Document:

DRAFT

                         FOR INFORMATIONAL PURPOSES ONLY
            NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY

                      FORM OF SECURITIES PURCHASE AGREEMENT

      Securities  Purchase  Agreement  (together with the schedules and exhibits
hereto, this "Agreement"), dated as of May ___, 2005, by and between United Fuel
& Energy  Corporation,  a Nevada  corporation  (the  "Company"),  and the person
identified on the signature page to this Agreement ("Purchaser").

                              W I T N E S S E T H:

      WHEREAS,  the Company desires to issue and sell to the Purchaser,  and the
Purchaser  desires to purchase from the Company,  the Common Stock (as such term
is defined below) as set forth below.

      NOW, THEREFORE,  in consideration of the premises and the mutual covenants
and  agreements  hereinafter   contained,   and  for  other  good  and  valuable
consideration,  the receipt and  sufficiency  of which are hereby  acknowledged,
intending to be legally bound, the parties hereto hereby agree as follows:

      1. Offer and Sale of Common Stock.

      1.1 The Offering. The Company is offering for sale up to 2,000,000 "Units"
of its securities.  A "Unit" shall mean one share of the Company's Common Stock,
par value $.001 per share (the  "Common  Stock")  and a warrant to purchase  one
share of the Common  Stock at $1.50 per share in the form set forth as Exhibit A
hereto ("Warrant"). The Purchaser shall have the benefit of certain registration
rights in respect of the shares of Common Stock purchased  (including  shares of
Common  Stock  underlying  the  Warrants)  on  the  terms  and  conditions  of a
Registration   Rights   Agreement,   in  the  form  of  Exhibit  B  hereto  (the
"Registration Rights Agreement"). The Company is offering Units (the "Offering")
for sale only to individuals, entities or groups, including, without limitation,
corporations,  limited  liability  companies,  limited or general  partnerships,
joint ventures,  associations,  joint stock  companies,  trusts,  unincorporated
organizations,  or governments or any agencies or political subdivisions thereof
(each,  a "Person") who are  "accredited  investors"  (as defined  herein).  The
Company is making the  Offering  of the Units  directly  through  certain of its
officers and its  directors,  but may engage a placement  agent (the  "Placement
Agent"), and other registered  broker-dealers ("Other Participating Agents") may
also place Units.  All subscription  proceeds will be paid upon  subscription to
the account or accounts of the escrow agent  utilized by the Company for receipt
of funds (the "Escrow Agent").

      1.2 Subscription.

      Subject  to the  terms  and  conditions  hereinafter  set  forth  in  this
Agreement,  the  Purchaser  hereby  offers to purchase,  at a price of $1.50 per
share,  the  number  of  shares of  Common  Stock  set  forth  beneath  each the
Purchaser's  name on the  signature  page of this  Agreement,  for an  aggregate
purchase price (the "Purchase  Price") to be paid by the Purchaser in the amount
set forth on the signature page beneath the Purchaser's name, to such account or
accounts as the Company may specify by written notice to the Purchaser.

      1.3 Subscription  Procedures.  To submit this Subscription,  the Purchaser
must deliver (i) this  Agreement,  including,  without  limitation,  the annexed
Purchaser Questionnaire,  both duly completed and executed, and (ii) an executed
Registration Rights Agreement to the following address, unless otherwise advised
by the Company:

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            United Fuel & Energy Corporation
            405 North Marienfeld
            Suite 300
            Midland, Texas 79701
            Attention:  President

            With a copy to:

            Richardson & Patel LLP
            10900 Wilshire Blvd., Suite 500
            Los Angeles, California 90024
            Attention:  Ryan S. Hong, Esq.

            (with  any  questions  to be  raised  with  Scott  Heller  at  (432)
            571-8001)

      The Purchaser shall,  promptly  following the delivery of the subscription
documents as described above,  deliver and pay the applicable  purchase price in
full for the Common Stock being  subscribed for by the Purchaser,  in the amount
of $1.50  for each  share of  Common  Stock,  in U.S.  dollars,  in  immediately
available funds, in accordance with the payment instructions  attached hereto as
Exhibit C. The Company may accept or reject  subscriptions,  in whole or in part
in its sole  discretion.  The Company shall notify the Purchaser of the portion,
if any, of the  Purchaser's  subscription  which has been  accepted  and, if any
portion of the  Purchaser's  subscription  is  rejected,  shall cause the Escrow
Agent to refund to the  Purchaser  the purchase  price paid by the Purchaser for
the shares of Common  Stock with respect to which the  Purchaser's  subscription
was rejected.

      2. Closing.

      2.1 Timing of Closing. Upon acceptance of subscriptions for Units totaling
at least $1,000,000,  the Company may hold a closing of the purchase and sale of
such  Units  (the  "Closing").  The  Closing  may,  but is not  required  to, be
completed  simultaneously with the closing of other purchases and sales of Units
in the  Offering.  The  Company  may hold  one or more  additional  closings  in
connection with the Offering. At the Closing with respect to the subscription by
the  Purchaser,  to the extent the same is accepted by the Company,  the Company
will register in the name of the Purchaser that number of Units being  purchased
by the Purchaser in accordance with the information on the applicable  signature
page of this Agreement.

      2.2  Escrow.  Pending  the  Closing,  all funds  paid in  respect  of this
Agreement  with regard to the Closing  shall be deposited  in an escrow  account
(the "Escrow Account")  maintained by the Escrow Agent. The Escrow Account shall
not be interest  bearing.  If the Offering is  terminated by the Company and the
Closing has not then occurred, then the subscription shall be void and all funds
paid  hereunder  by the  Purchaser,  without  deduction  therefrom  or  interest
thereon,  shall be promptly  returned to the Purchaser.  The subscription  under
this Agreement  shall be void and all funds  deposited by the Purchaser shall be
refunded to the Purchaser as provided in this Section 2.2 (which refund shall be
made on or before the fourth day after the Expiration Date (as defined  below)),
unless on or before July 1, 2005 or such other date as determined by the Company
(the "Expiration Date") all of the conditions set forth in Section 3 hereof have
been satisfied and the Closing shall have  occurred.  The  Purchaser's  offer to
purchase Common Stock pursuant to this Agreement  shall be irrevocable  prior to
the Expiration Date.

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      2.3.  Return of Funds.  The Purchaser  hereby  authorizes  and directs the
Escrow  Agent to return  or direct  the  return  of any  funds  from the  Escrow
Account,  without deduction  therefrom or interest thereon,  to the same account
from which the funds were  originally  drawn, to the extent that the Purchaser's
subscription is not accepted prior to the termination of the Offering.

      3. Conditions to the Obligations of the Purchaser at Closing.

      The  obligation of the  Purchaser to purchase the Common Stock  subscribed
for by the Purchaser at the Closing is subject to the  satisfaction  on or prior
to the Closing Date of the following conditions,  each of which may be waived by
the applicable Purchaser:

      3.1  Opinion of Counsel to the  Company.  The  Placement  Agent shall have
received from counsel for the Company,  its opinion  dated as of the  applicable
Closing Date,  and  addressed to the  Purchaser,  covering the matters  attached
hereto as Exhibit C.

      3.2 Representations and Warranties.  The representations and warranties of
the Company  contained in this  Agreement  which are qualified as to materiality
must be true and correct in all respects and the  representations and warranties
of the  Company  contained  in this  Agreement  which  are not  qualified  as to
materiality must be true and correct in all material  respects as of the Closing
Date except to the extent that the  representations  and warranties relate to an
earlier date in which case the  representations  and warranties must be true and
correct as written or true and correct in all material respects, as the case may
be, as of the earlier date.

      3.3 Performance of Covenants. The Company shall have performed or complied
in all  material  respects  with all  covenants  and  agreements  required to be
performed  by it on  or  prior  to  the  Closing  pursuant  to  this  Agreement,
including,  without  limitation,  the delivery of  certificates  evidencing  the
Common Stock issued to the Purchaser at the Closing.

      3.4 No  Injunctions;  etc. No court or governmental  injunction,  order or
decree  prohibiting the purchase and sale of the Common Stock will be in effect.
There  will  not be in  effect  any  law,  rule  or  regulation  prohibiting  or
restricting the sale or requiring any consent or approval of any Person that has
not been obtained to issue and sell the Common Stock to the Purchaser.

      3.5 Closing Documents. At the Closing, the Company shall have delivered to
the Purchaser the following:

      (a) a  certificate  of the  President of the Company  certifying  that the
conditions in Sections 3.2 and 3.3 have been satisfied;

      (b) a  certificate  of the  Secretary  of the  Company,  dated  as of that
Closing  Date,   certifying   (i)  the  attached   copies  of  the  Articles  of
Incorporation  and By-laws of the Company,  (ii) the resolutions of the Board of
Directors of the Company (the "Board")  authorizing the execution,  delivery and
performance of this Agreement and the issuance of the Common Stock and (iii) the
incumbency  of the officers duly  authorized  to execute this  Agreement and the
other documents contemplated by this Agreement;

      (c) a certificate of the Secretary of State of the State of Nevada,  dated
as of a recent  date (but no more  than  thirty  days)  prior to the date of the
Closing,  to the effect  that the  Company is in good  standing  in the State of
Nevada;

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      (d) a certificate  evidencing the Common Stock purchased by the Purchaser;
and

      (e) a Registration Rights Agreement duly executed by the Company.

      3.6 Waivers and Consents.  The Company will have obtained all consents and
waivers  necessary  to (i) execute and deliver  this  Agreement  and all related
documents and agreements, and (ii) to issue and deliver the Common Stock.

      3.7 Receipt of Minimum  Proceeds of Offering of Common  Stock.  The Escrow
Agent shall have received at least $1.0 million from investors in this Offering.

      4. Conditions to the Obligations of the Company at Closing.

      The  obligation  of the Company to issue and sell the Common  Stock to the
Purchaser is subject to the satisfaction on or prior to each Closing Date of the
following conditions, each of which may be waived by the Company:

      4.1  Receipt of  Purchase  Price.  The Escrow  Agent  shall have  received
payment in full in immediately  available funds in U.S.  dollars of the Purchase
Price for the Common  Stock with  respect to which the Company has  accepted the
Subscription  made by the  Purchaser by means of this  Agreement and the Company
has received at least $1.0 million from investors in this Offering.

      4.2 Representations and Warranties.  The representations and warranties of
the Purchaser  contained in this Agreement which are qualified as to materiality
must be true and correct in all respects and the  representations and warranties
of the  Purchaser  contained  in this  Agreement  which are not  qualified as to
materiality  must  be  true  and  correct  in all  material  respects  as of the
applicable Closing Date.

      4.3  Performance  of  Covenants.  The  Purchaser  will have  performed  or
complied in all material respects with all covenants and agreements  required to
be  performed  by the  Purchaser  on or prior to the  Closing  pursuant  to this
Agreement.

      4.4  Purchaser  Questionnaire.  All of the  information  furnished  by the
Purchaser  in  the  confidential  purchaser   questionnaire   accompanying  this
Agreement (the "Purchaser  Questionnaire") shall have been accurate and complete
in all material respects.

      4.5 No Injunctions.  No court or governmental injunction,  order or decree
prohibiting the purchase or sale of the Common Stock will be in effect.

      4.6 Closing  Document.  The Purchaser will have delivered to the Company a
Registration Rights Agreement duly executed by the Purchaser.

      5. Representations and Warranties of the Purchaser.

      The Purchaser,  in order to induce the Company to perform this  Agreement,
hereby represents and warrants as follows:

      5.1 Due Authorization.  The Purchaser has full power and authority and has
taken all action  necessary to authorize the  Purchaser to execute,  deliver and
perform the Purchaser's obligations under this Agreement.  This Agreement is the
legal,  valid and binding  obligation of the  Purchaser in  accordance  with its
terms.

                                      -4-
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                                                                           DRAFT

      5.2 Accredited  Investor.  The Purchaser is an Accredited Investor as that
term is defined in Regulation D promulgated under the Securities Act of 1933, as
amended (the "Securities Act").

      5.3  No   Investment   Advice.   The   Company  has  not  made  any  other
representations or warranties to the Purchaser other than as set forth herein or
incorporated  herein by  reference  with  respect to the Company or rendered any
investment advice.

      5.4 Investment Experience.  The Purchaser has not authorized any Person to
act as the  Purchaser's  Purchaser  Representative  (as that term is  defined in
Regulation D of the General Rules and  Regulations  under the Securities Act) in
connection  with  this  transaction.   The  Purchaser  has  such  knowledge  and
experience in financial,  investment and business  matters that the Purchaser is
capable of evaluating the merits and risks of the prospective  investment in the
securities of the Company.  The Purchaser  has consulted  with such  independent
legal  counsel or other  advisers as the  Purchaser  has deemed  appropriate  to
assist the Purchaser in evaluating the proposed investment in the Company.

      5.5 Adequate Means.  The Purchaser (i) has adequate means of providing for
the Purchaser's current financial needs and possible contingencies; and (ii) can
afford (a) to hold  unregistered  securities for an indefinite period of time as
required;  and  (b)  sustain  a  complete  loss  of  the  entire  amount  of the
subscription.

      5.6 Access to Information. The Purchaser has been afforded the opportunity
to ask questions of, and receive answers from the officers  and/or  directors of
the Company  acting on its behalf  concerning  the terms and  conditions of this
transaction  and to obtain any  additional  information,  to the extent that the
Company possesses such information or can acquire it without unreasonable effort
or expense,  necessary to verify the accuracy of the information furnished;  and
has had such opportunity to the extent the Purchaser considers it appropriate in
order to permit the  Purchaser to evaluate the merits and risks of an investment
in  the  Company.  It is  understood  that  all  documents,  records  and  books
pertaining to this investment have been made available for inspection,  and that
the books and records of the Company will be available  upon  reasonable  notice
for inspection by investors  during  reasonable  business hours at its principal
place of business.  The foregoing shall in no way be deemed to limit the ability
of the Purchaser to rely on the  representations and warranties set forth herein
or incorporated herein by reference.

      5.7 No Endorsement.  The Purchaser further acknowledges that the offer and
sale of the Units has not been  passed  upon or the merits  thereof  endorsed or
approved by any state or federal authorities.

      5.8 Non-Registered  Securities.  The Purchaser acknowledges that the offer
and sale of the Units have not been  registered  under the Securities Act or any
state  securities laws and the Common Stock  (including  Common Stock underlying
the  Warrants)  may be resold  only if  registered  pursuant  to the  provisions
thereunder or if an exemption  from  registration  is  available.  The Purchaser
understands  that the offer and sale of the Units is  intended to be exempt from
registration under the Securities Act, based, in part, upon the representations,
warranties and agreements of the Purchaser contained in this Agreement.

                                      -5-
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                                                                           DRAFT

      5.9 No Resale.  The Units being  subscribed for are being acquired  solely
for the account of the Purchaser for the  Purchaser's  investment and not with a
view to, or for resale in connection  with, any distribution in any jurisdiction
where such sale or distribution would be precluded. By such representation,  the
Purchaser means that no other Person has a beneficial interest in the Units, and
that no other Person has furnished or will furnish  directly or indirectly,  any
part of or guarantee the payment of any part of the  consideration to be paid by
the Purchaser to the Company in  connection  therewith.  The Purchaser  does not
intend to dispose of all or any part of the Common Stock (including Common Stock
underlying  the  Warrants)  except  in  compliance  with the  provisions  of the
Securities Act and applicable  state  securities  laws, and understands that the
Units are being offered pursuant to a specific exemption under the provisions of
the Securities Act, which  exemption(s)  depends,  among other things,  upon the
compliance with the provisions of the Securities Act.

