Document:

EXHIBIT A

                             ON2 Technologies, Inc.

                   CERTIFICATE OF DESIGNATION OF PREFERENCES,
                             RIGHTS AND LIMITATIONS
                                       OF
                      SERIES D CONVERTIBLE PREFERRED STOCK

                         PURSUANT TO SECTION 151 OF THE
                        DELAWARE GENERAL CORPORATION LAW

        The undersigned, Douglas McIntyre and Tim Reusing, do hereby certify
that:

                1. They are the President and Secretary, respectively, of ON2
Technologies, Inc., a Delaware corporation (the "Corporation").

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

        WHEREAS, the Certificate of Incorporation of the Corporation provides
for a class of its authorized stock known as preferred stock, of comprised of
20,000,000 shares, $0.01 par value, issuable from time to time in one or more
series;

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

        WHEREAS, it is the desire of the Board of Directors of the Corporation,
pursuant to its authority as aforesaid, to fix the rights, preferences,
restrictions and other matters relating to a series of the preferred stock,
which shall consist of, except as otherwise set forth in the Purchase Agreement,
up to 4,000 shares of the preferred stock which the corporation has the
authority to issue, as follows:

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

                            TERMS OF PREFERRED STOCK

                  Section 1. Definitions. Capitalized terms used and not
otherwise defined herein that are defined in the Purchase Agreement shall have
the meanings given such terms in the Purchase Agreement. For the purposes
hereof, the following terms shall have the following meanings:

                  "Bankruptcy Event" means any of the following events: (a) the
         Corporation or any Significant Subsidiary (as such term is defined in
         Rule 1.02(s) of Regulation S-X) thereof commences a case or other
         proceeding under any bankruptcy, reorganization, arrangement,
         adjustment of debt, relief of debtors, dissolution, insolvency or
         liquidation or similar law of any jurisdiction relating to the
         Corporation or any Significant Subsidiary thereof; (b) there is
         commenced against the Corporation or any Significant Subsidiary thereof
         any such case or proceeding that is not dismissed within 60 days after
         commencement; (c) the Corporation or any Significant Subsidiary thereof
         is adjudicated insolvent or bankrupt or any order of relief or other
         order approving any such case or proceeding is entered; (d) the
         Corporation or any Significant Subsidiary thereof suffers any
         appointment of any custodian or the like for it or any substantial part
         of its property that is not discharged or stayed within 60 days; (e)
         the Corporation or any Significant Subsidiary thereof makes a general
         assignment for the benefit of creditors; (f) the Corporation or any
         Significant Subsidiary thereof calls a meeting of its creditors with a
         view to arranging a composition, adjustment or restructuring of its
         debts; or (g) the Corporation or any Significant Subsidiary thereof, by
         any act or failure to act, expressly indicates its consent to, approval
         of or acquiescence in any of the foregoing or takes any corporate or
         other action for the purpose of effecting any of the foregoing.

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

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

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<PAGE>

      "Commission" means the Securities and Exchange Commission.

      "Common Stock" means the Corporation's common stock, par value $0.01 per
share, and stock of any other class into which such shares may hereafter have
been reclassified or changed.

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

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

      "Conversion Date" shall have the meaning set forth in Section 6(a).

      "Conversion Price" shall have the meaning set forth in Section 6(b).

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

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

      "Dividend Payment Date" shall have the meaning set forth in Section 3(a).

      "Dilutive Issuance" shall have the meaning set forth in Section 7(b)
hereof.

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

      "Equity Conditions" shall mean, during the period in question, (i) the
Corporation shall have duly honored all conversions scheduled to occur or
occurring by virtue of one or more Notices of Conversion, if any, (ii) all
liquidated damages and other amounts owing in respect of the Preferred Stock
shall have been paid; (iii) there is an effective Conversion Shares Registration
Statement pursuant to which the Holder is permitted to utilize the prospectus
thereunder to resell all of the shares issuable pursuant to the Transaction
Documents (and the Corporation believes, in good faith, that such effectiveness
will continue uninterrupted for the foreseeable future), (iv) the Common

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<PAGE>

Stock is trading on the Trading Market and all of the shares issuable pursuant
to the Transaction Documents are listed for trading on a Trading Market (and the
Corporation believes, in good faith, that trading of the Common Stock on a
Trading Market will continue uninterrupted for the foreseeable future), (v)
there is a sufficient number of authorized but unissued and otherwise unreserved
shares of Common Stock for the issuance of all of the shares issuable pursuant
to the Transaction Documents, (vi) there is then existing no Triggering Event or
event which, with the passage of time or the giving of notice, would constitute
a Triggering Event, (vii) all of the shares issued or issuable pursuant to the
transaction proposed would not violate the limitations set forth in Sections
6(c)(ii) and (d), and (viii) no public announcement of a pending or proposed
Fundamental Transaction, Change of Control Transaction or acquisition
transaction has occurred that has not been consummated.

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

      "Exempt Issuance" means the issuance of (a) shares of Common Stock or
options to employees, officers or directors of the Corporation pursuant to any
stock or option plan duly adopted by a majority of the non-employee members of
the Board of Directors of the Corporation or a majority of the members of a
committee of non-employee directors established for such purpose, (b) securities
upon the exercise of or conversion of any securities issued hereunder,
convertible securities, options or warrants issued and outstanding on the date
of this Agreement, provided that such securities have not been amended since the
date of this Agreement to increase the number of such securities, and (c)
securities issued pursuant to acquisitions or strategic transactions, provided
any such issuance shall only be to a Person which is, itself or through its
subsidiaries, an operating corporation in a business synergistic with the
business of the Corporation and in which the Corporation receives benefits in
addition to the investment of funds, but shall not include a transaction in
which the Corporation is issuing securities primarily for the purpose of raising
capital or to an entity whose primary business is investing in securities.

      "Fundamental Transaction" shall have the meaning set forth in Section
7(f)(iii) hereof.

      "Holder" shall have the meaning given such term in Section 2 hereof.

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

      "Monthly Conversion Price" shall have the meaning set forth in Section
8(a) hereof.

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<PAGE>

      "Monthly Redemption" shall mean the redemption of the shares of Preferred
Stock pursuant to Section 8(a) hereof.

      "Monthly Redemption Amount" shall mean, as to a Monthly Redemption,
$571,429 in the aggregate among all Holders.

      "Monthly Redemption Date" means the first Trading Day on the 24th month
following the Original Issue Date and on the first Trading Day on every third
month thereafter, ending upon the full redemption of the aggregate Stated Value.

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

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

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

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

      "Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.

      "Subscription Amount" shall mean, as to each Purchaser, the amount to be
paid for the Preferred Stock purchased pursuant to the Purchase Agreement as
specified below such Purchaser's name on the signature page of the Purchase
Agreement and next to the heading "Subscription Amount", in United States
Dollars and in immediately available funds.

      "Subsidiary" shall have the meaning given to such term in the Purchase
Agreement.

      "Trading Day" means a day on which the Common Stock is traded on a Trading
Market.

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

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<PAGE>

      "Transaction Documents" shall have the meaning set forth in the Purchase
Agreement.

      "Triggering Event" shall have the meaning set forth in Section 9(a).

      "Triggering Redemption Amount" for each share of Preferred Stock means the
sum of (i) the greater of (A) 130% of the Stated Value and (B) the product of
(a) the VWAP on the Trading Day immediately preceding the date of the Triggering
Event and (b) the Stated Value divided by the then Conversion Price, (ii) all
accrued but unpaid dividends thereon and (iii) all liquidated damages and other
amounts due in respect of the Preferred Stock.

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

      Section 2. Designation, Amount and Par Value. The series of preferred
stock shall be designated as its Series D Convertible Preferred Stock (the
"Preferred Stock") and the number of shares so designated shall be 4,000 (which
shall not be subject to increase without the consent of all of the holders of
the Preferred Stock (each, a "Holder" and collectively, the "Holders")). Each
share of Preferred Stock shall have a par value of $0.01 per share and a stated
value equal to $1,000 (the "Stated Value"). Capitalized terms not otherwise
defined herein shall have the meaning given such terms in Section 1 hereof.

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<PAGE>

      Section 3. Dividends.

      a) Dividends in Cash or in Kind. Holders shall be entitled to receive and
the Corporation shall pay, cumulative dividends at the rate per share (as a
percentage of the Stated Value per share) of 8% per annum (subject to increase
pursuant to Section 9(b)), payable quarterly on March 1, June 1, September 1 and
December 1, beginning with the first such date after the Original Issue Date and
on any Conversion Date (except that, if such date is not a Trading Day, the
payment date shall be the next succeeding Trading Day)("Dividend Payment Date").
The form of dividend payments to each Holder shall be made in the following
order: (i) if funds are legally available for the payment of dividends and the
Equity Conditions have not been met, in cash only, (ii) if funds are legally
available for the payment of dividends and the Equity Conditions have been met,
at the sole election of the Corporation, in cash or shares of Common Stock which
shall be valued solely for such purpose at 93% of the average of the VWAPs for
the 20 consecutive Trading Days immediately prior to the Dividend Payment Date;
(iii) if funds are not legally available for the payment of dividends and the
Equity Conditions have been met, in shares of Common Stock which shall be valued
at 93% of the average of the VWAPs for the 20 consecutive Trading Days
immediately prior to the Dividend Payment Date; (iv) if funds are not legally
available for the payment of dividends and the Equity Conditions relating to
registration have been waived by such Holder, as to such Holder only, in
unregistered shares of Common Stock which shall be valued at 93% of the average
of the VWAPs for the 20 consecutive Trading Days immediately prior to the
Dividend Payment Date; and (v) if funds are not legally available for the
payment of dividends and the Equity Conditions have not been met, then, at the
election of such Holder, such dividends shall accrue to the next Dividend
Payment Date or shall be accreted to the outstanding Stated Value. The Holders
shall have the same rights and remedies with respect to the delivery of any such
shares as if such shares were being issued pursuant to Section 6. On the Closing
Date the Corporation shall have notified the Holders whether or not it may
lawfully pay cash dividends. The Corporation shall promptly notify the Holders
at any time the Corporation shall become able or unable, as the case may be, to
lawfully pay cash dividends. If at any time the Corporation has the right to pay
dividends in cash or Common Stock, the Corporation must provide the Holder with
at least 20 Trading Days' notice of its election to pay a regularly scheduled
dividend in Common Stock. Dividends on the Preferred Stock shall be calculated
on the basis of a 360-day year, shall accrue daily commencing on the Original
Issue Date, and shall be deemed to accrue from such date whether or not earned
or declared and whether or not there are profits, surplus or other funds of the
Corporation legally available for the payment of dividends. Except as otherwise
provided herein, if at any time the Corporation pays dividends partially in cash
and partially in shares, then such payment shall be distributed ratably among
the Holders based upon the number of shares of Preferred Stock held by each
Holder. Any dividends, whether paid in cash or shares, that are not paid within
three Trading Days following a Dividend Payment Date shall continue to accrue
and shall entail a late fee, which must be paid in cash, at the rate of 18% per
annum or the lesser rate permitted by applicable law (such fees to accrue daily,
from the Dividend Payment Date through and including the date of payment).

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<PAGE>

      b) So long as any Preferred Stock shall remain outstanding, neither the
Corporation nor any Subsidiary thereof shall redeem, purchase or otherwise
acquire directly or indirectly any Junior Securities. So long as any Preferred
Stock shall remain outstanding, neither the Corporation nor any Subsidiary
thereof shall directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in Section 6 or
dividends due and paid in the ordinary course on preferred stock of the
Corporation at such times when the Corporation is in compliance with its payment
and other obligations hereunder) upon, nor shall any distribution be made in
respect of, any Junior Securities so long as any dividends due on the Preferred
Stock remain unpaid, nor shall any monies be set aside for or applied to the
purchase or redemption (through a sinking fund or otherwise) of any Junior
Securities or shares pari passu with the Preferred Stock.

      c) The Corporation acknowledges and agrees that the capital of the
Corporation (as such term is used in Section 154 of the General Corporation Law
of Delaware) in respect of the Preferred Stock and any future issuances of the
Corporation's capital stock shall be equal to the aggregate par value of such
Preferred Stock or capital stock, as the case may be, and that, on or after the
date of the Purchase Agreement, it shall not increase the capital of the
Corporation with respect to any shares of the Corporation's capital stock issued
and outstanding on such date. The Corporation also acknowledges and agrees that
it shall not create any special reserves under Section 171 of the General
Corporation Law of Delaware without the prior written consent of each Holder.

