Document:

EXHIBIT 4.1

                          SECURITIES PURCHASE AGREEMENT

         This Securities Purchase Agreement (this "Agreement") is dated as of
September 13, 2004, by and among RCG Companies Incorporated, 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 (as defined below),
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 in the aggregate, up to $6,000,000 million of
Preferred Stock, Warrants and Additional Investment Rights on the Closing Date.

         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

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

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

                   "Actual Minimum" means, as of any date, the maximum aggregate
         number of shares of Common Stock then issued or potentially issuable in
         the future pursuant to the Transaction Documents, including any
         Underlying Shares issuable upon exercise or conversion in full of all
         Warrants and Additional Investment Rights 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 5(a)(iii) of the
         Certificate of Designation.

                  "Additional Investment Right" means the Additional Investment
         Rights in the form of Exhibit E, delivered to the Purchasers at the
         Closing in accordance with Section 2.2(a)(iv).

                  "Additional Investment Right Shares" means the shares of
         Common Stock issuable upon exercise of the Additional Investment
         Rights.

                  "Affiliate" means any Person that, directly or indirectly
         through one or more intermediaries, controls or is controlled by or is
         under common control with a Person, as such terms are used in and
         construed under Rule 144 under the Securities Act. With respect to a
         Purchaser, any investment fund or managed account that is managed on a
         discretionary basis by the same investment manager as such Purchaser
         will be deemed to be an Affiliate of such Purchaser.

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

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

                  "Closing Date" means the Trading Day when all of the
         Transaction Documents have been executed and delivered by the
         applicable parties thereto, and all conditions precedent to (i) each
         Purchaser's obligations to pay the Subscription Amount have been
         satisfied or waived (ii) and the Company's obligations to deliver the
         Securities have been satisfied or waived.

                   "Commission" means the Securities and Exchange Commission.

                  "Common Stock" means the common stock of the Company, par
         value $0.04 per share, and any securities into which such common stock
         shall hereinafter been reclassified into.

                  "Common Stock Equivalents" means any securities of the Company
         or the Subsidiaries (other than Lifestyle Innovations, Inc.) which
         would entitle the holder thereof to acquire at any time Common Stock,
         including without limitation, any debt, preferred stock, rights,
         options, warrants or other instrument that is at any time convertible
         into or exchangeable for, or otherwise entitles the holder thereof to
         receive, Common Stock.

                  "Company Counsel" means Adorno & Yoss PA.

                  "Disclosure Schedules" means the Disclosure Schedules of the
         Company delivered concurrently herewith.

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

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

                  "Escrow Agreement" shall mean the Escrow Agreement in
         substantially the form of Exhibit G hereto executed and delivered
         contemporaneously with this Agreement.

                  "Exchange Act" means the Securities Exchange Act of 1934, as
         amended.

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                  "Exempt Issuance" the issuance of (a) shares of Common Stock
         or options to employees, officers or directors of the Company pursuant
         to any stock or option plan duly adopted by a majority of the
         non-employee members of the Board of Directors of the Company or a
         majority of the members of a committee of non-employee directors
         established for such purpose, (b) securities upon the exercise of or
         conversion of any securities issued hereunder, convertible securities,
         options or warrants issued and outstanding on the date of this
         Agreement, provided that such securities have not been amended since
         the date of this Agreement to increase the number of such securities;
         (c) securities issued pursuant to acquisitions or strategic
         transactions, provided any such issuance shall only be to a Person
         which is, itself or through its subsidiaries, an operating company and
         in which the Company receives benefits in addition to the investment of
         funds, but shall not include a transaction in which the Company is
         issuing securities primarily for the purpose of raising capital or to
         an entity whose primary business is investing in securities; and (d) an
         additional issuance of Preferred Stock, Warrants and Additional
         Investment Rights on the exact same terms and conditions as the
         issuance under the Transaction Documents and placed through HPC Capital
         for up to the difference between $6 million and the aggregate
         Subscription Amount raised hereunder, which exempt issuance shall have
         occurred within 5 Trading Days of the date hereof; provided, however,
         such issuance shall not toll or extend the Closing Date for purposes of
         the Transaction Documents.

                  "FW" means Feldman Weinstein LLP with offices located 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).

                  "Liens" means a lien, charge, security interest, encumbrance,
         right of first refusal, preemptive right or other similar restriction.

                  "Losses" means any and all losses, claims, damages,
         liabilities, settlement costs and expenses, including without
         limitation costs of preparation and reasonable attorneys' fees.

                  "Market Price" means $0.94.

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

                  "Material Permits" shall have the meaning ascribed to such
         term in Section 3.1(m).

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

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                  "Proceeding" means an action, claim, suit, investigation or
         proceeding (including, without limitation, an investigation or partial
         proceeding, such as a deposition), whether commenced or threatened.

                  "Registration Rights Agreement" means the Registration Rights
         Agreement, dated the date hereof, among the Company and each Purchaser,
         in the form of Exhibit B.

                  "Registration Statement" means a registration statement
         meeting the requirements set forth in the Registration Rights Agreement
         and covering the resale by the Purchasers of the Underlying Shares.

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

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

                  "Shareholder Approval" means such approval as may be required
         by the applicable rules and regulations of the Principal 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.

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

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

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

                  "Set Price" shall have the meaning ascribed to such term in
         the Certificate of Designations.

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

                  "Subscription Amount" shall mean, as to each Purchaser, the
         amount to be paid for the Preferred Stock purchased hereunder as
         specified below such Purchaser's name on the signature page of this
         Agreement, in United States Dollars.

                  "Subsidiary" means any subsidiary of the Company that is
         required to be listed in Schedule 3.1(a).

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

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                  "Trading Market" means the following markets or exchanges on
         which the Common Stock is listed or quoted for trading on the date in
         question: the American Stock Exchange, the New York Stock Exchange, the
         Nasdaq National Market or the Nasdaq SmallCap Market.

                  "Transaction Documents" means this Agreement, the Certificate
         of Designation, the Warrants, the Additional Investment Rights, the
         Registration Rights Agreement and the Escrow Agreement.

                  "Underlying Shares" means the shares of Common Stock issuable
         upon conversion of the Preferred Stock, upon exercise of the Warrants
         and Additional Investment Rights and issued and issuable in lieu of the
         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 Principal
         Market and if prices for the Common Stock are then quoted on the OTC
         Bulletin Board, the volume weighted average price of the Common Stock
         for such date (or the nearest preceding date) on the OTC Bulletin
         Board; (c) if the Common Stock is not then listed or quoted on the OTC
         Bulletin Board and if prices for the Common Stock are then reported in
         the "Pink Sheets" published by the National Quotation Bureau
         Incorporated (or a similar organization or agency succeeding to its
         functions of reporting prices), the most recent bid price per share of
         the Common Stock so reported; or (c) in all other cases, the fair
         market value of a share of Common Stock as determined by an independent
         appraiser selected in good faith by the Purchasers and reasonably
         acceptable to the Company.

                   "Warrants" means 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.

                                   ARTICLE II
                                PURCHASE AND SALE

         2.1 Closing. On the Closing Date, each Purchaser shall purchase from
the Company, severally and not jointly with the other Purchasers, and the
Company shall issue and sell to each Purchaser, (a) shares of Preferred Stock
with an aggregate Stated Value equal to such Purchaser's Subscription Amount;
(b) the Warrants as determined pursuant to Section 2.2(a)(iii) and (c) the
Additional Investment Rights as determined pursuant to Section 2.2(a)(iv). The
aggregate number of shares of Preferred Stock sold hereunder shall be up to
6,000. Upon satisfaction of the conditions set forth in Section 2.2, the Closing
shall occur at the offices of the Escrow Agent or such other location as the
parties shall mutually agree.

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         2.2 Conditions to Closing. The Closing is subject to the satisfaction
or waiver by the party to be benefited thereby of the following conditions:

                  (a) The Company shall have delivered or caused to be delivered
         to the Escrow Agent the following:

                           (i) this Agreement duly executed by the Company;

                           (ii) 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;

                           (iii) a Warrant, registered in the name of such
                  Purchaser, to purchase up to a number of shares of Common
                  Stock equal to 25% of such Purchaser's Subscription Amount
                  divided by the Market Price, with an exercise price equal to
                  $1.20, subject to adjustment as set forth therein, and
                  exercisable beginning 181 days after the date hereof for a
                  term of 3 years;

                           (iv) an Additional Investment Right, registered in
                  the name of such Purchaser, to purchase up to a number of
                  shares of Common Stock equal to 75% of such Purchaser's
                  Subscription Amount divided by the Market Price, with an
                  exercise price equal to $1.03 and exercisable starting 181
                  days from the date hereof for a term ending the earlier of (A)
                  the later of (1) 181 days after the Effective Date and (2) 181
                  days after the initial exercise date thereof and (B) the 2nd
                  year anniversary of the date hereof, both subject to
                  adjustment as set forth therein;

                           (v) the written voting agreement, substantially in
                  the form of Exhibit F attached hereto, of all of the executive
                  officers and directors to vote all Common Stock owned by each
                  of such shareholders as of the record date for the annual
                  meeting of shareholders of the Company in favor of Shareholder
                  Approval;

                           (vi) a legal opinion of Company Counsel, in the form
                  of Exhibit D attached hereto, addressed to each Purchaser;

                           (vii) the Escrow Agreement duly executed by the
                  Company; and

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

                  (b) At the Closing, each Purchaser shall have delivered or
         caused to be delivered to the Escrow Agent the following:

                           (i) this Agreement duly executed by such Purchaser;

                           (ii) such Purchaser's Subscription Amount by wire
                  transfer to the account as specified in writing by the
                  Company;

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<PAGE>

                           (iii) the Escrow Agreement duly executed by such
                  Purchaser; and

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

                  (c) All representations and warranties of the other party
         contained herein shall remain true and correct in all material respects
         (except those qualified as to materiality, which shall remain true and
         correct) as of the Closing Date and all covenants of the other party
         shall have been performed if due prior to such date.

                  (d) From the date hereof to the Closing Date, trading in the
         Common Stock shall not have been suspended by the Commission (except
         for any suspension of trading of limited duration agreed to by the
         Company, which suspension shall be terminated prior to the Closing),
         and, at any time prior to the Closing Date, trading in securities
         generally as reported by Bloomberg Financial Markets shall not have
         been suspended or limited, or minimum prices shall not have been
         established on securities whose trades are reported by such service, or
         on any Trading Market, nor shall a banking moratorium have been
         declared either by the United States or New York State authorities nor
         shall there have occurred any material outbreak or escalation of
         hostilities or other national or international calamity of such
         magnitude in its effect on, or any material adverse change in, any
         financial market which, in each case, in the reasonable judgment of
         each Purchaser, makes it impracticable or inadvisable to purchase the
         shares of Preferred Stock at the Closing.

                                   ARTICLE III
                         REPRESENTATIONS AND WARRANTIES

         3.1 Representations and Warranties of the Company. Except as set forth
in the SEC Reports or under the corresponding section of the Disclosure
Schedules which Disclosure Schedules shall be deemed a part hereof, the Company
hereby makes the representations and warranties set forth below to each
Purchaser:

                  (a) Subsidiaries. All of the direct and indirect subsidiaries
         of the Company are set forth on Schedule 3.1(a). The Company owns,
         directly or indirectly, all of the capital stock or other equity
         interests of each Subsidiary free and clear of any Liens, and all the
         issued and outstanding shares of capital stock of each Subsidiary
         (other than Lifestyle Innovations, Inc.) are validly issued and are
         fully paid, non-assessable and free of preemptive and similar rights to
         subscribe for or purchase securities. If the Company has no
         subsidiaries, then references in the Transaction Documents to the
         Subsidiaries will be disregarded.

                  (b) Organization and Qualification. Each of the Company and
         the Subsidiaries (other than Lifestyle Innovations, Inc.) is an entity
         duly incorporated or otherwise organized, validly existing and in good
         standing under the laws of the jurisdiction of its incorporation or
         organization (as applicable), with the requisite power and authority to
         own and use its properties and assets and to carry on its business as
         currently conducted. Neither the Company nor any Subsidiary (other than
         Lifestyle Innovations, Inc.) is in violation or default of any of the
         provisions of its respective certificate or articles of incorporation,
         bylaws or other organizational or charter documents. Each of the
         Company and the Subsidiaries (other than Lifestyle Innovations, Inc.)
         is duly qualified to conduct business and is in good standing as a
         foreign corporation or other entity in each jurisdiction in which the
         nature of the business conducted or property owned by it makes such
         qualification necessary, except where the failure to be so qualified or
         in good standing, as the case may be, could not have or reasonably be
         expected to result in (i) a material adverse effect on the legality,
         validity or enforceability of any Transaction Document, (ii) a material
         adverse effect on the results of operations, assets, business or
         financial condition of the Company and the Subsidiaries, taken as a
         whole other than any change, event or occurrence resulting from any
         change to the extent generally affecting the national or any local
         economy or the industries in which the Company and the Subsidiaries
         operate, or (iii) a material adverse effect on the Company's ability to
         perform in any material respect on a timely basis its obligations under
         any Transaction Document (any of (i), (ii) or (iii), a "Material
         Adverse Effect") and to the Company's knowledge no Proceeding has been
         instituted in any such jurisdiction revoking, limiting or curtailing or
         seeking to revoke, limit or curtail such power and authority or
         qualification.

