Document:

Exhibit 10.4

                                                                EXECUTION COPY

          ASSIGNMENT, ASSUMPTION AND RECOGNITION AGREEMENT (as amended or
supplemented from time to time including pursuant to any Supplement Agreement
(as defined below) the "Agreement") made this 30th day of August, 2004, among
The Huntington National Bank, a national banking association organized under
the laws of the United States of America ("HNB" or the "Servicer"), Morgan
Stanley ABS Capital II Inc., a corporation organized under the laws of
Delaware (the "Assignee"), and Morgan Stanley Asset Funding Inc., a
corporation organized under the laws of Delaware (the "Assignor" or the
"Purchaser").

          WHEREAS, the Purchaser and HNB have entered into a certain Flow
Purchase and Servicing Agreement dated as of May 31, 2004 (the "Purchase and
Servicing Agreement"), pursuant to which HNB (i) sold to the Purchaser certain
retail motor vehicle loan and installment sale contracts identified on the
receivable schedule attached as Schedule 1 hereto (the "Initial Receivables")
in transactions that occurred in June, July and August 2004 and (ii) has
agreed to sell to the Purchaser subsequent to the date of this Agreement, a
pool of retail automobile and light-duty truck loan and installment sale
contracts in a aggregate principal amount of approximately $50,000,000 (the
"Subsequent Receivables" collectively with the Initial Receivables the
"Receivables"), in each case listed on the receivable schedule attached as an
exhibit to the Purchase and Servicing Agreement;

          WHEREAS, pursuant to a Sale and Servicing Agreement, dated as of
June 30, 2004 (the "Sale and Servicing Agreement"), among the Assignee, as
depositor, Morgan Stanley Auto Loan Trust 2004-HB2, as issuer (the "Issuer"),
the Servicer, the Assignor, as seller and Wells Fargo Bank, National
Association, as indenture trustee (the "Indenture Trustee"), the Assignee will
transfer the Receivables to the Issuer, together with the Assignee's rights in
the Purchase and Servicing Agreement;

          NOW THEREFORE, in consideration of the mutual promises contained
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:

                                   ARTICLE I

                          Assignment and Assumption.

          Section 1.01 Assignment and Assumption of Rights in Respect of
Initial Receivables. The Assignor hereby assigns to the Assignee all of its
right, title and interest in and to the Initial Receivables and the Purchase
and Servicing Agreement and each applicable Assignment, to the extent relating
to the Initial Receivables (other than the rights of the Assignor to
indemnification and contribution under Sections 10.02 and 10.04 of the
Purchase and Servicing Agreement), and all other Conveyed Assets with respect
thereto, and the Assignee hereby assumes all of the Assignor's obligations
under the Purchase and Servicing Agreement, to the extent relating to the
Initial Receivables from and after the date hereof, and HNB hereby
acknowledges such assignment and assumption and hereby agrees to the release
of the Assignor from any obligations under the Purchase and Servicing
Agreement from and after the date hereof, to the extent relating to the
Initial Receivables.

<PAGE>

          Section 1.02 Agreement to Assign and Assume Rights in Respect of
Subsequent Receivables. The Assignor and the Assignee agree to enter into an
agreement supplemental to this Agreement substantially in the form attached
hereto as Exhibit I hereto (a "Supplemental Agreement") with respect to the
Subsequent Receivables to be transferred pursuant to the Sale and Servicing
Agreement for the purpose of extending the provisions of this Agreement to the
Subsequent Receivables.

          Section 1.03 Limitation. Notwithstanding the foregoing Section 1.01
and 1.02, it is understood that the Assignor is not released from liability
for any breaches of the representations and warranties made in Section 3.03 of
the Purchase and Servicing Agreement, and the Assignee is not undertaking any
such liability hereunder.

                                  ARTICLE II

                 Accuracy of Purchase and Servicing Agreement.

          HNB and the Assignor represent and warrant to the Assignee that (a)
attached hereto as Exhibit 2 is a true, accurate and complete copy of the
Purchase and Servicing Agreement and any amendments, supplements or other
modifications thereto, (b) the Purchase and Servicing Agreement is in full
force and effect as of the date hereof, (c) the Purchase and Servicing
Agreement has not been amended or modified in any respect except as set forth
in Exhibit 2 and (d) no notice of termination has been given to the Servicer
under the Purchase and Servicing Agreement.

                                  ARTICLE III

                           Recognition of Purchaser.

          Section 3.01 Notation of Initial Receivables. From and after the
date hereof the Servicer shall note the transfer of the Initial Receivables to
the Assignee in its books and records, shall recognize the Assignee as the
owner of the Initial Receivables and shall service the Initial Receivables for
the benefit of the Assignee pursuant to the Purchase and Servicing Agreement
and the applicable Assignment, the terms of which are incorporated herein by
reference.

          Section 3.02 Notation of Subsequent Receivables. From and after the
date of any Supplemental Agreement, the Servicer shall note the transfer of
the Subsequent Receivables transferred on such date to the Assignee in its
books and records, shall recognize the Assignee as the owner of such
Subsequent Receivables and shall service such Subsequent Receivables for the
benefit of the Assignee pursuant to the Purchase and Servicing Agreement and
the applicable Assignment, the terms of which shall be incorporated herein by
reference upon the execution of the applicable Supplemental Agreement.

          Section 3.03 Binding Effect. It is the intention of the Assignor,
HNB and the Assignee that the Purchase and Servicing Agreement shall be
binding upon and inure to the benefit of the Assignee and its permitted
successors and assigns.

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                                  ARTICLE IV

                Representations and Warranties of the Assignee.

          The Assignee hereby represents and warrants to the Assignor, as of
the date hereof and as of the date of each Supplemental Agreement, as follows:

          Section 4.01 Decision to Purchase. The Assignee represents and
warrants that it is a sophisticated investor able to evaluate the risks and
merits of the transactions contemplated hereby, and that it has not relied in
connection therewith upon any statements or representations of the Assignor or
the Seller other than those contained in the Purchase and Servicing Agreement
or this Agreement.

          Section 4.02 Authority. The Assignee hereto represents and warrants
that it is duly and legally authorized to enter into this Agreement and to
perform its obligations hereunder and under the Purchase and Servicing
Agreement.

          Section 4.03 Enforceability. The Assignee hereto represents and
warrants that this Agreement has been duly authorized, executed and delivered
by it and (assuming due authorization, execution and delivery thereof by each
of the other parties hereto) constitutes its legal, valid and binding
obligation, enforceable in accordance with its terms, except as such
enforcement may be limited by bankruptcy, insolvency, reorganization or other
similar laws affecting the enforcement of creditors' rights generally and by
general equitable principles (regardless of whether such enforcement is
considered in a proceeding in equity or at law).