      5.10 Legend. The Purchaser hereby acknowledges and agrees that the Company
may  insert the  following  or  similar  legend on the face of the  certificates
evidencing  the Common Stock  (including  Common Stock  underlying the Warrants)
purchased by the Purchaser if required in compliance  with the Securities Act or
state securities laws:

      "These  securities  have not been  registered  under the Securities Act of
      1933, as amended (the "Securities  Act"), or any state securities laws and
      may not be sold or otherwise transferred or disposed of except pursuant to
      an  effective  registration  statement  under the  Securities  Act and any
      applicable state securities laws, or an opinion of counsel satisfactory to
      counsel  to the  issuer  that an  exemption  from  registration  under the
      Securities Act and any applicable state securities laws is available."

      5.11 Broker's or Finder's Commissions.  Other than the Placement Agent (as
placement agent on behalf of the Company) or any Other  Participating  Agent, if
any, no finder,  broker, agent, financial person or other intermediary has acted
on  behalf  of the  Purchaser  in  connection  with the sale of the Units by the
Company  or the  consummation  of  this  Agreement  or  any of the  transactions
contemplated hereby.

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

      5.13 No Tax or Legal  Advice.  The Purchaser  understands  that nothing in
this  Agreement,  any other  agreement or any other  materials  presented to the
Purchaser in  connection  with the purchase and sale of the Units or exercise of
any Warrants  constitutes  legal,  tax or investment  advice.  The Purchaser has
consulted such legal, tax and investment advisors as it, in its sole discretion,
has deemed  necessary or appropriate in connection with its purchase of Units or
exercise of any Warrants.

      The Purchaser  certifies  that each of the foregoing  representations  and
warranties  by the  Purchaser set forth in this Section 5 is true as of the date
hereof and shall survive such date.

      6. Representations and Warranties of the Company.

      The Company  represents and warrants to the Purchaser as follows as of the
Closing,  each such  representation  and  warranty  being  made  subject to such
disclosures  as are made  pursuant to this  Agreement,  any schedule  (including
Disclosure Schedule) or exhibit delivered in connection herewith at the Closing,
or any report  (including any exhibit or schedule filed thereto)  required to be
filed by the Company under the  Securities  Act and the Exchange Act,  including
without limitation  Schedule 14C, Form 8-K, Form 10-Q and Form 10-K, for the two
years preceding the date hereof:

      6.1  Organization,  Good  Standing  and  Qualification.  The  Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Nevada.  The  Subsidiaries  (as defined in Section 6.2) are each
corporations  duly  organized,  validly  existing and in good standing under the
laws of the  jurisdiction in which they are  incorporated.  The Company and each
Subsidiary has full corporate power and authority to own and hold its properties
and to conduct its business. The Company and each Subsidiary is duly licensed or
qualified to do business,  and in good standing,  in each  jurisdiction in which
the nature of its business requires  licensing,  qualification or good standing,
except for any failure to be so licensed or qualified or in good  standing  that
would not have a material  adverse effect on the Company and the Subsidiaries or
their results of operations,  assets and financial condition,  taken as a whole,
or on the Company's  ability to perform its obligations  under this Agreement or
to issue the Common Stock (collectively, a "Material Adverse Effect").

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      6.2  Capitalization.  The authorized capital stock of the Company consists
of 55,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. As
of May 17,  2005,  (i)  11,254,457  shares of Common  Stock  (plus the number of
shares  issuable  in lieu of  fractional  shares  resulting  from the  Company's
1-for-40  reverse  stock  split  effected  on January  31,  2005) are issued and
outstanding,  and (ii) no shares of Preferred  Stock were issued or outstanding.
All the outstanding shares of Common Stock have been duly authorized and validly
issued,  are fully paid and  nonassessable and free of preemptive rights created
by or through the Company,  have been issued in compliance  with all federal and
state  securities  laws, and not have been issued in violation of any preemptive
rights or similar rights to subscribe for or purchase securities.  As of May 17,
2005,  there  were no  options,  warrants  or other  rights,  convertible  debt,
agreements,  arrangements or commitments of any character obligating the Company
to issue or sell any shares of capital stock of or other equity interests in the
Company. The Company is not obligated to retire, redeem, repurchase or otherwise
reacquire  any  of  its  capital  stock  or  other  securities.   There  are  no
stockholders  agreements,  voting  agreements or other similar  agreements  with
respect to the Common  Stock to which the Company is a party.  The Company  owns
all of the  issued  and  outstanding  capital  stock  of  United  Fuel &  Energy
Corporation,  a Texas corporation  ("United Fuel"),  which, in turn, owns all of
the issued and outstanding capital stock of Eddins-Walcher Oil Company and Three
D Oil Company, Inc. (United Fuel and such entities are referred to herein as the
"Subsidiaries").  There are no options,  warrants or other  rights,  convertible
debt,  agreements,  arrangements or commitments of any character  obligating any
Subsidiary  to issue or sell any  shares  of  capital  stock of or other  equity
interests  in the  Subsidiary.  Except  as  disclosed  in or  pursuant  to  this
Agreement,  the  Company  does  not  directly  or  indirectly  own or  have  any
investment in any of the capital stock of, or any other proprietary interest in,
any  Person  other  than  the  Subsidiaries.  The  Company  has  not  adopted  a
stockholders rights plan, poison pill or similar arrangement.

      6.3 Corporate Power, Authorization;  Enforceability.  The Company has full
corporate power and authority to execute, deliver and enter into this Agreement,
and  the   Registration   Rights  Agreement   (collectively,   the  "Transaction
Documents") and to consummate the transactions  contemplated hereby and thereby.
Except as  contemplated  by this  Agreement,  including the next two  succeeding
sentences,  all action on the part of the Company, its directors or stockholders
necessary for the  authorization,  execution,  delivery and  performance  of the
Transaction  Documents by the Company,  the  authorization,  sale,  issuance and
delivery of the Common  Stock  contemplated  hereby and the  performance  of the
Company's  obligations hereunder and thereunder has been taken. The Common Stock
to be purchased on the Closing Date has been duly authorized and, when issued in
accordance  with  this  Agreement  will  be  validly  issued,   fully  paid  and
nonassessable and will be free and clear of any mortgage, deed of trust, pledge,
hypothecation, assignment, encumbrance, lien (statutory or other) or preference,
priority,  right or other security  interest or preferential  arrangement of any
kind  or  nature  whatsoever  (excluding  preferred  stock  and  equity  related
preferences)  (collectively,  "Liens")  imposed by or through the Company  other
than  restrictions  imposed  by  this  Agreement  and  the  Registration  Rights
Agreement,  as the case may be, and applicable securities laws. No preemptive or
other  rights to  subscribe  for or purchase  equity  securities  of the Company
exists  with  respect to the  issuance  and sale of the Units.  The  Transaction
Documents  have been duly executed and delivered by the Company,  and constitute
the legal, valid and binding obligations of the Company, enforceable against the
Company in accordance with their terms,  except as enforceability may be limited
by applicable bankruptcy, insolvency,  reorganization,  fraudulent conveyance or
transfer,  moratorium or similar laws  affecting the  enforcement  of creditors'
rights generally and by general  principles of equity relating to enforceability
(regardless of whether considered in a proceeding at law or in equity).

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      6.4 Financial Statements;  Undisclosed Liabilities. (a) Attached hereto as
Exhibit D are true and complete copies of the audited consolidated balance sheet
(the "2004 Balance Sheet") of United Fuel and its  subsidiaries,  as of December
31, 2004, and the related  audited income  statement and statement of cash flows
for the period then ended and the unaudited consolidated balance sheet of United
Fuel as of March 31,  2005,  and the  related  unaudited  income  statement  and
statement of cash flows for the  three-month  periods then ended  (collectively,
the  "Financial  Statements").  The Financial  Statements  have been prepared in
accordance  with  U.S.  generally  accepted  accounting   principles   ("GAAP"),
consistently  applied,  during  the  periods  involved  (except  in the  case of
unaudited interim statements, to the extent they may exclude footnotes or may be
condensed or summary statements) and fairly present in all material respects the
consolidated  financial  position of the Company as of the dates thereof and the
results of its operations and cash flows for the periods then ended (subject, in
the case of unaudited  statements,  to normal year-end audit  adjustments).  The
Company  keeps  proper  accounting  records  in which all  material  assets  and
liabilities  and all  material  transactions  of the  Company  are  recorded  in
conformity with GAAP.

      (b) Since March 31,  2005,  neither the  Company  nor any  Subsidiary  has
incurred any  liabilities  or  obligations,  whether or not  accrued,  absolute,
contingent or otherwise,  of a type required by GAAP to be included in a balance
sheet  ("Liabilities"),  other than  Liabilities (i) incurred in connection with
this  Agreement,  the  Transaction  Documents or the  transactions  contemplated
hereby and thereby (collectively,  "Transaction Liabilities"),  (ii) incurred in
the ordinary course of business,  or (iii) that would not reasonably be expected
to have a Material Adverse Effect.

      6.5 No Material Adverse Changes.  Since March 31, 2005, there has not been
any material  adverse change in the business,  financial  condition or operating
results of United  Fuel that would  reasonably  be  expected  to have a Material
Adverse Effect.

      6.6 Absence of Certain Developments. Except as contemplated in or pursuant
to this Agreement,  since March 31, 2005, through the date immediately preceding
the Closing  Date,  neither the  Company nor any  Subsidiary  has (a) issued any
stock,  options,  bonds or other corporate securities other than as reflected in
Section 6.2 hereof, (b) borrowed any amount or incurred or became subject to any
Liabilities   (absolute,   accrued  or  contingent),   other  than   Transaction
Liabilities, current Liabilities incurred in the ordinary course of business and
Liabilities under contracts entered into in the ordinary course of business, (c)
discharged  or  satisfied  any  material  Lien or  adverse  claim  or  paid  any
obligation or Liability  (absolute,  accrued or contingent),  other than current
Liabilities shown on the Balance Sheet and current  Liabilities  incurred in the
ordinary course of business, (d) declared or made any payment or distribution of
cash or other  property  to the  stockholders  of the  Company or  purchased  or
redeemed any securities of the Company,  (e) mortgaged,  pledged or subjected to
any material Lien or adverse claim any of its  properties or assets,  except for
Liens for taxes not yet due and payable or otherwise  in the ordinary  course of
business,  (f) sold,  assigned or  transferred  any of its  assets,  tangible or
intangible,  except in the ordinary course of business or in an amount less than
$250,000, (g) suffered any extraordinary losses or waived any rights of material
value  other  than in the  ordinary  course of  business,  (h) made any  capital
expenditures  or  commitments  therefor  other  than in the  ordinary  course of
business  or in an  amount  less  than  $250,000,  (i)  entered  into any  other
transaction other than in the ordinary course of business in an amount less than
$250,000  or  entered  into  any  material  transaction,  whether  or not in the
ordinary course of business,  (j) made any charitable  contributions  or pledges
other  than in the  ordinary  course of  business,  (k)  suffered  any  damages,
destruction or casualty loss, whether or not covered by insurance, affecting any
of its  properties  or assets which,  individually  or in the  aggregate,  would
reasonably be expected to have or result in a Material Adverse Effect,  (l) made
any  material  change  in  the  nature  or  operations  of  its  business,   (m)
participated  in any  transaction  that would  reasonably  be expected to have a
Material  Adverse  Effect or  otherwise  acted  outside the  ordinary  course of
business,  (n) increased the  compensation of any of its officers or the rate of
pay of any of its employees, except as part of regular compensation increases in
the ordinary course of business, or (o) entered into any agreement or commitment
to do any of the foregoing.

                                      -8-
<PAGE>
                                                                           DRAFT

      6.7 No Conflict;  Governmental Consents. (a) The execution and delivery by
the  Company  of  the  Transaction   Documents  and  the   consummation  of  the
transactions  contemplated  hereby  and  thereby  will  not  (i)  result  in the
violation of any provision of the Articles of  Incorporation or By-laws or other
organizational  documents  of the Company,  (ii) result in any  violation of any
law, statute, rule, regulation,  order, writ, injunction,  judgment or decree of
any court or  Governmental  Authority  to or by which the  Company is bound,  or
(iii)  conflict with, or result in a breach or violation of, any of the terms or
provisions  of,  or  constitute  (with  due  notice  or lapse of time or both) a
default under, any bond, debenture,  note or other evidence of indebtedness,  or
any  material  lease,  contract,  indenture,   mortgage,  deed  of  trust,  loan
agreement,  joint venture or other  agreement or instrument to which the Company
or any Subsidiary is a party or by which any of them or their property is bound,
nor result in the creation or imposition of any Lien upon any of the  properties
or assets of the Company or any  Subsidiary,  except for, in the case of clauses
(ii) and (iii) of this subsection  6.7(a),  any violation,  conflict,  breach or
default  which  would not  reasonably  be  expected  to have a Material  Adverse
Effect.

      (b) No material consent, approval, license, permit, order or authorization
of, or  registration,  declaration  or filing  with,  any court,  administrative
agency or commission or other Governmental  Authority or Person, and no lapse of
any waiting  period under any  Requirements  of Law,  remains to be obtained (or
lapsed) or is  otherwise  required to be  obtained by the Company in  connection
with the authorization,  execution and delivery of the Transaction  Documents or
the consummation of the transactions contemplated hereby or thereby,  including,
without  limitation  the  issue and sale of the  Common  Stock,  except  for any
registration,  notice or filing with (i) the Securities and Exchange Commission,
(ii) the National  Association of Securities  Dealers,  Inc. ("NASD"),  or (iii)
state blue sky or other securities regulatory authorities.  For purposes of this
Agreement,  "Requirements  of Law" means,  as to any Person,  any law,  statute,
treaty, rule, regulation, right, privilege, qualification,  license or franchise
or  determination of an arbitrator or a court or other government of any nation,
state,  city,  locality  or other  political  subdivision  thereof,  any  entity
exercising  executive,  legislative,   judicial,  regulatory  or  administrative
functions of or pertaining to  government,  and any  corporation or other entity
owned or controlled,  through stock or capital ownership or otherwise, by any of
the foregoing  (each, a  "Governmental  Authority"),  in each case applicable or
binding  upon such Person or any of its  property or to which such Person or any
of its  property  is subject  or  pertaining  to any or all of the  transactions
contemplated or referred to herein.

      6.8  Litigation.  Except as  disclosed  in or pursuant to this  Agreement,
there are no claims, actions,  suits,  investigations or proceedings pending or,
to the Company's  knowledge,  threatened  proceedings  against the Company,  any
Subsidiary or their  respective  assets,  at law or in equity,  by or before any
Governmental  Authority,  or by or on behalf of any third party,  except for any
claim, action,  suit,  investigation or proceeding which would not reasonably be
expected to have a Material Adverse Effect. There are no claims, actions, suits,
investigations or proceedings pending or, to the Company's knowledge, threatened
proceedings  against the Company or any  Subsidiary  contesting the right of the
Company or Subsidiary to use, sell,  import,  license,  or make available to any
Person any of the Company's or  Subsidiary's  products or services  currently or
previously  sold,  offered,  licensed or made available to any Person or used by
the  Company  or  opposing  or   attempting  to  cancel  any  of  the  Company's
Intellectual  Property (as defined below) rights,  except for any claim, action,
suit, investigation or proceeding which would not reasonably be expected to have
a Material Adverse Effect.