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<PAGE>

                  (c) Authorization; Enforcement. The Company has the requisite
         corporate power and authority to enter into and to consummate the
         transactions contemplated by each of the Transaction Documents and
         otherwise to carry out its obligations hereunder 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 (other than Lifestyle Innovations, Inc.) is in violation of
         any of the provisions of its respective certificate or articles of
         incorporation, by-laws or other organizational or charter documents
         except where such violation could not, individually or in the
         aggregate, constitute a Material Adverse Effect.

                  (d) No Conflicts. The execution, delivery and performance of
         the Transaction Documents by the Company, the issuance and sale of the
         Securities and the consummation by the Company of the other
         transactions contemplated thereby do not and will not (i) conflict with
         or violate any provision of the Company's or any Subsidiary's (other
         than Lifestyle Innovations, Inc.) certificate or articles of
         incorporation, bylaws or other organizational or charter documents, or
         (ii) conflict with, or constitute a default (or an event that with
         notice or lapse of time or both would become a default) under, result
         in the creation of any Lien upon any of the properties or assets of the
         Company or any Subsidiary, or give to others any rights of termination,
         amendment, acceleration or cancellation (with or without notice, lapse
         of time or both) of, any agreement, credit facility, debt or other
         instrument (evidencing a Company or Subsidiary (other than Lifestyle
         Innovations, Inc.) debt or otherwise) or other understanding to which
         the Company or any Subsidiary (other than Lifestyle Innovations, Inc.)
         is a party or by which any property or asset of the Company or any
         Subsidiary (other than Lifestyle Innovations, Inc.) is bound or
         affected, or (iii) subject to the Required Approvals, conflict with or
         result in a violation of any law, rule, regulation, order, judgment,
         injunction, decree or other restriction of any court or governmental
         authority to which the Company or a Subsidiary (other than Lifestyle
         Innovations, Inc.) 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, or (iv) conflict with or violate
         the terms of any agreement by which the Company or any Subsidiary
         (other than Lifestyle Innovations, Inc.) is bound or to which any
         property or asset of the Company or any Subsidiary is bound or
         affected; except in the case of each of clauses (ii), (iii) and (iv),
         such as could not have or reasonably be expected to 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 filings required under Section 4.4, (ii) the filing with the
         Commission of the Registration Statement, (iii) the application(s) to
         each applicable Trading Market for the listing of the Underlying Shares
         for trading thereon in the time and manner required thereby, (iv) the
         filing with the Commission of a Form D pursuant to Commission
         Regulation D, (v) applicable Blue Sky filings and (vi) the filing of
         the Certificate of Designation with the Secretary of State of Delaware
         (collectively, the "Required Approvals").

                  (f) Issuance of the Securities. The Securities are duly
         authorized and, when issued and paid for in accordance with the
         applicable Transaction Documents, will be duly and validly issued,
         fully paid and nonassessable, free and clear of all Liens. The Company
         has reserved from its duly authorized capital stock a number of shares
         of Common Stock for issuance of the Underlying Shares at least equal to
         the Actual Minimum on the date hereof.

                  (g) Capitalization. The capitalization of the Company is as
         described in the Company's most recent periodic report filed with the
         Commission. The Company has not issued any capital stock since such
         filing other than pursuant to the exercise of employee stock options
         under the Company's stock option plans, the issuance of shares of
         Common Stock to employees pursuant to the Company's employee stock
         purchase plan and pursuant to the conversion or exercise of outstanding
         Common Stock Equivalents outstanding. 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
         (other than Lifestyle Innovations, Inc.) 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 issue and
         sale of the Securities will not obligate the Company to issue shares of
         Common Stock or other securities to any Person (other than the
         Purchasers) and will not result in a right of any holder of Company
         securities to adjust the exercise, conversion, exchange or reset price
         under such securities. All of the outstanding shares of capital stock
         of the Company are validly issued, fully paid and nonassessable, have
         been issued in compliance with all federal and state securities laws,
         and none of such outstanding shares was issued in violation of any
         preemptive rights or similar rights to subscribe for or purchase
         securities. No further approval or authorization of any stockholder,
         the Board of Directors of the Company or others is required for the
         issuance and sale of the shares of Preferred Stock other than
         Shareholder Approval to comply with rules of the American Stock
         Exchange. There are no stockholders agreements, voting agreements or
         other similar agreements with respect to the Company's capital stock to
         which the Company is a party or, to the knowledge of the Company,
         between or among any of the Company's stockholders.

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<PAGE>

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

                  (i) Material Changes. Since the date of the latest audited
         financial statements included within the SEC Reports, (i) there has
         been no event, occurrence or development that has had or that would
         reasonably be expected to result in a Material Adverse Effect, (ii) the
         Company has not incurred any liabilities (contingent or otherwise)
         other than (A) trade payables and accrued expenses incurred in the
         ordinary course of business consistent with past practice and (B)
         liabilities not required to be reflected in the Company's financial
         statements pursuant to GAAP or required to be disclosed in filings made
         with the Commission, (iii) the Company has not altered its method of
         accounting, (iv) the Company has not declared or made any dividend or
         distribution of cash or other property to its stockholders or
         purchased, redeemed or made any agreements to purchase or redeem any
         shares of its capital stock and (v) the Company has not issued any
         equity securities to any executive officer, director or Affiliate,
         except pursuant to existing Company stock option plans. The Company
         does not have pending before the Commission any request for
         confidential treatment of information.

                  (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 (other than Lifestyle Innovations, Inc.) 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) would, if there were an unfavorable decision, have or reasonably
         be expected to result in a Material Adverse Effect. Neither the Company
         nor any Subsidiary (other than Lifestyle Innovations, Inc.), nor any
         director or executive 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 as it
         relates to the Company or its Subsidiary. 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
         (other than Lifestyle Innovations, Inc.) under the Exchange Act or the
         Securities Act.

                                       10
<PAGE>

                  (k) Labor Relations. No material labor dispute exists or, to
         the knowledge of the Company, is imminent with respect to any of the
         employees of the Company which could reasonably be expected to result
         in a Material Adverse Effect.

                  (l) Compliance. Neither the Company nor any Subsidiary (other
         than Lifestyle Innovations, Inc.) (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 (other than Lifestyle Innovations, Inc.)
         under), nor has the Company or any Subsidiary (other than Lifestyle
         Innovations, Inc.) received notice of a claim that it is in default
         under or that it is in violation of, any indenture, loan or credit
         agreement or any other agreement or instrument to which it is a party
         or by which it or any of its properties is bound (whether or not such
         default or violation has been waived), (ii) is in violation of any
         order of any court, arbitrator or governmental body, or (iii) is or has
         been in violation of any statute, rule or regulation of any
         governmental authority, including without limitation all foreign,
         federal, state and local laws applicable to its business except in each
         case as could not have a Material Adverse Effect.

                                       11
<PAGE>

                  (m) Regulatory Permits. The Company and the Subsidiaries
         (other than Lifestyle Innovations, Inc.) 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 (other than Lifestyle Innovations, Inc.) 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 (other
         than Lifestyle Innovations, Inc.) 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 (other than Lifestyle
         Innovations, Inc.) and good and marketable title in all personal
         property owned by them that is material to the business of the Company
         and the Subsidiaries (other than Lifestyle Innovations, Inc.), 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 (other than Lifestyle Innovations, Inc.) and Liens
         for the payment of federal, state or other taxes, the payment of which
         is neither delinquent nor subject to penalties. Any real property and
         facilities held under lease by the Company and the Subsidiaries (other
         than Lifestyle Innovations, Inc.) are held by them under valid,
         subsisting and enforceable leases of which the Company and the
         Subsidiaries (other than Lifestyle Innovations, Inc.) are in
         compliance.

                  (o) Patents and Trademarks. The Company and the Subsidiaries
         (other than Lifestyle Innovations, Inc.) have, or have rights to use,
         all patents, patent applications, trademarks, trademark applications,
         service marks, trade names, copyrights, licenses and other similar
         rights that are 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 (other than Lifestyle Innovations, Inc.) has received a
         written notice that the Intellectual Property Rights used by the
         Company or any Subsidiary (other than Lifestyle Innovations, Inc.)
         violates or infringes upon the rights of any Person. To the knowledge
         of the Company, all such Intellectual Property Rights are enforceable
         and there is no existing infringement by another Person of any of the
         Intellectual Property Rights of others.

                  (p) Insurance. The Company and the Subsidiaries (other than
         Lifestyle Innovations, Inc.) are insured against such losses and risks
         and in such amounts as are prudent and customary in the businesses in
         which the Company and the Subsidiaries (other than Lifestyle
         Innovations, Inc.) are engaged. Neither the Company nor any Subsidiary
         (other than Lifestyle Innovations, Inc.) has any reason to believe that
         it will not be able to renew its existing insurance coverage as and
         when such coverage expires or to obtain similar coverage from similar
         insurers as may be necessary to continue its business without a
         significant increase in cost.

                                       12
<PAGE>

                  (q) Transactions With Affiliates and Employees. None of the
         executive 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
         Lifestyle Innovations, Inc.) (other than for services as employees,
         officers and directors), including any contract, agreement or other
         arrangement providing for the furnishing of services to or by,
         providing for rental of real or personal property to or from, or
         otherwise requiring payments to or from any officer, director or such
         employee or, to the knowledge of the Company, any entity in which any
         officer, director, or any such employee has a substantial interest or
         is an officer, director, trustee or partner, in each case in excess of
         $60,000 other than (i) for payment of salary or consulting fees for
         services rendered, (ii) reimbursement for expenses incurred on behalf
         of the Company and (iii) for other employee benefits, including stock
         option agreements under any stock option plan of the Company.

                  (r) Sarbanes-Oxley; Internal Accounting Controls. The Company
         is in material compliance with all provisions of the Sarbanes-Oxley Act
         of 2002 which are applicable to it as of the Closing Date. The Company
         and the Subsidiaries (other than Lifestyle Innovations, Inc.) 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
         Subsidiaries (other than Lifestyle Innovations, Inc.), is made known to
         the certifying officers by others within those entities, particularly
         during the period in which the Company's most recently filed periodic
         report under the Exchange Act, as the case may be, is being prepared.
         The Company's certifying officers have evaluated the effectiveness of
         the Company's controls and procedures as of the date prior to the
         filing date of the most recently filed periodic report under the
         Exchange Act (such date, the "Evaluation Date"). The Company presented
         in its most recently filed periodic report under the Exchange Act the
         conclusions of the certifying officers about the effectiveness of the
         disclosure controls and procedures based on their evaluations as of the
         Evaluation Date. Since the Evaluation Date, there have been no
         significant changes in the Company's internal controls (as such term is
         defined in Item 307(b) of Regulation S-K under the Exchange Act) or, to
         the Company's knowledge, in other factors that could significantly
         affect the Company's internal controls.

                  (s) Certain Fees. No brokerage or finder's fees or commissions
         are or will be payable by the Company to any broker, financial advisor
         or consultant, finder, placement agent, investment banker, bank or
         other Person with respect to the transactions contemplated by this
         Agreement. The Purchasers shall have no obligation with respect to any
         fees or with respect to any claims made by or on behalf of other
         Persons for fees of a type contemplated in this Section that may be due
         in connection with the transactions contemplated by this Agreement.

                                       13
<PAGE>

                  (t) Private Placement. Assuming the accuracy of the Purchasers
         representations and warranties set forth in Section 3.2, no
         registration under the Securities Act is required for the offer and
         sale of the Securities by the Company to the Purchasers as contemplated
         hereby. The issuance and sale of the Securities hereunder does not
         contravene the rules and regulations of the Trading Market.

                  (u) Investment Company. The Company is not, and is not an
         Affiliate of, and immediately after receipt of payment for the shares
         of Preferred Stock, 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.

                  (v) Registration Rights. No Person has any right to cause the
         Company to effect the registration under the Securities Act of any
         securities of the Company.

                  (w) Listing and Maintenance Requirements. The Company's Common
         Stock is registered pursuant to Section 12(g) of the Exchange Act, and
         the Company has taken no action designed to, or which to its knowledge
         is likely to have the effect of, terminating the registration of the
         Common Stock under the Exchange Act nor has the Company received any
         notification that the Commission is contemplating terminating such
         registration. The Company has not, in the 12 months preceding the date
         hereof, received notice from any Trading Market on which the Common
         Stock is or has been listed or quoted to the effect that the Company is
         not in compliance with the listing or maintenance requirements of such
         Trading Market. The Company is, and has no reason to believe that it
         will not in the foreseeable future continue to be, in compliance with
         all such listing and maintenance requirements.

                  (x) Application of Takeover Protections. The Company and its
         Board of Directors have taken all necessary action, if any, in order to
         render inapplicable any control share acquisition, business
         combination, poison pill (including any distribution under a rights
         agreement) or other similar anti-takeover provision under the Company's
         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 without limitation the Company's issuance of the
         Securities and the Purchasers' ownership of the Securities.

                  (y) Disclosure. Other than the terms of the Transaction
         Documents, the Company confirms that, the Company has not provided any
         of the Purchasers with any information that constitutes or might
         constitute material, non-public information. The Company understands
         and confirms that the Purchasers will rely on the foregoing
         representations and covenants in effecting transactions in securities
         of the Company. All disclosure provided to the Purchasers regarding the
         Company, its business and the transactions contemplated hereby,
         including the 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 in all material respects 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.

