Document:

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                                                                     EXHIBIT 4.1

                          FORM OF UNDERWRITER"S WARRANT

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THESE SECURITIES MAY NOT BE PUBLICLY OFFERED OR SOLD UNLESS AT THE TIME OF SUCH
OFFER OR SALE, THE PERSON MAKING SUCH OFFER OR SALE DELIVERS A PROSPECTUS
MEETING THE REQUIREMENTS OF SECTION 10 OF THE SECURITIES ACT OF 1933 FORMING A
PART OF A REGISTRATION STATEMENT, OR POST-EFFECTIVE AMENDMENT THERETO, WHICH IS
EFFECTIVE UNDER SAID ACT, OR UNLESS IN THE OPINION OF COUNSEL TO THE COMPANY,
SUCH OFFER AND SALE IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF SAID ACT.

                                     WARRANT
          For the Purchase of Common Stock, Par Value $0.0001 per Share
                                       of
                      INTERNATIONAL MONETARY SYSTEMS, LTD.
             (Incorporated Under the Laws of the State of Wisconsin)

                Void after 5:00 P.M., Milwaukee time, on ___________, _________

No.________                                                  Warrant to Purchase
                                                             __________ Shares

     THIS IS TO CERTIFY, that, for value received, J.E. Liss & Company, Inc.
("Underwriter"), or registered assigns, is entitled, subject to the terms and
conditions hereinafter set forth, on or after ____________, ______ and at any
time prior to 5:00 P.M., Milwaukee Time, on ________, ________, but not
thereafter, to purchase the number of shares set forth above ("Shares") of
common stock ("Common Stock"), of International Monetary Systems, Ltd., a
Wisconsin corporation ("Company"), from the Company upon payment to the Company
of $__________ per share ("Purchase Price") if and to the extent this Warrant is
exercised, in whole or in part, during the period this Warrant remains in force,
subject in all cases to adjustment as provided in Article II hereof, and to
receive a certificate or certificates representing the Shares so purchased, upon
presentation and surrender to the Company of this Warrant, with the form of
subscription attached hereto duly executed, and accompanied by payment of the
Purchase Price of each Share purchased. This Warrant is one of a class of
warrants ("Warrants") initially exercisable for the purchase an aggregate of
100,000 shares of Common Stock of the Company.

                                    ARTICLE I
                              TERMS OF THE WARRANT

     Section 1.01. Subject to the provisions of Sections 1.05 and 3.01 hereof,
this Warrant may be exercised at any time and from time to time after 9:00 A.M.,
Milwaukee time, on _________, ________ ("Exercise Commencement Date"), but no
later than 5:00 P.M., Milwaukee time, on _________, ______ ("Expiration Time").
If this Warrant is not exercised on or before the Expiration Time it shall
become void, and all rights hereunder shall thereupon cease.

     Section 1.02. (1) The holder of this Warrant ("Holder") may exercise this
Warrant, in whole or in part, upon surrender of this Warrant with the form of
subscription attached hereto duly executed, to the Company at its office in
Milwaukee, Wisconsin, together with the full Purchase Price for each Share to be
purchased pursuant hereto in lawful money of the United States, or by certified
check, bank draft or postal or express money order payable in United States
dollars to the order of the Company, and upon compliance with and subject to the
conditions set forth herein.

     (2) Upon receipt of this Warrant with the form of subscription duly
executed and accompanied by payment of the aggregate Purchase Price for the
Shares for which this Warrant is then being exercised, the Company shall cause
to be issued certificates for the total number of whole Shares for which this
Warrant is being exercised in such denominations as are required for delivery to
the Holder, and the Company shall thereupon deliver such certificates to the
Holder or its permitted nominee.

     (3) In case the Holder shall exercise this Warrant with respect to less
than all of the Shares that may be purchased under this Warrant, the Company
shall execute a new Warrant for the balance of the Shares that may be purchased
upon exercise of this Warrant and deliver such new Warrant to the Holder.

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     (4) The Company covenants and agrees that it will pay when due and payable
any and all taxes which may be payable in respect of the issue of this Warrant,
or the issue of any Shares upon the exercise of this Warrant. The Company shall
not, however, be required to pay any tax which may be payable in respect of any
transfer involved in the issuance or delivery of this Warrant or of the Shares
in a name other than that of the Holder at the time of surrender, and until the
payment of such tax the Company shall not be required to issue such Shares.

     Section 1.03. This Warrant may be split-up, combined or exchanged for
another Warrant or Warrants of like tenor to purchase a like aggregate number of
Shares. If the Holder desires to split-up, combine or exchange this Warrant, the
Holder shall make such request in writing delivered to the Company at its
corporate office and shall surrender this Warrant and any other Warrants to be
so split-up, combined or exchanged at said office. Upon any such surrender for a
split-up, combination or exchange, the Company shall execute and deliver to the
person entitled thereto a Warrant or Warrants, as the case may be, as so
requested. The Company shall not be required to effect any split-up, combination
or exchange which will result in the issuance of a Warrant entitling the Holder
to purchase upon exercise a fraction of a Share. The Company may require the
Holder to pay a sum sufficient to cover any tax or governmental charge that may
be imposed in connection with any split-up, combination or exchange of Warrants.

     Section 1.04. Prior to due presentment for registration of transfer of this
Warrant, the Company may deem and treat the Holder as the absolute owner of this
Warrant (notwithstanding any notation of ownership or other writing hereon) for
the purpose of any exercise hereof and for all other purposes, and the Company
shall not be affected by any notice to the contrary.

     Section 1.05. For one (1) year following the date hereof, this Warrant may
not be sold, hypothecated, exercised, assigned or transferred, except to
individuals who are officers of the Underwriter or any successor to its business
or pursuant to the laws of descent and distribution, and thereafter and until
its expiration shall be assignable and transferable in accordance with the
Securities Act of 1933 and applicable state securities laws.

     Section 1.06. Any assignment permitted hereunder shall be made by surrender
of this Warrant to the Company at its principal office with the form of
assignment attached hereto duly executed and funds sufficient to pay any
transfer tax. In such event, the Company shall, without charge, execute and
deliver a new Warrant in the name of the assignee named in such instrument of
assignment and this Warrant shall promptly be cancelled. This Warrant may be
divided or combined with other Warrants which carry the same rights upon
presentation thereof at the corporate office of the Company together with a
written notice signed by the Holder, specifying the names and denominations in
which such new Warrants are to be issued.

     Section 1.07. Nothing contained in this Warrant shall be construed as
conferring upon the Holder the right to vote or to consent or to receive notice
as a stockholder in respect of any meetings of stockholders for the election of
directors or any other matter, or as having any rights whatsoever as a
stockholder of the Company. If, however, at any time prior to the expiration of
this Warrant and prior to its exercise, any of the following shall occur:

     (a) the Company shall take a record of the holders of its shares of Common
Stock for the purpose of entitling them to receive a dividend or distribution
payable otherwise than in cash, or a cash dividend or distribution payable
otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or

     (b) the Company shall offer to the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or

     (c) there shall be proposed any capital reorganization or reclassification
of the Common Stock, or a sale of all or substantially all of the assets of the
Company, or a consolidation or merger of the Company with another entity; or

     (d) there shall be proposed a voluntary or involuntary dissolution,
liquidation or winding up of the Company;

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then, in any one or more of said cases, the Company shall cause to be mailed to
the Holder, at the earliest practicable time (and, in any event, not less than
thirty (30) days before any record date or other date set for definitive
action), written notice of the date on which the books of the Company shall
close or a record shall be taken to determine the stockholders entitled to such
dividend, distribution, convertible or exchangeable securities or subscription
rights, or entitled to vote on such reorganization, reclassification, sale,
consolidation, merger, dissolution, liquidation or winding up, as the case may
be. Such notice shall also set forth such facts as shall indicate the effect of
such action (to the extent such effect may be known at the date of such notice)
on the Purchase Price and the kind and amount of the Common Stock and other
securities and property deliverable upon exercise of this Warrant. Such notice
shall also specify the date as of which the holders of the Common Stock of
record shall participate in said distribution or subscription rights or shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, sale, consolidation,
merger, dissolution, liquidation or winding up, as the case may be (on which
date, in the event of voluntary or involuntary dissolution, liquidation or
winding up of the Company, the right to exercise this Warrant shall terminate).
Without limiting the obligation of the Company to provide notice to the holder
of actions hereunder, it is agreed that failure of the Company to give notice
shall not invalidate such action of the Company.

     Section 1.08. If this Warrant is lost, stolen, mutilated or destroyed, the
Company shall, on such reasonable terms as to indemnity or otherwise as it may
impose (which shall, in the case of a mutilated Warrant, include the surrender
thereof), issue a new Warrant of like denomination and tenor as, and in
substitution for, this Warrant, which shall thereupon become void. Any such new
Warrant shall constitute an additional contractual obligation of the Company.

     Section 1.09. (1) The Company covenants and agrees that at all times it
shall reserve and keep available for the exercise hereof sufficient authorized
Shares to permit the exercise in full of this Warrant.

     (2) Prior to the issuance of any Shares upon exercise of this Warrant, the
Company shall secure the listing of such Shares upon any securities exchange or
automated quotation system upon which the shares of the Company's Common Stock
are listed for trading.

     (3) The Company covenants that all Shares when issued upon the exercise of
this Warrant will be validly issued, fully paid, non-assessable and free of
preemptive rights.

                                   ARTICLE II
                        ADJUSTMENT OF PURCHASE PRICE AND
                   NUMBER OF SHARES PURCHASABLE UPON EXERCISE

     Section 2.01. In case the Company shall, while this Warrant remains
unexercised, in whole or in part, and in force, effect a recapitalization of
such character that the Shares purchasable hereunder shall be changed into or
become exchangeable for a larger or smaller number of shares, then, after the
date of record for effecting such recapitalization, the number of Shares of
Common Stock which the Holder hereof shall be entitled to purchase hereunder
shall be increased or decreased, as the case may be, in direct proportion to the
increase or decrease in the number of shares of Common Stock by reason such
recapitalization, and of the Purchase Price, per share, whether or not in effect
immediately prior to the time of such recapitalization, of such recapitalized
Common Stock shall in the case of an increase in the number of such Shares be
proportionately reduced, and in the case of a decrease in the number of such
Shares shall be proportionately increased. For the purposes of this Section
2.01, a stock dividend, stock split-up or reverse split shall be considered as a
recapitalization and as an exchange for a larger or smaller number of shares, as
the case may be.

     Section 2.02. In case of any consolidation of the Company with, or merger
of the Company into, any other corporation, or in case of any sale or conveyance
of all or substantially all of the assets of the Company other than in
connection with a plan of complete liquidation of the Company, then, as a
condition of such consolidation, merger or sale or conveyance, adequate
provision shall be made whereby the Holder shall thereafter have the right to
purchase and receive, upon the basis and upon the terms and conditions specified
in this Warrant and in lieu of Shares of Common Stock immediately theretofore
purchasable and receivable upon the exercise of the rights represented hereby,
such shares of stock or securities as may be issued in connection with such
consolidation, merger

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or sale or conveyance, with respect to or in exchange for the number of
outstanding shares of Common Stock equal to the number of shares of Common Stock
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby had such consolidation, merger or sale or conveyance,
not taken place, and in any such case appropriate provision shall be made with
respect to the rights and interests of the Holder of this Warrant to the end
that the provisions hereof shall be applicable as nearly as may be in relation
to any shares of stock or securities thereafter deliverable upon the exercise
hereof.

     Section 2.03. Subject to the provisions of Section 2.04, below, in case the
Company shall, while this Warrant remains unexercised, in whole or in part, and
in force, declare to make any distribution of its assets to holders of Common
Stock as a partial liquidating dividend, by way of return of capital or
otherwise, then, after the date of record for determining stockholders entitled
to such distribution, but prior to the date of distribution, the Holder shall be
entitled upon exercise of this Warrant and purchase of any or all of the Shares
of Common Stock subject hereto, to receive the amount of such assets (or, at the
option of the Company, a sum equal to the value thereof at the time of such
distribution to holders of Common Stock as such value is determined by the Board
of Directors of the Company in good faith) which would have been payable to the
Holder had he been the holder of such Shares of Common Stock on the record date
for the determination of stockholders entitled to such distribution.

     Section 2.04. Except as otherwise provided in Section 2.02, above, in the
case of any sale or conveyance of all or substantially all of the assets of the
Company in connection with a plan of complete liquidation of the Company, in the
case of the dissolution, liquidation or winding-up of the Company, all rights
under this Warrant shall terminate on a date fixed by the Company, such date so
fixed to be not earlier than the date of the commencement of the proceedings for
such dissolution, liquidation or winding-up and not later than thirty (30) days
after such commencement date. Notice of such termination of purchase rights
shall be given to the Holder at least thirty (30) days prior to such termination
date.

     Section 2.05. Any adjustment pursuant to the provisions of this Article II
shall be made on the basis of the number of Shares of Common Stock which the
Holder would have been entitled to acquire by exercise of this Warrant
immediately prior to the event giving rise to such adjustment and, as to the
Purchase Price per share in effect immediately prior to such adjustment.
Whenever any such adjustment is required to be made, the Company shall forthwith
determine the new number of Shares of Common Stock which the Holder hereof shall
be entitled to purchase hereunder and/or such new Purchase Price per share and
shall prepare, retain on file and transmit to the Holder within ten (10) days
after such preparation a statement describing in reasonable detail the method
used in calculating such adjustment.

