Document:

EXHIBIT 4.3

                          SECURITIES PURCHASE AGREEMENT

         SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of April 22,
2003, by and among Palladium Communications, Inc. a Nevada corporation, with
headquarters located at 416 W. Muhammad Ali Boulevard, Louisville, Kentucky
40202 (the "Company"), and each of the purchasers set forth on the signature
pages hereto (the "Buyers").

         WHEREAS:

         A. The Company and the Buyers 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. Buyers desire to purchase and the Company desires to issue and sell,
upon the terms and conditions set forth in this Agreement (i) 12% convertible
debentures of the Company, in the form attached hereto as Exhibit "A", in the
aggregate principal amount of Seven Hundred Eighty-Five Thousand Dollars
($785,000) (together with any debenture(s) issued in replacement thereof or as a
dividend thereon or otherwise with respect thereto in accordance with the terms
thereof, the "Debentures"), convertible into shares of common stock, par value
$.001 per share, of the Company (the "Common Stock"), upon the terms and subject
to the limitations and conditions set forth in such Debentures and (ii)
warrants, in the form attached hereto as Exhibit "B", to purchase One Million
Five Hundred Seventy Thousand (1,570,000) shares of Common Stock (the
"Warrants").

         C. Each Buyer wishes to purchase, upon the terms and conditions stated
in this Agreement, such principal amount of Debentures and number of Warrants as
is set forth immediately below its name on the signature pages hereto; and

         D. Contemporaneous with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement,
in the form attached hereto as Exhibit "C" (the "Registration Rights
Agreement"), pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.

         NOW THEREFORE, the Company and each of the Buyers severally (and not
jointly) hereby agree as follows:

         1. PURCHASE AND SALE OF DEBENTURES AND WARRANTS.

             a. Purchase of Debentures and Warrants. On the Closing Date (as
defined below), the Company shall issue and sell to each Buyer and each Buyer
severally agrees to purchase from the Company such principal amount of
Debentures and number of Warrants as is set forth immediately below such Buyer's
name on the signature pages hereto.

             b. Form of Payment. On the Closing Date (as defined below), (i)
each Buyer shall pay the purchase price for the Debentures and the Warrants to
be issued and sold to it at the Closing (as defined below) (the "Purchase
Price") by wire transfer of immediately available funds to the Company, in
accordance with the Company's written wiring instructions, against delivery of
the Debentures in the principal amount equal to the Purchase Price and the
number of Warrants as is set forth immediately below such Buyer's name on the
signature pages hereto, and (ii) the Company shall deliver such Debentures and
Warrants duly executed on behalf of the Company, to such Buyer, against delivery
of such Purchase Price.

<PAGE>

             c. Closing Date. Subject to the satisfaction (or written waiver) of
the conditions thereto set forth in Section 6 and Section 7 below, the date and
time of the issuance and sale of the Debentures and the Warrants pursuant to
this Agreement (the "Closing Date") shall be 12:00 noon, Eastern Standard Time
on April 22, 2003, or such other mutually agreed upon time. The closing of the
transactions contemplated by this Agreement (the "Closing") shall occur on the
Closing Date at such location as may be agreed to by the parties.

         2. BUYERS' REPRESENTATIONS AND WARRANTIES. Each Buyer severally (and
not jointly) represents and warrants to the Company solely as to such Buyer
that:

             a. Investment Purpose. As of the date hereof, the Buyer is
purchasing the Debentures and the shares of Common Stock issuable upon
conversion of or otherwise pursuant to the Debentures (including, without
limitation, such additional shares of Common Stock, if any, as are issuable (i)
on account of interest on the Debentures, (ii) as a result of the events
described in Sections 1.3 and 1.4(g) of the Debentures and Section 2(c) of the
Registration Rights Agreement or (iii) in payment of the Standard Liquidated
Damages Amount (as defined in Section 2(f) below) 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
Debentures, 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, the
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. The Buyer is an "accredited
investor" as that term is defined in Rule 501(a) of Regulation D (an "Accredited
Investor").

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

             d. Information. The Buyer and its advisors, if any, have been, and
for so long as the Debentures and Warrants remain outstanding will continue to
be, furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Securities which have been requested by the Buyer or its advisors. The Buyer and
its advisors, if any, have been, and for so long as the Debentures and Warrants
remain outstanding will continue to be, afforded the opportunity to ask
questions of the Company. Notwithstanding the foregoing, the Company has not
disclosed to the Buyer any material nonpublic information and will not disclose
such information unless such information is disclosed to the public prior to or
promptly following such disclosure to the Buyer. Neither such inquiries nor any
other due diligence investigation conducted by Buyer or any of its advisors or
representatives shall modify, amend or affect Buyer's right to rely on the
Company's representations and warranties contained in Section 3 below. The Buyer
understands that its investment in the Securities involves a significant degree
of risk.

             e. Governmental Review. The 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.

<PAGE>

             f. Transfer or Re-sale. The Buyer understands that (i) except as
provided in the Registration Rights Agreement, the sale or re-sale of the
Securities has not been and is not being registered under the 1933 Act or any
applicable state securities laws, and the Securities may not be transferred
unless (a) the Securities are sold pursuant to an effective registration
statement under the 1933 Act, (b) the 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, which opinion shall be accepted by 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 the Buyer
who agrees to sell or otherwise transfer the Securities only in accordance with
this Section 2(f) and who is an Accredited Investor, (d) the Securities are sold
pursuant to Rule 144, or (e) the Securities are sold pursuant to Regulation S
under the 1933 Act (or a successor rule) ("Regulation S"), and the 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,
which opinion shall be accepted by 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 register such Securities
under the 1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder (in each case, other than pursuant to the
Registration Rights Agreement). Notwithstanding the foregoing or anything else
contained herein to the contrary, the Securities may be pledged as collateral in
connection with a bona fide margin account or other lending arrangement. In the
event that the Company does not accept the opinion of counsel provided by the
Buyer with respect to the transfer of Securities pursuant to an exemption from
registration, such as Rule 144 or Regulation S, within three (3) business days
of delivery of the opinion to the Company, the Company shall pay to the Buyer
liquidated damages of three percent (3%) of the outstanding amount of the
Debentures per month plus accrued and unpaid interest on the Debentures,
prorated for partial months, in cash or shares at the option of the Buyer
("Standard Liquidated Damages Amount"). If the Buyer elects to be paid the
Standard Liquidated Damages Amount in shares of Common Stock, such shares shall
be issued at the Conversion Price at the time of payment.

             g. Legends. The Buyer understands that the Debentures and the
Warrants and, until such time as the Conversion Shares and Warrant Shares have
been registered under the 1933 Act as contemplated by the Registration Rights
Agreement or otherwise may be sold pursuant to Rule 144 or Regulation S without
any restriction as to the number of securities as of a particular date that can
then be immediately sold, the Conversion Shares and Warrant Shares may bear a
restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of the certificates for such Securities):

           "The securities represented by this certificate have not been
           registered under the Securities Act of 1933, as amended. The
           securities may not be sold, transferred or assigned in the absence of
           an effective registration statement for the securities under said
           Act, or an opinion of counsel, 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 or
           Regulation S under said Act."

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

             h. Authorization; Enforcement. This Agreement and the Registration
Rights Agreement have been duly and validly authorized. This Agreement has been
duly executed and delivered on behalf of the Buyer, and this Agreement
constitutes, and upon execution and delivery by the Buyer of the Registration
Rights Agreement, such agreement will constitute, valid and binding agreements
of the Buyer enforceable in accordance with their terms.

<PAGE>

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

         3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Buyer that:

             a. Organization and Qualification. The Company and each of its
Subsidiaries (as defined below), if any, is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is incorporated, with full power and authority (corporate and other) to
own, lease, use and operate its properties and to carry on its business as and
where now owned, leased, used, operated and conducted. Schedule 3(a) sets forth
a list of all of the Subsidiaries of the Company and the jurisdiction in which
each is incorporated. The Company and each of its Subsidiaries is duly qualified
as a foreign corporation to do business and is in good standing in every
jurisdiction in which its ownership or use of property or the nature of the
business conducted by it makes such qualification necessary except where the
failure to be so qualified or in good standing would not have a Material Adverse
Effect. "Material Adverse Effect" means any material adverse effect on 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. (i) The Company has all requisite
corporate power and authority to enter into and perform this Agreement, the
Registration Rights Agreement, the Debentures and the Warrants and to consummate
the transactions contemplated hereby and thereby and to issue the Securities, in
accordance with the terms hereof and thereof, (ii) the execution and delivery of
this Agreement, the Registration Rights Agreement, the Debentures and the
Warrants by the Company and the consummation by it of the transactions
contemplated hereby and thereby (including without limitation, the issuance of
the Debentures and the Warrants and the issuance and reservation for issuance of
the Conversion Shares and Warrant Shares issuable upon conversion or exercise
thereof) have been duly authorized by the Company's Board of Directors and no
further consent or authorization of the Company, its Board of Directors, or its
shareholders is required, (iii) this Agreement has been duly executed and
delivered by the Company by its authorized representative, 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, and (iv) this Agreement constitutes, and upon execution
and delivery by the Company of the Registration Rights Agreement, the Debentures
and the Warrants, each of such instruments will constitute, a legal, valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms.

             c. Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of (i) 900,000,000 shares of Common Stock, of
which 2,119,076 shares are issued and outstanding, no shares are reserved for
issuance pursuant to the Company's stock option plans, no shares are reserved
for issuance pursuant to securities (other than the Debentures and the Warrants)
exercisable for, or convertible into or exchangeable for shares of Common Stock
and 104,666,667 shares are reserved for issuance upon conversion of the
Debentures and the Additional Debentures (as defined in Section 4(l)) and
exercise of the Warrants and the Additional Warrants (as defined in Section
4(l)) (subject to adjustment pursuant to the Company's covenant set forth in
Section 4(h) below); and (ii) no shares of preferred stock. All of such
outstanding 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 disclosed in
Schedule 3(c), as of the effective date of this Agreement, (i) there are no
outstanding options, warrants, scrip, rights to subscribe for, puts, calls,
rights of first refusal, agreements, understandings, claims or other commitments
or rights of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for any shares of capital stock of the Company
or any of its Subsidiaries, or arrangements by which the Company or any of its
Subsidiaries is or may become bound to issue additional shares of capital stock
of the Company or any of its Subsidiaries, (ii) there are no agreements or
arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of its or their securities under the 1933 Act (except
the Registration Rights Agreement) and (iii) there are no anti-dilution or price
adjustment provisions contained in any security issued by the Company (or in any
agreement providing rights to security holders) that will be triggered by the
issuance of the Debentures, the Warrants, the Conversion Shares or Warrant
Shares. The Company has furnished to the Buyer true and correct copies of the
Company's Articles of Incorporation as in effect on the date hereof ("Articles
of Incorporation"), the Company's By-laws, as in effect on the date hereof (the
"By-laws"), and the terms of all securities convertible into or exercisable for
Common Stock of the Company and the material rights of the holders thereof in
respect thereto. The Company shall provide the Buyer with a written update of
this representation signed by the Company's Chief Executive or Chief Financial
Officer on behalf of the Company as of the Closing Date.