      Section 4. Voting Rights. Except as otherwise provided herein and as
otherwise required by law, the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, the
Corporation shall not, without the affirmative vote of the Holders of the shares
of the Preferred Stock then outstanding, (a) alter or change adversely the
powers, preferences or rights given to the Preferred Stock or alter or amend
this Certificate of Designation, (b) authorize or create any class of stock
ranking as to dividends, redemption or distribution of assets upon a Liquidation
(as defined in Section 5) senior to or otherwise pari passu with the Preferred
Stock, (c) amend its certificate of incorporation or other charter documents so
as to affect adversely any rights of the Holders, (d) increase the authorized
number of shares of Preferred Stock, or (e) enter into any agreement with
respect to the foregoing.

      Section 5. Liquidation. Upon any liquidation, dissolution or winding-up of
the Corporation, whether voluntary or involuntary (a "Liquidation"), the Holders
shall be entitled to receive out of the assets of the Corporation, whether such
assets are capital or surplus, for each share of Preferred Stock an amount equal
to the Stated Value per share plus any accrued and unpaid dividends thereon and
any other fees or liquidated damages owing thereon before any distribution or
payment shall be made to the holders of any Junior Securities, and if the assets
of the Corporation shall be insufficient to pay in full such amounts, then the
entire assets to be distributed to the Holders shall be distributed among the
Holders ratably in accordance with the respective amounts that would be payable
on such shares if all amounts payable thereon were paid in full. A Fundamental
Transaction or Change of Control Transaction shall not be treated as a
Liquidation. The Corporation shall mail written notice of any such Liquidation,
not less than 45 days prior to the payment date stated therein, to each record
Holder.

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<PAGE>

      Section 6. Conversion.

      a) Conversions at Option of Holder. Each share of Preferred Stock shall be
convertible into that number of shares of Common Stock (subject to the
limitations set forth in Sections 6(c)(i) and (d)) determined by dividing the
Stated Value of such share of Preferred Stock by the Conversion Price, at the
option of the Holder, at any time and from time to time from and after the
Original Issue Date. Holders shall effect conversions by providing the
Corporation with the form of conversion notice attached hereto as Annex A (a
"Notice of Conversion"). Each Notice of Conversion shall specify the number of
shares of Preferred Stock to be converted, the number of shares of Preferred
Stock owned prior to the conversion at issue, the number of shares of Preferred
Stock owned subsequent to the conversion at issue and the date on which such
conversion is to be effected, which date may not be prior to the date the Holder
delivers such Notice of Conversion to the Corporation by facsimile (the
"Conversion Date"). If no Conversion Date is specified in a Notice of
Conversion, the Conversion Date shall be the date that such Notice of Conversion
to the Corporation is deemed delivered hereunder. To effect conversions, as the
case may be, of shares of Preferred Stock, a Holder shall not be required to
surrender the certificate(s) representing such shares of Preferred Stock to the
Corporation unless all of the shares of Preferred Stock represented thereby are
so converted, in which case the Holder shall deliver the certificate
representing such share of Preferred Stock promptly following the Conversion
Date at issue. Shares of Preferred Stock converted into Common Stock or redeemed
in accordance with the terms hereof shall be canceled and may not be reissued.

      b) Conversion Price. The conversion price for the Preferred Stock shall
equal $0.70 (the "Conversion Price"), subject to adjustment herein.

      c) Holder's Restriction on Conversion.

            i. The Corporation shall not effect any conversion of the Preferred
Stock, and the Holder shall not have the right to convert any portion of the
Preferred Stock to the extent that after giving effect to such conversion, the
Holder (together with the Holder's affiliates), as set forth on the applicable
Notice of Conversion, would beneficially own in excess of 4.99% of the number of
shares of the Common Stock outstanding immediately after giving effect to such
conversion. For purposes of the foregoing sentence, the number of shares of
Common Stock beneficially owned by the Holder and its affiliates shall include
the number of shares of Common Stock issuable upon conversion of the Preferred
Stock with respect to which the determination of such sentence is being made,
but shall exclude the number of shares of Common Stock which would be issuable

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<PAGE>

upon (A) conversion of the remaining, nonconverted Stated Value of Preferred
Stock beneficially owned by the Holder or any of its affiliates and (B) exercise
or conversion of the unexercised or nonconverted portion of any other securities
of the Corporation (including the Warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein beneficially
owned by the Holder or any of its affiliates. Except as set forth in the
preceding sentence, for purposes of this Section 6(c)(i), beneficial ownership
shall be calculated in accordance with Section 13(d) of the Exchange Act. To the
extent that the limitation contained in this Section 6(c)(i) applies, the
determination of whether the Preferred Stock is convertible (in relation to
other securities owned by the Holder together with any affiliates) and of which
shares of Preferred Stock is convertible shall be in the sole discretion of such
Holder, and the submission of a Notice of Conversion shall be deemed to be such
Holder's determination of whether the shares of Preferred Stock may be converted
(in relation to other securities owned by such Holder) and which shares of the
Preferred Stock is convertible, in each case subject to such aggregate
percentage limitations. To ensure compliance with this restriction, the Holder
will be deemed to represent to the Corporation each time it delivers a Notice of
Conversion that such Notice of Conversion has not violated the restrictions set
forth in this paragraph and the Corporation shall have no obligation to verify
or confirm the accuracy of such determination. For purposes of this Section
6(c)(i), in determining the number of outstanding shares of Common Stock, the
Holder may rely on the number of outstanding shares of Common Stock as reflected
in the most recent of the following: (A) the Corporation's most recent Form
10-QSB or Form 10-KSB, as the case may be, (B) a more recent public announcement
by the Corporation or (C) any other notice by the Corporation or the
Corporation's transfer agent setting forth the number of shares of Common Stock
outstanding. Upon the written or oral request of the Holder, the Corporation
shall within three Trading Days confirm orally and in writing to the Holder the
number of shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to
the conversion or exercise of securities of the Corporation, including the
Preferred Stock, by the Holder or its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. The provisions of
this Section 6(c)(i) may be waived by the Holder upon, at the election of the
Holder, not less than 61 days' prior notice to the Corporation, and the
provisions of this Section 6(c)(i) shall continue to apply until such 61st day
(or such later date, as determined by the Holder, as may be specified in such
notice of waiver).

            ii. The Corporation shall not effect any conversion of this
Preferred Stock pursuant to Section 6(a) or otherwise, to the extent that after
giving effect to such conversion, the Holder (together with the Holder's
affiliates), as set forth on the applicable Notice of Conversion, would
beneficially own in excess of 9.99% of the number of shares of the Common Stock
outstanding immediately after giving effect to such conversion. For purposes of
the foregoing sentence, the number of shares of Common Stock beneficially owned
by the Holder and its affiliates shall include the number of shares of Common

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<PAGE>

Stock issuable upon conversion of this Preferred Stock with respect to which the
determination of such sentence is being made, but shall exclude the number of
shares of Common Stock which would be issuable upon (A) conversion of the
remaining, nonconverted portion of this Preferred Stock beneficially owned by
the Holder or any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Corporation
(including, without limitation, any other shares of Preferred Stock or the
Warrants) subject to a limitation on conversion or exercise analogous to the
limitation contained herein beneficially owned by the Holder or any of its
affiliates. Except as set forth in the preceding sentence, for purposes of this
Section 6(c)(ii), beneficial ownership shall be calculated in accordance with
Section 13(d) of the Exchange Act. To the extent that the limitation contained
in this section applies, the determination of whether this Preferred Stock is
convertible (in relation to other securities owned by the Holder) and of which a
portion of this Preferred Stock is convertible shall be in the sole discretion
of such Holder. To ensure compliance with this restriction, the Holder will be
deemed to represent to the Corporation each time it delivers a Notice of
Conversion that such Notice of Conversion has not violated the restrictions set
forth in this paragraph and the Corporation shall have no obligation to verify
or confirm the accuracy of such determination. For purposes of this Section
6(c)(ii), in determining the number of outstanding shares of Common Stock, the
Holder may rely on the number of outstanding shares of Common Stock as reflected
in (x) the Corporation's most recent Form 10-QSB or Form 10-KSB, as the case may
be, (y) a more recent public announcement by the Corporation or (z) any other
notice by the Corporation or the Corporation's Transfer Agent setting forth the
number of shares of Common Stock outstanding. Upon the written or oral request
of the Holder, the Corporation shall within two Trading Days confirm orally and
in writing to the Holder the number of shares of Common Stock then outstanding.
In any case, the number of outstanding shares of Common Stock shall be
determined after giving effect to the conversion or exercise of securities of
the Corporation, including this Preferred Stock, by the Holder or its affiliates
since the date as of which such number of outstanding shares of Common Stock was
reported. -

      d) Limitation on Number of Shares Issuable. Notwithstanding anything
herein to the contrary, the Corporation shall not issue to any Holder any shares
of Common Stock, including pursuant to any rights herein, including, without
limitation, any conversion rights or right to issue shares of Common Stock in
payment of dividends, to the extent such shares, when added to the number of
shares of Common Stock issued (A) upon conversion of any shares of Preferred
Stock pursuant to Section 6(a) and (B) upon exercise of those certain warrants
issued pursuant to that certain Securities Purchase Agreement would exceed
15,520,721 shares of Common Stock, 19.999% of the Corporation's outstanding

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Common Stock, immediately prior to the Closing Date, or such greater number of
shares of Common Stock permitted pursuant to the corporate governance rules of
the Trading Market that is at the time the principal trading exchange or market
for the Common Stock, based upon share volume, as confirmed in writing by
counsel to the Corporation (the "Maximum Aggregate Share Amount"), unless the
Corporation first obtains shareholder approval permitting such issuances in
accordance with the Trading Market rules ("Shareholder Approval"). Each Holder
shall be entitled to a portion of the Maximum Aggregate Share Amount equal to
the quotient obtained by dividing (x) such the number of shares of Preferred
Stock initially purchased by such Holder by (y) the aggregate number of shares
purchased by all Holders. Such portions shall be adjusted upward ratably in the
event all of the shares of Preferred Stock of any Holder are no longer
outstanding. If at any time the number of shares of Common Stock which could,
notwithstanding the limitation set forth herein, be issuable and sold to all
Holders during the following 12 months (assuming all dividends are paid in
shares of Common Stock during such period of determination based upon the VWAP
at the time of any such determination) equals or exceeds the Maximum Aggregate
Share Amount, then the Corporation shall, subject to any requirements in the
Purchase Agreement to act sooner, obtain the Shareholder Approval applicable to
such issuance as soon as is possible, but in any event not later than the 75th
day after the date in which the Corporation determines (or is notified by any
Holder) that the Maximum Aggregate Share Amount could be exceeded and shall
continue to seek to obtain Shareholder Approval every 75 days until such
Shareholder Approval is obtained.

      e) Mechanics of Conversion

            iii. Delivery of Certificate Upon Conversion. Not later than three
Trading Days after each Conversion Date (the "Share Delivery Date"), the
Corporation shall deliver to the Holder (A) a certificate or certificates which,
after the Effective Date, shall be free of restrictive legends and trading
restrictions (other than those required by the Purchase Agreement) representing
the number of shares of Common Stock being acquired upon the conversion of
shares of Preferred Stock, and (B) a bank check in the amount of accrued and
unpaid dividends (if the Corporation has elected or is required to pay accrued
dividends in cash). After the Effective Date, the Corporation shall, upon
request of the Holder, deliver any certificate or certificates required to be
delivered by the Corporation under this Section electronically through the
Depository Trust Corporation or another established clearing corporation
performing similar functions. If in the case of any Notice of Conversion such
certificate or certificates are not delivered to or as directed by the
applicable Holder by the fifth Trading Day after the Conversion Date, the Holder
shall be entitled to elect by written notice to the Corporation at any time on
or before its receipt of such certificate or certificates thereafter, to rescind
such conversion, in which event the Corporation shall immediately return the
certificates representing the shares of Preferred Stock tendered for conversion.

