shall be deemed to be a
continuing waiver in the future or a waiver of any subsequent default or a
waiver of any other provision, condition or requirement hereof, nor shall any
delay or omission of either party to exercise any right hereunder in any manner
impair the exercise of any such right.

                                      -29-
<PAGE>

         5.5 Construction. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.

         5.6 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the Purchasers. Any Purchaser may assign
its rights under this Agreement and the Registration Rights Agreement to any
Person to whom such Purchaser assigns or transfers any Securities; provided,
however, that no Purchaser may assign its rights to a competitor or potential
competitor of the Company.

         5.7 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.11.

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

                                      -30-
<PAGE>

         5.9 Survival. The representations and warranties contained herein shall
survive the Closing and the delivery, exercise and/or conversion of the
Securities, as applicable for the applicable statue of limitations.

         5.10 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.

         5.11 Severability. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.

         5.12 Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, within 7 Trading Days from when any Purchaser exercises a
right, election, demand or option under a Transaction Document and the Company
does not timely perform its related obligations within the periods therein
provided, then such Purchaser may rescind or withdraw, in its sole discretion
from time to time upon written notice to the Company, any relevant notice,
demand or election in whole or in part without prejudice to its future actions
and rights; provided, however, in the case of a rescission of a conversion of
the shares of Preferred Stock or exercise of a Warrant, the Purchaser shall be
required to return any shares of Common Stock subject to any such rescinded
conversion or exercise notice.

         5.13 Replacement of Securities. If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof, or in lieu of and substitution therefor, a new certificate
or instrument, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested.

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

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

                                      -31-
<PAGE>

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

         5.17 Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document. Nothing contained herein or in any
Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Document. Each
Purchaser shall be entitled to independently protect and enforce its rights,
including the rights arising out of this Agreement or out of the other
Transaction Documents, and it shall not be necessary for any other Purchaser to
be joined as an additional party in any proceeding for such purpose. Each
Purchaser has been represented by its own separate legal counsel in their review
and negotiation of the Transaction Documents. For reasons of administrative
convenience only, Purchasers and their respective counsel have chosen to
communicate with the Company through FW. FW does not represent all of the
Purchasers but only Omicron. The Company has elected to provide all Purchasers
with the same terms and Transaction Documents for the convenience of the Company
and not because it was required or requested to do so by the Purchasers.

                                      -32-
<PAGE>

         5.18 Liquidated Damages. The Company's obligations to pay any
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
liquidated damages and other amounts have been paid notwithstanding the fact
that the instrument or security pursuant to which such liquidated damages or
other amounts are due and payable shall have been canceled.

         5.19 Consent. Where in the Transaction Documents the consent of a
Purchaser is required within a specific period of time, consent shall be deemed
to have been given if no objection is given by notice to the Company within the
applicable period of time.

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

                            (Signature Pages Follow)

                                      -33-
<PAGE>

         IN WITNESS WHEREOF, the parties hereto have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.

                                    INTERACTIVE SYSTEMS WORLDWIDE INC.

                                    By: /s/ Bernard Albanese
                                    Name: Bernard Albanese
                                    Title: President

                                    Address for Notice:

                                    2 Andrews Road (2nd Floor)
                                    West Paterson, NJ 07424
                                    Attn: James McDade
                                    Tel: 973.256.8181 Ext. 24
                                    Fax: 973.256.8211

With a copy (which is required
for notice to be valid) to each of: Friedman Kaplan Seiler & Adelman LLP
                                    1633 Broadway (46th Floor)
                                    New York, NY 10019
                                    Attn: Richard M. Hoffman, Esq.
                                    Tel:  212.833.1116
                                    Fax:  212.833.1250

                           and to:
                                    Global Interactive Gaming Ltd.
                                    Centre Point Tower
                                    103 New Oxford Street
                                    London WC1A 100
                                    Attn: Steve Salmon
                                    Tel:  +44-207-663-8950 Ext. 8973
                                    Fax:  +44-207-663-8951

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

                                      -34-
<PAGE>

                       [PURCHASER'S SIGNATURE PAGE - ISWI]

         IN WITNESS WHEREOF, the undersigned have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.

Name of Investing Entity: Iroquois Master Fund Ltd.
Signature of Authorized Signatory of Investing Entity: /s/ Richard Abbe
Name of Authorized Signatory: Richard Abbe
Title of Authorized Signatory: Director
Email Address of Authorized Signatory: kpage@icfund.com

Address for Notice of Investing Entity:  641 Lexington Ave.; New York, NY  10022

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

Subscription Amount:  $250,000
Shares of Preferred Stock:  250
Warrant Shares: 34,819

                           [SIGNATURE PAGES CONTINUE]

                                      -35-
<PAGE>

                       [PURCHASER'S SIGNATURE PAGE - ISWI]

         IN WITNESS WHEREOF, the undersigned have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.

Name of Investing Entity: Midsummer Investment, Ltd.
Signature of Authorized Signatory of Investing Entity: /s/ Scott D. Kaufman
Name of Authorized Signatory: Scott D. Kaufman
Title of Authorized Signatory: Managing Director, Midsummer Capital, LLC
(acting as investment manager of Midsummer Investment Ltd.)
Email Address of Authorized Signatory: sk@midsummercapital.com

Address for Notice of Investing Entity:

485 Madison Avenue
23rd Floor
New York, NY  10022

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

Subscription Amount:  $1,500,000
Shares of Preferred Stock:  1,500
Warrant Shares: 208,914

                           [SIGNATURE PAGES CONTINUE]

                                      -36-
<PAGE>

                       [PURCHASER'S SIGNATURE PAGE - ISWI]

         IN WITNESS WHEREOF, the undersigned have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.

Name of Investing Entity:  Omicron Master Trust
Signature of Authorized Signatory of Investing Entity: /s/ Bruce Bernstein
Name of Authorized Signatory: Bruce Bernstein
Title of Authorized Signatory: Managing Partner
Email Address of Authorized Signatory: bb@omicroncapital.com

Address for Notice of Investing Entity:

650 5th Avenue, 24th Floor
New York, NY  10019

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

Subscription Amount: $2,250,000
Shares of Preferred Stock: 2,250
Warrant Shares: 313,370

                                      -37-
<PAGE>

                                                                         ANNEX A

                                CLOSING STATEMENT

Pursuant to the attached Securities Purchase Agreement, dated as of the date
hereto, the purchasers shall purchase $4,000,000 of Preferred Stock and Warrants
from Interactive Systems Worldwide Inc., a Delaware corporation (the "Company").
All funds will be wired into a trust account maintained by Friedman Kaplan
Seiler & Adelman LLP, counsel to the Company. All funds will be disbursed in
accordance with this Closing Statement.

DISBURSEMENT DATE:    August ___, 2005

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

I.   PURCHASE PRICE

                               GROSS PROCEEDS TO BE RECEIVED IN TRUST       $

II.  DISBURSEMENTS

                                                                            $
                                                                            $
                                                                            $
                                                                            $
                                                                            $

TOTAL AMOUNT DISBURSED:                                                     $

WIRE INSTRUCTIONS:

First Republic Bank - Branch 79
1230 Avenue of the Americas
New York, NY 10020

ABA No. (Bank Wiring Number):            321081669

For the benefit of (Account Name):       Friedman Kaplan Seiler & Adelman LLP
                                         IOLA Attorney Trust Account

Account Number:                          97900019856

                                      -38-<PAGE>

                                                                    Exhibit 10.2

                          REGISTRATION RIGHTS AGREEMENT

         This Registration Rights Agreement (this "Agreement") is made and
entered into as of August 3, 2005, among Interactive Systems Worldwide Inc., a
Delaware corporation (the "Company"), and the purchasers signatory hereto (each
such purchaser is a "Purchaser" and all such purchasers are, collectively, the
"Purchasers").