<PAGE>

             d. Issuance of Shares. The Conversion Shares and Warrant Shares are
duly authorized and reserved for issuance and, upon conversion of the Debentures
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 and will not impose personal liability upon the holder thereof.

             e. Acknowledgment of Dilution. The Company understands and
acknowledges the potentially dilutive effect to the Common Stock upon the
issuance of the Conversion Shares 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
Debentures or exercise of the Warrants in accordance with this Agreement, the
Debentures 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, the Registration Rights Agreement, the Debentures and the Warrants 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 Articles of Incorporation
or By-laws or (ii) violate or conflict with, or result in a breach of any
provision of, or constitute a default (or an event which with notice or lapse of
time or both could become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any 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 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 or any third party in order for it to execute, deliver or
perform any of its obligations under this Agreement, the Registration Rights
Agreement, the Debentures or the Warrants in accordance with the terms hereof or
thereof or to issue and sell the Debentures and Warrants in accordance with the
terms hereof and to issue the Conversion Shares upon conversion of the
Debentures and the Warrant Shares upon exercise of the Warrants. Except as
disclosed in Schedule 3(f), all consents, authorizations, orders, filings and
registrations which the Company is required to obtain pursuant to the preceding
sentence have been obtained or effected on or prior to the date hereof. The
Company is not in violation of the listing requirements of the Over-the-Counter
Bulletin Board (the "OTCBB") and does not reasonably anticipate that the Common
Stock will be delisted by the OTCBB in the foreseeable future. The Company and
its Subsidiaries are unaware of any facts or circumstances which might give rise
to any of the foregoing.

<PAGE>

             g. SEC Documents; Financial Statements. Except as disclosed in
Schedule 3(g), the Company has timely filed all reports, schedules, forms,
statements and other documents required to be filed by it with the SEC pursuant
to the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "1934 Act") (all of the foregoing filed prior to the date hereof and all
exhibits included therein and financial statements and schedules thereto and
documents (other than exhibits to such documents) incorporated by reference
therein, being hereinafter referred to herein as the "SEC Documents"). The
Company has delivered to each Buyer true and complete copies of the SEC
Documents, except for such exhibits and incorporated documents. As of their
respective dates, the SEC Documents complied in all material respects with the
requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. None of the
statements made in any such SEC Documents is, or has been, required to be
amended or updated under applicable law (except for such statements as have been
amended or updated in subsequent filings prior the date hereof). As of their
respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto. Such financial statements have been prepared in accordance with
United States generally accepted accounting principles, consistently applied,
during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto, or (ii) in the case of unaudited
interim statements, to the extent they may not include footnotes or may be
condensed or summary statements) and fairly present in all material respects the
consolidated financial position of the Company and its consolidated Subsidiaries
as of the dates thereof and the consolidated results of their operations and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments). Except as set forth in the
financial statements of the Company included in the SEC Documents, the Company
has no liabilities, contingent or otherwise, other than (i) liabilities incurred
in the ordinary course of business subsequent to June 30, 2002 and (ii)
obligations under contracts and commitments incurred in the ordinary course of
business and not required under generally accepted accounting principles to be
reflected in such financial statements, which, individually or in the aggregate,
are not material to the financial condition or operating results of the Company.

             h. Absence of Certain Changes. Since June 30, 2002, 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.

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

<PAGE>

             j. Patents, Copyrights, etc.

                (i) The Company and each of its Subsidiaries owns or possesses
the requisite licenses or rights to use all patents, patent applications, patent
rights, inventions, know-how, trade secrets, trademarks, trademark applications,
service marks, service names, trade names and copyrights ("Intellectual
Property") necessary to enable it to conduct its business as now operated (and,
except as set forth in Schedule 3(j) hereof, to the best of the Company's
knowledge, as presently contemplated to be operated in the future); there is no
claim or action by any person pertaining to, or proceeding pending, or to the
Company's knowledge threatened, which challenges the right of the Company or of
a Subsidiary with respect to any Intellectual Property necessary to enable it to
conduct its business as now operated (and, except as set forth in Schedule 3(j)
hereof, to the best of the Company's knowledge, as presently contemplated to be
operated in the future); to the best of the Company's knowledge, the Company's
or its Subsidiaries' current and intended products, services and processes do
not infringe on any Intellectual Property or other rights held by any person;
and the Company is unaware of any facts or circumstances which might give rise
to any of the foregoing. The Company and each of its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of their Intellectual Property.

                (ii) All of the Company's computer software and computer
hardware, and other similar or related items of automated, computerized or
software systems that are used or relied on by the Company in the conduct of its
business or that were, or currently are being, sold or licensed by the Company
to customers (collectively, "Information Technology"), are Year 2000 Compliant.
For purposes of this Agreement, the term "Year 2000 Compliant" means, with
respect to the Company's Information Technology, that the Information Technology
is designed to be used prior to, during and after the calendar Year 2000, and
the Information Technology used during each such time period will accurately
receive, provide and process date and time data (including, but not limited to,
calculating, comparing and sequencing) from, into and between the 20th and 21st
centuries, including the years 1999 and 2000, and leap-year calculations, and
will not malfunction, cease to function, or provide invalid or incorrect results
as a result of the date or time data, to the extent that other information
technology, used in combination with the Information Technology, properly
exchanges date and time data with it. The Company has delivered to the Buyers
true and correct copies of all analyses, reports, studies and similar written
information, whether prepared by the Company or another party, relating to
whether the Information Technology is Year 2000 Compliant, if any.

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

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

<PAGE>

             m. Certain Transactions. Except as set forth on Schedule 3(m) and
except for arm's length transactions pursuant to which the Company or any of its
Subsidiaries makes payments in the ordinary course of business upon terms no
less favorable than the Company or any of its Subsidiaries could obtain from
third parties and other than the grant of stock options disclosed on Schedule
3(c), none of the officers, directors, or employees of the Company is presently
a party to any transaction with the Company or any of its Subsidiaries (other
than for services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any corporation, partnership, trust or other entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.

             n. Disclosure. All information relating to or concerning the
Company or any of its Subsidiaries set forth in this Agreement and provided to
the Buyers pursuant to Section 2(d) hereof and otherwise in connection with the
transactions contemplated hereby is true and correct in all material respects
and the Company has not omitted to state any material fact necessary in order to
make the statements made herein or therein, in light of the circumstances under
which they were made, not misleading. No event or circumstance has occurred or
exists with respect to the Company or any of its Subsidiaries or its or their
business, properties, prospects, operations or financial conditions, which,
under applicable law, rule or regulation, requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed (assuming for this purpose that the Company's reports filed under the
1934 Act are being incorporated into an effective registration statement filed
by the Company under the 1933 Act).

             o. Acknowledgment Regarding Buyers' Purchase of Securities. The
Company acknowledges and agrees that the Buyers are acting solely in the
capacity of arm's length purchasers with respect to this Agreement and the
transactions contemplated hereby. The Company further acknowledges that no Buyer
is acting as a financial advisor or fiduciary of the Company (or in any similar
capacity) with respect to this Agreement and the transactions contemplated
hereby and any statement made by any Buyer or any of their respective
representatives or agents in connection with this Agreement and the transactions
contemplated hereby is not advice or a recommendation and is merely incidental
to the Buyers' purchase of the Securities. The Company further represents to
each Buyer that the Company's decision to enter into this Agreement has been
based solely on the independent evaluation of the Company and its
representatives.

             p. No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales in any security or solicited any offers to
buy any security under circumstances that would require registration under the
1933 Act of the issuance of the Securities to the Buyers. The issuance of the
Securities to the Buyers will not be integrated with any other issuance of the
Company's securities (past, current or future) for purposes of any shareholder
approval provisions applicable to the Company or its securities.

             q. No Brokers. The Company has taken no action which would give
rise to any claim by any person for brokerage commissions, transaction fees or
similar payments relating to this Agreement or the transactions contemplated
hereby.

             r. Permits; Compliance. The Company and each of its Subsidiaries is
in possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, approvals and orders
necessary to own, lease and operate its properties and to carry on its business
as it is now being conducted (collectively, the "Company Permits"), and there is
no action pending or, to the knowledge of the Company, threatened regarding
suspension or cancellation of any of the Company Permits. Neither the Company
nor any of its Subsidiaries is in conflict with, or in default or violation of,
any of the Company Permits, except for any such conflicts, defaults or
violations which, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect. Since June 30, 2002, neither the
Company nor any of its Subsidiaries has received any notification with respect
to possible conflicts, defaults or violations of applicable laws, except for
notices relating to possible conflicts, defaults or violations, which conflicts,
defaults or violations would not have a Material Adverse Effect.

<PAGE>

             s. Environmental Matters.

                (i) Except as set forth in Schedule 3(s), there are, to the
Company's knowledge, with respect to the Company or any of its Subsidiaries or
any predecessor of the Company, no past or present violations of Environmental
Laws (as defined below), releases of any material into the environment, actions,
activities, circumstances, conditions, events, incidents, or contractual
obligations which may give rise to any common law environmental liability or any
liability under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 or similar federal, state, local or foreign laws and
neither the Company nor any of its Subsidiaries has received any notice with
respect to any of the foregoing, nor is any action pending or, to the Company's
knowledge, threatened in connection with any of the foregoing. The term
"Environmental Laws" means all federal, state, local or foreign laws relating to
pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata), including, without limitation, laws relating to emissions, discharges,
releases or threatened releases of chemicals, pollutants contaminants, or toxic
or hazardous substances or wastes (collectively, "Hazardous Materials") into the
environment, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous Materials,
as well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved thereunder.

                (ii) Other than those that are or were stored, used or disposed
of in compliance with applicable law, no Hazardous Materials are contained on or
about any real property currently owned, leased or used by the Company or any of
its Subsidiaries, and no Hazardous Materials were released on or about any real
property previously owned, leased or used by the Company or any of its
Subsidiaries during the period the property was owned, leased or used by the
Company or any of its Subsidiaries, except in the normal course of the Company's
or any of its Subsidiaries' business.

                (iii) Except as set forth in Schedule 3(s), there are no
underground storage tanks on or under any real property owned, leased or used by
the Company or any of its Subsidiaries that are not in compliance with
applicable law.

             t. Title to Property. The Company and its Subsidiaries have good
and marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its Subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in Schedule 3(t) or such
as would not have a Material Adverse Effect. Any real property and facilities
held under lease by the Company and its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as would not have
a Material Adverse Effect.

             u. Insurance. The Company and each of its Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its Subsidiaries are
engaged. Neither the Company nor any such Subsidiary has any reason to believe
that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not have a Material
Adverse Effect. The Company has provided to Buyer true and correct copies of all
policies relating to directors' and officers' liability coverage, errors and
omissions coverage, and commercial general liability coverage.

<PAGE>

             v. Internal Accounting Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient, in
the judgment of the Company's board of directors, to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.

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

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

             y. No Investment Company. The Company is not, and upon the issuance
and sale of the Securities as contemplated by this Agreement will not be an
"investment company" required to be registered under the Investment Company Act
of 1940 (an "Investment Company"). The Company is not controlled by an
Investment Company.

             z. Breach of Representations and Warranties by the Company. If the
Company breaches any of the representations or warranties set forth in this
Section 3, and in addition to any other remedies available to the Buyers
pursuant to this Agreement, the Company shall pay to the Buyer the Standard
Liquidated Damages Amount in cash or in shares of Common Stock at the option of
the Buyer, until such breach is cured. If the Buyers elect to be paid the
Standard Liquidated Damages Amounts in shares of Common Stock, such shares shall
be issued at the Conversion Price at the time of payment.