                                      -9-
<PAGE>
                                                                           DRAFT

      6.9 Compliance  with Laws; No Default or Violation;  Contracts.  Except as
disclosed in or pursuant to this  Agreement,  the Company and each Subsidiary is
in compliance  in all material  respects  with all  Requirements  of Law and all
orders issued by any court or Governmental  Authority against the Company or any
Subsidiary.  To the  Company's  knowledge,  there is no  existing  or  currently
proposed  Requirement  of Law which would  reasonably be expected to prohibit or
restrict the Company or any Subsidiary from, or otherwise  materially  adversely
affect  the  Company  or any  Subsidiary  in,  conducting  its  business  in any
jurisdiction in which it now conducts or proposes to conduct such business.  The
Company has all material  licenses,  permits and  approvals of any  Governmental
Authority  (collectively,  "Permits")  that are necessary for the conduct of the
business of the Company or such  Subsidiary  as currently  conducted;  (ii) such
Permits are in full force and effect;  and (iii) no violations  are or have been
recorded in respect of any Permit. No material expenditure is presently required
by the Company or any Subsidiary to comply with any existing Requirements of Law
or order.  Except as disclosed in or pursuant to this  Agreement or as would not
reasonably be expected to have a Material  Adverse  Effect,  neither the Company
nor any  Subsidiary  is (i) in default  under or in violation of any  indenture,
loan or credit  agreement or any other  agreement or instrument to which it is a
party of by which it or any of its  properties  is bound or (ii) in violation of
any order,  decree or judgment of any court,  arbitrator  or other  Governmental
Authority.  The contracts that are material to the Company and the  Subsidiaries
taken as a whole (collectively, the "Contractual Obligations") are in full force
and effect on the date hereof,  and neither the Company,  any Subsidiary nor, to
the Company's  knowledge,  any other party to such  contracts is in breach of or
default under any of such  contracts nor, to the Company's  knowledge,  does any
condition  exist that with  notice or lapse of time or both would  constitute  a
default  thereunder,  except,  in each  case,  for any  default  that  would not
reasonably be expected to have a Material Adverse Effect. Except as disclosed in
or pursuant to this  Agreement,  neither  the  Company  nor any  Subsidiary  has
received  notice  of a  default  under,  or with  respect  to,  any  Contractual
Obligation.  All of the Contractual Obligations are valid,  subsisting,  in full
force and effect and binding upon the Company or the applicable  Subsidiary and,
to the Company's knowledge, the other parties thereto.

      6.10  Insurance.  The  Company  and the  Subsidiaries  maintain  and  will
continue to maintain  insurance of the types and in the amounts that the Company
reasonably believes is adequate for their respective  business,  including,  but
not limited to,  insurance  covering  all real and  personal  property  owned or
leased by the Company or Subsidiary against theft, damage, destruction,  acts of
vandalism and all other risks customarily  insured against by similarly situated
companies, all of which insurance is in full force and effect.

      6.11  Environmental  Matters.  The  Company  and the  Subsidiaries  are in
compliance,  in all material respects,  with all applicable  Environmental Laws.
There is no civil,  criminal or administrative  judgment,  action, suit, demand,
claim, hearing, notice of violation, investigation, proceeding, notice or demand
letter pending or, to the Company's knowledge, threatened against the Company or
any Subsidiary pursuant to Environmental Laws. To the Company's knowledge, there
are no past or present events, conditions, circumstances, activities, practices,
incidents,  agreements,  actions or plans which could  reasonably be expected to
prevent  compliance  with,  or which  have  given  rise to or will  give rise to
liability which would  reasonably be expected to have a Material Adverse Effect,
under  Environmental Laws. For purposes of the foregoing,  "Environmental  Laws"
means  federal,  state and local laws,  principles  of common laws,  civil laws,
regulations,  and codes, as well as orders,  decrees,  judgments or injunctions,
issued,  promulgated,  approved or entered  thereunder  relating  to  pollution,
protection of the environment or public health and safety.

                                      -10-
<PAGE>
                                                                           DRAFT

      6.12 Taxes. The Company and each Subsidiary has paid or caused to be paid,
or has  established  reserves in  accordance  with GAAP for all Tax  liabilities
applicable to the Company or such  Subsidiary for all fiscal years that have not
been examined and reported on by the taxing authorities (or closed by applicable
statutes).  No additional Tax  assessment  against the Company or any Subsidiary
has been heretofore proposed or, to the Company's  knowledge,  threatened by any
Governmental Authority for which provision has not been made on the Company's or
the applicable Subsidiary's balance sheet.

      No  tax  audit  is  currently  in  progress  and  there  is no  unassessed
deficiency  proposed  or, to the  Company's  knowledge,  threatened  against the
Company or any  Subsidiary.  The Company has no  knowledge  of any change in the
rates or basis of  assessment  of any Tax (other  than  federal or state  income
tax),  of the Company or any  Subsidiary  which would  reasonably be expected to
have a Material  Adverse  Effect.  Neither the Company  nor any  Subsidiary  has
agreed to or is required to make any  adjustments  under section 481 of the Code
by reason of a change of accounting  method or otherwise.  None of the assets of
the Company or any  Subsidiary  are required to be treated as being owned by any
Person,  other than the Company or the  applicable  Subsidiary,  pursuant to the
"safe harbor" leasing  provisions of Section 168(f)(8) of the Code.  Neither the
Company  nor  any  Subsidiary  is  a  "United   States  real  property   holding
corporation"  (a "USRPHC")  as that term is defined in Section  897(c)(2) of the
Code and the regulations promulgated thereunder.

      For purposes of this Agreement,  "Code" means the Internal Revenue Code of
1986, as amended,  and "Taxes"  means any federal,  state,  provincial,  county,
local, foreign and other taxes (including,  without limitation, income, profits,
windfall profits,  alternative minimum,  accumulated earnings,  personal holding
company, capital stock, premium, estimated, excise, sales, use, occupancy, gross
receipts, franchise, ad valorem, severance, capital levy, production,  transfer,
withholding,  employment, unemployment compensation, payroll and property taxes,
import duties and other  governmental  charges and assessments),  whether or not
measured  in  whole  or in  part  by net  income,  and  including  deficiencies,
interest,  additions to tax or interest, and penalties with respect thereto, and
including expenses  associated with contesting any proposed  adjustments related
to any of the foregoing.

      6.13 Intellectual Property.

      (a)  "Intellectual  Property"  shall mean all of the following as they are
necessary in connection with the business of the Company and the Subsidiaries as
presently conducted and as they exist in all jurisdictions throughout the world,
in  each  case,  to the  extent  owned  by or  licensed  to the  Company  or any
Subsidiary:  (i)  patents,  patent  applications  and  inventions,  designs  and
improvements  described and claimed  therein,  patentable  inventions  and other
patent rights  (including any divisions,  continuations,  continuations-in-part,
reissues,  reexaminations,  or interferences thereof, whether or not patents are
issued on any such  applications  and whether or not any such  applications  are
modified,  withdrawn,  or resubmitted)  ("Patents");  (ii)  trademarks,  service
marks,  trade dress,  trade names,  brand names,  designs,  logos,  or corporate
names,   whether   registered  or  unregistered,   and  all   registrations  and
applications for registration thereof ("Trademarks");  (iii) copyrights and mask
works,  including all renewals and extensions thereof,  copyright  registrations
and  applications  for  registration  thereof,  and  non-registered   copyrights
("Copyrights");  (iv) trade secrets,  inventions,  know-how, process technology,
databases, confidential business information, customer lists, technical data and
other  proprietary  information  and  rights  ("Trade  Secrets");  (v)  computer
software programs,  including, without limitation, all source code, object code,
and documentation related thereto ("Software");  (vi) Internet addresses, domain
names, web sites,  web pages and similar rights and items  ("Internet  Assets");
and  (vii)  all  licenses,  sublicenses  and  other  agreements  or  permissions
including the right to receive royalties,  or any other consideration related to
the property  described in (i)-(vi).  The Intellectual  Property contains all of
the intellectual  property  necessary to operate the business of the Company and
the Subsidiaries as currently conducted.

                                      -11-
<PAGE>
                                                                           DRAFT

      (b) The Company or the  applicable  Subsidiary  owns (or otherwise has the
right to use the Intellectual  Property pursuant to a valid license,  sublicense
or other agreement), free and clear of all Liens, and has the unrestricted right
(subject to any such license terms,  if applicable)  to use, sell,  license,  or
sublicense all Intellectual Property.

      (c) As used in this  Agreement,  the term "IP Licenses" means all material
licenses,   sublicenses,   distributor   agreements  and  other   agreements  or
permissions  under which the Company or a Subsidiary is a (i) licensor,  or (ii)
licensee,  distributor, or reseller, except such licenses, sublicenses and other
agreements relating to off-the-shelf software which is commercially available on
a retail basis for less than $500 per license and $25,000 in the  aggregate  and
used solely on the computers of the Company or the Subsidiaries  ("Off-the-Shelf
Software").  To the knowledge of the Company,  all of the IP Licenses are valid,
enforceable,  and in full force and effect,  and, with respect to the Company or
the applicable  Subsidiary,  will continue to be on identical terms  immediately
following the completion of the transactions contemplated by this Agreement.

      (d) To the  Company's  knowledge,  all the  Company's or any  Subsidiary's
Intellectual  Property  rights  are valid and  enforceable.  The  Company or the
applicable  Subsidiary has taken reasonable actions to maintain and protect each
item of Intellectual Property owned by the Company or such Subsidiary.

      (e) To the knowledge of the Company,  none of the  Intellectual  Property,
products or services owned, used, developed,  provided,  sold or licensed by the
Company  or any  Subsidiary,  or made for,  used or sold by or  licensed  to the
Company or any Subsidiary by any person infringes upon or otherwise violates any
Intellectual Property rights of others.

      (f) To the  knowledge  of the  Company,  no Person is  infringing  upon or
otherwise  violating  the  Intellectual  Property  rights of the  Company or any
Subsidiary.

      6.14 Employee Benefit Plans.

      (a) Neither the Company,  any  Subsidiary nor any other entity which is or
was under common control with the Company within the meaning of Section  414(b),
(c),  (m) or (o) of the Code  maintains  or  contributes  to, or has  within the
preceding six years maintained or contributed to, or may have any liability with
respect to any employee benefit plan subject to Title IV of Employee  Retirement
Income Security Act of 1974, as amended ("ERISA"), or Section 412 of the Code or
any  "multiple  employer  plan"  within the  meaning of the Code or ERISA.  Each
employee benefit plan,  arrangement,  policy,  program,  agreement or commitment
which the Company or any  Subsidiary  maintains,  contributes to or may have any
liability in respect to (each, a "Plan") has been  established and  administered
in all material  respects in accordance with its terms, and complies in form and
in  operation  with the  applicable  requirements  of ERISA,  the Code and other
applicable  Requirements of Law. No claim with respect to the  administration or
the  investment  of the  assets  of any Plan  (other  than  routine  claims  for
benefits)  is  pending.  No event has  occurred  in  connection  with  which the
Company, any Subsidiary or any Plan, directly or indirectly, could be subject to
any material  liability  under ERISA,  the Code or any other law,  regulation or
governmental  order applicable to any Plan, or under any agreement,  instrument,
statute,  rule of law or  regulation  pursuant to or under which the Company has
agreed to  indemnify  any person  against  liability  incurred  under,  or for a
violation or failure to satisfy the requirement of, any such statute, regulation
or order.  Neither the Company nor any  Subsidiary  has any material  liability,
whether absolute or contingent,  including any obligations  under any Plan, with
respect  to any  misclassification  of any person as an  independent  contractor
rather than as an employee.

                                      -12-
<PAGE>
                                                                           DRAFT

      (b) Neither the Company nor any Subsidiary has any  obligations to provide
or any direct or indirect  liability,  whether  contingent  or  otherwise,  with
respect to the  provision  of health or death  benefits  to or in respect of any
former employee, except as may be required pursuant to Section 4980B of the Code
and the  corresponding  provisions of ERISA and the cost of which are fully paid
by such former employees.

      (c) There are no unfunded  obligations  under any Plan which are not fully
reflected on the Financial Statements.

      6.15 Investment Company.  The Company is not an "investment company" or an
"affiliated  person"  of,  or  "promoter"  or  "principal  underwriter"  for  an
investment company, within the meaning of the Investment Company Act of 1940, as
amended.

      6.16   Private   Offerings.   Assuming   the  truth  of  the   Purchaser's
representations  and   acknowledgments   contained  in  Section  5  hereof  (and
corresponding  representations and acknowledgments  made by each other purchaser
of Units in the Offering  (each,  an  "Investor")),  neither the Company nor any
Person acting on its behalf  (other than the  Purchaser or any  Investor,  as to
whom the  Company  makes no  representations)  has  offered or sold the Units by
means of any general  solicitation or general  advertising within the meaning of
Rule 502(c) under the  Securities  Act. The Company has not sold Units to anyone
other than the Purchaser and the Investors. Each certificate representing shares
of Common  Stock shall bear  substantially  the same legend set forth in Section
5.10 hereof for at least so long as required by the Securities Act.

      6.17 Broker's or Finder's Commissions.  Other than the Placement Agent (as
placement agent on behalf of the Company) or any Other  Participating  Agent, no
finder,  broker,  agent,  financial  person or other  intermediary  has acted on
behalf of the  Company in  connection  with the sale of the Common  Stock by the
Company  or the  consummation  of  this  Agreement  or  any of the  transactions
contemplated hereby. The Company has not had any direct or indirect contact with
any other investment banking firm (or similar firm) with respect to the offer of
the Common Stock by the Company to the Purchaser or Investors or the Purchaser's
or Investors' subscriptions for the Common Stock.

      6.18  Disclosure.  The  Transaction  Documents  do not  contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make  the  statements  contained  herein  or  therein,  in the  light  of the
circumstances  under which they were made, not misleading.  The Company does not
have any knowledge of any fact that has specific  application  to the Company or
any Subsidiary  (other than general  economic or industry  conditions)  and that
would reasonably be expected to have a Material Adverse Effect that has not been
disclosed in or pursuant to the Transaction Documents.

      The  Company  certifies  that each of the  foregoing  representations  and
warranties  by the Company  set forth in this  Section 6 are true as of the date
hereof and shall survive such date as contemplated in Section 7.1.

      7. Indemnification.

                                      -13-
<PAGE>
                                                                           DRAFT

      7.1 The Company agrees to indemnify and hold harmless the  Purchaser,  its
affiliates and each of their respective directors, officers, general and limited
partners,   principals,   agents  and  attorneys  (individually,   a  "Purchaser
Indemnified Party" and collectively,  the "Purchaser  Indemnified Parties") from
and against any and all losses, claims, damages,  Liabilities,  costs (including
reasonable attorneys' fees) and expenses  (collectively,  "Losses") to which any
Purchaser Indemnified Party may become subject, insofar as such Losses arise out
of or result from (i) any breach of any  representation  or warranty made by the
Company contained in or made pursuant to this Agreement,  or (ii) the failure of
the Company to fulfill any  agreement or covenant  contained in or made pursuant
to this Agreement. All of the representations and warranties of the Company made
herein shall survive the execution and delivery of this Agreement until the date
that  is  one  year  after  the  Closing  Date,  except  for  (a)  Sections  6.1
(Organization,  Good  Standing and  Qualification),  6.2  (Capitalization),  6.3
(Corporate Power, Authorization;  Enforceability),  6.16 (Private Offerings) and
6.17 (Broker's or Finder's  Commission),  which  representations  and warranties
shall survive  indefinitely (or if indefinite  survival is not permitted by law,
then for the maximum  period  permitted  by  applicable  law),  (b) Section 6.12
(Taxes),  which  representation  and warranty  shall  survive until the later to
occur  of (i) the  lapse of the  statute  of  limitations  with  respect  to the
assessment  of  any  tax to  which  such  representation  and  warranty  relates
(including any extensions or waivers thereof) and (ii) sixty (60) days after the
final  administrative  or  judicial  determination  of the  Taxes to which  such
representation  and warranty relates,  and no claim with respect to Section 6.12
may be asserted thereafter with the exception of claims arising out of any fact,
circumstance, action or proceeding to which the party asserting such claim shall
have  given  notice  to  the  other  parties  to  this  Agreement  prior  to the
termination  of such  period of  reasonable  belief  that a tax  liability  will
subsequently  arise  therefrom,  and (c) Section 6.11  (Environmental  Matters),
which  representation  and  warranty  shall  survive  until  the  lapse  of  the
applicable  statute  of  limitations.  Except  as set forth  herein,  all of the
covenants,  agreements and  obligations of the Company shall survive the Closing
indefinitely  (or if  indefinite  survival is not permitted by law, then for the
maximum period permitted by applicable law).