                                       14
<PAGE>

                  (z) 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, without limitation, under the rules and regulations of the
         Trading Market.

                  (aa) Solvency/Indebtedness. To the best of the Company's
         knowledge, based on the financial condition of the Company as of the
         Closing Date, including the application of the net proceeds raised
         hereunder: (i) the fair saleable market 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
         through, if less than $6 million is raised hereunder, December 31,
         2004, and if $6 million in gross proceeds are raised hereunder in one
         or more closings, the one year anniversary of the date hereof, as now
         conducted and as proposed to be conducted including its capital needs
         taking into account the particular capital requirements of the business
         conducted by the Company, and projected capital requirements and
         capital availability thereof; and (iii) the current cash flow of the
         Company, together with the proceeds the Company would receive, were it
         to liquidate all of its assets, after taking into account all
         anticipated uses of the cash, would be sufficient to pay all amounts on
         or in respect of its debt when such amounts are required to be paid.
         The Company does not intend to incur debts beyond its ability to pay
         such debts as they mature (taking into account the timing and amounts
         of cash to be payable on or in respect of its debt). The Company has no
         knowledge of any facts or circumstances which lead it to believe that
         it will file for reorganization or liquidation under the bankruptcy or
         reorganization laws of any jurisdiction within one year from the
         Closing Date. The SEC Reports set forth as of the dates thereof all
         outstanding secured and unsecured Indebtedness of the Company or any
         Subsidiary, or for which the Company or any Subsidiary has commitments.
         For the purposes of this Agreement, "Indebtedness" shall mean (a) any
         liabilities for borrowed money or amounts owed in excess of $50,000
         (other than trade accounts payable incurred in the ordinary course of
         business), (b) all guaranties, endorsements and other contingent
         obligations in respect of Indebtedness of others, whether or not the
         same are or should be reflected in the Company's balance sheet (or the
         notes thereto), except guaranties by endorsement of negotiable
         instruments for deposit or collection or similar transactions in the
         ordinary course of business; and (c) the present value of any lease
         payments in excess of $50,000 due under leases required to be
         capitalized in accordance with GAAP. Neither the Company nor any
         Subsidiary is in default with respect to any Indebtedness.

                                       15
<PAGE>

                  (bb) S-3 Eligibility. To its knowledge, the Company is
         eligible to register the Underlying Shares for resale by the Purchasers
         on SEC Form S-3.

                  (cc) Tax Status. The Company and each of its Subsidiaries
         (other than Lifestyle Innovations, Inc.) 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
         made provision 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.

                  (dd) 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, the Warrants or Additional Investment Rights, 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.

                  (ee) Foreign Corrupt Practices. Neither the Company, nor to
         the knowledge of the Company, any agent or other person acting on
         behalf of the Company, has (i) directly or indirectly, used any corrupt
         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.

                                       16
<PAGE>

                  (ff) 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 advisor
         or fiduciary of the Company (or in any similar capacity) with respect
         to this Agreement and the transactions contemplated hereby and any
         statement made 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.

                  (gg) Seniority. As of the date of this Agreement, no 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.

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

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

                  (b) Investment Intent. Such Purchaser understands that the
         Securities are "restricted securities" and have not been registered
         under the Securities Act or any applicable state securities law and is
         acquiring the Securities as principal for its own account and not with
         a view to or for distributing or reselling such Securities or any part
         thereof, has no present intention of distributing any of such
         Securities and has no arrangement or understanding with any other
         persons regarding the distribution of such Securities (this
         representation and warranty not limiting such Purchaser's right to sell
         the Securities pursuant to the Registration Statement or otherwise in
         compliance with applicable federal and state securities laws). 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.

                                       17
<PAGE>

                  (c) Purchaser Status. At the time such Purchaser was offered
         the Securities, it was, and at the date hereof it is, and on each date
         on which it exercises any Warrants or Additional Investment Rights or
         converts the Preferred Stock, it will be either: (i) an "accredited
         investor" as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or
         (a)(8) under the Securities Act or (ii) a "qualified institutional
         buyer" as defined in Rule 144A(a) under the Securities Act. Such
         Purchaser is not required to be registered as a broker-dealer under
         Section 15 of the Exchange Act.

                  (d) Experience of such Purchaser. Such Purchaser, either alone
         or together with its representatives, has such knowledge,
         sophistication and experience in business and financial matters so as
         to be capable of evaluating the merits and risks of the prospective
         investment in the Securities, and has so evaluated the merits and risks
         of such investment. Such Purchaser is able to bear the economic risk of
         an investment in the Securities and, at the present time, is able to
         afford a complete loss of such investment.

                  (e) General Solicitation. Such Purchaser is not purchasing the
         Securities as a result of any advertisement, article, notice or other
         communication regarding the Securities published in any newspaper,
         magazine or similar media or broadcast over television or radio or
         presented at any seminar or any other general solicitation or general
         advertisement.

                  (f) Certain Trading Activities. Such Purchaser has not
         directly or indirectly, nor has any Person acting on behalf of or
         pursuant to any understanding with such Purchaser, engaged in any
         transactions in the securities of the Company (including, without
         limitations, any Short Sales involving the Company's securities) since
         the time that such Purchaser was first contacted by the Company or HPC
         Capital Management regarding this investment in the Company. For
         purposes of this Section, "Short Sales" include, without limitation,
         all "short sales" as defined in Rule 3b-3 of the Exchange Act and
         include all types of direct and indirect stock pledges, forward sale
         contracts, options, puts, calls, short sales, swaps and similar
         arrangements (including on a total return basis), and sales and other
         transactions through non-US broker dealers or foreign regulated brokers
         having the effect of hedging the securities or investment made under
         this Agreement. Such Purchaser covenants that neither it nor any Person
         acting on its behalf or pursuant to any understanding with it will
         engage in any transactions in the securities of the Company (including
         Short Sales) prior to the time that the transactions contemplated by
         this Agreement are publicly disclosed.

                  (g) Access to Information. Such Purchaser acknowledges and
         agrees that it has access to the Company's SEC Reports and has reviewed
         such filings as such Purchaser has deemed necessary or desirable
         including the Company's Annual Report on Form 10-KSB for the fiscal
         year ended June 30, 2003 and the Company's Quarterly Report on Form
         10-QSB for the quarter ended March 31 2004. Each Purchaser and its
         respective representatives have been afforded an opportunity to ask
         such questions of the officers, employees, agents, accountants and
         representatives of the Company concerning the business, operations,
         financial condition, assets, liabilities, and other relevant matters as
         such Purchaser and its representatives have deemed necessary or
         desirable, and each Purchaser hereby confirms that it or its agents
         have been given all such information as has been requested in order to
         evaluate the merits and risks of the prospective investment
         contemplated hereby and that it does not desire any additional
         information. Without limiting the foregoing, each Purchaser
         specifically acknowledges that it has had the opportunity to review the
         Company's SEC Reports.

                                       18
<PAGE>

                  (h) Risk Factors. Such Purchaser understands and acknowledges
         that an investment in the Shares is highly speculative and includes a
         high degree of risk including, but not limited to, those risks
         specifically set forth in the Company's Annual Report on Form 10-KSB
         for the period ended June 30, 2003, which, by its signature below, each
         Purchaser acknowledges it has reviewed.

         The Company acknowledges and agrees that each Purchaser does not make
or has not made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in this
Section 3.2.

                                   ARTICLE IV
                         OTHER AGREEMENTS OF THE PARTIES

         4.1      Transfer Restrictions.

                  (a) The Securities may only be disposed of in compliance with
         state and federal securities laws. In connection with any transfer of
         Securities other than pursuant to an effective registration statement
         or Rule 144, to the Company or to an Affiliate of a Purchaser or in
         connection with a pledge as contemplated in Section 4.1(b), the Company
         may require the transferor thereof to provide to the Company an opinion
         of counsel selected by the transferor and reasonably acceptable to the
         Company, the form and substance of which opinion and 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 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.

                                       19
<PAGE>

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

                  (c) Certificates evidencing Underlying Shares shall not
         contain any legend (including the legend set forth in Section 4.1(b)):
         (i) while a registration statement (including the Registration
         Statement) covering the resale of such Underlying Shares is effective
         under the Securities Act, or (ii) following any sale of such Underlying
         Shares pursuant to Rule 144, or (iii) if such Securities are eligible
         for sale under Rule 144(k), or (iv) if such legend is not required
         under applicable requirements of the Securities Act (including judicial
         interpretations and pronouncements issued by the Staff of the
         Commission). The Company shall cause its counsel to issue a legal
         opinion to the Company's transfer agent promptly after the Effective
         Date if required by the Company's transfer agent to effect the removal
         of the legend hereunder. If all or any shares of Preferred Stock or any
         portion of a Warrant or Additional Investment Right 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
         three Trading Days following the delivery by a Purchaser to the Company
         or the Company's transfer agent of a certificate representing
         Securities issued with a restrictive legend (such date, the "Legend
         Removal Date"), deliver or cause to be delivered to such Purchaser a
         certificate representing such Underlying 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.

                                       20
<PAGE>

                  (d) In addition to such Purchaser's other available remedies,
         the Company shall pay to a Purchaser, in cash, as partial liquidated
         damages and not as a penalty, for each $1,000 of Underlying Shares
         (based on the VWAP 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), $10 per Trading Day
         (increasing to $20 per Trading Day five (5) Trading Days after such
         damages have begun to accrue) for each Trading Day after the Legend
         Removal Date until such certificate is delivered. Nothing herein shall
         limit such Purchaser's right to pursue actual damages for the Company's
         failure to deliver certificates representing any Securities as required
         by the Transaction Documents, and such Purchaser shall have the right
         to pursue all remedies available to it at law or in equity including,
         without limitation, a decree of specific performance and/or injunctive
         relief.

                  (e) Each Purchaser, severally and not jointly with the other
         Purchasers, agrees that the removal of the restrictive legend from
         certificates representing Securities as set forth in this Section 4.1
         is predicated upon the Company's reliance that the Purchaser will sell
         any Securities pursuant to either the registration requirements of the
         Securities Act, including any applicable prospectus delivery
         requirements, or an exemption therefrom.

                  (f) From the date hereof until the 12 month anniversary of the
         Effective Date, the Company shall not undertake a reverse or forward
         stock split or reclassification of the Common Stock without the prior
         written consent of the Purchasers holding a majority in interest of the
         shares of Preferred Stock.

         4.2 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 date hereof pursuant to the Exchange Act. Upon the written request of any
Purchaser, the Company shall deliver to such Purchaser a written certification
of a duly authorized officer as to whether it has complied with the preceding
sentence. 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
each Purchaser and make publicly available in accordance with Rule 144(c) such
information as is required for each Purchaser to sell the Securities under Rule
144. The Company further covenants that it will take such further action as any
holder of Securities may reasonably request, all to the extent required from
time to time to enable such Person to sell such Securities without registration
under the Securities Act within the limitation of the exemptions provided by
Rule 144.

                                       21
<PAGE>

         4.3 Integration. The Company shall not sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the Securities in a manner that would require the registration under the
Securities Act of the sale of the Securities to the Purchasers or that would be
integrated with the offer or sale of the Securities for purposes of the rules
and regulations of any Trading Market such that it would require shareholder
approval prior to the closing of such other transaction unless shareholder
approval is obtained before the closing of such subsequent transaction.

         4.4 Securities Laws Disclosure; Publicity. The Company shall, by 8:30
a.m. Eastern time on the second Trading Day following the date hereof, issue a
press release or file a Current Report on Form 8-K, in each case reasonably
acceptable to each Purchaser disclosing the material terms of the transactions
contemplated hereby (if a Purchaser does not object to the content of a press
release within 1 Trading Day of receipt for review, such Purchaser shall be
deemed to have approved such press release). The Company and each Purchaser
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, except if such disclosure is required by law, in which case the
disclosing party shall promptly provide the other party with prior notice of
such public statement or communication. Notwithstanding the foregoing, the
Company shall not publicly disclose the name of any Purchaser, or include the
name of any Purchaser in any filing with the Commission or any regulatory agency
or Trading Market, without the prior written consent of such Purchaser, except
(i) as required by federal securities law in connection with the registration
statement contemplated by the Registration Rights Agreement and (ii) to the
extent such disclosure is required by law or Trading Market regulations, in
which case the Company shall provide the Purchasers with prior notice of such
disclosure permitted under subclause (i) or (ii).

         4.5 Shareholders Rights Plan. No claim will be made or enforced by the
Company or, to the knowledge of the Company, any other Person that any Purchaser
is an "Acquiring Person" under any shareholders rights plan or similar plan or
arrangement in effect or hereafter adopted by the Company, or that any Purchaser
could be deemed to trigger the provisions of any such plan or arrangement, by
virtue of receiving Securities under the Transaction Documents or under any
other agreement between the Company and the Purchasers. The Company shall
conduct its business in a manner so that it will not become subject to the
Investment Company Act.

         4.6 Non-Public Information. The Company covenants and agrees that it
will not and will not direct any other Person to, 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.