                                       12
<PAGE>

            iv. Obligation Absolute; Partial Liquidated Damages. The
Corporation's obligations to issue and deliver the Conversion Shares upon
conversion of Preferred Stock in accordance with the terms hereof are absolute
and unconditional, irrespective of any action or inaction by the Holder to
enforce the same, any waiver or consent with respect to any provision hereof,
the recovery of any judgment against any Person or any action to enforce the
same, or any setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the Holder or any other Person of any obligation to
the Corporation or any violation or alleged violation of law by the Holder or
any other person, and irrespective of any other circumstance which might
otherwise limit such obligation of the Corporation to the Holder in connection
with the issuance of such Conversion Shares. In the event a Holder shall elect
to convert any or all of the Stated Value of its Preferred Stock, the
Corporation may not refuse conversion based on any claim that such Holder or any
one associated or affiliated with the Holder of has been engaged in any
violation of law, agreement or for any other reason, unless, an injunction from
a court, on notice, restraining and or enjoining conversion of all or part of
this Preferred Stock shall have been sought and obtained and the Corporation
posts a surety bond for the benefit of the Holder in the amount of 150% of the
Stated Value of Preferred Stock outstanding, which is subject to the injunction,
which bond shall remain in effect until the completion of arbitration/litigation
of the dispute and the proceeds of which shall be payable to such Holder to the
extent it obtains judgment. In the absence of an injunction precluding the same,
the Corporation shall issue Conversion Shares or, if applicable, cash, upon a
properly noticed conversion. If the Corporation fails to deliver to the Holder
such certificate or certificates pursuant to Section 6(e)(i) within two Trading
Days of the Share Delivery Date applicable to such conversion, the Corporation
shall pay to such Holder, in cash, as liquidated damages and not as a penalty,
for each $5,000 of Stated Value of Preferred Stock being converted, $50 per
Trading Day (increasing to $100 per Trading Day after 3 Trading Days and
increasing to $200 per Trading Day 6 Trading Days after such damages begin to
accrue) for each Trading Day after the Share Delivery Date until such
certificates are delivered. Nothing herein shall limit a Holder's right to
pursue actual damages for the Corporation's failure to deliver certificates
representing shares of Common Stock upon conversion within the period specified
herein and such Holder shall have the right to pursue all remedies available to
it hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief.

            v. Compensation for Buy-In on Failure to Timely Deliver Certificates
Upon Conversion. If the Corporation fails to deliver to the Holder such
certificate or certificates pursuant to Section 6(e)(i) by a Share Delivery
Date, and if after such Share Delivery Date the Holder purchases (in an open

                                       13
<PAGE>

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

            vi. Reservation of Shares Issuable Upon Conversion. The Corporation
covenants that it will at all times reserve and keep available out of its
authorized and unissued shares of Common Stock solely for the purpose of
issuance upon conversion of the Preferred Stock and payment of dividends on the
Preferred Stock, each as herein provided, free from preemptive rights or any
other actual contingent purchase rights of persons other than the Holders, not
less than such number of shares of the Common Stock as shall (subject to any
additional requirements of the Corporation as to reservation of such shares set
forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 7) upon the conversion of all
outstanding shares of Preferred Stock. The Corporation covenants that all shares
of Common Stock that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid, nonassessable and, if the Conversion Shares
Registration Statement is then effective under the Securities Act, registered
for public sale in accordance with such Conversion Shares Registration
Statement.

            vii. Fractional Shares. Upon a conversion hereunder, the Corporation
shall not be required to issue stock certificates representing fractions of
shares of the Common Stock, but may if otherwise permitted, make a cash payment
in respect of any final fraction of a share based on the VWAP at such time. If
the Corporation elects not, or is unable, to make such a cash payment, the
Holder shall be entitled to receive, in lieu of the final fraction of a share,
one whole share of Common Stock.

                                       14
<PAGE>

            viii. Transfer Taxes. The issuance of certificates for shares of the
Common Stock on conversion of the Preferred Stock shall be made without charge
to the Holders thereof for any documentary stamp or similar taxes that may be
payable in respect of the issue or delivery of such certificate, provided that
the Corporation shall not be required to pay any tax that may be payable in
respect of any transfer involved in the issuance and delivery of any such
certificate upon conversion in a name other than that of the Holder of such
shares of Preferred Stock so converted and the Corporation shall not be required
to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Corporation the amount of
such tax or shall have established to the satisfaction of the Corporation that
such tax has been paid.

      Section 7. Certain Adjustments.

      a) Stock Dividends and Stock Splits. If the Corporation, at any time while
the Preferred Stock is outstanding: (A) shall pay a stock dividend or otherwise
make a distribution or distributions on shares of its Common Stock or any other
equity or equity equivalent securities payable in shares of Common Stock (which,
for avoidance of doubt, shall not include any shares of Common Stock issued by
the Corporation pursuant to this Preferred Sock), (B) subdivide outstanding
shares of Common Stock into a larger number of shares, (C) combine (including by
way of reverse stock split) outstanding shares of Common Stock into a smaller
number of shares, or (D) issue by reclassification of shares of the Common Stock
any shares of capital stock of the Corporation, then the Conversion Price shall
be multiplied by a fraction of which the numerator shall be the number of shares
of Common Stock (excluding treasury shares, if any) outstanding before such
event and of which the denominator shall be the number of shares of Common Stock
outstanding after such event. Any adjustment made pursuant to this Section shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.

      b) Subsequent Equity Sales. If the Corporation or any Subsidiary thereof,
as applicable, at any time while Preferred Stock is outstanding, shall offer,
sell, grant any option to purchase or offer, sell or grant any right to reprice
its securities, or otherwise dispose of or issue (or announce any offer, sale,
grant or any option to purchase or other disposition) any Common Stock or Common
Stock Equivalents entitling any Person to acquire shares of Common Stock, at an
effective price per share less than the then Conversion Price ("Dilutive

                                       15
<PAGE>

Issuance"), as adjusted hereunder (if the holder of the Common Stock or Common
Stock Equivalents so issued shall at any time, whether by operation of purchase
price adjustments, reset provisions, floating conversion, exercise or exchange
prices or otherwise, or due to warrants, options or rights per share which is
issued in connection with such issuance, be entitled to receive shares of Common
Stock at an effective price per share which is less than the Conversion Price,
such issuance shall be deemed to have occurred for less than the Conversion
Price), then the Conversion Price shall be reduced by multiplying the Conversion
Price by a fraction, the numerator of which is the number of shares of Common
Stock issued and outstanding immediately prior to the Dilutive Issuance plus the
number of shares of Common Stock which the offering price for such Dilutive
Issuance would purchase at the then Conversion Price, and the denominator of
which shall be the sum of the number of shares of Common Stock issued and
outstanding immediately prior to the Dilutive Issuance plus the number of shares
of Common Stock so issued or issuable in connection with the Dilutive Issuance.
Such adjustment shall be made whenever such Common Stock or Common Stock
Equivalents are issued. The Corporation shall notify the Holder in writing, no
later than the Business Day following the issuance of any Common Stock or Common
Stock Equivalents subject to this section, indicating therein the applicable
issuance price, or of applicable reset price, exchange price, conversion price
and other pricing terms (such notice the "Dilutive Issuance Notice"). For
purposes of clarification, whether or not the Corporation provides a Dilutive
Issuance Notice pursuant to this Section 7(b), upon the occurrence of any
Dilutive Issuance, after the date of such Dilutive Issuance the Holder is
entitled to receive a number of Conversion Shares based upon the Base Conversion
Price regardless of whether the Holder accurately refers to the Base Conversion
Price in the Notice of Conversion.

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

      d) Pro Rata Distributions. If the Corporation, at any time while Preferred
Stock is outstanding, shall distribute to all holders of Common Stock (and not
to Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security, then in each such case the Conversion
Price shall be determined by multiplying such Conversion Price in effect

                                       16
<PAGE>

immediately prior to the record date fixed for determination of stockholders
entitled to receive such distribution by a fraction of which the denominator
shall be the VWAP determined as of the record date mentioned above, and of which
the numerator shall be such VWAP on such record date less the then fair market
value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of the Common
Stock as determined by the Board of Directors in good faith. In either case the
adjustments shall be described in a statement provided to the Holders of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.

      e) Calculations. All calculations under this Section 7 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be. The
number of shares of Common Stock outstanding at any given time shall not include
shares owned or held by or for the account of the Corporation, and the
description of any such shares of Common Stock shall be considered on issue or
sale of Common Stock. For purposes of this Section 7, the number of shares of
Common Stock deemed to be issued and outstanding as of a given date shall be the
sum of the number of shares of Common Stock (excluding treasury shares, if any)
issued and outstanding.

      f) Notice to Holders.

            i. Adjustment to Conversion Price. Whenever the Conversion Price is
adjusted pursuant to any of this Section 7, the Corporation shall promptly mail
to each Holder a notice setting forth the Conversion Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment. If
the Corporation issues a variable rate security, despite the prohibition thereon
in the Purchase Agreement, the Corporation shall be deemed to have issued Common
Stock or Common Stock Equivalents at the lowest possible conversion or exercise
price at which such securities may be converted or exercised in the case of a
Variable Rate Transaction (as defined in the Purchase Agreement), or the lowest
possible adjustment price in the case of an MFN Transaction (as defined in the
Purchase Agreement).

            ii. Notice to Allow Conversion by Holder. If (A) the Corporation
shall declare a dividend (or any other distribution) on the Common Stock; (B)
the Corporation shall declare a special nonrecurring cash dividend on or a
redemption of the Common Stock; (C) the Corporation shall authorize the granting
to all holders of the Common Stock rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of any rights; (D) the
approval of any stockholders of the Corporation shall be required in connection
with any reclassification of the Common Stock, any consolidation or merger to
which the Corporation is a party, any sale or transfer of all or substantially
all of the assets of the Corporation, of any compulsory share exchange whereby
the Common Stock is converted into other securities, cash or property; (E) the
Corporation shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Corporation; then, in each case,
the Corporation shall cause to be filed at each office or agency maintained for
the purpose of conversion of the Preferred Stock, and shall cause to be mailed
to the Holders at their last addresses as they shall appear upon the stock books
of the Corporation, at least 20 calendar days prior to the applicable record or

                                       17
<PAGE>

effective date hereinafter specified, a notice stating (x) the date on which a
record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of the Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be determined or
(y) the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and the
date as of which it is expected that holders of the Common Stock of record shall
be entitled to exchange their shares of the Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange; provided, that the failure to mail such notice
or any defect therein or in the mailing thereof shall not affect the validity of
the corporate action required to be specified in such notice. Holders are
entitled to convert the Conversion Amount of Preferred Stock during the 20-day
period commencing the date of such notice to the effective date of the event
triggering such notice.

            iii. Fundamental Transaction. If, at any time while this Preferred
Stock is outstanding, (A) the Corporation effects any merger or consolidation of
the Corporation with or into another Person, (B) the Corporation effects any
sale of all or substantially all of its assets in one or a series of related
transactions, (C) any tender offer or exchange offer (whether by the Corporation
or another Person) is completed pursuant to which holders of Common Stock are
permitted to tender or exchange their shares for other securities, cash or
property, or (D) the Corporation effects any reclassification of the Common
Stock or any compulsory share exchange pursuant to which the Common Stock is
effectively converted into or exchanged for other securities, cash or property
(in any such case, a "Fundamental Transaction"), then upon any subsequent
conversion of this Preferred Stock, the Holder shall have the right to receive,
for each Conversion Share that would have been issuable upon such conversion
absent such Fundamental Transaction, the same kind and amount of securities,
cash or property as it would have been entitled to receive upon the occurrence
of such Fundamental Transaction if it had been, immediately prior to such
Fundamental Transaction, the holder of one share of Common Stock (the "Alternate
Consideration"). For purposes of any such conversion, the determination of the
Conversion Price shall be appropriately adjusted to apply to such Alternate
Consideration based on the amount of Alternate Consideration issuable in respect
of one share of Common Stock in such Fundamental Transaction, and the
Corporation shall apportion the Conversion Price among the Alternate
Consideration in a reasonable manner reflecting the relative value of any
different components of the Alternate Consideration. If holders of Common Stock
are given any choice as to the securities, cash or property to be received in a
Fundamental Transaction, then the Holder shall be given the same choice as to
the Alternate Consideration it receives upon any conversion of this Preferred
Stock following such Fundamental Transaction. To the extent necessary to
effectuate the foregoing provisions, any successor to the Corporation or
surviving entity in such Fundamental Transaction shall file a new Certificate of
Designations with the same terms and conditions and issue to the Holder new
preferred stock consistent with the foregoing provisions and evidencing the
Holder's right to convert such preferred stock into Alternate Consideration. The
terms of any agreement pursuant to which a Fundamental Transaction is effected
shall include terms requiring any such successor or surviving entity to comply
with the provisions of this paragraph (f)(iii) and insuring that this Preferred
Stock (or any such replacement security) will be similarly adjusted upon any
subsequent transaction analogous to a Fundamental Transaction.