      7.2 The Purchaser agrees, severally and not jointly, to indemnify and hold
harmless the Company,  its  affiliates and each of their  respective  directors,
officers,  general  and  limited  partners,  principals,  agents  and  attorneys
(individually,  a "Company  Indemnified  Party" and  collectively,  the "Company
Indemnified  Parties")  from and against any and all Losses to which any Company
Indemnified  Party may become  subject,  insofar as such Losses  arise out of or
result  from  (i) any  breach  of any  representation  or  warranty  made by the
Purchaser  contained in or made pursuant to this Agreement,  or (ii) the failure
of the  Purchaser  to fulfill any  agreement  or covenant  contained  in or made
pursuant to this  Agreement.  All of the  representations  and warranties of the
Purchaser made herein shall survive the execution and delivery of this Agreement
until the date that is three years after the Closing  Date.  Except as set forth
herein, all of the covenants,  agreements and obligations of the Purchaser shall
survive the Closing  indefinitely (or if indefinite survival is not permitted by
law, then for the maximum period permitted by applicable law).

                                      -14-
<PAGE>
                                                                           DRAFT

      7.3 Promptly  after  receipt by a Purchaser  Indemnified  Party or Company
Indemnified  Party (each an  "Indemnified  Party")  under  Section 7.1 or 7.2 of
notice of any claim as to which  indemnity  may be  sought,  including,  without
limitation,  the commencement of any action or proceeding, the Indemnified Party
will,  if a claim in respect  thereof  may be made  against  the  Company or the
applicable  Purchaser  (as  applicable,  the  "Indemnifying  Party")  under this
Section 7, promptly notify the Indemnifying Party in writing of the commencement
thereof;  provided  that the failure of the  Indemnified  Party to so notify the
Indemnifying  Party will not relieve the Indemnifying Party from its obligations
under this Section 7 unless,  and only to the extent that, such omission results
in the  Indemnifying  Party's  forfeiture of  substantive  rights or defenses or
being  materially  prejudiced by the  Indemnified  Party's  failure to give such
notice.  In case any action or  proceeding  is brought  against any  Indemnified
Party, and it notifies the Indemnifying Party of the commencement  thereof,  the
Indemnifying  Party shall be  entitled to assume the defense  thereof at its own
expense,  with counsel  satisfactory to such Indemnified Party in its reasonable
approval  (which  approval  will  not  be  withheld  or  delayed  unreasonably);
provided,  however,  that any Indemnified Party may, at its own expense,  retain
separate counsel to participate in such defense at its own expense. After notice
from the  Indemnifying  Party to the  Indemnified  Party of its  election  to so
assume the defense  thereof,  the  Indemnifying  Party will not be Liable to the
Indemnified  Party  under  this  Section 7 for any  legal or any other  expenses
subsequently  incurred by the  Indemnified  Party in connection with the defense
thereof (other than reasonable  costs of  investigation)  unless incurred at the
written  request of the  Indemnifying  Party.  Notwithstanding  the  above,  the
Indemnified Party will have the right to employ counsel of its own choice in any
action  or  proceeding  (and be  reimbursed  by the  Indemnifying  Party for the
reasonable  fees and expenses of the counsel and other  reasonable  costs of the
defense)  if,  in the  written  opinion  of such  Indemnified  Party's  counsel,
representation  of  the  Indemnified  Party  by  the  counsel  retained  by  the
Indemnifying  Party would be inappropriate due to actual or potential  differing
interests  or  conflicts  between  the  Indemnified  Party and any  other  party
represented  by  the  counsel  in  the  action;  provided,   however,  that  the
Indemnifying  Party will not in connection  with any one action or proceeding or
separate but  substantially  similar  actions or proceedings  arising out of the
same general allegations, be Liable for the reasonable fees and expenses of more
than one separate  firm of attorneys  at any time for all  Indemnified  Parties,
except to the extent that local  counsel,  in addition  to regular  counsel,  is
required in order to effectively  defend  against the action or proceeding.  For
purposes of the proviso in the preceding sentence,  "Indemnified Parties" in the
context of Purchaser  Indemnified  Parties shall include all Investors and other
Persons  entitled to  indemnification  by the Company pursuant to any Securities
Purchase Agreement entered into by the Company with respect to the Offering.  An
Indemnifying  Party  will  not  be  Liable  to any  Indemnified  Party  for  any
settlement or entry of judgment  concerning  any action or  proceeding  effected
without  the  consent of the  Indemnifying  Party,  which  consent  shall not be
unreasonably  withheld.  The Indemnifying Party agrees that it will not, without
the prior  written  consent of the  Indemnified  Party,  settle,  compromise  or
consent to the entry of any judgment in any pending or threatened claim relating
to the matters  contemplated hereby (if any Indemnified Party is a party thereto
or has  been  actually  threatened  to be  made a  party  thereto)  unless  such
settlement,  compromise  or consent  includes an  unconditional  release of each
Indemnified  Party  from all  liability  arising  or that may  arise out of such
claim.  The  rights  accorded  to an  Indemnified  Party  hereunder  shall be in
addition  to any rights  that any  Indemnified  Party may have at common law, by
separate agreement or otherwise;  provided,  however,  that  notwithstanding the
foregoing or anything to the contrary  contained in this Agreement,  (a) nothing
in this Section 7 shall restrict or limit any rights that any Indemnified  Party
may have to seek  equitable  relief and (b) this Section 7 shall be the sole and
exclusive   remedy  for  any  breach  of  the   Company's  or  the   Purchaser's
representations  and warranties  contained in Section 5 or 6 except with respect
to claims arising out of fraud or willful misconduct.

      8. Covenants.

      8.1 Use of Proceeds.  The Company may use the proceeds  from this Offering
for  working  capital  and  general  corporate  purposes,   including,   without
limitation,  for such acquisitions as the Company has considered or may consider
from time to time.

      8.2 Conduct of the  Company's  Business.  Except as  contemplated  by this
Agreement,  during the period  from the date  hereof to the  Closing  Date,  the
Company will,  and will cause the  Subsidiaries  to,  conduct  their  respective
business and  operations  solely in the ordinary  course of business  consistent
with past practice and use reasonable  commercial  efforts to keep available the
services of its officers and  employees  and preserve its current  relationships
with  customers,  suppliers,  licensors,  creditors and others  having  business
dealings with it.

      8.3 Reasonable  Best Efforts.  Subject to the terms and conditions of this
Agreement,  each of the parties hereto will use its  reasonable  best efforts to
take,  or cause to be taken,  all actions,  and to do, or cause to be done,  all
things  necessary,  proper or advisable under applicable laws and regulations to
consummate  the  transactions  contemplated  by this  Agreement  at the earliest
practicable date.

                                      -15-
<PAGE>
                                                                           DRAFT

      8.4 Tax Matters.

      The Company covenants that it will use commercially reasonable efforts not
to become a USRPHC at any time  while the  Purchaser  owns any of the  shares of
Common Stock.

      9. FOR RESIDENTS OF ALL STATES:  THE  SECURITIES  OFFERED  HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,  OR THE SECURITIES
LAWS OF ANY STATE AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS  FROM
THE  REGISTRATION  REQUIREMENTS  OF SAID ACT AND SUCH LAWS.  THE  SECURITIES ARE
SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED
OR  RESOLD  EXCEPT  AS  PERMITTED  UNDER  SAID ACT AND  SUCH  LAWS  PURSUANT  TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME.

      10. No Waiver.

      Notwithstanding any of the representations, warranties, acknowledgments or
agreements  made herein by the  Purchaser,  the Purchaser does not thereby or in
any manner  waive any rights  granted to the  Purchaser  under  federal or state
securities laws.

      11. Miscellaneous.

      11.1 Notices.  Any notice or other  communication  given  hereunder by any
party  hereto  to any other  party  hereto  shall be in  writing  and  delivered
personally or by facsimile  transmission or sent by registered or certified mail
or by any express mail or overnight courier service, postage or fees prepaid:

            If to the Company, to:

                  United Fuel & Energy Corporation
                  405 N. Marienfeld
                  Midland, Texas  79701
                  Attention: President
                  Facsimile No.:  432-571-8098

                  With a copy to :

                  Richardson & Patel LLP
                  10900 Wilshire Blvd., Suite 500
                  Los Angeles, California 90024
                  Attention: Ryan S. Hong, Esq.

            If to the Purchaser, to:

                  To  the  Purchaser  at  the  Purchaser's  name,   address  and
                  facsimile  number  set  forth  on the  signature  page to this
                  Agreement

Any notice that is  delivered  personally  or by facsimile  transmission  in the
manner  provided  herein shall be deemed to have been duly given to the party to
whom it is directed upon actual  receipt by such party or its agent.  Any notice
that is addressed  and mailed or sent by courier in the manner  herein  provided
shall be conclusively  presumed to have been duly given to the party to which it
is  addressed  at the close of  business,  local time of the  recipient,  on the
fourth  business  day after the day it is so placed in the mail or, if  earlier,
the time of actual receipt.

                                      -16-
<PAGE>
                                                                           DRAFT

      11.2 Successors and Assigns. This Agreement will be binding upon and inure
to the  benefit of the  parties  hereto  and to their  respective  heirs,  legal
representatives, successors and assigns; provided, that no party may assign this
Agreement  or its rights  hereunder  without  the prior  written  consent of the
Company, in the case of an assignment by the Purchaser,  or the Purchaser in the
case of an  assignment  by the  Company,  such  consent  not to be  unreasonably
withheld  (however,  the Company  shall under no  circumstances  be obligated to
consent to an  assignment  by the  Purchaser  to a purchaser  of Common  Stock);
provided,  further,  that  the  Purchaser  may  assign  this  Agreement  to  its
affiliates  without consent;  provided that any transfer of Common Stock must be
in compliance with the Transaction Documents and all applicable law.

      11.3 Entire Agreement.  This Agreement sets forth the entire agreement and
understanding  among the parties as to the subject  matter hereof and merges and
supersedes all prior discussions, agreements and understandings of any and every
nature among them;  provided,  that any  confidentiality  agreement  between the
Company and the Purchaser shall remain in effect.  This Agreement may be amended
only by mutual written agreement of the Company and the Purchaser.

      11.4 Governing  Law. This Agreement  shall be governed by and construed in
accordance  with the laws of the State of Texas with respect to  contracts  made
and to be fully  performed  therein,  without  regard to the  conflicts  of laws
principles thereof.  The parties hereto hereby agree that any suit or proceeding
arising under this  Agreement,  or in connection  with the  consummation  of the
transactions  contemplated hereby, shall be brought solely in a federal or state
court  located  in the County of Midland  and State of Texas.  By its  execution
hereof, both the Company and the Purchaser hereby consent and irrevocably submit
to the in personam  jurisdiction  of the federal and state courts located in the
County of Midland  and State of Texas and agree that any  process in any suit or
proceeding  commenced in such courts under this  Agreement may be served upon it
personally or by certified or registered mail, return receipt  requested,  or by
Federal Express or other courier  service,  with the same force and effect as if
personally  served upon the applicable  party in Texas and in the city or county
in which such other  court is located.  The parties  hereto each waive any claim
that  any such  jurisdiction  is not a  convenient  forum  for any such  suit or
proceeding  and any defense of lack of in  personam  jurisdiction  with  respect
thereto.

      11.5  Severability.  The holding of any provision of this  Agreement to be
invalid or  unenforceable by a court of competent  jurisdiction  will not affect
any other  provision  of this  Agreement,  which  will  remain in full force and
effect.  If any provision of this  Agreement is declared by a court of competent
jurisdiction  to be invalid,  illegal or incapable of being enforced in whole or
in part, the provision  will be  interpreted so as to remain  enforceable to the
maximum  extent  permissible  consistent  with  applicable law and the remaining
conditions and provisions or portions thereof will  nevertheless  remain in full
force and  effect  and  enforceable  to the  extent  they are  valid,  legal and
enforceable,  and no provisions will be deemed dependent upon any other covenant
or provision unless so expressed herein.

      11.6 No Waiver.  A waiver by either party of a breach of any  provision of
this Agreement will not operate, or be construed,  as a waiver of any subsequent
breach by that same party.

      11.7  Further  Assurances.  The  parties  agree to execute and deliver all
further documents,  agreements and instruments and take further action as may be
necessary or appropriate to carry out the purposes and intent of this Agreement.

                                      -17-
<PAGE>
                                                                           DRAFT

      11.8  Counterparts.  This  Agreement  may  be  executed  in  two  or  more
counterparts,  each of which will be deemed an  original,  but all of which will
together constitute the same instrument.

      11.9 No Third Party  Beneficiaries.  Nothing in this Agreement  creates in
any Person not a party to this Agreement any legal or equitable right, remedy or
claim under this Agreement,  and this Agreement is for the exclusive  benefit of
the parties hereto.  The parties expressly  recognize that this Agreement is not
intended to create a  partnership,  joint venture or other  similar  arrangement
between any of the parties or their respective affiliates.

      11.10 Headings.  The headings in this Agreement are solely for convenience
of reference and shall be given no effect in the construction or  interpretation
of this Agreement.

      11.11 Specific Performance.  The Purchaser acknowledges and agrees that in
the event of any breach of this  Agreement,  the  Company  would be  irreparably
harmed  and  could  not  be  made  whole  by  monetary  damages.  The  Purchaser
accordingly agrees to waive the defense in any action for injunction or specific
performance  that a remedy at law would be adequate and that the parties hereto,
in  addition  to any other  remedy to which  they may be  entitled  at law or in
equity,  shall be entitled to an injunction or to compel specific performance of
this Agreement.

      11.12  Publicity  Restrictions.  Except as may be required  by  applicable
Requirements of Law, none of the parties hereto shall issue a publicity  release
or  public  announcement  or  otherwise  make  any  disclosure  concerning  this
Agreement,  the transactions  contemplated  hereby without prior approval by the
other party hereto;  provided that after the issuance of the Common Stock to the
Purchaser has been publicly  disclosed by the Company the Purchaser may disclose
on its worldwide web pages and its offering  materials,  if any, the name of the
Company,  the  name of the  Chief  Executive  Officer  of the  Company,  a brief
description of the business of the Company  consistent  with the Company's press
releases or other public statements, the Company's logo and the aggregate amount
of the Purchaser's investment in the Company. If any announcement is required by
applicable law or the rules of any securities exchange or market on which shares
of Common Stock are traded to be made by any party hereto,  prior to making such
announcement  such party will deliver a draft of such  announcement to the other
parties  and shall  give the other  parties  reasonable  opportunity  to comment
thereon.  The parties agree to attribute and otherwise indicate ownership of the
other parties' trademarks and logos.