         4.7 Use of Proceeds. The Company shall use the net proceeds from the
sale of the Securities hereunder for and 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, and accrued expenses in the ordinary
course of the Company's business and prior practices), to redeem any Company
equity or equity-equivalent securities or to settle any outstanding litigation.
Prior to the receipt of Shareholder Approval, the Company shall not declare or
pay any cash dividend on its shares of Common Stock while any shares of
Preferred Stock remain outstanding.

                                       22
<PAGE>

         4.8 Trading Market Approval. In the event the Company does not obtain
the approval of the Trading Market for this transaction within 10 Trading Days
of the date hereof, the Company shall return the respective net Subscription
Amounts to each Purchaser within 2 Trading Days of the date a majority in
interest of the Purchaser's notify the Company to return said amounts and the
Purchasers and the Company, upon receipt of such payment by the Purchasers,
shall instruct the Escrow Agent to return the Preferred Stock, Warrants and the
Additional Investment Rights to the Company.

         4.9 Indemnification of Purchasers. Subject to the provisions of this
Section 4.9, 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 material breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (b) any action instituted against a
Purchaser, or any of them or their respective Affiliates, by any stockholder of
the Company who is not an Affiliate of such Purchaser, arising solely out of the
transactions contemplated by the Transaction Documents (unless such action is
based upon a breach of such Purchaser's representation, warranties or covenants
under the Transaction Documents or any agreements or understandings such
Purchaser may have with any such stockholder or any violations by the Purchaser
of state or federal securities laws or any conduct by such Purchaser which
constitutes fraud, gross negligence, willful misconduct or malfeasance). If any
action shall be brought against any Purchaser Party in respect of which
indemnity may be sought pursuant to this Agreement, such Purchaser Party shall
promptly notify the Company in writing, and the Company shall have the right to
assume the defense thereof with counsel of its own choosing. Any Purchaser Party
shall have the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Purchaser Party except to the extent that (i)
the employment thereof has been specifically authorized by the Company in
writing, (ii) the Company has failed after a reasonable period of time to assume
such defense and to employ counsel or (iii) in such action there is, in the
reasonable written opinion of such separate counsel, a material conflict on any
material issue between the position of the Company and the position of such
Purchaser Party. The Company will not be liable to any Purchaser Party under
this Agreement (i) for any settlement by an Purchaser Party effected without the
Company's prior written consent, which shall not be unreasonably withheld or
delayed; or (ii) to the extent, but only to the extent that a loss, claim,
damage or liability is attributable to any Purchaser Party's breach of any of
the representations, warranties, covenants or agreements made by the Purchasers
in this Agreement or in the other Transaction Documents.

                                       23
<PAGE>

         4.10     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 130% of
         (i) the Actual Minimum on such date, minus (ii) the number of shares of
         Common Stock previously issued pursuant to the Transaction Documents,
         then the Board of Directors of the Company shall use commercially
         reasonable efforts to amend the Company's certificate or articles of
         incorporation to increase the number of authorized but unissued shares
         of Common Stock to at least the Actual Minimum at such time (minus the
         number of shares of Common Stock previously issued pursuant to the
         Transaction Documents), as soon as possible and in any event not later
         than the 75th day after such date; provided that the Company will not
         be required at any time to authorize a number of shares of Common Stock
         greater than the maximum remaining number of shares of Common Stock
         that could possibly be issued after such time pursuant to the
         Transaction Documents.

                  (c) The Company shall: (i) in the time and manner required by
         the Trading Market, prepare and file with such Trading Market an
         additional shares listing application covering a number of shares of
         Common Stock at least equal to the Actual Minimum on the date of such
         application, (ii) take all steps necessary to cause such shares of
         Common Stock to be approved for listing on the Trading Market as soon
         as possible thereafter, (iii) upon a Purchaser's written request,
         provide to each Purchaser evidence of such listing, and (iv) use
         reasonable efforts to maintain the listing of such Common Stock on such
         Trading Market or another Trading Market. In addition, the Company
         shall hold a special meeting of shareholders (which may also be at the
         annual meeting of shareholders) at the earliest practical date, but in
         no event later than November 30, 2004, for the purpose of obtaining
         Shareholder Approval, 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.

                  (d) If, on any date, the Company is listed on a different
         Trading Market, then the Company shall take the necessary actions to
         list all of the Underlying Shares on such Trading Market as soon as
         reasonably possible.

         4.11 Conversion and Exercise Procedures. The form of Election to
Purchase included in the Warrants and the Additional Investment Rights and the
forms of Conversion Notice included in the Certificate of Designation set forth
the totality of the procedures required in order to exercise the Warrants and
Additional Investment Rights or convert the Preferred Stock. No additional legal
opinion or other information or instructions shall be necessary to enable each
Purchaser to exercise their Warrants and Additional Investment Rights or convert
their Preferred Stock. The Company shall honor exercises of the Warrants and
Additional Investment Rights 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. 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.

                                       24
<PAGE>

         4.12 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 Purchasers as a class and shall not in
any way be construed as the Purchasers acting in concert or as a group with
respect to the purchase, disposition or voting of Securities or otherwise.

         4.13 Participation in Future Financing. Until the 6 month anniversary
of the Effective Date, upon any financing by the Company of its Common Stock or
Common Stock Equivalents (a "Subsequent Financing"), each Purchaser shall have
the right to participate in up to 100% of such Subsequent Financing. 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 written request of a Purchaser, and
only upon a request by such Purchaser, for a Subsequent Financing Notice, the
Company shall promptly, but no later than 1 Trading Day after such request,
deliver a Subsequent Financing Notice to such Purchaser. The Subsequent
Financing Notice shall describe in reasonable detail the proposed terms of such
Subsequent Financing, the amount of proceeds intended to be raised thereunder,
the Person with whom such Subsequent Financing is proposed to be effected, and
attached to which shall be a term sheet or similar document relating thereto. If
by 6:30 p.m. (New York City time) on the 3rd Trading Day after all of the
Purchasers have received the Pre-Notice, notifications of the Purchasers of
their willingness to participate in the Subsequent Financing (or to cause their
designees to provide) is, in the aggregate, less than the total amount of the
Subsequent Financing, then the Company may effect the remaining portion of such
Subsequent Financing on the terms and to the Persons set forth in the Subsequent
Financing Notice. 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 4.13, if the
Subsequent Financing subject to the initial Subsequent Financing Notice is not
consummated for any reason on the terms set forth in such Subsequent Financing
Notice within 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 Subsequent Financing, each such Purchaser shall have the right to purchase
their Pro Rata Portion (as defined below) of the Subsequent Financing. "Pro Rata
Portion" is the ratio of (x) the Subscription Amount of a participating
Purchaser and (y) the sum of the aggregate Subscription Amount of all
participating Purchasers. Notwithstanding the foregoing, this Section 4.13 shall
not apply in respect of an Exempt Issuance and the reasonable and customary
issuance of Common Stock or Common Stock Equivalents to service providers of the
Company, the primary purpose of which is not to raise capital.

                                       25
<PAGE>

4.14 Future Financings. From the date hereof until 90 days after the Effective
Date, other than as contemplated by this Agreement, neither the Company nor any
Subsidiary (with respect to Common Stock Equivalents) shall issue or sell any
Common Stock or Common Stock Equivalents entitling any Person to acquire shares
of Common Stock. Notwithstanding anything herein to the contrary, the 90 day
period set forth in this Section 4.14 shall be extended for the number of
Trading Days during such period in which (i) trading in the Common Stock is
suspended by any Trading Market, or (ii) following the Effective Date, the
Registration Statement is not effective or the prospectus included in the
Registration Statement may not be used by each Purchaser for the resale of the
Underlying Shares. Notwithstanding anything to the contrary herein, this Section
4.14 shall not apply in respect of an Exempt Issuance and the reasonable and
customary issuance of Common Stock or Common Stock Equivalents to service
providers of the Company, the primary purpose of which is not to raise capital.
In addition to the limitations set forth herein, from the date hereof until such
time as no Purchaser holds any of the Securities, the Company shall be
prohibited from effecting or enter into an agreement to effect any Subsequent
Financing involving any security which is not a Junior Security as defined in
the Certificate of Designation or pari passu with the Preferred Stock, or any
"Variable Rate Transaction" (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; provided that the existence of anti-dilution provisions
attached to any such securities shall not alone make a transaction a Variable
Rate Transaction. In addition, unless Shareholder Approval has been obtained and
deemed effective in accordance with Section 4.10(c), the Company shall not make
any issuance whatsoever of Common Stock or Common Stock Equivalents which would
cause any adjustment of the Set Price to the extent the holders of Preferred
Stock would not be permitted, pursuant to Section 5(a)(iii) of the Certificate
of Designations, to convert their respective outstanding Preferred Stock and
Warrants in full.

                                    ARTICLE V
                                  MISCELLANEOUS

         5.1 Fees and Expenses. Except as otherwise set forth in this Agreement,
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 stamp and other taxes and duties
levied in connection with the sale of the Securities.

                                       26
<PAGE>

         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 prior to 4:00 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 4:00 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 each Purchaser or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought. No waiver of any default
with respect to any provision, condition or requirement of this Agreement shall
be deemed to be a continuing waiver in the future or a waiver of any subsequent
default or a waiver of any other provision, condition or requirement hereof, nor
shall any delay or omission of either party to exercise any right hereunder in
any manner impair the exercise of any such right.

         5.5 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 each Purchaser. Any Purchaser may assign
any or all of its rights under this Agreement to any Person to whom such
Purchaser assigns or transfers any Securities, provided such transferee agrees
in writing with the Company to be bound, with respect to the transferred
Securities, by the provisions hereof that apply to the "Purchasers".

                                       27
<PAGE>

         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 4.9.

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

         5.9 Survival. The representations and warranties contained herein shall
survive the Closing and the delivery, exercise and/or conversion of the
Securities, as applicable, until the 3 year anniversary of the date hereof.

         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, whenever any Purchaser exercises a right, election,
demand or option under a Transaction Document and the Company does not timely
perform its related obligations within the periods therein provided, then such
Purchaser may rescind or withdraw, in its sole discretion from time to time upon
written notice to the Company, any relevant notice, demand or election in whole
or in part without prejudice to its future actions and rights.

                                       28
<PAGE>

         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. The applicants for a new certificate or instrument
under such circumstances shall also pay any reasonable third-party costs
associated with the issuance of such replacement Securities.

         5.14 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of each
Purchaser 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.

         5.16 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 without limitation, the rights arising out of this Agreement or out of
the other Transaction Documents, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such
purpose. Each Purchaser has been represented by its own separate legal counsel
in their review and negotiation of the Transaction Documents. For reasons of
administrative convenience only, Purchasers and their respective counsel have
chosen to communicate with the Company through FW. FW does not represent the
Purchasers but only HPC Capital Management. 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.

                                       29
<PAGE>

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

                            [SIGNATURE PAGE FOLLOWS]

                                       30
<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.

RCG COMPANIES INCORPORATED                  Address for Notice:
                                            -------------------

By:____________________________             6836 Morrison Blvd.
     Name:                                  Suite 200
     Title:                                 Charlotte, North Carolina 28211
                                            Attn:  William Hodge
                                            Fax: (704) 366 5056
                                            Tel: (704) 366 5054 x28

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

Joel Mayersohn, Esq.
Adorno & Yoss, P.A.
350 East Las Olas Boulevard
Suite 1700
Fort Lauderdale, Florida 33301
954.763.1200 (phone)
954.766.7800 (fax)

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

                                       31
<PAGE>

        [PURCHASER SIGNATURE PAGES TO RCG SECURITIES PURCHASE AGREEMENT]

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

Name of Investing Entity: __________________________
Signature of Authorized Signatory of Investing Entity: _________________________
Name of Authorized Signatory: _________________________
Title of Authorized Signatory: __________________________
Email Address of Authorized Signatory:________________________________

Address for Notice of Investing Entity:

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

Subscription Amount:
Shares of Preferred Stock:
Warrant Shares:
Additional Investment Right Shares:

                           [SIGNATURE PAGES CONTINUE]

                                       32EXHIBIT 4.2

                           RCG COMPANIES INCORPORATED

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

                         PURSUANT TO SECTION 151 OF THE
                        DELAWARE GENERAL CORPORATION LAW

         The undersigned,  Michael Pruitt,  Chief Executive  Officer and Melinda
Morris Zanoni, Secretary, do hereby certify that:

         1. They are the President and Secretary, respectively, of RCG Companies
Incorporated, a Delaware corporation (the "Corporation").

         2.  The  Corporation  is  authorized  to  issue  10,000,000  shares  of
preferred stock, none of which have been issued.

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

         WHEREAS,  the Certificate of Incorporation of the Corporation  provides
for a class of its  authorized  stock known as  preferred  stock,  comprised  of
10,000,000  shares,  $0.01 par value,  issuable from time to time in one or more
series;

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

         WHEREAS, it is the desire of the Board of Directors of the Corporation,
pursuant  to its  authority  as  aforesaid,  to  fix  the  rights,  preferences,
restrictions  and other  matters  relating to a series of the  preferred  stock,
which shall consist of, except as otherwise set forth in the Purchase Agreement,
up to  6,000  shares  of the  preferred  stock  which  the  corporation  has the
authority to issue, as follows:

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

<PAGE>

                            TERMS OF PREFERRED STOCK

         Section 1.  Designation,  Amount and  Ranking.  The series of preferred
stock shall be designated as its Series A 6%  Convertible  Preferred  Stock (the
"Preferred  Stock") and the number of shares so designated shall be 6,000 (which
shall not be subject to  increase  without  the consent of all of the holders of
the Preferred Stock (each, a "Holder" and  collectively,  the "Holders")).  Each
share of Preferred  Stock shall have a stated value equal to $1,000 (the "Stated
Value").  Capitalized  terms not otherwise defined herein shall have the meaning
given such terms in Section 8 hereof.