                                   ARTICLE V

                Representations and Warranties of the Assignor.

          The Assignor hereby represents and warrants to the Assignee, as of
the date hereof and as of the date of each Supplemental Agreement, as follows:

          Section 5.01 Existence. The Assignor has been duly organized and is
validly existing as a corporation in good standing under the laws of Delaware
with full power and authority to enter into and perform its obligations under
the Purchase and Servicing Agreement and this Agreement.

          Section 5.02 Execution, Delivery, Enforceability. This Agreement has
been duly executed and delivered by the Assignor, and, assuming due
authorization, execution and delivery by each of the other parties hereto,
constitutes a legal, valid, and binding agreement of the Assignor, enforceable
against it in accordance with its terms, subject to bankruptcy, insolvency,
reorganization, moratorium, or other similar laws affecting creditors' rights
generally and to general principles of equity regardless of whether
enforcement is sought in a proceeding in equity or at law.

          Section 5.03 No Consent Required. The execution, delivery and
performance by the Assignor of this Agreement and the consummation of the
transactions contemplated

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thereby do not require the consent or approval of, the giving of notice to,
the registration with, or the taking of any other action in respect of, any
state, federal or other governmental authority or agency, except such as has
been obtained, given, effected or taken prior to the date thereof.

          Section 5.04 Due Execution and Delivery. The execution and delivery
of this Agreement have been duly authorized by all necessary corporate action
on the part of the Assignor; neither the execution and delivery by the
Assignor of this Agreement, nor the consummation by the Assignor of the
transactions therein contemplated, nor compliance by the Assignor with the
provisions thereof, will conflict with or result in a breach of, or constitute
(with or without notice or lapse of time or both) a default under, any of the
provisions of the governing documents of the Assignor or any law, governmental
rule or regulation or any material judgment, decree or order binding on the
Assignor or any of its properties, or any of the provisions of any material
indenture, mortgage, deed of trust, contract or other instrument to which the
Assignor is a party or by which it is bound.

          Section 5.05 No Action or Proceedings. There are no actions, suits
or proceedings pending or, to the knowledge of the Assignor, threatened,
before or by any court, administrative agency, arbitrator or governmental body
(i) with respect to any of the transactions contemplated by this Agreement or
(ii) with respect to any other matter that in the judgment of the Assignor
will be determined adversely to the Assignor and will if determined adversely
to the Assignor materially adversely affect its ability to perform its
obligations under this Agreement.

          Section 5.06 No Assignment of Receivables. Except for the sale to
the Assignee, the Assignor has not assigned or pledged any Receivable or any
interest or participation therein.

          Section 5.07 No Cancellation etc. of Receivables. The Assignor has
not satisfied, canceled, or subordinated in whole or in part, or rescinded the
collateral securing the Receivable, and the Assignor has not released the
collateral securing the Receivable from the lien of the Receivable, in whole
or in part, nor has the Assignor executed an instrument that would effect any
such release, cancellation, subordination, or rescission. The Assignor has not
released any Obligor, in whole or in part, from its obligations with respect
to the related Receivable.

          Section 5.08 No Impairment of Receivables. The Assignor represents
and warrants to the Assignee that the Assignor has not taken any action that
would serve to impair or encumber the Assignor's ownership interest in any
Receivable since the date on which it acquired such Receivable pursuant to the
Purchase and Servicing Agreement.

          It is understood and agreed that the representations and warranties
set forth in this Article 5 shall inure to the benefit of the Assignee and its
permitted assigns notwithstanding any restrictive or qualified endorsement or
assignment. Upon the discovery by the Assignor or the Assignee and its
permitted assigns of a breach of the foregoing representations and warranties,
the party discovering such breach shall give prompt written notice to the
other parties to this Agreement and in no event later than two (2) Business
Days from the date of such discovery. It is understood and agreed that the
obligations of the Assignor set forth in Article 6 to repurchase a Receivable
constitute the sole remedies available to the Assignee and its permitted
assigns on

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their behalf respecting a breach of the representations and warranties
contained in this Article 5. It is further understood and agreed that the
Assignor shall be deemed not to have made the representations and warranties
in this Article 5 with respect to, and to the extent of, representations and
warranties made, as to the matters covered in this Article 5, by the Servicer
in the Purchase and Servicing Agreement (or any officer's certificate
delivered pursuant thereto).

          It is understood and agreed that the Assignor has made no
representations or warranties to the Assignee other than those contained in
this Article 5, and no other affiliate of the Assignor has made any
representations or warranties of any kind to the Assignee.

                                  ARTICLE VI

                          Repurchase of Receivables.

          Upon discovery or notice of any breach by the Assignor of any
representation, warranty, or covenant under this Agreement that materially and
adversely affects the value of any Receivable theretofore transferred to the
Assignee or the interest of the Assignee therein (it being understood that any
such defect or breach shall be deemed to have materially and adversely
affected the value of the related Receivable or the interest of the Assignee
therein if the Assignee incurs a loss as a result of such defect or breach),
the Assignee promptly shall request that the Assignor cure such breach and, if
the Assignor does not cure such breach in all material respects within sixty
(60) days from the date on which it is notified of the breach, the Assignee
may enforce the Assignor's obligation hereunder to purchase such Receivable
from the Assignee.

          The Assignor hereby irrevocably appoints the Indenture Trustee as
its attorney-in-fact to exercise the Assignor's remedies against HNB in the
event that HNB, as Seller, breaches any of its representations or warranties
made in Section 3.01(b) of the Purchase and Servicing Agreement or any
Assignment pursuant thereto.

          Except as specifically set forth herein, the Assignee shall have no
responsibility to enforce any provision of this Agreement, to oversee
compliance hereof, or to take notice of any breach or default thereof.

                                  ARTICLE VII

                 Purchase and Servicing Agreement Unimpaired.

          Section 7.01 Full Force and Effect. Except as contemplated hereby,
the Purchase and Servicing Agreement and each applicable Assignment thereunder
shall remain in full force and effect in accordance with its terms.

          Section 7.02 Certain Amendments. HNB and the Assignor shall have the
right to amend, modify or terminate the Purchase and Servicing Agreement
without the joinder of the Assignee with respect to retail motor vehicle loan
and installment sale contracts not conveyed to

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<PAGE>

the Assignee hereunder; provided, however, that such amendment, modification
or termination shall not affect or be binding on the Assignee.

                                 ARTICLE VIII

                                Governing Law.

          THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF
THE STATE OF NEW YORK.

                                  ARTICLE IX

                                   Notices.