      11.13  Certification.  The Purchaser certifies that the Purchaser has read
this entire  Agreement and that every statement on the Purchaser's part made and
set forth herein is true and complete.

                  [Remainder of page intentionally left blank.]

                                      -18-
<PAGE>
                                                                           DRAFT

      IN WITNESS WHEREOF,  the undersigned has executed this Securities Purchase
Agreement on the date his signature has been subscribed and sworn to below.

<TABLE>
<S>                                                          <C>
The shares of Common Stock                                   _____________________________________________________
are to be issued in:                                         Print Name of Investor

____ individual name                                         __________________ Units subscribed for

                                                             Subscription price paid herewith:
                                                             $_________________ (being $1.50 x the number of Units
____ tenants in the entirety                                 listed above)

                                                             _____________________________________________________
____ corporation (an officer must sign)                      Print Name of Joint Investor
                                                             (if applicable)

                                                             _____________________________________________________
____ partnership (all general partners must sign)            Signature of Investor

                                                             _____________________________________________________
____ trust                                                   Signature of Joint Investor
                                                             Address of Investor:

____ limited liability company                               _____________________________________________________

                                                             _____________________________________________________

                                                             Facsimile No.: ______________________________________

                                                             (with a copy to:)
                                                             _____________________________________________________

                                                             _____________________________________________________

                                                             Facsimile No.: ______________________________________
</TABLE>

Accepted  as of the ___ day of  _________,  2005  as to  _______________  Units;
Subscription price accepted being  $______________,  being $1.50 x the number of
Units as to which this Subscription is accepted:

UNITED FUEL & ENERGY CORPORATION

By:      ___________________________________________
Name:    Scott Heller
Title:   President and Chief Executive Officer

                                      -19-
<PAGE>

                        [Insert Purchaser Questionnaire]

                                       xx
<PAGE>

                                    Exhibit A

                                 Form of Warrant

                                       iv
<PAGE>

                                    Exhibit B

                      Form of Registration Rights Agreement

                                       v
<PAGE>

                                    Exhibit C

                   Wire Transfer Instructions for Escrow Agent

                                       vi
<PAGE>

                                    Exhibit D

           Matters to be Covered in Legal Opinion of Company's Counsel

      1. The Company is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Nevada.

      2. The Company has all necessary corporate power and authority to execute,
deliver,  enter into and perform its  obligations  under each of the Transaction
Documents and to consummate the transactions  contemplated  thereby,  including,
without  limitation,  to issue,  sell and  deliver  the  Common  Stock  issuable
pursuant  thereto.  The  execution,  delivery,  and  performance  of each of the
Transaction Documents has been duly authorized by all necessary corporate action
on the part of the Company.

      3. The Transaction  Documents have been duly executed and delivered by the
Company and  constitute  legal,  valid and binding  obligations  of the Company,
subject to laws of general  application  relating to bankruptcy,  insolvency and
the  relief  of  debtors  and  rules  of  law  governing  specific  performance,
injunctive  relief or other  equitable  remedies,  and to  limitations of public
policy.

      4. The shares of Common Stock have been duly  authorized  and, when issued
in accordance with the Securities  Purchase Agreement will be validly issued and
nonassessable  and will be free and clear of all Liens imposed by or through the
Company other than restrictions imposed by the Securities Purchase Agreement and
applicable  securities  laws.  Other than as  specified,  no preemptive or other
rights to subscribe for or purchase equity securities of the Company exist under
statute or the  Articles of  Incorporation  of the Company  with  respect to the
issuance and sale of the Common Stock by the Company pursuant to the Transaction
Documents.

      5. The execution and delivery by the Company of the Transaction  Documents
do not and the  consummation of the transactions  contemplated  thereby will not
(A) violate any  provision  of the Articles of  Incorporation  or By-laws of the
Company, or (B) violate any law, statute, rule,  regulation,  order, judgment or
decree  of any court or  Governmental  Authority  which,  to our  knowledge,  is
applicable to the Company, except for, in the case of clause (B), any violation,
breach or default  which  would not  reasonably  be  expected to have a Material
Adverse Effect.

      6. Except for filings,  authorizations  or approvals  contemplated  by the
Securities Purchase  Agreement,  to our knowledge no authorizations or approvals
of, and no filings with, any Governmental Authority are necessary or required by
the Company for the execution and delivery of the  Transaction  Documents or the
consummation of the transactions contemplated thereby.

      7. The Company is not an  "investment  company"  within the meaning of the
Investment Company Act of 1940, as amended.

      8.  Assuming the accuracy of the  representations  and  warranties  of the
Purchaser and the other Investors in the Offering in their respective Securities
Purchase  Agreements,  the offer and sale of the Common Stock is exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Section 4(2) and/or Rule 506 under Regulation D of the Securities Act.

The opinion will set forth counsel's customary assumptions and qualifications.

                                      vii
<PAGE>

                                    Exhibit E

                       Financial Statements of the Company

                                      viiiEXHIBIT 4.2

                        SECURITIES PURCHASE AGREEMENT

      SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated August 10, 2005,
by and among Peak Entertainment Holdings, Inc., a Nevada corporation (the
"Company"), and the purchaser set forth on the signature page hereto ("Buyer").

                                   WHEREAS:

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

      B. This Agreement is for a private placement offering by the Company
pursuant to which the Buyer is purchasing a $100,000 ninety day convertible
promissory note yielding 10% simple annual interest (the "Private Placement");

      C. Buyer desires to purchase and the Company desires to issue and sell,
upon the terms and conditions set forth in this Agreement: (i) 10% convertible
promissory note of the Company, in the form attached hereto as Exhibit A (the
"Promissory Note"), convertible into shares of common stock of the Company (the
"Common Stock"), at a valuation of $0.30 per share ("Bridge Valuation"), upon
the terms and subject to the limitations and conditions set forth in such
Promissory Note; and (ii) such number of warrants as providing a 35% warrant
coverage ("Warrant Coverage"), in the form attached hereto as Exhibit B, to
purchase shares of the Company's Common Stock (the "Warrants"), exercisable for
three years at $0.30 per share; (the Common Stock and Warrants are sometimes
referred to herein as the "Securities")

      D. Buyer wishes to purchase, upon the terms and conditions stated in this
Agreement, the amount of Securities issuable in the Private Placement for that
"Amount Invested" that Buyer indicates on the signature page hereto;

      NOW THEREFORE, the Company and Buyer hereby agrees as follows:

      1. PURCHASE AND SALE OF SECURITIES.

            a. Purchase of Securities. On the Closing Date (as defined below),
the Company shall issue and sell to Buyer and Buyer agrees to purchase from the
Company such principal amount of Promissory Note as equals the Amount Invested
and such number of Warrants as providing a 100% Warrant Coverage. "Warrant
Coverage" is defined and calculated as the principal amount of the Promissory
Note ($100,000) divided by the warrant exercise price, with that number then
multiplied by 1.00. For example, an Amount Invested of $100,000 would entitle
the Buyer to: (i) $100,000 in principal amount of Promissory Note; and (ii)
warrants to purchase 333,333 shares of common stock.

            b. Form of Payment. Upon execution of this Agreement, (i) Buyer
shall pay the purchase price for the Promissory Note and the Warrants to be
issued and sold to them at the Closing (as defined below) (the "Purchase Price")
by wire transfer of immediately available funds shall be paid to the Company by
wire transfer to:

                        Law Offices of Dan Brecher
                        Escrow Account
                        Account No. 95050499
                        Citibank, N.A.
                        90 Park Avenue
                        New York, NY 10016
                        ABA:  021000089

            c. Closing Date. The date and time of the issuance and sale of the
Securities pursuant to this Agreement (the "Closing Date") shall be on or before
August 10, 2005.

                                       1
<PAGE>

      2. BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer represents and warrants
to the Company solely as to it that:

            a. Investment Purpose. As of the date hereof, Buyer is purchasing
the Promissory Note and the shares of Common Stock issuable upon conversion of
or otherwise pursuant to the Promissory Note pursuant to this Agreement (such
shares of Common Stock being collectively referred to herein as the "Conversion
Shares") and the Warrants and the shares of Common Stock issuable upon exercise
thereof (the "Warrant Shares" and, collectively with the Promissory Note,
Warrants and Conversion Shares, the "Securities") 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, Buyer 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. Buyer is a sophisticated investor (as
described in Rule 506(b)(2)(ii) of Regulation D) and an accredited investor (as
defined in Rule 501 of Regulation D), and Buyer has such experience in business
and financial matters that it has the capacity to protect its own interests in
connection with this transaction and is capable of evaluating the merits and
risks of an investment in the Securities pursuant to this Agreement. Buyer has
been represented by counsel and advisors of its choice. Buyer acknowledges that
an investment in the Securities pursuant to this Agreement is speculative and
involves a high degree of risk.

            c. Reliance on Exemptions. Buyer 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 Buyer's
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of Buyer to acquire the
Securities.

            d. Information. Buyer has conducted its own independent
investigation of the Company, has access to the Company's filings on Edgar
available at http://www.sec.gov/, and has, so far as the Buyer is aware,
received all documents, records, books and other information pertaining to
Buyer's investment in the Company that have been requested by Buyer.

            e. Governmental Review. Buyer 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 Resale. Buyer understands that: (i) except as
provided for herein, 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) Buyer
shall have delivered to the Company an opinion of counsel that shall be in form,
substance and scope customary for opinions of counsel in comparable transactions
to the effect that the Securities to be sold or transferred may be sold or
transferred pursuant to an exemption from such registration to the reasonable
satisfaction of the Company, (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 Buyer 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, and
Buyer shall have delivered to the Company an opinion of counsel that shall be in
form, substance and scope customary for opinions of counsel in corporate
transactions to the reasonable satisfaction of the Company; (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 file 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 provisions herein). 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.

                                       2
<PAGE>

            g. Legends. Buyer understands that until such time as the Securities
have been registered 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, the Securities 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, in
      form, substance and scope customary for opinions of counsel in comparable
      transactions, that registration is not required under said Act or unless
      sold pursuant to Rule 144 under said Act."

            h. Authorization; Enforcement. This Agreement has been duly
authorized and validly executed and delivered by Buyer and is a valid and
binding agreement of Buyer enforceable against it in accordance with its terms
(i) subject to applicable bankruptcy, insolvency, or similar laws relating to,
or affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application, (ii) subject to a court's
discretionary authority with respect to the granting of specific performance,
injunctive relief or other equitable remedies and (iii) except to the extent the
indemnification and contribution provisions, if any, contained in any this
Agreement may be limited by applicable federal or state securities laws or
unenforceable as against public policy..

            i. Residency. Buyer is a resident of the jurisdiction set forth
immediately below Buyer's name on the signature page hereto.

            j. Not an Affiliate. Buyer is not an officer, director or
"affiliate" (as that term is defined in Rule 405 under the 1933 Act) of the
Company.

            k. Manner of Sale. At no time was Buyer presented with or solicited
by or through any leaflet, public promotional meeting, television advertisement
or any other form of general solicitation or advertising.

      3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

            The Company represents and warrants to Buyer that:

            a. Organization and Qualification. The Company and each of its
subsidiaries, if any, is an entity duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it is incorporated,
organized or formed, 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. The Company and each of its
subsidiaries is duly qualified or intends to apply for qualification 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 a material adverse effect on the business,
operations, assets, financial condition or prospects of the Company or its
subsidiaries, if any, taken as a whole, or on the transactions contemplated
hereby or by the agreements or instruments to be entered into in connection
herewith. "Subsidiaries" means any corporation or other organization, whether
incorporated or unincorporated, in which the Company owns, directly or
indirectly, any equity or other ownership interest.

            b. Authorization; Enforcement. The Company has all requisite
corporate power and authority to enter into and perform this Agreement and the
agreements annexed hereto as exhibits (collectively the "Transaction
Agreements") and to consummate the transactions contemplated hereby and thereby
and to issue the Securities, in accordance with the terms hereof and thereof.
The execution and delivery of the Transaction Agreements by the Company and the
consummation by it of the transactions contemplated hereby and thereby
(including without limitation, the issuance of the Securities), have been duly
authorized by the Company's Board of Directors. This Agreement has been duly
executed and delivered by the Company by its authorized representative,

                                       3
<PAGE>

and such authorized representative is the true and official representative with
authority to sign this Agreement and the other documents executed in connection
herewith and bind the Company accordingly. This Agreement constitutes a legal,
valid and binding obligation of the Company enforceable against the Company in
accordance with its terms.

            c. Capitalization. As of August 5, 2005, the authorized capital
stock of the Company consists of 900,000,000 shares of Common Stock, of which
approximately 31,470,108 shares are issued and outstanding. As of August 5,
2005, the Company has a principal amount of $958,500 in 8% convertible
debentures issued in January 2004 outstanding (principal, as well as accrued
interest, are convertible at $.30 per share), a principal amount of $360,000 in
12% convertible debentures issued in May 2005 outstanding (convertible at $.30
per share), and warrants to purchase 9,282,000 shares of common stock (such
warrants or options are exerciseable at prices of $0.35 to $1.20 per share, with
most of those warrants exercisable at either $0.50 or $0.75). The Company has a
consulting agreement pursuant to which 106,380 shares remain to be issued in
2005. The Company also has or is negotiating commitments or plans for adoption
that call for it to issue 5,000,000 shares and/or options or warrants to
employees, consultants, and agents pursuant to negotiations or stock incentive
plans yet to be formally adopted and approved or concluded. The Company also
entered into a letter of intent with Maverick Entertainment Plc, pursuant to
which it may be required to issue securities. All of such outstanding reserved
shares of capital stock are, or upon issuance will be duly authorized, validly
issued, fully paid and nonassessable. No shares of capital stock of the Company
are subject to preemptive rights or any other similar rights of the shareholders
of the Company or any liens or encumbrances imposed through the actions or
failure to act of the Company. Except as set forth in this paragraph and in the
SEC Documents, there are no outstanding options, warrants, rights (including,
without limitation, rights of first refusal, anti-dilution, conversion,
preemptive or similar rights) or agreements for the purchase or acquisition from
the Company of any shares of its capital stock or any securities convertible
into or ultimately exchangeable or exercisable for any shares of its capital
stockother than the Securities.

            d. Issuance of Shares. The Conversion Shares and Warrant Shares are
duly authorized and reserved for issuance and, upon conversion of the Promissory
Note and exercise of the Warrants in accordance with their respective terms,
will be validly issued, fully paid and non-assessable, and free from all taxes,
liens, claims and encumbrances with respect to the issue thereof and shall not
be subject to preemptive rights or other similar rights of shareholders of the
Company.

            e. Acknowledgment of Dilution. The Company understands and
acknowledges the potentially dilutive effect to the Common Stock upon the
issuance of the Conversion Shares and Warrant Shares upon conversion of the
Debenture or exercise of the Warrants. The Company further acknowledges that its
obligation to issue Conversion Shares and Warrant Shares upon conversion of the
Promissory Note or exercise of the Warrants in accordance with this Agreement,
the Promissory Note and the Warrants is absolute and unconditional regardless of
the dilutive effect that such issuance may have on the ownership interests of
other shareholders of the Company.