     Section 2.06. Anything contained herein to the contrary notwithstanding,
the Company shall not be required to issue any fraction of a Share in connection
with the exercise of this Warrant, and in any case where the Holder would,
except for the provisions of this Section 2.06, be entitled under the terms of
this Warrant to receive a fraction of a Share upon such exercise, the Company
shall upon the exercise and receipt of the Purchase Price, issue the largest
number of whole Shares purchasable upon exercise of this Warrant. The Company
shall not be required to make any cash or other adjustment in respect of such
fraction of a Share to which the Holder would otherwise be entitled. The Holder,
by the acceptance of this Warrant, expressly waives the Holder's right to
receive a certificate for any fraction of a Share upon exercise hereof.

     Section 2.07. The form of Warrant need not be changed or modified because
of any change pursuant to this Article II in the Purchase Price or in the number
of Shares purchasable upon the exercise of a Warrant, and Common Stock Purchase
Warrants issued after such change may state the same Purchase Price and the same
number of shares of Common Stock as are stated in the Warrants as initially
issued.

                                   ARTICLE III
                  REGISTRATION UNDER THE SECURITIES ACT OF 1933

     Section 3.01. This Warrant and the Shares of Common Stock issuable upon
exercise of this Warrant have been registered under the Securities Act of 1933,
as amended ("Act"), on Form SB-2, SEC File No. 333-48527 ("Registration
Statement"). Upon exercise, in part or in whole, of this Warrant, the Shares
shall bear the following legend:

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          The shares represented by this certificate have been registered under
          the Securities Act of 1933, as amended, solely for sale to the holder
          of a warrant to purchase, which holder may be deemed to be an
          underwriter of such shares within the provisions and for purposes only
          of the Securities Act of 1933, as amended. The issuer of these shares
          will agree to a transfer hereof only if (1) an amended or supplemented
          prospectus setting forth the terms of the offer has been filed as part
          of a post-effective amendment to the Registration Statement under
          which these shares are registered or as part of a new registration
          statement, if then required, and such post-effective amendment or new
          registration statement has become effective under the Securities Act
          of 1933, as amended, or (2) counsel to the issuer is satisfied that no
          such post-effective amendment or new registration statement is
          required.

     The Company agrees that it shall be satisfied that no post-effective
amendment or new registration is required for the public sale of the Shares if
it shall be presented with a letter from the staff of the Securities and
Exchange Commission ("Commission") stating in effect that, based upon stated
facts which the Company shall have no reason to believe are not true in any
material respect, the staff will not recommend any action to the Commission if
such Shares are offered and sold without delivery of a prospectus, and that,
therefore, no post-effective amendment to the Registration Statement under which
such shares are registered or new registration statement is required to be
filed.

     Section 3.02. If, at any time during the period commencing one (1) year
from the date hereof and expiring five (5) years after the date hereof, the
Company proposes to register any of its securities under the Act, it will give
written notice, at least thirty (30) days prior to the filing of each such
registration statement, to the Holder and to all other holders of the Warrants
and/or the Shares of its intention to do so. If the Holder or other holders of
the Warrants and/or Shares notify the Company within twenty (20) days after
receipt of any such notice of its or their desire to include their Warrants or
Shares in such proposed registration statement, the Company shall afford the
Holder and/or such holders of the Warrants and/or Shares the opportunity to have
their Warrants or Shares registered under such registration statement.

     Notwithstanding the provisions of this Section 3.02, the Company shall have
the right at any time after it shall have given written notice pursuant to this
Section 3.02 (irrespective of whether a written request for inclusion of
Warrants or Shares shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.

     Section 3.03. (a) At any time during the period commencing one (1) year
from the date of this Warrant, and expiring five (5) years from the date hereof,
a majority of the Warrants and/or the Shares shall have the right (which right
is in addition to the registration rights under Section 3.02 hereof), as long as
current audited financial statements of the Company are available, to request,
one (1) time only, that the Company, upon written notice to it, prepare and file
with the Commission a post-effective amendment to the Registration Statement or
a new registration statement, if then required, and such other documents,
including an amended or supplemented prospectus, as may be necessary in the
opinion of both counsel for the Company and counsel for the Holder, in order to
comply with the provisions of the Act, so as to permit a public offering and
sale for nine (9) consecutive months of the Warrants and/or the Shares by such
Holders and any other holders notifying the Company within five (5) days after
receiving notice from the Company of such request.

     (b) In addition to the registration rights under Section 3.02 and
subsection (a) of this Section 3.03 and as long as current audited financial
statements of the Company are available, any holder(s) of the Warrants and/or
the Shares shall have the right, as long as current audited financial statements
are available, to request that the Company during the period commencing one (1)
year from the date hereof and ending five (5) years from the date hereof,
prepare and file with the Commission a post-effective amendment to the
Registration Statement or a new registration statement, if then required, so as
to permit a public offering and sale for nine (9) consecutive months of its or
his Shares; provided, however, that the provisions of Section 3.04(b) hereof
shall not apply to such registration request and registration and all costs
incident thereto shall be at the expense of the Holder and other holders making
such request.

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     (c) The Company covenants and agrees to give written notice of any
registration request under this Section 3.03 by any holder or holders to all
other registered holders of the Warrants and Shares within ten (10) days from
the date of the receipt of any such registration request.

     Section 3.04. In connection with any registration under Section 3.02 or
3.03 hereof, the Company covenants and agrees as follows:

     (a) The Company shall use its best efforts to have any post-effective
amendment or new registration statement declared effective at the earliest
possible time, and shall furnish such number of prospectuses as shall reasonably
be requested.

     (b) The Company shall pay all costs, fees and expenses in connection with
all post-effective amendments or new registration statements under Section 3.02
and Section 3.03(a) hereof including, without limitation, the Company's legal
and accounting fees, printing expenses, blue sky fees and expenses, except that
the Company shall not pay for any of the following costs, fees or expenses: (i)
underwriting discounts and commissions allocable to the Shares, (ii) state
transfer taxes, (iii) brokerage commissions and (iv) fees and expenses of
counsel and accountants for the holders of the Warrants and/or Shares. The
Company shall not be required to bear the incremental cost of any registration
arising from the exercise of the demand registration rights provided in Section
3.03(a) hereof which together with (i) the underwriting discounts, managing
underwriter's fee and expense reimbursement paid or incurred in connection with
the offering of securities pursuant to the Registration Statement and (ii) an
amount equal to 20% of the initial public offering price of the securities
offered pursuant to the Registration Statement multiplied by the Warrants
covered hereby, exceed 15% of the aggregate proceeds to be now and hereinafter
derived from the sale of the securities registered pursuant to the Registration
Statement.

     (c) The Company will take all necessary action which may be required in
qualifying or registering the Warrants and/or the Shares included in a
post-effective amendment or new registration statement for offering and sale
under the securities or blue sky laws of such states as are requested by the
holders of such Warrants and/or Shares, provided that the Company shall not be
obligated to execute or file any general consent to service or process or to
qualify as a foreign corporation to do business under the laws of any such
jurisdiction.

     (d) The Holder shall be entitled to pay the Purchase Price for the Shares
purchasable upon the exercise of this Warrant out of the proceeds of any
concurrent sale of the Shares purchasable upon its exercise.

     Section 3.05. (a) The Company shall indemnify and hold harmless each person
registering securities pursuant to this Article III ("Seller") and each
underwriter, within the meaning of the Act, who may purchase from or sell for
any Seller any of the Warrants or Shares from and against any and all losses,
claims, damages and liabilities caused by any untrue statement or alleged untrue
statement of a material fact contained in any post-effective amendment or new
registration statement or any supplemented prospectus under the Act included
therein required to be filed or furnished by reason of Section 3.04, above, or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages or liabilities are
caused by any such untrue statement or alleged untrue statement or omission or
alleged omission based upon information furnished or required to be furnished in
writing to the Company by such Seller or underwriter expressly for use therein,
which indemnification shall include each person, if any, who controls any such
Seller or underwriter within the meaning of such Act; provided, however, that
the indemnity agreement by the Company set forth in this Section 3.05 with
respect to any prospectus which shall be subsequently amended prior to the
written confirmation of the sale of any Warrants or Shares shall not inure to
the benefit of any Seller or underwriter from whom the person asserting any such
losses, claims, damages or liabilities purchased such Warrants or Shares which
are the subject thereof (or to the benefit of any person controlling such Seller
or underwriter), if such Seller or underwriter failed to send or give a copy of
the prospectus as amended to such person at or prior to the written confirmation
of the sale of such Warrants or Shares to such person and if such amended
prospectus did not contain any untrue statement or alleged untrue statement or
omission or alleged omission giving rise to such cause, claim, damage or
liability.

     (b) Each Seller which avails itself of the procedures under Article III
shall indemnify and secure the agreement of any underwriter which the Seller
employs to indemnify the Company, its directors, each officer signing the
related post-effective amendment or registration statement and each person, if
any, who controls the

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Company within the meaning of the Act from and against any and all losses,
claims, damages and liabilities caused by any untrue statement or alleged untrue
statement of a material fact contained in any post-effective amendment or
registration statement or any prospectus required to be filed or furnished by
reason of Section 3.04 or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, insofar as such losses, claims, damages or
liabilities are caused by any untrue statement or alleged untrue statement or
omission or alleged omission based upon information furnished in writing to the
Company by any such Seller or underwriter expressly for use therein.

     Section 3.06. The agreements in this Article III shall continue in effect
regardless of the exercise and surrender of this Warrant.

                                   ARTICLE IV
                                  OTHER MATTERS

     Section 4.01. The Company will from time to time promptly pay, subject
to the provisions of subparagraph (4) of Section 1.02 hereof, all taxes and
charges that may be imposed upon the Company in respect of the issuance or
delivery of this Warrant or the Shares purchasable upon the exercise of this
Warrant.

     Section 4.02. All the covenants and provisions of this Warrant by or for
the benefit of the Company shall bind and inure to the benefit of its successors
and assigns hereunder. The covenants and provisions of this Warrant shall be
waived or amended only by the written agreement of the Company and the Holder.

         Section 4.03. The validity, interpretation and performance of this
Warrant shall be governed by the laws of the State of Wisconsin.

     Section 4.04. Notices or demands pursuant to this Warrant to be given or
made by the Holder to or on the Company shall be sufficiently given or made if
sent by certified or registered mail, return receipt requested, postage prepaid,
and addressed, until another address is designated in writing by the Company, as
follows:

                               International Monetary Systems, Ltd.
                               16901 West Glendale Drive
                               New Berlin, Wisconsin  53151

     Notices to the Holder provided for in this Warrant shall be deemed given or
made by the Company if sent by certified or registered mail, return receipt
requested, postage prepaid, and addressed to the Holder at his last known
address as it shall appear on the books of the Company.

     Section 4.05. Nothing in this Warrant expressed and nothing that may be
implied from any of the provisions hereof is intended, or shall be construed, to
confer upon, or give to, any person or corporation other than the Company and
the Holder any right, remedy or claim under promise or agreement hereof, and all
covenants, conditions, stipulations, promises and agreements contained in this
Warrant shall be for the sole and exclusive benefit of the Company and its
successors and of the Holder, its successors and, if permitted, its assignees.

     Section 4.06. The Article headings herein are for convenience only and are
not part of this Warrant and shall not affect the interpretation thereof.

     IN WITNESS WHEREOF, this Warrant has been duly executed by the Company as
of the          day of        , 200          .
       --------        ------        --------
                                            INTERNATIONAL MONETARY SYSTEMS, LTD.

Attest:

                                   By:
-----------------------------         ------------------------------------------
                    Secretary                                         President

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                      INTERNATIONAL MONETARY SYSTEMS, LTD.

                                   ASSIGNMENT

               (To be executed by the registered holder to effect
                      a transfer of the foregoing Warrant)

         FOR VALUE RECEIVED, __________________________________________________
hereby sells, assigns and transfers unto_______________________________________
the within Warrant and all of the rights represented thereby, and does hereby
irrevocably constitute and appoint ___________________________________________,
Attorney, to transfer said Warrant on the books of the Company, with full power
of substitution.

Dated:

                                         _______________________________________
                                                   (Signature of Holder)

Signature guaranteed:

_____________________________

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                      INTERNATIONAL MONETARY SYSTEMS, LTD.

                                SUBSCRIPTION FORM

              (To be executed by the registered holder to exercise
     the right to purchase Common Stock evidenced by the foregoing Warrant)

International Monetary Systems, Ltd.
16901 West Glendale Drive
New Berlin, Wisconsin  53151

     The undersigned hereby irrevocably subscribes for the purchase of shares of
your Common Stock pursuant to and in accordance with the terms and conditions of
this Warrant, and herewith makes payment, covering such shares of Common Stock
which should be delivered to the undersigned at the address stated below, and,
if said number of shares shall not be all of the shares purchasable hereunder,
that a new Warrant of like tenor for the balance of the remaining shares
purchasable hereunder be delivered to the undersigned at the address stated
below.