         4. COVENANTS.

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

             b. Form D; Blue Sky Laws. The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to each Buyer promptly after such filing. The Company shall, on or
before the Closing Date, take such action as the Company shall reasonably
determine is necessary to qualify the Securities for sale to the Buyers at the
applicable closing pursuant to this Agreement under applicable securities or
"blue sky" laws of the states of the United States (or to obtain an exemption
from such qualification), and shall provide evidence of any such action so taken
to each Buyer on or prior to the Closing Date.

<PAGE>

             c. Reporting Status; Eligibility to Use Form S-3, SB-2 or Form S-1.
The Company's Common Stock is registered under Section 12(g) of the 1934 Act.
The Company represents and warrants that it meets the requirements for the use
of Form S-3 (or if the Company is not eligible for the use of Form S-3 as of the
Filing Date (as defined in the Registration Rights Agreement), the Company may
use the form of registration for which it is eligible at that time) for
registration of the sale by the Buyer of the Registrable Securities (as defined
in the Registration Rights Agreement). So long as the Buyer beneficially owns
any of the Securities, the Company shall timely file all reports required to be
filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate
its status as an issuer required to file reports under the 1934 Act even if the
1934 Act or the rules and regulations thereunder would permit such termination.
The Company further agrees to file all reports required to be filed by the
Company with the SEC in a timely manner so as to become eligible, and thereafter
to maintain its eligibility, for the use of Form S-3. The Company shall issue a
press release describing the materials terms of the transaction contemplated
hereby as soon as practicable following the Closing Date but in no event more
than two (2) business days of the Closing Date, which press release shall be
subject to prior review by the Buyers. The Company agrees that such press
release shall not disclose the name of the Buyers unless expressly consented to
in writing by the Buyers or unless required by applicable law or regulation, and
then only to the extent of such requirement.

             d. Use of Proceeds. The Company shall use the proceeds from the
sale of the Debentures and the Warrants in the manner set forth in Schedule 4(d)
attached hereto and made a part hereof and shall not, directly or indirectly,
use such proceeds for any loan to or investment in any other corporation,
partnership, enterprise or other person (except in connection with its currently
existing direct or indirect Subsidiaries)

             e. Future Offerings. Subject to the exceptions described below, the
Company will not, without the prior written consent of a majority-in-interest of
the Buyers, not to be unreasonably withheld, (A) negotiate or contract with any
party to obtain additional equity financing (including debt financing with an
equity component) that involves the issuance of convertible securities that are
convertible into an indeterminate number of shares of Common Stock or (B) grant
any registration rights in connection with any issuance of Common Stock or
warrants during the period (the "Lock-up Period") beginning on the Closing Date
and ending on the later of (i) two hundred seventy (270) days from the Closing
Date and (ii) one hundred eighty (180) days from the date the Registration
Statement (as defined in the Registration Rights Agreement) is declared
effective (plus any days in which sales cannot be made thereunder).
Notwithstanding the foregoing, the Company shall be permitted to obtain
additional equity financing (including debt financing with an equity component)
that does not involve the issuance of convertible securities that are
convertible into an indeterminate number of shares of Common Stock and which
involves the grant of registration rights, so long as such registration rights
do not become effective or may not be invoked by the holder thereof for a period
of at least 320 days from the Closing Date. In addition, subject to the
exceptions described below, the Company will not conduct any equity financing
(including debt with an equity component) ("Future Offerings") during the period
beginning on the Closing Date and ending two (2) years after the end of the
Lock-up Period unless it shall have first delivered to each Buyer, at least
twenty (20) business days prior to the closing of such Future Offering, written
notice describing the proposed Future Offering, including the terms and
conditions thereof and proposed definitive documentation to be entered into in
connection therewith, and providing each Buyer an option during the fifteen (15)
day period following delivery of such notice to purchase its pro rata share
(based on the ratio that the aggregate principal amount of Debentures purchased
by it hereunder bears to the aggregate principal amount of Debentures purchased
hereunder) of the securities being offered in the Future Offering on the same
terms as contemplated by such Future Offering (the limitations referred to in
this sentence and the preceding sentence are collectively referred to as the
"Capital Raising Limitations"). In the event the terms and conditions of a
proposed Future Offering are amended in any respect after delivery of the notice
to the Buyers concerning the proposed Future Offering, the Company shall deliver
a new notice to each Buyer describing the amended terms and conditions of the
proposed Future Offering and each Buyer thereafter shall have an option during
the fifteen (15) day period following delivery of such new notice to purchase
its pro rata share of the securities being offered on the same terms as
contemplated by such proposed Future Offering, as amended. The foregoing
sentence shall apply to successive amendments to the terms and conditions of any
proposed Future Offering. The Capital Raising Limitations shall not apply to any
transaction involving (i) issuances of securities in a firm commitment
underwritten public offering (excluding a continuous offering pursuant to Rule
415 under the 1933 Act) or (ii) issuances of securities as consideration for a
merger, consolidation or purchase of assets, or in connection with any strategic
partnership or joint venture (the primary purpose of which is not to raise
equity capital), or in connection with the disposition or acquisition of a
business, product or license by the Company. The Capital Raising Limitations
also shall not apply to the issuance of securities upon exercise or conversion
of the Company's options, warrants or other convertible securities outstanding
as of the date hereof or to the grant of additional options or warrants, or the
issuance of additional securities, under any Company stock option or restricted
stock plan approved by the shareholders of the Company.

<PAGE>

             f. Expenses. At the Closing, the Company shall reimburse Buyers for
expenses incurred by them in connection with the negotiation, preparation,
execution, delivery and performance of this Agreement and the other agreements
to be executed in connection herewith ("Documents"), including, without
limitation, attorneys' and consultants' fees and expenses, transfer agent fees,
fees for stock quotation services, fees relating to any amendments or
modifications of the Documents or any consents or waivers of provisions in the
Documents, fees for the preparation of opinions of counsel, escrow fees, and
costs of restructuring the transactions contemplated by the Documents. When
possible, the Company must pay these fees directly, otherwise the Company must
make immediate payment for reimbursement to the Buyers for all fees and expenses
immediately upon written notice by the Buyer or the submission of an invoice by
the Buyer If the Company fails to reimburse the Buyer in full within three (3)
business days of the written notice or submission of invoice by the Buyer, the
Company shall pay interest on the total amount of fees to be reimbursed at a
rate of 15% per annum.

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

             h. Authorization and Reservation of Shares. The Company shall at
all times have authorized, and reserved for the purpose of issuance, a
sufficient number of shares of Common Stock to provide for the full conversion
or exercise of the outstanding Debentures and Warrants and issuance of the
Conversion Shares and Warrant Shares in connection therewith (based on the
Conversion Price of the Debentures or Exercise Price of the Warrants in effect
from time to time) and as otherwise required by the Debentures. The Company
shall not reduce the number of shares of Common Stock reserved for issuance upon
conversion of Debentures and exercise of the Warrants without the consent of
each Buyer. The Company shall at all times maintain the number of shares of
Common Stock so reserved for issuance at an amount ("Reserved Amount") equal to
no less than two (2) times the number that is then actually issuable upon full
conversion of the Debentures and Additional Debentures and upon exercise of the
Warrants and the Additional Warrants (based on the Conversion Price of the
Debentures or the Exercise Price of the Warrants in effect from time to time).
If at any time the number of shares of Common Stock authorized and reserved for
issuance ("Authorized and Reserved Shares") is below the Reserved Amount, the
Company will promptly take all corporate action necessary to authorize and
reserve a sufficient number of shares, including, without limitation, calling a
special meeting of shareholders to authorize additional shares to meet the
Company's obligations under this Section 4(h), in the case of an insufficient
number of authorized shares, obtain shareholder approval of an increase in such
authorized number of shares, and voting the management shares of the Company in
favor of an increase in the authorized shares of the Company to ensure that the
number of authorized shares is sufficient to meet the Reserved Amount. If the
Company fails to obtain such shareholder approval within thirty (30) days
following the date on which the number of Authorized and Reserved Shares exceeds
the Reserved Amount, the Company shall pay to the Borrower the Standard
Liquidated Damages Amount, in cash or in shares of Common Stock at the option of
the Buyer. If the Buyer elects to be paid the Standard Liquidated Damages Amount
in shares of Common Stock, such shares shall be issued at the Conversion Price
at the time of payment. In order to ensure that the Company has authorized a
sufficient amount of shares to meet the Reserved Amount at all times, the
Company must deliver to the Buyer at the end of every month a list detailing (1)
the current amount of shares authorized by the Company and reserved for the
Buyer; and (2) amount of shares issuable upon conversion of the Debentures and
upon exercise of the Warrants and as payment of interest accrued on the
Debentures for one year. If the Company fails to provide such list within five
(5) business days of the end of each month, the Company shall pay the Standard
Liquidated Damages Amount, in cash or in shares of Common Stock at the option of
the Buyer, until the list is delivered. If the Buyer elects to be paid the
Standard Liquidated Damages Amount in shares of Common Stock, such shares shall
be issued at the Conversion Price at the time of payment.

<PAGE>

             i. Listing. The Company shall promptly secure the listing of the
Conversion Shares and Warrant Shares upon each national securities exchange or
automated quotation system, if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance) and, so long as any Buyer owns
any of the Securities, shall maintain, so long as any other shares of Common
Stock shall be so listed, such listing of all Conversion Shares and Warrant
Shares from time to time issuable upon conversion of the Debentures or exercise
of the Warrants. The Company will obtain and, so long as any Buyer owns any of
the Securities, maintain the listing and trading of its Common Stock on the
OTCBB or any equivalent replacement exchange, 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 shall promptly provide to each
Buyer copies of any notices it receives from the OTCBB and any other exchanges
or quotation systems on which the Common Stock is then listed regarding the
continued eligibility of the Common Stock for listing on such exchanges and
quotation systems.

             j. Corporate Existence. So long as a Buyer beneficially owns any
Debentures 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.

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

             l. Subsequent Investment. The Company and the Buyers agree that,
upon filing by the Company of the Registration Statement to be filed pursuant to
the Registration Rights Agreement (the "Filing Date"), the Buyers shall purchase
additional debentures ("Filing Debentures") in the aggregate principal amount of
Two Hundred Fifty Thousand Dollars ($250,000) and additional warrants (the
"Filing Warrants") to purchase an aggregate of 500,000 shares of Common Stock,
for an aggregate purchase price of Two Hundred Fifty Thousand Dollars ($250,000)
with the closing of such purchase to occur within ten (10) days of the Filing
Date; provided, however, that the obligation of each Buyer to purchase the
Filing Debentures and the Filing Warrants is subject to the satisfaction, at or
before the closing of such purchase and sale, of the conditions set forth in
Section 7. The Company and the Buyers further agree that, upon the declaration
of effectiveness of the Registration Statement to be filed pursuant to the
Registration Rights Agreement (the "Effective Date"), the Buyers shall purchase
additional debentures (the "Effectiveness Debentures" and, collectively with the
Filing Debentures, the "Additional Debentures") in the aggregate principal
amount of Two Hundred Thirty-Five Thousand Dollars ($235,000) and additional
warrants (the "Effectiveness Warrants" and, collectively with the Filing
Warrants, the "Additional Warrants") to purchase an aggregate of 470,000 shares
of Common Stock, for an aggregate purchase price of Two Hundred Thirty-Five
Thousand Dollars ($235,000) with the closing of such purchase to occur within
five (5) days of the Effective Date; provided, however, that the obligation of
each Buyer to purchase the Effectiveness Debentures and the Effectiveness
Warrants is subject to the satisfaction, at or before the closing of such
purchase and sale, of the conditions set forth in Section 7; and, provided,
further, that there shall not have been a Material Adverse Effect as of such
effective date. The terms of the Additional Debentures and the Additional
Warrants shall be identical to the terms of the Debentures and Warrants, as the
case may be, to be issued on the Closing Date. The Common Stock underlying the
Additional Debentures and the Additional Warrants shall be Registrable
Securities (as defined in the Registration Rights Agreement) and shall be
included in the Registration Statement to be filed pursuant to the Registration
Rights Agreement.