            f. No Conflicts. The execution, delivery and performance of this
Agreement and the other Transaction Documents 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 of the
Conversion Shares and Warrant Shares), will not (i) conflict with or result in a
violation of any provision of the Company's Articles of Incorporation or
By-laws, (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 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, defaults, terminations,
amendments, accelerations, cancellations and violations as would not,
individually or in the aggregate, have a Material Adverse Effect). Neither the
Company nor any of its Subsidiaries is in violation of its Articles of
Incorporation, By-laws or 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

                                       4
<PAGE>

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 taken any action
or failed to take any action that would give to others any rights of
termination, amendment, acceleration or cancellation of, any 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. The businesses
of the Company and its Subsidiaries, if any, are not being conducted, and shall
not be conducted so long as a Buyer owns any of the Securities, in violation of
any law, ordinance or regulation of any governmental entity. 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 in order for it to execute, deliver or perform any of its
obligations under this Agreement, the Promissory Note or the Warrants in
accordance with the terms hereof or thereof or to issue and sell the Promissory
Note and Warrants in accordance with the terms hereof and to issue the
Conversion Shares upon conversion of the Promissory Note and the Warrant Shares
upon exercise of the Warrants.

            g. Reports and Financial Statements; Absence of Certain Changes. The
Company has filed all reports, schedules, forms, statements and other documents
required to be filed by the Company with the SEC as of the date of this
Agreement (collectively, the "SEC Documents") pursuant to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "1934
Act"), and has previously furnished or made available to Buyer true and complete
copies of such SEC Documents and shall promptly deliver to Buyer any SEC
Documents filed between the date hereof and the Closing Date. Such SEC Documents
complied with the reporting requirements with respect thereto, and none of such
SEC Documents, as of their respective dates (and as amended through the date
hereof), contained or, with respect to SEC Documents filed after the date
hereof, will contain any untrue statement of material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading. All reports, schedules, forms, statements and other
documents required to be filed by any person or entity with respect to the
Company pursuant to Section 16 of the 1934 Act as of the date hereof have been
filed, and do not contain any untrue statement of material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading. Since December 31, 2004, other than in the
ordinary course of business, 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, except as disclosed herein or in the SEC
Documents.

            i. Intellectual Property. The Company has the rights stated herein
and in the SEC Documents (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures) and
other similar rights and proprietary knowledge (collectively, "Intangibles")
necessary for the conduct of its business as now being conducted. To the
Company's knowledge, except as disclosed herein and/or in the SEC Documents,
neither the Company nor any of its subsidiaries is infringing upon or in
conflict with any right of any other person with respect to any Intangibles.
Except as disclosed herein and/or in the SEC Documents, no adverse claims have
been asserted by any person to the ownership or use of any Intangibles and the
Company has no knowledge of any basis for such claim.

                  The obligations of the Company under the Promissory Note shall
be secured by intellectual property owned by the Company; the security interest
rights granted to the Buyer are behind those previously granted to existing
debenture holders. The Company shall be entitled to grant security interest
rights senior to the rights of the Buyer to a financial institution, subject to
the approval of the Buyer, which shall not be unreasonably withheld. The Company
shall be entitled to grant security interest rights similar to the rights
granted to the Buyer to debenture purchasers in an offering planned to raise a
total of $1 - $4 million dollars.

            j. Trading in Securities. The Company specifically acknowledges
that, except to the extent specifically provided herein or in any of the other
Transaction Agreements (but limited in each instance to the extent so
specified), Buyer retain the right (but are not otherwise obligated) to buy,
sell, engage in hedging transactions or otherwise trade in the securities of the
Company, including, but not necessarily limited to, the Securities, at any time
before, contemporaneous with or after the execution of this Agreement or from
time to time, but only, in each case, in any manner whatsoever permitted by
applicable federal and state securities laws.

                                       5
<PAGE>

      4. COVENANTS.

            a. SEC Reporting. So long as Buyer beneficially owns any of the
Securities, the Company shall use best efforts to timely file all reports
required to be filed with the SEC pursuant to the 1934 Act, and the Company
shall use best efforts to maintain its status as an issuer filing reports under
the 1934 Act even if the 1934 Act or the rules and regulations thereunder would
permit such termination.

            b. Use of Proceeds. The Company shall use the proceeds from the sale
of the Securities for its working capital.

            c. Listing. The Company will use best efforts, so long as Buyer owns
at least one-third of the Securities, to maintain the quoting/listing and
trading of its Common Stock on the OTCBB or any equivalent or replacement
quotation service or exchange, including, but not limited to, the Nasdaq
National Market ("Nasdaq"), the Nasdaq SmallCap Market ("Nasdaq SmallCap"), the
New York Stock Exchange ("NYSE"), or the American Stock Exchange ("AMEX") 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 will promptly
notify Buyer regarding the continued eligibility of the Common Stock for listing
or quotation should there be a material change.

            e. Corporate Existence. So long as Buyer beneficially owns any
Promissory Note or Warrants, 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 surviving or successor entity in such
transaction (i) assumes the Company's obligations hereunder and under the
agreements and instruments entered into in connection herewith and (ii) is a
publicly traded corporation whose Common Stock is listed for trading on the
OTCBB, Nasdaq, Nasdaq SmallCap, NYSE or AMEX, or any other equivalent or
replacement quotation service or exchange.

            f. Registration Rights. If the Company proposes to register any of
its securities under the Securities Act for sale to the public, whether for its
own account or for the account of other security holders or both (except with
respect to registration statements on Forms S-4, S-8 and any successor forms
thereto), each such time it will give written notice to such effect to each
holder of the Securities from time to time (a "Holder") at least ten days prior
to such filing. Upon the written request of any Holder, received by the Company
within ten days after the giving of any such notice by the Company, to register
any of its shares of common stock eligible to be registered, the Company will
cause such shares as Buyer has a right to own pursuant to ownership of the
Securities to be covered by the registration statement proposed to be filed by
the Company. Notwithstanding the foregoing, in the event that any registration
pursuant to this provision shall be, in whole or in part, an underwritten public
offering of common stock, the number of shares to be included in such an
underwriting may be reduced (pro rata among the requesting holders and the
Company's placement agent and its assigns (based upon the number of Shares
requested to be registered by them)) if and to the extent that the managing
underwriter shall be of the good faith opinion that such inclusion would reduce
the number of shares to be offered by the Company, its other securities owners,
the placement agent and its assigns or requesting holders of Shares.
Notwithstanding the foregoing provisions, the Company may withdraw any
registration statement referred to in this provision without thereby incurring
any liability to any Holder. In the event that the SEC restricts or prohibits
the inclusion of any part of the common stock included in the registration
statement on the basis of integration or that such securities are not deemed
owned or paid for or any other reason, the Company shall not register such
shares. Holder shall cooperate with the Company in furnishing such information
regarding itself as reasonably needed to prepare, file and effect the
registration statement, and the failure to cooperate shall suspend the Company's
obligations discussed in this paragraph.

                  Notwithstanding anything to the contrary, if the Company has
not filed a registration statement within six months hereof, Buyer shall be
entitled to demand the filing of a registration statement covering the resale of
the shares of common stock underlying the Securities purchased pursuant to this
Agreement. Such demand shall be consistent with the Company's year-end federal
securities reporting obligations.

                                       6
<PAGE>

                  All expenses other than underwriting discounts and commissions
incurred in connection with registrations, filings or qualifications pursuant to
this paragraph, including, without limitation, all registration, filing and
qualification fees (including "blue sky" fees), printers' and accounting fees,
fees and disbursements of counsel for the Company (including fees and
disbursements of counsel for the Company) shall be borne by the Company.

                  Whenever required under this paragraph to effect the
registration of any shares of Common Stock underlying Securities of a Holder,
the Company shall, as expeditiously as is feasible:

                        (i) prepare and file with the SEC a registration
statement with respect to such shares of Common Stock underlying Securities and
use commercially reasonable efforts to cause such registration statement to
become effective, and keep such registration statement effective for a period of
up to 120 days or, if earlier, until the distribution contemplated in such
registration statement has been completed; provided, however, that such 120 day
period shall be extended for a period of time equal to the period a Holder
refrains from selling any securities included in such registration at the
request of an underwriter of Common Stock (or other securities) of the Company;

                        (ii) prepare and file with the SEC such amendments
and supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply with
the provisions of the Act with respect to the disposition of all securities
covered by such registration statement;

                        (iii) furnish to each Holder (A) a draft copy of the
registration statement and (B) a prospectus, including a preliminary prospectus,
in conformity with the requirements of the 1933 Act, and such other documents as
it may reasonably request in order to facilitate the disposition of Securities
owned by it;

                        (iv) in the event of any underwritten public
offering, enter into and perform its obligations under an underwriting
agreement, in usual and customary form, with the managing underwriter of such
offering. Each Holder participating in such underwriting, if any, shall also
enter into and perform its obligations under such an agreement. In connection
with any offering involving an underwriting of shares of the Company's capital
stock, the Company shall not be required to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by the Company
and enter into an underwriting agreement in customary form with an underwriter
or underwriters selected by the Company. If the total amount of securities,
including shares of Common Stock underlying Securities of a Holder, to be
included in such offering exceeds the amount of securities that the underwriters
determine in their sole discretion is compatible with the success of the
offering, then the Company shall be required to include in the offering only
that number of securities that the underwriters determine in their sole
discretion will not jeopardize the success of the offering;

                        (v) notify each Holder of Securities covered by
such registration statement, at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act, of (i) the issuance of any stop
order by the SEC in respect of such registration statement, or (ii) the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing; and.

                        (vi) use commercially reasonable efforts to register
and qualify the securities covered by such registration statement under such
other securities or "blue sky" laws of such jurisdictions as shall be reasonably
requested by a Holder, provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business, where
not otherwise required, or to file a general consent to service of process in
any such states or jurisdictions, unless the Company is already subject to
service in such jurisdiction and except as may be required by the 1933 Act.

                                       7
<PAGE>

      5. CONDITIONS TO THE COMPANY'S OBLIGATION. The obligation of the Company
hereunder to issue and sell the Securities to Buyer 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. Buyer shall have executed this Agreement, and delivered the same
to the Company.

            b. Buyer shall have delivered and the Company shall have received
the Purchase Price in accordance with Section 1.

            c. The representations and warranties of Buyer 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 that time (except for representations and warranties that
speak as of a specific date), and Buyer 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 Buyer
at or prior to the Closing Date.

            d. No undisclosed 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.

      6. CONDITIONS TO BUYER'S OBLIGATION. The obligation of Buyer to purchase
the Securities 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 Buyer's sole benefit and may be waived by Buyer at any time in its sole
discretion:

            a. The Company shall have executed this Agreement and the Warrant
Agreement. The Company shall have submitted irrevocable instructions to its
transfer agent for the issuance of the Common Stock.

            b. 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) 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.

            c. 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. GOVERNING LAW; MISCELLANEOUS.

            a. Governing Law. THIS AGREEMENT SHALL BE ENFORCED, GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICT OF LAWS. THE PARTIES HERETO HEREBY SUBMIT TO THE
EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS AND THE NEW YORK
STATE COURTS LOCATED IN NEW YORK COUNTY IN THE STATE OF NEW YORK WITH RESPECT TO
ANY DISPUTE ARISING UNDER THIS AGREEMENT, THE AGREEMENTS ENTERED INTO IN
CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 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.

                                       8
<PAGE>

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. The
Company and Buyer hereby waive a trial by jury in any action, proceeding or
counterclaim brought by either of the Parties hereto against the other in
respect of any matter arising out or in connection with the Transaction
Agreements.

            b. Counterparts; Signatures by Facsimile. This Agreement may be
executed in one or more counterparts, each of which shall be deemed an original
but all of which shall constitute 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 only and shall not form part of, or affect the interpretation of, this
Agreement.

            d. Severability. In the event that any provision of this Agreement
is invalid or unenforceable under any applicable statute or rule of law, then
such provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any provision hereof which may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision hereof.

            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 Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters. Except as
provided herein, 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 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:

                                       9
<PAGE>

                  If to the Company:
                  Attn.:      Wilfred Shorrocks, President
                  Peak Entertainment Holdings, Inc.
                  Bagshaw Hall, Bagshaw Hill
                  Bakewell, Derbyshire, UK DE45 1DL
                  Tel:  +44(0)1629 814555
                  Fax:  +44(0)1629 813539

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

                  Attn.:  Dan Brecher, Esq.
                  Law Offices of Dan Brecher
                  99 Park Avenue, 16th Floor
                  New York, NY 10016
                  Tel:  212-286-0747
                  Fax:  212-808-4155

                  If to Buyer:
                  At the address and facsimile number listed on the signature
                  page hereof.

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 any Buyer 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), any Buyer may assign its
rights hereunder to any person that purchases Securities in a private
transaction fromBuyer or to any of its affiliates.

            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. 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.

            j. 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.

            k. Remedies. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to Buyer by vitiating the
intent and purpose of the transaction 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 Buyer
shall be entitled, in addition to all other available remedies at law or in
equity.

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

                                       10
<PAGE>

            m. Indemnification.

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

                        (i) any material misrepresentation, omission of
fact or breach of any of the Company's representations or warranties contained
in this Agreement, the annexes, schedules or exhibits hereto or any instrument,
agreement or certificate entered into or delivered by the Company pursuant to
this Agreement; or

                        (ii) any material failure by the Company to perform
in any material respect any of its covenants, agreements, undertakings or
obligations set forth in this Agreement, the annexes, schedules or exhibits
hereto or any instrument, agreement or certificate entered into or delivered by
the Company pursuant to this Agreement; or

                        (iii) any action instituted against any Buyer, or any
of its affiliates, by any stockholder of the Company who is not an affiliate of
Buyer, with respect to any of the transactions contemplated by this Agreement.

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

                        (i) any material misrepresentation, omission of
fact, or breach of any of any Buyer's representations or warranties contained in
this Agreement, the annexes, schedules or exhibits hereto or any instrument,
agreement or certificate entered into or delivered by Buyer pursuant to this
Agreement; or

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

                  (c) Promptly after receipt by either party hereto seeking
indemnification pursuant to this Section 7(m) (an "Indemnified Party") of
written notice of any investigation, claim, proceeding or other action in
respect of which indemnification is being sought (each, a "Claim"), the
Indemnified Party promptly shall notify the party from whom indemnification
pursuant to this Section 7(m) is being sought (the "Indemnifying Party") of the
commencement thereof; but the omission to so notify the Indemnifying Party shall
not relieve it from any liability that it otherwise may have to the Indemnified
Party, except to the extent that the Indemnifying Party is actually prejudiced
by such omission or delay. In connection with any Claim as to which both the
Indemnifying Party and the Indemnified Party are parties, the Indemnifying Party
shall be entitled to assume the defense thereof. Notwithstanding the assumption
of the defense of any Claim by the Indemnifying Party, the Indemnified Party
shall have the right to employ separate legal counsel and to participate in the
defense of such Claim, and the Indemnifying Party shall bear the reasonable
fees, out-of-pocket costs and expenses of such separate legal counsel to the
Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed
to pay such fees, out-of-pocket costs and expenses, (y) the Indemnified Party
reasonably shall have concluded that representation of the Indemnified Party and
the Indemnifying Party by the same legal counsel would not be appropriate due to
actual or, as reasonably determined by legal counsel to the Indemnified Party,
potentially differing interests between such parties in the conduct of the
defense of such Claim, or if there may be legal defenses available to the
Indemnified Party that are in addition to or disparate from those available to
the Indemnifying Party, or (z) the Indemnifying Party shall have failed to
employ legal counsel reasonably satisfactory to the Indemnified Party within a
reasonable period of time after notice of the commencement of such Claim. If the
Indemnified Party employs separate legal counsel in

                                       11
<PAGE>

circumstances other than as described in clauses (x), (y) or (z) above, the
fees, costs and expenses of such legal counsel shall be borne exclusively by the
Indemnified Party. Except as provided above, the Indemnifying Party shall not,
in connection with any Claim in the same jurisdiction, be liable for the fees
and expenses of more than one firm of legal counsel for the Indemnified Party
(together with appropriate local counsel). The Indemnifying Party shall not,
without the prior written consent of the Indemnified Party (which consent shall
not unreasonably be withheld), settle or compromise any Claim or consent to the
entry of any judgment that does not include an unconditional release of the
Indemnified Party from all liabilities with respect to such Claim or judgment.

      n. Certain Fees. Each party will bear its own expenses and fees in
connection with this Agreement.