     The undersigned agrees that: (1) the undersigned will not offer, sell,
transfer or otherwise dispose of any such shares of Common Stock unless either
(a) a registration statement, or post-effective amendment thereto, covering such
shares of Common Stock has been filed by Heartland Wisconsin Corp. ("Company")
with the Securities and Exchange Commission pursuant to the Securities Act of
1933, as amended ("Act"), and such sale, transfer or other disposition is
accompanied by a prospectus meeting the requirements of Section 10 of the Act
forming a part of such registration statement, or post-effective amendment
thereto, which is in effect under the Act covering the shares of Common Stock to
be so sold, transferred or otherwise disposed of, and such offer, sale transfer
or other disposition is registered or qualified under applicable state
securities laws, or (b) counsel to the Company satisfactory to the undersigned
has rendered an opinion in writing and addressed to the Company that such
proposed offer, sale, transfer or other disposition of the shares of Common
Stock is exempt from the provisions of Section 5 of the Act and applicable state
securities laws in view of the circumstances of such proposed offer, sale,
transfer or other disposition; (2) the Company may notify the transfer agent for
its Common Stock that the certificates for the Common Stock acquired by the
undersigned are not to be transferred unless the transfer agent receives advice
from the Company that one or both of the conditions referred to in (1)(a) and
(1)(b), above, have been satisfied; and (3) the Company may affix the legend set
forth in Section 3.01 of this Warrant to the certificates for shares of Common
Stock hereby subscribed for, if such legend is applicable.

Dated:

                                            ------------------------------------
                                                    (Signature of Holder)

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

                                            ------------------------------------
                                                      (Address of Holder)

Signature guaranteed:

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

                                        9<PAGE>   1
                          SECURITIES PURCHASE AGREEMENT

                  THIS SECURITIES PURCHASE AGREEMENT, dated as of October 13,
1999, between Innovative Gaming Corporation of America, a Minnesota corporation
with principal executive offices located at 4725 Aircenter Circle, Reno, Nevada
89502 (the "COMPANY"), and The Shaar Fund Ltd. ("BUYER").

                  WHEREAS, Buyer desires to purchase from the Company, and the
Company desires to issue and sell to Buyer, upon the terms and subject to the
conditions of this Agreement, (i) 500 shares of the Company's Series D 6%
Convertible Preferred Stock, par value $0.01 per share (collectively, the
"PREFERRED SHARES"), and (ii) Common Stock Purchase Warrants in the form
attached hereto as Exhibit A (collectively, the "WARRANTS");

                  WHEREAS, upon the terms and subject to the designations,
preferences and rights set forth in the Company's Certificate of Designation of
Series D 6% Convertible Preferred Stock in the form attached hereto as Exhibit B
(the "CERTIFICATE OF DESIGNATION"), the Preferred Shares are convertible into
shares of the Company's common stock, par value $0.01 per share (the "COMMON
STOCK");

                  WHEREAS, the Warrants, upon the terms and subject to the
conditions in the Warrants, will be exercisable for a period of five years;

                  NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein, the parties hereto, intending to be legally
bound, hereby agree as follows:

              I. PURCHASE AND SALE OF PREFERRED SHARES AND WARRANTS

                  A.      TRANSACTION. Buyer hereby agrees to purchase from the
Company, and the Company has offered and hereby agrees to issue and sell to
Buyer in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT"),
the Preferred Shares and the Warrants to purchase 50,000 shares of Common Stock.

                  B.      PURCHASE PRICE; FORM OF PAYMENT. The purchase price
for the Preferred Shares and the Warrants to be purchased by Buyer hereunder
shall be $500,000 (the "PURCHASE PRICE"). Buyer shall pay the Purchase Price by
wire transfer of immediately available funds to the escrow agent (the "ESCROW
AGENT") identified in those certain Escrow Instructions of even date herewith, a
copy of which is attached hereto as Exhibit C (the "ESCROW INSTRUCTIONS").
Simultaneously with the execution of this Agreement, the Company shall deliver
one or more duly authorized, issued and executed certificates (I/N/O Buyer or,
if the Company otherwise has been notified, I/N/O Buyer's nominee) evidencing
the Preferred Shares and the Warrants which Buyer is purchasing, to the Escrow
Agent or its designated depository. By executing and delivering this Agreement,
Buyer and the Company each hereby agrees to observe the terms and

<PAGE>   2

conditions of the Escrow Instructions, all of which are incorporated herein by
reference as if fully set forth herein.

                  C.      METHOD OF PAYMENT. Payment into escrow of the Purchase
Price shall be made by wire transfer of immediately available funds to:

                  The Bank of New York
                  48 Wall Street
                  New York, NY 10038
                  ABA No.:                021000018
                  For the Account of:     Cadwalader, Wickersham & Taft
                                          Trust Account IOLA Fund
                  Account No.:            0902061070

                  D.      APPROVAL. Buyer shall be given notice prior to any
purchase and sale of any shares of the Company's Series D 6% Convertible
Preferred Stock, notice of the names and addresses of the purchasers of any
shares of the Company's Series D 6% Convertible Preferred Stock.

                          II. BUYER'S REPRESENTATIONS AND WARRANTIES

                  Buyer represents and warrants to and covenants and agrees with
the Company as follows:

                  A.      Buyer is purchasing the Preferred Shares, the
Warrants, the Common Stock issuable upon exercise of the Warrants (the "WARRANT
SHARES"), the Common Stock, if any, issuable in payment of dividends on the
Preferred Shares (the "DIVIDEND SHARES"), and the Common Stock issuable upon
conversion or redemption of the Preferred Shares (the "CONVERSION SHARES" and,
collectively with the Preferred Shares, the Warrants, the Warrant Shares and the
Dividend Shares, the "SECURITIES") for its own account, for investment purposes
only and not with a view towards or in connection with the public sale or
distribution thereof in violation of the Securities Act.

                  B.      Buyer is (i) an "ACCREDITED INVESTOR" within the
meaning of Rule 501 of Regulation D under the Securities Act, (ii) experienced
in making investments of the kind contemplated by this Agreement, (iii) capable,
by reason of its business and financial experience, of evaluating the relative
merits and risks of an investment in the Securities, and (iv) able to afford the
loss of its investment in the Securities.

                  C.      Buyer understands that the Securities are being
offered and sold by the Company in reliance on an exemption from the
registration requirements of the Securities Act and equivalent state securities
and "blue sky" laws, and that the Company is relying upon the accuracy of, and
Buyer's compliance with, Buyer's representations, warranties and covenants set
forth in this Agreement to determine the availability of such exemption and the
eligibility of Buyer to purchase the Securities;

                                       2
<PAGE>   3

                  D.      Buyer understands that the Securities have not been
approved or disapproved by the Securities and Exchange Commission (the
"COMMISSION") or any state securities commission.

                  E.      This Agreement has been duly and validly authorized,
executed and delivered by Buyer and is a valid and binding agreement of Buyer
enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors' rights and remedies generally and except as
rights to indemnity and contribution may be limited by federal or state
securities laws or the public policy underlying such laws.

                  F.      Neither Buyer nor its affiliates nor any person acting
on its or their behalf has the intention of entering, or will enter into, prior
to the closing, any put option, short position or other similar instrument or
position with respect to the Common Stock and neither Buyer nor any of its
affiliates nor any person acting on its or their behalf will use at any time
shares of Common Stock acquired pursuant to this Agreement to settle any put
option, short position or other similar instrument or position that may have
been entered into prior to the execution of this Agreement.

                  G.      Buyer understands that there will be no market for the
Preferred Shares, that there are significant restrictions on the transferability
of the Preferred Shares and that, for these and other reasons, Buyer may not be
able to liquidate an investment in the Preferred Shares for an indefinite
period.

                  H.      Buyer acknowledges that the Company's Articles of
Incorporation provide that no person or entity may become the beneficial owner
of 5% or more of the Company's shares of capital stock of every series and class
unless such person or entity agrees to provide personal background and financial
information to gaming authorities, consent to a background investigation and
respond to questions from gaming authorities. Buyer further acknowledges that
the Company may, pursuant to the terms of its Articles of Incorporation and
Section 6.5 of the Certificate of Designation, repurchase shares held by any
person or entity whose status as a shareholder jeopardizes the approval,
continued existence or renewal by any gaming authority of a tribal, federal or
state license or franchise held by the Company or any of its Subsidiaries. The
foregoing restrictions will be contained in a legend on each certificate of
Common Stock.

                       III. THE COMPANY'S REPRESENTATIONS

                  The Company represents and warrants to Buyer that:

                  A.      CAPITALIZATION.

                          1.     The authorized capital stock of the Company
             consists solely of 100,000,000 shares of capital stock, of which
             (i) 7,501,648 shares of common stock are issued and outstanding on
             the date hereof (ii) 4,000 shares have been designated Series B
             Convertible Preferred Stock, par value $0.01 per share, of which
             825 shares are issued and outstanding on the date hereof and (iii)
             2,000 shares have been designated Series C Cumulative Convertible
             Preferred Stock, par value $0.01 per share, of which 1,400 shares

                                       3
<PAGE>   4

             are issued and outstanding on the date hereof. All of the issued
             and outstanding shares of Common Stock and preferred stock, if any,
             have been duly authorized and validly issued and are fully paid and
             nonassessable. As of the date hereof, the Company has outstanding
             stock options to purchase 978,000 shares of Common Stock and
             outstanding warrants to purchase 1,250,000 shares of Common Stock.

                          2.     The Conversion Shares, the Dividend Shares and
             the Warrant Shares have been duly and validly authorized and
             reserved for issuance by the Company, and when issued by the
             Company upon conversion of, or in lieu of cash dividends on, the
             Preferred Shares and on exercise of the Warrants will be duly and
             validly issued, fully paid and nonassessable and will not subject
             the holder thereof to personal liability by reason of being such
             holder.

                          3.     Except as disclosed on Schedule III.A.3.
             hereto, there are no preemptive, subscription, "call," right of
             first refusal or other similar rights to acquire any capital stock
             of the Company or any of its Subsidiaries or other voting
             securities of the Company that have been issued or granted to any
             person or any other obligations of the Company or any of its
             Subsidiaries to issue, grant, extend or enter into any security,
             option, warrant, "call," right, commitment, agreement, arrangement
             or undertaking with respect to any of their respective capital
             stock.

                          4.     Schedule III.A.4. hereto lists all the
             subsidiaries of the Company (the "SUBSIDIARIES"). Except as
             disclosed on Schedule III.A.4. hereto, the Company does not own or
             control, directly or indirectly, any interest in any other
             corporation, partnership, limited liability company, unincorporated
             business organization, association, trust or other business entity.

                          5.     The Company has delivered to Buyer complete and
             correct copies of the Certificate of Incorporation and the By-Laws
             of each of the Company and the Subsidiaries, in each case as
             amended to the date of this Agreement. Except as set forth on
             Schedule III.A.5. hereto, the Company has delivered to Buyer true
             and complete copies of all minutes of the Board of Directors of the
             Company (the "BOARD OF DIRECTORS") since October 1, 1996.

                  B.      ORGANIZATION; REPORTING COMPANY STATUS.

                          1.     Each of the Company and the Subsidiaries is a
             corporation duly organized, validly existing and in good standing
             under the laws of the state of jurisdiction in which it is
             incorporated and is duly qualified as a foreign corporation in all
             jurisdictions in which the failure to so qualify would reasonably
             be expected to have a material adverse effect on the business,
             properties, prospects, condition (financial or otherwise) or
             results of operations of the Company and the Subsidiaries taken as
             a whole or on the consummation of any of the transactions
             contemplated by this Agreement (a "MATERIAL ADVERSE EFFECT").

                          2.     The Company has registered the Common Stock
             pursuant to Section 12 of the Securities Exchange Act of 1934, as
             amended (the "EXCHANGE ACT").

                                       4
<PAGE>   5

             The Common Stock is listed and traded on the Nasdaq National Market
             ("NASDAQ") and the Company has not received any notice regarding,
             and to its knowledge there is no threat of, the termination or
             discontinuance of the eligibility of the Common Stock for such
             listing.

                  C.      AUTHORIZED SHARES. The Company (i) has duly and
validly authorized and reserved for issuance 1,500,000 shares of Common Stock,
sufficient in number for the conversion of and the payment of dividends (in lieu
of cash payments) on the 500 Preferred Shares in accordance with the Certificate
of Designation and the exercise of the Warrants, and (ii) at all times from and
after the date hereof shall have a sufficient number of shares of Common Stock
duly and validly authorized and reserved for issuance to satisfy the conversion
of Preferred Shares, the payment of dividends (in lieu of cash payments) on the
Preferred Shares and the exercise of the Warrants and (iii) at all times from
and after the date hereof shall have a sufficient number of shares of Common
Stock duly and validly authorized and reserved for issuance to satisfy the
conversion of Preferred Shares, the payment of dividends (in lieu of cash
payments) on the Preferred Shares and the exercise of the Warrants. The Company
understands and acknowledges the potentially dilutive effect to the Common Stock
of the issuance of the Preferred Shares, the Conversion Shares, the Dividend
Shares and the Warrant Shares upon the conversion of, and payment of dividends
on, the Preferred Shares and the exercise of the Warrants, respectively. The
Company further acknowledges that its obligation to issue Conversion Shares upon
conversion of the Preferred Shares and Warrant Shares upon exercise of the
Warrants in accordance with this Agreement, the Certificate of Designation and
the Warrants is absolute and unconditional regardless of the dilutive effect
that such issuance may have on the ownership interests of other stockholders of
the Company and notwithstanding the commencement of any case under 11 U.S.C. ss.
101 et seq. (the "BANKRUPTCY CODE"). In the event the Company is a debtor under
the Bankruptcy Code, the Company hereby waives to the fullest extent permitted
any rights to relief it may have under 11 U.S.C. ss. 362 in respect of the
conversion of the Preferred Shares and the exercise of the Warrants. The Company
agrees, without cost or expense to Buyer, to take or consent to any and all
action necessary to effectuate relief under 11 U.S.C. ss. 362. Schedule III.C.
hereto sets forth (a) all issuances and sales by the Company since December 31,
1998 of its capital stock, and other securities convertible, exercisable or
exchangeable for capital stock of the Company, except for shares issued upon
exercise of options granted pursuant to the Company's 1992 Stock Option and
Compensation Plan, the Company's 1998 Non-Executive Stock Option Plan or the
Company 1997 Director's Stock Option Plan, (b) the amount of such securities
sold, including any underlying shares of capital stock, (c) the purchaser
thereof, (d) the amount paid therefor, and (e) the material terms of all
outstanding capital stock of the Company (other than the Common Stock).