<PAGE>

             m. Breach of Covenants. If the Company breaches any of the
covenants set forth in this Section 4, and in addition to any other remedies
available to the Buyers pursuant to this Agreement, the Company shall pay to the
Buyers the Standard Liquidated Damages Amount, in cash or in shares of Common
Stock at the option of the Buyer, until such breach is cured. If the Buyers
elect to be paid the Standard Liquidated Damages Amount in shares, such shares
shall be issued at the Conversion Price at the time of payment.

         5. TRANSFER AGENT INSTRUCTIONS. The Company shall issue irrevocable
instructions to its transfer agent to issue certificates, registered in the name
of each Buyer or its nominee, for the Conversion Shares and Warrant Shares in
such amounts as specified from time to time by each Buyer to the Company upon
conversion of the Debentures or exercise of the Warrants in accordance with the
terms thereof (the "Irrevocable Transfer Agent Instructions"). Prior to
registration of the Conversion Shares and Warrant Shares under the 1933 Act or
the date on which the Conversion Shares and Warrant Shares may be sold pursuant
to Rule 144 without any restriction as to the number of Securities as of a
particular date that can then be immediately sold, all such certificates shall
bear the restrictive legend specified in Section 2(g) of this Agreement. The
Company warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this Section 5, and stop transfer instructions to
give effect to Section 2(f) hereof (in the case of the Conversion Shares and
Warrant Shares, prior to registration of the Conversion Shares and Warrant
Shares under the 1933 Act or the date on which the Conversion Shares and Warrant
Shares may be sold pursuant to Rule 144 without any restriction as to the number
of Securities as of a particular date that can then be immediately sold), will
be given by the Company to its transfer agent and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement and the Registration Rights Agreement.
Nothing in this Section shall affect in any way the Buyer's obligations and
agreement set forth in Section 2(g) hereof to comply with all applicable
prospectus delivery requirements, if any, upon re-sale of the Securities. If a
Buyer provides the Company with (i) an opinion of counsel in form, substance and
scope customary for opinions in comparable transactions, to the effect that a
public sale or transfer of such Securities may be made without registration
under the 1933 Act and such sale or transfer is effected or (ii) the Buyer
provides reasonable assurances that the Securities can be sold pursuant to Rule
144, the Company shall permit the transfer, and, in the case of the Conversion
Shares and Warrant Shares, promptly instruct its transfer agent to issue one or
more certificates, free from restrictive legend, in such name and in such
denominations as specified by such Buyer. The Company acknowledges that a breach
by it of its obligations hereunder will cause irreparable harm to the Buyers, by
vitiating the intent and purpose of the transactions contemplated hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of its
obligations under this Section 5 may be inadequate and agrees, in the event of a
breach or threatened breach by the Company of the provisions of this Section,
that the Buyers shall be entitled, in addition to all other available remedies,
to an injunction restraining any breach and requiring immediate transfer,
without the necessity of showing economic loss and without any bond or other
security being required.

         6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation of
the Company hereunder to issue and sell the Debentures and Warrants to a 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:

<PAGE>

             a. The applicable Buyer shall have executed this Agreement and the
Registration Rights Agreement, and delivered the same to the Company.

             b. The applicable Buyer shall have delivered the Purchase Price in
accordance with Section 1(b) above.

             c. The representations and warranties of the applicable 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 the applicable 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 the applicable Buyer at or prior to the Closing
Date.

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

         7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE. The obligation of
each Buyer hereunder to purchase the Debentures and Warrants 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 such Buyer's sole
benefit and may be waived by such Buyer at any time in its sole discretion:

             a. The Company shall have executed this Agreement and the
Registration Rights Agreement, and delivered the same to the Buyer.

             b. The Company shall have delivered to such Buyer duly executed
Debentures (in such denominations as the Buyer shall request) and Warrants in
accordance with Section 1(b) above.

             c. The Irrevocable Transfer Agent Instructions, in form and
substance satisfactory to a majority-in-interest of the Buyers, shall have been
delivered to and acknowledged in writing by the Company's Transfer Agent.

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

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

             f. No event shall have occurred which could reasonably be expected
to have a Material Adverse Effect on the Company.

<PAGE>

             g. The Conversion Shares and Warrant Shares shall have been
authorized for quotation on the OTCBB and trading in the Common Stock on the
OTCBB shall not have been suspended by the SEC or the OTCBB.

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

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

         8. GOVERNING LAW; MISCELLANEOUS.

             a. Governing Law. THIS AGREEMENT SHALL BE 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 LOCATED IN NEW YORK,
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. 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 PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER
THIS AGREEMENT SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING
ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH
DISPUTE.

             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 the Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived or amended other than by an instrument in writing
signed by the party to be charged with enforcement.

             f. Notices. Any notices required or permitted to be given under the
terms of this Agreement shall be 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:

<PAGE>

      If to the Company:     Palladium Communications, Inc.
                             416 W. Muhammad Ali Boulevard
                             Louisville, Kentucky 40202
                             Attention:  President and Chief Executive Officer
                             Telephone: (502) 585-6364
                             Facsimile: (502) 585-6365

      With copies to:        Sichenzia Ross Friedman Ference LLP
                             1065 Avenue of the Americas
                             New York, New York 10018
                             Attention:  Gregory Sichenzia, Esq.
                             Telephone:  (212) 930-9700
                             Facsimile:  (212) 930-9725
                             Email:  gsichenzia@srfllp.net

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

         With copy to:       Ballard Spahr Andrews & Ingersoll, LLP
                             1735 Market Street
                             51st Floor
                             Philadelphia, Pennsylvania  19103
                             Attention:  Gerald J. Guarcini, Esq.
                             Telephone:  215-864-8625
                             Facsimile:  215-864-8999
                             Email:  guarcini@ballardspahr.com

         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 from a Buyer or to any of its "affiliates," as that term is defined
under the 1934 Act, without the consent of the Company.

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

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

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

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

<PAGE>

             l. No Strict Construction. The language used in this Agreement will
be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.

             m. Remedies. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Buyers 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 the
Buyers shall be entitled, in addition to all other available remedies at law or
in equity, and in addition to the penalties assessable herein, to an injunction
or injunctions restraining, preventing or curing any breach of this Agreement
and to enforce specifically the terms and provisions hereof, without the
necessity of showing economic loss and without any bond or other security being
required.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

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

PALLADIUM COMMUNICATIONS, INC.

/s/ WILF SHORROCKS

Wilf Shorrocks
President and Chief Executive Officer

AJW PARTNERS, LLC
By:  SMS Group, LLC

/s/ COREY S. RIBOTSKY

Corey S. Ribotsky
Manager

RESIDENCE:  Delaware

ADDRESS: 1044 Northern Boulevard
                  Suite 302
                  Roslyn, New York  11576
                  Facsimile:  (516) 739-7115
                  Telephone:  (516) 739-7110

AGGREGATE SUBSCRIPTION AMOUNT:

         Aggregate Principal Amount of Debentures:              $  75,000
         Number of Warrants:                                      150,000
         Aggregate Purchase Price:                              $  75,000

AJW OFFSHORE, LTD.
By:  First Street Manager II, LLC

/s/ COREY S. RIBOTSKY

Corey S. Ribotsky
Manager

RESIDENCE:            Cayman Islands

ADDRESS: AJW Offshore, Ltd.
                  P.O. Box 32021 SMB
                  Grand Cayman, Cayman Island, B.W.I.

AGGREGATE SUBSCRIPTION AMOUNT:

         Aggregate Principal Amount of Debentures:          $   75,000
         Number of Warrants:                                   150,000
         Aggregate Purchase Price:                          $   75,000

AJW QUALIFIED PARTNERS, LLC
By:  AJW Manager, LLC

/s/ COREY S. RIBOTSKY

Corey S. Ribotsky
Manager

<PAGE>

RESIDENCE:            New York

ADDRESS: 1044 Northern Boulevard
                  Suite 302
                  Roslyn, New York  11576
                  Facsimile:        (516) 739-7115
                  Telephone:        (516) 739-7110

AGGREGATE SUBSCRIPTION AMOUNT:

         Aggregate Principal Amount of Debentures:          $  75,000
         Number of Warrants:                                  150,000
         Aggregate Purchase Price:                          $  75,000

NEW MILLENNIUM CAPITAL PARTNERS II, LLC
By:  First Street Manager II, LLC

/s/ COREY S. RIBOTSKY

Corey S. Ribotsky
Manager

RESIDENCE:            New York

ADDRESS: 1044 Northern Boulevard
                  Suite 302
                  Roslyn, New York  11576

                  Facsimile:        (516) 739-7115
                  Telephone:        (516) 739-7110

AGGREGATE SUBSCRIPTION AMOUNT:

         Aggregate Principal Amount of Debentures:          $     75,000
         Number of Warrants:                                     150,000
         Aggregate Purchase Price:                          $     75,000

<PAGE>

                              [FORM OF DEBENTURES]

         THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). 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 OR REGULATION S UNDER SAID ACT.

                          SECURED CONVERTIBLE DEBENTURE

Louisville, Kentucky
April 22, 2003                                                          $75,000

         FOR VALUE RECEIVED, PALLADIUM COMMUNICATIONS, INC. a Nevada corporation
(hereinafter called the "Borrower"), hereby promises to pay to the order of AJW
Offshore, Ltd or registered assigns (the "Holder") the sum of Seventy-Five
Thousand Dollars ($75,000), on April 22, 2004 (the "Maturity Date"), and to pay
interest on the unpaid principal balance hereof at the rate of twelve percent
(12%) per annum from April 22, 2003 (the "Issue Date") until the same becomes
due and payable, whether at maturity or upon acceleration or by prepayment or
otherwise. Any amount of principal or interest on this Debenture which is not
paid when due shall bear interest at the rate of fifteen percent (15%) per annum
from the due date thereof until the same is paid ("Default Interest"). Interest
shall commence accruing on the issue date, shall be computed on the basis of a
365-day year and the actual number of days elapsed and shall be payable, at the
option of the Holder, either quarterly on, June 30, September 30 and December 31
of each year beginning on June 30, 2003, or at the time of conversion of the
principal to which such interest relates in accordance with Article I below. All
payments due hereunder (to the extent not converted into common stock, $.001 par
value per share, of the Borrower (the "Common Stock") in accordance with the
terms hereof) shall be made in lawful money of the United States of America or,
at the option of the Borrower, in whole or in part, in shares of Common Stock of
the Borrower valued at the then applicable Conversion Price (as defined herein).
All payments shall be made at such address as the Holder shall hereafter give to
the Borrower by written notice made in accordance with the provisions of this
Debenture. Whenever any amount expressed to be due by the terms of this
Debenture is due on any day which is not a business day, the same shall instead
be due on the next succeeding day which is a business day and, in the case of
any interest payment date which is not the date on which this Debenture is paid
in full, the extension of the due date thereof shall not be taken into account
for purposes of determining the amount of interest due on such date. As used in
this Debenture, the term "business day" shall mean any day other than a
Saturday, Sunday or a day on which commercial banks in the city of New York, New
York are authorized or required by law or executive order to remain closed. Each
capitalized term used herein, and not otherwise defined, shall have the meaning
ascribed thereto in that certain Securities Purchase Agreement, dated April 22,
2003, pursuant to which this Debenture was originally issued (the "Purchase
Agreement").