               This Agreement is made pursuant to the Securities Purchase
Agreement, dated as of the date hereof among the Company and the Purchasers (the
"Purchase Agreement").

               The Company and the Purchasers hereby agree as follows:

         1. Definitions

               CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN THAT ARE
DEFINED IN THE PURCHASE AGREEMENT SHALL HAVE THE MEANINGS GIVEN SUCH TERMS IN
THE PURCHASE AGREEMENT. As used in this Agreement, the following terms shall
have the following meanings:

                  "Advice" shall have the meaning set forth in Section 6(d).

                  "Effectiveness Date" means, with respect to the initial
         Registration Statement required to be filed hereunder, the 90th
         calendar day following the Closing Date (120th calendar day following
         the Closing Date in the event of a review of the Registration Statement
         by the Commission, including a review of any SEC Reports incorporated
         therein by reference) and, with respect to any additional Registration
         Statements which may be required pursuant to Section 3(c), the 90th
         calendar day following the date on which the Company first knows, or
         reasonably should have known pursuant to Section 3(c), that such
         additional Registration Statement is required hereunder; provided,
         however, in the event the Company is notified by the Commission that
         one of the above Registration Statements will not be reviewed or is no
         longer subject to further review and comments, the Effectiveness Date
         as to such Registration Statement shall be the fifth Trading Day
         following the date on which the Company is so notified if such date
         precedes the dates required above.

                  "Effectiveness Period" shall have the meaning set forth in
         Section 2(a).

                  "Event" shall have the meaning set forth in Section 2(b).

                  "Event Date" shall have the meaning set forth in Section 2(b).

                                       1
<PAGE>

                  "Filing Date" means, with respect to the initial Registration
         Statement required hereunder, the 45th calendar day following the
         Closing Date, and, with respect to any additional Registration
         Statements which may be required pursuant to Section 3(c), the 15th
         Trading Day following the date on which the Company first knows, or
         reasonably should have known pursuant to Section 3(c), that such
         additional Registration Statement is required hereunder.

                  "Holder" or "Holders" means the holder or holders, as the case
         may be, from time to time of Registrable Securities.

                  "Indemnified Party" shall have the meaning set forth in
         Section 5(c) hereof.

                  "Indemnifying Party" shall have the meaning set forth in
         Section 5(c) hereof.

                  "Losses" means any and all losses, claims, damages,
         liabilities, settlement costs and expenses, including costs of
         preparation and reasonable attorneys' fees.

                  "Plan of Distribution" shall have the meaning set forth in
         Section 2(a).

                  "Proceeding" means an action, claim, suit, investigation or
         proceeding (including an investigation or partial proceeding, such as a
         deposition), whether commenced or threatened.

                  "Prospectus" means the prospectus included in a Registration
         Statement (including a prospectus that includes any information
         previously omitted from a prospectus filed as part of an effective
         registration statement in reliance upon Rule 430A promulgated under the
         Securities Act), as amended or supplemented by any prospectus
         supplement, with respect to the terms of the offering of any portion of
         the Registrable Securities covered by a Registration Statement, and all
         other amendments and supplements to the Prospectus, including
         post-effective amendments, and all material incorporated by reference
         or deemed to be incorporated by reference in such Prospectus.

                     "Registrable Securities" means, as of the date in question,
         (i) all of the shares of Common Stock issuable upon conversion in full
         of the shares of Preferred Stock, assuming for such purposes that all
         of the Preferred Stock outstanding on the date of determination are
         convertible at the lowest possible conversion price in effect since the
         Closing Date, (ii) all shares issuable as dividends on the Preferred
         Stock assuming all dividend payments are made in shares of Common Stock
         and the Preferred Stock is held for at least 3 years, (iii) all Warrant
         Shares, (iv) any securities issued or issuable upon any stock split,
         dividend or other distribution recapitalization or similar event with
         respect to the foregoing and (v) any additional shares issuable in
         connection with any anti-dilution provisions in the Preferred Stock and
         Warrants (in each case, without giving effect to any limitations on
         conversion set forth in the Certificate of Designation or limitations
         on exercise set forth in the Warrant).

                                       2
<PAGE>

                  "Registration Statement" means the registration statements
         required to be filed hereunder and any additional registration
         statements contemplated by Section 3(c) (including registration
         statements filed pursuant to Rule 462(b), as promulgated under the
         Securities Act), including (in each case) the Prospectus, amendments
         and supplements to such registration statement or Prospectus, including
         pre- and post-effective amendments, all exhibits thereto, and all
         material incorporated by reference or deemed to be incorporated by
         reference in such registration statement.

                  "Rule 415" means Rule 415 promulgated by the Commission
         pursuant to the Securities Act, as such Rule may be amended from time
         to time, or any similar rule or regulation hereafter adopted by the
         Commission having substantially the same purpose and effect as such
         Rule.

                  "Rule 424" means Rule 424 promulgated by the Commission
         pursuant to the Securities Act, as such Rule may be amended from time
         to time, or any similar rule or regulation hereafter adopted by the
         Commission having substantially the same purpose and effect as such
         Rule.

                  "Securities Act" means the Securities Act of 1933, as amended.

                  "Selling Shareholder Questionnaire" shall have the meaning set
         forth in Section 3(a).

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

                  "Warrants" means the Common Stock purchase warrants issued to
         the Purchasers pursuant to the Purchase Agreement.

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

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

                                       3
<PAGE>

         2. Shelf Registration

                        (a) On or prior to each Filing Date, the Company shall
         prepare and file with the Commission a "Shelf" Registration Statement
         for an offering to be made on a continuous basis pursuant to Rule 415
         and covering the resale of 150% of the Registrable Securities on the
         date of such filing. The Registration Statement shall be on Form S-3
         (unless the Company is not then eligible to register for resale the
         Registrable Securities for resale on Form S-3, in which case such
         registration shall be on another appropriate form in accordance
         herewith) and shall contain (unless otherwise directed by the Holders)
         substantially the "Plan of Distribution" attached hereto as Annex A.
         Subject to the terms of this Agreement, the Company shall use
         commercially reasonable efforts to cause the Registration Statement to
         be declared effective under the Securities Act as promptly as possible
         after the filing thereof, but in any event prior to the applicable
         Effectiveness Date, and shall use commercially reasonable efforts to
         keep such Registration Statement continuously effective under the
         Securities Act until all Registrable Securities covered by such
         Registration Statement have been sold or may be sold without volume
         restrictions pursuant to Rule 144(k) as determined by the counsel to
         the Company pursuant to a written opinion letter (or a letter of
         direction or authorization from the counsel to the Company) to such
         effect, addressed and acceptable to the Company's transfer agent (the
         "Effectiveness Period"). The Company shall telephonically request
         effectiveness of a Registration Statement as of 5:00 pm Eastern Time on
         a Trading Day. The Company shall immediately notify the Holders via
         facsimile of the effectiveness of a Registration Statement on the same
         Trading Day that the Company telephonically confirms effectiveness with
         the Commission, which shall be the date requested for effectiveness of
         a Registration Statement. The Company shall use its commercially
         reasonable efforts, by 9:30 am Eastern Time on the Trading Day after
         the Effective Date (as defined in the Purchase Agreement), to file a
         prospectus supplement pursuant to Rule 424 with the Commission. Failure
         to so notify the Holder within 1 Trading Day of such notification shall
         be deemed an Event under Section 2(b).