                           [signature page follows]

                                       12
<PAGE>

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

THE COMPANY:                  PEAK ENTERTAINMENT HOLDINGS, INC.

                              By:   /s/ Wilf Shorrocks
                                    Wilf Shorrocks
                                    President and Chief Executive Officer

BUYER:                        CROWN NORTHERN WAY CAPITAL, LLC
                              CROWN CAPITAL CORPORATION

                              By:   /s/ R. William Breece, President
                                    Name:       R. William Breece, President
                                    Title:      Managing Member

                              STATE OF INCORPORATION/FORMATION:   Missouri

                              ADDRESS:    540 Maryville Centre
                                          St. Louis, Missouri 63141
                              FACSIMILE:  314-576-1525

                              AMOUNT INVESTED:  $100,000

                                       13
<PAGE>

                                                                       EXHIBIT A

THIS PROMISSORY NOTE AND THE SECURITIES PURCHASABLE UPON EXERCISE OF THE RIGHTS
CONTAINED IN THIS PROMISSORY NOTE (COLLECTIVELY, THE "SECURITIES") HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT"). THE
SECURITIES MAY NOT BE SOLD, ASSIGNED, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED
OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS IN THE OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY AN EXEMPTION FROM SUCH REGISTRATION UNDER THE
SECURITIES ACT IS APPLICABLE TO SUCH PROPOSED EXERCISE OR SALE, ASSIGNMENT,
PLEDGE, TRANSFER OR OTHER DISPOSITION.

                         CONVERTIBLE PROMISSORY NOTE

$100,000                                                        August 10, 2005
New York, New York

      FOR VALUE RECEIVED, Peak Entertainment Holdings, Inc., a Nevada
corporation (the "Borrower"), hereby promises to pay to CROWN NORTHERN WAY
CAPITAL, LLC (the "Holder"), the sum of $100,000 on November 8, 2005 (the
"Maturity Date"), together with accrued interest. Borrower shall repay the
principal and any accrued but unpaid interest due upon this Note on the Maturity
Date, by check or wire transfer to the person who is the registered holder of
this Note. Whenever any payment to be made hereunder falls due on a Saturday,
Sunday or business holiday in New York, New York, such payment may be made on
the next succeeding business day and such extension of time will, in such case,
be included in computing interest, if any, in connection with such payment.

      Interest shall accrue on the principal amount of the Note at a fixed
simple rate of ten percent (10%) per year, calculated on the actual number of
days elapsed on the basis of a 360 day year.

      Until and including on the Maturity Date, the Holder shall have the right
to convert the full unpaid principal and interest of this Promissory Note into
fully paid and nonassessable shares of Borrower's common stock. The conversion
price shall be $0.30 per share (the "Conversion Price"). Any fractional shares
issuable upon conversion of this Note shall be rounded down to the nearest whole
share.

      The Conversion Price and the number of shares issuable upon conversion
shall be proportionally adjusted for an Adjustment Event, as defined herein. The
term "Adjustment Event" shall mean any stock split, reverse stock split, stock
dividend, reclassification of the common stock, recapitalization, merger or
consolidation, or like capital adjustment affecting the number of common stock
of the Borrower outstanding. The good faith determination by the Board of
Directors as to what adjustments, amendments or arrangements shall be made to
the Conversion Price, and the extent thereof, shall be final and conclusive,
provided that the Conversion Price is adjusted in a manner that is no less
favorable than the manner of adjustment used as to any other person with similar
adjustment rights.

      Conversion of all or a part of this Note shall be effectuated by
submitting a written notice, in the name of the Holder stated in Schedule 1
hereto (the "Notice of Conversion"), executed by the Holder evidencing such
Holder's intention to convert this Note or a specified portion hereof. No
fraction of a share or scrip representing a fraction of a share will be issued
on conversion, but the number of shares issuable shall be rounded down to the
nearest whole share. The date on which Notice of Conversion is given (the
"Conversion Date") shall be deemed to be the date on which the Borrower first
receives the Notice of Conversion. Certificates representing Common Stock upon
conversion will be delivered to the Holder within three (3) trading days,
subject to reasonable delay for processing by the Borrower's transfer agent if
any, from the date the Notice of Conversion is delivered to the Borrower
("Delivery Date"). Delivery of shares upon conversion shall be made to the
address specified by the Holder in the Notice of Conversion.

                                       1
<PAGE>

      The obligations of Borrower for repayment of principal and payment of
interest on maturity are secured by a subordinated lien on intellectual property
of the Company, that is subordinate to the liens of prior lenders as described
in the Borrower's public filings.

      Any notice herein required or permitted to be given shall be in writing
and sent by means of certified or registered mail, express mail, or other
overnight delivery service, hand delivery confirmed by signed receipt or
facsimile transmission (followed by prompt transmission of the original of such
notice by any of the foregoing means) in each case proper postage or other
charges pre-paid and addressed or directed to the Holder or to the Borrower as
the address set forth in the Securities Purchase Agreement. Such notice shall be
deemed given when actually received. Both the Holder and Borrower may change the
address and fax number for notices by service of notice to the other as herein
provided.

      The following shall constitute an "Event of Default":

            (a)   The Borrower fails to issue shares of Common Stock to the
                  Holder or to cause its Transfer Agent to issue shares of
                  Common Stock upon proper exercise by the Holder of the
                  conversion rights of the Holder in accordance with the terms
                  of this Note; or
            (b)   The Borrower shall, without cause, fail to perform or observe,
                  in any material respect, any other material covenant, term,
                  provision, condition, agreement or obligation of the Borrower
                  under the Securities Purchase Agreement and such failure shall
                  continue uncured for a period of thirty days after written
                  notice from the Holder of such failure; or

      Borrower waives demand for payment, notice of nonpayment, presentment,
notice of dishonor, protest, and notice of protest. If default is made in the
payment of this Promissory Note, Borrower shall pay the Holder hereof, interest
at 20%, costs of collection, and including reasonable attorneys' fees.

      This Promissory Note shall be governed by the internal laws of the State
of New York. Any proceedings related to this Promissory Note shall be brought in
New York County in the State of New York.

      This Promissory Note is the entire agreement between the parties and
neither party is relying on any prior or contemporaneous representation or
promise, or any omission of any information, in entering into this Promissory
Note.

                           [signature page follows]

                                       2
<PAGE>

      IN WITNESS WHEREOF, Borrower has caused this Promissory Note to be signed
in its name by its duly authorized representative on the date first written.

                              PEAK ENTERTAINMENT HOLDINGS, INC.

                              By:   /s/ Wilf Shorrocks
                                 ----------------------------
                              Name:  Wilf Shorrocks
                              Title:  Chief Executive Officer

                                       3
<PAGE>

                                  SCHEDULE 1

                              NOTICE OF CONVERSION

 (To be Executed by the Registered Holder in order to Convert the Debentures)

      The undersigned hereby irrevocably elects to convert $ ________________ of
the principal amount of the above Note, dated August 10, 2005 into Shares of
Common Stock of PEAK ENTERTAINMENT HOLDINGS, INC. (the "Company") according to
the conditions hereof, as of the date written below.

Date of Conversion:
                   -----------------------------------------------------

Conversion Price:
                 -------------------------------------------------------

Accrued Interest:
                 -------------------------------------------------------

Number of Shares of Common Stock to be Issued:
                                              --------------------------

Name:
     -------------------------------------------------------------------

Signature:
          --------------------------------------------------------------

Address:
        ----------------------------------------------------------------

                                       4
<PAGE>

                                                                       EXHIBIT B

THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. EXCEPT AS
OTHERWISE SET FORTH HEREIN, OR IN THE SECURITIES PURCHASE AGREEMENT, NEITHER
THIS WARRANT NOR ANY OF SUCH SHARES MAY BE SOLD, PLEDGED, TRANSFERRED, ASSIGNED,
ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR SUCH SECURITIES UNDER SAID ACT OR, AN OPINION OF COUNSEL, IN FORM,
SUBSTANCE AND SCOPE, CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE
TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD
PURSUANT TO RULE 144 UNDER SUCH ACT.

                      PEAK ENTERTAINMENT HOLDINGS, INC.

                        COMMON STOCK PURCHASE WARRANT
               RIGHT TO PURCHASE 333,333 SHARES OF COMMON STOCK
                       EXERCISE PRICE: $0.30 PER SHARE

Warrant No. 081005.1

      THIS CERTIFIES THAT, for value received, CROWN NORTHERN WAY CAPITAL, LLC
(the "Holder"), is entitled, upon the terms and subject to the conditions
hereinafter set forth, at any time on or after the closing of the related
Securities Purchase Agreement (the "Initial Exercise Date") entered into Peak
Entertainment Holdings, Inc., a Nevada corporation (the "Company") and the
Holder, as of even date, and on or prior to the close of business on the third
year anniversary of this Warrant (the "Termination Date"), but not thereafter,
to subscribe for and purchase from the Company, up to 333,333 fully paid and
nonassessable shares of the Company's Common Stock (the "Common Stock"), at the
exercise price of $0.30 per share (the "Exercise Price"). The Exercise Price and
the number of shares for which this Warrant is exercisable shall be subject to
adjustment as provided herein. In the event of any conflict between the terms of
this Warrant and the Securities Purchase Agreement, the Securities Purchase
Agreement shall control. Capitalized terms used and not otherwise defined herein
shall have the meanings set forth for such terms in the Securities Purchase
Agreement.

      1. Title to Warrant. Prior to the Termination Date and subject to
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company by the
holder hereof in person or by duly authorized attorney, upon surrender of this
Warrant together with the Assignment Form annexed hereto, properly endorsed.

      2. Authorization of Shares. The Company covenants that all shares of
Common Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant, be duly
authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).

      3. Exercise of Warrant. Except as provided in Sections 4 and 5 herein,
exercise of the purchase rights represented by this Warrant may be made at any
time or times on or after the Initial Exercise Date, and before the close of
business on the Termination Date by the surrender of this Warrant and the Notice
of Exercise Form annexed hereto, duly executed, at the office of the Company (or
such other office or agency of the Company as it may designate by notice in
writing to the registered holder hereof at the address of such holder appearing
on the books of the Company) and upon payment of the Exercise Price of the
shares thereby purchased by wire transfer or cashier's check drawn on a United
States bank, the holder of this Warrant shall be entitled to receive a
certificate for the number of shares of Common Stock so purchased. Certificates
for shares purchased hereunder shall be delivered to the Holder hereof within
three (3) Trading Days after the date on which this Warrant shall have been
exercised as aforesaid. This Warrant shall be deemed to have been exercised and
such certificate or certificates shall be deemed to have been issued, and the
Holder or any other person so designated to be named therein shall be deemed to
have become a holder of record of such shares for all purposes, as of the date
this Warrant has been exercised by payment

                                       1
<PAGE>

to, and receipt thereof by, the Company of the Exercise Price and all taxes
required to be paid by Holder, if any, pursuant to Section 5 herein prior to the
issuance of such shares. If this Warrant shall have been exercised in part, the
Company shall, at the time of delivery of the certificate or certificates
representing Warrant Shares, deliver to Holder a new Warrant evidencing the
rights of Holder to purchase the unpurchased shares of Common Stock called for
by this Warrant, which new warrant shall in all other respects be identical with
this Warrant.

      4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. As to any fraction of a share which Holder would otherwise be entitled
to purchase upon such exercise, the Company shall pay a cash adjustment in
respect of such final fraction in an amount equal to the Exercise Price.

      5. Limitation on Exercise of Warrant. In no event shall the Holder be
permitted to exercise this Warrant for shares of Common Stock in excess of the
amount of this Warrant upon the exercise of which, (x) the number of shares of
Common Stock beneficially owned by such Holder (other than shares of Common
Stock issuable upon exercise of this Warrant) plus (y) the number of shares of
Common Stock issuable upon exercise of this Warrant, would be equal to or exceed
4.9% of the number of shares of Common Stock then issued and outstanding,
including shares issuable upon exercise of this Warrant held by such Holder
after application of this Section 5. As used herein, beneficial ownership shall
be determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder. To the extent that
the limitation contained in this Section 5 applies, the determination of whether
this Warrant is exercisable (in relation to other securities owned by the
Holder) and which portion of this Warrant is exercisable shall be in the sole
discretion of such Holder, and the submission of a Notice of Exercise shall be
deemed to be such Holder's determination of whether this Warrant is exercisable
(in relation to other securities owned by such Holder) and of which portion of
this Warrant is exercisable, in each case subject to such aggregate percentage
limitation, and the Company shall have no obligation to verify or confirm the
accuracy of such determination. Nothing contained herein shall be deemed to
restrict the right of a Holder to exercise this Warrant into shares of Common
Stock at such time as such exercise will not violate the provisions of this
Section 5. The provisions of this Section 5 may be waived by the Holder of this
Warrant upon not less than 75 days' prior notice to the Company, and the
provisions of this Section 5 shall continue to apply until such 75th day (or
such later date as may be specified in such notice of waiver). No exercise of
this Warrant in violation of this Section 5, but otherwise in accordance with
this Warrant, shall affect the status of the Common Stock issued upon such
exercise as validly issued, fully-paid and nonassessable.

      6. Charges, Taxes and Expenses. Issuance of certificates for shares of
Common Stock upon the exercise of this Warrant shall be made without charge to
the Holder hereof for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the Holder of this Warrant, or in such name or names as may be directed by
the holder of this Warrant; provided, however, that in the event certificates
for shares of Common Stock are to be issued in a name other than the name of the
Holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto, duly executed by the Holder
hereof; and the Company may require, as a condition thereto, the payment of a
sum sufficient to reimburse it for any transfer tax incidental thereto.

      7. Closing of Books. The Company will not close its shareholder books or
records in any manner which prevents the timely exercise of this Warrant.

      8. Transfer, Division and Combination.

            (a) Subject to compliance with any applicable securities laws,
transfer of this Warrant and all rights hereunder, in whole or in part, shall be
registered on the books of the Company to be maintained for such purpose, upon
surrender of this Warrant at the principal office of the Company, together with
a written assignment of this Warrant substantially in the form attached hereto
duly executed by Holder or its agent or attorney and funds sufficient to pay any
transfer taxes payable upon the making of such transfer. Upon such surrender
and, if required, such payment, the Company shall execute and deliver a new
warrant or warrants in the name of the assignee or assignees and in the
denomination or denominations specified in such instrument of assignment, and
shall issue to

                                       2
<PAGE>

the assignor a new warrant evidencing the portion of this Warrant not so
assigned, and this Warrant shall promptly be cancelled. This Warrant, if
properly assigned, may be exercised by a new holder for the purchase of shares
of Common Stock without having a new warrant issued.