         This Debenture is 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 Borrower and will not impose
personal liability upon the holder thereof. The obligations of the Borrower
under this Debenture shall be secured by that certain Security Agreement dated
by and between the Borrower and the Holder of even date herewith.

         The following terms shall apply to this Debenture:

                          Article I. CONVERSION RIGHTS

         1.1 Conversion Right. The Holder shall have the right from time to
time, and at any time on or prior to the earlier of (i) the Maturity Date and
(ii) the date of payment of the Default Amount (as defined in Article III)
pursuant to Section 1.6(a) or Article III, the Optional Prepayment Amount (as
defined in Section 5.1 or any payments pursuant to Section 1.7, each in respect
of the remaining outstanding principal amount of this Debenture to convert all
or any part of the outstanding and unpaid principal amount of this Debenture
into fully paid and non-assessable shares of Common Stock, as such Common Stock
exists on the Issue Date, or any shares of capital stock or other securities of
the Borrower into which such Common Stock shall hereafter be changed or
reclassified at the conversion price (the "Conversion Price") determined as
provided herein (a "Conversion"); provided, however, that in no event shall the
Holder be entitled to convert any portion of this Debenture in excess of that
portion of this Debenture upon conversion of which the sum of (1) the number of
shares of Common Stock beneficially owned by the Holder and its affiliates
(other than shares of Common Stock which may be deemed beneficially owned
through the ownership of the unconverted portion of the Debentures or the
unexercised or unconverted portion of any other security of the Borrower
(including, without limitation, the warrants issued by the Borrower pursuant to
the Purchase Agreement) subject to a limitation on conversion or exercise
analogous to the limitations contained herein) and (2) the number of shares of
Common Stock issuable upon the conversion of the portion of this Debenture with
respect to which the determination of this proviso is being made, would result
in beneficial ownership by the Holder and its affiliates of more than 4.9% of
the outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulations 13D-G thereunder, except as otherwise provided in
clause (1) of such proviso. The Holder of this Debenture may waive the
limitations set forth herein by sixty-one (61) days written notice to the
Company. The number of shares of Common Stock to be issued upon each conversion
of this Debenture shall be determined by dividing the Conversion Amount (as
defined below) by the applicable Conversion Price then in effect on the date
specified in the notice of conversion, in the form attached hereto as Exhibit A
(the "Notice of Conversion"), delivered to the Borrower by the Holder in
accordance with Section 1.4 below; provided that the Notice of Conversion is
submitted by facsimile (or by other means resulting in, or reasonably expected
to result in, notice) to the Borrower before 6:00 p.m., New York, New York time
on such conversion date (the "Conversion Date"). The term "Conversion Amount"
means, with respect to any conversion of this Debenture, the sum of (1) the
principal amount of this Debenture to be converted in such conversion plus (2)
accrued and unpaid interest, if any, on such principal amount at the interest
rates provided in this Debenture to the Conversion Date plus (3) Default
Interest, if any, on the amounts referred to in the immediately preceding
clauses (1) and/or (2) plus (4) at the Holder's option, any amounts owed to the
Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section 2(c) of
that certain Registration Rights Agreement, dated as of April 22, 2003, executed
in connection with the initial issuance of this Debenture and the other
Debentures issued on the Issue Date (the "Registration Rights Agreement").

<PAGE>

         1.2 Conversion Price.

             Calculation of Conversion Price. The Conversion Price shall be the
lesser of (i) the Variable Conversion Price (as defined herein) and (ii) the
Fixed Conversion Price (as defined herein) (subject, in each case, to equitable
adjustments for stock splits, stock dividends or rights offerings by the
Borrower relating to the Borrower's securities or the securities of any
subsidiary of the Borrower, combinations, recapitalization, reclassifications,
extraordinary distributions and similar events). The "Variable Conversion Price"
shall mean the Applicable Percentage (as defined herein) multiplied by the
Market Price (as defined herein). "Market Price" means the average of the lowest
three (3) Trading Prices (as defined below) for the Common Stock during the
twenty (20) Trading Day period ending one Trading Day prior to the date the
Conversion Notice is sent by the Holder to the Borrower via facsimile (the
"Conversion Date"). "Trading Price" means, for any security as of any date, the
intraday trading price on the Over-the-Counter Bulletin Board (the "OTCBB") as
reported by a reliable reporting service mutually acceptable to and hereafter
designated by Holders of a majority in interest of the Debentures and the
Borrower or, if the OTCBB is not the principal trading market for such security,
the intraday trading price of such security on the principal securities exchange
or trading market where such security is listed or traded or, if no intraday
trading price of such security is available in any of the foregoing manners, the
average of the intraday trading prices of any market makers for such security
that are listed in the "pink sheets" by the National Quotation Bureau, Inc. If
the Trading Price cannot be calculated for such security on such date in the
manner provided above, the Trading Price shall be the fair market value as
mutually determined by the Borrower and the holders of a majority in interest of
the Debentures being converted for which the calculation of the Trading Price is
required in order to determine the Conversion Price of such Debentures. "Trading
Day" shall mean any day on which the Common Stock is traded for any period on
the OTCBB, or on the principal securities exchange or other securities market on
which the Common Stock is then being traded. "Applicable Percentage" shall mean
50.0%. The "Fixed Conversion Price" shall mean $1.00.

<PAGE>

             (a) Conversion Price During Major Announcements. Notwithstanding
anything contained in Section 1.2(a) to the contrary, in the event the Borrower
(i) makes a public announcement that it intends to consolidate or merge with any
other corporation (other than a merger in which the Borrower is the surviving or
continuing corporation and its capital stock is unchanged) or sell or transfer
all or substantially all of the assets of the Borrower or (ii) any person, group
or entity (including the Borrower) publicly announces a tender offer to purchase
50% or more of the Borrower's Common Stock (or any other takeover scheme) (the
date of the announcement referred to in clause (i) or (ii) is hereinafter
referred to as the "Announcement Date"), then the Conversion Price shall,
effective upon the Announcement Date and continuing through the Adjusted
Conversion Price Termination Date (as defined below), be equal to the lower of
(x) the Conversion Price which would have been applicable for a Conversion
occurring on the Announcement Date and (y) the Conversion Price that would
otherwise be in effect. From and after the Adjusted Conversion Price Termination
Date, the Conversion Price shall be determined as set forth in this Section
1.2(a). For purposes hereof, "Adjusted Conversion Price Termination Date" shall
mean, with respect to any proposed transaction or tender offer (or takeover
scheme) for which a public announcement as contemplated by this Section 1.2(b)
has been made, the date upon which the Borrower (in the case of clause (i)
above) or the person, group or entity (in the case of clause (ii) above)
consummates or publicly announces the termination or abandonment of the proposed
transaction or tender offer (or takeover scheme) which caused this Section
1.2(b) to become operative.

         1.3 Authorized Shares. The Borrower covenants that during the period
the conversion right exists, the Borrower will reserve from its authorized and
unissued Common Stock a sufficient number of shares, free from preemptive
rights, to provide for the issuance of Common Stock upon the full conversion of
this Debenture and the other Debentures issued pursuant to the Purchase
Agreement. The Borrower is required at all times to have authorized and reserved
two times the number of shares that is actually issuable upon full conversion of
the Debentures (based on the Conversion Price of the Debentures or the Exercise
Price of the Warrants in effect from time to time) (the "Reserved Amount"). The
Reserved Amount shall be increased from time to time in accordance with the
Borrower's obligations pursuant to Section 4(h) of the Purchase Agreement. The
Borrower represents that upon issuance, such shares will be duly and validly
issued, fully paid and non-assessable. In addition, if the Borrower shall issue
any securities or make any change to its capital structure which would change
the number of shares of Common Stock into which the Debentures shall be
convertible at the then current Conversion Price, the Borrower shall at the same
time make proper provision so that thereafter there shall be a sufficient number
of shares of Common Stock authorized and reserved, free from preemptive rights,
for conversion of the outstanding Debentures. The Borrower (i) acknowledges that
it has irrevocably instructed its transfer agent to issue certificates for the
Common Stock issuable upon conversion of this Debenture, and (ii) agrees that
its issuance of this Debenture shall constitute full authority to its officers
and agents who are charged with the duty of executing stock certificates to
execute and issue the necessary certificates for shares of Common Stock in
accordance with the terms and conditions of this Debenture.

             If, at any time a Holder of this Debenture submits a Notice of
Conversion, and the Borrower does not have sufficient authorized but unissued
shares of Common Stock available to effect such conversion in accordance with
the provisions of this Article I (a "Conversion Default"), subject to Section
4.8, the Borrower shall issue to the Holder all of the shares of Common Stock
which are then available to effect such conversion. The portion of this
Debenture which the Holder included in its Conversion Notice and which exceeds
the amount which is then convertible into available shares of Common Stock (the
"Excess Amount") shall, notwithstanding anything to the contrary contained
herein, not be convertible into Common Stock in accordance with the terms hereof
until (and at the Holder's option at any time after) the date additional shares
of Common Stock are authorized by the Borrower to permit such conversion, at
which time the Conversion Price in respect thereof shall be the lesser of (i)
the Conversion Price on the Conversion Default Date (as defined below) and (ii)
the Conversion Price on the Conversion Date thereafter elected by the Holder in
respect thereof. In addition, the Borrower shall pay to the Holder payments
("Conversion Default Payments") for a Conversion Default in the amount of (x)
the sum of (1) the then outstanding principal amount of this Debenture plus (2)
accrued and unpaid interest on the unpaid principal amount of this Debenture
through the Authorization Date (as defined below) plus (3) Default Interest, if
any, on the amounts referred to in clauses (1) and/or (2), multiplied by (y)
..24, multiplied by (z) (N/365), where N = the number of days from the day the
holder submits a Notice of Conversion giving rise to a Conversion Default (the
"Conversion Default Date") to the date (the "Authorization Date") that the
Borrower authorizes a sufficient number of shares of Common Stock to effect
conversion of the full outstanding principal balance of this Debenture. The
Borrower shall use its best efforts to authorize a sufficient number of shares
of Common Stock as soon as practicable following the earlier of (i) such time
that the Holder notifies the Borrower or that the Borrower otherwise becomes
aware that there are or likely will be insufficient authorized and unissued
shares to allow full conversion thereof and (ii) a Conversion Default. The
Borrower shall send notice to the Holder of the authorization of additional
shares of Common Stock, the Authorization Date and the amount of Holder's
accrued Conversion Default Payments. The accrued Conversion Default Payments for
each calendar month shall be paid in cash or shall be convertible into Common
Stock (at such time as there are sufficient authorized shares of Common Stock)
at the applicable Conversion Price, at the Holder's option, as follows:

<PAGE>

             (a) In the event Holder elects to take such payment in cash, cash
payment shall be made to Holder by the fifth (5th) day of the month following
the month in which it has accrued; and

             (b) In the event Holder elects to take such payment in Common
Stock, the Holder may convert such payment amount into Common Stock at the
Conversion Price (as in effect at the time of conversion) at any time after the
fifth day of the month following the month in which it has accrued in accordance
with the terms of this Article I (so long as there is then a sufficient number
of authorized shares of Common Stock).