                                       4
<PAGE>

                        (b) If: (i) a Registration Statement is not filed on or
         prior to its Filing Date (if the Company files a Registration Statement
         without affording the Holders the opportunity to review and comment on
         the same as required by Section 3(a), the Company shall not be deemed
         to have satisfied this clause (i)), or (ii) the Company fails to file
         with the Commission a request for acceleration in accordance with Rule
         461 promulgated under the Securities Act promptly after (but in any
         event within 5 Trading Days) the date that the Company is notified
         (orally or in writing, whichever is earlier) by the Commission that a
         Registration Statement will not be "reviewed" (including a review of
         any SEC Report incorporated therein by reference ) or not subject to
         further review, or (iii) prior to its Effectiveness Date, the Company
         fails to file a pre-effective amendment and otherwise respond in
         writing to comments made by the Commission in respect of such
         Registration Statement within 15 Trading Days after the receipt of
         comments by or notice from the Commission that such amendment is
         required in order for a Registration Statement to be declared
         effective, or (iv) a Registration Statement filed or required to be
         filed hereunder is not declared effective by the Commission by its
         Effectiveness Date, or (v) after the Effectiveness Date, a Registration
         Statement ceases for any reason to remain continuously effective as to
         all Registrable Securities for which it is required to be effective, or
         the Holders are not permitted to utilize the Prospectus therein to
         resell such Registrable Securities for more than 15 consecutive Trading
         Days or an aggregate of 25 Trading Days during any 12-month period
         (which need not be consecutive Trading Days) (any such failure or
         breach being referred to as an "Event", and for purposes of clause (i)
         or (iv) the date on which such Event occurs, or for purposes of clause
         (ii) the date on which such five Trading Day period is exceeded, or for
         purposes of clause (iii) the date which such 15 Trading Day period is
         exceeded, or for purposes of clause (v) the date on which such 15 or 25
         Trading Day period, as applicable, is exceeded being referred to as
         "Event Date"), then in addition to any other rights the Holders may
         have hereunder or under applicable law, on each such Event Date and on
         each monthly anniversary of each such Event Date (if the applicable
         Event shall not have been cured by such date) until the applicable
         Event is cured, the Company shall pay to each Holder an amount in cash,
         as partial liquidated damages and not as a penalty, equal to 1.5% per
         month, pro rata on a daily basis, of the Subscription Amount paid by
         such Holder pursuant to the Purchase Agreement for any Registrable
         Securities then held by such Holder. If the Company fails to pay any
         partial liquidated damages pursuant to this Section in full within
         seven days after the date payable, the Company will pay interest
         thereon at a rate of 12% per annum (or such lesser maximum amount that
         is permitted to be paid by applicable law) to the Holder, accruing
         daily from the date such partial liquidated damages are due until such
         amounts, plus all such interest thereon, are paid in full. The
         liquidated damages pursuant to the terms hereof shall apply on a daily
         pro-rata basis for any portion of a month prior to the cure of an
         Event. Notwithstanding anything to the contrary contained herein, as to
         a Holder, no liquidated damages shall accrue or be payable by the
         Company and no Event shall be deemed to have occurred during any period
         when the failure by the Company to meet any deadline or perform any act
         is caused solely as a result of such Holder's material breach of a
         representation or warranty made by the Holder in the Transaction
         Documents or such Holder's failure to materially comply with any of the
         covenants or agreements under the Transaction Documents; provided,
         however, the Company's obligations to use commercially reasonable
         efforts to register for resale such Holder's Registrable Securities
         hereunder shall continue in full force and effect during such periods
         notwithstanding such Holder's breach.

                                       5
<PAGE>

         3. Registration Procedures

               In connection with the Company's registration obligations
hereunder, the Company shall:

                        (a) Not less than five Trading Days prior to the filing
         of each Registration Statement or any related Prospectus or any
         amendment or supplement thereto (i) furnish to each Holder copies of
         all such documents proposed to be filed, which documents (other than
         those incorporated or deemed to be incorporated by reference) will be
         subject to the review of such Holders, and (ii) cause its officers and
         directors, counsel and independent certified public accountants to be
         available to respond to such inquiries as shall be necessary, in the
         reasonable opinion of respective counsel to conduct a reasonable
         investigation within the meaning of the Securities Act. The Company
         shall not file a Registration Statement or any such Prospectus or any
         amendments or supplements thereto to which the Holders of a majority of
         the Registrable Securities shall reasonably and in good faith object,
         provided, the Company is notified of such objection in writing no later
         than 3 Trading Days after the Holders have been so furnished copies of
         such documents. Notwithstanding the foregoing, in the event the Company
         does not agree with any objection raised by any of the Holders, the
         Company and the applicable Holder shall discuss the objection, after
         which the Company shall be entitled to file any such Registration
         Statement, Prospectus, amendment or supplement in the manner it deems
         appropriate. Failure of any Holder to respond to any notice within the
         time period required shall be deemed to be consent by such Holder. Each
         Holder agrees to furnish to the Company a completed Questionnaire in
         the form attached to this Agreement as Annex B (a "Selling Shareholder
         Questionnaire") not less than two Trading Days prior to the Filing Date
         or by 5:30 p.m. New York time on the fourth Trading Day following the
         date on which such Holder receives draft materials in accordance with
         this Section.

                        (b) (i) Prepare and file with the Commission such
         amendments, including post-effective amendments, to a Registration
         Statement and the Prospectus used in connection therewith as may be
         necessary to keep a Registration Statement continuously effective as to
         the applicable Registrable Securities for the Effectiveness Period and
         prepare and file with the Commission such additional Registration
         Statements in order to register for resale under the Securities Act all
         of the Registrable Securities; (ii) cause the related Prospectus to be
         amended or supplemented by any required Prospectus supplement (subject
         to the terms of this Agreement), and as so supplemented or amended to
         be filed pursuant to Rule 424; (iii) respond as promptly as reasonably
         possible to any comments received from the Commission with respect to a
         Registration Statement or any amendment thereto and as promptly as
         reasonably possible provide the Holders true and complete copies of all
         correspondence from and to the Commission relating to a Registration
         Statement; and (iv) comply in all material respects with the provisions
         of the Securities Act and the Exchange Act with respect to the
         disposition of all Registrable Securities covered by a Registration
         Statement during the applicable period in accordance (subject to the
         terms of this Agreement) with the intended methods of disposition by
         the Holders thereof set forth in such Registration Statement as so
         amended or in such Prospectus as so supplemented.

                                       6
<PAGE>

                        (c) During the Effectiveness Period, if the number of
         Registrable Securities at any time exceeds 75% of the number of shares
         of Common Stock then registered in a Registration Statement, file as
         soon as reasonably practicable but in any case prior to the applicable
         Filing Date, an additional Registration Statement covering the resale
         by the Holders of not less than 150% of the number of such Registrable
         Securities.