          Any notices or other communications permitted or required hereunder
or under the Purchase and Servicing Agreement shall be in writing and shall be
deemed conclusively to have been given if personally delivered at or mailed by
registered mail, postage prepaid, and return receipt requested or transmitted
by telex, telegraph or telecopier and confirmed by a similar mailed writing,
to: (a) in the case of the HNB, The Huntington National Bank, Huntington
Center, 41 South High Street, Columbus, OH 43287, Attention: Timothy R. Barber
or such address as may hereafter be furnished by the Seller; (b) in the case
of the Assignee, Morgan Stanley ABS Capital II Inc., 1585 Broadway, New York,
New York 10036, Attention: Jack Kattan, with a copy to Michelle Wilke, or such
other address as may hereafter be furnished by the Assignee and (c) in the
case of the Assignor, Morgan Stanley Asset Funding Inc., 1585 Broadway, New
York, New York 10036, Attention: Michelle Wilke, or such other address as may
hereafter be furnished by the Assignor.

                                   ARTICLE X

                                 Counterparts.

          This Agreement may be executed in counterparts, each of which when
so executed shall be deemed to be an original and all of which when taken
together shall constitute one and the same instrument.

                                  ARTICLE XI

                                 Definitions.

          Any capitalized term used but not defined in this Agreement has the
same meaning as in the Purchase and Servicing Agreement.

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<PAGE>

                                  ARTICLE XII

                             Absolute Assignment.

          It is the intention of the Assignor and Assignee that this Agreement
shall evidence a sale of the Receivables and other related property from the
Assignor to the Assignee (for non-tax purposes), as of the date hereof, in the
case of the Initial Receivables, and as of the date of the related
Supplemental Agreement, in the case of the Subsequent Receivables, and that
such Conveyed Assets shall not be treated as property of the Assignor as
debtor-in-possession or by a bankruptcy trustee in any insolvency, bankruptcy
or other similar proceeding in respect of the Assignor under any Applicable
Law. Further, it is not the intent of the parties hereto that any such
assignment be deemed a grant by the Assignor to the Assignee of a mere
security interest (for non-tax purposes) in any of the Conveyed Assets in
order to secure a debt or other obligation of the Assignor. However, in the
event and to the extent that, notwithstanding the intent of the parties
hereto, the transfer and assignment contemplated hereby is held not to be a
true or absolute sale (for non-tax purposes), this Agreement shall constitute
a security agreement under Applicable Law, and, in such event, the Assignor
shall be deemed to have granted, and the Assignor hereby grants, as of the
date hereof, in the case of the Initial Receivables, and as of the date of the
related Supplemental Agreement, in the case of the Subsequent Receivables, to
the Assignee a first priority security interest in all accounts, money,
chattel paper, securities, instruments, documents, deposit accounts,
certificates of deposit, letters of credit, advices of credit, banker's
acceptances, uncertificated securities, general intangibles, contract rights,
goods and other property consisting of, arising from or relating to such
Conveyed Assets, for the benefit of the Assignee and its assignees as security
for the Assignor's obligations hereunder and the Assignor consents to the
pledge of the foregoing Conveyed Assets to the Indenture Trustee under the
Indenture entered into by the Trust and the Indenture Trustee.

                                 ARTICLE XIII

                      Addition as Subsequent Receivables.

          This Agreement shall be deemed to be amended and restated to reflect
the terms of each Supplemental Agreement entered into in accordance with the
second Paragraph of Section 1.01 and Schedule 1 attached hereto shall be
deemed to include all Subsequent Receivables identified in Annex A of any such
Supplemental Agreement.

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<PAGE>

          IN WITNESS WHEREOF, the parties hereto have executed this Agreement
the day and year first above written.

                                            MORGAN STANLEY ABS CAPITAL II INC.

                                            By:   /s/ Jack Kattan
                                               -------------------------------
                                               Name:   Jack Kattan
                                               Title:  Vice President

                                            MORGAN STANLEY ASSET FUNDING INC.

                                            By:   /s/ J. Douglas Van Ness
                                               -------------------------------
                                               Name:   J. Douglas Van Ness
                                               Title:  Vice President

                                            Acknowledged by:

                                            THE HUNTINGTON NATIONAL BANK

                                            By:   /s/ Timothy R. Barber
                                               -------------------------------
                                               Name:   Timothy R. Barber
                                               Title:  Senior Vice President

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<PAGE>

                                                                     EXHIBIT I

                        FORM OF SUPPLEMENTAL AGREEMENT

          This Supplemental Agreement, dated [______], is made with respect to
the ASSIGNMENT, ASSUMPTION AND RECOGNITION AGREEMENT dated August 30, 2004
(the "AAR Agreement"), among The Huntington National Bank, a national banking
association organized under the laws of the United States of America ("HNB" or
the "Servicer"), Morgan Stanley ABS Capital II Inc., a corporation organized
under the laws of Delaware (the "Assignee"), and Morgan Stanley Asset Funding
Inc., a corporation organized under the laws of Delaware (the "Assignor" or
the "Purchaser") . Terms used and not defined herein have the respective
meaning as defined in this AAR Agreement.

          The Assignor herby assigns to the Assignee all of its right, title
and interest in and to the Subsequent Receivables listed in Annex A attached
hereto and the Purchase and Servicing Agreement and the related Assignment, to
the extent relating to such Subsequent Receivables (other than the rights of
the Assignor to indemnification and contribution under Sections 10.02 and
10.04 of the Purchase and Servicing Agreement), and all other Conveyed Assets
with respect thereto, and the Assignee hereby assumes all of the Assignor's
obligations under the Purchase and Servicing Agreement to the extent relating
to such Subsequent Receivables from and after the date hereof. HNB hereby
acknowledges such assignment and assumption and hereby agrees to the release
of the Assignor from any obligations under the Purchase and Servicing
Agreement from and after the date hereof, to the extent relating to such
Subsequent Receivables.

          The AAR Agreement is hereby deemed to be amended, modified and
supplemented by this Supplemental Agreement such that such Subsequent
Receivables and all associated rights and obligations with respect thereto are
considered to be covered by the AAR Agreement as fully as if such Additional
Subsequent Receivables had originally been identified in Schedule 1 attached
thereto

          IN WITNESS WHEREOF, the parties hereto have executed this
Supplemental Agreement as of the day and year first above written.

                                        [Signatures appear on next page]

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<PAGE>

                                       MORGAN STANLEY ABS CAPITAL II INC.

                                       By:_________________________
                                          Name:
                                          Title:

                                       MORGAN STANLEY ASSET FUNDING INC.