                                       18
<PAGE>

            iv. Exempt Issuance. Notwithstanding the foregoing, no adjustment
will be made under this Section 7 in respect of an Exempt Issuance.

      Section 8. Redemption.

      a) Monthly Redemption. At any time after the 24 month anniversary of the
Original Issue Date, on each Monthly Redemption Date, the Corporation shall
redeem each Holder's Pro Rata Portion of the Monthly Redemption Amount plus
accrued but unpaid dividends, the sum of all liquidated damages and any other
amounts then owing to such Holder in respect of the shares of Preferred Stock
held by such Holder. For purposes of this subsection 8(a) only, "Pro Rata
Portion" is the ration of (x) the number of shares of Preferred Stock held by
such Holder on the Original Issue Date and (y) the sum of the aggregate shares
of Preferred Stock issued to all Holders. If any Holder shall no longer hold
shares of Preferred Stock, then the Pro Rata Portion shall be recalculated to
exclude such Holder's shares from clause (y) above and the Monthly Redemption
Amount shall be allocated pro-rata among the remaining Holders. The Monthly
Redemption Amount due on each Monthly Redemption Date shall, except as provided
in this Section, be paid in cash. As to any Monthly Redemption and upon 20
Trading Days' prior written irrevocable notice, in lieu of a cash redemption
payment the Corporation may elect to pay 100% of a Monthly Redemption in
Conversion Shares based on a conversion price equal to 95% of the average of the
20 VWAPs immediately prior to the applicable Monthly Redemption Date (subject to
adjustment for any stock dividend, stock split, stock combination or other
similar event affecting the Common Stock during such 20 Trading Day period) (the
"Monthly Conversion Price"); provided, however, that the Corporation may not pay
the Monthly Redemption Amount in Conversion Shares unless, on the Monthly
Redemption Date and during the 20 Trading Day period immediately prior thereto,
the Equity Conditions have been satisfied. The Holders may convert, pursuant to
Section 6(a), any shares of Preferred Stock subject to a Monthly Redemption at
any time prior to the date that the Monthly Redemption Amount and all amounts
owing thereon are due and paid in full. Any shares of Preferred Stock converted
during any 20 day period until the date the Monthly Redemption Amount is paid
shall be first applied to the shares of Preferred Stock subject to the Monthly
Redemption and such Holder's cash payment of the Monthly Redemption Amount on
such Monthly Redemption Date shall be reduced accordingly. The Corporation
covenants and agrees that it will honor all Notice of Conversions tendered up
until such amounts are paid in full.

                                       19
<PAGE>

      b) Redemption Procedure. The payment of cash and/or issuance of Common
Stock, as the case may be, pursuant to a Monthly Redemption shall be made on the
Monthly Redemption Date. If any portion of the cash payment for a Monthly
Redemption shall not be paid by the Corporation by the respective due date,
interest shall accrue thereon at the rate of 18% per annum (or the maximum rate
permitted by applicable law, whichever is less) until the payment of the Monthly
Redemption Amount plus all amounts owing thereon is paid in full. Alternatively,
if any portion of the Monthly Redemption Amount remains unpaid after such date,
the Holders subject to such redemption may elect, by written notice to the
Corporation given at any time thereafter, to invalidate ab initio such
redemption, notwithstanding anything herein contained to the contrary.
Notwithstanding anything to the contrary in this Section 8, the Corporation's
determination to redeem in cash or shares of Common Stock shall be applied
ratably among the Holders based upon the shares of Preferred Stock initially
purchased by each Holder, adjusted upward ratably in the event all of the shares
of Preferred Stock of any Holder are no longer outstanding. The Holder may elect
to convert the outstanding shares of Preferred Stock pursuant to Section 6 prior
to actual payment in cash for any redemption under this Section 8 by fax
delivery of a Notice of Conversion to the Corporation.

      Section 9. Redemption Upon Triggering Events.

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

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

            ii. if, during the Effectiveness Period, the effectiveness of the
Conversion Shares Registration Statement lapses for any reason for more than an
aggregate of 25 calendar days (which need not be consecutive days) during any 12
month period, or the Holder shall not be permitted to resell Registrable
Securities under the Conversion Shares Registration Statement for more than an
aggregate of 25 calendar days (which need not be consecutive days) during any 12
month period;

                                       20
<PAGE>

            iii. the Corporation shall fail to deliver certificates representing
Conversion Shares issuable upon a conversion hereunder that comply with the
provisions hereof prior to the 5th Trading Day after such shares are required to
be delivered hereunder, or the Corporation shall provide written notice to any
Holder, including by way of public announcement, at any time, of its intention
not to comply with requests for conversion of any shares of Preferred Stock in
accordance with the terms hereof;

            iv. one of the Events (as defined in the Registration Rights
Agreement) described in subsections (i), (ii) or (iii) of Section 2(b) of the
Registration Rights Agreement shall not have been cured to the satisfaction of
the Holders prior to the expiration of 30 days from the Event Date (as defined
in the Registration Rights Agreement) relating thereto (other than an Event
resulting from a failure of a Conversion Shares Registration Statement to be
declared effective by the Commission on or prior to the 180th day after the
Original Issue Date, which shall be covered by Section 9(a)(i));

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

            vi. the Corporation shall fail to have available a sufficient number
of authorized and unreserved shares of Common Stock to issue to such Holder upon
a conversion hereunder;

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

            viii. the Corporation shall redeem more than a de minimis number of
Junior Securities;

            ix. any breach of the agreements delivered to the initial Holders at
the Closing pursuant to Section 2.2(a)(vii) of the Purchase Agreement;

            x. the Corporation shall be party to a Change of Control
Transaction;

                                       21
<PAGE>

            xi. there shall have occurred a Bankruptcy Event; or

            xii. the Common Stock shall fail to be listed or quoted for trading
on a Trading Market and shall not again be eligible for and quoted or listed for
trading thereon within 5 Trading Days.

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

      Section 10. Miscellaneous.

      a) Notices. Any and all notices or other communications or deliveries to
be provided by the Holders hereunder, including, without limitation, any Notice
of Conversion, shall be in writing and delivered personally, by facsimile, sent
by a nationally recognized overnight courier service, addressed to the
Corporation, at the address set forth above, facsimile number 1 (646) 292 3534,
Attn: President or such other address or facsimile number as the Corporation may
specify for such purposes by notice to the Holders delivered in accordance with
this Section. Any and all notices or other communications or deliveries to be
provided by the Corporation hereunder shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service addressed to each Holder at the facsimile telephone number or address of
such Holder appearing on the books of the Corporation, or if no such facsimile
telephone number or address appears, at the principal place of business of the
Holder. Any notice or other communication or deliveries hereunder shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 5:30 p.m. (New York City
time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 5:30 p.m. (New York City time) on any date
and earlier than 11:59 p.m. (New York City time) on such date, (iii) the second
Business Day following the date of mailing, if sent by nationally recognized
overnight courier service, or (iv) upon actual receipt by the party to whom such
notice is required to be given.

                                       22
<PAGE>

      b) Absolute Obligation. Except as expressly provided herein, no provision
of this Certificate of Designation shall alter or impair the obligation of the
Corporation, which is absolute and unconditional, to pay the liquidated damages
(if any) on, the shares of Preferred Stock at the time, place, and rate, and in
the coin or currency, herein prescribed.

      c) Lost or Mutilated Preferred Stock Certificate. If a Holder's Preferred
Stock certificate shall be mutilated, lost, stolen or destroyed, the Corporation
shall execute and deliver, in exchange and substitution for and upon
cancellation of a mutilated certificate, or in lieu of or in substitution for a
lost, stolen or destroyed certificate, a new certificate for the shares of
Preferred Stock so mutilated, lost, stolen or destroyed but only upon receipt of
evidence of such loss, theft or destruction of such certificate, and of the
ownership hereof, and indemnity, if requested, all reasonably satisfactory to
the Corporation.

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

                                       23
<PAGE>

      e) Waiver. Any waiver by the Corporation or the Holder of a breach of any
provision of this Certificate of Designation shall not operate as or be
construed to be a waiver of any other breach of such provision or of any breach
of any other provision of this Certificate of Designation. The failure of the
Corporation or the Holder to insist upon strict adherence to any term of this
Certificate of Designation on one or more occasions shall not be considered a
waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Certificate of Designation. Any
waiver must be in writing.

      f) Severability. If any provision of this Certificate of Designation is
invalid, illegal or unenforceable, the balance of this Certificate of
Designation shall remain in effect, and if any provision is inapplicable to any
person or circumstance, it shall nevertheless remain applicable to all other
persons and circumstances. If it shall be found that any interest or other
amount deemed interest due hereunder violates applicable laws governing usury,
the applicable rate of interest due hereunder shall automatically be lowered to
equal the maximum permitted rate of interest.

      g) Next Business Day. Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day.

      h) Headings. The headings contained herein are for convenience only, do
not constitute a part of this Certificate of Designation and shall not be deemed
to limit or affect any of the provisions hereof.

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

                                       24
<PAGE>

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

        IN WITNESS WHEREOF, the undersigned have executed this Certificate this
27th day of October 2004.

--------------------------                              ------------------------
Name:   Douglas A. McIntyre                             Name:  Timothy Reusing
Title:  President                                              Title: Secretary

                                       25
<PAGE>

                                     ANNEX A

                              NOTICE OF CONVERSION

(To be Executed by the Registered Holder in order to Convert Shares of Preferred
Stock)

The undersigned hereby elects to convert the number of shares of Series D
Convertible Preferred Stock indicated below, into shares of common stock, par
value $0.01 per share (the "Common Stock"), of ON2 Technologies, Inc., a
Delaware corporation (the "Corporation"), according to the conditions hereof, as
of the date written below. If shares are to be issued in the name of a person
other than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Corporation in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if
any.

Conversion calculations:

   Date to Effect Conversion: _____________________________________________

   Number of shares of Preferred Stock owned prior to Conversion: ______________

   Number of shares of Preferred Stock to be Converted: ________________________

   Stated Value of shares of Preferred Stock to be Converted: __________________

   Number of shares of Common Stock to be Issued: ___________________________

   Applicable Conversion Price:

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

   Number of shares of Preferred Stock subsequent to Conversion: _______________

                                 [HOLDER]

                                 By:___________________________________
                                    Name:
                                    Title:

                                       26SECURITIES PURCHASE AGREEMENT

      This  Securities  Purchase  Agreement  (this  "Agreement")  is dated as of
October 27, 2004, by and among ON2 Technologies, Inc., a Nevada corporation (the
"Company"),  and the purchasers  identified on the signature pages hereto (each,
including  its  successors  and assigns,  a  "Purchaser"  and  collectively  the
"Purchasers").