                        (d) Notify the Holders of Registrable Securities to be
         sold (which notice shall, pursuant to clauses (ii) through (vi) hereof,
         shall be accompanied by an instruction to suspend the use of the
         Prospectus until the requisite changes have been made) as promptly as
         reasonably possible (and, in the case of (i)(A) below, not less than
         five Trading Days prior to such filing) and (if requested by any such
         Person) confirm such notice in writing promptly (i)(A) when a
         Prospectus or any Prospectus supplement or post-effective amendment to
         a Registration Statement is proposed to be filed; (B) when the
         Commission notifies the Company whether there will be a "review" of
         such Registration Statement and whenever the Commission comments in
         writing on such Registration Statement (the Company shall provide true
         and complete copies thereof and all written responses thereto to each
         of the Holders); and (C) with respect to a Registration Statement or
         any post-effective amendment, when the same has become effective; (ii)
         of any request by the Commission or any other Federal or state
         governmental authority for amendments or supplements to a Registration
         Statement or Prospectus or for additional information; (iii) of the
         issuance by the Commission or any other federal or state governmental
         authority of any stop order suspending the effectiveness of a
         Registration Statement covering any or all of the Registrable
         Securities or the initiation of any Proceedings for that purpose; (iv)
         of the receipt by the Company of any notification with respect to the
         suspension of the qualification or exemption from qualification of any
         of the Registrable Securities for sale in any jurisdiction, or the
         initiation or threatening of any Proceeding for such purpose; (v) of
         the occurrence of any event or passage of time that makes the financial
         statements included in a Registration Statement ineligible for
         inclusion therein or any statement made in a Registration Statement or
         Prospectus or any document incorporated or deemed to be incorporated
         therein by reference untrue in any material respect or that requires
         any revisions to a Registration Statement, Prospectus or other
         documents so that, in the case of a Registration Statement or the
         Prospectus, as the case may be, it will not contain any untrue
         statement of a material fact or omit to state any material fact
         required to be stated therein or necessary to make the statements
         therein, in light of the circumstances under which they were made, not
         misleading; and (vi) the occurrence or existence of any pending
         corporate development with respect to the Company that the Company
         believes may be material and that, in the determination of the Company,
         makes it not in the best interest of the Company to allow continued
         availability of a Registration Statement or Prospectus; provided that
         any and all of such information shall remain confidential to each
         Holder until such information otherwise becomes public, unless
         disclosure by a Holder is required by law; provided, further, that
         notwithstanding each Holder's agreement to keep such information
         confidential, the Holders make no acknowledgement that any such
         information is material, non-public information.

                                       7
<PAGE>

                        (e) Promptly deliver to each Holder, without charge, as
         many copies of the Prospectus or Prospectuses (including each form of
         prospectus) and each amendment or supplement thereto as such Persons
         may reasonably request in connection with resales by the Holder of
         Registrable Securities. Subject to the terms of this Agreement, the
         Company hereby consents to the use of such Prospectus and each
         amendment or supplement thereto by each of the selling Holders in
         connection with the offering and sale of the Registrable Securities
         covered by such Prospectus and any amendment or supplement thereto,
         except after the giving on any notice pursuant to Section 3(d).

                        (f) Prior to any resale of Registrable Securities by a
         Holder, use its commercially reasonable efforts to register or qualify
         or cooperate with the selling Holders in connection with the
         registration or qualification (or exemption from the Registration or
         qualification) of such Registrable Securities for the resale by the
         Holder under the securities or Blue Sky laws of such jurisdictions
         within the United States as any Holder reasonably requests in writing,
         to keep each registration or qualification (or exemption therefrom)
         effective during the Effectiveness Period and to do any and all other
         acts or things reasonably necessary to enable the disposition in such
         jurisdictions of the Registrable Securities covered by each
         Registration Statement; provided, that the Company shall not be
         required to qualify generally to do business in any jurisdiction where
         it is not then so qualified, subject the Company to any material tax in
         any such jurisdiction where it is not then so subject or file a general
         consent to service of process in any such jurisdiction.

                        (g) If requested by the Holders, cooperate with the
         Holders to facilitate the timely preparation and delivery of
         certificates representing Registrable Securities to be delivered to a
         transferee pursuant to a Registration Statement, which certificates
         shall be free, to the extent permitted by the Purchase Agreement, of
         all restrictive legends, and to enable such Registrable Securities to
         be in such denominations and registered in such names as any such
         Holders may request.

                                       8
<PAGE>

                        (h) Upon the occurrence of any event contemplated by
         this Section 3(d), as promptly as reasonably possible under the
         circumstances taking into account the Company's good faith assessment
         of any adverse consequences to the Company and its stockholders of the
         premature disclosure of such event, prepare a supplement or amendment,
         including a post-effective amendment, to a Registration Statement or a
         supplement to the related Prospectus or any document incorporated or
         deemed to be incorporated therein by reference, and file any other
         required document so that, as thereafter delivered, neither a
         Registration Statement nor such Prospectus will contain an untrue
         statement of a material fact or omit to state a material fact required
         to be stated therein or necessary to make the statements therein, in
         light of the circumstances under which they were made, not misleading.
         If the Company notifies the Holders in accordance with clauses (ii)
         through (vi) of Section 3(d) above to suspend the use of any Prospectus
         until the requisite changes to such Prospectus have been made, then the
         Holders shall suspend use of such Prospectus. The Company will use
         commercially reasonable efforts to ensure that the use of the
         Prospectus may be resumed as promptly as is practicable. The Company
         shall be entitled to exercise its right under this Section 3(h) to
         suspend the availability of a Registration Statement and Prospectus,
         subject to the payment of partial liquidated damages pursuant to
         Section 2(b), if any, for a period not to exceed 90 days (which need
         not be consecutive days) in any 12 month period.

                        (i) Comply in all material respects with all applicable
         rules and regulations of the Commission.

                        (j) Use commercially reasonable efforts to avoid the
         issuance of, or, if issued, obtain the withdrawal of (i) any order
         suspending the effectiveness of a Registration Statement, or (ii) any
         suspension of the qualification (or exemption from qualification) of
         any of the Registrable Securities for sale in any jurisdiction, at the
         earliest practicable moment.

                        (k) [INTENTIONALLY DELETED]

                        (l) The Company may require, at any time prior to the
         third Trading Day prior to the Filing Date, each selling Holder to
         furnish to the Company a certified statement as to the number of shares
         of Common Stock beneficially owned by such Holder and, if required by
         the Commission, the controlling person thereof that has voting and
         dispositive control over the Securities, within three Trading days of
         the Company's request. During any periods that the Company is unable to
         meet its obligations under this Agreement with respect to the
         registration of the Registrable Securities solely because any Holder
         fails to furnish any such information requested by the Company within
         three Trading Days of the Company's request, any liquidated damages
         that are accruing at such time as to such Holder only shall be tolled
         and any Event that may otherwise occur solely because of such delay
         shall be suspended for up to 10 Trading Days as to all Holders until
         such information is delivered to the Company and, as to such Holder
         only, until such information is delivered to the Company.

                                       9
<PAGE>

                        (m) If NASDR, Inc. Rule 2710 requires any broker-dealer
         to make a filing prior to executing a sale by a Holder, the Company
         shall (i) make an Issuer Filing (as defined therein) with the NASDR,
         Inc. Corporate Financing Department pursuant to NASDR Rule
         2710(b)(10)(A)(i), (ii) respond within five Trading Days to any
         comments received from NASDR in connection therewith, and (iii) pay the
         filing fee required in connection therewith.