         Section 2. Dividends.

                  (a) Holders  shall be entitled to receive and the  Corporation
         shall pay, cumulative  dividends at the rate per share (as a percentage
         of the  Stated  Value  per  share)  of 6% per  annum  from  the date of
         issuance,  payable  quarterly  on  March  1,  June 1,  September  1 and
         December 1, beginning with December 1, 2004 and on any Conversion  Date
         pursuant to the terms  hereunder  (except  that,  if such date is not a
         Trading  Day,  the payment  date shall be the next  succeeding  Trading
         Day)("Dividend  Payment Date").  The form of dividend  payments to each
         Holder shall be made in the following  order:  (i) if funds are legally
         available for the payment of dividends and the Equity  Conditions  have
         not been met, in cash only, (ii) if funds are legally available for the
         payment of dividends  and the Equity  Conditions  have been met, at the
         sole  election of the  Corporation,  in cash or shares of Common  Stock
         which shall be valued  solely for such purpose at 90% of the average of
         the 5 VWAPs  immediately  prior to the Dividend  Payment Date; (iii) if
         funds are not legally  available  for the payment of dividends  and the
         Equity  Conditions have been met, in shares of Common Stock which shall
         be valued at 90% of the average of the 5 VWAPs immediately prior to the
         Dividend Payment Date; (iv) if funds are not legally  available for the
         payment of dividends and the Equity Conditions relating to registration
         have  been  waived  by  such  Holder,   as  to  such  Holder  only,  in
         unregistered shares of Common Stock which shall be valued at 90% of the
         average of the 5 VWAPs  immediately prior to the Dividend Payment Date;
         and (v) if funds are not legally available for the payment of dividends
         and the Equity  Conditions  have not been met, then, at the election of
         such Holder,  such dividends shall accrue to the next Dividend  Payment
         Date or shall be accreted to the outstanding  Stated Value. The Holders
         shall have the same rights and remedies with respect to the delivery of
         any such shares as if such shares were being issued pursuant to Section
         5. As of the Closing Date, the  Corporation  is lawfully  unable to pay
         dividends in cash. The Corporation shall promptly notify the Holders at
         any time the Corporation  shall become able or unable,  as the case may
         be, to lawfully pay cash dividends.  If at any time the Corporation has
         the right to pay  dividends in cash or Common  Stock,  the  Corporation
         must  provide the Holder with at least 15 Trading  Days'  notice of its
         election  to  pay a  regularly  scheduled  dividend  in  Common  Stock.
         Dividends on the Preferred  Stock shall be calculated on the basis of a
         360-day year, shall accrue daily commencing on the Original Issue Date,
         and shall be deemed to accrue  from such date  whether or not earned or
         declared and whether or not there are  profits,  surplus or other funds
         of the  Corporation  legally  available  for the payment of  dividends.
         Except as otherwise  provided  herein,  if at any time the  Corporation
         pays  dividends  partially in cash and  partially in shares,  then such

                                       2
<PAGE>

         payment shall be  distributed  ratably among the Holders based upon the
         number of shares of Preferred Stock held by each Holder. Any dividends,
         whether paid in cash or shares,  that are not paid within three Trading
         Days  following a Dividend  Payment  Date shall  continue to accrue and
         shall entail a late fee, which must be paid in cash, at the rate of 18%
         per annum or the lesser rate  permitted by applicable law (such fees to
         accrue daily,  from the Dividend Payment Date through and including the
         date of payment).

                   (b) So long as any Preferred Stock shall remain  outstanding,
         neither  the  Corporation  nor any  subsidiary  thereof  shall  redeem,
         purchase  or  otherwise  acquire  directly  or  indirectly  any  Junior
         Securities.  So long as any Preferred  Stock shall remain  outstanding,
         neither the  Corporation  nor any subsidiary  thereof shall directly or
         indirectly pay or declare any dividend or make any distribution  (other
         than a dividend or distribution described in Section 5 or dividends due
         and paid in the ordinary  course on preferred  stock of the Corporation
         at such times when the  Corporation  is in compliance  with its payment
         and other  obligations  hereunder)  upon, nor shall any distribution be
         made in  respect  of, any Junior  Securities  so long as any  dividends
         currently  due on the  Preferred  Stock  remain  unpaid,  nor shall any
         monies  be set aside  for or  applied  to the  purchase  or  redemption
         (through  a sinking  fund or  otherwise)  of any Junior  Securities  or
         shares pari passu with the Preferred Stock.

                  (c) The Corporation  acknowledges  and agrees that the capital
         of the  Corporation (as such term is used in Section 151 of the General
         Corporation  Law of Delaware) in respect of the Preferred Stock and any
         future issuances of the  Corporation's  capital stock shall be equal to
         the aggregate par value of such Preferred  Stock or capital  stock,  as
         the case  may be,  and  that,  on or  after  the  date of the  Purchase
         Agreement,  it shall not increase the capital of the  Corporation  with
         respect to any shares of the  Corporation's  capital  stock  issued and
         outstanding on such date. The Corporation also  acknowledges and agrees
         that it shall not create any special  reserves under Section 171 of the
         General  Corporation Law of Delaware  without the prior written consent
         of each Holder.

         Section 3. Voting Rights.  Except as otherwise  provided  herein and as
otherwise  required by law,  the  Preferred  Stock shall have no voting  rights.
However,  so  long  as any  shares  of  Preferred  Stock  are  outstanding,  the
Corporation shall not, without the affirmative vote of the Holders of the shares
of the  Preferred  Stock then  outstanding,  (a) alter or change  adversely  the
powers,  preferences  or rights given to the  Preferred  Stock or alter or amend
this  Certificate  of  Designation,  (b)  authorize or create any class of stock
ranking as to dividends, redemption or distribution of assets upon a Liquidation
(as  defined  in  Section  4)  senior  to the  Preferred  Stock,  (c)  amend its
certificate  of  incorporation  or  other  charter  documents  so as  to  affect
adversely  any rights of the  Holders,  (d) increase  the  authorized  number of
shares of Preferred  Stock,  or (e) enter into any agreement with respect to the
foregoing.

         Section 4. Liquidation. Upon any liquidation, dissolution or winding-up
of the  Corporation,  whether  voluntary or involuntary (a  "Liquidation"),  the
Holders  shall be  entitled  to receive  out of the  assets of the  Corporation,
whether such assets are capital or surplus, for each share of Preferred Stock an
amount equal to the Stated Value per share plus any accrued and unpaid dividends

                                       3
<PAGE>

thereon  and any other  fees or  liquidated  damages  owing  thereon  before any
distribution  or payment shall be made to the holders of any Junior  Securities,
and if the assets of the  Corporation  shall be insufficient to pay in full such
amounts,  then the  entire  assets to be  distributed  to the  Holders  shall be
distributed among the Holders ratably in accordance with the respective  amounts
that would be payable on such shares if all amounts payable thereon were paid in
full. A Fundamental  Transaction or Change of Control  Transaction  shall not be
treated as a Liquidation.  The Corporation shall mail written notice of any such
Liquidation,  not less than 45 days prior to the payment date stated therein, to
each record Holder.

         Section 5. Conversion.

                  (a) (i)  Conversions  at  Option  of  Holder.  Each  share  of
                  Preferred  Stock  shall be  convertible  into  that  number of
                  shares of Common Stock (subject to the  limitations  set forth
                  in Section  5(a)(ii))  determined by dividing the Stated Value
                  of such  share of  Preferred  Stock by the Set  Price,  at the
                  option of the  Holder,  at any time and from time to time from
                  and  after the  Original  Issue  Date.  Holders  shall  effect
                  conversions  by  providing  the  Corporation  with the form of
                  conversion  notice  attached  hereto as Annex A (a "Conversion
                  Notice").  Each Conversion  Notice shall specify the number of
                  shares  of  Preferred  Stock to be  converted,  the  number of
                  shares of  Preferred  Stock owned prior to the  conversion  at
                  issue,   the  number  of  shares  of  Preferred   Stock  owned
                  subsequent  to the  conversion  at issue and the date on which
                  such conversion is to be effected, which date may not be prior
                  to the date the Holder delivers such Conversion  Notice to the
                  Corporation  by  facsimile  (the  "Conversion  Date").  If  no
                  Conversion  Date is  specified  in a  Conversion  Notice,  the
                  Conversion Date shall be the date that such Conversion  Notice
                  to  the  Corporation  is  deemed  delivered   hereunder.   The
                  calculations  and entries set forth in the  Conversion  Notice
                  shall  control in the  absence  of  manifest  or  mathematical
                  error.

                           (ii) Beneficial Ownership Limitation. The Corporation
                  shall not effect any  conversion of the Preferred  Stock,  and
                  the Holder  shall not have the right to convert any portion of
                  the Preferred  Stock to the extent that after giving effect to
                  such  conversion,  the  Holder  (together  with  the  Holder's
                  affiliates), as set forth on the applicable Conversion Notice,
                  would  beneficially  own in excess  of 4.99% of the  number of
                  shares  of the  Common  Stock  outstanding  immediately  after
                  giving  effect  to  such  conversion.   For  purposes  of  the
                  foregoing  sentence,  the  number of  shares  of Common  Stock
                  beneficially  owned by the  Holder  and its  affiliates  shall
                  include  the number of shares of Common  Stock  issuable  upon
                  conversion  of the  Preferred  Stock with respect to which the
                  determination  of such  sentence  is  being  made,  but  shall
                  exclude  the number of shares of Common  Stock  which would be
                  issuable upon (A)  conversion of the  remaining,  nonconverted
                  Stated  Value of  Preferred  Stock  beneficially  owned by the
                  Holder or any of its affiliates and (B) exercise or conversion
                  of the  unexercised  or  nonconverted  portion  of  any  other
                  securities of the Corporation (including the Warrants) subject
                  to a limitation  on  conversion  or exercise  analogous to the
                  limitation  contained herein  beneficially owned by the Holder
                  or any of its affiliates. Except as set forth in the preceding

                                       4
<PAGE>

                  sentence,  for purposes of this Section  5(a)(ii),  beneficial
                  ownership shall be calculated in accordance with Section 13(d)
                  of  the  Exchange  Act.  To the  extent  that  the  limitation
                  contained in this Section 5(a)(ii) applies,  the determination
                  of whether the Preferred  Stock is convertible (in relation to
                  other  securities  owned  by  the  Holder  together  with  any
                  affiliates)   and  of  which  shares  of  Preferred  Stock  is
                  convertible  shall be in the sole  discretion  of such Holder,
                  and the  submission of a Conversion  Notice shall be deemed to
                  be such  Holder's  determination  of  whether  the  shares  of
                  Preferred  Stock  may  be  converted  (in  relation  to  other
                  securities  owned by such  Holder)  and  which  shares  of the
                  Preferred Stock is  convertible,  in each case subject to such
                  aggregate  percentage  limitations.  To ensure compliance with
                  this  restriction,  the Holder will be deemed to  represent to
                  the Corporation each time it delivers a Conversion Notice that
                  such Conversion  Notice has not violated the  restrictions set
                  forth in this  paragraph  and the  Corporation  shall  have no
                  obligation   to  verify  or  confirm  the   accuracy  of  such
                  determination.  For  purposes  of this  Section  5(a)(ii),  in
                  determining the number of outstanding  shares of Common Stock,
                  the  Holder may rely on the  number of  outstanding  shares of
                  Common Stock as reflected in the most recent of the following:
                  (A) the  Corporation's  most recent Form 10-Q or Form 10-K, as
                  the case may be, (B) a more recent public  announcement by the
                  Corporation or (C) any other written notice by the Corporation
                  or the  Corporation's  transfer agent setting forth the number
                  of shares of Common  Stock  outstanding.  Upon the  written or
                  oral request of the Holder,  the Corporation  shall within two
                  Trading Days  confirm  orally and in writing to the Holder the
                  number  of shares of Common  Stock  then  outstanding.  In any
                  case, the number of  outstanding  shares of Common Stock shall
                  be  determined  after  giving  effect  to  the  conversion  or
                  exercise  of  securities  of the  Corporation,  including  the
                  Preferred  Stock,  by the Holder or its  affiliates  since the
                  date as of which such number of  outstanding  shares of Common
                  Stock was reported.