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

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

                                    ARTICLE I
                                   DEFINITIONS

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

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

            "Actual Minimum" means, as of any date, the maximum aggregate number
      of shares of Common  Stock  then  issued or  potentially  issuable  in the
      future pursuant to the Transaction Documents, including any Warrant Shares
      or Underlying  Shares  issuable  upon  conversion in full of all shares of
      Preferred  Stock,  ignoring any  conversion  or exercise  limits set forth
      therein, and assuming that any previously  unconverted shares of Preferred
      Stock  are held  until  the 42nd  month  after  the  Closing  Date and all
      dividends   are  paid  in  shares  of  Common   Stock   until  such  date,
      notwithstanding  any  limitations  on  conversion  in the  Certificate  of
      Designation.

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

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

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

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

            "Commission" means the Securities and Exchange Commission.

            "Common  Stock"  means the common  stock of the  Company,  par value
      $0.01 per share,  and any  securities  into which such common  stock shall
      hereinafter have been reclassified into.

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

            "Company  Counsel" means  McGuireWoods  LLP, with offices located at
      1345 Avenue of the Americas, Seventh Floor, New York, New York 10105-0106.

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

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

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

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

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

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

            "Exempt  Issuance"  means the issuance of (a) shares of Common Stock
      or options to employees,  officers or directors of the Company pursuant to
      any stock or option plan duly  adopted by a majority  of the  non-employee
      members of the Board of  Directors  of the  Company  or a majority  of the
      members of a committee  of  non-employee  directors  established  for such
      purpose,  (b)  securities  upon  the  exercise  of or  conversion  of  any
      securities issued hereunder,  convertible securities,  options or warrants
      issued and outstanding on the date of this  Agreement,  provided that such
      securities  have not been  amended  since  the date of this  Agreement  to
      increase the number of such securities, and (c) securities issued pursuant
      to  acquisitions  or strategic  transactions,  provided any such  issuance
      shall only be to a Person which is, itself or through its subsidiaries, an
      operating  company  in a business  synergistic  with the  business  of the
      Company  and in which the  Company  receives  benefits  in addition to the
      investment  of funds,  but shall not  include a  transaction  in which the
      Company is issuing securities primarily for the purpose of raising capital
      or to an entity whose primary business is investing in securities.

                                       2
<PAGE>

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

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

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

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

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

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

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

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

            "Registration   Rights  Agreement"  means  the  Registration  Rights
      Agreement, dated the date hereof, among the Company and the Purchasers, in
      the form of Exhibit B attached hereto.

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

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

                                       3
<PAGE>

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

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

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

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

            "Shareholder Approval" means such approval as may be required by the
      applicable  rules and  regulations of the Trading Market (or any successor
      entity)  from  the  shareholders  of  the  Company  with  respect  to  the
      transactions  contemplated  by the  Transaction  Documents,  including the
      issuance of all of the Underlying  Shares and the Warrant Shares in excess
      of 19.99% of the issued and outstanding Common Stock on the Closing Date.

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

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

            "Subsequent  Financing" shall have the meaning ascribed to such term
      in Section 4.13.

            "Subsidiary"  means any  subsidiary  of the  Company as set forth on
      Schedule 3.1(a).

            "Trading  Day" means a day on which the Common  Stock is traded on a
      Trading Market.

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

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

                                       4
<PAGE>

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

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

            "Warrants" means collectively the Common Stock purchase warrants, in
      the forms of Exhibit C and Exhibit D,  delivered to the  Purchasers at the
      Closing in accordance with Section 2.2(a) hereof.

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

                                   ARTICLE II
                                PURCHASE AND SALE

      2.1  Closing.  On the  Closing  Date,  upon the terms and  subject  to the
conditions set forth herein,  concurrent with the execution and delivery of this
Agreement by the parties hereto,  the Company agrees to sell, and each Purchaser
agrees to purchase in the aggregate, severally and not jointly, up to $4,000,000
of shares of  Preferred  Stock with an  aggregated  Stated  Value  equal to such
Purchaser's  Subscription  Amount and  Warrants  as  determined  by  pursuant to
Section  2.2(a)(iii).  The  aggregate  number of shares of Preferred  Stock sold
hereunder shall be up to 4,000.  Each Purchaser shall deliver to the Company via
wire transfer or a certified check of immediately available funds equal to their
Subscription  Amount  and the  Company  shall  deliver to each  Purchaser  their
respective  shares of  Preferred  Stock and Warrants as  determined  pursuant to
Section  2.2(a) and the other  items set forth in Section  2.2  issuable  at the
Closing.  Upon  satisfaction  of the  conditions  set forth in Section  2.2, the
Closing shall occur at the offices of the Escrow Agent,  or such other  location
as the parties shall mutually agree.

      2.2 Deliveries.

            a)    On the Closing Date,  the Company shall deliver or cause to be
                  delivered to the Escrow  Agent with respect to each  Purchaser
                  the following:

                  (i)   this Agreement duly executed by the Company;

                  (ii)  a certificate evidencing a number of shares of Preferred
                        Stock  equal  to such  Purchaser's  Subscription  Amount
                        divided by the Stated  Value,  registered in the name of
                        such Purchaser;

                  (iii) a Warrant  registered  in the name of such  Purchaser to
                        purchase up to a number of shares of Common  Stock equal
                        to 50% of such Purchaser's  Subscription  Amount divided
                        by  $0.668,  with an  exercise  price  equal  to  $0.65,
                        subject to adjustment  therein,  and which Warrant shall
                        be exercisable  immediately  and have a term of exercise
                        equal to one year (the "Series A Warrant"),  in the form
                        of Exhibit C attached hereto;

                  (iv)  a Warrant  registered  in the name of such  Purchaser to
                        purchase up to a number of shares of Common  Stock equal
                        to 50% of such Purchaser's  Subscription  Amount divided
                        by  $0.668,  with an  exercise  price  equal  to  $0.76,
                        subject to  adjustment  therein,  which Warrant shall be
                        exercisable  immediately  and  have a term  of  exercise
                        equal to five years  (the  "Series B  Warrant"),  in the
                        form of Exhibit D attached hereto;

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

                  (vi)  a legal  opinion  of  Company  Counsel,  in the  form of
                        Exhibit E attached hereto;

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

                 (viii) the Escrow Agreement duly executed by the Company.

            b)    On the Closing Date,  each Purchaser shall deliver or cause to
                  be delivered to the Escrow Agent the following:

                  (i)   this Agreement duly executed by such Purchaser;

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

                                       5
<PAGE>

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

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

2.3   Closing Conditions.

      a)    The  obligations  of the Company  hereunder in  connection  with the
            Closing are subject to the following conditions being met:

            (i)   the  accuracy in all  material  respects  when made and on the
                  Closing  Date of the  representations  and  warranties  of the
                  Purchasers contained herein;

            (ii)  all  obligations,  covenants and  agreements of the Purchasers
                  required to be performed at or prior to the Closing Date shall
                  have been performed; and

            (iii) the  delivery  by the  Purchasers  of the  items  set forth in
                  Section 2.2(b) of this Agreement.

      b)    The respective obligations of the Purchasers hereunder in connection
            with the Closing are subject to the following conditions being met:

            (i)   the accuracy in all  material  respects on the Closing Date of
                  the  representations  and warranties of the Company  contained
                  herein;

            (ii)  all  obligations,  covenants  and  agreements  of the  Company
                  required to be performed at or prior to the Closing Date shall
                  have been performed;

            (iii) the  delivery by the Company of the items set forth in Section
                  2.2(a) of this Agreement;

            (iv)  there shall have been no Material  Adverse Effect with respect
                  to the Company since the date hereof; and

            (v)   From the date  hereof  to the  Closing  Date,  trading  in the
                  Common Stock shall not have been  suspended by the  Commission
                  (except  for any  suspension  of trading  of limited  duration
                  agreed to by the Company, which suspension shall be terminated
                  prior to the  Closing),  and, at any time prior to the Closing
                  Date, trading in securities generally as reported by Bloomberg
                  Financial Markets shall not have been suspended or limited, or
                  minimum  prices shall not have been  established on securities
                  whose trades are reported by such  service,  or on any Trading
                  Market,  nor shall a  banking  moratorium  have been  declared
                  either by the United States or New York State authorities.

                                       6
<PAGE>

                                   ARTICLE III
                         REPRESENTATIONS AND WARRANTIES

      3.1  Representations  and  Warranties of the Company.  Except as set forth
under the  corresponding  section of the disclosure  schedules  delivered to the
Purchasers  concurrently herewith (the "Disclosure  Schedules") which Disclosure
Schedules  shall  be  deemed  a  part  hereof,  the  Company  hereby  makes  the
representations and warranties set forth below to each Purchaser.

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

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

            (c)  Authorization;  Enforcement.  The  Company  has  the  requisite
      corporate  power  and  authority  to  enter  into  and to  consummate  the
      transactions  contemplated  by  each  of  the  Transaction  Documents  and
      otherwise  to carry out its  obligations  thereunder.  The  execution  and
      delivery  of each of the  Transaction  Documents  by the  Company  and the
      consummation by it of the transactions contemplated thereby have been duly
      authorized  by all  necessary  action  on the part of the  Company  and no
      further  action is required by the Company in connection  therewith  other
      than in connection with the Required Approvals.  Each Transaction Document
      has been (or upon  delivery  will have been) duly  executed by the Company
      and, when delivered in accordance  with the terms hereof,  will constitute
      the valid and binding  obligation of the Company  enforceable  against the
      Company in  accordance  with its terms except (i) as limited by applicable
      bankruptcy,  insolvency,  reorganization,  moratorium  and  other  laws of
      general application  affecting  enforcement of creditors' rights generally
      and (ii) as limited  by laws  relating  to the  availability  of  specific
      performance, injunctive relief or other equitable remedies.

                                       7
<PAGE>

            (d) No Conflicts.  The  execution,  delivery and  performance of the
      Transaction  Documents by the Company and the  consummation by the Company
      of the other  transactions  contemplated  thereby do not and will not: (i)
      conflict   with  or  violate  any   provision  of  the  Company's  or  any
      Subsidiary's  certificate  or articles of  incorporation,  bylaws or other
      organizational or charter documents,  or (ii) conflict with, or constitute
      a default  (or an event  that with  notice or lapse of time or both  would
      become a default)  under,  result in the  creation of any Lien upon any of
      the  properties  or assets of the  Company or any  Subsidiary,  or give to
      others any rights of termination,  amendment, acceleration or cancellation
      (with or without notice, lapse of time or both) of, any agreement,  credit
      facility,  debt or other  instrument  (evidencing  a Company or Subsidiary
      debt or otherwise) to which the Company or any Subsidiary is a party or by
      which any property or asset of the Company or any  Subsidiary  is bound or
      affected,  or (iii)  subject to the Required  Approvals,  conflict with or
      result in a  violation  of any law,  rule,  regulation,  order,  judgment,
      injunction,  decree  or other  restriction  of any  court or  governmental
      authority  to which the  Company or a  Subsidiary  is  subject  (including
      federal  and  state  securities  laws and  regulations),  or by which  any
      property or asset of the  Company or a  Subsidiary  is bound or  affected;
      except in the case of each of clauses  (ii) and  (iii),  such as could not
      have or reasonably be expected to result in a Material Adverse Effect.

            (e) Filings,  Consents and Approvals. The Company is not required to
      obtain any consent, waiver, authorization or order of, give any notice to,
      or make any  filing or  registration  with,  any  court or other  federal,
      state, local or other governmental authority or other Person in connection
      with  the  execution,  delivery  and  performance  by the  Company  of the
      Transaction Documents, other than (i) filings required pursuant to Section
      4.6, (ii) the filing with the  Commission of the  Registration  Statement,
      (iii) the notice and/or  application(s) to each applicable  Trading Market
      for the  issuance  and sale of the  Preferred  Stock and  Warrants and the
      listing of the Underlying Shares and Warrant Shares for trading thereon in
      the time and manner required  thereby,  (iv) the filing of Form D with the
      Commission  and such filings as are  required to be made under  applicable
      state securities laws and (vi)  Shareholder  Approval  (collectively,  the
      "Required Approvals").

