ASHTON TECHNOLOGY GROUP INC
SECURITIES EXCHANGE AGREEMENT
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>4
<FILENAME>dex103.txt
<DESCRIPTION>SECURITIES EXCHANGE AGREEMENT
<TEXT>

<PAGE>

                                                                    Exhibit 10.3

                         SECURITIES EXCHANGE AGREEMENT

     SECURITIES EXCHANGE AGREEMENT (this "Agreement"), dated as of July 13,
2001, by and among The Ashton Technology Group, Inc., a Delaware corporation,
with headquarters located at 1835 Market Street, Suite 420, Philadelphia, PA
19103 ("Company"), and the security holder set forth on the signature pages
hereto (the "Holder").

     WHEREAS:

     A.   The Company and the Holder are executing and delivering this Agreement
in reliance upon an exemption from securities registration under the Securities
Act of 1933, as amended (the "1933 Act"), and the rules and regulations
promulgated thereunder by the United States Securities and Exchange Commission
(the "SEC") under 1933 Act;

     B.   The Company and the Holder are parties to a Securities Purchase
Agreement dated as of August 18, 1999 (the "Prior Purchase Agreement") pursuant
to which Holder purchased 20,000 shares of the Company's Series F Convertible
Preferred Stock, par value $0.01 per share (the "Series F Preferred Stock"),
having the rights, preferences and privileges set forth in the Certificate of
Designations, Preferences and Rights attached as Exhibit "A" to the Prior
Purchase Agreement (the "Certificate of Designation");

     C.   The Company and the Holder desire to enter into this Agreement and to
effectuate the transactions contemplated hereby, including the exchange of all
shares of Series F Preferred Stock currently owned by the Holder (the "Preferred
Shares") for the Company's 9% Secured Convertible Notes in the form attached
hereto as Exhibit "A" (the "Notes").

     D.   The Notes are convertible into shares of the Company's common stock,
$.01 par value per share (the "Common Stock"), upon the terms and subject to the
limitations and conditions set forth in the Notes.  The Notes are secured by a
senior security lien on all of the Company's Collateral (as defined in the
Security Agreement (as defined herein)), pursuant to a Security Agreement, in
the form attached hereto as Exhibit "B" (the "Security Agreement").

     E.   The Company desires to register the resale by the Holder of the shares
of Common Stock issuable upon conversion of the Notes (the "Conversion Shares"
and, collectively with the Notes, the "Securities") pursuant to the terms and
conditions of a Registration Rights Agreement in the form attached hereto as
Exhibit "C" (the "Registration Rights Agreement"), pursuant to which the Company
has agreed to provide certain registration rights under the 1933 Act and the
rules and regulations promulgated thereunder and applicable state securities
laws.

     NOW THEREFORE, in consideration of the mutual premises, covenants and
agreements contained herein and for other good and valuable consideration, the
receipt and
<PAGE>

sufficiency of which are hereby acknowledged, and intending to be legally bound,
the Company and the Holder hereby agree as follows:

          1.   EXCHANGE OF SECURITIES.
               ----------------------

               (a)  Exchange of Securities. On and subject to the terms and
                    ----------------------
conditions set forth in this Agreement, at the Closing (as defined below), the
Company shall issue the Notes to the Holder in exchange for the Preferred
Shares. The aggregate principal amount of Notes to be issued at the Closing is
$5,111,526 and is equal to the sum of (i) the aggregate Stated Value (as defined
in the Certificate of Designation) of the Preferred Shares being exchanged, plus
(ii) the aggregate Premium Amount (as defined in the Certificate of Designation)
accrued with respect to such Preferred Shares as of the Closing Date (as defined
below).

               (b)  Closing Date.  Subject to the satisfaction (or waiver) of
                    ------------
the conditions thereto set forth in Section 6 and Section 7 below, the date and
time of the exchange contemplated pursuant to this Agreement shall be as soon as
practicable following the satisfaction (or waiver) of the conditions to such
closing set forth in Section 6 and Section 7 of this Agreement, but in no event
later than 5:00 p.m. Eastern Daylight Time on July 13, 2001 (the "Closing
Date"). The closing of the transactions contemplated by this Agreement (the
"Closing") shall occur on the Closing Date at the offices of Klehr, Harrison,
Harvey, Branzburg & Ellers LLP, 260 S. Broad Street, Philadelphia, PA 19102 or
at such other location as may be agreed to by the parties.

          2.   HOLDER'S REPRESENTATIONS AND WARRANTIES.  The Holder represents
               ---------------------------------------
and warrants to the Company that:

               (a)  Investment Purpose.  As of the date hereof, the Holder is
                    ------------------
purchasing the Securities pursuant to the exchange contemplated hereby for its
own account and not with a present view towards the public sale or distribution
thereof, except pursuant to sales registered or exempted from registration under
the 1933 Act; provided, however, that by making the representations herein, the
              --------  -------
Holder does not agree to hold any of the Securities for any minimum or other
specific term and reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an exemption under
the 1933 Act.

               (b)  Accredited Investor Status.  The Holder is an "accredited
                    --------------------------
investor" as that term is defined in Rule 501(a) of Regulation D under the 1933
Act (an "Accredited Investor").

               (c)  Reliance on Exemptions.  The Holder understands that the
                    ----------------------
Securities are being offered and sold to it in reliance upon specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying upon the truth and accuracy of, and the
Holder's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Holder set forth herein in

                                      -2-
<PAGE>

order to determine the availability of such exemptions and the eligibility of
the Holder to acquire the Securities.

               (d)  Information.  The Holder and its advisors, if any, have been
                    -----------
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
which have been requested by the Holder or its advisors or have obtained such
information from the SEC Documents (as defined below).  The Holder and its
advisors, if any, have been afforded the opportunity to ask questions of the
Company and has received what the Holder believes to be satisfactory answers to
such questions.  Neither such inquiries nor any other due diligence
investigation conducted by Holder or any of its advisors or representatives
shall modify, amend or affect Holder's right to rely on the Company's
representations and warranties contained in Section 3 below.

               (e)  Governmental Review.  The Holder understands that no United
                    -------------------
States federal or state agency or any other government or governmental agency
has passed upon or made any recommendation or endorsement of the Securities.