                                       By:_________________________
                                          Name:
                                          Title:

                                       Acknowledged by:

                                       THE HUNTINGTON NATIONAL BANK

                                       By:_________________________
                                          Name:
                                          Title:

                                      10EXHIBIT 4.2

                     CERTIFICATE OF DESIGNATION, PREFERENCES

                                  AND RIGHTS OF

                      SERIES A CONVERTIBLE PREFERRED STOCK

                                       OF

                        DOBI MEDICAL INTERNATIONAL, INC.

     Dobi Medical International, Inc., a corporation organized and existing
under the laws of the State of Delaware (the "Company"), by its Chief Executive
Officer, does hereby certify that, pursuant to authority conferred upon the
Board of Directors by Article Four of the Certificate of Incorporation of the
Company, the Board of Directors of the Company, by unanimous written consent,
has duly adopted resolutions providing for the issuance of up to 520 shares of
Series A Convertible Preferred Stock at an issuance price of $25,000 per share
(the "Original Purchase Price") and setting forth the voting powers,
designation, preferences and relative, participating, optional and other special
rights, and the qualifications, limitations and restrictions thereof, which
resolution is as follows:

     RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Company in accordance with the provisions of its Certificate of
Incorporation, there be, and hereby is, created out of the class of 10,000,000
shares of preferred stock, par value $.0001 per share, of the Company authorized
by Article Four of its Certificate of Incorporation, a series of preferred stock
of the Company with the following voting powers, designation, preferences and
relative, participating, optional and other special rights, and qualifications,
limitations and restrictions:

     1. Designation and Number of Shares. 520 shares of preferred stock (the
"Shares") are hereby designated as Series A Convertible Preferred Stock (the
"Series A Preferred Stock").

     2. Ranking. The Series A Preferred Stock shall, with respect to
distribution rights upon the Liquidation (as defined in Section 3 below) of the
Company and dividend rights, rank (a) subject to clauses (b) and (c), senior to
the common stock, par value $ .0001 per share, of the Company (the "Common
Stock") and all other preferred stock of the Company, and (b) as applicable,
junior to or on a parity with such preferred stock of the Company the terms of
which expressly provide that such preferred stock will rank senior to or on a
parity with Series A Preferred Stock. Without the consent of holders of at least
50% of the then outstanding shares of Series A Preferred Stock, the Company
shall not create, authorize or issue any other series of preferred stock which
rank senior to or pari passu with the Series A Preferred Stock.

     3. Liquidation.

        (a) Upon any liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary ("Liquidation"), the holders of record of the
shares of the Series A Preferred Stock shall be entitled to receive, immediately
after any distributions required by the Company's Certificate of Incorporation
and any certificate(s) of designation, powers, preferences and rights in respect
of any securities of the Company having priority over the Series A Preferred
Stock with respect to the distribution of the assets of the Company upon
Liquidation, and before and in preference to any distribution or payment of
assets of the Company or the proceeds thereof may be made or set apart with
respect to any securities of the Company over which the Series A Preferred Stock
has priority with respect to the distribution of the assets of the Company upon
Liquidation ("Junior Securities"), an amount in cash with respect to each share
of Series A Preferred Stock held by such holders, equal to the Original Issue
Price per share (subject to adjustment in the event of stock splits,
combinations or similar events) plus all accrued and unpaid dividends on such
share as of the date of Liquidation, if any. If, upon such Liquidation, the
assets of the Company available for distribution to the holders of Series A
Preferred Stock and any securities of the Company having equal priority with the
Series A Preferred Stock with respect to the distribution of the assets of the
Company upon Liquidation ("Parity Securities") shall be insufficient to permit
payment in full to the holders of

<PAGE>

the Series A Preferred Stock and Parity Securities, then the entire assets and
funds of the Company legally available for distribution to such holders and the
holders of the Parity Securities then outstanding shall be distributed ratably
among the holders of the Series A Preferred Stock and Parity Securities based
upon the proportion the total amount distributable on each share upon
liquidation bears to the aggregate amount available for distribution on all
shares of the Series A Preferred Stock and of such Parity Securities, if any.

        (b) Upon the completion of the distributions required by paragraph (a)
of this Section 3, if assets remain in the Company, they shall be distributed to
holders of Junior Securities in accordance with the Company's Certificate of
Incorporation and any applicable certificate(s) of designation, powers,
preferences and rights.

        (c) For purposes of this Section 3, a merger or consolidation or a sale
or lease of all or substantially all of the assets of the Company shall be
considered a Liquidation except in the event that in such a transaction, the
holders of the Series A Preferred Stock shall be entitled to receive, in
preference to the holders of the Junior Securities, the greater of: (i) a per
share amount equal to the Original Purchase Price for the Series A Preferred
Stock, plus any declared but unpaid dividends, and (ii) such amount per share
that would have been payable if each share of Series A Preferred Stock had been
converted to Common Stock immediately prior to such liquidation.

     4. Dividends.

        (a) Subject to the rights of any other series or class of Preferred
Stock that may from time to time come into existence which rank senior to or
pari passu with the Series A Preferred Stock and which are created with the
consent of at least 50% of the then outstanding shares of Series A Preferred
Stock, the holders of shares of Series A Preferred Stock shall be entitled to
receive, out of any assets legally available therefor, a quarterly cumulative
dividend at the end of each three-month period on each share of Series A
Preferred Stock, calculated at a rate of 8% per annum of the Original Issue
Price of any outstanding share of Series A Preferred Stock for the first three
years after the date on which the Series A Preferred Stock are issued, 10% per
annum for the following two years and 12% per annum for any additional year in
which any share of Series A Preferred Stock remains outstanding. At the option
of the Company, the dividends may be paid in either cash or registered shares of
Common Stock. The first such dividend shall be paid on January 31, 2005. The
amount of such initial dividend, and any other dividend payable on the Series A
Preferred Stock for any partial dividend period, shall be computed on the basis
of a 360-day year consisting of twelve 30-day months. Dividends will be payable
to holders of record as they appear in the stockholder records of the Company at
the close of business on the applicable record date, which shall be the 15th day
of January, April, July and October of each year (the "Dividend Payment Date")
or on such other date designated by the Board of Directors for the payment of
dividends that is not more than 30 nor less than 10 days prior to the Dividend
Payment Date. With respect to any given year, no dividends shall be paid upon,
or declared and set apart for, any shares of Common Stock or any other
securities of the Company over which the Series A Preferred Stock has priority
with respect to the payment of dividends if the Board of Directors of the
Company shall have failed duly and lawfully to declare and pay in full a cash
dividend to the holders of Series A Preferred Stock with respect to such year in
the amount described above. If such dividends on the Series A Preferred Stock
shall not have been paid in full for the Series A Preferred Stock, the aggregate
deficiency shall be cumulative and shall be fully paid prior to the payment of
any dividend by the Company (other than a dividend payable solely in Common
Stock) with respect to Common Stock or any other securities of the Company over
which the Series A Preferred Stock has priority with respect to the payment of
dividends. Accumulations of dividends on the Series A Preferred Stock shall not
bear interest. For purposes of the first sentence of this Section 4(a) only,
shares of Common Stock issued as dividends shall be valued at 95% of the current
market value (as determined pursuant to Section 4(b)) of the Common Stock into
which such shares are convertible as of the date of declaration of the dividend
in question.