                           (iii)   Limitation  on  Number  of  Shares  Issuable.
                  Notwithstanding   anything   herein  to  the   contrary,   the
                  Corporation shall not issue to any Holder any shares of Common
                  Stock,  including  pursuant to any rights  herein,  including,
                  without  limitation,  any conversion  rights or right to issue
                  shares of Common Stock in payment of dividends,  to the extent
                  such  shares,  when  added to the  number  of shares of Common
                  Stock  previously  issued  upon  conversion  of any  shares of
                  Preferred  Stock  pursuant  to Section  5(a)(i)  would  exceed
                  3,875,188,  or such  greater  or  lesser  number  of shares of
                  Common Stock  permitted  pursuant to the corporate  governance
                  rules  of  the  Principal  Market  that  is at  the  time  the
                  principal  trading  exchange  or market for the Common  Stock,
                  based upon share volume, as confirmed in writing by counsel to
                  the  Corporation  (subject to  increase  or  decrease  only to
                  account for stock splits,  reverse splits and like adjustments
                  occurring  after the  Closing  Date) (the  "Maximum  Aggregate
                  Share   Amount"),   unless  the   Corporation   first  obtains
                  shareholder  approval  permitting such issuances in accordance
                  with the Principal Market rules ("Shareholder  Approval").  On
                  any given date,  each Holder shall be entitled to a portion of
                  the Maximum Aggregate Share Amount equal to the product of (y)
                  the  fraction  determined  by dividing the number of shares of

                                       5
<PAGE>

                  Preferred  Stock  then held by such  Holder as of such date by
                  the aggregate  number of shares held by all Holders as of such
                  date and (z) the  difference  between  the  Maximum  Aggregate
                  Share Amount and the number of shares of Common Stock  issued,
                  in  the   aggregate   among  all  Holders,   pursuant  to  any
                  conversions of Preferred  Stock or exercises of Warrants prior
                  to such  date.  If at any time the  number of shares of Common
                  Stock which could,  notwithstanding  the  limitation set forth
                  herein,  be  issuable  and  sold  to all  Holders  during  the
                  following 12 months (assuming all dividends are paid in shares
                  of Common Stock during such period of determination based upon
                  the  VWAP at the  time of any such  determination)  equals  or
                  exceeds  the  Maximum   Aggregate   Share  Amount,   then  the
                  Corporation shall, subject to any requirements in the Purchase
                  Agreement  to act  sooner,  obtain  the  Shareholder  Approval
                  applicable to such issuance as soon as is possible, but in any
                  event not later  than the 90th day after the date in which the
                  Corporation determines (or is notified by any Holder) that the
                  Maximum  Aggregate  Share  Amount  could be exceeded and shall
                  continue to seek to obtain Shareholder  Approval every 90 days
                  until such Shareholder Approval is obtained.

                  (iv) Forced Conversion. Notwithstanding anything herein to the
                  contrary, if after the Effective Date the VWAP for each of any
                  10 consecutive  Trading Days  ("Threshold  Period"),  which 10
                  consecutive Trading Day period shall have commenced only after
                  the  Effective  Date,  exceeds 200% of the then  effective Set
                  Price (defined below),  the Company may, within 2 Trading Days
                  after  any such  Threshold  Period,  deliver  a notice  to all
                  Holders (a "Forced Conversion Notice" and the date such notice
                  is received by the  Holders,  the  "Forced  Conversion  Notice
                  Date") to cause the Holders to immediately convert all or part
                  of the then outstanding  shares of Preferred Stock pursuant to
                  Section 5 and the Holders  shall  surrender  (if all Preferred
                  Stock is converted) their respective shares of Preferred Stock
                  to the Company  for  conversion  within 5 Trading  Days of the
                  Forced  Conversion  Notice Date. The Company may only effect a
                  Forced  Conversion Notice if all of the Equity Conditions have
                  been met  during  the  Threshold  Period  through  the  Forced
                  Conversion Notice Date. Any Forced Conversion Notices shall be
                  applied  ratably to all of the Holders in  proportion  to each
                  Holders initial purchases of Preferred Stock hereunder.

                  (b)  (i)  Not  later  than  three   Trading  Days  after  each
                  Conversion Date (the "Share Delivery  Date"),  the Corporation
                  shall deliver to the Holder (A) a certificate or  certificates
                  which,  after the Effective Date, shall be free of restrictive
                  legends and trading restrictions (other than those required by
                  Section 4.1 of the Purchase Agreement) representing the number
                  of shares of Common Stock being  acquired upon the  conversion
                  of  shares of  Preferred  Stock,  and (B) a bank  check in the
                  amount of accrued and unpaid dividends (if the Corporation has
                  elected or is required to pay accrued dividends in cash and is
                  permitted to make such payment). After the Effective Date, the
                  Corporation  shall,  upon  request of the Holder,  deliver any
                  certificate  or  certificates  required to be delivered by the
                  Corporation  under this  Section  electronically  through  the
                  Depository Trust Corporation or another  established  clearing

                                       6
<PAGE>

                  corporation  performing similar  functions.  If in the case of
                  any Conversion Notice such certificate or certificates are not
                  delivered  to or as directed by the  applicable  Holder by the
                  third Trading Day after the Conversion  Date, the Holder shall
                  be entitled to elect by written  notice to the  Corporation at
                  any time on or  before  its  receipt  of such  certificate  or
                  certificates thereafter,  to rescind such conversion, in which
                  event   the   Corporation   shall   immediately   return   the
                  certificates   representing  the  shares  of  Preferred  Stock
                  tendered for conversion.

                           (ii)  The  Corporation's  obligations  to  issue  and
                  deliver the  Conversion  Shares upon  conversion  of Preferred
                  Stock in  accordance  with the terms  hereof are  absolute and
                  unconditional,  irrespective  of any action or inaction by the
                  Holder to enforce the same, any waiver or consent with respect
                  to any provision hereof,  the recovery of any judgment against
                  any Person or any action to enforce  the same,  or any setoff,
                  counterclaim,  recoupment,  limitation or termination,  or any
                  breach or alleged  breach by the Holder or any other Person of
                  any obligation to the  Corporation or any violation or alleged
                  violation  of law by the  Holder  or  any  other  person,  and
                  irrespective of any other  circumstance  which might otherwise
                  limit  such  obligation  of the  Corporation  to the Holder in
                  connection with the issuance of such Conversion Shares. In the
                  event a Holder shall elect to convert any or all of the Stated
                  Value of its  Preferred  Stock,  the  Company  may not  refuse
                  conversion  based on any  claim  that  such  Holder or any one
                  associated or  affiliated  with the Holder of has been engaged
                  in any  violation of law,  agreement or for any other  reason,
                  unless, an injunction from a court, on notice, restraining and
                  or enjoining conversion of all or part of this Debenture shall
                  have been sought and obtained  and the Company  posts a surety
                  bond for the  benefit  of the  Holder in the amount of 150% of
                  the Stated  Value of  Preferred  Stock  outstanding,  which is
                  subject to the  injunction,  which bond shall remain in effect
                  until the completion of  arbitration/litigation of the dispute
                  and the  proceeds  of which shall be payable to such Holder to
                  the  extent  it  obtains  judgment.   In  the  absence  of  an
                  injunction  precluding  the  same,  the  Company  shall  issue
                  Conversion  Shares or, if  applicable,  cash,  upon a properly
                  noticed conversion. If the Corporation fails to deliver to the
                  Holder such  certificate or  certificates  pursuant to Section
                  5(b)(i)  by  the  Share  Delivery  Date   applicable  to  such
                  conversion, the Corporation shall pay to such Holder, in cash,
                  as liquidated damages and not as a penalty, for each $5,000 of
                  Stated  Value of  Preferred  Stock  being  converted,  $50 per
                  Trading  Day  (increasing  to $100  per  Trading  Day  after 3
                  Trading Days and  increasing to $200 per Trading Day 6 Trading

                                       7
<PAGE>

                  Days after such damages  begin to accrue) for each Trading Day
                  after the Share  Delivery  Date  until such  certificates  are
                  delivered.  Nothing  herein  shall  limit a Holder's  right to
                  pursue actual damages for the Corporation's failure to deliver
                  certificates   representing   shares  of  Common   Stock  upon
                  conversion  within the period specified herein and such Holder
                  shall have the right to pursue all  remedies  available  to it
                  hereunder, at law or in equity including,  without limitation,
                  a decree of specific performance and/or injunctive relief.

                           (iii)  If the  Corporation  fails to  deliver  to the
                  Holder such  certificate or  certificates  pursuant to Section
                  5(b)(i)  by a Share  Delivery  Date,  and if after  such Share
                  Delivery  Date  the  Holder   purchases  (in  an  open  market
                  transaction   or   otherwise)   Common  Stock  to  deliver  in
                  satisfaction of a sale by such Holder of the Conversion Shares
                  which the Holder was entitled to receive  upon the  conversion
                  relating to such Share  Delivery Date (a  "Buy-In"),  then the
                  Corporation  shall  pay in cash to the  Holder  the  amount by
                  which  (x)  the  Holder's  total  purchase  price   (including
                  brokerage  commissions,  if  any)  for  the  Common  Stock  so
                  purchased  exceeds (y) the product of (1) the aggregate number
                  of shares of Common  Stock that such  Holder was  entitled  to
                  receive from the  conversion  at issue  multiplied  by (2) the
                  price at which the sell  order  giving  rise to such  purchase
                  obligation was executed.  For example, if the Holder purchases
                  Common Stock having a total purchase price of $11,000 to cover
                  a Buy-In with respect to an attempted  conversion of shares of
                  Preferred Stock with respect to which the aggregate sale price
                  giving rise to such  purchase  obligation  is  $10,000,  under
                  clause  (A)  of  the   immediately   preceding   sentence  the
                  Corporation  shall be required to pay the Holder  $1,000.  The
                  Holder shall provide the Corporation written notice indicating
                  the  amounts  payable to the Holder in respect of the  Buy-In,
                  together  with  applicable  confirmations  and other  evidence
                  reasonably requested by the Corporation.  Nothing herein shall
                  limit a Holder's right to pursue any other remedies  available
                  to it  hereunder,  at  law  or in  equity  including,  without
                  limitation, a decree of specific performance and/or injunctive
                  relief  with  respect to the  Corporation's  failure to timely
                  deliver certificates  representing shares of Common Stock upon
                  conversion  of the  shares  of  Preferred  Stock  as  required
                  pursuant to the terms hereof.

                  (c) (i) The  conversion  price  shall  equal  $0.94  (the "Set
                  Price"), subject to adjustment below.

                           (ii)  if the  Corporation,  at  any  time  while  the
                  Preferred Stock is outstanding: (A) shall pay a stock dividend
                  or otherwise make a distribution or distributions on shares of
                  its  Common  Stock or any other  equity  or equity  equivalent
                  securities  payable in shares of Common  Stock,  (B) subdivide
                  outstanding  shares of Common  Stock  into a larger  number of
                  shares,  (C) combine (including by way of reverse stock split)
                  outstanding  shares of Common  Stock into a smaller  number of
                  shares,  or (D)  issue by  reclassification  of  shares of the
                  Common Stock any shares of capital  stock of the  Corporation,
                  then the Set Price shall be  multiplied by a fraction of which
                  the  numerator  shall be the number of shares of Common  Stock

                                       8
<PAGE>

                  Outstanding  before  such  event and of which the  denominator
                  shall be the  number of shares  of  Common  Stock  Outstanding
                  after such event. Any adjustment made pursuant to this Section
                  shall become effective  immediately  after the record date for
                  the  determination  of  stockholders  entitled to receive such
                  dividend   or   distribution   and  shall   become   effective
                  immediately  after  the  effective  date  in  the  case  of  a
                  subdivision, combination or reclassification.

                           (iii)  if the  Corporation,  at any  time  while  the
                  Preferred Stock is outstanding, shall issue rights, options or
                  warrants to all  holders of Common  Stock (and not to Holders)
                  entitling  them to subscribe for or purchase  shares of Common
                  Stock at a price  per share  less than the VWAP at the  record
                  date mentioned  below,  then the Set Price shall be multiplied
                  by a fraction, of which the denominator shall be the number of
                  shares of the Common Stock Outstanding on the date of issuance
                  of such  rights or  warrants  plus the  number  of  additional
                  shares of Common Stock offered for  subscription  or purchase,
                  and of which the  numerator  shall be the  number of shares of
                  the Common Stock  Outstanding  on the date of issuance of such
                  rights  or  warrants  plus the  number  of  shares  which  the
                  aggregate  offering  price of the  total  number  of shares so
                  offered  (assuming  receipt by the  Corporation in full of all
                  consideration payable upon exercise of such rights, options or
                  warrants) would purchase at such VWAP.  Such adjustment  shall
                  be made whenever such rights or warrants are issued, and shall
                  become  effective  immediately  after the record  date for the
                  determination of stockholders entitled to receive such rights,
                  options or warrants.

                           (iv) if the Corporation or any subsidiary  thereof at
                  any time  while  any of the  Preferred  Stock is  outstanding,
                  shall sell, grant any option or warrant to purchase or sell or
                  grant  any  right to  reprice  its  securities,  or  otherwise
                  dispose of or issue any  Common  Stock or any equity or equity
                  equivalent  securities  (including  any equity,  debt or other
                  instrument   that  is  at  any  time  over  the  life  thereof
                  convertible   into   or   exchangeable   for   Common   Stock)
                  (collectively,   "Common  Stock  Equivalents")  entitling  any
                  Person to  acquire  shares of Common  Stock,  at an  effective
                  price  per  share  less  than  the  Set  Price  (a   "Dilutive
                  Issuance"), as adjusted hereunder (if the holder of the Common
                  Stock or Common Stock  Equivalent so issued shall at any time,
                  whether by  operation  of purchase  price  adjustments,  reset
                  provisions,  floating conversion,  exercise or exchange prices
                  or otherwise, or due to warrants,  options or rights per share
                  which are issued in connection with such issuance, be entitled
                  to receive  shares of Common  Stock at a price per share which
                  is less than the Set Price,  such issuance  shall be deemed to
                  have occurred for less than the Set Price), then the Set Price
                  shall be reduced to equal the effective  conversion,  exchange
                  or  purchase  price  for such  Common  Stock or  Common  Stock
                  Equivalents (including any reset provisions thereof) at issue.
                  Such  adjustment  shall be made  whenever such Common Stock or
                  Common Stock  Equivalents are issued.  The  Corporation  shall
                  notify the Holder in writing, no later than the second Trading
                  Day following the issuance of any Common Stock or Common Stock
                  Equivalent  subject to this  section,  indicating  therein the
                  applicable  issuance  price,  or of  applicable  reset  price,

                                       9
<PAGE>

                  exchange price,  conversion price and other pricing terms. For
                  purposes  of this  subsection,  a Dilutive  Issuance  shall be
                  deemed to have  occurred  when  binding  agreements  have been
                  closed by the Corporation and any purchaser therein.