         The Holder's election shall be made in writing to the Borrower at any
time prior to 6:00 p.m., New York, New York time, on the third day of the month
following the month in which Conversion Default payments have accrued. If no
election is made, the Holder shall be deemed to have elected to receive cash.
Nothing herein shall limit the Holder's right to pursue actual damages (to the
extent in excess of the Conversion Default Payments) for the Borrower's failure
to maintain a sufficient number of authorized shares of Common Stock, and each
holder shall have the right to pursue all remedies available at law or in equity
(including degree of specific performance and/or injunctive relief).

         1.4 Method of Conversion.

             (a) Mechanics of Conversion. Subject to Section 1.1, this Debenture
may be converted by the Holder in whole or in part at any time from time to time
after the Issue Date, by (A) submitting to the Borrower a Notice of Conversion
(by facsimile or other reasonable means of communication dispatched on the
Conversion Date prior to 6:00 p.m., New York, New York time) and (B) subject to
Section 1.4(b), surrendering this Debenture at the principal office of the
Borrower.

             (b) Surrender of Debenture Upon Conversion. Notwithstanding
anything to the contrary set forth herein, upon conversion of this Debenture in
accordance with the terms hereof, the Holder shall not be required to physically
surrender this Debenture to the Borrower unless the entire unpaid principal
amount of this Debenture is so converted. The Holder and the Borrower shall
maintain records showing the principal amount so converted and the dates of such
conversions or shall use such other method, reasonably satisfactory to the
Holder and the Borrower, so as not to require physical surrender of this
Debenture upon each such conversion. In the event of any dispute or discrepancy,
such records of the Borrower shall be controlling and determinative in the
absence of manifest error. Notwithstanding the foregoing, if any portion of this
Debenture is converted as aforesaid, the Holder may not transfer this Debenture
unless the Holder first physically surrenders this Debenture to the Borrower,
whereupon the Borrower will forthwith issue and deliver upon the order of the
Holder a new Debenture of like tenor, registered as the Holder (upon payment by
the Holder of any applicable transfer taxes) may request, representing in the
aggregate the remaining unpaid principal amount of this Debenture. The Holder
and any assignee, by acceptance of this Debenture, acknowledge and agree that,
by reason of the provisions of this paragraph, following conversion of a portion
of this Debenture, the unpaid and unconverted principal amount of this Debenture
represented by this Debenture may be less than the amount stated on the face
hereof.

<PAGE>

             (c) Payment of Taxes. The Borrower shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock or other securities or property on conversion
of this Debenture in a name other than that of the Holder (or in street name),
and the Borrower shall not be required to issue or deliver any such shares or
other securities or property unless and until the person or persons (other than
the Holder or the custodian in whose street name such shares are to be held for
the Holder's account) requesting the issuance thereof shall have paid to the
Borrower the amount of any such tax or shall have established to the
satisfaction of the Borrower that such tax has been paid.

             (d) Delivery of Common Stock Upon Conversion. Upon receipt by the
Borrower from the Holder of a facsimile transmission (or other reasonable means
of communication) of a Notice of Conversion meeting the requirements for
conversion as provided in this Section 1.4, the Borrower shall issue and deliver
or cause to be issued and delivered to or upon the order of the Holder
certificates for the Common Stock issuable upon such conversion within two (2)
business days after such receipt (and, solely in the case of conversion of the
entire unpaid principal amount hereof, surrender of this Debenture) (such second
business day being hereinafter referred to as the "Deadline") in accordance with
the terms hereof and the Purchase Agreement (including, without limitation, in
accordance with the requirements of Section 2(g) of the Purchase Agreement that
certificates for shares of Common Stock issued on or after the effective date of
the Registration Statement upon conversion of this Debenture shall not bear any
restrictive legend).

             (e) Obligation of Borrower to Deliver Common Stock. Upon receipt by
the Borrower of a Notice of Conversion, the Holder shall be deemed to be the
holder of record of the Common Stock issuable upon such conversion, the
outstanding principal amount and the amount of accrued and unpaid interest on
this Debenture shall be reduced to reflect such conversion, and, unless the
Borrower defaults on its obligations under this Article I, all rights with
respect to the portion of this Debenture being so converted shall forthwith
terminate except the right to receive the Common Stock or other securities, cash
or other assets, as herein provided, on such conversion. If the Holder shall
have given a Notice of Conversion as provided herein, the Borrower's obligation
to issue and deliver the certificates for Common Stock shall be absolute and
unconditional, irrespective of the absence of any action by the Holder to
enforce the same, any waiver or consent with respect to any provision thereof,
the recovery of any judgment against any person or any action to enforce the
same, any failure or delay in the enforcement of any other obligation of the
Borrower to the holder of record, or any setoff, counterclaim, recoupment,
limitation or termination, or any breach or alleged breach by the Holder of any
obligation to the Borrower, and irrespective of any other circumstance which
might otherwise limit such obligation of the Borrower to the Holder in
connection with such conversion. The Conversion Date specified in the Notice of
Conversion shall be the Conversion Date so long as the Notice of Conversion is
received by the Borrower before 6:00 p.m., New York, New York time, on such
date.

             (f) Delivery of Common Stock by Electronic Transfer. In lieu of
delivering physical certificates representing the Common Stock issuable upon
conversion, provided the Borrower's transfer agent is participating in the
Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST")
program, upon request of the Holder and its compliance with the provisions
contained in Section 1.1 and in this Section 1.4, the Borrower shall use its
best efforts to cause its transfer agent to electronically transmit the Common
Stock issuable upon conversion to the Holder by crediting the account of
Holder's Prime Broker with DTC through its Deposit Withdrawal Agent Commission
("DWAC") system.

             (g) Failure to Deliver Common Stock Prior to Deadline. Without in
any way limiting the Holder's right to pursue other remedies, including actual
damages and/or equitable relief, the parties agree that if delivery of the
Common Stock issuable upon conversion of this Debenture is more than two (2)
days after the Deadline (other than a failure due to the circumstances described
in Section 1.3 above, which failure shall be governed by such Section) the
Borrower shall pay to the Holder $2,000 per day in cash, for each day beyond the
Deadline that the Borrower fails to deliver such Common Stock. Such cash amount
shall be paid to Holder by the fifth day of the month following the month in
which it has accrued or, at the option of the Holder (by written notice to the
Borrower by the first day of the month following the month in which it has
accrued), shall be added to the principal amount of this Debenture, in which
event interest shall accrue thereon in accordance with the terms of this
Debenture and such additional principal amount shall be convertible into Common
Stock in accordance with the terms of this Debenture.

<PAGE>

         1.5 Concerning the Shares. The shares of Common Stock issuable upon
conversion of this Debenture may not be sold or transferred unless (i) such
shares are sold pursuant to an effective registration statement under the Act or
(ii) the Borrower or its transfer agent shall have been furnished with an
opinion of counsel (which opinion shall be in form, substance and scope
customary for opinions of counsel in comparable transactions) to the effect that
the shares to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration or (iii) such shares are sold or transferred
pursuant to Rule 144 under the Act (or a successor rule) ("Rule 144") or (iv)
such shares are transferred to an "affiliate" (as defined in Rule 144) of the
Borrower who agrees to sell or otherwise transfer the shares only in accordance
with this Section 1.5 and who is an Accredited Investor (as defined in the
Purchase Agreement). Except as otherwise provided in the Purchase Agreement (and
subject to the removal provisions set forth below), until such time as the
shares of Common Stock issuable upon conversion of this Debenture have been
registered under the Act as contemplated by the Registration Rights Agreement or
otherwise may be sold pursuant to Rule 144 without any restriction as to the
number of securities as of a particular date that can then be immediately sold,
each certificate for shares of Common Stock issuable upon conversion of this
Debenture that has not been so included in an effective registration statement
or that has not been sold pursuant to an effective registration statement or an
exemption that permits removal of the legend, shall bear a legend substantially
in the following form, as appropriate:

         "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 UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION S UNDER
         SAID ACT."

         The legend set forth above shall be removed and the Borrower shall
issue to the Holder a new certificate therefor free of any transfer legend if
(i) the Borrower or its transfer agent shall have received an opinion of
counsel, in form, substance and scope customary for opinions of counsel in
comparable transactions, to the effect that a public sale or transfer of such
Common Stock may be made without registration under the Act and the shares are
so sold or transferred, (ii) such Holder provides the Borrower or its transfer
agent with reasonable assurances that the Common Stock issuable upon conversion
of this Debenture (to the extent such securities are deemed to have been
acquired on the same date) can be sold pursuant to Rule 144 or (iii) in the case
of the Common Stock issuable upon conversion of this Debenture, such security is
registered for sale by the Holder under an effective registration statement
filed under the 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. Nothing in this Debenture shall (i) limit the Borrower's
obligation under the Registration Rights Agreement or (ii) affect in any way the
Holder's obligations to comply with applicable prospectus delivery requirements
upon the resale of the securities referred to herein.

         1.6 Effect of Certain Events.

             (a) Effect of Merger, Consolidation, Etc. At the option of the
Holder, the sale, conveyance or disposition of all or substantially all of the
assets of the Borrower, the effectuation by the Borrower of a transaction or
series of related transactions in which more than 50% of the voting power of the
Borrower is disposed of, or the consolidation, merger or other business
combination of the Borrower with or into any other Person (as defined below) or
Persons when the Borrower is not the survivor shall either: (i) be deemed to be
an Event of Default (as defined in Article III) pursuant to which the Borrower
shall be required to pay to the Holder upon the consummation of and as a
condition to such transaction an amount equal to the Default Amount (as defined
in Article III) or (ii) be treated pursuant to Section 1.6(b) hereof. "Person"
shall mean any individual, corporation, limited liability company, partnership,
association, trust or other entity or organization.

<PAGE>

             (b) Adjustment Due to Merger, Consolidation, Etc. If, at any time
when this Debenture is issued and outstanding and prior to conversion of all of
the Debentures, there shall be any merger, consolidation, exchange of shares,
recapitalization, reorganization, or other similar event, as a result of which
shares of Common Stock of the Borrower shall be changed into the same or a
different number of shares of another class or classes of stock or securities of
the Borrower or another entity, or in case of any sale or conveyance of all or
substantially all of the assets of the Borrower other than in connection with a
plan of complete liquidation of the Borrower, then the Holder of this Debenture
shall thereafter have the right to receive upon conversion of this Debenture,
upon the basis and upon the terms and conditions specified herein and in lieu of
the shares of Common Stock immediately theretofore issuable upon conversion,
such stock, securities or assets which the Holder would have been entitled to
receive in such transaction had this Debenture been converted in full
immediately prior to such transaction (without regard to any limitations on
conversion set forth herein), and in any such case appropriate provisions shall
be made with respect to the rights and interests of the Holder of this Debenture
to the end that the provisions hereof (including, without limitation, provisions
for adjustment of the Conversion Price and of the number of shares issuable upon
conversion of the Debenture) shall thereafter be applicable, as nearly as may be
practicable in relation to any securities or assets thereafter deliverable upon
the conversion hereof. The Borrower shall not effect any transaction described
in this Section 1.6(b) unless (a) it first gives, to the extent practicable,
thirty (30) days prior written notice (but in any event at least fifteen (15)
days prior written notice) of the record date of the special meeting of
shareholders to approve, or if there is no such record date, the consummation
of, such merger, consolidation, exchange of shares, recapitalization,
reorganization or other similar event or sale of assets (during which time the
Holder shall be entitled to convert this Debenture) and (b) the resulting
successor or acquiring entity (if not the Borrower) assumes by written
instrument the obligations of this Section 1.6(b). The above provisions shall
similarly apply to successive consolidations, mergers, sales, transfers or share
exchanges.