        (b) For the purposes of any computation pursuant to Section 3(a), the
current market price per share of Common Stock at any date shall be deemed to be
the average of the daily closing price for the 20 consecutive trading days
ending on the day prior to the day on which such dividend is due. The closing
price for each day shall be: (i) the average of the closing high bid and low ask
prices as officially quoted by the OTC Bulletin Board; or (ii) the last sales
price on such day as officially quoted by the American Stock Exchange, if such
exchange shall become the principal trading market for the Common Stock; or
(iii) if, in the reasonable judgment of the Board

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<PAGE>

of Directors of the Company, the OTC Bulletin Board or the American Stock
Exchange is no longer the principal United States market for the Common Stock,
then as quoted on the principal United States market for the Common Stock, as
reasonably determined by the Board of Directors of the Company; or (iv) if, in
the reasonable judgment of the Board of Directors of the Company, there exists
no principal United States market for the Common Stock, then as reasonably
determined by the Board of Directors of the Company.

     5. Conversion Rights. Each holder of record of shares of the Series A
Preferred Stock shall have the right to convert all or any part of such holder's
share of Series A Preferred Stock into Common Stock as follows:

        (a) Optional Conversion. Subject to and upon compliance with the
provisions of this Section 5, the holder of any shares of Series A Preferred
Stock shall have the right at such holder's option, at any time or from time to
time, to convert any of such shares of Series A Preferred Stock into fully paid
and non-assessable shares of Common Stock determined by dividing (A) the
aggregate Original Purchase Price of such shares of Series A Preferred Stock by
(B) the Conversion Price (as defined in Section (5)(c) below) in effect on the
Conversion Date (as defined in Section 5(d) below) upon the terms hereinafter
set forth.

        (b) Mandatory Conversion. Each outstanding share of Series A Preferred
Stock may, at the Company's option, upon 30 days written notice, be
automatically converted into fully paid and non-assessable shares of Common
Stock at the Conversion Price then in effect at any time following the
conclusion of the twentieth (20th) consecutive trading day with respect to which
the closing market price for the Common Stock on a national securities exchange
on which the Common Stock is traded (including, without limitation, the American
Stock Exchange and the OTC Bulletin Board was at least $6.00 per share.
Notwithstanding the foregoing, the Company may not automatically convert each
outstanding share of Series A Preferred Stock into shares of Common Stock
pursuant to this Section 5(b) unless (i) the Common Stock has also traded at or
above $6.00 per share for a period of ten (10) days prior to the date on which
the Mandatory Conversion Notice (as defined in Section 5(d) below) is sent to
the holders of the Series A Preferred Stock, and (ii) at the time the shares of
Common Stock underlying Series A Preferred Stock are issued, there exists an
effective registration statement containing a current prospectus covering such
shares of Common Stock and the shares of Common Stock underlying the warrants
issued with the Series A Preferred Stock, under the Securities Act of 1933, as
amended (the "Securities Act").

        (c) Conversion Price. Each share of the Series A Preferred Stock shall
be convertible into that number of fully paid and non-assessable shares of
Common Stock of the Company equal to the Original Purchase Price plus accrued
and unpaid dividends to the date of conversion divided by the conversion price
in effect at the time of conversion (the "Conversion Price"), determined as
hereinafter provided. The Conversion Price shall initially be $2.00 per share of
Common Stock. The number of shares of Common Stock into which each share of
Preferred Stock is convertible is herein referred to as the "Conversion Rate."

        (d) Mechanics of Conversion. (i) Before any holder of Series A
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, such holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Company or of any transfer agent for the
Series A Preferred Stock, and shall give written notice to the Company at its
principal corporate office, of the election to convert the same and shall state
therein the name or names in which the certificate or certificates for shares of
Common Stock are to be issued. The Company shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of Series A
Preferred Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid. Conversion shall be deemed to have been effected on
the date when delivery of notice of an election to convert and certificates for
shares is made or on the date of the occurrence of the event specified in
Section 5(b) as the case may be, and such date is referred to herein as the
"Optional Conversion Date."

            (ii) In the case of a mandatory conversion pursuant to Section 4(b),
        the Company shall give written notice (the "Mandatory Conversion
        Notice") to all holders of the Series A Preferred Stock of its intention
        to require the conversion of the shares of Series A Preferred Stock
        identified therein. The Mandatory Conversion Notice shall set forth the
        number of Series A Preferred Stock being converted, the date on which
        such conversion shall be effective (the "Mandatory Conversion Date"),
        and shall be given no earlier than 30 days prior to the Mandatory
        Conversion Date. The Mandatory Conversion Notice shall be delivered to
        each holder at the address as it appears on the stock transfer books of
        the Company. In order

                                      3
<PAGE>

        to receive the shares of Common Stock into which the Series A
        Preferred Stock is convertible pursuant to this Section 5(d)(ii), each
        holder of the Series A Preferred Stock shall surrender to the Company at
        the place designated in the Mandatory Conversion Notice the
        certificate(s) representing the number of shares of Series A Preferred
        Stock specified in the Mandatory Conversion Notice. Upon the Mandatory
        Conversion Date, such converted Series A Preferred Stock shall no longer
        be deemed to be outstanding, and all rights of the holder with respect
        to such shares shall immediately terminate, except the right to receive
        the shares of Common Stock into which the Series A Preferred Stock is
        convertible pursuant to this Section 5(d)(ii).

            (iii) All Common Stock which may be issued upon conversion of the
        Series A Preferred Stock will, upon issuance, be duly issued, fully paid
        and non-assessable and free from all taxes, liens, and charges with
        respect to the issuance thereof. At all times that any shares of Series
        A Preferred Stock are outstanding, the Company shall have authorized and
        shall have reserved for the purpose of issuance upon such conversion
        into Common Stock of all Series A Preferred Stock, a sufficient number
        of shares of Common Stock to provide for the conversion of all
        outstanding shares of Series A Preferred Stock at the then effective
        Conversion Rate. Without limiting the generality of the foregoing, if,
        at any time, the Conversion Price is decreased, the number of shares of
        Common Stock authorized and reserved for issuance upon the conversion of
        the Series A Preferred Stock shall be proportionately increased.

        (e) Conversion Price Adjustments. The Conversion Price shall be subject
to the adjustment provisions of Section 6 below.