                  D.      AUTHORITY; VALIDITY AND ENFORCEABILITY. The Company
has the requisite corporate power and authority to file and perform its
obligations under the Certificate of Designation and to enter into the Documents
(as hereinafter defined), and to perform all of its obligations hereunder and
thereunder (including the issuance, sale and delivery to Buyer of the
Securities). The execution, delivery and performance by the Company of the
Documents, and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, the filing of the Certificate
of Designation with the Minnesota Secretary of State's office, the issuance of
the Preferred Shares, the Warrants and the issuance and reservation for issuance
of the Conversion Shares, the Dividend Shares and the Warrant

                                       5
<PAGE>   6

Shares), have been duly authorized by all necessary corporate action on the part
of the Company. Each of the Documents has been duly and validly executed and
delivered by the Company and the Certificate of Designation has been duly filed
with the Minnesota Secretary of State's office by the Company and each Document
constitutes a valid and binding obligation of the Company enforceable against it
in accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally and except as rights to indemnity and
contribution may be limited by federal or state securities laws or the public
policy underlying such laws. The Securities have been duly and validly
authorized for issuance by the Company and, when executed and delivered by the
Company, will be valid and binding obligations of the Company enforceable
against it in accordance with their terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally. For purposes of this
Agreement, the term "DOCUMENTS" means (i) this Agreement; (ii) the Registration
Rights Agreement of even date herewith between the Company and Buyer, a copy of
which is annexed hereto as Exhibit D (the "REGISTRATION RIGHTS AGREEMENT");
(iii) the Certificate of Designation; (iv) the Warrants; and (v) the Escrow
Instructions.

                  E.      VALIDITY OF ISSUANCE OF THE SECURITIES. As of the
Closing Date, the Preferred Shares and the Warrants, and the Conversion Shares,
the Dividend Shares and the Warrant Shares upon their issuance in accordance
with the Certificate of Designation, respectively, will be validly issued and
outstanding, fully paid and nonassessable, and not subject to any preemptive
rights, rights of first refusal, tag-along rights, drag-along rights or other
similar rights.

                  F.      NON-CONTRAVENTION. Except as set forth on Schedule
III.F. hereto, the execution and delivery by the Company of the Documents, the
issuance of the Securities, and the consummation by the Company of the other
transactions contemplated hereby and thereby, including, without limitation, the
filing of the Certificate of Designation with the Minnesota Secretary of State's
office, do not, and compliance with the provisions of this Agreement and other
Documents will not, conflict with, or result in any violation of, or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of termination, cancellation or acceleration of any obligation or loss of
a material benefit under, or result in the creation of any Lien (as defined
below) upon any of the properties or assets of the Company or any of its
Subsidiaries under, or result in the termination of, or require that any consent
be obtained or any notice be given with respect to, (i) the Articles of
Incorporation or By-Laws of the Company or the comparable charter or
organizational documents of any of its Subsidiaries, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, lease, contract or other agreement,
instrument or permit applicable to the Company or any of its Subsidiaries or
their respective properties or assets, or (iii) any Law (as defined below)
applicable to the Company or any of its Subsidiaries or their respective
properties or assets.

                  G.      APPROVALS. Except as set forth on Schedule III.G.
hereto, no authorization, approval or consent of any court or public or
governmental authority is required to be obtained by the Company for the
issuance and sale of the Preferred Shares or the Warrants (and the Conversion
Shares and Warrant Shares) to Buyer as contemplated by this Agreement, except
such authorizations, approvals and consents that have been obtained by the
Company prior to the date hereof.

                                       6
<PAGE>   7

                  H.      COMMISSION FILINGS. The Company has properly and
timely filed with the Commission all reports, proxy statements, forms and other
documents required to be filed with the Commission under the Securities Act and
the Exchange Act since October 1, 1996 (the "COMMISSION FILINGS"). As of their
respective dates, (i) the Commission Filings complied in all material respects
with the requirements of the Securities Act, or the Exchange Act, as the case
may be, and the rules and regulations of the Commission promulgated thereunder
applicable to such Commission Filings, and (ii) none of the Commission Filings
contained at the time of their filing 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 Commission Filings, as of the dates of such documents, were true and
complete in all material respects and complied with applicable accounting
requirements and the published rules and regulations of the Commission with
respect thereto, have been prepared in accordance with generally accepted
accounting principles in the United States ("GAAP") (except in the case of the
unaudited statements, as permitted by Form 10-Q under the Exchange Act) applied
on a consistent basis during the periods involved (except as may be indicated in
the notes thereto) and fairly presented the consolidated financial position of
the Company and its Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended (subject,
in the case of unaudited statements, to normal year-end audit adjustments that
in the aggregate are not material and to any other adjustment described
therein).

                  I.      ABSENCE OF CERTAIN CHANGES. Since the Balance Sheet
Date (as defined in Section III.M.), there has not occurred any change, event or
development in the business, financial condition, prospects or results of
operations of the Company or any of the Subsidiaries, except as disclosed in the
Commission Filings, there has not existed any condition having or reasonably
likely to have a Material Adverse Effect, and the Company and the Subsidiaries
have conducted there respective businesses only in the ordinary course.

                  J.      FULL DISCLOSURE. There is no fact known to the Company
(other than general economic or industry conditions known to the public
generally) that has not been fully disclosed in writing to Buyer that (i)
reasonably could be expected to have a Material Adverse Effect or (ii)
reasonably could be expected to materially and adversely affect the ability of
the Company to perform its obligations pursuant to the Documents.

                  K.      ABSENCE OF LITIGATION. Except as set forth on Schedule
III.K., there are (i) no suits, actions or proceedings pending or, to the
knowledge of the Company, threatened against the Company or any of its
Subsidiaries, (ii) no complaints, lawsuits, charges or other proceedings pending
or, to the knowledge of the Company, threatened in any forum by or on behalf of
any present or former employee of the Company or any of its Subsidiaries, any
applicant for employment or classes of the foregoing alleging breach of any
express or implied contract of employment, any applicable law governing
employment or the termination thereof or other discriminatory, wrongful or
tortuous conduct in connection with the employment relationship, and (iii) no
judgments, decrees, injunctions or orders of any governmental entity or
arbitrator outstanding against the Company or any Subsidiary.

                  L.      ABSENCE OF EVENTS OF DEFAULT. Except as set forth on
Schedule III.L., no "EVENT OF DEFAULT" (as defined in any agreement or
instrument to which the Company is a party)

                                       7
<PAGE>   8

and no event which, with notice, lapse of time or both, would constitute an
Event of Default (as so defined), has occurred and is continuing.

                  M.      FINANCIAL STATEMENTS; NO UNDISCLOSED LIABILITIES. The
Company has delivered to Buyer true and complete copies of the (i) audited
balance sheet of the Company and the Subsidiaries as at December 31, 1998, 1997
and 1996, respectively, and the related audited statements of income, changes in
stockholders' equity and cash flows for the three fiscal years ended December
31, 1998, including the related notes and schedules thereto and (ii) unaudited
balance sheets of the Company and the Subsidiaries and the statements of income,
changes in stockholders' equity and cash flows for each fiscal quarter ended
since December 31, 1998, including the related notes and schedules, all
certified by the chief financial officer of the Company (collectively, the
"FINANCIAL STATEMENTS"), and all management letters, if any, from the Company's
independent auditors relating to the dates and periods covered by the Financial
Statements. Each of the Financial Statements is complete and correct in all
material respects, has been prepared in accordance with GAAP (subject, in the
case of the interim Financial Statements, to normal year end adjustments and the
absence of footnotes), and fairly presents the financial position, results of
operations and cash flows of the Company as at the dates and for the periods
indicated. For purposes hereof, the audited balance sheet of the Company as at
December 31, 1998 is hereinafter referred to as the "BALANCE SHEET" and December
31, 1998 is hereinafter referred to as the "BALANCE SHEET DATE". The Company has
no indebtedness, obligations or liabilities of any kind (whether accrued,
absolute, contingent or otherwise, and whether due or to become due), which was
not fully reflected in, reserved against or otherwise described in the Balance
Sheet or the notes thereto or was not incurred in the ordinary course of
business consistent with the Company's past practices since the Balance Sheet
Date.

                  N.      COMPLIANCE WITH LAWS; PERMITS. Each of the Company and
the Subsidiaries has complied is in compliance with all laws, rules,
regulations, codes, ordinances and statutes (collectively, "LAWS") applicable to
it or to the conduct of its business. Each of the Company and the Subsidiaries
possesses all material permits, approvals, authorizations, licenses,
certificates and consents from all public and governmental authorities which are
necessary to conduct its business.

                  O.      RELATED PARTY TRANSACTIONS. Except as set forth on
Schedule III.O. hereto, neither the Company nor any of its officers, directors
or "AFFILIATES" (as such term is defined in Rule 12b-2 under the Exchange Act)
nor any family member of any officer, director or Affiliate of the Company has
borrowed any moneys from or has outstanding any indebtedness or other similar
obligations to the Company or any of the Subsidiaries. Except as set forth on
Schedule III.O. hereto, neither the Company nor any of its officers, directors
or Affiliates nor any family member of any officer, director or Affiliate of the
Company (i) owns any direct or indirect interest constituting more than a 1%
equity (or similar profit participation) interest in, or controls or is a
director, officer, partner, member or employee of, or consultant to or lender to
or borrower from, or has the right to participate in the profits of, any person
or entity which is (x) a competitor, supplier, customer, landlord, tenant,
creditor or debtor of the Company or any Subsidiary, (y) engaged in a business
related to the business of the Company or any Subsidiary, or (z) a participant
in any transaction to which the Company or any Subsidiary is a party or (ii) is
a party to any contract, agreement, commitment or other arrangement with the
Company or any Subsidiary.

                                       8
<PAGE>   9

                  P.      INSURANCE. Each of the Company and the Subsidiaries
maintains property and casualty, general liability, workers' compensation,
environmental hazard, personal injury and other similar types of insurance with
financially sound and reputable insurers that is adequate, consistent with
industry standards and the Company's historical claims experience. None of the
Company and the Subsidiaries has received notice from, and none of them has
knowledge of any threat by, any insurer (that has issued any insurance policy to
the Company or any Subsidiary) that such insurer intends to deny coverage under
or cancel, discontinue or not renew any insurance policy presently in force.

                  Q.      SECURITIES LAW MATTERS. Assuming the accuracy of the
representations and warranties of Buyer set forth in Section II hereof, the
offer and sale by the Company of the Securities is exempt from (i) the
registration and prospectus delivery requirements of the Securities Act and the
rules and regulations of the Commission thereunder and (ii) the registration
and/or qualification provisions of all applicable state securities and "blue
sky" laws. Other than pursuant to an effective registration statement under the
Securities Act, the Company has not issued, offered or sold the Preferred Shares
or any shares of Common Stock (including for this purpose any securities of the
same or a similar class as the Preferred Shares or Common Stock, or any
securities convertible into or exchangeable or exercisable for the Preferred
Shares or Common Stock or any such other securities) within the one-year next
preceding the date hereof, except as disclosed on Schedule III.Q. hereto or
otherwise previously disclosed in writing to Buyer, and the Company shall not
directly or indirectly take, and shall not permit any of its directors, officers
or Affiliates directly or indirectly to take, any action (including, without
limitation, any offering or sale to any person or entity of the Preferred Shares
or shares of Common Stock), so as to make unavailable the exemption from
Securities Act registration being relied upon by the Company for the offer and
sale to Buyer of the Preferred Shares and the Warrants (and the Conversion
Shares and the Warrant Shares) as contemplated by this Agreement. No form of
general solicitation or advertising has been used or authorized by the Company
or any of its officers, directors or Affiliates in connection with the offer or
sale of the Preferred Shares and the Warrants (and the Conversion Shares and the
Warrant Shares) as contemplated by this Agreement or any other agreement to
which the Company is a party.