         4. Registration Expenses. All fees and expenses incident to the
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not any Registrable Securities are sold pursuant to a
Registration Statement. The fees and expenses referred to in the foregoing
sentence shall include (i) all registration and filing fees (including fees and
expenses (A) with respect to filings required to be made with the Principal
Market on which the Common Stock is then listed for trading, (B) in compliance
with applicable state securities or Blue Sky laws reasonably agreed to by the
Company in writing (including fees and disbursements of counsel for the Company
in connection with Blue Sky qualifications or exemptions of the Registrable
Securities and determination of the eligibility of the Registrable Securities
for investment under the laws of such jurisdictions as requested by the Holders)
and (C) if not previously paid by the Company in connection with an Issuer
Filing, with respect to any filing that may be required to be made by any broker
through which a Holder intends to make sales of Registrable Securities with NASD
Regulation, Inc. pursuant to the NASD Rule 2710, so long as the broker is
receiving no more than a customary brokerage commission in connection with such
sale, (ii) printing expenses (including, expenses of printing certificates for
Registrable Securities and of printing prospectuses if the printing of
prospectuses is reasonably requested by the holders of a majority of the
Registrable Securities included in a Registration Statement), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel for the
Company, (v) Securities Act liability insurance, if the Company so desires such
insurance, and (vi) fees and expenses of all other Persons retained by the
Company in connection with the consummation of the transactions contemplated by
this Agreement. In addition, the Company shall be responsible for all of its
internal expenses incurred in connection with the consummation of the
transactions contemplated by this Agreement (including all salaries and expenses
of its officers and employees performing legal or accounting duties), the
expense of any annual audit and the fees and expenses incurred in connection
with the listing of the Registrable Securities on any securities exchange as
required hereunder. In no event shall the Company be responsible for any broker
or similar commissions or, except to the extent provided for in the Transaction
Documents, any legal fees or other costs of the Holders.

         5. Indemnification

                        (a) Indemnification by the Company. The Company shall,
         notwithstanding any termination of this Agreement, indemnify and hold
         harmless each Holder, the officers, directors, agents, brokers
         (including brokers who offer and sell Registrable Securities as
         principal as a result of a pledge or any failure to perform under a
         margin call of Common Stock), investment advisors and employees of each
         of them, each Person who controls any such Holder (within the meaning
         of Section 15 of the Securities Act or Section 20 of the Exchange Act)
         and the officers, directors, agents and employees of each such
         controlling Person, to the fullest extent permitted by applicable law,
         from and against any and Losses as incurred, arising out of or relating
         to any untrue or alleged untrue statement of a material fact contained
         in a Registration Statement, any Prospectus or any form of prospectus,
         or in any amendment or supplement thereto or in any preliminary
         prospectus, or arising out of or relating to any omission or alleged
         omission of a material fact required to be stated therein or necessary
         to make the statements therein (in the case of any Prospectus or form
         of prospectus or supplement thereto, in light of the circumstances
         under which they were made) not misleading, except to the extent, but
         only to the extent, that (1) such untrue statements or omissions or
         alleged untrue statements or omissions are based upon information
         regarding such Holder furnished in writing to the Company by such
         Holder expressly for use therein, or to the extent that such
         information relates to such Holder or such Holder's proposed method of
         distribution of Registrable Securities and was reviewed and expressly
         approved in writing by such Holder expressly for use in a Registration
         Statement, such Prospectus or such form of Prospectus or in any
         amendment or supplement thereto or (it being understood that the Holder
         has approved Annex A hereto for this purpose) or (2) in the case of an
         occurrence of an event of the type specified in Section 3(d)(ii)-(vi),
         the use by such Holder of an outdated or defective Prospectus after the
         Company has notified such Holder in writing that the Prospectus is
         outdated or defective and prior to the receipt by such Holder of the
         Advice contemplated in Section 6(e). The Company shall notify the
         Holders promptly of the institution, threat or assertion of any
         Proceeding arising from or in connection with the transactions
         contemplated by this Agreement of which the Company is aware.

                                       10
<PAGE>

                        (b) Indemnification by Holders. Each Holder shall,
         severally and not jointly, and notwithstanding any termination of this
         Agreement, indemnify and hold harmless the Company, its directors,
         officers, agents and employees, each Person who controls the Company
         (within the meaning of Section 15 of the Securities Act and Section 20
         of the Exchange Act), and the directors, officers, agents and employees
         of each such controlling Persons, to the fullest extent permitted by
         applicable law, from and against all Losses, as incurred, arising out
         of or relating to any untrue or alleged untrue statement of a material
         fact contained in any Registration Statement, any Prospectus, or any
         form of prospectus, or in any amendment or supplement thereto or in any
         preliminary prospectus, or arising solely out of or relating to: (i)
         such Holder's failure to comply with the prospectus delivery
         requirements of the Securities Act or (ii) any omission or alleged
         omission of a material fact required to be stated therein or necessary
         to make the statements therein (in the case of any Prospectus or form
         of prospectus or supplement thereto, in light of the circumstances
         under which they were made) not misleading to the extent, but only to
         the extent, such untrue statement or omission is contained in any
         information so furnished in writing or required to be furnished by such
         Holder to the Company specifically for inclusion in such Registration
         Statement or such Prospectus or to the extent that (1) such untrue
         statements or omissions or alleged untrue statements or omissions are
         based upon information regarding such Holder furnished in writing to
         the Company by such Holder expressly for use therein, or to the extent
         such information relates to such Holder or such Holder's proposed
         method of distribution of Registrable Securities and was reviewed and
         expressly approved in writing by such Holder expressly for use in a
         Registration Statement (it being understood that the Holder has
         approved Annex A hereto for this purpose), such Prospectus or such form
         of Prospectus or in any amendment or supplement thereto or (2) in the
         case of an occurrence of an event of the type specified in Section
         3(d)(ii)-(vi), the use by such Holder of an outdated or defective
         Prospectus after the Company has notified such Holder in writing that
         the Prospectus is outdated or defective and prior to the receipt by
         such Holder of the Advice contemplated in Section 6(e). In no event
         shall the liability of any selling Holder hereunder be greater in
         amount than the dollar amount of the net proceeds received by such
         Holder upon the sale of the Registrable Securities giving rise to such
         indemnification obligation. Each of the Holders shall notify the
         Company promptly of the institution, threat or assertion of any
         Proceeding arising from or in connection with the transactions
         contemplated by this Agreement of which such Holder is aware.

                                       11
<PAGE>

                        (c) Conduct of Indemnification Proceedings. If any
         Proceeding shall be brought or asserted against any Person entitled to
         indemnity hereunder (an "Indemnified Party"), such Indemnified Party
         shall promptly notify the Person from whom indemnity is sought (the
         "Indemnifying Party") in writing, and the Indemnifying Party shall have
         the right to assume the defense thereof, including the employment of
         counsel, selected by the Indemnifying Party and reasonably satisfactory
         to the Indemnified Party and the payment of all fees and expenses
         incurred in connection with defense thereof; provided, that the failure
         of any Indemnified Party to give such notice shall not relieve the
         Indemnifying Party of its obligations or liabilities pursuant to this
         Agreement, except (and only) to the extent that such failure shall have
         prejudiced the Indemnifying Party.

                        An Indemnified Party shall have the right to employ
         separate counsel in any such Proceeding and to participate in the
         defense thereof, but the fees and expenses of such counsel shall be at
         the expense of such Indemnified Party or Parties unless: (1) the
         Indemnifying Party has agreed in writing to pay such fees and expenses;
         or (2) the Indemnifying Party shall have failed promptly to assume the
         defense of such Proceeding and to employ counsel reasonably
         satisfactory to such Indemnified Party in any such Proceeding; or (3)
         the named parties to any such Proceeding (including any impleaded
         parties) include both such Indemnified Party and the Indemnifying
         Party, and such Indemnified Party shall have been advised by counsel
         that a material conflict of interest is likely to exist if the same
         counsel were to represent such Indemnified Party and the Indemnifying
         Party (in which case, if such Indemnified Party notifies the
         Indemnifying Party in writing that it elects to employ separate counsel
         at the expense of the Indemnifying Party, the Indemnifying Party shall
         not have the right to assume the defense thereof and the expense of one
         such counsel for each Holder shall be at the expense of the
         Indemnifying Party). The Indemnifying Party shall not be liable for any
         settlement of any such Proceeding effected without its written consent,
         which consent shall not be unreasonably withheld. No Indemnifying Party
         shall, without the prior written consent of the Indemnified Party,
         effect any settlement of any pending Proceeding in respect of which any
         Indemnified Party is a party, unless such settlement includes an
         unconditional release of such Indemnified Party from all liability on
         claims that are the subject matter of such Proceeding.