     6. Anti-Dilution Provisions. The Conversion Price in effect at any time and
the number and kind of securities issuable upon the conversion of the Series A
Preferred Stock shall be subject to adjustment from time to time, upon the
happening of the following events, provided, however that the anti-dilution
provisions set forth below in Sections 6(c), 6(e) and 6(f) will be effective
only for the two year period following the date of the final closing of the
original issuance of the Series A Preferred Stock:

        (a) Consolidation, Merger or Sale. If any consolidation or merger of the
Company with another person, or the sale, transfer or lease of all or
substantially all of its assets to another person shall be effected in such a
way that holders of shares of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for their shares of Common
Stock, then provision shall be made, in accordance with this Section 6(a),
whereby each holder of shares of Series A Preferred Stock shall thereafter have
the right to receive such securities or assets as would have been issued or
payable with respect to or in exchange for the shares of Common Stock into which
the shares of Series A Preferred Stock held by such holder were convertible
immediately prior to the closing of such merger, sale, transfer or lease, as
applicable. The Company will not effect any such consolidation, merger, sale,
transfer or lease unless prior to the consummation thereof the successor entity
(if other than the Company) resulting from such consolidation or merger or the
entity purchasing or leasing such assets shall assume by written instrument (i)
the obligation to deliver to the holders of Series A Preferred Stock such
securities or assets as, in accordance with the foregoing provisions, such
holders may be entitled to purchase, and (ii) all other obligations of the
Company hereunder. The provisions of this Section 6(a) shall similarly apply to
successive mergers, sales, transfers or leases.

        (b) Common Stock Dividends, Subdivisions, Combinations, etc. In case the
Company shall hereafter (i) declare a dividend or make a distribution on its
outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or
reclassify its outstanding shares of Common Stock into a greater number of
shares, or (iii) combine or reclassify its outstanding shares of Common Stock
into a smaller number of shares, the Conversion Price in effect at the time of
the record date for such dividend or distribution or of the effective date of
such subdivision, combination or reclassification shall be adjusted so that it
shall equal the price determined by multiplying the Conversion Price by a
fraction, the denominator of which shall be the number of shares of Common Stock
outstanding after giving effect to such action, and the numerator of which shall
be the number of shares of Common Stock outstanding immediately prior to such
action. Such adjustment shall be made successively whenever any event listed
above shall occur.

                                      4
<PAGE>

        (c) Discounted Warrants or Rights.

            (i) In case the Company shall fix a record date for the issuance of
     rights or warrants to all or any holders of its Common Stock entitling them
     to subscribe for or purchase shares of Common Stock (or securities
     convertible into Common Stock) at a price (the "Subscription Price") (or
     having a conversion price per share) less than the then effective
     Conversion Price, the Conversion Price shall be adjusted so that the same
     shall equal the price determined by multiplying the Conversion Price in
     effect immediately prior to the date of such issuance by a fraction, the
     numerator of which shall be the sum of the number of shares of Common Stock
     outstanding immediately prior to the issuance of such rights or warrants
     and the number of shares of Common Stock which the aggregate consideration
     to be received in respect of such rights or warrants (including without
     limitation, consideration to be received upon the issuance and/or exercise
     of such rights or warrants) would purchase at such Subscription Price per
     share of the Common Stock, and the denominator of which shall be the sum of
     the number of shares of Common Stock outstanding immediately prior to such
     issuance and the number of shares of Common Stock of the Company
     deliverable upon the exercise of such rights or warrants at the initial
     exercise price or rate.

            (ii) Notwithstanding the provisions of Section 6(c)(i), in case the
     Company shall fix a record date for the issuance of rights or warrants to
     all holders of its Common Stock entitling them to subscribe for or purchase
     shares of Common Stock (or securities convertible into Common Stock) at a
     Subscription Price (or having a conversion price per share) less than the
     Conversion Price as of such record date, the Conversion Price shall be
     adjusted so that the same shall equal such Subscription Price.

            (iii) Adjustments to the Conversion Price pursuant to this Section
     6(c) shall be made successively whenever rights or warrants of the type
     described in this Section 6(c) are issued and shall become effective
     immediately after the record date for the determination of stockholders
     entitled to receive such rights or warrants; and to the extent that shares
     of Common Stock are not delivered (or securities convertible into Common
     Stock are not delivered) after the expiration of rights or warrants in
     respect of which an adjustment to the Conversion Price was made pursuant to
     Section 6(c)(i), the Conversion Price shall be readjusted to the Conversion
     Price which would then be in effect had the adjustments made upon the
     issuance of such rights or warrants been made upon the basis of delivery of
     only the number of shares of Common Stock (or securities convertible into
     Common Stock) actually delivered.

        (d) Distributions of Certain Assets. In case the Company shall
hereafter distribute to the holders of its Common Stock evidences of its
indebtedness or assets (excluding cash dividends or distributions and dividends
or distributions referred to in Section 6(b) above) or subscription rights or
warrants (excluding those referred to in Section 6(c) above), then in each such
case the Conversion Price in effect thereafter shall be determined by
multiplying the Conversion Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the total number of shares of Common
Stock outstanding multiplied by the current market price per share of Common
Stock, less the fair market value (as determined by the Company's Board of
Directors) of said assets or evidences of indebtedness so distributed or of such
rights or warrants, and the denominator of which shall be the total number of
shares of Common Stock outstanding multiplied by such current market price per
share of Common Stock. Such adjustment shall be made successively whenever such
a record date is fixed. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of shareholders entitled to receive such
distribution.

        (e) Discounted Common Stock.

            (i) Subject to Section 6(e)(iv), in case the Company shall hereafter
     issue shares of its Common Stock for a consideration per share (the
     "Offering Price") less than the Conversion Price, the Conversion Price
     shall be adjusted immediately thereafter so that it shall equal the price
     determined by multiplying the Conversion Price in effect immediately prior
     thereto by a fraction, the numerator of which shall be the sum of the
     number of shares of Common Stock outstanding immediately prior to the
     issuance of such additional shares and the number of shares of Common Stock
     which the aggregate consideration received for the issuance of such
     additional shares would purchase at such Offering Price per share of Common
     Stock, and the denominator of which shall be the number of shares of Common
     Stock outstanding immediately after the issuance of such additional shares.

                                      5
<PAGE>

            (ii) Notwithstanding the provisions of Section 6(e)(i), subject to
     Section 6(e)(iv), in case the Company shall hereafter issue shares of its
     Common Stock for an Offering Price less than the then applicable Conversion
     Price, the Conversion Price shall be adjusted immediately thereafter so
     that it shall equal such Offering Price.

            (iii) Adjustments to the Conversion Price pursuant to this Section
     6(e) shall be made successively whenever an issuance of shares triggering
     such an adjustment is made.