             (c) Adjustment Due to Distribution. If the Borrower shall declare
or make any distribution of its assets (or rights to acquire its assets) to
holders of Common Stock as a dividend, stock repurchase, by way of return of
capital or otherwise (including any dividend or distribution to the Borrower's
shareholders in cash or shares (or rights to acquire shares) of capital stock of
a subsidiary (i.e., a spin-off)) (a "Distribution"), then the Holder of this
Debenture shall be entitled, upon any conversion of this Debenture after the
date of record for determining shareholders entitled to such Distribution, to
receive the amount of such assets which would have been payable to the Holder
with respect to the shares of Common Stock issuable upon such conversion had
such Holder been the holder of such shares of Common Stock on the record date
for the determination of shareholders entitled to such Distribution.

             (d) Adjustment Due to Dilutive Issuance. If, at any time when any
Debentures are issued and outstanding, the Borrower issues or sells, or in
accordance with this Section 1.6(d) hereof is deemed to have issued or sold, any
shares of Common Stock for no consideration or for a consideration per share
(before deduction of reasonable expenses or commissions or underwriting
discounts or allowances in connection therewith) less than the Fixed Conversion
Price in effect on the date of such issuance (or deemed issuance) of such shares
of Common Stock (a "Dilutive Issuance"), then immediately upon the Dilutive
Issuance, the Fixed Conversion Price will be reduced to the amount of the
consideration per share received by the Borrower in such Dilutive Issuance;
provided that only one adjustment will be made for each Dilutive Issuance.

<PAGE>

         The Borrower shall be deemed to have issued or sold shares of Common
Stock if the Borrower in any manner issues or grants any warrants, rights or
options, whether or not immediately exercisable, to subscribe for or to purchase
Common Stock or other securities convertible into or exchangeable for Common
Stock ("Convertible Securities") (such warrants, rights and options to purchase
Common Stock or Convertible Securities are hereinafter referred to as "Options")
and the price per share for which Common Stock is issuable upon the exercise of
such Options is less than the Fixed Conversion Price then in effect, then the
Fixed Conversion Price shall be equal to such price per share. For purposes of
the preceding sentence, the "price per share for which Common Stock is issuable
upon the exercise of such Options" is determined by dividing (i) the total
amount, if any, received or receivable by the Borrower as consideration for the
issuance or granting of all such Options, plus the minimum aggregate amount of
additional consideration, if any, payable to the Borrower upon the exercise of
all such Options, plus, in the case of Convertible Securities issuable upon the
exercise of such Options, the minimum aggregate amount of additional
consideration payable upon the conversion or exchange thereof at the time such
Convertible Securities first become convertible or exchangeable, by (ii) the
maximum total number of shares of Common Stock issuable upon the exercise of all
such Options (assuming full conversion of Convertible Securities, if
applicable). No further adjustment to the Conversion Price will be made upon the
actual issuance of such Common Stock upon the exercise of such Options or upon
the conversion or exchange of Convertible Securities issuable upon exercise of
such Options.

         Additionally, the Borrower shall be deemed to have issued or sold
shares of Common Stock if the Borrower in any manner issues or sells any
Convertible Securities, whether or not immediately convertible (other than where
the same are issuable upon the exercise of Options), and the price per share for
which Common Stock is issuable upon such conversion or exchange is less than the
Fixed Conversion Price then in effect, then the Fixed Conversion Price shall be
equal to such price per share. For the purposes of the preceding sentence, the
"price per share for which Common Stock is issuable upon such conversion or
exchange" is determined by dividing (i) the total amount, if any, received or
receivable by the Borrower as consideration for the issuance or sale of all such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Borrower upon the conversion or exchange
thereof at the time such Convertible Securities first become convertible or
exchangeable, by (ii) the maximum total number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities. No
further adjustment to the Fixed Conversion Price will be made upon the actual
issuance of such Common Stock upon conversion or exchange of such Convertible
Securities.

             (e) Purchase Rights. If, at any time when any Debentures are issued
and outstanding, the Borrower issues any convertible securities or rights to
purchase stock, warrants, securities or other property (the "Purchase Rights")
pro rata to the record holders of any class of Common Stock, then the Holder of
this Debenture will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such Holder could have
acquired if such Holder had held the number of shares of Common Stock acquirable
upon complete conversion of this Debenture (without regard to any limitations on
conversion contained herein) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.

             (f) Notice of Adjustments. Upon the occurrence of each adjustment
or readjustment of the Conversion Price as a result of the events described in
this Section 1.6, the Borrower, at its expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to the Holder of a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Borrower
shall, upon the written request at any time of the Holder, furnish to such
Holder a like certificate setting forth (i) such adjustment or readjustment,
(ii) the Conversion Price at the time in effect and (iii) the number of shares
of Common Stock and the amount, if any, of other securities or property which at
the time would be received upon conversion of the Debenture.

<PAGE>

         1.7 Trading Market Limitations. Unless permitted by the applicable
rules and regulations of the principal securities market on which the Common
Stock is then listed or traded, in no event shall the Borrower issue upon
conversion of or otherwise pursuant to this Debenture and the other Debentures
issued pursuant to the Purchase Agreement more than the maximum number of shares
of Common Stock that the Borrower can issue pursuant to any rule of the
principal United States securities market on which the Common Stock is then
traded (the "Maximum Share Amount"), which shall be 423,603 shares (19.99% of
the total shares outstanding on the Issue Date), subject to equitable adjustment
from time to time for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring after
the date hereof. Once the Maximum Share Amount has been issued (the date of
which is hereinafter referred to as the "Maximum Conversion Date"), if the
Borrower fails to eliminate any prohibitions under applicable law or the rules
or regulations of any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Borrower or any of its
securities on the Borrower's ability to issue shares of Common Stock in excess
of the Maximum Share Amount (a "Trading Market Prepayment Event"), in lieu of
any further right to convert this Debenture, and in full satisfaction of the
Borrower's obligations under this Debenture, the Borrower shall pay to the
Holder, within fifteen (15) business days of the Maximum Conversion Date (the
"Trading Market Prepayment Date"), an amount equal to 130% times the sum of (a)
the then outstanding principal amount of this Debenture immediately following
the Maximum Conversion Date, plus (b) accrued and unpaid interest on the unpaid
principal amount of this Debenture to the Trading Market Prepayment Date, plus
(c) Default Interest, if any, on the amounts referred to in clause (a) and/or
(b) above, plus (d) any optional amounts that may be added thereto at the
Maximum Conversion Date by the Holder in accordance with the terms hereof (the
then outstanding principal amount of this Debenture immediately following the
Maximum Conversion Date, plus the amounts referred to in clauses (b), (c) and
(d) above shall collectively be referred to as the "Remaining Convertible
Amount"). With respect to each Holder of Debentures, the Maximum Share Amount
shall refer to such Holder's pro rata share thereof determined in accordance
with Section 4.8 below. In the event that the sum of (x) the aggregate number of
shares of Common Stock issued upon conversion of this Debenture and the other
Debentures issued pursuant to the Purchase Agreement plus (y) the aggregate
number of shares of Common Stock that remain issuable upon conversion of this
Debenture and the other Debentures issued pursuant to the Purchase Agreement,
represents at least one hundred percent (100%) of the Maximum Share Amount (the
"Triggering Event"), the Borrower will use its best efforts to seek and obtain
Shareholder Approval (or obtain such other relief as will allow conversions
hereunder in excess of the Maximum Share Amount) as soon as practicable
following the Triggering Event and before the Maximum Conversion Date. As used
herein, "Shareholder Approval" means approval by the shareholders of the
Borrower to authorize the issuance of the full number of shares of Common Stock
which would be issuable upon full conversion of the then outstanding Debentures
but for the Maximum Share Amount.

         1.8 Status as Shareholder. Upon submission of a Notice of Conversion by
a Holder, (i) the shares covered thereby (other than the shares, if any, which
cannot be issued because their issuance would exceed such Holder's allocated
portion of the Reserved Amount or Maximum Share Amount) shall be deemed
converted into shares of Common Stock and (ii) the Holder's rights as a Holder
of such converted portion of this Debenture shall cease and terminate, excepting
only the right to receive certificates for such shares of Common Stock and to
any remedies provided herein or otherwise available at law or in equity to such
Holder because of a failure by the Borrower to comply with the terms of this
Debenture. Notwithstanding the foregoing, if a Holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Deadline with respect to a conversion of any
portion of this Debenture for any reason, then (unless the Holder otherwise
elects to retain its status as a holder of Common Stock by so notifying the
Borrower) the Holder shall regain the rights of a Holder of this Debenture with
respect to such unconverted portions of this Debenture and the Borrower shall,
as soon as practicable, return such unconverted Debenture to the Holder or, if
the Debenture has not been surrendered, adjust its records to reflect that such
portion of this Debenture has not been converted. In all cases, the Holder shall
retain all of its rights and remedies (including, without limitation, (i) the
right to receive Conversion Default Payments pursuant to Section 1.3 to the
extent required thereby for such Conversion Default and any subsequent
Conversion Default and (ii) the right to have the Conversion Price with respect
to subsequent conversions determined in accordance with Section 1.3) for the
Borrower's failure to convert this Debenture.

<PAGE>

                          Article II. CERTAIN COVENANTS

         2.1 Distributions on Capital Stock. So long as the Borrower shall have
any obligation under this Debenture, the Borrower shall not without the Holder's
written consent (a) pay, declare or set apart for such payment, any dividend or
other distribution (whether in cash, property or other securities) on shares of
capital stock other than dividends on shares of Common Stock solely in the form
of additional shares of Common Stock or (b) directly or indirectly or through
any subsidiary make any other payment or distribution in respect of its capital
stock except for distributions pursuant to any shareholders' rights plan which
is approved by a majority of the Borrower's disinterested directors.

         2.2 Restriction on Stock Repurchases. So long as the Borrower shall
have any obligation under this Debenture, the Borrower shall not without the
Holder's written consent redeem, repurchase or otherwise acquire (whether for
cash or in exchange for property or other securities or otherwise) in any one
transaction or series of related transactions any shares of capital stock of the
Borrower or any warrants, rights or options to purchase or acquire any such
shares.

         2.3 Borrowings. So long as the Borrower shall have any obligation under
this Debenture, the Borrower shall not, without the Holder's written consent,
create, incur, assume or suffer to exist any liability for borrowed money,
except (a) borrowings in existence or committed on the date hereof and of which
the Borrower has informed Holder in writing prior to the date hereof, (b)
indebtedness to trade creditors or financial institutions incurred in the
ordinary course of business or (c) borrowings, the proceeds of which shall be
used to repay this Debenture.