                  R.      ENVIRONMENTAL MATTERS.

                  Except as set forth on Schedule III.R. hereto:

                          1.     The Company, the Subsidiaries and their
             respective operations are in compliance with all applicable
             Environmental Laws and all permits (including terms, conditions,
             and limitations therein) issued pursuant to Environmental Laws or
             otherwise;

                          2.     Each of the Company and each of the
             Subsidiaries has all permits, licenses, waivers, exceptions, and
             exemptions required under all applicable Environmental Laws
             necessary to operate its business;

                          3.     Each of the Company and each of the
             Subsidiaries is not the subject of any outstanding written order of
             or agreement with any governmental authority or person respecting
             (i) Environmental Laws or permits, (ii) Remedial Action or (iii)
             any Release or threatened Release of Hazardous Materials;

                                       9
<PAGE>   10

                          4.     Each of the Company and each of the
             Subsidiaries has not received any written communication alleging
             that it may be in violation of any Environmental Law or any permit
             issued pursuant to any Environmental Law, or may have any liability
             under any Environmental Law;

                          5.     Each of the Company and each of the
             Subsidiaries does not have any liability, contingent or otherwise,
             in connection with any presence, treatment, storage, disposal or
             Release of any Hazardous Materials whether on property owned or
             operated by the Company and the Subsidiaries or property of third
             parties, and the Company and the Subsidiaries have not transported,
             or arranged for transportation of, any Hazardous Materials for
             treatment or disposal of any property;

                          6.     There are no investigations of the business,
             operations, or currently or previously owned, operated or leased
             property of the Company and the Subsidiaries pending or threatened
             which could lead to the imposition of any case or liability
             pursuant to any Environmental Law;

                          7.     There is not located at any of the properties
             owned or operated by the Company and the Subsidiaries any (A)
             underground storage tanks, (B) asbestos-containing material or (C)
             equipment containing polychlorinated biphenyls; and,

                          8.     Each of the Company and each of the
             Subsidiaries has provided to Buyer all environmentally related
             assessments, audits, studies, reports, analyses, and results of
             investigations that have been performed with respect to the
             currently or previously owned, leased or operated properties or
             activities of the Company and the Subsidiaries.

                          9.     There are no liens arising under or pursuant to
             any Environmental Law on any real property owned, operated, or
             leased by the Company and the Subsidiaries, and no action of any
             governmental authority has been taken or, to the knowledge of the
             Company, is in process of being taken which could subject any of
             such properties to such liens, and the Company and the Subsidiaries
             have not and is not expected to be required to place any notice or
             restriction relating to the presence of Hazardous Material at any
             real property owned, operated, or leased by it in any deed to such
             property.

                          10.    Neither the Company nor any of the Subsidiaries
             does own, operate, or lease any hazardous waste generation,
             treatment, storage, or disposal facility, as such terms are used
             pursuant to the RCRA and related or analogous state, local, or
             foreign law. None of the properties owned, operated, or leased by
             the Company, the Subsidiaries or any predecessor thereof are now,
             or were in the past, used in any part as a dump, landfill, or
             disposal site, and neither Company, the Subsidiaries nor any
             predecessor thereof have filled any wetlands.

                          11.    The purchase that is the subject of this
             Agreement will not require any governmental approvals under
             Environmental Laws, including those that are triggered by sales or
             transfers of businesses or real property, including, as examples
             and

                                       10
<PAGE>   11

             without limitation, the New Jersey Industrial Site Recovery Act,
             N.J. Stat. 13:1K-7 et seq., and the Connecticut Transfer of
             Establishments Act, Conn. Gen. Stat. ss. 22a-134 et seq.

                          12.    There is no currently existing requirement or
             requirement to be imposed in the future by any Environmental Law or
             Environmental Permit which could result in the incurrence of a cost
             that could be reasonably expected to have a Material Adverse
             Effect.

                          13.    Each of the Company and each of the
             Subsidiaries has disclosed to Buyer all other acts or conditions
             that could result in an costs or liabilities under Environmental
             Laws.

                  For purposes of this Section III.R.:

                  "ENVIRONMENTAL LAW" means any foreign, federal, state or local
statute, regulation, ordinance, or common law as now or hereafter in effect in
any way relating to the protection of human health, safety or welfare, or the
environment including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act, the Hazardous Materials Transportation
Act, the Resource Conservation and Recovery Act ("RCRA"), the Clean Water Act,
the Clean Air Act, the Toxic Substances Control Act, the Federal Insecticide,
Fungicide, and Rodenticide Act, and the Occupational Safety and Health Act, and
the regulations promulgated pursuant thereto.

                  "HAZARDOUS MATERIAL" means any substance that is listed,
classified or regulated pursuant to any Environmental Law, including petroleum,
gasoline, and any other petroleum product, by-product, fraction or derivative,
asbestos or asbestos-containing material, lead-containing paint, water, or
plumbing, polychlorinated biphenyls, radioactive materials and radon;

                  "RELEASE" means any placement, release, spill, filtration,
emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal,
migration, or leaching to, through, or under the indoor or outdoor environment,
or into, through, under, or out of any property;

                  "REMEDIAL ACTION" means all actions to (x) clean up, remove,
remediate, treat or in any other way address any Hazardous Material; (y) prevent
or contain the Release of any Hazardous Material; or (z) perform studies and
investigations or post-remedial monitoring and care in relation to (x) and (y)
above.

                  S.   LABOR MATTERS. Neither the Company nor any of the
Subsidiaries is party to any labor or collective bargaining agreement and there
are no labor or collective bargaining agreements which pertain to employees of
the Company. No employees of the Company or the Subsidiaries are represented by
any labor organization and none of such employees has made a pending demand for
recognition, and there are no representation proceedings or petitions seeking a
representation proceeding presently pending or, to the Company's knowledge,
threatened to be brought or filed, with the National Labor Relations Board or
other labor relations tribunal. There is no organizing activity involving the
Company or the Subsidiaries pending or to the Company's knowledge, threatened by
any labor organization or group of employees of the Company or the

                                       11
<PAGE>   12

Subsidiaries. There are no (i) strikes, work stoppages, slowdowns, lockouts or
arbitrations or (ii) material grievances or other labor disputes pending or, to
the knowledge of the Company, threatened against or involving the Company or the
Subsidiaries. There are no unfair labor practice charges, grievances or
complaints pending or, to the knowledge of the Company, threatened by or on
behalf of any employee or group of employees of the Company or the Subsidiaries.

                  T.      ERISA MATTERS. All Plans maintained by the Company,
its Subsidiaries and ERISA Affiliates are listed in Schedule III.T. and copies
of all documentation relating to such Plans (including, but not limited to,
copies of written Plans, written descriptions of oral Plans, summary plan
descriptions, trust agreements, the three most recent annual returns, employee
communications and IRS determination letters) have been delivered or made
available for review by the Buyer. Each Plan has at all times been maintained
and administered in all material respects in accordance with its terms and the
requirements of applicable law, including ERISA and the Code, and each Plan
intended to qualify under Section 401(a) of the Code has at all times since its
adoption been so qualified, and each trust which forms a part of any such plan
has at all times since its adoption been tax-exempt under Section 501(a) of the
Code. The Company, its Subsidiaries and its ERISA Affiliates are in compliance
in all material respects with all provisions of ERISA applicable to it. No
Reportable Event has occurred, been waived or exists as to which the Company,
its Subsidiaries or any ERISA Affiliate was required to file a report with the
PBGC, and the present value of all liabilities under each Pension Plan (based on
those assumptions used to fund such Plans) listed in Schedule III.T. did not, as
of the most recent annual valuation date applicable thereto, exceed the value of
the assets of such Pension Plan. None of the Company, its Subsidiaries or ERISA
Affiliates has incurred, or reasonably expects to incur, any Withdrawal
Liability with respect to any Multi-employer Plan that could result in a
Material Adverse Effect. None of the Company, its Subsidiaries or ERISA
Affiliates has received any notification that any Multi-employer Plan is in
reorganization or has been terminated within the meaning of Title IV of ERISA,
and no Multi-employer Plan is reasonably expected to be in reorganization or
termination where such reorganization or termination has resulted or could
reasonably be expected to result in increases to the contributions required to
be made to such Plan or otherwise. No direct, contingent or secondary liability
has been incurred or is expected to be incurred by the Company or its
Subsidiaries under Title IV of ERISA to any party with respect to any Plan, or
with respect to any other Plan presently or heretofore maintained or contributed
to by any ERISA Affiliate. Neither the Company, its Subsidiaries, or ERISA
Affiliate has incurred any liability for any tax imposed under section 4971
through 4980B of the Code or civil liability under section 502(i) or (l) of
ERISA. No suit, action or other litigation (excluding claims for benefits
incurred in the ordinary course of plan activities and any other claim which
could reasonably be expected to result in a material liability or expense to the
Company, its Subsidiaries or ERISA Affiliates) has been brought or, to the
knowledge of the Company, threatened against or with respect to any Plan and
there are no facts or circumstances known to the Company, its Subsidiaries or
ERISA Affiliates that could reasonably be expected to give rise to any such
suit, action or other litigation. All contributions to Plans that were required
to be made under such Plans have been made, and all benefits accrued under any
unfunded Plan have been paid, accrued or otherwise adequately reserved in
accordance with generally accepted accounting principles, all of which accruals
under unfunded Plans are as disclosed in Schedule III.T., and the Company, its
Subsidiaries and ERISA Affiliates have each performed all material obligations
required to be performed under all Plans. The

                                       12
<PAGE>   13

execution, delivery and performance of this Agreement, the Note, the Warrants
and the Registration Rights Agreement and the consummation of the transactions
contemplated hereby and thereby (including, without limitation, the offer, issue
and sale by the Company and its Subsidiaries, and the purchase by the Buyer, of
the Preferred Shares, the Conversion Shares, the Warrants, the Warrant Shares
and Dividend Shares) will not involve any "prohibited transaction" within the
meaning of ERISA or the Code with respect to any Plan.

                  For purposes of this Section III.T.:

                  "ERISA" means the Employee Retirement Income Security Act of
1974, or any successor statute, together with the regulations thereunder, as the
same may be amended from time to time.

                  "ERISA AFFILIATE" means any trade or business (whether or not
incorporated) that was, is or hereafter may become, a member of a group of which
the Company is a member and which is treated as a single employer under Section
414 of the Internal Revenue Code of 1986, as amended (the "INTERNAL REVENUE
CODE").

                  "MULTI-EMPLOYER PLAN" means a multi-employer plan as defined
in Section 4001(a)(3) of ERISA to which the Company or any ERISA Affiliate
(other than one considered an ERISA Affiliate only pursuant to subsection (m) or
(o) of Section 414 of the Internal Revenue Code) is making or accruing an
obligation to make contributions, or has within any of the preceding six plan
years made or accrued an obligation to make contributions.

                  "PBGC" means the Pension Benefit Guaranty Corporation referred
to and defined in ERISA or any successor thereto.

                  "PLAN" means any bonus, incentive compensation, deferred
compensation, pension, profit sharing, retirement, stock purchase, stock option,
stock ownership, stock appreciation rights, phantom stock, leave of absence,
layoff, vacation, day or dependent care, legal services, cafeteria, life,
health, accident, disability, workmen's compensation or other insurance,
severance, separation or other employee benefit plan, practice, policy or
arrangement of any kind, whether written or oral, or whether for the benefit of
a single individual or more than one individual including, but not limited to,
any "employee benefit plan" within the meaning of Section 3(3) of ERISA,
including any Pension Plan.

                  "PENSION PLAN" means any pension plan (other than a
Multi-employer Plan) subject to the provision of Title IV of ERISA or Section
412 of the Internal Revenue Code that is maintained for employees of the
Company, its Subsidiaries, or any ERISA Affiliate.

                  "REPORTABLE EVENT" means any reportable event as defined in
Section 4043(b) of ERISA or the regulations issued thereunder with respect to a
Plan.

                  "WITHDRAWAL LIABILITY" means liability to a Multi-employer
Plan as a result of a complete or partial withdrawal from such Multi-employer
Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.

                                       13
<PAGE>   14

                  U.      TAX MATTERS.

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

                          2.     No claim has been made by a taxing authority in
             a jurisdiction where the Company does not file tax returns that
             such corporation is or may be subject to taxation by that
             jurisdiction. There are no foreign, federal, state or local tax
             audits or administrative or judicial proceedings pending or being
             conducted with respect to the Company; no information related to
             Tax matters has been requested by any foreign, federal, state or
             local taxing authority; and, except as disclosed above, no written
             notice indicating an intent to open an audit or other review has
             been received by the Company from any foreign, federal, state or
             local taxing authority. There are no material unresolved questions
             or claims concerning the Company's Tax liability. The Company (A)
             has not executed or entered into a closing agreement pursuant to
             Section 7121 of the Internal Revenue Code or any predecessor
             provision thereof or any similar provision of state, local or
             foreign law; or (B) has not agreed to or is required to make any
             adjustments pursuant to Section 481(a) of the Internal Revenue Code
             or any similar provision of state, local or foreign law by reason
             of a change in accounting method initiated by the Company or any of
             its subsidiaries or has any knowledge that the IRS has proposed any
             such adjustment or change in accounting method, or has any
             application pending with any taxing authority requesting permission
             for any changes in accounting methods that relate to the business
             or operations of the Company. The Company has not been a United
             States real property holding corporation within the meaning of
             Section 897(c)(2) of the Internal Revenue Code during the
             applicable period specified in Section 897(c)(1)(A)(ii) of the
             Internal Revenue Code.