                           (v)  if  the  Corporation,  at  any  time  while  the
                  Preferred  Stock  is  outstanding,  shall  distribute  to  all
                  holders of Common Stock (and not to Holders)  evidences of its
                  indebtedness  or assets or rights or warrants to subscribe for
                  or purchase  any  security  other than the Common Stock (which
                  shall be subject to Section 5(c)(iii),  then in each such case
                  the Set Price shall be adjusted by  multiplying  the Set Price
                  in  effect  immediately  prior to the  record  date  fixed for
                  determination   of  stockholders   entitled  to  receive  such
                  distribution by a fraction of which the  denominator  shall be
                  the VWAP determined as of the record date mentioned above, and
                  of which the numerator  shall be such VWAP on such record date
                  less the then per share fair market  value at such record date
                  of the portion of such assets or evidence of  indebtedness  so
                  distributed  applicable to one outstanding share of the Common
                  Stock as  determined  by the Board of Directors in good faith.
                  In  either  case  the  adjustments  shall  be  described  in a
                  statement  provided to the Holders of the portion of assets or
                  evidences of indebtedness so distributed or such  subscription
                  rights   applicable  to  one  share  of  Common  Stock.   Such
                  adjustment  shall be made  whenever any such  distribution  is
                  made and shall become effective  immediately  after the record
                  date mentioned above.

                           (vi) All  calculations  under this Section 5(c) shall
                  be made to the nearest cent or the nearest 1/100th of a share,
                  as the case may be.  The  number of  shares  of  Common  Stock
                  outstanding  at any given time shall not include  shares owned
                  or held  by or for the  account  of the  Corporation,  and the
                  disposition of any such shares shall be considered an issue or
                  sale of Common Stock.  For purposes of this Section 5(c),  the
                  number of shares of Common Stock deemed to be outstanding (the
                  "Common  Stock  Outstanding")  as of a given date shall be the
                  sum of  the  number  of  shares  of  Common  Stock  (excluding
                  treasury shares, if any) issued and outstanding.

                           (vii)   Notwithstanding   anything  to  the  contrary
                  herein,  no adjustment  shall be made  hereunder in connection
                  with an Exempt Issuance.

                           (viii) Whenever the Set Price is adjusted pursuant to
                  this Section the Corporation  shall promptly,  but in no event
                  more  than  2  Trading  Days  after  the  occurrence  of  such
                  adjustment,  mail to each Holder,  a notice  setting forth the
                  Set Price  after such  adjustment  and  setting  forth a brief
                  statement of the facts requiring such adjustment.

         Section 6.   [INTENTIONALLY OMMITED]

         Section 7.   Redemption Upon Triggering Events.

                                       10
<PAGE>

                   (a) Upon the  occurrence of a Triggering  Event,  each Holder
         shall (in addition to all other  rights it may have  hereunder or under
         applicable law) have the right,  exercisable at the sole option of such
         Holder, to require the Corporation to redeem all of the Preferred Stock
         then held by such Holder for a redemption  price, in cash, equal to the
         Triggering Redemption Amount. The Triggering Redemption Amount shall be
         due and payable  within 5 Trading  Days of the date on which the notice
         for the payment  therefor  is  provided  by a Holder  (the  "Triggering
         Redemption  Payment  Date").  If  the  Corporation  fails  to  pay  the
         Triggering Redemption Amount hereunder in full pursuant to this Section
         on the date such amount is due in  accordance  with this  Section,  the
         Corporation  will pay  interest  thereon at a rate of 18% per annum (or
         such lesser amount  permitted by applicable  law),  accruing daily from
         such  date  until  the  Triggering  Redemption  Amount,  plus  all such
         interest  thereon,  is paid in full.  For purposes of this  Section,  a
         share of Preferred  Stock is outstanding  until such date as the Holder
         shall have received the Triggering  Redemption  Amount plus all accrued
         but unpaid dividends and all accrued but unpaid  liquidated  damages in
         cash.

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

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

                           (ii)  if,  during  the  Effectiveness   Period,   the
                  effectiveness of the Conversion Shares Registration  Statement
                  lapses  for  any  reason  for  more  than an  aggregate  of 60
                  calendar days (which need not be consecutive  days) during any
                  12 month  period,  or the  Holder  shall not be  permitted  to
                  resell  Registrable  Securities  under the  Conversion  Shares
                  Registration Statement other than as a result of any action or
                  inaction of a Holder for more than an aggregate of 60 calendar
                  days (which need not be consecutive  days) during any 12 month
                  period;

                           (iii)  the   Corporation   shall   fail  to   deliver
                  certificates  representing  Conversion  Shares issuable upon a
                  conversion  hereunder that comply with the  provisions  hereof
                  prior to the 10th  Trading Day after such shares are  required
                  to be delivered  hereunder,  or the Corporation  shall provide
                  written  notice  to any  Holder,  including  by way of  public
                  announcement, at any time, of its intention not to comply with
                  requests for  conversion  of any shares of Preferred  Stock in
                  accordance with the terms hereof;

                           (iv)  one  of  the   Events   (as   defined   in  the
                  Registration Rights Agreement) described in subsections (i) or
                  (ii) of  Section  2(b) of the  Registration  Rights  Agreement
                  shall not have been cured to the  satisfaction  of the Holders
                  prior to the  expiration  of 15 days from the  Event  Date (as
                  defined in the Registration Rights Agreement) relating thereto
                  (other than an Event  resulting from a failure of a Conversion

                                       11
<PAGE>

                  Shares Registration  Statement to be declared effective by the
                  Commission  on or prior to the 180th  day  after the  Original
                  Issue Date, which shall be covered by Section 7(b)(i));

                           (v) the Corporation  shall fail for any reason to pay
                  in full the amount of cash due  pursuant to a Buy-In  within 5
                  Trading Days after notice  therefor is delivered  hereunder or
                  shall  fail to pay all  amounts  owed on  account  of an Event
                  within five days of the date due;

                           (vi) the  Corporation  shall fail to have available a
                  sufficient  number  of  authorized  and  unreserved  shares of
                  Common  Stock  to  issue  to  such  Holder  upon a  conversion
                  hereunder  unless the  Corporation  has complied  with Section
                  4.10(b) of the Purchase Agreement;

                           (vii)  the  Corporation  shall  fail  to  observe  or
                  perform any other  material  covenant,  agreement  or warranty
                  contained   in,  or   otherwise   commit  any  breach  of  the
                  Transaction  Documents,  and such  material  failure or breach
                  shall  not,  if subject  to the  possibility  of a cure by the
                  Corporation,  have been remedied within 30 calendar days after
                  the date on which  written  notice of such  failure  or breach
                  shall have been given;

                           (ix) the  Company  shall be a party to any  Change of
                  Control  Transaction or the Corporation shall redeem more than
                  a de minimis number of Junior Securities;

                           (x) there shall have occurred a Bankruptcy Event;

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

                           (xi) the  Common  Stock  shall  fail to be  listed or
                  quoted  for  trading  on a  Trading  Market  for  more  than 5
                  consecutive Trading Days.

         Section 8.  Definitions.  For the purposes hereof,  the following terms
shall have the following meanings:

                  "Bankruptcy  Event" means any of the following events: (a) the
         Corporation or any  Significant  Subsidiary (as such term is defined in
         Rule  1.02(s) of  Regulation  S-X)  thereof  commences  a case or other
         proceeding   under   any   bankruptcy,   reorganization,   arrangement,
         adjustment  of debt,  relief of  debtors,  dissolution,  insolvency  or
         liquidation  or  similar  law  of  any  jurisdiction  relating  to  the
         Corporation  or  any  Significant  Subsidiary  thereof;  (b)  there  is
         commenced against the Corporation or any Significant Subsidiary thereof
         any such case or proceeding that is not dismissed  within 60 days after
         commencement; (c) the Corporation or any Significant Subsidiary thereof
         is  adjudicated  insolvent  or bankrupt or any order of relief or other
         order  approving  any  such  case or  proceeding  is  entered;  (d) the
         Corporation  or  any   Significant   Subsidiary   thereof  suffers  any

                                       12
<PAGE>

         appointment of any custodian or the like for it or any substantial part
         of its property that is not  discharged  or stayed within 60 days;  (e)
         the Corporation or any Significant  Subsidiary  thereof makes a general
         assignment  for the benefit of creditors;  (f) the  Corporation  or any
         Significant  Subsidiary thereof calls a meeting of its creditors with a
         view to arranging a  composition,  adjustment or  restructuring  of its
         debts; or (g) the Corporation or any Significant Subsidiary thereof, by
         any act or failure to act, expressly indicates its consent to, approval
         of or  acquiescence  in any of the  foregoing or takes any corporate or
         other action for the purpose of effecting any of the foregoing.

                  "Change of Control Transaction" means the occurrence after the
         date  hereof of any of (a) an  acquisition  after the date hereof by an
         individual or legal entity or "group" (as described in Rule 13d-5(b)(1)
         promulgated  under the  Exchange  Act) of  effective  control  (whether
         through  legal  or  beneficial   ownership  of  capital  stock  of  the
         Corporation,  by  contract  or  otherwise)  of in  excess of 50% of the
         voting securities of the Corporation,  or (b) a replacement at one time
         or within a one year period of more than one-half of the members of the
         Corporation's board of directors which is not approved by a majority of
         those individuals who are members of the board of directors on the date
         hereof (or by those individuals who are serving as members of the board
         of directors on any date whose nomination to the board of directors was
         approved by a majority of the members of the board of directors who are
         members on the date hereof), or (c) the execution by the Corporation of
         an  agreement  to which  the  Corporation  is a party or by which it is
         bound, providing for any of the events set forth above in (a) or (b).

                  "Closing"  means  closing  of the  purchase  and  sale  of the
         Preferred Stock.

                  "Commission" means the Securities and Exchange Commission.

                  "Common Stock" means the Corporation's common stock, par value
         $0.04 per share,  and stock of any other  class into which such  shares
         may hereafter have been reclassified or changed.

                  "Common Stock Outstanding" shall have the meaning set forth in
         Section 5(c)(vi).

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

                  "Conversion  Date" shall have the meaning set forth in Section
         5(b)(i).

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

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

                  "Dividend  Payment  Date"  shall have the meaning set forth in
         Section 2(a).

                                       13
<PAGE>

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

                  "Equity  Conditions"  Unless  waived  by  a  Holder  as  to  a
         particular event (which waiver shall apply only to such Holder),  as of
         such  event  date,  the  following  conditions  have been met:  (i) the
         Corporation shall have duly honored or cured all conversions  scheduled
         to occur or  occurring  prior to such date,  (ii) there is an effective
         Conversion Shares Registration  Statement pursuant to which the Holders
         are permitted to utilize the prospectus thereunder to resell all of the
         Conversion  Shares  issued  to the  Holders  and all of the  Conversion
         Shares as are  issuable to the Holders upon  conversion  in full of the
         Preferred Stock or the Conversion Shares are available for resale under
         Rule 144(k) (and the  Corporation  believes,  in good faith,  that such
         effectiveness will continue  uninterrupted for the foreseeable future),
         (iii) the Common Stock is listed for trading on the Trading Market (and
         the  Corporation  believes,  in good faith,  that trading of the Common
         Stock  on the  Trading  Market  will  continue  uninterrupted  for  the
         foreseeable  future),  (iv) all  liquidated  damages and other  amounts
         owing including  dividends in respect of the Preferred Stock shall have
         been paid or will,  concurrently  with the  issuance of the  Conversion
         Shares, be paid in cash; (v) there is a sufficient number of authorized
         but unissued and  otherwise  unreserved  shares of Common Stock for the
         issuance  of all the  Conversion  Shares as are  issuable to the Holder
         upon  conversion  in full of the  Preferred  Stock;  (vi) no Triggering
         Event has  occurred  and is  continuing;  (vii)  all of the  Conversion
         Shares  issuable to the Holder upon conversion in full of the Preferred
         Stock will not violate the limitations  set forth in Sections  5(a)(ii)
         or  5(a)(iii);  and  (viii) no  public  announcement  of a  pending  or
         proposed  Fundamental  Transaction or Change of Control Transaction has
         occurred that has not been consummated.

                  "Exchange Act" means the  Securities  Exchange Act of 1934, as
         amended.

                  "Forced Conversion Notice" shall have the meaning set forth in
         Section 5(a)(iv).