               (f)  Transfer or Re-sale.  The Holder understands that (i)
                    -------------------
except as provided in the Registration Rights Agreement, the sale or re-sale of
the Securities has not been and is not being registered under the 1933 Act or
any applicable state securities laws, and the Securities may not be transferred
unless (a) the Securities are sold pursuant to an effective registration
statement under the 1933 Act, (b) the Holder shall have delivered to the Company
an opinion of counsel (which opinion shall be reasonably satisfactory to the
Company) to the effect that the Securities to be sold or transferred may be sold
or transferred pursuant to an exemption from such registration, (c) the
Securities are sold or transferred to an "affiliate" (as defined in Rule 144
promulgated under the 1933 Act (or a successor rule) ("Rule 144")) of the Holder
who agrees to sell or otherwise transfer the Securities only in accordance with
this Section 2(f) and who is an Accredited Investor or (d) the Securities are
sold pursuant to Rule 144; (ii) any sale of such Securities made in reliance on
Rule 144 may be made only in accordance with the terms of said Rule and further,
if said Rule is not applicable, any re-sale of such Securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
person is under any obligation to register such Securities under the 1933 Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder (in each case, other than pursuant to the Registration
Rights Agreement). Notwithstanding the foregoing or anything else contained
herein to the contrary, the Securities may be pledged as collateral in
connection with a bona fide margin account or other lending arrangement.
                  ---- ----

               (g)  Legends.  The Holder understands that the Notes, and until
                    -------
such time as the Conversion Shares have been registered under the 1933 Act as
contemplated by the Registration Rights Agreement or otherwise may be sold
pursuant to Rule 144 without any restriction as to the number of securities as
of a particular date that can then be immediately sold,

                                      -3-
<PAGE>

the Conversion Shares may bear a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against transfer of the
certificates for such Securities):

          "The securities represented by this certificate have not been
           registered under the Securities Act of 1933, as amended. The
           securities may not be sold, transferred or assigned in the
           absence of an effective registration statement for the
           securities under said Act, or an opinion of counsel, reasonably
           satisfactory to the Company, that registration is not required
           under said Act or unless sold pursuant to Rule 144 under said
           Act."

     The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of any Security upon which it is
stamped, if, unless otherwise required by applicable state securities laws, (a)
such Security is registered for sale under an effective registration statement
filed under the 1933 Act or otherwise may be sold pursuant to Rule 144 without
any restriction as to the number of securities as of a particular date that can
then be immediately sold, or (b) such holder provides the Company with an
opinion of counsel, reasonably satisfactory to the Company, to the effect that a
public sale or transfer of such Security may be made without registration under
the 1933 Act and such sale or transfer is effected or (c) such holder provides
the Company with reasonable assurances that such Security can be sold pursuant
to Rule 144.  The Holder agrees to sell all Securities, including those
represented by a certificate(s) from which the legend has been removed, in
compliance with applicable prospectus delivery requirements, if any, or
otherwise in compliance with the requirements for an exemption from registration
under the 1933 Act.

               (h)  Authorization; Enforcement.  The execution, delivery and
                    --------------------------
performance of this Agreement, the Security Agreement and the Registration
Rights Agreement have been duly and validly authorized.  This Agreement has been
duly executed and delivered on behalf of the Holder, and this Agreement
constitutes, and upon execution and delivery by the Holder of the Security
Agreement and the Registration Rights Agreement, such agreements will
constitute, valid and binding agreements of the Holder enforceable in accordance
with their terms, subject to the effect of any applicable bankruptcy,
insolvency, reorganization, or moratorium or similar laws affecting the rights
of creditors generally and the application of general principles of equity.

               (i)  Residency.  The Holder is a resident of the jurisdiction
                    ---------
set forth immediately below such Holder's name on the signature pages hereto.

               (j)  No General Solicitation or General Advertising.  Neither the
                    ----------------------------------------------
Holder nor any person acting on the Holder's behalf (if any) has conducted any
"general solicitation or general advertising" as such terms are defined in
Regulation D, with respect to any of the Securities offered hereby.

                                      -4-
<PAGE>

               (k)  No Brokers.  The Holder has taken no action which would
                    ----------
give rise to any claim by any person for brokerage commissions, finder's fees or
similar payments relating to this Agreement or the transactions contemplated
hereby and is not aware of any such claim that is pending or threatened.

          3.   REPRESENTATIONS AND WARRANTIES OF THE COMPANY.  The Company
               ---------------------------------------------
represents and warrants to the Holder with respect to itself and each of its
Subsidiaries (as defined below) that:

               (a)  Organization and Qualification.  The Company and each of its
                    ------------------------------
Subsidiaries, if any, is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction in which it is incorporated,
with full power and authority (corporate and other) to own, lease, use and
operate its properties and to carry on its business as and where now owned,
leased, used, operated and conducted.  Schedule 3(a) sets forth a list of all of
the Subsidiaries of the Company and the jurisdiction in which each is
incorporated.  Except as set forth on Schedule 3(a), the Company and each of its
Subsidiaries is duly qualified as a foreign corporation to do business and is in
good standing in every jurisdiction in which its ownership or use of property or
the nature of the business conducted by it makes such qualification necessary
except where the failure to be so qualified or in good standing would not have a
Material Adverse Effect.  "Material Adverse Effect" means any material adverse
effect on (i) the Securities, (ii) the business, operations, assets, financial
condition or prospects of the Company and its Subsidiaries, if any, taken as a
whole, (iii) on the transactions contemplated hereby or by the agreements or
instruments to be entered into in connection herewith or (iv) the authority or
the ability of the Company to perform its obligation under this Agreement, the
Security Agreement, the Registration Rights Agreement or the Notes.
"Subsidiaries" (and each, a "Subsidiary") means any "significant subsidiary" (as
defined in Section 210.1-02(w) of Regulation S-X promulgated under 1933 Act) of
the Borrower.

               (b)  Authorization; Enforcement.  (i) The Company has all
                    --------------------------
requisite corporate power and authority to enter into and perform its
obligations under this Agreement, the Notes, the Security Agreement and the
Registration Rights Agreement and to consummate the transactions contemplated
hereby and thereby and to issue the Securities, in accordance with the terms
hereof and thereof, (ii) the execution and delivery of this Agreement, the
Security Agreement, the Registration Rights Agreement and the Notes by the
Company and the consummation by it of the transactions contemplated hereby and
thereby (including without limitation, the issuance of the Notes and the
issuance and reservation for issuance of the Conversion Shares issuable upon
conversion of or otherwise pursuant to the Notes) have been duly authorized by
the Company's Board of Directors and no further consent or authorization of the
Company, its Board of Directors, or its stockholders (other than the Stockholder
Approval (as defined in Section 4(k) below)) is required, (iii) this Agreement
has been duly executed and delivered by the Company, and (iv) this Agreement
constitutes, and upon execution and delivery by the Company of the Security
Agreement, the Registration Rights Agreement and the Notes, each of such
agreements and instruments will constitute, a legal, valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms, subject to the effect

                                      -5-
<PAGE>

of any applicable bankruptcy, insolvency, reorganization, or moratorium or
similar laws affecting the rights of creditors generally and the application of
general principles of equity.