                                       12
<PAGE>

                        Subject to the terms of this Agreement, all fees and
         expenses of the Indemnified Party (including reasonable fees and
         expenses to the extent incurred in connection with investigating or
         preparing to defend such Proceeding in a manner not inconsistent with
         this Section) shall be paid to the Indemnified Party, as incurred,
         promptly after written notice thereof to the Indemnifying Party
         (regardless of whether it is ultimately determined that an Indemnified
         Party is not entitled to indemnification hereunder; provided, that the
         Indemnifying Party may require such Indemnified Party to undertake to
         reimburse all such fees and expenses to the extent it is finally
         judicially determined that such Indemnified Party is not entitled to
         indemnification hereunder).

                        (d) Contribution. If a claim for indemnification under
         Section 5(a) or 5(b) is unavailable to an Indemnified Party (by reason
         of public policy or otherwise), then each Indemnifying Party, in lieu
         of indemnifying such Indemnified Party, shall contribute to the amount
         paid or payable by such Indemnified Party as a result of such Losses,
         in such proportion as is appropriate to reflect the relative fault of
         the Indemnifying Party and Indemnified Party in connection with the
         actions, statements or omissions that resulted in such Losses as well
         as any other relevant equitable considerations. The relative fault of
         such Indemnifying Party and Indemnified Party shall be determined by
         reference to, among other things, whether any action in question,
         including any untrue or alleged untrue statement of a material fact or
         omission or alleged omission of a material fact, has been taken or made
         by, or relates to information supplied by, such Indemnifying Party or
         Indemnified Party, and the parties' relative intent, knowledge, access
         to information and opportunity to correct or prevent such action,
         statement or omission. The amount paid or payable by a party as a
         result of any Losses shall be deemed to include, subject to the
         limitations set forth in Section 5(c), any reasonable attorneys' or
         other reasonable fees or expenses incurred by such party in connection
         with any Proceeding to the extent such party would have been
         indemnified for such fees or expenses if the indemnification provided
         for in this Section was available to such party in accordance with its
         terms.

                                       13
<PAGE>

                        The parties hereto agree that it would not be just and
         equitable if contribution pursuant to this Section 5(d) were determined
         by pro rata allocation or by any other method of allocation that does
         not take into account the equitable considerations referred to in the
         immediately preceding paragraph. Notwithstanding the provisions of this
         Section 5(d), no Holder shall be required to contribute, in the
         aggregate, any amount in excess of the amount by which the proceeds
         actually received by such Holder from the sale of the Registrable
         Securities subject to the Proceeding exceeds the amount of any damages
         that such Holder has otherwise been required to pay by reason of such
         untrue or alleged untrue statement or omission or alleged omission.

               The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may have
to the Indemnified Parties.

         6. Miscellaneous

                        (a) Amendments and Waivers. The provisions of this
         Agreement, including the provisions of this sentence, may not be
         amended, modified or supplemented, and waivers or consents to
         departures from the provisions hereof may not be given, unless the same
         shall be in writing and signed by the Company and Holders of at least
         66.66% of the Registrable Securities. Notwithstanding the foregoing, a
         waiver or consent to depart from the provisions hereof with respect to
         a matter that relates exclusively to the rights of specific Holders and
         that does not directly or indirectly affect the rights of other Holders
         may be given by the specific Holders of all of the Registrable
         Securities to which such waiver or consent relates; provided, however,
         that the provisions of this sentence may not be amended, modified, or
         supplemented except in accordance with the provisions of the
         immediately preceding sentence.

                        (b) No Inconsistent Agreements. Neither the Company nor
         any of its subsidiaries has entered, as of the date hereof, nor shall
         the Company or any of its subsidiaries, on or after the date of this
         Agreement, enter into any agreement with respect to its securities,
         that would materially and adversely affect the rights granted to the
         Holders in this Agreement or otherwise conflicts with the provisions
         hereof. Except as set forth on Schedule 6(b), neither the Company nor
         any of its subsidiaries has previously entered into any agreement
         granting any registration rights with respect to any of its securities
         to any Person that have not been satisfied in full.

                        (c) No Piggyback on Registrations. Except as set forth
         on Schedule 6(c) attached hereto, neither the Company nor any of its
         security holders (other than the Holders in such capacity pursuant
         hereto) may include securities of the Company in the Registration
         Statement other than the Registrable Securities. The Company shall not
         file any other registration statements until the initial Registration
         Statement required hereunder is declared effective by the Commission,
         provided that this Section 6(c) shall not prohibit the Company from
         filing amendments to registration statements already filed.

                                       14
<PAGE>

                        (d) Compliance. Each Holder covenants and agrees that it
         will comply with the prospectus delivery requirements of the Securities
         Act as applicable to it in connection with sales of Registrable
         Securities pursuant to the Registration Statement.

                        (e) Discontinued Disposition. Each Holder agrees by its
         acquisition of such Registrable Securities that, upon receipt of a
         notice from the Company of the occurrence of any event of the kind
         described in Sections 3(d)(ii) - (vi), such Holder will forthwith
         discontinue disposition of such Registrable Securities under a
         Registration Statement until such Holder's receipt of the copies of the
         supplemented Prospectus and/or amended Registration Statement
         contemplated by Section 3(h), or until it is advised in writing (the
         "Advice") by the Company that the use of the applicable Prospectus may
         be resumed, and, in either case, has received copies of any additional
         or supplemental filings that are incorporated or deemed to be
         incorporated by reference in such Prospectus or Registration Statement.
         The Company may provide appropriate stop orders to enforce the
         provisions of this paragraph. The Company agrees and acknowledges that
         any period during which the Holder is required to discontinue the
         disposition of the Registrable Securities hereunder shall be subject to
         the provisions of Section 2(b).

                        (f) Piggy-Back Registrations. If at any time during the
         Effectiveness Period there is not an effective Registration Statement
         covering all of the Registrable Securities (other than pursuant to
         Section 3(d)) and the Company shall determine to prepare and file with
         the Commission 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 (each as
         promulgated under the Securities Act) 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, then
         the Company shall send to each Holder written notice of such
         determination and, if within five Trading Days after receipt of such
         notice, any such Holder shall so request in writing, the Company shall
         include in such registration statement all or any part of such
         Registrable Securities such holder requests to be registered; provided,
         that, the Company shall not be required to register any Registrable
         Securities pursuant to this Section 6(f) that are eligible for resale
         pursuant to Rule 144(k) promulgated under the Securities Act or that
         are the subject of a then effective Registration Statement.

                        (g) Notices. Any and all notices or other communications
         or deliveries required or permitted to be provided hereunder shall be
         delivered as set forth in the Purchase Agreement.

                                       15
<PAGE>

                        (h) Successors and Assigns. This Agreement shall be
         binding upon and inure to the benefit of the parties and their
         successors and permitted assigns. The Company may not assign this
         Agreement or any rights or obligations hereunder without the prior
         written consent of all of the Holders of Registrable Securities. Any
         Holder may assign its rights under this Agreement to any Person to whom
         such Holder assigns or transfers any Securities; provided, however,
         that no Holder may assign its rights to a competitor or potential
         competitor of the Company.