            (iv) Notwithstanding anything to the contrary set forth in this
     Section 6(e), no adjustment to the Conversion Price shall be made pursuant
     to this Section 6(e) in the case of shares issued: (A) in any of the
     transactions described in Section 6(b) above; (B) upon exercise of stock
     options granted to the Company's officers, directors, employees and
     consultants under a plan or plans adopted by the Company's Board of
     Directors and approved by its stockholders, if such shares would otherwise
     be included in this Section 6(e) (but only to the extent that the aggregate
     number of shares excluded hereby and issued after the date hereof, shall
     not exceed 15% of the Company's Common Stock outstanding, on a
     fully-diluted basis, at the time of any issuance); (C) upon the exercise of
     stock options, warrants, convertible securities and convertible debentures
     outstanding as of the date hereof; (D) in respect of the conversion of the
     shares of Series A Preferred Stock; (E) to stockholders of any corporation
     which merges into the Company in proportion to their stock holdings of such
     corporation immediately prior to such merger, upon such merger; (F) upon
     the exercise of warrants granted to any commercial bank or equipment
     lessor; (G) issued in a private placement with respect to which less than
     1,000 shares are issued or where the offering price for such shares is at
     least 90% of the current market price; (H) issued in a bona fide public
     offering pursuant to a firm commitment underwriting; or (I) issued in
     connection with strategic alliances or acquisitions of one or more
     businesses, products or technologies which have been approved by a majority
     of the Company's directors but only if no adjustment is required pursuant
     to any other specific subsection of this Section 6 (without regard to
     Section 6(i) below) with respect to the transaction giving rise to such
     rights.

        (f) Discounted Convertible Stock.

            (i) Subject to Section 6(f)(iv), in case the Company shall hereafter
     issue any securities convertible into or exchangeable for its Common Stock
     for a consideration per share of Common Stock (the "Exchange Price")
     initially deliverable upon conversion or exchange of such securities
     (determined as provided in Section 6(h) below) less than the current market
     price, the Conversion Price shall be adjusted immediately thereafter so
     that it shall equal the price determined by multiplying the Conversion
     Price in effect immediately prior thereto by a fraction, the numerator of
     which shall be the sum of the number of shares of Common Stock outstanding
     immediately prior to the issuance of such securities and the number of
     shares of Common Stock which the aggregate consideration received for such
     securities would purchase at such current market price per share of Common
     Stock, and the denominator of which shall be the sum of the number of
     shares of Common Stock outstanding immediately prior to such issuance and
     the maximum number of shares of Common Stock of the Company deliverable
     upon conversion of or in exchange for such securities at the initial
     conversion or exchange price or rate.

            (ii) Notwithstanding the provisions of Section 6(f)(i), subject to
     Section 6(f)(iv), in case the Company shall hereafter issue any securities
     convertible into or exchangeable for its Common Stock for an Exchange Price
     initially deliverable upon conversion or exchange of such securities
     (determined as provided in Section 6(h) below) less than the then
     applicable Conversion Price, the Conversion Price shall be adjusted
     immediately thereafter so that it shall equal such Exchange Price.

            (iii) Adjustments to the Conversion Price pursuant to this Section
     6(f) shall be made successively whenever an issuance of shares triggering
     such an adjustment is made.

            (iv) Notwithstanding anything to the contrary set forth in this
     Section 6(f), no adjustment to the Conversion Price shall be made pursuant
     to this Section 6(f) in the case of securities issued in transactions
     described in Sections 6(c), 6(d) and 6(e)(iv)(A) through (H) above (with
     any reference in Sections 6(e)(iv)(A) through (H) to price or quantity of
     shares issued being understood, for

                                      6
<PAGE>

     purposes of this Section 6(f)(iv), to refer to the aggregate price or
     quantity, as applicable, of the shares of Common Stock into which such
     securities are convertible or exchangeable).

        (g) Adjustment of Conversion Shares. Whenever the Conversion Price is
adjusted pursuant to Sections 6(b), (c), (d), (e) and (f) above and (k) below,
the number of Conversion Shares issuable upon conversion of the Series A
Preferred Stock shall simultaneously be adjusted by multiplying the number of
Conversion Shares initially issuable upon conversion of the Series A Preferred
Stock by the Conversion Price in effect on the date hereof and dividing the
product so obtained by the Conversion Price, as adjusted.

        (h) Computation of Certain Consideration. For purposes of any
computation respecting consideration received pursuant to Sections 6(e) and (f)
above, the following shall apply:

            (i) in the case of the issuance of shares of Common Stock for cash,
        the consideration shall be the amount of such cash, provided that in no
        case shall any deduction be made for any commissions, discounts or other
        expenses incurred by the Company for any underwriting of the issue or
        otherwise in connection therewith;

            (ii) in the case of the issuance of shares of Common Stock for a
        consideration in whole or in part other than cash, the consideration
        other than cash shall be deemed to be the fair market value thereof as
        determined in good faith by the Board of Directors of the Company
        (irrespective of the accounting treatment thereof), whose determination
        shall be conclusive; and

            (iii) in the case of the issuance of securities convertible into or
        exchangeable for shares of Common Stock, the aggregate consideration
        received therefor shall be deemed to be the consideration received by
        the Company for the issuance of such securities plus the additional
        minimum consideration, if any, to be received by the Company upon the
        conversion or exchange thereof (the consideration in each case to be
        determined in the same manner as provided in clauses (i) and (ii) of
        this Section 6(h)).

        (i) Computation of Market Price. For the purposes of any computation
under Sections 6(c), (d), (e) and (f) above, the current market price per share
of Common Stock at any date shall be deemed to be the average of the daily
closing price for the 20 consecutive trading days ending on the day prior to the
day in question. The closing price for each day shall be: (i) the average of the
closing high bid and low ask prices as officially quoted by the OTC Bulletin
Board; or (ii) the last sales price on such day as officially quoted by the
American Stock Exchange, if such exchange shall become the principal trading
market for the Common Stock; or (iii) if, in the reasonable judgment of the
Board of Directors of the Company, the OTC Bulletin Board or the American Stock
Exchange is no longer the principal United States market for the Common Stock,
then as quoted on the principal United States market for the Common Stock, as
reasonably determined by the Board of Directors of the Company; or (iv) if, in
the reasonable judgment of the Board of Directors of the Company, there exists
no principal United States market for the Common Stock, then as reasonably
determined by the Board of Directors of the Company.