               (c)  Capitalization.  As of the date hereof, the authorized
                    --------------
capital stock of the Company consists of (i) 100,000,000 shares of Common Stock
of which [33,178,830] shares are issued and outstanding, [8,372,877] shares are
reserved for issuance pursuant to the Company's stock option plans, [4,915,419]
shares are reserved for issuance pursuant to securities (other than the Notes)
exercisable for, or convertible into or exchangeable for shares of Common Stock
and 12,000,000 shares are reserved for issuance upon conversion of the Notes
(subject to adjustment pursuant to the Company's covenant set forth in Section
4(h) below); and (ii) 3,000,000 shares of preferred stock, 592,500 of which are
designated as Series B Convertible Preferred Stock, of which 44,200 shares are
issued and outstanding, and of which 20,000 are designated as the Series F
Preferred Stock, of which the Preferred Shares are the only issued and
outstanding shares. All of such outstanding shares of capital stock are, or upon
issuance against consideration therefor will be, duly authorized, fully paid,
nonassessable and, except as set forth on Schedule 3(c), validly issued. Except
as set forth on Schedule 3(c), no shares of capital stock of the Company are
subject to preemptive rights or any other similar rights of the stockholders of
the Company or any liens or encumbrances imposed through the actions or failure
to act of the Company. The authorized capital stock of each Subsidiary, the
number and type of shares of capital stock issued and outstanding, and the
number and type of shares of capital stock reserved for issuance pursuant to
stock option plans and pursuant to securities exercisable for, convertible into
or exchangeable for such shares of capital stock are set forth on Schedule 3(c).
Except as disclosed in Schedule 3(c), as of the effective date of this
Agreement, (i) there are no outstanding options, warrants, scrip, rights to
subscribe for, puts, calls, rights of first refusal, agreements, understandings,
claims or other commitments or rights of any character whatsoever relating to,
or securities or rights convertible into or exchangeable for any shares of
capital stock of the Company or any of its Subsidiaries, or arrangements by
which the Company or any of its Subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its Subsidiaries,
(ii) there are no agreements or arrangements under which the Company or any of
its Subsidiaries is obligated to register the sale of any of its or their
securities under the 1933 Act (except the Registration Rights Agreement and that
certain Registration Rights Agreement dated as of August 18, 1999 by and among
the Company and the Holder) and (iii) there are no anti-dilution or price
adjustment provisions contained in any security issued by the Company or its
Subsidiaries (or in any agreement providing rights to security holders) that
will be triggered by the issuance of the Notes or the Conversion Shares. The
Company has furnished to the Holder true and correct copies of the Company's
Certificate of Incorporation as in effect on the date hereof ("Certificate of
Incorporation"), the Company's By-laws, as in effect on the date hereof (the
"By-laws"), and the terms of all securities convertible into or exercisable for
Common Stock of the Company and the material rights of the holders thereof in
respect thereto and has provided the Holder similar information with respect to
each Subsidiary. The Company shall provide the Holder with a written update of
this representation signed by the Company's President on behalf of the Company
as of the Closing Date.

                                      -6-
<PAGE>

               (d)  Issuance of Shares.  The Conversion Shares are duly
                    ------------------
authorized and reserved for issuance, and, upon conversion of the Notes in
accordance with the terms thereof, will be validly issued, fully paid and non-
assessable, and free from all taxes, liens, claims and encumbrances and will not
be subject to preemptive rights or other similar rights of stockholders of the
Company and will not impose personal liability upon the holder thereof.

               (e)  Acknowledgment of Dilution.  The Company understands and
                    --------------------------
acknowledges the potentially dilutive effect to the Common Stock upon the
issuance of the Conversion Shares upon conversion of or otherwise pursuant to
the Notes.  The Company's directors and executive officers have studied and
fully understand the nature of the Securities being sold hereunder.  The Company
further acknowledges that its obligation to issue Conversion Shares upon
conversion of the Notes in accordance with the terms thereof is absolute and
unconditional regardless of the dilutive effect that such issuance may have on
the ownership interests of other stockholders of the Company.  Taking the
foregoing into account, the Company's Board of Directors has determined, in its
good faith business judgment, that the issuance of the Securities hereunder and
the consummation of the transactions contemplated hereby are in the best
interests of the Company and its stockholders.

               (f)  Series of Preferred Stock.  The terms, designations, powers,
                    -------------------------
preferences and relative, participating and optional or special rights, and the
qualifications, limitations and restrictions of each series of preferred stock
of the Company are as stated in the Certificate of Incorporation, filed on or
prior to the date hereof, and the Bylaws.

               (g)  No Conflicts.  The execution, delivery and performance of
                    ------------
this Agreement, the Security Agreement, the Registration Rights Agreement and
the Notes by the Company and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the issuance and
reservation for issuance, as applicable, of the Notes and Conversion Shares)
will not (i) conflict with or result in a violation of any provision of the
Certificate of Incorporation or By-laws or (ii) violate or conflict with, or
result in a breach of any provision of, or constitute a default (or an event
which with notice or lapse of time or both could become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, indenture, patent, patent license or
instrument to which the Company or any of its Subsidiaries is a party, or (iii)
result in a violation of any law, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations and regulations of
any self-regulatory organizations to which the Company or its securities are
subject) applicable to the Company or any of its Subsidiaries or by which any
property or asset of the Company or any of its Subsidiaries is bound or affected
(except for such conflicts, breaches, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect). Except as set forth on Schedule
3(g), neither the Company nor any of its Subsidiaries is in violation of its
Certificate of Incorporation, By-laws or its respective other organizational
documents and neither the Company nor any of its Subsidiaries is in default (and
no event has occurred which with notice or lapse of time or both could put the
Company or any of its Subsidiaries in default) under, and neither the Company
nor any of its Subsidiaries has

                                      -7-
<PAGE>

taken any action or failed to take any action that would give to others any
rights of termination, amendment, acceleration or cancellation of, any material
agreement, indenture or instrument to which the Company or any of its
Subsidiaries is a party or by which any property or assets of the Company or any
of its Subsidiaries is bound or affected, except for possible defaults as would
not, individually or in the aggregate, have a Material Adverse Effect. Except as
set forth on Schedule 3(g), the businesses of the Company and its Subsidiaries,
if any, are not being conducted, and shall not be conducted so long as a Holder
owns any of the Securities, in violation of any law, ordinance or regulation of
any governmental entity the failure to comply with which would, individually or
in the aggregate, have a Material Adverse Effect. Except as specifically
contemplated by this Agreement and as required under the 1933 Act and any
applicable state securities laws, the Company is not required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court, governmental agency, regulatory agency, self regulatory organization or
stock market or any third party in order for it to execute, deliver or perform
any of its obligations under this Agreement, the Security Agreement, the
Registration Rights Agreement or the Notes in accordance with the terms hereof
or thereof or to issue and sell the Notes in accordance with the terms hereof
and to issue the Conversion Shares upon conversion of or otherwise pursuant to
the Notes. Except as disclosed in Schedule 3(g), all consents, authorizations,
orders, filings and registrations which the Company is required to obtain
pursuant to the preceding sentence have been obtained or effected on or prior to
the date hereof. Except as disclosed in Schedule 3(g), the Company is not in
violation of the listing requirements of The Nasdaq National Market (the "NNM")
and does not reasonably anticipate that the Common Stock will be delisted by the
NNM in the foreseeable future. Except as disclosed on Schedule 3(g), the Company
and its Subsidiaries are unaware of any facts or circumstances which might give
rise to any of the foregoing.