                          3.     The Company has not made an election under
             Section 341(f) of the Internal Revenue Code. The Company is not
             liable for the Taxes of another person that is not a subsidiary of
             the Company under (A) Treas. Reg. Section 1.1502-6 (or comparable
             provisions of state, local or foreign law), (B) as a transferee or
             successor, (C) by contract or indemnity or (D) otherwise. The
             Company is not a party to any tax sharing agreement. The Company
             has not made any payments, is obligated to make payments or is a
             party to an agreement that could obligate it to make any payments
             that would not be deductible under Section 280G of the Internal
             Revenue Code.

                  For purposes of this Section III.U.:

                                       14
<PAGE>   15

                  "IRS" means the United States Internal Revenue Service.

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

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

                  V.      PROPERTY. Except as set forth on Schedule III.V., each
of the Company and each of the Subsidiaries has good and marketable title to all
of its assets and properties material to the conduct of its business, free and
clear of any liens, pledges, security interests, claims, encumbrances or other
restrictions of any kind (collectively, "LIENS"). With respect to any assets or
properties it leases, each of the Company and its Subsidiaries holds a valid and
subsisting leasehold interest therein, free and clear of any Liens, is in
compliance, in all material respects, with the terms of the applicable lease,
and enjoys peaceful and undisturbed possession under such lease. All of the
assets and properties of the Company and its Subsidiaries that are material to
the conduct of business as presently conducted or as proposed to be conducted by
it are in good operating condition and repair. Except as reserved for, the
inventory of the Company and its Subsidiaries is in good and marketable
condition, does not include any material quantity of items which are obsolete,
damaged or slow moving, and is salable (or may be leased) in the normal course
of business as currently conducted by it.

                  W.      INTELLECTUAL PROPERTY. The Company owns or possesses
adequate and enforceable rights to use all patents, patent applications,
trademarks, trademark applications, trade names, service marks, copyrights,
copyright applications, licenses, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures) and other similar rights and proprietary knowledge (collectively,
"INTANGIBLES") necessary for the conduct of its business as now being conducted
including, but not limited to, those described on Schedule III.W. hereto. Except
as set forth on Schedule III.W, the Company has all right, title and interest in
all of the Intangibles, free and clear of any and all Liens. The Company is not
infringing upon or in conflict with any right of any other person with respect
to any Intangibles. Except as disclosed on Schedule III.W. hereto, (i) no claims
have been asserted by any individual, partnership, corporation, unincorporated
organization or association, limited liability company, trust or other entity
(collectively, a "PERSON") contesting the validity, enforceability, use or
ownership of any Intangibles, and the Company has no knowledge of any basis for
such claim, and (ii) neither the Company nor the Subsidiaries has any knowledge
of infringement or misappropriation of the Intangibles by any third party.

                  X.      CONTRACTS. All contracts, agreements, notes,
instruments, franchises, leases, licenses, commitments, arrangements or
understanding, written or oral (collectively, "CONTRACTS") which are material to
the business and operations of the Company and the Subsidiaries are in full
force and effect and constitute legal, valid and binding obligations of the

                                       15
<PAGE>   16

Company and the Subsidiaries and, to the best knowledge of the Company, the
other parties thereto; the Company and the Subsidiaries and, to the best
knowledge of the Company, each other party thereto, have performed in all
material respects all obligations required to be performed by them under the
Contracts, and no material violation or default exists in respect thereof, nor
any event that with notice or lapse of time, or both, would constitute a default
thereof, on the part of the Company and the Subsidiaries or, to the best
knowledge of the Company, any other party thereto; none of the Contracts is
currently being renegotiated; and the validity, effectiveness and continuation
of all Contracts will not be materially adversely affected by the transactions
contemplated by this Agreement.

                  Y.      REGISTRATION RIGHTS. Except as set forth on Schedule
III.Y., no Person has, and as of the Closing (as defined below), no Person shall
have, demand, "piggy-back" or other rights to cause the Company to file any
registration statement under the Securities Act, relating to any of its
securities or to participate in any such registration statement.

                  Z.      DIVIDENDS. The timely payment of dividends on the
Preferred Shares as specified in the Certificate of Designation is not
prohibited by the Certificate of Incorporation or By-Laws of the Company or any
agreement, contract, documents or other undertaking to which the Company or any
of the Subsidiaries is a party.

                  AA.     INVESTMENT COMPANY ACT. Neither the Company nor any of
the Subsidiaries is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended (the "INVESTMENT COMPANY ACT"), nor is the
Company nor any of the Subsidiaries directly or indirectly controlled by or
acting on behalf of any Person which is an "investment company" within the
meaning of the Investment Company Act.

                  BB.     BUSINESS PLAN. Any business information of the Company
previously submitted to Buyer in any form, including the projections contained
therein, was prepared by the senior management of the Company in good faith and
is based on assumptions that the Company believes are reasonable. The Company is
not aware of any fact or condition that could reasonably be expected to result
in the Company not achieving the results described in such business plan.

                  CC.     YEAR 2000 COMPLIANCE. The Company is currently
reviewing its products, business and operations that could be adversely affected
by the risk that computer applications used by the Company and the Subsidiaries
may be unable to recognize and properly perform date-sensitive functions
involving dates prior to and after December 31, 1999 (the "YEAR 2000 PROBLEM").
The Company believes its internal information and business systems will be able
to perform properly date-sensitive functions for all dates before and after
January 1, 2000. In addition, the Company is currently surveying those vendors,
suppliers and other third parties (collectively, the "OUTSIDE PARTIES") with
which the Company and the Subsidiaries do business and whose failure to
adequately address the Year 2000 Problem could reasonably be expected to
adversely affect the business and operations of the Company and the
Subsidiaries. Based upon the aforementioned internal review and surveys of the
Outside Parties as of the date of this Agreement, the Year 2000 Problem has not
resulted in, and is not reasonably expected to have, a Material Adverse Effect.

                                       16
<PAGE>   17

                  DD.     INTERNAL CONTROLS AND PROCEDURES. The Company
maintains accurate books and records and internal accounting controls that
provide reasonable assurance that (i) all transactions to which the Company or
each of the Subsidiaries is a party or by which its properties are bound are
executed with management's authorization; (ii) the reported accountability of
the Company's and the Subsidiaries' assets is compared with existing assets at
regular intervals; (iii) access to the Company's and the Subsidiaries' assets is
permitted only in accordance with management's authorization; and (iv) all
transactions to which each of the Company and the Subsidiaries is a party or by
which its properties are bound are recorded as necessary to permit preparation
of the financial statements of the Company in accordance with GAAP.

                  EE.     PAYMENTS AND CONTRIBUTIONS. Neither the Company nor
any of its Subsidiaries nor any of their respective directors, officers or, to
their respective knowledge, other employees has (i) used any company funds for
any unlawful contribution, endorsement, gift, entertainment or other unlawful
expense relating to political activity; (ii) made any direct or indirect
unlawful payment of company funds to any foreign or domestic government official
or employee, (iii) violated or is in violation of any provision of the Foreign
Corrupt Practices Act of 1977, as amended; or (iv) made any bribe, rebate,
payoff, influence payment, kickback or other similar payment to any person with
respect to the company matters.

                  FF.     NO MISREPRESENTATION. No representation or warranty of
the Company contained in this Agreement, any schedule, annex or exhibit hereto
or any agreement, instrument or certificate furnished by the Company to Buyer
pursuant to this Agreement, contains any untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, not misleading.

                  GG.     FINDER'S FEE. There are no finder's fee, brokerage
commission or like payment in connection with the transactions contemplated by
this Agreement for which Buyer is liable or responsible.

                    IV. CERTAIN COVENANTS AND ACKNOWLEDGMENTS

                  A.      RESTRICTIVE LEGEND. Buyer acknowledges and agrees
that, upon issuance pursuant to this Agreement, the Securities (including
without limitation any Dividend Shares, Conversion Shares or Warrant Shares)
shall have endorsed thereon a legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the Preferred Shares, the
Warrant Shares and the Conversion Shares until such legend has been removed):

         "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
         1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
         STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE
         REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE
         SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN
         EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT
         TO AN AVAILABLE EXEMPTION

                                       17
<PAGE>   18

         FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER
         LAWS."

                  B.      FILINGS. The Company shall make all necessary
Commission Filings and "blue sky" filings required to be made by the Company in
connection with the sale of the Securities to Buyer as required by all
applicable Laws, and shall provide a copy thereof to Buyer promptly after such
filing.

                  C.      REPORTING STATUS. So long as Buyer beneficially owns
any of the Securities, the Company shall timely file all reports required to be
filed by it with the Commission pursuant to Section 13 or 15(d) of the Exchange
Act.

                  D.      USE OF PROCEEDS. The Company shall use the net
proceeds from the sale of the Securities (excluding amounts paid by the Company
for Buyer's out-of-pocket costs and expenses, whether or not accounted for or
incurred, in connection with the transactions contemplated by this Agreement
(including the fees and disbursements of Buyer's legal counsel) and excluding
finder's fees in connection with such sale) solely for general corporate and
working capital purposes.

                  E.      LISTING. Except to the extent the Company lists its
Common Stock on the New York Stock Exchange, the Company shall use its best
efforts to maintain its listing of the Common Stock on Nasdaq. If the Common
Stock is delisted from Nasdaq, the Company will use its best efforts to list the
Common Stock on the most liquid national securities exchange or quotation system
that the Common Stock is qualified to be listed on.

                  F.      RESERVED CONVERSION SHARES. The Company at all times
from and after the date hereof shall have such number of shares of Common Stock
duly and validly authorized and reserved for issuance as shall be sufficient for
the conversion, in full of, and the payment of dividends on, the 500 Preferred
Shares and the exercise in full of the Warrants.

                  G.      INFORMATION. Each of the parties hereto acknowledges
and agrees that Buyer shall not be provided with, nor be given access to, any
material non-public information relating to the Company and the Subsidiaries.

                  H.      EXEMPTION FROM INVESTMENT COMPANY ACT. The Company
shall conduct its business, and shall cause the Subsidiaries to conduct their
businesses, in a manner so that neither the Company nor any Subsidiary shall
become an "investment company" within the meaning of the Investment Company Act.

                  I.      ACCOUNTING AND RESERVES. The Company shall maintain a
standard and uniform system of accounting and shall keep proper books and
records and accounts in which full, true and correct entries shall be made of
its transactions, all in accordance with GAAP applied on a consistent basis
through all periods, and shall set aside on such books for each fiscal year all
such proper reserves for depreciation, obsolescence, amortization, bad debts and
other purposes in connection with its operations as are required by such
principles so applied.

                  J.      TRANSACTIONS WITH AFFILIATES. Neither the Company nor
any of its Subsidiaries shall, directly or indirectly, enter into any
transaction or agreement with any

                                       18
<PAGE>   19

stockholder, officer director or Affiliate of the Company or family member of
any officer, director or Affiliate of the Company, unless the transaction or
agreement is (i) reviewed and approved by a majority of Disinterested Directors
(as defined below) and (ii) on terms no less favorable to the Company or the
applicable Subsidiary than those obtainable from a non-affiliated person. A
"DISINTERESTED DIRECTOR" shall mean an individual who is not and who has not
been an officer or employee of the Company and who is not a member of the family
of, controlled by or under common control with, any such officer or employee.

                  K.      CERTAIN RESTRICTIONS. So long as any Preferred Shares
are outstanding, no dividends shall be declared or paid or set apart for payment
or other distribution declared or made upon Junior Securities (as defined in the
Certificate of Designation), nor shall any Junior Securities be redeemed,
purchased or otherwise acquired (other than a redemption, purchase or other
acquisition of shares of Common Stock made for purposes of an employee incentive
or benefit plan (including a stock option plan) of the Company or any
Subsidiary, for any consideration (or any moneys be paid to or made available
for a sinking fund for the redemption of any shares of any such stock) by the
Company, directly or indirectly.

                         V. TRANSFER AGENT INSTRUCTIONS

                  A.      The Company undertakes and agrees that no instruction
other than the instructions referred to in this Section V and customary stop
transfer instructions prior to the registration and sale of the Common Stock
pursuant to an effective Securities Act registration statement will be given to
its transfer agent for the Common Stock and that the Conversion Shares, the
Dividend Shares and the Warrant Shares otherwise shall be freely transferable on
the books and records of the Company as and to the extent provided in this
Agreement, the Registration Rights Agreement and applicable law. Nothing
contained in this Section V.A. shall affect in any way Buyer's obligations and
agreement to comply with all applicable securities laws upon resale of such
Common Stock. If, at any time, Buyer provides the Company with an opinion of
counsel reasonably satisfactory to the Company that registration of the resale
by Buyer of such Common Stock is not required under the Securities Act and that
the removal of restrictive legends is permitted under applicable law, the
Company shall permit the transfer of such Common Stock and, promptly instruct
the Company's transfer agent to issue one or more certificates for Common Stock
without any restrictive legends endorsed thereon.