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

                                       8
<PAGE>

            (g)  Capitalization.   The  capitalization  of  the  Company  is  as
      described  in the  Company's  most recent  periodic  report filed with the
      Commission. The Company has not issued any capital stock since such filing
      other than  pursuant to the exercise of employee  stock  options under the
      Company's  stock option  plans,  the issuance of shares of Common Stock to
      employees  pursuant to the  Company's  employee  stock  purchase  plan and
      pursuant  to the  conversion  or  exercise  of  outstanding  Common  Stock
      Equivalents.  No Person has any right of first refusal,  preemptive right,
      right  of  participation,  or any  similar  right  to  participate  in the
      transactions contemplated by the Transaction Documents. Except as a result
      of the  purchase  and sale of the  Securities,  there  are no  outstanding
      options,  warrants, script rights to subscribe to, calls or commitments of
      any character whatsoever relating to, or securities, rights or obligations
      convertible  into or  exchangeable  for, or giving any Person any right to
      subscribe  for or  acquire,  any  shares of Common  Stock,  or  contracts,
      commitments,  understandings  or  arrangements by which the Company or any
      Subsidiary  is or may become  bound to issue  additional  shares of Common
      Stock or Common Stock Equivalents. The issuance and sale of the Securities
      will not  obligate  the Company to issue  shares of Common  Stock or other
      securities to any Person (other than the  Purchasers)  and will not result
      in a right of any holder of  Company  securities  to adjust the  exercise,
      conversion,  exchange  or reset price  under such  securities.  All of the
      outstanding  shares of capital  stock of the Company  are validly  issued,
      fully paid and  nonassessable,  have been  issued in  compliance  with all
      federal and state securities laws, and none of such outstanding shares was
      issued  in  violation  of any  preemptive  rights  or  similar  rights  to
      subscribe for or purchase securities. No further approval or authorization
      of any  stockholder,  the Board of  Directors  of the Company or others is
      required for the issuance and sale of the shares of Preferred Stock. There
      are  no  stockholders  agreements,  voting  agreements  or  other  similar
      agreements  with  respect  to the  Company's  capital  stock to which  the
      Company is a party or, to the  knowledge of the Company,  between or among
      any of the Company's stockholders.

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

                                       9
<PAGE>

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

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

                                       10
<PAGE>

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

            (l)  Compliance.  Neither the Company nor any  Subsidiary  (i) is in
      default  under or in violation of (and no event has occurred  that has not
      been waived that, with notice or lapse of time or both,  would result in a
      default by the Company or any  Subsidiary  under),  nor has the Company or
      any Subsidiary  received  notice of a claim that it is in default under or
      that it is in violation of, any indenture, loan or credit agreement or any
      other agreement or instrument to which it is a party or by which it or any
      of its  properties is bound  (whether or not such default or violation has
      been waived),  (ii) is in violation of any order of any court,  arbitrator
      or governmental body, or (iii) is or has been in violation of any statute,
      rule  or  regulation  of any  governmental  authority,  including  without
      limitation all foreign,  federal,  state and local laws  applicable to its
      business except in each case as could not have a Material Adverse Effect.

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

            (n) Title to Assets.  The Company and the Subsidiaries have good and
      marketable  title in fee simple to all real property owned by them that is
      material to the business of the Company and the  Subsidiaries and good and
      marketable  title in all personal  property owned by them that is material
      to the business of the Company and the Subsidiaries, in each case free and
      clear of all Liens, except for Liens as do not materially affect the value
      of such  property and do not  materially  interfere  with the use made and
      proposed to be made of such  property by the Company and the  Subsidiaries
      and Liens for the payment of federal, state or other taxes, the payment of
      which is neither  delinquent  nor subject to penalties.  Any real property
      and facilities  held under lease by the Company and the  Subsidiaries  are
      held by them under valid,  subsisting and enforceable  leases of which the
      Company and the Subsidiaries are in compliance.

            (o) Patents and Trademarks.  The Company and the Subsidiaries  have,
      or have  rights to use,  all  patents,  patent  applications,  trademarks,
      trademark applications,  service marks, trade names, copyrights,  licenses
      and  other  similar  rights  that are  necessary  or  material  for use in
      connection  with  their  respective  businesses  as  described  in the SEC
      Reports  and which the  failure to so have  could have a Material  Adverse
      Effect  (collectively,  the "Intellectual  Property Rights").  Neither the
      Company  nor any  Subsidiary  has  received  a  written  notice  that  the
      Intellectual  Property  Rights  used  by the  Company  or  any  Subsidiary
      violates or infringes  upon the rights of any Person.  To the knowledge of
      the Company,  all such  Intellectual  Property  Rights are enforceable and
      there  is no  existing  infringement  by  another  Person  of  any  of the
      Intellectual Property Rights.

                                       11
<PAGE>

            (p)  Insurance.  The  Company  and the  Subsidiaries  are insured by
      insurers of recognized  financial  responsibility  against such losses and
      risks and in such amounts as are prudent and  customary in the  businesses
      in which the Company and the Subsidiaries  are engaged,  including but not
      limited to,  directors and officers  insurance  coverage at least equal to
      the aggregate  Subscription  Amount.  To the best of Company's  knowledge,
      such insurance  contracts and policies are accurate and complete.  Neither
      the Company nor any  Subsidiary has any reason to believe that it will not
      be able to renew its existing insurance coverage as and when such coverage
      expires or to obtain  similar  coverage  from  similar  insurers as may be
      necessary to continue its business without a significant increase in cost.

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

            (r) Sarbanes-Oxley;  Internal Accounting Controls. The Company is in
      material  compliance with all provisions of the Sarbanes-Oxley Act of 2002
      which are  applicable  to it as of the Closing  Date.  The Company and the
      Subsidiaries  maintain a system of internal accounting controls sufficient
      to provide  reasonable  assurance  that (i)  transactions  are executed in
      accordance  with  management's  general or specific  authorizations,  (ii)
      transactions are recorded as necessary to permit  preparation of financial
      statements in conformity  with GAAP and to maintain asset  accountability,
      (iii) access to assets is permitted only in accordance  with  management's
      general or specific  authorization,  and (iv) the recorded  accountability
      for assets is compared with the existing  assets at  reasonable  intervals
      and  appropriate  action is taken  with  respect to any  differences.  The
      Company has established  disclosure controls and procedures (as defined in
      Exchange Act Rules  13a-15(e) and  15d-15(e)) for the Company and designed
      such   disclosure   controls  and   procedures  to  ensure  that  material
      information relating to the Company,  including its Subsidiaries,  is made
      known  to  the  certifying  officers  by  others  within  those  entities,
      particularly  during the period in which the Company's most recently filed
      periodic  report  under  the  Exchange  Act,  as the case may be, is being
      prepared.   The  Company's   certifying   officers   have   evaluated  the
      effectiveness  of the  Company's  controls and  procedures  as of the date
      prior to the filing date of the most recently filed periodic  report under
      the Exchange Act (such date, the "Evaluation Date"). The Company presented
      in its most  recently  filed  periodic  report  under the Exchange Act the
      conclusions of the  certifying  officers  about the  effectiveness  of the
      disclosure  controls and procedures  based on their  evaluations as of the
      Evaluation Date. Since the Evaluation Date, there have been no significant
      changes in the  Company's  internal  controls  (as such term is defined in
      Item 307(b) of Regulation S-K under the Exchange Act) or, to the Company's
      knowledge,  in other factors that could significantly affect the Company's
      internal controls.

                                       12
<PAGE>

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

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

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

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

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

                                       13
<PAGE>

            (x) Application of Takeover  Protections.  The Company and its Board
      of Directors have taken all necessary  action,  if any, in order to render
      inapplicable any control share acquisition,  business combination,  poison
      pill  (including  any  distribution  under a  rights  agreement)  or other
      similar  anti-takeover   provision  under  the  Company's  Certificate  of
      Incorporation  (or similar charter  documents) or the laws of its state of
      incorporation  that is or could become  applicable to the  Purchasers as a
      result of the Purchasers and the Company  fulfilling their  obligations or
      exercising their rights under the Transaction Documents, including without
      limitation the Company's  issuance of the  Securities and the  Purchasers'
      ownership of the Securities.

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

            (z) No Integrated Offering. Assuming the accuracy of the Purchasers'
      representations  and  warranties  set forth in Section  3.2,  neither  the
      Company, nor any of its affiliates,  nor any Person acting on its or their
      behalf  has,  directly  or  indirectly,  made any  offers  or sales of any
      security or solicited any offers to buy any security,  under circumstances
      that would cause this offering of the  Securities  to be  integrated  with
      prior  offerings by the Company for purposes of the  Securities Act or any
      applicable shareholder approval provisions, including, without limitation,
      under the rules and  regulations  of any exchange or  automated  quotation
      system  on which  any of the  securities  of the  Company  are  listed  or
      designated.

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

                                       14
<PAGE>

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

            (cc) Tax Status.  Except for matters that would not, individually or
      in the  aggregate,  have or reasonably be expected to result in a Material
      Adverse  Effect,  the Company and each  Subsidiary has filed all necessary
      federal,  state and foreign  income and franchise tax returns and has paid
      or  accrued  all  taxes  shown  as due  thereon,  and the  Company  has no
      knowledge  of a tax  deficiency  which  has been  asserted  or  threatened
      against the Company or any Subsidiary.

            (dd) No General  Solicitation.  Neither  the  Company nor any person
      acting on behalf of the Company has offered or sold any of the  Securities
      by any form of general  solicitation or general  advertising.  The Company
      has offered the  Securities  for sale only to the  Purchasers  and certain
      other  "accredited  investors"  within  the  meaning of Rule 501 under the
      Securities Act.

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

                                       15
<PAGE>

            (ff)  Accountants.  The  Company's  accountants  are  set  forth  on
      Schedule 3.1(ff) of the Disclosure  Schedule.  To the Company's knowledge,
      such accountants,  who the Company expects will express their opinion with
      respect to the financial statements to be included in the Company's Annual
      Report  on Form  10-KSB  for the  year  ending  December  31,  2004  are a
      registered public accounting firm as required by the Securities Act.

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

            (hh) No  Disagreements  with  Accountants and Lawyers.  There are no
      disagreements of any kind presently existing, or reasonably anticipated by
      the Company to arise,  between  the  accountants  and lawyers  formerly or
      presently  employed by the Company which  individually or in the aggregate
      could  reasonably  be expected to result in a Material  Adverse  Effect or
      result in a delay in the effectiveness of the Registration Statement,  and
      the Company is current  with  respect to any fees owed to its  accountants
      and lawyers.

            (ii) Acknowledgment  Regarding  Purchasers'  Purchase of Securities.
      The Company  acknowledges and agrees that each of the Purchasers is acting
      solely in the  capacity of an arm's length  purchaser  with respect to the
      Transaction  Documents  and  the  transactions  contemplated  hereby.  The
      Company  further  acknowledges  that no Purchaser is acting as a financial
      advisor or  fiduciary  of the Company (or in any  similar  capacity)  with
      respect to this Agreement and the transactions contemplated hereby and any
      advice given by any Purchaser or any of their  respective  representatives
      or  agents  in  connection  with  this  Agreement  and  the   transactions
      contemplated  hereby is merely  incidental to the Purchasers'  purchase of
      the Securities.  The Company further represents to each Purchaser that the
      Company's  decision to enter into this  Agreement has been based solely on
      the independent evaluation of the transactions  contemplated hereby by the
      Company and its representatives.

      The Purchaser  acknowledges  and agrees that the Company does not make and
has not made any  representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in this Section 3.1.

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

                                       16
<PAGE>

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

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

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

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

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

                                       17
<PAGE>

            (f) Short Sale.  Each Purchaser  represents that after the date that
      such Purchaser  learned of the terms of this  transaction and prior to the
      date hereof, neither it nor any Person over which the Purchaser has direct
      control,  have made any net short  sales of, or granted any option for the
      purchase of or entered  into any hedging or similar  transaction  with the
      same economic effect as a net short sale, in the Common Stock.