               (h)  SEC Documents; Financial Statements.  Since March 31, 1998,
                    -----------------------------------
the Company has timely filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act")
(all of the foregoing filed prior to the date hereof and all exhibits included
therein and financial statements and schedules thereto and documents (other than
exhibits to such documents) incorporated by reference therein, being hereinafter
referred to herein as the "SEC Documents").  The Company has made available to
each Holder true and complete copies of the SEC Documents, except for such
exhibits and incorporated documents.  As of their respective dates and except as
disclosed on Schedule 3(h) attached hereto, the SEC Documents complied in all
material respects with the requirements of the 1934 Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC,
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.  None of the statements made in any such SEC Documents is, or has
been, required to be amended or updated under applicable law (except for such
statements as have been amended or updated in subsequent filings prior to the
date hereof).  As of their respective dates, and except as disclosed on Schedule
3(h) attached hereto, the financial statements of the Company included in the
SEC Documents complied as to form in all

                                      -8-
<PAGE>

material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto. Except as disclosed on
Schedule 3(h) attached hereto, such financial statements have been prepared in
accordance with United States generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements) and fairly present in all
material respects the consolidated financial position of the Company and its
consolidated Subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments). Except as
set forth in the financial statements of the Company (including the notes
thereto) included in the SEC Documents, the Company has no liabilities,
contingent or otherwise, other than (i) liabilities incurred in the ordinary
course of business subsequent to March 31, 2000 and (ii) obligations under
contracts and commitments incurred in the ordinary course of business and not
required under generally accepted accounting principles to be reflected in such
financial statements (including the notes thereto), which, individually or in
the aggregate, are not material to the financial condition or operating results
of the Company.

               (i)  Absence of Certain Changes.  Except as set forth on
                    --------------------------
Schedule 3(i) or as otherwise fully disclosed in the SEC Documents filed prior
to the date hereof, since March 31, 2000, there has been no material adverse
change and no material adverse development in the assets, liabilities, business,
properties, operations, financial condition, results of operations or prospects
of the Company or any of its Subsidiaries.

               (j)  Absence of Litigation.  There is no action, suit, claim,
                    ---------------------
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company or any of its Subsidiaries, threatened against or
affecting the Company or any of its Subsidiaries, or their officers or directors
in their capacity as such, that could have a Material Adverse Effect.  Schedule
3(j) contains a complete list and summary description of any pending or, to the
Company's knowledge, threatened proceeding against or affecting the Company or
any of its Subsidiaries, without regard to whether it would have a Material
Adverse Effect.  Except as set forth on Schedule 3(j), the Company and its
Subsidiaries are unaware of any facts or circumstances which might give rise to
any of the foregoing.

               (k)  Patents, Copyrights, etc.  The Company and each of its
                    ------------------------
Subsidiaries owns or possesses the requisite licenses or rights to use all
Intellectual Property (as defined in the Security Agreement) necessary to enable
it to conduct its business as now operated (and, except as set forth in Schedule
3(k) hereof, to the best of the Company's knowledge, as presently contemplated
to be operated in the future); there is no claim or action by any person
pertaining to, or proceeding pending, or to the Company's knowledge threatened,
which challenges the right of the Company or of a Subsidiary with respect to any
Intellectual Property necessary to enable it to conduct its business as now
operated (and, except as set forth in Schedule 3(k) hereof, to the best of the
Company's knowledge, as presently contemplated to be

                                      -9-
<PAGE>

operated in the future); to the best of the Company's knowledge, the Company's
or its Subsidiaries' current and intended products, services and processes do
not infringe on any Intellectual Property or other rights held by any person;
and the Company is unaware of any facts or circumstances which might give rise
to any of the foregoing. The Company and each of its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of their Intellectual Property.

               (l)  No Materially Adverse Contracts, Etc.  Neither the Company
                    ------------------------------------
nor any of its Subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
judgment of the Company's officers has or is currently expected in the future to
have a Material Adverse Effect.  Neither the Company nor any of its Subsidiaries
is a party to any contract or agreement which in the judgment of the Company's
officers has or is currently expected in the future to have a Material Adverse
Effect.

               (m)  Tax Status.  Except as set forth on Schedule 3(m), the
                    ----------
Company and each of its Subsidiaries has made or filed all federal, state and
foreign income and all other tax returns, reports and declarations required by
any jurisdiction to which it is subject (unless and only to the extent that the
Company and each of its Subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) and has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith, and has set aside on
its books provisions reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply. There are no unpaid taxes in any material amount claimed to be due by the
taxing authority of any jurisdiction, and the officers of the Company know of no
basis for any such claim. The Company has not executed a waiver with respect to
the statute of limitations relating to the assessment or collection of any
foreign, federal, state or local tax. Except as set forth on Schedule 3(m), none
of the Company's tax returns is presently being audited by any taxing authority.

               (n)  Certain Transactions.  Except as set forth in the SEC
                    --------------------
Documents and except for arm's length transactions pursuant to which the Company
or any of its Subsidiaries makes payments in the ordinary course of business
upon terms no less favorable than the Company or any of its Subsidiaries could
obtain from third parties and other than the grant of stock options disclosed on
Schedule 3(c), none of the officers, directors, or employees of the Company is
presently a party to any transaction, with the Company or any of its
Subsidiaries (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 corporation,
partnership, trust or other 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, which would be required to be disclosed by the Company in
its public filings under the 1934 Act.

                                      -10-
<PAGE>

               (o)  Disclosure.  All information relating to or concerning the
                    ----------
Company or any of its Subsidiaries set forth in this Agreement and provided to
the Holder pursuant to Section 2(d) hereof and otherwise in connection with the
transactions contemplated hereby is true and correct in all material respects
and the Company has not omitted to state any material fact necessary in order to
make the statements made herein or therein, in light of the circumstances under
which they were made, not misleading (provided that in the case of the SEC
Documents, each of such SEC Documents satisfied the foregoing standards as of
their respective dates and at the time they were filed with the SEC and none of
the statements made in any such SEC Documents is, or has been, required to be
amended or updated under applicable law (except for such statements as have been
amended or updated in subsequent filings prior to the date hereof)). No event or
circumstance has occurred or exists with respect to the Company or any of its
Subsidiaries or its or their business, properties, prospects, operations or
financial conditions, which has not been publicly announced or disclosed but
under applicable law, rule or regulation, requires public disclosure or
announcement by the Company (assuming for this purpose that the Company's
reports filed under the 1934 Act are being incorporated into an effective
registration statement filed by the Company under the 1933 Act).