                        (i) Execution. This Agreement may be executed in two or
         more counterparts, all of which when taken together shall be considered
         one and the same agreement and shall become effective when counterparts
         have been signed by each party and delivered to the other party, it
         being understood that both parties need not sign the same counterpart.
         In the event that any signature is delivered by facsimile transmission,
         such signature shall create a valid and binding obligation of the party
         executing (or on whose behalf such signature is executed) with the same
         force and effect as if such facsimile signature page were an original
         thereof.

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

                                       16
<PAGE>

                        (k) Cumulative Remedies. The remedies provided herein
         are cumulative and not exclusive of any remedies provided by law.

                        (l) Severability. If any provision of this Agreement is
         held to be invalid or unenforceable in any respect, the validity and
         enforceability of the remaining terms and provisions of this Agreement
         shall not in any way be affected or impaired thereby and the parties
         will attempt to agree upon a valid and enforceable provision that is a
         reasonable substitute therefor, and upon so agreeing, shall incorporate
         such substitute provision in this Agreement.

                        (m) Construction. The headings herein are for
         convenience only, do not constitute a part of this Agreement and shall
         not be deemed to limit or affect any of the provisions hereof. The
         language used in this Agreement will be deemed to be the language
         chosen by the parties to express their mutual intent, and no rules of
         strict construction will be applied against any party.

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

                        (o) Independent Nature of Holders' Obligations and
         Rights. The obligations of each Holder under this Agreement are several
         and not joint with the obligations of any other Holder, and no Holder
         shall be responsible in any way for the performance of the obligations
         of any other Holder under this Agreement. Nothing contained herein or
         in any Transaction Document, and no action taken by any Holder pursuant
         thereto, shall be deemed to constitute the Holders as a partnership, an
         association, a joint venture or any other kind of entity, or create a
         presumption that the Holders are in any way acting in concert or as a
         group with respect to such obligations or the transactions contemplated
         by this Agreement. Each Holder shall be entitled to independently
         protect and enforce its rights, including the rights arising out of
         this Agreement, and it shall not be necessary for any other Holder to
         be joined as an additional party in any proceeding for such purpose.

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

                                       17
<PAGE>

               IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first written above.

                                    INTERACTIVE SYSTEMS WORLDWIDE INC.

                                    By: /s/ Bernard Albanese
                                           Name: Bernard Albanese
                                           Title: President

                       [SIGNATURE PAGE OF HOLDERS FOLLOWS]

                                       18
<PAGE>

                    [PURCHASER'S SIGNATURE PAGE TO ISWI RRA]

Name of Investing Entity: Iroquois Master Fund Ltd.
Signature of Authorized Signatory of Investing Entity: /s/ Richard Abbe
Name of Authorized Signatory: Richard Abbe
Title of Authorized Signatory: Director

                           [SIGNATURE PAGES CONTINUE]

                                       19
<PAGE>

                    [PURCHASER'S SIGNATURE PAGE TO ISWI RRA]

Name of Investing Entity: Midsummer Investment, Ltd.
Signature of Authorized Signatory of Investing Entity:  /s/ Scott D. Kaufman
Name of Authorized Signatory: Scott D. Kaufman
Title of Authorized Signatory: Managing Director, Midsummer Capital, LLC
(acting as investment manager of Midsummer Investment Ltd.)

                           [SIGNATURE PAGES CONTINUE]

                                       20
<PAGE>

                    [PURCHASER'S SIGNATURE PAGE TO ISWI RRA]

Name of Investing Entity:  Omicron Master Trust
Signature of Authorized Signatory of Investing Entity: /s/ Bruce Bernstein
Name of Authorized Signatory: Bruce Bernstein
Title of Authorized Signatory: Managing Director

                           [SIGNATURE PAGES CONTINUE]

                                       21
<PAGE>

                                  SCHEDULE 6(B)

         See the Disclosure Schedule to the Securities Purchase Agreement for
references to registration rights provisions in outstanding warrants, warrants
to be issued to a placement agent pursuant to this transaction and registration
rights in the Company's Series A Preferred Stock.

                                       22
<PAGE>

                                  SCHEDULE 6(c)

     See the Disclosure Schedule to the Securities Purchase Agreement for
references to registration rights provisions in outstanding warrants, warrants
to be issued to a placement agent pursuant to this transaction and registration
rights in the Company's Series A Preferred Stock.

                                       23
<PAGE>

                                                                         ANNEX A

                              PLAN OF DISTRIBUTION

         The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:

o        ordinary brokerage transactions and transactions in which the broker
         dealer solicits purchasers;

o        block trades in which the broker dealer will attempt to sell the shares
         as agent but may position and resell a portion of the block as
         principal to facilitate the transaction;

o        purchases by a broker-dealer as principal and resale by the broker
         dealer for its account;

o        an exchange distribution in accordance with the rules of the applicable
         exchange;

o        privately negotiated transactions;

o        broker dealers may agree with the selling stockholders to sell a
         specified number of such shares at a stipulated price per share;

o        settlement of short sales entered into after the effective date of the
         registration statement of which this prospectus is a part;

o        a combination of any such methods of sale;

o        through the writing or settlement of options or other hedging
         transactions, whether through an options exchange or otherwise; or

o        any other method permitted pursuant to applicable law.

         The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. Broker dealers
engaged by the selling stockholders may arrange for other brokers dealers to
participate in sales. Broker dealers may receive commissions or discounts from
the selling stockholders (or, if any broker dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved. In no event shall any
broker-dealer receive fees, commissions and markups which, in the aggregate,
would exceed eight percent (8%). Broker dealers may agree to sell a specified
number of such shares at a stipulated price per share, and, to the extent such
broker dealer is unable to do so acting as agent for us or a selling
shareholder, to purchase as principal any unsold shares at the price required to
fulfill the broker-dealer commitment. Broker dealers who acquire shares as
principal may thereafter resell such shares from time to time in transactions,
which may involve block transactions and sales to and through other broker
dealers, including transactions of the nature described above, in the over the
counter markets or otherwise at prices and on terms then prevailing at the time
of sale, at prices other than related to the then-current market price or in
negotiated transactions. In connection with such resales, broker-dealers may pay
to or receive from the purchasers such shares commissions as described above.

                                       24
<PAGE>

         The selling stockholder may from time to time pledge or grant a
security interest in some or all of the common stock or Warrant owned by them
and, if they default in the performance of their secured obligations, the
pledgees or secured parties may offer and sell the shares of common stock from
time to time under this prospectus, or under an amendment to this prospectus
under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933
amending the list of selling stockholders to include the pledgee, transferee or
other successors in interest as selling stockholders under this prospectus.

         The selling stockholders also may transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.

         In connection with the sale of the Common Stock or interests therein,
the Selling Stockholders may enter into hedging transactions with broker-dealers
or other financial institutions, which may in turn engage in short sales of the
Common Stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of the Common Stock short and deliver these
securities to close out their short positions, or loan or pledge the Common
Stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).

         The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The selling stockholders have
informed the Company that none of them have any written or oral agreement or
understanding, directly or indirectly, with any person to distribute the common
stock.

         The Company is required to pay all fees and expenses incurred by the
Company incident to the registration of the shares. The Company has agreed to
indemnify the selling stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.

                                       25
<PAGE>

         Because selling stockholders may be deemed to be "underwriters" within
the meaning of the Securities Act, they will be subject to the prospectus
delivery requirements of the Securities Act. In addition, underwriters are
subject to certain statutory limitations, including, but not limited to,
Sections 11, 12 and 17 of the Securities Act. We will make copies of this
prospectus available to the selling stockholders and have informed them of the
need to deliver a copy of this prospectus to each purchaser at or prior to the
time of the sale.