                  B.      Buyer shall have the right to convert the Preferred
Shares by telecopying an executed and completed Notice of Conversion (as defined
in the Certificate of Designation) to the Company. Each date on which a Notice
of Conversion is telecopied to and received by the Company in accordance with
the provisions hereof shall be deemed a Conversion Date (as defined in the
Certificate of Designation). The Company shall transmit the certificates
evidencing the shares of Common Stock issuable upon conversion of any Preferred
Shares (together with certificates evidencing any Preferred Shares not being so
converted) to Buyer via express courier, by electronic transfer or otherwise,
within five business days after receipt by the Company of the Notice of
Conversion (the "DELIVERY DATE"). Within 15 days after Buyer delivers the Notice
of Conversion to the Company, Buyer shall deliver to the Company the Preferred
Shares being converted.

                                       19
<PAGE>   20

                  C.      Buyer shall have the right to purchase shares of
Common Stock pursuant to exercise of the Warrants in accordance with its
applicable terms of the Warrants. The last date that the Company may deliver
shares of Common Stock issuable upon any exercise of Warrants is referred to
herein as the "WARRANT DELIVERY DATE."

                  D.      The Company understands that a delay in the issuance
of the shares of Common Stock issuable in lieu of cash dividends on the
Preferred Shares, upon the conversion of the Preferred Shares or exercise of the
Warrants beyond the applicable Dividend Payment Due Date (as defined in the
Certificate of Designation), Delivery Date or Warrant Delivery Date could result
in economic loss to Buyer. As compensation to Buyer for such loss (and not as a
penalty), the Company agrees to pay to Buyer for late issuance of Common Stock
issuable in lieu of cash dividends on the Preferred Shares, upon conversion of
the Preferred Shares or exercise of the Warrants in accordance with the
following schedule (where "NO. BUSINESS DAYS" is defined as the number of
business days beyond five business days from the Dividend Payment Due Date, the
Delivery Date or the Warrant Delivery Date, as applicable):

<TABLE>
<CAPTION>
                               COMPENSATION FOR EACH 10 SHARES
                              OF PREFERRED SHARES NOT CONVERTED
                               TIMELY OR 500 SHARES OF COMMON
                                STOCK ISSUABLE IN PAYMENT OF
                                DIVIDENDS OR UPON EXERCISE OF
     NO. BUSINESS DAYS           WARRANTS NOT ISSUED TIMELY
-------------------------    -----------------------------------
<S>                          <C>
           1                               $   25
           2                                   50
           3                                   75
           4                                  100
           5                                  125
           6                                  150
           7                                  175
           8                                  200
           9                                  225
           10                                 250
       more than 10
                                              $250 + $100 for
                            each Business Day Late beyond 10 days
</TABLE>

The Company shall pay to Buyer the compensation described above by the transfer
of immediately available funds upon Buyer's demand. Nothing herein shall limit
Buyer's right to pursue actual damages for the Company's failure to issue and
deliver Common Stock to Buyer, and in addition to any other remedies which may
be available to Buyer, in the event the Company fails for any reason to effect
delivery of such shares of Common Stock within five business days after the
relevant Dividend Payment Due Date, the Delivery Date or the Warrant Delivery
Date, as applicable, Buyer shall be entitled to rescind the relevant Notice of
Conversion or exercise of Warrants by delivering a notice to such effect to the
Company whereupon the Company and Buyer shall each be restored to their
respective original positions immediately prior to delivery of such Notice of
Conversion on delivery.

                                       20
<PAGE>   21

                           VI. DELIVERY INSTRUCTIONS

                  The Securities shall be delivered by the Company to the Escrow
Agent pursuant to Section I.B. hereof on a "delivery-against-payment basis" at
the Closing.

                               VII. CLOSING DATE

                  The date and time (the "CLOSING DATE") of the issuance and
sale of the Preferred Shares and the Warrants shall be the date hereof or such
other date and time as shall be mutually agreed upon in writing. The issuance
and sale of the Securities shall occur on the Closing Date at the offices of the
Escrow Agent. Notwithstanding anything to the contrary contained herein, the
Escrow Agent shall not be authorized to release to the Company the Purchase
Price and to Buyer the certificate(s) (I/N/O Buyer or I/N/O Buyer's nominee)
evidencing the Securities being purchased by Buyer unless the conditions set
forth in Section VIII.C. and IX.G. hereof have been satisfied.

                  VIII. CONDITIONS TO THE COMPANY'S OBLIGATIONS

                  Buyer understands that the Company's obligation to sell the
Securities on the Closing Date to Buyer pursuant to this Agreement is
conditioned upon:

                  A.      Delivery by Buyer to the Escrow Agent of the Purchase
Price;

                  B.      The accuracy in all material respects on the Closing
Date of the representations and warranties of Buyer contained in this Agreement
as if made on the Closing Date (except for representations and warranties which,
by their express terms, speak as of and relate to a specified date, in which
case such accuracy shall be measured as of such specified date) and the
performance by Buyer in all material respects on or before the Closing Date of
all covenants and agreements of Buyer required to be performed by it pursuant to
this Agreement on or before the Closing Date; and

                  C.      There shall not be in effect any Law or order, ruling,
judgment or writ of any court or public or governmental authority restraining,
enjoining or otherwise prohibiting any of the transactions contemplated by this
Agreement.

                      IX. CONDITIONS TO BUYER'S OBLIGATIONS

                  The Company understands that Buyer's obligation to purchase
the Securities on the Closing Date pursuant to this Agreement is conditioned
upon:

                  A.      Delivery by the Company to Buyer of evidence that the
Certificate of Designation has been filed and is effective.

                  B.      Delivery by the Company to the Escrow Agent of one or
more certificates (I/N/O Buyer or I/N/O Buyer's nominee) evidencing the
Securities to be purchased by Buyer pursuant to this Agreement;

                                       21
<PAGE>   22

                  C.      The accuracy in all material respects on the Closing
Date of the representations and warranties of the Company contained in this
Agreement as if made on the Closing Date (except for representations and
warranties which, by their express terms, speak as of and relate to a specified
date, in which case such accuracy shall be measured as of such specified date)
and the performance by the Company in all respects on or before the Closing Date
of all covenants and agreements of the Company required to be performed by it
pursuant to this Agreement on or before the Closing Date, all of which shall be
confirmed to Buyer by the chief executive officer of the Company by delivery of
the certificate to that effect;

                  D.      Buyer having received an opinion of counsel for the
Company, dated the Closing Date, in form, scope and substance reasonably
satisfactory to Buyer as to the matters set forth in Annex A;

                  E.      There not having occurred (i) any general suspension
of trading in, or limitation on prices listed for, the Common Stock on Nasdaq,
(ii) the declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States, (iii) the commencement of a war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States or any of its territories, protectorates or
possessions, or (iv) in the case of the foregoing existing at the date of this
Agreement, a material acceleration or worsening thereof;

                  F.      There not having occurred any event or development,
and there being in existence no condition, having or which reasonably and
foreseeably could have a Material Adverse Effect;

                  G.      The Company shall have delivered to Buyer (as provided
in the Escrow Instructions) reimbursement of Buyer's out-of-pocket costs and
expenses whether or not accounted for or incurred in connection with the
transactions contemplated by this Agreement (including the fees and
disbursements of Buyer's legal counsel) of $50,000;

                  H.      There shall not be in effect any Law or order, ruling,
judgment or writ of any court or public or governmental authority restraining,
enjoining or otherwise prohibiting any of the transactions contemplated by this
Agreement;

                  I.      Delivery of irrevocable instructions to the Company's
transfer agent to reserve 1,500,000 shares of Common Stock for issuance of the
Conversion Shares, the Dividend Shares and the Warrant Shares;

                  J.      Except as set forth on Schedule III.F. hereof, the
Company shall have obtained all consents, approvals or waivers from governmental
authorities and third persons necessary for the execution, delivery and
performance of this Agreement and the other Documents and the transactions
contemplated hereby and thereby, all without material cost to the Company; and

                  K.      Buyer shall have received such additional documents,
certificates, payment, assignments, transfers and other delivers, as it or its
legal counsel may reasonably request and as are customary to effect a closing of
the matters herein contemplated.

                                       22
<PAGE>   23

                                 X. TERMINATION

                  A.      TERMINATION BY MUTUAL WRITTEN CONSENT. This Agreement
may be terminated and the transactions contemplated hereby may be abandoned, for
any reason and at any time prior to the Closing Date, by the mutual written
consent of the Company and Buyer.

                  B.      TERMINATION BY THE COMPANY OR BUYER. This Agreement
may be terminated and the transactions contemplated hereby may be abandoned by
action of the Company or Buyer if (i) the Closing shall not have occurred at or
prior to 5:00 p.m., New York City time, on October 13, 1999 (the "LATEST CLOSING
DATE"); provided, however, that the right to terminate this Agreement pursuant
to this Section X.B. shall not be available to any party whose failure to
fulfill any of its obligations under this Agreement has been the cause of or
resulted in the failure of the Closing to occur at or before such time and date;
provided, further, however, that if the Closing shall not have occurred on or
prior to the Latest Closing Date, the Closing may only occur after the Latest
Closing Date with the written consent of Buyer.

                  C.      TERMINATION BY BUYER. This Agreement may be terminated
and the transactions contemplated hereby may be abandoned by Buyer at any time
prior to the Closing Date, if (i) the Company shall have failed to comply with
any of its covenants or agreements contained in this Agreement, (ii) there shall
have been a breach by the Company with respect to any representation or warranty
made by it in this Agreement, (iii) there shall have occurred any event or
development, or there shall be in existence any condition, having or reasonably
likely to have a Material Adverse Effect or (iv) the Company shall have failed
to satisfy the conditions provided in Section IX hereof.

                  D.      TERMINATION BY THE COMPANY. This Agreement may be
terminated and the transactions contemplated hereby may be abandoned by the
Company at any time prior to the Closing Date, if (i) Buyer shall have failed to
comply with any of its covenants or agreements contained in this Agreement or
(ii) there shall have been a breach by Buyer with respect to any representation
or warranty made by it in this Agreement.

                  E.      EFFECT OF TERMINATION. In the event of the termination
of this Agreement pursuant to this Section X, this Agreement shall thereafter
become void and have no effect, and no party hereto shall have any liability or
obligation to any other party hereto in respect of this Agreement, except that
the provisions of Article XI, this Section X.E. and Section X.F. shall survive
any such termination; provided, however, that no party shall be released from
any liability hereunder if this Agreement is terminated and the transactions
contemplated hereby abandoned by reason of (i) willful failure of such party to
perform its obligations hereunder or (ii) any misrepresentation made by such
party of any matter set forth herein.

                  F.      FEES AND EXPENSES OF TERMINATION. If this Agreement is
terminated for any reason, the Company shall promptly reimburse Buyer for all of
Buyer's out-of-pocket costs and expenses incurred in connection with the
transactions contemplated by this Agreement and the other Documents (including,
without limitation, the fees and disbursements of Buyer's legal counsel).

                                       23
<PAGE>   24

                          XI. SURVIVAL; INDEMNIFICATION

                  A.      The representations, warranties and covenants made by
each of the Company and Buyer in this Agreement, the annexes, schedules and
exhibits hereto and in each instrument, agreement and certificate entered into
and delivered by them pursuant to this Agreement, shall survive the Closing and
the consummation of the transactions contemplated hereby. In the event of a
breach or violation of any of such representations, warranties or covenants, the
party to whom such representations, warranties or covenants have been made shall
have all rights and remedies for such breach or violation available to it under
the provisions of this Agreement or otherwise, whether at law or in equity,
irrespective of any investigation made by or on behalf of such party on or prior
to the Closing Date.

                  B.      The Company hereby agrees to indemnify and hold
harmless Buyer, its Affiliates and their respective officers, directors,
partners and members (collectively, the "BUYER INDEMNITEES"), from and against
any and all losses, claims, damages, judgments, penalties, liabilities and
deficiencies (collectively, "LOSSES"), and agrees to reimburse Buyer Indemnitees
for all out of-pocket expenses (including the fees and expenses of legal
counsel), in each case promptly as incurred by Buyer Indemnitees and to the
extent arising out of or in connection with:

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

                          2.     the purchase of the Preferred Shares and the
             Warrants, the conversion of the Preferred Shares and the exercise
             of the Warrants and the consummation of the transactions
             contemplated by this Agreement and the other Documents, the use of
             any of the proceeds of the Purchase Price by the Company, the
             purchase or ownership of any or all of the Securities, the
             performance by the parties hereto of their respective obligations
             hereunder and under the Documents or any claim, litigation,
             investigation, proceedings or governmental action relating to any
             of the foregoing, whether or not Buyer is a party thereto; and

                          3.     resales of the Common Shares by Buyer in the
             manner and as contemplated by this Agreement and the Registration
             Rights Agreement.

                  C.      Buyer hereby agrees to indemnify and hold harmless the
Company, its Affiliates and their respective officers, directors, partners and
members (collectively, the "COMPANY INDEMNITEES"), from and against any and all
Losses, and agrees to reimburse the Company Indemnitees for all out-of-pocket
expenses (including the fees and expenses of legal counsel), in each case
promptly as incurred by the Company Indemnitees and to the extent arising out of
or in connection with:

                          1.     any misrepresentation, omission of fact, or
             breach of any of Buyer's representations or warranties contained in
             this Agreement or the other Documents, or the annexes, schedules or
             exhibits hereto or thereto or any instrument,

                                       24
<PAGE>   25

             agreement or certificate entered into or delivered by Buyer
             pursuant to this Agreement or the other Documents; and

                          2.     any failure by Buyer to perform in any material
             respect any of its covenants, agreements, undertakings or
             obligations set forth in this Agreement or the other Documents or
             any instrument, certificate or agreement entered into or delivered
             by Buyer pursuant to this Agreement or the other Documents.