               (p)  Acknowledgment Regarding Holder' Purchase of Securities.
                    -------------------------------------------------------
The Company acknowledges and agrees that the Holder is acting solely in the
capacity of arm's length purchaser with respect to this Agreement and the
transactions contemplated hereby. The Company further acknowledges that the
Holder is not 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 that any statement made by the Holder or any of its
respective representatives or agents in connection with this Agreement and the
transactions contemplated hereby is not advice or a recommendation and is merely
incidental to the Holder's purchase of the Securities and has not been relied
upon by the Company, its officers or directors in any way. The Company further
represents to the Holder that the Company's decision to enter into this
Agreement has been based solely on the independent evaluation of the Company and
its representatives.

               (q)  No Integrated Offering.  Neither the Company, nor any of its
                    ----------------------
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would require registration under the
1933 Act of the issuance of the Securities to the Holder.  The issuance of the
Securities to the Holder will not be integrated with any other issuance of the
Company's securities past, current or future (other than the issuance of the
Series F Preferred Stock and related securities pursuant to the Prior Purchase
Agreement) for purposes of any stockholder approval provisions applicable to the
Company or its securities.

               (r)  No Brokers.  The Company has taken no action which would
                    ----------
give rise to any claim by any person for brokerage commissions, finder's fees or
similar payments relating to this Agreement or the transactions contemplated
hereby and is not aware of any such claim that is pending or threatened.

                                      -11-
<PAGE>

               (s)  Permits; Compliance.  The Company and each of its
                    -------------------
Subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exemptions, consents, certificates,
approvals and orders necessary to own, lease and operate its properties and to
carry on its business as it is now being conducted except those the failure of
which to possess would not, individually or in the aggregate, have a Material
Adverse Effect (collectively, the "Company Permits"), and there is no action
pending or, to the knowledge of the Company, threatened regarding suspension or
cancellation of any of the Company Permits. Neither the Company nor any of its
Subsidiaries is in conflict with, or in default or violation of, any of the
Company Permits, except for any such conflicts, defaults or violations which,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect. Since March 31, 2000, except as set forth in Schedule
3(s), neither the Company nor any of its Subsidiaries has received any
notification with respect to possible conflicts, defaults or violations of
applicable laws, except for notices relating to possible conflicts, defaults or
violations, which conflicts, defaults or violations would not have a Material
Adverse Effect.

               (t)  Environmental Matters.  Except as set forth in Schedule
                    ---------------------
3(t) and except with regard to such violations that would not, individually or
in the aggregate, have a Material Adverse Effect, there are, to the Company's
knowledge, with respect to the Company or any of its Subsidiaries or any
predecessor of the Company, no past or present violations of Environmental Laws
(as defined below), releases of any material into the environment, actions,
activities, circumstances, conditions, events, incidents, or contractual
obligations which may give rise to any common law environmental liability or any
liability under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 or similar federal, state, local or foreign laws and
neither the Company nor any of its Subsidiaries has received any notice with
respect to any of the foregoing, nor is any action pending or, to the Company's
knowledge, threatened in connection with any of the foregoing. The term
"Environmental Laws" means all federal, state, local or foreign laws relating to
pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata), including, without limitation, laws relating to emissions, discharges,
releases or threatened releases of chemicals, pollutants contaminants, or toxic
or hazardous substances or wastes (collectively, "Hazardous Materials") into the
environment, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous Materials,
as well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved thereunder.

               (u)  Title to Property.  Neither the Company nor its
                    -----------------
Subsidiaries owns any real property. The Company and its Subsidiaries have good
and marketable title to all personal property owned by them which is material to
the business of the Company and its Subsidiaries, in each case free and clear of
all liens, encumbrances and defects except such as are described in Schedule
3(u) or such as would not have a Material Adverse Effect. Any real property and
facilities held under lease by the Company and its Subsidiaries are held by them
under valid, subsisting and enforceable leases with such exceptions as would not
have a Material Adverse Effect.

                                      -12-
<PAGE>

          (v) Insurance.  The Company and each of its Subsidiaries are insured
              ---------
by insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its Subsidiaries are
engaged.  Neither the Company nor any such 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 at a cost that would not have a Material
Adverse Effect.

          (w) Internal Accounting Controls.  The Company and each of its
              ----------------------------
Subsidiaries maintain a system of internal accounting controls sufficient, in
the judgment of the Company's board of directors, 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 generally
accepted accounting principles 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.

          (x) Foreign Corrupt Practices.  Neither the Company, nor any of its
              -------------------------
Subsidiaries, nor to the Company's knowledge, any director, officer, agent,
employee or other person acting on behalf of the Company or any Subsidiary has,
in the course of his actions for, or on behalf of, the Company, used any
corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; made any direct or indirect
unlawful payment to any foreign or domestic government official or employee from
corporate funds; violated or is in violation of any provision of the U.S.
Foreign Corrupt Practices Act of 1977; or made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic
government official or employee.

          (y) Solvency.  The Company (both before and after giving effect to the
              --------
transactions contemplated by this Agreement) is solvent (i.e., its assets have a
                                                         ----
fair market value in excess of the amount required to pay its probable
liabilities on its existing debts as they become absolute and matured) and,
except as set forth on Schedule 3(y), currently the Company has no information
that would lead it to reasonably conclude that the Company would not have the
ability to, nor does it intend to take any action that would impair its ability
to, pay its debts from time to time incurred in connection therewith as such
debts mature.  The Company did not receive a qualified opinion from its auditors
with respect to its most recent fiscal year end and, following the consummation
of the exchange contemplated hereby, does not anticipate or know of any basis
upon which its auditors might issue a qualified opinion in respect of its
current fiscal year except as set forth on Schedule 3(y).

          (z) No Investment Company.  The Company is not, and upon the issuance
              ---------------------
and sale of the Securities as contemplated by this Agreement will not be an
"investment

                                      -13-
<PAGE>

company" required to be registered under the Investment Company Act of 1940 (an
"Investment Company"). The Company is not controlled by an Investment Company.

               (aa) No General Solicitation or General Advertising.  Neither the
                    ----------------------------------------------
Company nor any person acting on the Company's behalf (if any) has conducted any
"general solicitation or general advertising" as such terms are defined in
Regulation D, with respect to any of the Securities being offered hereby.