         We agreed to use commercially reasonable efforts to keep this
prospectus effective until the earlier of (i) the date on which the shares may
be resold by the Selling Stockholders without registration and without regard to
any volume limitations by reason of Rule 144(e) under the Securities Act or any
other rule of similar effect or (ii) all of the shares have been sold pursuant
to the prospectus or Rule 144 under the Securities Act or any other rule of
similar effect. The resale shares will be sold only through registered or
licensed brokers or dealers if required under applicable state securities laws.
In addition, in certain states, the resale shares may not be sold unless they
have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is available and is
complied with.

         Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the resale shares may not simultaneously
engage in market making activities with respect to the Common Stock for the
applicable restricted period, as defined in Regulation M, prior to the
commencement of the distribution. In addition, the selling stockholders will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including Regulation M, which may limit the timing of
purchases and sales of shares of the Common Stock by the selling stockholders or
any other person.

         The selling stockholders have agreed to comply with all rules and
regulations contained in Regulation M with respect to the purchase and resale of
the shares of Common Stock included for registration in this prospectus. The
selling stockholders have also agreed not to use any of the shares of Common
Stock included for registration in this prospectus to cover any short sales made
after the date of the securities purchase agreement and prior to the effective
date of the registration statement of which this prospectus is a part.

                                       26
<PAGE>

                                                                         ANNEX B

                       INTERACTIVE SYSTEMS WORLDWIDE INC.

                 SELLING SECURITYHOLDER NOTICE AND QUESTIONNAIRE

         The undersigned beneficial owner of common stock, par value $0.001 per
share (the "Common Stock"), of Interactive Systems Worldwide Inc., a Delaware
corporation (the "Company"), (the "Registrable Securities") understands that the
Company has filed or intends to file with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-3 (the "Registration
Statement") for the registration and resale under Rule 415 of the Securities Act
of 1933, as amended (the "Securities Act"), of the Registrable Securities, in
accordance with the terms of the Registration Rights Agreement, dated as of
August ___, 2005 (the "Registration Rights Agreement"), among the Company and
the Purchasers named therein. A copy of the Registration Rights Agreement is
available from the Company upon request at the address set forth below. All
capitalized terms not otherwise defined herein shall have the meanings ascribed
thereto in the Registration Rights Agreement.

         Certain legal consequences arise from being named as a selling
securityholder in the Registration Statement and the related prospectus.
Accordingly, holders and beneficial owners of Registrable Securities are advised
to consult their own securities law counsel regarding the consequences of being
named or not being named as a selling securityholder in the Registration
Statement and the related prospectus.

                                     NOTICE

         The undersigned beneficial owner (the "Selling Securityholder") of
Registrable Securities hereby elects to include the Registrable Securities owned
by it and listed below in Item 3 (unless otherwise specified under such Item 3)
in the Registration Statement.

                                       27
<PAGE>

The undersigned hereby provides the following information to the Company and
represents and warrants that such information is accurate:

                                  QUESTIONNAIRE

1.       NAME.

         (a)      Full Legal Name of Selling Securityholder

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

         (b)      Full Legal Name of Registered Holder (if not the same as (a)
                  above) through which Registrable Securities Listed in Item 3
                  below are held:

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

         (c)      Full Legal Name of Natural Control Person (which means a
                  natural person who directly you indirectly alone or with
                  others has power to vote or dispose of the securities covered
                  by the questionnaire):

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

2.  ADDRESS FOR NOTICES TO SELLING SECURITYHOLDER:

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

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

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

Telephone:
          ----------------------------------------------------------------------
Fax:
    ----------------------------------------------------------------------------
Contact Person:
               -----------------------------------------------------------------

3.  BENEFICIAL OWNERSHIP OF REGISTRABLE SECURITIES:

         (a) Type and Number of Registrable Securities beneficially owned:

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

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

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

                                       28
<PAGE>

4.  BROKER-DEALER STATUS:

         (a) Are you a broker-dealer?

                                            Yes |_|     No |_|

         (b)      If "yes" to Section 4(a), did you receive your Registrable
                  Securities as compensation for investment banking services to
                  the Company.

                                            Yes |_|     No |_|

         Note:    If no, the  Commission's  staff has indicated  that you should
                  be identified as an underwriter in the Registration Statement.

         (c)      Are you an affiliate of a broker-dealer?

                                            Yes |_|     No |_|

         (d)      If you are an affiliate of a broker-dealer, do you certify
                  that you bought the Registrable Securities in the ordinary
                  course of business, and at the time of the purchase of the
                  Registrable Securities to be resold, you had no agreements or
                  understandings, directly or indirectly, with any person to
                  distribute the Registrable Securities?

                                            Yes |_|     No |_|

         Note:    If no, the  Commission's  staff has indicated  that you should
                  be identified as an underwriter in the Registration Statement.

5. BENEFICIAL OWNERSHIP OF OTHER SECURITIES OF THE COMPANY OWNED BY THE SELLING
   SECURITYHOLDER.

         Except as set forth below in this Item 5, the undersigned is not the
         beneficial or registered owner of any securities of the Company other
         than the Registrable Securities listed above in Item 3.

         (a) Type and Amount of Other Securities beneficially owned by the
             Selling Securityholder:

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

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

                                       29
<PAGE>

6.  RELATIONSHIPS WITH THE COMPANY:

         Except as set forth below, neither the undersigned nor any of its
         affiliates, officers, directors or principal equity holders (owners of
         5% of more of the equity securities of the undersigned) has held any
         position or office or has had any other material relationship with the
         Company (or its predecessors or affiliates) during the past three
         years.

         State any exceptions here:

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

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

         The undersigned understands and acknowledges that the Commission
currently takes the position that the coverage of short sales of shares of the
Common Stock "against the box" prior to the Effective Date with the Registrable
Securities is a violation of Section 5 of the Securities Act, as set forth in
Item 65, Section 5 under Section A, of the Manual of Publicly Available
Telephone Interpretations, dated August 1997, compiled by the Office of Chief
Counsel, Division of Corporation Finance. Accordingly, the undersigned hereby
agrees not to use any of the Registrable Securities to cover any short sales
made after the date of the Purchase Agreement and prior to the Effective Date.
In addition, the undersigned hereby agrees that it will comply with all of the
rules and restrictions contained in Regulation M promulgated under the Exchange
Act with respect to the purchase and sale of shares of Common Stock of the
Company.

         The undersigned agrees to promptly notify the Company of any
inaccuracies or changes in the information provided herein that may occur
subsequent to the date hereof at any time while the Registration Statement
remains effective.

         By signing below, the undersigned consents to the disclosure of the
information contained herein in its answers to Items 1 through 6 and the
inclusion of such information in the Registration Statement and the related
prospectus and any amendments or supplements thereto. The undersigned
understands that such information will be relied upon by the Company in
connection with the preparation or amendment of the Registration Statement and
the related prospectus.

         IN WITNESS WHEREOF the undersigned, by authority duly given, has caused
this Notice and Questionnaire to be executed and delivered either in person or
by its duly authorized agent.

Dated:                                  Beneficial Owner:
       ------------------------------                     ----------------------

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

                                       30
<PAGE>

PLEASE FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE, AND
RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:

Friedman Kaplan Seiler & Adelman LLP
1633 Broadway - 46th Floor
New York, New York 10019
Attention:  Richard M. Hoffman
Fax: (212) 833-1250
Phone: (212) 833-1116

                                       31

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