        (j) Notice of Adjustment. Whenever the Conversion Price is adjusted, as
herein provided, the Company shall promptly but no later than 10 days after any
request for such an adjustment by the Holder, cause a notice setting forth the
adjusted Conversion Price and adjusted number of Conversion Shares issuable upon
exercise of each share of Series A Preferred Stock, and, if requested,
information describing the transactions giving rise to such adjustments, to be
mailed to the Holders at their last addresses appearing in the Share Register,
and shall cause a certified copy thereof to be mailed to its transfer agent, if
any. The Company may retain a firm of independent certified public accountants
selected by the Board of Directors (who may be the regular accountants employed
by the Company) to make any computation required by this Section 6, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of such adjustment.

        (k) Receipt of Securities Other than Common Stock. In the event that at
any time, as a result of an adjustment made pursuant to Section 6(b) above, the
holders of the Series A Preferred Stock thereafter shall become entitled to
receive any shares of the Company, other than Common Stock, thereafter the
number of such other shares so receivable upon conversion of the Series A
Preferred Stock shall be subject to adjustment from time

                                      7
<PAGE>

to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in Sections 6(a) to (h)
above.

     7. Redemption. Neither the Company nor the holders of the Series A
Preferred Stock shall have any right at any time to require the redemption of
any of the shares of Series A Preferred Stock, except upon and by reason of any
liquidation, dissolution or winding-up of the Company, as and to the extent
herein provided. Nothing herein contained, however, shall be deemed to prohibit
or impair the Company's ability, by agreement with any holder(s) of Series A
Preferred Stock, to redeem any or all of the outstanding shares of Series A
Preferred Stock at any time and from time to time, out of funds legally
available therefor.

     8. Voting Rights. Except as expressly required by applicable law, the
holders of Series A Preferred Stock shall not be entitled to vote on any matters
as to which holders of Common Stock or any future issued shares of capital stock
of the Company shall be entitled to vote.

     9. Covenants of the Company. The Company covenants and agrees that, so long
as the Shares are outstanding, it will perform the obligations set forth in this
Section 9:

        (a) Taxes and Levies. The Company will promptly pay and discharge all
taxes, assessments, and governmental charges or levies imposed upon the Company
or upon its income and profits, or upon any of its property, before the same
shall become delinquent, as well as all claims for labor, materials and supplies
which, if unpaid, might become a lien or charge upon such properties or any part
thereof; provided, however, that the Company shall not be required to pay and
discharge any such tax, assessment, charge, levy or claim so long as the
validity thereof shall be contested in good faith by appropriate proceedings and
the Company shall set aside on its books adequate reserves in accordance with
generally accepted accounting principles ("GAAP") with respect to any such tax,
assessment, charge, levy or claim so contested;

        (b) Maintenance of Existence. The Company will do or cause to be done
all things reasonably necessary to preserve and keep in full force and effect
its corporate existence, rights and franchises and comply with all laws
applicable to the Company, except where the failure to comply would not have a
material adverse effect on the Company;

        (c) Maintenance of Property. The Company will at all times maintain,
preserve, protect and keep its property used or useful in the conduct of its
business in good repair, working order and condition, and from time to time make
all needful and proper repairs, renewals, replacements and improvements thereto
as shall be reasonably required in the conduct of its business;

        (d) Insurance. The Company will, to the extent necessary for the
operation of its business, keep adequately insured by financially sound
reputable insurers, all property of a character usually insured by similar
corporations and carry such other insurance as is usually carried by similar
corporations;

        (e) Books and Records. The Company will at all times keep true and
correct books, records and accounts reflecting all of its business affairs and
transactions in accordance with GAAP; and

        (f) Notice of Certain Events. The Company will give prompt written
notice (with a description in reasonable detail) to the holders of Series A
Preferred Stock in the event the Company shall:

            (i) become insolvent or generally fail or be unable to pay, or admit
        in writing its inability to pay, its debts as they become due;

            (ii) undergo any reorganization, merger, liquidation, dissolution,
        winding up or consolidation;

            (iii) declare any split of its outstanding shares of capital stock,
        declare or make any dividend or distribution, or subdivide, reclassify
        or combine any of its outstanding shares of capital stock;

                                        8
<PAGE>

            (iv) apply for, consent to, or acquiesce in, the appointment of a
        trustee, receiver, sequestrator or other custodian for the Company or
        any of its property, or make a general assignment for the benefit of
        creditors;

            (v) in the absence of such application, consent or acquiesce in,
        permit or suffer to exist the appointment of a trustee, receiver,
        sequestrator or other custodian for the Company or for any part of its
        property; or

            (vi) permit or suffer to exist the commencement of any bankruptcy,
        reorganization, debt arrangement or other case or proceeding under any
        bankruptcy or insolvency law, or any dissolution, winding up or
        liquidation proceeding, in respect of the Company, and, if such case or
        proceeding is not commenced by the Company or converted to a voluntary
        case, such case or proceeding shall be consented to or acquiesced in by
        the Company or shall result in the entry of an order for relief.

     10. Reservation of Shares. The Company shall at all times reserve and keep
available and free of preemptive rights out of its authorized but unissued
Common Stock, solely for the purpose of effecting the conversion of the Series A
Preferred Stock pursuant to the terms hereof, such number of its shares of
Common Stock (or other shares or other securities as may be required) as shall
from time to time be sufficient to effect the conversion of all outstanding
Series A Preferred Stock pursuant to the terms hereof. If at any time the number
of authorized but unissued shares of Common Stock (or such other shares or other
securities) shall not be sufficient to affect the conversion of all then
outstanding Series A Preferred Stock, the Company shall promptly take such
action as may be necessary to increase its authorized but unissued Common Stock
(or other shares or other securities) to such number of shares as shall be
sufficient for such purpose.

     11. Miscellaneous.

         (a) There is no sinking fund with respect to the Series A Preferred
Stock.

         (b) The shares of the Series A Preferred Stock shall not have any
preferences, voting powers or relative, participating, optional, preemptive or
other special rights except as set forth above in this Certificate of
Designation, Preferences and Rights and in the Certificate of Incorporation of
the Company.

         (c) The holders of the Series A Preferred Stock shall be entitled to
receive all communications sent by the Company to the holders of the Common
Stock.

     IN WITNESS WHEREOF, Dobi Medical International, Inc. has caused this
Certificate of Designation, Preferences and Rights of Series A Convertible
Preferred Stock to be signed by its Chief Executive Officer, on this 28th day of
June 2004, and such person hereby affirms under penalty of perjury that this
Certificate of Designation, Preferences and Rights of Series A Convertible
Preferred Stock is the act and deed of Dobi Medical International, Inc. and that
the facts stated herein are true and correct.

                                DOBI MEDICAL INTERNATIONAL, INC.

                                By:  /s/Phillip C. Thomas
                                     -------------------------------------
                                     Phillip C. Thomas, Chief Executive Officer

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