          4.   COVENANTS.
               ---------

               (a)  Best Efforts. The parties shall use their best efforts to
                    ------------
satisfy timely each of the conditions described in Section 6 and 7 of this
Agreement.

               (b)  Blue Sky Laws. The Company shall, on or before the Closing
                    -------------
Date, take such action as the Company shall reasonably determine is necessary to
qualify the Securities for sale to the Holder at the Closing pursuant to this
Agreement under applicable securities or "blue sky" laws of the states of the
United States (or to obtain an exemption from such qualification), and shall
provide evidence of any such action so taken to the Holder on or prior to the
Closing Date.

               (c)  Reporting Status; Eligibility to Use Form S-3. The Company's
                    ---------------------------------------------
Common Stock is registered under Section 12(g) of the 1934 Act. So long as the
Holder beneficially owns any of the Securities, the Company shall timely file
all reports required to be filed with the SEC pursuant to the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations thereunder
would permit such termination. The Company currently meets, and will take all
necessary action to continue to meet, the "registrant eligibility" requirements
set forth in the general instructions to Form S-3 for secondary offerings. The
Company shall file with the SEC either (i) a Current Report on Form 8-K or (ii)
its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2001
describing the material terms of the transactions contemplated hereby (and
attaching as exhibits thereto this Agreement and the Notes) within fifteen (15)
calendar days after the Closing Date, which Form 8-K or Form 10-Q, as the case
may be, shall be subject to prior review by the Holder.

               (d)  Notice of Meetings of Stockholders. For as long as the
                    ----------------------------------
Holder owns the Securities, the Company shall provide Holder with prior
notification of any meeting of the stockholders (and copies of proxy materials
and other information sent to stockholders). In the event of any taking by the
Company of a record of its stockholders for the purpose of determining
stockholders who are entitled to receive payment of any dividend or other
distribution, any right to subscribe for, purchase or otherwise acquire
(including by way of merger, consolidation or recapitalization) any share of any
class or any other securities or property, or to receive any other right, or for
the purpose of determining stockholders who are entitled to vote in connection
with any proposed sale, lease or conveyance of all or substantially all of the
assets of the Company, or any proposed liquidation, dissolution or winding up of
the

                                      -14-
<PAGE>

Company, the Company shall mail a notice to Holder, at least ten (10) days prior
to the record date specified therein (or thirty (30) days prior to the
consummation of the transaction or event, whichever is earlier), of the date on
which any such record is to be taken for the purpose of such dividend,
distribution, right or other event, and a brief statement regarding the amount
and character of such dividend, distribution, right or other event to the extent
known at such time.

               (e) Financial Information. The Company agrees to send the
                   ---------------------
following reports to the Holder until the Holder transfers, assigns, or sells
all of the Securities: (i) within ten (10) days after the filing with the SEC, a
copy of its Annual Report on Form 10-KSB or Form 10-K, its Quarterly Reports on
Form 10-QSB or Form 10-Q and any Current Reports on Form 8-K; (ii) within one
(1) day after release, copies of all press releases issued by the Company or any
of its Subsidiaries; and (iii) contemporaneously with the making available or
giving to the stockholders of the Company, copies of any notices or other
information the Company makes available or gives to such stockholders.

               (f) Reservation of Shares.  The Company shall at all times have
                   ---------------------
authorized, and reserved for the purpose of issuance, a sufficient number of
shares of Common Stock to provide for the full conversion of the Notes (based on
the lesser of the Market Price in effect from time to time and the Fixed
Conversion Price in effect from time to time (each as defined in the Notes)) and
as otherwise required by the Notes.  The Company shall not reduce the number of
shares of Common Stock reserved for issuance upon conversion of or otherwise
pursuant to the Notes without the consent of the Holder.  The Company shall use
its best efforts at all times to maintain the number of shares of Common Stock
so reserved for issuance at no less than two (2) times the number that is then
actually issuable upon full conversion of the Notes (based on the lesser of the
Market Price in effect from time to time and the Fixed Conversion Price in
effect from time to time).  If at any time the number of shares of Common Stock
authorized and reserved for issuance is below the number of Conversion Shares
issued and issuable upon conversion of or otherwise pursuant to the terms of the
Notes (based on the lesser of the Market Price in effect from time to time and
the Fixed Conversion Price in effect from time to time), the Company will
promptly take all corporate action necessary to authorize and reserve a
sufficient number of shares, including, without limitation, calling a special
meeting of stockholders to authorize additional shares to meet the Company's
obligations under this Section 4(f), in the case of an insufficient number of
authorized shares, and using its best efforts to obtain stockholder approval of
an increase in such authorized number of shares.

               (g) Listing. The Company shall promptly secure the listing of the
                   -------
Conversion Shares upon each national securities exchange or automated quotation
system, if any, upon which shares of Common Stock are then listed (subject to
official notice of issuance) within one (1) business day of obtaining the
Stockholder Approval (as defined herein) and, so long as the Holder owns any of
the Securities, shall maintain, so long as any other shares of Common Stock
shall be so listed, such listing of all Conversion Shares from time to time
issuable upon conversion of or otherwise pursuant to the terms of the Notes. The
Company will obtain and, so long as the Holder owns any of the Securities,
maintain the listing and trading of its Common Stock on the NNM, the Nasdaq
SmallCap Market ("Nasdaq SmallCap"), the New

                                      -15-
<PAGE>

York Stock Exchange ("NYSE"), the American Stock Exchange ("AMEX") or the Over-
the-Counter Bulletin Board and will comply in all respects with the Company's
reporting, filing and other obligations under the bylaws or rules of the
National Association of Securities Dealers ("NASD") and such exchanges, as
applicable. The Company shall promptly provide to the Holder copies of any
notices it receives from the NNM and any other exchanges or quotation systems on
which the Common Stock is then listed regarding the continued eligibility of the
Common Stock for listing on such exchanges and quotation systems; provided,
                                                                  --------
however, that if the disclosure of such information would make the Holder an
-------
"insider," no such disclosure shall be made unless the Holder consents in
writing prior to such disclosure.

          (h) Corporate Existence.  So long as the Holder beneficially owns the
              -------------------
Notes or any portion thereof, the Company shall maintain its corporate existence
and shall not sell all or substantially all of the Company's assets, except in
the event of a merger or consolidation or sale of all or substantially all of
the Company's assets, where the successor or acquiring entity and, if an entity
different from the successor or acquiring entity, the entity whose capital stock
or assets the holders of the Common Stock are entitled to receive as a result of
such transaction, in such transaction (i) assumes the Company's obligations
hereunder and under the agreements and instruments entered into in connection
herewith (including the Notes) and (ii) is a publicly traded corporation whose
Common Stock is listed for trading on the NNM, Nasdaq SmallCap, the NYSE or
AMEX.