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

                                   ARTICLE IV
                         OTHER AGREEMENTS OF THE PARTIES

      4.1 Transfer Restrictions.

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

            (b) The Purchasers  agree to the imprinting,  so long as is required
      by this  Section  4.1(b),  of a  legend  on any of the  Securities  in the
      following form:

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

                                       18
<PAGE>

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

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

                                       19
<PAGE>

            (d) In addition to such Purchaser's  other available  remedies,  the
      Company shall pay to a Purchaser,  in cash, as partial  liquidated damages
      and not as a penalty,  for each  $1,000 of  Underlying  Shares and Warrant
      Shares (based on the VWAP of the Common Stock on the date such  Securities
      are submitted to the Company's  transfer  agent)  delivered for removal of
      the restrictive legend and subject to this Section 4.1(c), $10 per Trading
      Day  (increasing  to $20 per Trading Day 5 Trading Days after such damages
      have begun to accrue) for each  Trading Day after the Legend  Removal Date
      until such certificate is delivered without a legend. Nothing herein shall
      limit such  Purchaser's  right to pursue actual  damages for the Company's
      failure to deliver certificates representing any Securities as required by
      the  Transaction  Documents,  and such  Purchaser  shall have the right to
      pursue all remedies available to it at law or in equity including, without
      limitation, a decree of specific performance and/or injunctive relief.

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

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

      4.2 Acknowledgment of Dilution. The Company acknowledges that the issuance
of the  Securities  may result in dilution of the  outstanding  shares of Common
Stock,  which dilution may be substantial under certain market  conditions.  The
Company  further   acknowledges  that  its  obligations  under  the  Transaction
Documents,  including without  limitation its obligation to issue the Underlying
Shares  and the  Warrant  Shares  pursuant  to the  Transaction  Documents,  are
unconditional   and   absolute  and  not  subject  to  any  right  of  set  off,
counterclaim,  delay or reduction, regardless of the effect of any such dilution
or any claim the Company may have against any  Purchaser  and  regardless of the
dilutive  effect  that  such  issuance  may have on the  ownership  of the other
stockholders of the Company.

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

                                       20
<PAGE>

      4.4  Integration.  The Company  shall not sell,  offer for sale or solicit
offers to buy or  otherwise  negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the  Securities  in a manner that would  require the  registration  under the
Securities  Act of the sale of the Securities to the Purchasers or that would be
integrated  with the offer or sale of the  Securities  for purposes of the rules
and regulations of any Trading Market.

      4.5  Conversion  and Exercise  Procedures.  The form of Notice of Exercise
included  in  the  Warrants  and  the  Notice  of  Conversion  included  in  the
Certificate of Designations set forth the totality of the procedures required of
the Purchasers in order to exercise the Warrants or convert the Preferred Stock.
Other than as may be required by applicable  law or by the rules  promulgated by
the Commission, no additional legal opinion or other information or instructions
shall be required of the  Purchasers to exercise their Warrants or convert their
Preferred  Stock.  The  Company  shall  honor  exercises  of  the  Warrants  and
conversions  of the  Preferred  Stock and  shall  deliver  Underlying  Shares in
accordance  with  the  terms,  conditions  and  time  periods  set  forth in the
Transaction Documents.

      4.6 Securities Laws Disclosure; Publicity. The Company shall, by 8:30 a.m.
Eastern  time on the  Trading Day  following  the date  hereof,  issue a Current
Report on Form 8-K,  reasonably  acceptable  to each  Purchaser  disclosing  the
material terms of the  transactions  contemplated  hereby,  and shall attach the
Transaction Documents thereto. The Company and each Purchaser shall consult with
each other in issuing any other press releases with respect to the  transactions
contemplated  hereby,  and neither the Company nor any Purchaser shall issue any
such press release or otherwise make any such public statement without the prior
consent of the Company,  with respect to any press release of any Purchaser,  or
without the prior consent of each  Purchaser,  with respect to any press release
of the Company, which consent shall not unreasonably be withheld, except if such
disclosure is required by law, in which case the disclosing party shall promptly
provide  the  other  party  with  prior  notice  of  such  public  statement  or
communication.  Notwithstanding  the  foregoing,  the Company shall not publicly
disclose the name of any Purchaser,  or include the name of any Purchaser in any
filing with the Commission or any regulatory  agency or Trading Market,  without
the prior written consent of such  Purchaser,  except (i) as required by federal
securities law in connection with the registration statement contemplated by the
Registration Rights Agreement and (ii) to the extent such disclosure is required
by law or Trading  Market  regulations,  in which case the Company shall provide
the Purchasers  with prior notice of such  disclosure  permitted under subclause
(i) or (ii).

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

                                       21
<PAGE>

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

      4.9 Use of Proceeds.  Except as set forth on Schedule 4.9 attached hereto,
the Company shall use the net proceeds from the sale of the Securities hereunder
for working capital  purposes and not for the satisfaction of any portion of the
Company's debt (other than payment of trade  payables in the ordinary  course of
the Company's  business and prior  practices),  to redeem any Company  equity or
equity-equivalent  securities or to settle any outstanding litigation.  Prior to
the receipt of  Shareholder  Approval,  the Company shall not declare or pay any
cash dividend on its shares of Common Stock while any shares of Preferred  Stock
remain outstanding.

      4.10  Reimbursement.  If any Purchaser becomes involved in any capacity in
any  Proceeding  by or against  any Person who is a  stockholder  of the Company
(except as a result of sales, pledges,  margin sales and similar transactions by
such Purchaser to or with any current  stockholder),  solely as a result of such
Purchaser's acquisition of the Securities under this Agreement, the Company will
reimburse such Purchaser for its reasonable legal and other expenses  (including
the cost of any  investigation  preparation and travel in connection  therewith)
incurred  in  connection   therewith,   as  such  expenses  are  incurred.   The
reimbursement  obligations  of the  Company  under  this  paragraph  shall be in
addition to any  liability  which the Company may otherwise  have,  shall extend
upon the same terms and  conditions to any  Affiliates of the Purchasers who are
actually  named in such  action,  proceeding  or  investigation,  and  partners,
directors,  agents,  employees and controlling persons (if any), as the case may
be, of the  Purchasers  and any such  Affiliate,  and shall be binding  upon and
inure  to  the  benefit  of  any   successors,   assigns,   heirs  and  personal
representatives  of the Company,  the  Purchasers and any such Affiliate and any
such Person.  The Company also agrees that neither the  Purchasers  nor any such
Affiliates,  partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any Person asserting claims on behalf of or
in right of the Company  solely as a result of acquiring  the  Securities  under
this Agreement.

      4.11  Indemnification  of  Purchasers.  Subject to the  provisions of this
Section  4.11,  the Company will  indemnify  and hold the  Purchasers  and their
directors,  officers,  shareholders,  partners,  employees and agents  (each,  a
"Purchaser Party") harmless from any and all losses,  liabilities,  obligations,
claims,  contingencies,  damages,  costs and expenses,  including all judgments,
amounts paid in  settlements,  court costs and  reasonable  attorneys'  fees and
costs of  investigation  that any such Purchaser  Party may suffer or incur as a
result  of or  relating  to (a)  any  breach  of  any  of  the  representations,
warranties,  covenants or agreements made by the Company in this Agreement or in
the  other  Transaction  Documents  or  (b)  any  action  instituted  against  a
Purchaser, or any of them or their respective Affiliates,  by any stockholder of
the Company who is not an  Affiliate of such  Purchaser,  with respect to any of
the transactions  contemplated by the Transaction  Documents (unless such action
is  based  upon a  breach  of such  Purchaser's  representation,  warranties  or
covenants  under the Transaction  Documents or any agreements or  understandings
such  Purchaser  may have with any such  stockholder  or any  violations  by the
Purchaser of state or federal  securities  laws or any conduct by such Purchaser
which constitutes fraud,  gross negligence,  willful misconduct or malfeasance).
If any action shall be brought  against any Purchaser  Party in respect of which
indemnity may be sought pursuant to this  Agreement,  such Purchaser Party shall
promptly notify the Company in writing,  and the Company shall have the right to
assume the defense thereof with counsel of its own choosing. Any Purchaser Party
shall  have  the  right to  employ  separate  counsel  in any  such  action  and
participate  in the defense  thereof,  but the fees and expenses of such counsel
shall be at the expense of such  Purchaser  Party  except to the extent that (i)
the  employment  thereof  has been  specifically  authorized  by the  Company in
writing, (ii) the Company has failed after a reasonable period of time to assume
such  defense  and to employ  counsel or (iii) in such  action  there is, in the
reasonable opinion of such separate counsel, a material conflict on any material
issue  between the  position of the Company and the  position of such  Purchaser
Party.  The  Company  will not be  liable  to any  Purchaser  Party  under  this
Agreement  (i) for any  settlement  by a Purchaser  Party  effected  without the
Company's prior written  consent,  which shall not be  unreasonably  withheld or
delayed;  or (ii) to the  extent,  but only to the  extent  that a loss,  claim,
damage or liability is  attributable  to any Purchaser  Party's breach of any of
the representations,  warranties, covenants or agreements made by the Purchasers
in this Agreement or in the other Transaction Documents.

                                       22
<PAGE>

      4.12 Reservation and Listing of Securities.

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

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

            (c) The Company  shall,  if  applicable:  (i) in the time and manner
      required by the Trading Market,  prepare and file with such Trading Market
      an additional  shares listing  application  covering a number of shares of
      Common  Stock at least  equal to the  Actual  Minimum  on the date of such
      application,  (ii) take all steps necessary to cause such shares of Common
      Stock to be approved for listing on the Trading Market as soon as possible
      thereafter,  (iii) provide to the Purchasers evidence of such listing, and
      (iv)  maintain the listing of such Common Stock on any date at least equal
      to the  Actual  Minimum  on such date on such  Trading  Market or  another
      Trading Market.  In addition,  the Company shall hold a special meeting of
      shareholders  (which may also be at the annual meeting of shareholders) at
      the earliest  practical date after the date the number of shares of Common
      Stock issuable  pursuant to this  Agreement  exceeds 15% of the issued and
      outstanding  shares of Common Stock on the Closing Date for the purpose of
      obtaining Shareholder  Approval,  with the recommendation of the Company's
      Board of Directors  that such proposal be approved,  and the Company shall
      solicit proxies from its shareholders in connection  therewith in the same
      manner as all other  management  proposals in such proxy statement and all
      management-appointed  proxyholders  shall vote  their  proxies in favor of
      such proposal.

                                       23
<PAGE>

      4.13 Participation in Future Financing.  From the date hereof until the 12
month  anniversary of the Effective  Date,  upon any financing by the Company or
any of  its  Subsidiaries  of  Common  Stock  or  Common  Stock  Equivalents  (a
"Subsequent  Financing"),  each Purchaser shall have the right to participate in
up to 100% of the Subsequent Financing (the "Participation  Maximum").  At least
10 Trading Days prior to the closing of the  Subsequent  Financing,  the Company
shall  deliver to each  Purchaser a written  notice of its intention to effect a
Subsequent Financing  ("Pre-Notice"),  which Pre-Notice shall ask such Purchaser
if it wants to review the details of such financing (such  additional  notice, a
"Subsequent Financing Notice"). Upon the request of a Purchaser, and only upon a
request by such Purchaser,  for a Subsequent Financing Notice, the Company shall
promptly,  but no later  than 1  Trading  Day  after  such  request,  deliver  a
Subsequent  Financing Notice to such Purchaser.  The Subsequent Financing Notice
shall  describe  in  reasonable  detail the  proposed  terms of such  Subsequent
Financing,  the amount of proceeds intended to be raised thereunder,  the Person
with whom such Subsequent Financing is proposed to be effected,  and attached to
which shall be a term sheet or similar document relating thereto.  Any Purchaser
electing to participate in the Subsequent  Financing  shall be prepared to close
on such financing  within 5 Trading Days pursuant to the terms of the Subsequent
Financing  Notice.  If by 5:30 p.m. (New York City time) on the 10th Trading Day
after all of the Purchasers have received the Pre-Notice,  notifications  by the
Purchasers of their  willingness to participate in the Subsequent  Financing (or
to cause their  designees to  participate)  is, in the aggregate,  less than the
total  amount of the  Subsequent  Financing,  then the  Company  may  effect the
remaining  portion of such Subsequent  Financing on the terms and to the Persons
set forth in the Subsequent  Financing Notice. If the Company receives no notice
from a Purchaser as of such 10th Trading Day, such Purchaser  shall be deemed to
have  notified  the Company that it does not elect to  participate.  The Company
must provide the Purchasers with a second Subsequent  Financing Notice,  and the
Purchasers  will again have the right of  participation  set forth above in this
Section  4.13, if the  Subsequent  Financing  subject to the initial  Subsequent
Financing  Notice is not  consummated  for any  reason on the terms set forth in
such  Subsequent  Financing  Notice within 60 Trading Days after the date of the
initial Subsequent Financing Notice. In the event the Company receives responses
to Subsequent  Financing  Notices from Purchasers  seeking to purchase more than
the aggregate amount of the Subsequent Financing, each such Purchaser shall have
the  right to  purchase  their  Pro  Rata  Portion  (as  defined  below)  of the
Participation  Maximum.  "Pro Rata Portion" is the ratio of (x) the Subscription
Amount of Securities  purchased by a participating  Purchaser and (y) the sum of
the   aggregate   Subscription   Amount   of   all   participating   Purchasers.
Notwithstanding  the foregoing,  this Section 4.13 shall not apply in respect of
an Exempt Issuance.