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

                  E.      In the event one party hereunder should have a claim
for indemnification that does not involve a claim or demand being asserted by a
third party, the Indemnified Party promptly shall deliver notice of such claim
to the Indemnifying Party. If the Indemnified Party disputes the claim, such
dispute shall be resolved by mutual agreement of the Indemnified Party and the
Indemnifying Party or by binding arbitration conducted in accordance with the

                                       25
<PAGE>   26
procedures and rules of the American Arbitration Association. Judgment upon any
award rendered by any arbitrators may be entered in any court having competent
jurisdiction thereof.

                               XII. GOVERNING LAW

          This Agreement shall be governed by and interpreted in accordance with
the laws of the State of New York, without regard to the conflicts of law
principles of such state.

                        XIII. SUBMISSION TO JURISDICTION

          Each of the parties hereto consents to the exclusive jurisdiction of
the federal courts whose districts encompass any part of the City of New York or
the state courts of the State of New York sitting in the City of New York in
connection with any dispute arising under this Agreement and the other
Documents. Each party hereto hereby irrevocably and unconditionally waives, to
the fullest extent it may effectively do so, any defense of an inconvenient
forum or improper venue to the maintenance of such action or proceeding in any
such court and any right of jurisdiction on account of its place of residence or
domicile. Each party hereto irrevocably and unconditionally consents to the
service of any and all process in any such action or proceeding in such courts
by the mailing of copies of such process by certified or registered airmail at
its address specified in Section XIX. Each party hereto agrees that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law.

                            XIV. WAIVER OF JURY TRIAL

          TO THE FULLEST EXTENT PERMITTED BY LAW, EACH OF THE PARTIES HERETO
HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ITS RESPECTIVE RIGHTS TO
A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR ANY OTHER DOCUMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE
SUBJECT MATTER OF THIS AGREEMENT AND OTHER DOCUMENTS. EACH PARTY HERETO (I)
CERTIFIES THAT NEITHER OF THEIR RESPECTIVE REPRESENTATIVES, AGENTS OR ATTORNEYS
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH PARTY WOULD NOT, IN THE EVENT
OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (II) ACKNOWLEDGES THAT
IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE
MUTUAL WAIVERS AND CERTIFICATIONS HEREIN.

                      XV. COUNTERPARTS; EXECUTION

          This Agreement may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which when so
executed and delivered shall be an original, but all the counterparts shall
together constitute one and the same instrument. A facsimile transmission of
this signed Agreement shall be legal and binding on all parties hereto.

                                       26
<PAGE>   27

                                 XVI. HEADINGS

          The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement.

                               XVII. SEVERABILITY

          In the event any one or more of the provisions contained in this
Agreement or in the other Documents should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein or therein shall not in any way be
affected or impaired thereby. The parties shall endeavor in good-faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions the economic effect of which comes as close as possible to that
of the invalid, illegal or unenforceable provisions.

            XVIII. ENTIRE AGREEMENT; REMEDIES, AMENDMENTS AND WAIVERS

          This Agreement and the Documents constitute the entire agreement among
the parties pertaining to the subject matter hereof and supersedes all prior
agreements, understandings, negotiations and discussions, whether oral or
written, of the parties. No supplement, modification or waiver of this Agreement
shall be binding unless executed in writing by all parties. No waiver of any of
the provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.

                                  XIX. NOTICES

          Except as may be otherwise provided herein, any notice or other
communication or delivery required or permitted hereunder shall be in writing
and shall be delivered personally or sent by certified mail, postage prepaid, or
by a nationally recognized overnight courier service, and shall be deemed given
when so delivered personally or by overnight courier service, or, if mailed,
three (3) days after the date of deposit in the United States mails, as follows:

                                       27
<PAGE>   28

                  A.       to the Company, to:

                           Innovative Gaming Corporation of America
                           4725 Aircenter Circle
                           Reno, Nevada 89502
                           Attention:  Edward G. Stevenson, CEO
                           (775) 823-3000
                           (775) 823-3030 (Fax)

                           with a copy to:

                           Maslon Edelman Borman & Brand, LLP
                           3300 Norwest Center
                           90 South Seventh Street
                           Minneapolis, Minnesota  55402
                           Attention:  Douglas T. Holod, Esq.
                           (612) 672-8200
                           (612) 672-8397 (Fax)

                  B.       if to Buyer, to:

                           The Shaar Fund Ltd.
                           c/o Levinson Capital Management
                           2 World Trade Center, Suite 1820
                           New York, NY 10048
                           Attention:  Samuel Levinson
                           (212) 432-7711
                           (212) 432-7771 (Fax)

                           with a copy to:

                           Cadwalader, Wickersham & Taft
                           100 Maiden Lane
                           New York, NY 10038
                           Attention:  Dennis J. Block, Esq.
                           (212) 504-5555
                           (212) 504-5557 (Fax)

                  C.       if to the Escrow Agent, to:

                           Cadwalader, Wickersham & Taft
                           100 Maiden Lane
                           New York, NY 10038
                           Attention:  Dennis J. Block, Esq.
                           (212) 504-5555
                           (212) 504-5557 (Fax)

                                       28
<PAGE>   29

The Company, Buyer or the Escrow Agent may change the foregoing address by
notice given pursuant to this Section XIII.

                              XX. CONFIDENTIALITY

          Each of the Company and Buyer agrees to keep confidential and not to
disclose to or use for the benefit of any third party the terms of this
Agreement or any other information which at any time is communicated by the
other party as being confidential without the prior written approval of the
other party; provided, however, that this provision shall not apply to
information which, at the time of disclosure, is already part of the public
domain (except by breach of this Agreement) and information which is required to
be disclosed by law (including, without limitation, pursuant to Item 601(b)(10)
of Regulation S-K under the Securities Act and the Exchange Act).

                                 XXI. ASSIGNMENT

          This Agreement shall not be assignable by either of the parties hereto
prior to the Closing without the prior written consent of the other party, and
any attempted assignment contrary to the provisions hereby shall be null and
void; provided, however, that Buyer may assign its rights and obligations
hereunder, in whole or in part, to any affiliate of Buyer.

                             SIGNATURE PAGE FOLLOWS

                                       29
<PAGE>   30

          In Witness Whereof, the parties hereto have duly executed and
delivered this Agreement on the date first above written.

                                   INNOVATIVE GAMING CORPORATION OF AMERICA

                                   By:  s/ Edward G. Stevenson
                                      -----------------------------------------
                                       Name:  Edward G. Stevenson
                                       Title: Chief Executive Officer

                                   THE SHAAR FUND LTD.

                                   By:  s/ Samuel Levinson
                                      -----------------------------------------
                                      Name:  Samuel Levinson
                                      Title: Managing Director

                                       30

<PAGE>   31
                                                                       EXHIBIT A

                         COMMON STOCK PURCHASE WARRANTS

<PAGE>   32

                                                                       EXHIBIT B

                           CERTIFICATE OF DESIGNATION

<PAGE>   33

                                                                       EXHIBIT C

                               ESCROW INSTRUCTIONS

<PAGE>   34
                                                                       EXHIBIT D

                          REGISTRATION RIGHTS AGREEMENT

<PAGE>   35

                                SCHEDULE III.A.3.

               PREEMPTIVE, SUBSCRIPTION, "CALL" OR SIMILAR RIGHTS

None.

<PAGE>   36
                                SCHEDULE III.A.4.

                                  SUBSIDIARIES

Innovative Gaming, Inc., a Nevada corporation.

<PAGE>   37

                                SCHEDULE III.A.5.

                                     MINUTES

September 15, 1999 Board Minutes being drafted.

September 22, 1999 Board Minutes being drafted.

<PAGE>   38
                                 SCHEDULE III.C.

                                AUTHORIZED SHARES

See attached.

<PAGE>   39

                                 SCHEDULE III.F.

                                NON-CONTRAVENTION

None.

<PAGE>   40

                                 SCHEDULE III.G.

                                    APPROVALS

The Registration Statement relating to the Conversion Shares and Warrant Shares
must be approved by the Securities Exchange Commission and the Nevada Gaming
Commission.

<PAGE>   41

                                 SCHEDULE III.K.

                                   LITIGATION

None.

<PAGE>   42

                                 SCHEDULE III.L.

                                EVENTS OF DEFAULT

None.

<PAGE>   43

                                 SCHEDULE III.O.

                           RELATED PARTY TRANSACTIONS

None.

<PAGE>   44

                                 SCHEDULE III.Q.

                             SECURITIES LAW MATTERS

See Schedule III.C.

<PAGE>   45

                                 SCHEDULE III.R.

                              ENVIRONMENTAL MATTERS
None.

<PAGE>   46

                                 SCHEDULE III.T.

                                  ERISA MATTERS

The Company's 401-K Plan.
The Company's Premium Only Plan for Health Insurance.

<PAGE>   47

                                 SCHEDULE III.V.

                                    PROPERTY

See attached.

<PAGE>   48

                                 SCHEDULE III.W.

                              INTELLECTUAL PROPERTY
See attached.

<PAGE>   49

                                 SCHEDULE III.Y.

                               REGISTRATION RIGHTS

The Convertible Notes indicated on Schedule III.C. have demand and "piggy-back"
registration rights.

<PAGE>   50
                                                                         ANNEX A

                                 FORM OF OPINION

          1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Minnesota, is duly
qualified to do business as a foreign corporation and is in good standing in all
jurisdictions where the Company owns or leases properties or conducts business,
except for jurisdictions in which the failure to so qualify would not have a
Material Adverse Effect, and has all requisite corporate power and authority to
own its properties and conduct its business as described in the Commission
Filings.

          2. The authorized capital stock of the Company consists solely of
100,000,000 shares of capital stock, of which (i) 7,501,648 shares of common
stock are issued and outstanding on the date hereof (ii) 4,000 shares have been
designated Series B Convertible Preferred Stock, par value $0.01 per share, of
which 825 shares are issued and outstanding on the date hereof and (iii) $2,000
shares have been designated Series C Cumulative Convertible Preferred Stock, par
value $0.01 per share, of which 1,400 shares are issued and outstanding on the
date hereof. All of the issued and outstanding shares of Common Stock and
preferred stock, if any, have been duly authorized and validly issued and are
fully paid and nonassessable. As of the date hereof, the Company has outstanding
stock options to purchase 978,000 shares of Common Stock and outstanding
warrants to purchase 1,250,000 shares of Common Stock.

          3. When delivered to you or upon your order against payment of the
agreed consideration therefor in accordance with the provisions of the
Documents, the Securities will be duly authorized and validly issued, fully paid
and nonassessable.

          4. The Company has the requisite corporate power and authority to
enter into the Documents and to sell and deliver the Securities as described in
the Documents; each of the Documents has been duly and validly authorized by all
necessary corporate action by the Company; each of the Documents has been duly
and validly executed and delivered by and on behalf of the Company, and is valid
and binding agreement of the Company, enforceable in accordance with its terms,
except as enforceability may be limited by general equitable principles,
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
other laws affecting creditors rights generally.

          5. The executive, delivery and performance of the Documents by the
Company and the performance of its obligations thereunder do not and will not
constitute a breach or violation of any of the terms and provisions of, or
constitute a default (or with notice, lapse of time or both would constitute a
default) under or conflict with or violate any provision of (i) the Company's
certificate of incorporation or bylaws, (ii) any indenture, mortgage, deed of
trust, agreement or other instrument known to us to which the Company is a party
or by which it or any of its property is bound, (iii) or, to the best of our
knowledge, any judgment, decree or order of any court or governmental body
having jurisdiction over the Company or any of its property. To the best of our
knowledge, no consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over the Company
or any of its properties or assets

                                      A-1
<PAGE>   51

is required for the execution, delivery and performance by the Company of the
Documents or the consummation by the Company of the transactions contemplated
thereby.

          6.  When issued, the Preferred Shares and the Warrants shall be duly
authorized, validly issued, fully paid and nonassessable, and free and clear of
all encumbrances and restrictions, except for restrictions on transfer imposed
by applicable securities laws. The Conversion Shares and Warrant Shares issuable
upon conversion or exercise, respectively, of the Preferred Shares and the
Warrants, respectively, will be duly authorized, validly issued, fully paid and
nonassessable, and free and clear of all encumbrances and restrictions, except
for restrictions on transfer imposed by applicable securities laws.

          7.  Based on Buyer's representations contained in this Agreement, the
offer and sale of the Preferred Shares and the Warrants are exempt from the
registration requirements of the Securities Act.

          8.  To the best of our knowledge, other than as described in the
Commission Filings, there are no outstanding options, warrants or other
securities exercisable or convertible into Common Stock of the Company.

          9.  There is no action, suit, claim, inquiry or investigation pending
or, to the best of our knowledge, threatened by or before any court or public or
governmental authority which, if determined adversely to the Company, would have
a Material Adverse Effect.

          10. Neither the Company nor any of its subsidiaries is, or will be
after the consummation of the transactions contemplated by this Agreement and
the other Documents and the use of the proceeds from the sale of the Securities,
an "investment company" or an entity "controlled" by an "investment company," as
such terms are defined in the Investment Company Act of 1940, as amended.

                                      A-2

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