          (i) No Integration.  The Company shall not make any offers or sales of
              --------------
any security (other than the Securities) under circumstances that would require
registration of the Securities being offered or sold hereunder under the 1933
Act or cause the offering of Securities to be integrated with any other offering
of securities by the Company for the purpose of any stockholder approval
provision applicable to the Company or its securities.

          (j) Trading in Common Stock.  The Holder shall conduct sales of Common
              -----------------------
Stock in compliance with all applicable federal and state securities laws and
rules or regulations promulgated thereunder.  The Holder will not under any
circumstances create any daily low trading prices in the Common Stock or conduct
sales in a manner intended to manipulate the Common Stock price.

          (k) Stockholder Approval.  The Company shall hold a special or annual
              --------------------
meeting of stockholders not later than September 25, 2001, and, at such meeting,
obtain such approvals of the Company's stockholders as may be required under
applicable laws and regulations (including the rules and regulations of the NNM)
to issue all of the shares of Common Stock issuable upon conversion of, or
otherwise pursuant to, the Notes (the "Stockholder Approval").  The Company
shall comply with the filing and disclosure requirements of Section 14 under the
Exchange Act, and the rules and regulations thereunder, in connection with the
solicitation, acquisition and the disclosure of the Stockholder Approval.  The
Company represents and warrants that its Board of Directors has approved, and
will recommend that the Company's stockholders approve, the proposals
contemplated by this Section 4(k) and shall so indicate such recommendation in
the proxy statement used to solicit the Stockholder

                                      -16-
<PAGE>

Approval. The Company shall use its best efforts to cause its officers,
directors and affiliates to vote in favor of the proposals contemplated by this
Section 4(k).

          5.   TRANSFER AGENT INSTRUCTIONS.  The Company shall issue irrevocable
               ---------------------------
instructions to its transfer agent to issue certificates, registered in the name
of each Holder or its nominee, for the Conversion Shares in such amounts as
specified from time to time by each Holder to the Company upon conversion of the
Notes in accordance with the terms thereof (the "Irrevocable Transfer Agent
Instructions").  Prior to registration of the Conversion Shares under the 1933
Act or the date on which the Conversion Shares may be sold pursuant to Rule 144
without any restriction as to the number of securities as of a particular date
that can then be immediately sold, all such certificates shall bear the
restrictive legend specified in Section 2(g) of this Agreement.  The Company
warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this Section 5, and stop transfer instructions to
give effect to Section 2(f) hereof (in the case of the Conversion Shares, prior
to registration of the Conversion Shares under the 1933 Act or the date on which
the Conversion Shares may be sold pursuant to Rule 144 without any restriction
as to the number of securities as of a particular date that can then be
immediately sold), will be given by the Company to its transfer agent and that
the Securities shall otherwise be freely transferable on the books and records
of the Company as and to the extent provided in this Agreement and the
Registration Rights Agreement.  Nothing in this Section shall affect in any way
the Holder's obligations and agreement set forth in Section 2(g) hereof to
comply with all applicable prospectus delivery requirements, if any, upon re-
sale of the Securities.  If a Holder provides the Company with (i) an opinion of
counsel, reasonably satisfactory to the Company, to the effect that a public
sale or transfer of  such  Securities may be made without registration under the
1933 Act and such sale or transfer is effected or (ii) the Holder provides
reasonable assurances that the Securities can be sold pursuant to Rule 144, the
Company shall permit the transfer, and, in the case of the Conversion Shares,
promptly instruct its transfer agent to issue one or more certificates, free
from any restrictive legend, in such name and in such denominations as specified
by such Holder.

          6.   CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.  The obligation
               ----------------------------------------------
of the Company hereunder to issue and sell the Notes to the Holder at the
Closing is subject to the satisfaction, at or before the Closing Date, of each
of the following conditions thereto, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion:

               (a) The Holder shall have executed this Agreement, the Security
Agreement and the Registration Rights Agreement, and delivered the same to the
Company.

               (b) The Holder shall have delivered to the Company the Preferred
Shares, together with executed stock powers in blank.

               (c) The representations and warranties of the Holder shall be
true and correct in all material respects as of the date when made and as of the
Closing Date as though

                                      -17-
<PAGE>

made at that time (except for representations and warranties that speak as of a
specific date, which representations and warranties shall be true and correct as
of such date), and the Holder shall have performed, satisfied and complied in
all material respects with the covenants, agreements and conditions required by
this Agreement to be performed, satisfied or complied with by the Holder at or
prior to the Closing Date.

               (d)  No litigation, statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by or in any court or governmental authority of competent jurisdiction
or any self-regulatory organization having authority over the matters
contemplated hereby which prohibits the consummation of any of the transactions
contemplated by this Agreement.

          7.   CONDITIONS TO THE HOLDER'S OBLIGATION TO PURCHASE.  The
               -------------------------------------------------
obligation of the Holder hereunder to exchange the Preferred Shares for the
Notes at the Closing is subject to the satisfaction, at or before the Closing
Date of each of the following conditions, provided that these conditions are for
the Holder's sole benefit and may be waived by the Holder at any time in its
sole discretion:

               (a)  The Company shall have executed this Agreement, the Security
Agreement and the Registration Rights Agreement, and delivered the same to the
Holder.

               (b)  The Company shall have delivered to the Holder duly executed
Notes (in such denominations as the Holder shall request) in accordance with
Section 1(b) above.

               (c)  The Irrevocable Transfer Agent Instructions, in the form
attached hereto as Exhibit "D", shall have been delivered to and acknowledged in
writing by the Company's Transfer Agent.

               (d)  The representations and warranties of the Company shall be
true and correct in all material respects as of the date when made and as of the
Closing Date as though made at such time (except for representations and
warranties that speak as of a specific date, which representations and
warranties shall be true and correct as of such date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Closing Date. The Holder
shall have received a certificate or certificates, executed by the President of
the Company, dated as of the Closing Date, to the foregoing effect and as to
such other matters as may be reasonably requested by such Holder including, but
not limited to certificates with respect to the Company's Certificate of
Incorporation, By-laws and Board of Directors' resolutions relating to the
transactions contemplated hereby.

               (e)  No litigation, statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by or in any court or governmental authority of competent jurisdiction
or any self-regulatory organization having

                                      -18-
<PAGE>

authority over the matters contemplated hereby which prohibits the consummation
of any of the transactions contemplated by this Agreement.

               (f)  Trading in the Common Stock on the NNM shall not have been
suspended by the SEC or the NNM.

               (g)  The Holder shall have received an opinion of the Company's
counsel, dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to the Holder and in substantially the same form as Exhibit "E"
attached hereto.

               (h)  The Holder shall have received an officer's certificate
described in Section 3(c) above, dated as of the Closing Date.