                  "Forced  Conversion  Notice  Date"  shall have the meaning set
         forth in Section 5(a)(iv).

                  "Fundamental  Transaction" means the occurrence after the date
         hereof  of  any  of  (a)  the   Corporation   effects   any  merger  or
         consolidation of the Corporation with or into another Person,  in which
         it is not the  surviving  entity,  or the  Corporation's  then existing
         shareholders  will own less than 51% of the surviving  entity,  (b) the
         Corporation  effects any sale of all or substantially all of its assets
         in one or a series of related  transactions,  (c) any  tender  offer or
         exchange  offer  (whether  by the  Corporation  or  another  Person) is
         completed  pursuant to which  holders of Common Stock are  permitted to
         tender or exchange their shares for other securities, cash or property,
         the result of which to the Corporation's  shareholders at such time own
         less than 51% of the shares of Common Stock of the Corporation,  or (d)
         the Corporation effects any reclassification of the Common Stock or any
         compulsory  share  exchange  pursuant  to  which  the  Common  Stock is
         effectively  converted into or exchanged for other securities,  cash or
         property.

                                       14
<PAGE>

                  "Holder"  shall have the meaning  given such term in Section 1
         hereof.

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

                  "Original  Issue  Date"  shall  mean  the  date  of the  first
         issuance of any shares of the Preferred Stock  regardless of the number
         of transfers of any particular shares of Preferred Stock and regardless
         of the  number of  certificates  which may be issued to  evidence  such
         Preferred Stock.

                  "Person" means a corporation,  an association,  a partnership,
         an organization,  a business, an individual,  a government or political
         subdivision thereof or a governmental agency.

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

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

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

                  "Set  Price"  shall  have the  meaning  set  forth in  Section
         5(c)(i).

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

                  "Trading  Market" means the following  markets or exchanges on
         which the Common  Stock is listed or quoted for  trading on the date in
         question: the American Stock Exchange, the New York Stock Exchange, the
         Nasdaq National Market or the Nasdaq SmallCap Market.

                   "Transaction Documents" shall mean the Purchase Agreement and
         all  agreements  entered into in  connection  therewith,  including the
         Registration Rights Agreement and the Warrants.

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

                  "Triggering  Redemption  Amount"  for each share of  Preferred
         Stock means the sum of (i) the greater of (A) 120% of the Stated  Value
         and (B) the  product  of (a) the VWAP on the  Trading  Day  immediately

                                       15
<PAGE>

         preceding  the date of the  Triggering  Event and (b) the Stated  Value
         divided by the then Set Price,  (ii) all accrued  but unpaid  dividends
         thereon  and (iii) all  liquidated  damages  and other  amounts  due in
         respect of 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  Principal
         Market and if prices for the  Common  Stock are then  quoted on the OTC
         Bulletin Board,  the volume weighted  average price of the Common Stock
         for  such  date (or the  nearest  preceding  date) on the OTC  Bulletin
         Board;  (c) if the Common Stock is not then listed or quoted on the OTC
         Bulletin  Board and if prices for the Common Stock are then reported in
         the  "Pink  Sheets"   published  by  the  National   Quotation   Bureau
         Incorporated  (or a similar  organization  or agency  succeeding to its
         functions of reporting prices),  the most recent bid price per share of
         the  Common  Stock so  reported;  or (c) 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.

         Section  9.  Fundamental  Transactions.  If a  Fundamental  Transaction
occurs,  then upon any subsequent  conversion of shares of Preferred  Stock, the
Holder  shall have the right to receive,  for each  Conversion  Share that would
have been issuable upon such conversion absent such Fundamental Transaction, the
same kind and  amount of  securities,  cash or  property  as it would  have been
entitled to receive upon the  occurrence of such  Fundamental  Transaction if it
had been, immediately prior to such Fundamental  Transaction,  the holder of one
share of Common Stock (the "Alternate Consideration").  For purposes of any such
conversion,  the determination of the Set Price shall be appropriately  adjusted
to apply  to such  Alternate  Consideration  based on the  amount  of  Alternate
Consideration  issuable  in  respect  of one  share  of  Common  Stock  in  such
Fundamental Transaction, and the Corporation shall apportion the Set Price among
the Alternate Consideration in a reasonable manner reflecting the relative value
of any different components of the Alternate Consideration. If holders of Common
Stock are given any choice as to the securities, cash or property to be received
in a Fundamental Transaction,  then the Holder shall be given the same choice as
to the  Alternate  Consideration  it receives  upon any  conversion of shares of
Preferred Stock following such Fundamental Transaction.  To the extent necessary
to effectuate  the foregoing  provisions,  any successor to the  Corporation  or
surviving entity in such Fundamental  Transaction  shall issue to the Holder new
preferred  stock  consistent  with the foregoing  provisions  and evidencing the
Holder's right to convert such preferred stock into Alternate Consideration. The
terms of any agreement  pursuant to which a Fundamental  Transaction is effected
shall include terms  requiring any such successor or surviving  entity to comply
with the provisions of this Section 9 and insuring that the Preferred  Stock (or
any such  replacement  security) will be similarly  adjusted upon any subsequent
transaction analogous to a Fundamental Transaction.

Section 10.  Miscellaneous.

                                       16
<PAGE>

                  (a) If (i) the  Corporation  shall  declare a dividend (or any
         other  distribution)  on the Common Stock,  (ii) the Corporation  shall
         declare a special  nonrecurring cash dividend on or a redemption of the
         Common Stock, (iii) the Corporation shall authorize the granting to all
         holders of Common Stock rights or warrants to subscribe for or purchase
         any shares of  capital  stock of any class or of any  rights,  (iv) the
         approval of any  stockholders of the  Corporation  shall be required in
         connection  with any  Fundamental  Transaction  or  Change  of  Control
         Transaction,  or (v) the  Corporation  shall authorize the voluntary or
         involuntary  dissolution,  liquidation  or winding up of the affairs of
         the  Corporation;  then the  Corporation  shall file a press release or
         Current  Report on Form 8-K to disclose such  occurrence and notify the
         Holders at their last  addresses  as they shall  appear  upon the stock
         books  of the  Corporation,  at  least 20  calendar  days  prior to the
         applicable  record or effective date  hereinafter  specified,  a notice
         stating  (x) the date on which a record is to be taken for the  purpose
         of such dividend, distribution, redemption, rights or warrants, or if a
         record is not to be taken,  the date as of which the  holders of Common
         Stock  of  record  to be  entitled  to  such  dividend,  distributions,
         redemption,  rights or warrants are to be determined or (y) the date on
         which any such Fundamental Transaction or Change of Control Transaction
         is expected to become  effective or close,  and the date as of which it
         is expected that holders of Common Stock of record shall be entitled to
         exchange  their Common  Stock for  securities,  cash or other  property
         deliverable upon any such Fundamental  Transaction or Change of Control
         Transaction.  Subject to the applicable  laws,  Holders are entitled to
         convert the  Conversion  Amount of  Preferred  Stock  during the 20-day
         period  commencing the date of such notice to the effective date of the
         event triggering such notice.

                  (b) The  Corporation  covenants  that  it  will  at all  times
         reserve and keep available out of its authorized and unissued shares of
         Common  Stock  solely for the purpose of issuance  upon  conversion  of
         Preferred Stock,  each as herein provided,  free from preemptive rights
         or any other actual  contingent  purchase  rights of persons other than
         the  Holders,  not less than such  number of shares of Common  Stock as
         shall be issuable  upon the  conversion  of all  outstanding  shares of
         Preferred  Stock.  The Corporation  covenants that all shares of Common
         Stock that shall be so issuable shall,  upon issue, be duly and validly
         authorized, issued and fully paid and nonassessable.

                  (c) Upon a conversion  hereunder the Corporation  shall not be
         required to issue stock certificates  representing  fractions of shares
         of Common Stock, but may if otherwise permitted, make a cash payment in
         respect  of any  final  fraction  of a share  based on the VWAP at such
         time.  If any  fraction of a  Conversion  Share  would,  except for the
         provisions  of this Section,  be issuable upon a conversion  hereunder,
         the  Corporation  shall  pay an  amount  in  cash  equal  to  the  VWAP
         immediately  prior  to the  applicable  conversion  multiplied  by such
         fraction.

                  (d)  The  issuance  of   certificates   for  Common  Stock  on
         conversion  of  Preferred  Stock  shall be made  without  charge to the
         Holders thereof for any documentary  stamp or similar taxes that may be
         payable  in  respect  of the  issue or  delivery  of such  certificate,
         provided that the Corporation shall not be required to pay any tax that
         may be payable in respect of any transfer  involved in the issuance and

                                       17
<PAGE>

         delivery of any such  certificate  upon conversion in a name other than
         that of the Holder of such shares of Preferred Stock so converted.

                  (e) To effect  conversions  of shares of  Preferred  Stock,  a
         Holder   shall  not  be  required  to  surrender   the   certificate(s)
         representing  such shares of Preferred Stock to the Corporation  unless
         all of  the  shares  of  Preferred  Stock  represented  thereby  are so
         converted,  in which  case the Holder  shall  deliver  the  certificate
         representing  such share of  Preferred  Stock  promptly  following  the
         Conversion  Date at issue.  Shares of Preferred  Stock  converted  into
         Common Stock or redeemed in  accordance  with the terms hereof shall be
         canceled and may not be reissued.

                  (f). Any and all notices or other communications or deliveries
         to be  provided  by the  Holders  of  the  Preferred  Stock  hereunder,
         including,  without  limitation,  any  Conversion  Notice,  shall be in
         writing and delivered personally,  by facsimile or sent by a nationally
         recognized overnight courier service, addressed to the attention of the
         Chief Financial Officer of the Corporation  addressed to WILLIAM HODGE,
         FAX NUMBER: (704) 366 5056 or to such other address or facsimile number
         as shall be specified in writing by the  Corporation  for such purpose.
         Any and  all  notices  or  other  communications  or  deliveries  to be
         provided by the Corporation hereunder shall be in writing and delivered
         personally,  by facsimile or sent by a nationally  recognized overnight
         courier  service,  addressed to each Holder at the facsimile  telephone
         number  or  address  of  such  Holder  appearing  on the  books  of the
         Corporation,  which  address  shall  initially  be the  address of such
         Holder set forth on the signature pages of the Purchase  Agreement,  or
         such other address as the  Corporation or a Holder may designate by ten
         days advance written notice to the other parties hereto.  Any notice or
         other  communication or deliveries  hereunder shall be deemed given and
         effective  on the  earliest  of (i) the date of  transmission,  if such
         notice or  communication  is delivered  via  facsimile at the facsimile
         telephone number specified in this Section prior to 5:00 p.m. (New York
         City time) (with confirmation of transmission), (ii) the date after the
         date of transmission,  if such notice or communication is delivered via
         facsimile at the facsimile  telephone  number specified in this Section
         later than 5:00 p.m.  (New York City time) on any date and earlier than
         11:59  p.m.  (New York City time) on such date  (with  confirmation  of
         transmission),  (iii) five days after having been sent by registered or
         certified mail, return receipt requested, postage prepaid, (iv) one day
         after deposit with a nationally  recognized  overnight courier service,
         specifying next day delivery,  with written verification of service, or
         (v) upon actual receipt by the party to whom such notice is required to
         be given.

(g)      For purposes  hereof,  a share of Preferred Stock is outstanding  until
         such date as the  Holder  shall have  received  the  Conversion  Shares
         issuable to it in accordance with this Certificate of Designations.

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

                                       18
<PAGE>

RESOLVED,  FURTHER, that the Chairman, the president or any vice-president,  and
the secretary or any assistant secretary,  of the Corporation be and they hereby
are  authorized and directed to prepare and file a Certificate of Designation of
Preferences,  Rights and Limitations in accordance with the foregoing resolution
and the provisions of Delaware law.

        IN WITNESS WHEREOF,  the undersigned have executed this Certificate this
___ day of September 2004.

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

                                       19
<PAGE>

                                     ANNEX A

                              NOTICE OF CONVERSION

     (To be Executed by the Registered Holder in order to convert shares of
                                Preferred Stock)

The  undersigned  hereby  elects to convert the number of shares of  Convertible
Preferred Stock indicated  below,  into shares of common stock,  par value $0.04
per share  (the  "Common  Stock"),  of RCG  Companies  Incorporated,  a Delaware
corporation (the  "Corporation"),  according to the conditions hereof, as of the
date  written  below.  If shares are to be issued in the name of a person  other
than  undersigned,  the  undersigned  will pay all transfer  taxes  payable with
respect  thereto and is delivering  herewith such  certificates  and opinions as
reasonably requested by the Corporation in accordance therewith.  No fee will be
charged to the Holder for any  conversion,  except for such transfer  taxes,  if
any.

Conversion calculations:

       Date to Effect Conversion

       --------------------------------------------
       Number of shares of Preferred Stock owned prior to Conversion

       --------------------------------------------
       Number of shares of Preferred Stock to be Converted

       --------------------------------------------
       Stated Value of shares of Preferred Stock to be Converted

       --------------------------------------------
       Number of shares of Common Stock to be Issued

       --------------------------------------------
       Applicable Set Price

       --------------------------------------------
       Number of shares of Preferred Stock subsequent to Conversion

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

                                              [HOLDER]

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

                                       20

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