            (b) This Warrant may be divided or combined with other Warrants upon
presentation hereof at the aforesaid office of the Company, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued, signed by Holder or its agent or attorney. Subject to compliance
with Section 8(a), as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new Warrant or Warrants in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.

            (c) The Company shall prepare, issue and deliver at its own expense
(other than transfer taxes) the new Warrant or Warrants under this Section 8.

            (d) The Company agrees to maintain, at its aforesaid office, books
for the registration and the registration of transfer of the Warrants.

      9. No Rights as Shareholder until Exercise. This Warrant does not entitle
the Holder hereof to any voting rights or other rights as a shareholder of the
Company prior to the exercise hereof. Upon the surrender of this Warrant and the
payment of the aggregate Exercise Price, the Warrant Shares so purchased shall
be and be deemed to be issued to such Holder as the record owner of such shares
as of the close of business on the later of the date of such surrender or
payment.

      10. Loss, Theft, Destruction or Mutilation of Warrant. The Company
covenants that upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Warrant certificate
or any stock certificate relating to the Warrant Shares, and in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it
(which shall not include the posting of any bond), and upon surrender and
cancellation of such Warrant or stock certificate, if mutilated, the Company
will make and deliver a new warrant or stock certificate of like tenor and dated
as of such cancellation, in lieu of such Warrant or stock certificate.

      11. Saturdays, Sundays, Holidays, etc. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a Saturday,
Sunday or legal holiday.

      12. Adjustments of Exercise Price and Number of Warrant Shares.

            (a) Stock Splits, etc. The number and kind of securities purchasable
upon the exercise of this Warrant and the Exercise Price shall be subject to
adjustment from time to time upon the happening of any of the following. In the
event that the Company shall (i) pay a dividend in shares of Common Stock or
make a distribution in shares of Common Stock to holders of its outstanding
Common Stock, (ii) subdivide its outstanding shares of Common Stock into a
greater number of shares of Common Stock, (iii) combine its outstanding shares
of Common Stock into a smaller number of shares of Common Stock, (iv) issue any
shares of its capital stock in a reclassification of the Common Stock, or (v)
otherwise transacts a similar adjustment to its class of Common Stock, then the
number of Warrant Shares purchasable upon exercise of this Warrant and the
Exercise Price immediately prior thereto shall be adjusted so that the holder of
this Warrant shall be entitled to receive the kind and number of Warrant Shares
or other securities of the Company which the holder would have owned or have
been entitled to receive had such Warrant been exercised in advance thereof.
Upon each such adjustment of the kind and number of Warrant Shares or other
securities of the Company which are purchasable hereunder, the holder of this
Warrant shall thereafter be entitled to purchase the number of Warrant Shares or
other securities resulting from such adjustment at an Exercise Price per Warrant
Share or other security obtained by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of Warrant Shares purchasable
pursuant hereto immediately prior to such adjustment and dividing by the number
of Warrant Shares or other securities of the Company resulting from such
adjustment. An adjustment made pursuant to this paragraph shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.

                                       3
<PAGE>

            (b) Reorganization, Reclassification, Merger, Consolidation or
Disposition of Assets. In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is a change in or distribution with respect to the Common Stock of the Company),
or sell, transfer or otherwise dispose of all or substantially all its property,
assets or business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation ("Other
Property"), are to be received by or distributed to the holders of Common Stock
of the Company, then the Holder shall have the right thereafter to receive, upon
exercise of this Warrant, the number of shares of common stock of the successor
or acquiring corporation or of the Company, if it is the surviving corporation,
and Other Property receivable upon or as a result of such reorganization,
reclassification, merger, consolidation or disposition of assets by a holder of
the number of shares of Common Stock for which this Warrant is exercisable
immediately prior to such event. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined in good faith by resolution of the Board of
Directors of the Company) in order to provide for adjustments of shares of
Common Stock for which this Warrant is exercisable which shall be as nearly
equivalent as practicable to the adjustments provided for in this Section 12.
For purposes of this Section 12, "common stock of the successor or acquiring
corporation" shall include stock of such corporation of any class which is not
preferred as to dividends or assets over any other class of stock of such
corporation and which is not subject to redemption and shall also include any
evidences of indebtedness, shares of stock or other securities which are
exercisable into or exchangeable for any such stock, either immediately or upon
the arrival of a specified date or the happening of a specified event and any
warrants or other rights to subscribe for or purchase any such stock. The
foregoing provisions of this Section 12 shall similarly apply to successive
reorganizations, reclassifications, mergers, consolidations or disposition of
assets.

            (c) Adjustment for Spin Off. If, for any reason, prior to the
exercise of this Warrant in full, the Company spins off or otherwise divests
itself of a part of its business or operations or disposes all or a part of its
assets in a transaction (the "Spin Off") in which the Company does not receive
compensation for such business, operations or assets, but causes securities of
another entity (the "Spin Off Securities") to be issued to security holders of
the Company, then

                  (A) the Company shall cause (i) to be reserved Spin Off
Securities equal to the number thereof which would have been issued to the
Holder had all of the Holder's unexercised Warrants outstanding on the record
date (the "Record Date") for determining the amount and number of Spin Off
Securities to be issued to security holders of the Company (the "Outstanding
Warrants") been exercised as of the close of business on the trading day
immediately before the Record Date (the "Reserved Spin Off Shares"), and (ii) to
be issued to the Holder on the exercise of all or any of the Outstanding
Warrants, such amount of the Reserved Spin Off Shares equal to (x) the Reserved
Spin Off Shares multiplied by (y) a fraction, of which (I) the numerator is the
amount of the Outstanding Warrants then being exercised, and (II) the
denominator is the amount of the Outstanding Warrants; and

                  (B) the Exercise Price on the Outstanding Warrants shall be
adjusted immediately after consummation of the Spin Off by multiplying the
Exercise Price by a fraction (if, but only if, such fraction is less than 1.0),
the numerator of which is the average Closing Bid Price of the Common Stock for
the five (5) trading days immediately following the fifth trading day after the
Record Date, and the denominator of which is the average Closing Bid Price of
the Common Stock on the five (5) trading days immediately preceding the Record
Date; and such adjusted Exercise Price shall be deemed to be the Exercise Price
with respect to the Outstanding Warrants after the Record Date.

      13. Voluntary Adjustment by the Company. The Company may at any time
during the term of this Warrant, reduce the then current Exercise Price to any
amount and for any period of time deemed appropriate by the Board of Directors
of the Company.

                                       4
<PAGE>

      14. Notice of Adjustment. Whenever the number of Warrant Shares or number
or kind of securities or other property purchasable upon the exercise of this
Warrant or the Exercise Price is adjusted, as herein provided, the Company shall
promptly send notice to the holder of this Warrant notice of such adjustment or
adjustments setting forth the number of Warrant Shares (and other securities or
property) purchasable upon the exercise of this Warrant and the Exercise Price
of such Warrant Shares (and other securities or property) after such adjustment,
setting forth a brief statement of the facts requiring such adjustment and
setting forth the computation by which such adjustment was made. Such notice, in
the absence of manifest error, shall be conclusive evidence of the correctness
of such adjustment.

      15. Redemption. Prior to the Termination Date, the Warrant shall be
redeemable, under the circumstances described in this Section, at the discretion
of the Company, for $.10 per warrant (the "Redemption Fee"). The Company's right
to redemption shall be exercisable commencing upon the day following the tenth
consecutive business day during which the Company's common stock has traded at
prices of, or in excess of, $1.00 per share, subject to adjustment for stock
splits, dividends, subdivisions, reclassification and the like, with weekly
volume of such trading being in excess of the total number of shares represented
by this Warrant. In the event the Company exercises its right to redeem the
Warrants, the Company shall give the Holder written notice of such decision. In
the event that the Holder does not exercise all or any part of the Warrants or
that the Company does not receive the Warrant from the Holder within 30 days
from the date on the notice to the Holder of the Company's intention to redeem
the Warrant, then the Warrant shall be deemed canceled, and the Holder shall not
be entitled to further exercise thereof or to the Redemption Fee.

      16. Notice of Corporate Action. If at any time:

            (a) the Company shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend or other
distribution, or any right to subscribe for or purchase any evidences of its
indebtedness, any shares of stock of any class or any other securities or
property, or to receive any other right, or

            (b) there shall be any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
consolidation or merger of the Company with, or any sale, transfer or other
disposition of all or substantially all the property, assets or business of the
Company to, another corporation or,

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

then, in any one or more of such cases, the Company shall give to the Holder (i)
at least 30 days' prior written notice of the date on which a record date shall
be selected for such dividend, distribution or right or for determining rights
to vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, liquidation or winding up, and (ii)
in the case of any such reorganization, reclassification, merger, consolidation,
sale, transfer, disposition, dissolution, liquidation or winding up, at least 30
days' prior written notice of the date when the same shall take place. Such
notice in accordance with the foregoing clause also shall specify (i) the date
on which any such record is to be taken for the purpose of such dividend,
distribution or right, the date on which the holders of Common Stock shall be
entitled to any such dividend, distribution or right, and the amount and
character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such disposition, dissolution, liquidation or winding
up. Each such written notice shall be sufficiently given if addressed to the
Holder at the last address of the Holder appearing on the books of the Company
and delivered in accordance with Section 18(d).

      17. Authorized Shares. The Company covenants that during the period the
Warrant is outstanding, it will reserve from its authorized and unissued Common
Stock a sufficient number of shares to provide for the issuance of the Warrant
Shares upon the exercise of any purchase rights under this Warrant. The Company
further covenants that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the Warrant
Shares upon the

                                       5
<PAGE>

exercise of the purchase rights under this Warrant. The Company will take all
such reasonable action as may be necessary to assure that such Warrant Shares
may be issued as provided herein without violation of any applicable law or
regulation, or of any requirements of the OTCBB or other market upon which the
Common Stock may be listed.

            The Company shall not by any action, including, without limitation,
amending its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such actions as may be necessary or appropriate to protect the rights of the
Holder against impairment. Without limiting the generality of the foregoing, the
Company will (a) take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant, and (b)
use its best efforts to obtain all such authorizations, exemptions or consents
from any public regulatory body having jurisdiction thereof as may be necessary
to enable the Company to perform its obligations under this Warrant.

      18. Miscellaneous.

            (a) Jurisdiction. This Warrant shall be binding upon any successors
or assigns of the Company. This Warrant shall constitute a contract under the
laws of New York without regard to its conflict of law, principles or rules, and
be subject to governing law provisions set forth in the Securities Purchase
Agreement.

            (b) Restrictions. The holder hereof acknowledges that the Warrant
Shares acquired upon the exercise of this Warrant, if not registered, will have
restrictions upon resale imposed by state and federal securities laws.

            (c) Nonwaiver and Expenses. No course of dealing or any delay or
failure to exercise any right hereunder on the part of the Holder shall operate
as a waiver of such right or otherwise prejudice the Holder's rights, powers or
remedies, notwithstanding all rights hereunder terminate on the Termination
Date. If the Company fails to comply with any provision of this Warrant, the
Company shall pay to the Holder such amounts as shall be sufficient to cover any
costs and expenses including, but not limited to, reasonable attorneys' fees,
including those of appellate proceedings, incurred by the Holder in collecting
any amounts due pursuant hereto or in otherwise enforcing any of its rights,
powers or remedies hereunder.

            (d) Notices. Any notice, request or other document required or
permitted to be given or delivered to the Holder hereof by the Company shall be
delivered in accordance with the notice provisions of the Securities Purchase
Agreement.

            (e) Limitation of Liability. No provision hereof, in the absence of
affirmative action by the Holder to purchase shares of Common Stock, and no
enumeration herein of the rights or privileges of the Holder hereof, shall give
rise to any liability of the Holder for the purchase price of any Common Stock
or as a stockholder of the Company, whether such liability is asserted by the
Company or by creditors of the Company.

            (f) Remedies. The Holder, in addition to being entitled to exercise
all rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Warrant.

            (g) Successors and Assigns. Subject to applicable securities laws,
this Warrant and the rights and obligations evidenced hereby shall inure to the
benefit of and be binding upon the successors of the Company and the successors
and permitted assigns of the Holder. The provisions of this Warrant are intended
to be for the benefit of all Holders from time to time of this Warrant and shall
be enforceable by any such Holder or holder of Warrant Shares.

            (h) Indemnification. The Company agrees to indemnify and hold
harmless the Holder from and against any liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees,
expenses and disbursements of any kind which may be imposed upon, incurred by or
asserted against the

                                       6
<PAGE>

Holder in any manner relating to or arising out of any failure by the Company to
perform or observe in any material respect any of its covenants, agreements,
undertakings or obligations set forth in this Warrant; provided, however, that
the Company will not be liable hereunder to the extent that any liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, claims,
costs, attorneys' fees, expenses or disbursements are found in a final
non-appealable judgment by a court to have resulted from the holder's
negligence, bad faith or willful misconduct in its capacity as a stockholder or
warrantholder of the Company.

            (i) Amendment. This Warrant may be modified or amended or the
provisions hereof waived with the written consent of the Company and the Holder.

            (j) Severability. Wherever possible, each provision of this Warrant
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provisions of this Warrant.

            (k) Headings. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.

            (l) Piggyback Registration Rights. The initial Holder of this
Warrant is entitled to the benefit of certain registration rights with respect
to the shares of Common Stock issuable upon the exercise of this Warrant. If the
Company, at any time from the date of this Warrant through the date of
expiration of this Warrant, proposes to register any of its securities under the
Securities Act for sale to the public, whether for its own account or for the
account of other security holders or both (except with respect to registration
statements on Forms S-4, S-8 and any successor forms thereto), each such time
the Company will give written notice to such effect to the Holder at least 30
days prior to such filing. Upon the written request of Holder, received by the
Company within 30 days after the giving of any such notice by the Company, to
register any of the shares of Common Stock underlying this Warrant, the Company
will cause, at Company's expenses, such underlying shares of Common Stock to be
covered by the registration statement proposed to be filed by the Company, all
to the extent requisite to permit the sale or other disposition by the holder of
such shares so registered.

                           [signature page follows]

                                       7
<PAGE>

      IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its officer thereunto duly authorized.

Dated:  August 10, 2005

                                    Peak Entertainment Holdings, Inc.

                                    By:   /s/ Wilf Shorrocks
                                       --------------------------------
                                          Wilf Shorrocks
                                          President and Chief Executive Officer

                                       8
<PAGE>

                              NOTICE OF EXERCISE

To:   Peak Entertainment Holdings, Inc.

      The undersigned hereby elects to purchase ________ shares of Common Stock
(the "Common Stock"), at an exercise price of $0.30 per share, of Peak
Entertainment Holdings, Inc. pursuant to the terms of the attached Warrant,
Warrant No. 081005.1, and tenders herewith payment of the exercise price in
full, in the amount of $_____________, together with all applicable transfer
taxes, if any.

      Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other name as is
specified below:

                  -------------------------------
                  (Name)

                  -------------------------------
                  (Address)
                  -------------------------------

Dated:
      ------------------

                                          ------------------------------
                                          Signature

                                       9
<PAGE>

                               ASSIGNMENT FORM

(To assign the foregoing warrant, execute this form and supply required
information. Do not use this form to exercise the warrant.)

      FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby
are hereby assigned to ___________________________________ whose address is
_________________________.

Dated:__________________

                  Holder's Signature:     _____________________________

                  Holder's Address:       _____________________________

                                          _____________________________

Signature Guaranteed:  ___________________________________________

NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.

                                       10

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