          8.   GOVERNING LAW; MISCELLANEOUS.
               ----------------------------

               (a)  Governing Law. This Agreement shall be governed by and
                    -------------
construed in accordance with the laws of the State of Delaware applicable to
agreements made and to be performed in the State of Delaware (without regard to
principles of conflict of laws). Both parties irrevocably consent to the
exclusive jurisdiction of the United States federal courts and the state courts
located in Delaware with respect to any suit or proceeding based on or arising
under this Agreement, the agreements entered into in connection herewith or the
transactions contemplated hereby or thereby and irrevocably agree that all
claims in respect of such suit or proceeding may be determined in such courts.
Both parties irrevocably waive the defense of an inconvenient forum to the
maintenance of such suit or proceeding. Both parties further agree that service
of process upon a party mailed by first class mail shall be deemed in every
respect effective service of process upon the party in any such suit or
proceeding. Nothing herein shall affect either party's right to serve process in
any other manner permitted by law. Both parties agree that a final non-
appealable judgment in any such suit or proceeding shall be conclusive and may
be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.

               (b)  Counterparts; Signatures by Facsimile. This Agreement may be
                    -------------------------------------
executed in one or more counterparts, all of which 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. This Agreement, once executed by
a party, may be delivered to the other party hereto by facsimile transmission of
a copy of this Agreement bearing the signature of the party so delivering this
Agreement.

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

               (d)  Severability.  If any provision of this Agreement shall be
                    ------------
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction.

                                      -19-
<PAGE>

               (e)  Entire Agreement; Amendments.  This Agreement and the
                    ----------------------------
instruments referenced herein contain the entire understanding of the parties
with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor the Holder
makes any representation, warranty, covenant or undertaking with respect to such
matters. No provision of this Agreement may be waived or amended other than by
an instrument in writing signed by the party to be charged with enforcement.

               (f)  Notices.  Any notices required or permitted to be given
                    -------
under the terms of this Agreement shall be in writing and shall be sent by
certified or registered mail (return receipt requested) or delivered personally
or by courier (including a recognized overnight delivery service) or by
facsimile and shall be effective five days after being placed in the mail, if
mailed by regular United States mail, or upon receipt, if delivered personally
or by courier (including a recognized overnight delivery service) or by
facsimile, in each case addressed to a party. The addresses for such
communications shall be:

               If to the Company:

                    The Ashton Technology Group, Inc.
                    1835 Market Street
                    Suite 420
                    Philadelphia, Pennsylvania 19103
                    Attention:  President
                    Facsimile: (215) 789-3397

               With copy to:

                    Morgan, Lewis & Bockius LLP
                    1701 Market Street
                    Philadelphia, Pennsylvania 19103
                    Attention: Gary Arlen Smith, Esquire
                    Facsimile: (215) 563-5299

     If to a Holder:  To the address set forth immediately below such Holder's
name on the signature pages hereto.


               With copy to:

                    Klehr, Harrison, Harvey, Branzburg & Ellers LLP
                    260 S. Broad Street
                    Philadelphia, Pennsylvania 19102
                    Attention:  Barry J. Siegel, Esquire
                    Facsimile:  215-568-6603

                                      -20-
<PAGE>

     Each party shall provide notice to the other party of any change in
address.

          (g) Successors and Assigns.  This Agreement shall be binding upon and
              ----------------------
inure to the benefit of the parties and their successors and assigns.  Neither
the Company nor the Holder shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other.
Notwithstanding the foregoing, subject to Section 2(f), the Holder may assign
its rights hereunder to any person that purchases Securities in a private
transaction (so long as the transferee is not a direct business competitor of
the Company or its Subsidiaries) from the Holder or to any of its "affiliates,"
as that term is defined under the 1934 Act, without the consent of the Company.

          (h) Third Party Beneficiaries.  This Agreement is intended for the
              -------------------------
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.

          (i) Survival.  All representations and warranties set forth in
              --------
Sections 2 and 3 hereof shall survive the Closing until the expiration of the
applicable statute of limitations and the agreements and covenants set forth in
Sections 3, 4, 5 and 8 shall survive the Closing hereunder notwithstanding any
due diligence investigation conducted by or on behalf of the Holder.  The
Company agrees to indemnify and hold harmless the Holder and all its officers,
directors, employees and agents for loss or damage arising as a result of or
related to any breach or alleged breach by the Company of any of its
representations, warranties and covenants set forth in Sections 3 and 4 hereof
or any of its covenants and obligations under this Agreement, the Security
Agreement or the Registration Rights Agreement, including advancement of
expenses as they are incurred.

          (j) Publicity.  The Company and the Holder shall have the right to
              ---------
review a reasonable period of time before issuance of any press releases,
filings with the SEC, NASD or any stock exchange or interdealer quotation
system, or any other public statements with respect to the transactions
contemplated hereby; provided, however, that the Company shall be entitled,
                     --------  -------
without the prior approval of the Holder, to make any press release or public
filings with respect to such transactions as is required by applicable law and
regulations (although the Holder shall be consulted by the Company in connection
with any such press release prior to its release and shall be provided with a
copy thereof and be given an opportunity to comment thereon).

          (k) Further Assurances.  Each party shall do and perform, or cause to
              ------------------
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

                                      -21-
<PAGE>

          (l) No Strict Construction.  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.

          (m) Remedies.  The Company acknowledges that a breach by it of its
              --------
obligations hereunder will cause irreparable harm to the Holder by vitiating the
intent and purpose of the transactions contemplated hereby.  Accordingly, the
Company acknowledges that the remedy at law for a breach of its obligations
under this Agreement will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Agreement, that the
Holder shall be entitled, in addition to all other available remedies in law or
in equity, to an injunction or injunctions to prevent or cure any breaches of
the provisions of this Agreement and to enforce specifically the terms and
provisions of this Agreement, without the necessity of showing economic loss and
without any bond or other security being required.


                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                      -22-
<PAGE>

          IN WITNESS WHEREOF, the undersigned Holder and the Company have caused
this Agreement to be duly executed as of the date first above written.


THE ASHTON TECHNOLOGY GROUP, INC.


By:  /s/ Arthur J. Bacci
     -------------------
     Arthur J. Bacci
     President


RGC INTERNATIONAL INVESTORS, LDC
By:  Rose Glen Capital Management, L.P., Investment Manager
By:  RGC General Partner Corp., as General Partner


By:  /s/ Gary Kaminsky
     -----------------
     Gary Kaminsky
     Managing Director

RESIDENCE:   Cayman Islands

ADDRESS:

     c/o Rose Glen Capital Management, L.P.
     3 Bala Plaza East, Suite 501
     251 St. Asaphs Road
     Bala Cynwyd, PA  19004
     Facsimile:  (610) 617-0570
     Telephone:  (610) 617-5900


                                      -23-
</TEXT>
</DOCUMENT>