                                       24
<PAGE>

      4.14 Subsequent  Equity Sales.  From the date hereof until 90 Trading Days
after the Effective  Date,  neither the Company nor any  Subsidiary  shall issue
shares of Common Stock or Common Stock Equivalents;  provided,  however,  the 90
day period set forth in this  Section  4.14 shall be extended  for the number of
Trading  Days during  such  period in which (y)  trading in the Common  Stock is
suspended by any Trading  Market,  or (z)  following  the  Effective  Date,  the
Registration  Statement  is not  effective  or the  prospectus  included  in the
Registration  Statement may not be used by the  Purchasers for the resale of the
Underlying  Shares and Warrant Shares.  In addition to the limitations set forth
herein, from the date hereof until such time as no Purchaser holds any more than
25%  of  the  Securities  initially  issued  hereunder,  the  Company  shall  be
prohibited from effecting or entering into an agreement to effect any Subsequent
Financing  involving a "Variable Rate Transaction" or an "MFN Transaction" (each
as defined below). The term "Variable Rate Transaction" shall mean a transaction
in which the Company issues or sells (i) any debt or equity  securities that are
convertible  into,  exchangeable  or  exercisable  for,  or include the right to
receive  additional shares of Common Stock either (A) at a conversion,  exercise
or  exchange  rate or other  price that is based  upon  and/or  varies  with the
trading prices of or quotations for the shares of Common Stock at any time after
the  initial  issuance  of  such  debt  or  equity  securities,  or  (B)  with a
conversion,  exercise or  exchange  price that is subject to being reset at some
future date after the initial  issuance of such debt or equity  security or upon
the occurrence of specified or contingent events directly or indirectly  related
to the business of the Company or the market for the Common Stock. The term "MFN
Transaction"  shall mean a transaction  in which the Company issues or sells any
securities in a capital  raising  transaction or series of related  transactions
which  grants to an investor the right to receive  additional  shares based upon
future transactions of the Company on terms more favorable than those granted to
such investor in such offering; provided, however, this prohibition shall not be
interpreted  to preclude the Company  from  granting an investor  standard  full
ratchet  or  weighted  average  anti-dilution  protections  for a  warrant  or a
convertible  instrument.  In  addition,  unless  Shareholder  Approval  has been
obtained  and  deemed  effective,  the  Company  shall  not  make  any  issuance
whatsoever  of Common  Stock or Common Stock  Equivalents  which would cause any
adjustment of the Conversion  Price to the extent the holders of Preferred Stock
would not be permitted, pursuant to Section 7 of the Certificate of Designation,
to convert  their  respective  outstanding  Preferred  Stock and exercise  their
respective  Warrants in full,  ignoring  for such  purposes  any  conversion  or
exercise  limitations  therein.  Any  Purchaser  shall  be  entitled  to  obtain
injunctive  relief  against  the Company to preclude  any such  issuance,  which
remedy shall be in addition to any right to collect damages. Notwithstanding the
foregoing,  this Section 4.14 shall not apply in respect of an Exempt  Issuance,
except that no Variable Rate  Transaction or MFN Transaction  shall be an Exempt
Issuance.

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

                                       25
<PAGE>

      4.16 No Net Short  Position.  Each  Purchaser  agrees,  severally  and not
jointly with any other Purchasers, that they or any Person acting at the request
or direction of Purchaser,  will not enter into any Short Sales (as  hereinafter
defined)  from the period  commencing on the Closing Date and ending on the date
that such  Purchaser no longer holds any Preferred  Stock.  For purposes of this
Section 4.14, a "Short Sale" by any Purchaser  shall mean a sale of Common Stock
by such Purchaser that is marked as a short sale and that is made at a time when
there is no  equivalent  offsetting  long  position in Common Stock held by such
Purchaser. For purposes of determining whether there is an equivalent offsetting
long position in Common Stock held by the Purchaser, Underlying Shares that have
not yet been converted  pursuant to the  Certificate of Designation  and Warrant
Shares that have not yet been exercised pursuant to the Warrants shall be deemed
to be held long by the Purchaser,  and the amount of shares of Common Stock held
in a long position  shall be all  unconverted  Underlying  Shares  (ignoring any
conversion  limitations  therein) and unexercised  Warrant Shares  (ignoring any
exercise limitations included therein) held by such Purchaser on such date, plus
any shares of Common Stock otherwise then held by such Purchaser.  Additionally,
each Purchaser understands and acknowledges,  severally and not jointly with any
other  Purchaser,  that the SEC  currently  takes the position  that coverage of
short  sales of  shares  of the  Common  Stock  "against  the box"  prior to the
Effective Date of the Registration Statement with the Shares purchased hereunder
is a  violation  of Section 5 of the  Securities  Act,  as set forth in Item 65,
Section  5 under  Section  A, of the  Manual  of  Publicly  Available  Telephone
Interpretations,  dated July  1997,  compiled  by the  Office of Chief  Counsel,
Division of Corporation Finance.  Accordingly,  each Purchaser hereby agrees not
to use any of the  Underlying  Shares or Warrant Shares to cover any short sales
made prior to the Effective Date.

                                    ARTICLE V
                                  MISCELLANEOUS

      5.1  Termination.  This Agreement may be terminated by any  Purchaser,  by
written notice to the other parties,  if the Closing has not been consummated on
or before November 15, 2004;  provided that no such  termination will affect the
right of any party to sue for any breach by the other party (or parties).

      5.2 Fees and Expenses.  Except as expressly  set forth in the  Transaction
Documents  to the  contrary,  each party shall pay the fees and  expenses of its
advisers, counsel, accountants and other experts, if any, and all other expenses
incurred by such party  incident  to the  negotiation,  preparation,  execution,
delivery and performance of this  Agreement.  The Company shall pay all transfer
agent fees, stamp taxes and other taxes and duties levied in connection with the
issuance of any Securities.

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

                                       26
<PAGE>

      5.4 Notices.  Any and all notices or other  communications  or  deliveries
required or permitted to be provided  hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of  transmission,  if
such notice or  communication is delivered via facsimile at the facsimile number
set forth on the signature  pages  attached  hereto prior to 5:30 p.m. (New York
City  time)  on a  Trading  Day,  (b) the next  Trading  Day  after  the date of
transmission,  if such notice or communication is delivered via facsimile at the
facsimile  number set forth on the signature pages attached hereto on a day that
is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading
Day, (c) the second  Trading Day following the date of mailing,  if sent by U.S.
nationally  recognized  overnight courier service, or (d) upon actual receipt by
the party to whom such  notice is  required  to be given.  The  address for such
notices and communications shall be as set forth on the signature pages attached
hereto.

      5.5 Amendments;  Waivers.  No provision of this Agreement may be waived or
amended except in a written instrument  signed, in the case of an amendment,  by
the Company and each Purchaser or, in the case of a waiver, by the party against
whom  enforcement  of any such waiver is sought.  No waiver of any default  with
respect to any provision,  condition or  requirement of this Agreement  shall be
deemed to be a  continuing  waiver in the  future or a waiver of any  subsequent
default or a waiver of any other provision, condition or requirement hereof, nor
shall any delay or omission of either party to exercise  any right  hereunder in
any manner impair the exercise of any such right.

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

      5.7 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their  successors and permitted  assigns.  The
Company may not assign this  Agreement  or any rights or  obligations  hereunder
without the prior written  consent of each  Purchaser.  Any Purchaser may assign
any or all of its  rights  under  this  Agreement  to any  Person  to whom  such
Purchaser  assigns or transfers any Securities,  provided such transferee agrees
in  writing to be bound,  with  respect to the  transferred  Securities,  by the
provisions hereof that apply to the "Purchasers."

      5.8 No  Third-Party  Beneficiaries.  This  Agreement  is intended  for the
benefit of the parties  hereto and their  respective  successors  and  permitted
assigns and is not for the benefit of, nor may any provision  hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.9.

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

                                       27
<PAGE>

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

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

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

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

                                       28
<PAGE>

      5.14   Replacement  of  Securities.   If  any  certificate  or  instrument
evidencing any Securities is mutilated,  lost, stolen or destroyed,  the Company
shall  issue or cause to be issued in  exchange  and  substitution  for and upon
cancellation thereof, or in lieu of and substitution therefor, a new certificate
or instrument,  but only upon receipt of evidence reasonably satisfactory to the
Company  of such  loss,  theft  or  destruction  and  customary  and  reasonable
indemnity,  if requested.  The  applicants  for a new  certificate or instrument
under  such  circumstances  shall  also  pay any  reasonable  third-party  costs
associated with the issuance of such replacement Securities.

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

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

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

                                       29
<PAGE>

      5.18  Independent  Nature  of  Purchasers'  Obligations  and  Rights.  The
obligations of each Purchaser under any Transaction Document are several and not
joint with the  obligations of any other  Purchaser,  and no Purchaser  shall be
responsible  in any way for the  performance  of the  obligations  of any  other
Purchaser under any Transaction  Document.  Nothing  contained  herein or in any
Transaction  Document,  and no action taken by any Purchaser  pursuant  thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint  venture  or any other kind of entity,  or create a  presumption  that the
Purchasers  are in any way acting in concert or as a group with  respect to such
obligations or the transactions  contemplated by the Transaction Documents. Each
Purchaser  shall be  entitled to  independently  protect and enforce its rights,
including without limitation, the rights arising out of this Agreement or out of
the other  Transaction  Documents,  and it shall not be necessary  for any other
Purchaser  to be  joined  as an  additional  party  in any  proceeding  for such
purpose.  Each Purchaser has been  represented by its own separate legal counsel
in their review and  negotiation of the  Transaction  Documents.  For reasons of
administrative  convenience only,  Purchasers and their respective  counsel have
chosen to communicate  with the Company through FW. FW does not represent all of
the  Purchasers  but only  Midsummer  Capital,  LLC.  The Company has elected to
provide all  Purchasers  with the same terms and  Transaction  Documents for the
convenience of the Company and not because it was required or requested to do so
by the Purchasers.

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

                            [SIGNATURE PAGE FOLLOWS]

                                       30
<PAGE>

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

ON2 TECHNOLOGIES, INC.                                Address for Notice:

By:______________________________________
   Name:
   Title:

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

McGuireWoods LLP
1345 Avenue of the Americas
Seventh Floor
New York, New York 10105-0106
Attention:  Louis W. Zehil, Esq.

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

                                       31
<PAGE>

        [PURCHASER SIGNATURE PAGES TO ON2 SECURITIES PURCHASE AGREEMENT]

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

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

Address for Notice of Investing Entity:

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

Subscription Amount:
Shares of Preferred Stock:
Warrant Shares:
EIN Number:  [PROVIDE THIS UNDER SEPARATE COVER]

                                       32

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