         2.4 Sale of Assets. So long as the Borrower shall have any obligation
under this Debenture, the Borrower shall not, without the Holder's written
consent, sell, lease or otherwise dispose of any significant portion of its
assets outside the ordinary course of business. Any consent to the disposition
of any assets may be conditioned on a specified use of the proceeds of
disposition.

         2.5 Advances and Loans. So long as the Borrower shall have any
obligation under this Debenture, the Borrower shall not, without the Holder's
written consent, lend money, give credit or make advances to any person, firm,
joint venture or corporation, including, without limitation, officers,
directors, employees, subsidiaries and affiliates of the Borrower, except loans,
credits or advances (a) made to Peak Entertainment, Ltd., (b) in existence or
committed on the date hereof and which the Borrower has informed Holder in
writing prior to the date hereof, (c) made in the ordinary course of business or
(d) not in excess of $50,000.

         2.6 Contingent Liabilities. So long as the Borrower shall have any
obligation under this Debenture, the Borrower shall not, without the Holder's
written consent, assume, guarantee, endorse, contingently agree to purchase or
otherwise become liable upon the obligation of any person, firm, partnership,
joint venture or corporation, except by the endorsement of negotiable
instruments for deposit or collection and except assumptions, guarantees,
endorsements and contingencies (a) in existence or committed on the date hereof
and which the Borrower has informed Holder in writing prior to the date hereof,
and (b) similar transactions in the ordinary course of business.

                         Article III. EVENTS OF DEFAULT

         If any of the following events of default (each, an "Event of Default")
shall occur:

         3.1 Failure to Pay Principal or Interest. The Borrower fails to pay the
principal hereof or interest thereon when due on this Debenture, whether at
maturity, upon a Trading Market Prepayment Event pursuant to Section 1.7, upon
acceleration or otherwise;

<PAGE>

         3.2 Conversion and the Shares. The Borrower fails to issue shares of
Common Stock to the Holder (or announces or threatens that it will not honor its
obligation to do so) upon exercise by the Holder of the conversion rights of the
Holder in accordance with the terms of this Debenture (for a period of at least
sixty (60) days, if such failure is solely as a result of the circumstances
governed by Section 1.3 and the Borrower is using its best efforts to authorize
a sufficient number of shares of Common Stock as soon as practicable), fails to
transfer or cause its transfer agent to transfer (electronically or in
certificated form) any certificate for shares of Common Stock issued to the
Holder upon conversion of or otherwise pursuant to this Debenture as and when
required by this Debenture or the Registration Rights Agreement, or fails to
remove any restrictive legend (or to withdraw any stop transfer instructions in
respect thereof) on any certificate for any shares of Common Stock issued to the
Holder upon conversion of or otherwise pursuant to this Debenture as and when
required by this Debenture or the Registration Rights Agreement (or makes any
announcement, statement or threat that it does not intend to honor the
obligations described in this paragraph) and any such failure shall continue
uncured (or any announcement, statement or threat not to honor its obligations
shall not be rescinded in writing) for ten (10) days after the Borrower shall
have been notified thereof in writing by the Holder;

         3.3 Failure to Timely File Registration or Effect Registration. The
Borrower fails to file the Registration Statement within fifty-five (55) days
following the Closing Date (as defined in the Purchase Agreement) or obtain
effectiveness with the Securities and Exchange Commission of the Registration
Statement within one hundred thirty five (135) days following the Closing Date
(as defined in the Purchase Agreement) or such Registration Statement lapses in
effect (or sales cannot otherwise be made thereunder effective, whether by
reason of the Borrower's failure to amend or supplement the prospectus included
therein in accordance with the Registration Rights Agreement or otherwise) for
more than twenty (20) consecutive days or forty (40) days in any twelve month
period after the Registration Statement becomes effective;

         3.4 Breach of Covenants. The Borrower breaches any material covenant or
other material term or condition contained in Sections 1.3, 1.6 or 1.7 of this
Debenture, or Sections 4(c), 4(e), 4(h), 4(i), 4(j) or 5 of the Purchase
Agreement and such breach continues for a period of ten (10) days after written
notice thereof to the Borrower from the Holder;

         3.5 Breach of Representations and Warranties. Any representation or
warranty of the Borrower made herein or in any agreement, statement or
certificate given in writing pursuant hereto or in connection herewith
(including, without limitation, the Purchase Agreement and the Registration
Rights Agreement), shall be false or misleading in any material respect when
made and the breach of which has (or with the passage of time will have) a
material adverse effect on the rights of the Holder with respect to this
Debenture, the Purchase Agreement or the Registration Rights Agreement;

         3.6 Receiver or Trustee. The Borrower or any subsidiary of the Borrower
shall make an assignment for the benefit of creditors, or apply for or consent
to the appointment of a receiver or trustee for it or for a substantial part of
its property or business, or such a receiver or trustee shall otherwise be
appointed;

         3.7 Judgments. Any money judgment, writ or similar process shall be
entered or filed against the Borrower or any subsidiary of the Borrower or any
of its property or other assets for more than $50,000, and shall remain
unvacated, unbonded or unstayed for a period of twenty (20) days unless
otherwise consented to by the Holder, which consent will not be unreasonably
withheld;

         3.8 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Borrower or any
subsidiary of the Borrower;

         3.9 Delisting of Common Stock. The Borrower shall fail to maintain the
listing of the Common Stock on at least one of the OTCBB or an equivalent
replacement exchange, the Nasdaq National Market, the Nasdaq SmallCap Market,
the New York Stock Exchange, or the American Stock Exchange; or

<PAGE>

         3.10 Default Under Other Debentures. An Event of Default has occurred
and is continuing under any of the other Debentures issued pursuant to the
Purchase Agreement, then, upon the occurrence and during the continuation of any
Event of Default specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9, or
3.10, at the option of the Holders of a majority of the aggregate principal
amount of the outstanding Debentures issued pursuant to the Purchase Agreement
exercisable through the delivery of written notice to the Borrower by such
Holders (the "Default Notice"), and upon the occurrence of an Event of Default
specified in Section 3.6 or 3.8, the Debentures shall become immediately due and
payable and the Borrower shall pay to the Holder, in full satisfaction of its
obligations hereunder, an amount equal to the greater of (i) 130% times the sum
of (w) the then outstanding principal amount of this Debenture plus (x) accrued
and unpaid interest on the unpaid principal amount of this Debenture to the date
of payment (the "Mandatory Prepayment Date") plus (y) Default Interest, if any,
on the amounts referred to in clauses (w) and/or (x) plus (z) any amounts owed
to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section
2(c) of the Registration Rights Agreement (the then outstanding principal amount
of this Debenture to the date of payment plus the amounts referred to in clauses
(x), (y) and (z) shall collectively be known as the "Default Sum") or (ii) the
"parity value" of the Default Sum to be prepaid, where parity value means (a)
the highest number of shares of Common Stock issuable upon conversion of or
otherwise pursuant to such Default Sum in accordance with Article I, treating
the Trading Day immediately preceding the Mandatory Prepayment Date as the
"Conversion Date" for purposes of determining the lowest applicable Conversion
Price, unless the Default Event arises as a result of a breach in respect of a
specific Conversion Date in which case such Conversion Date shall be the
Conversion Date), multiplied by (b) the highest Closing Price for the Common
Stock during the period beginning on the date of first occurrence of the Event
of Default and ending one day prior to the Mandatory Prepayment Date (the
"Default Amount") and all other amounts payable hereunder shall immediately
become due and payable, all without demand, presentment or notice, all of which
hereby are expressly waived, together with all costs, including, without
limitation, legal fees and expenses, of collection, and the Holder shall be
entitled to exercise all other rights and remedies available at law or in
equity. If the Borrower fails to pay the Default Amount within five (5) business
days of written notice that such amount is due and payable, then the Holder
shall have the right at any time, so long as the Borrower remains in default
(and so long and to the extent that there are sufficient authorized shares), to
require the Borrower, upon written notice, to immediately issue, in lieu of the
Default Amount, the number of shares of Common Stock of the Borrower equal to
the Default Amount divided by the Conversion Price then in effect.

                            Article IV. MISCELLANEOUS

         4.1 Failure or Indulgence Not Waiver. No failure or delay on the part
of the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privileges. All rights and remedies existing hereunder
are cumulative to, and not exclusive of, any rights or remedies otherwise
available.

         4.2 Notices. Any notice herein required or permitted to be given shall
be in writing and may be personally served or delivered by courier or sent by
United States mail and shall be deemed to have been given upon receipt if
personally served (which shall include telephone line facsimile transmission) or
sent by courier or three (3) days after being deposited in the United States
mail, certified, with postage pre-paid and properly addressed, if sent by mail.
For the purposes hereof, the address of the Holder shall be as shown on the
records of the Borrower; and the address of the Borrower shall be 416 W.
Muhammad Ali Boulevard, Louisville, Kentucky 40202, facsimile number:
502-585-6365. Both the Holder and the Borrower may change the address for
service by service of written notice to the other as herein provided.

         4.3 Amendments. This Debenture and any provision hereof may only be
amended by an instrument in writing signed by the Borrower and the Holder. The
term "Debenture" and all reference thereto, as used throughout this instrument,
shall mean this instrument (and the other Debentures issued pursuant to the
Purchase Agreement) as originally executed, or if later amended or supplemented,
then as so amended or supplemented.

         4.4 Assignability. This Debenture shall be binding upon the Borrower
and its successors and assigns, and shall inure to be the benefit of the Holder
and its successors and assigns. Each transferee of this Debenture must be an
"accredited investor" (as defined in Rule 501(a) of the 1933 Act).
Notwithstanding anything in this Debenture to the contrary, this Debenture may
be pledged as collateral in connection with a bona fide margin account or other
lending arrangement.

<PAGE>

         4.5 Cost of Collection. If default is made in the payment of this
Debenture, the Borrower shall pay the Holder hereof costs of collection,
including reasonable attorneys' fees.

         4.6 Governing Law. THIS DEBENTURE 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 BORROWER HEREBY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK,
NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS DEBENTURE, 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. 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 PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER
THIS DEBENTURE SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING
ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH
DISPUTE.

         4.7 Certain Amounts. Whenever pursuant to this Debenture the Borrower
is required to pay an amount in excess of the outstanding principal amount (or
the portion thereof required to be paid at that time) plus accrued and unpaid
interest plus Default Interest on such interest, the Borrower and the Holder
agree that the actual damages to the Holder from the receipt of cash payment on
this Debenture may be difficult to determine and the amount to be so paid by the
Borrower represents stipulated damages and not a penalty and is intended to
compensate the Holder in part for loss of the opportunity to convert this
Debenture and to earn a return from the sale of shares of Common Stock acquired
upon conversion of this Debenture at a price in excess of the price paid for
such shares pursuant to this Debenture. The Borrower and the Holder hereby agree
that such amount of stipulated damages is not plainly disproportionate to the
possible loss to the Holder from the receipt of a cash payment without the
opportunity to convert this Debenture into shares of Common Stock.

         4.8 Allocations of Maximum Share Amount and Reserved Amount. The
Maximum Share Amount and Reserved Amount shall be allocated pro rata among the
Holders of Debentures based on the principal amount of such Debentures issued to
each Holder. Each increase to the Maximum Share Amount and Reserved Amount shall
be allocated pro rata among the Holders of Debentures based on the principal
amount of such Debentures held by each Holder at the time of the increase in the
Maximum Share Amount or Reserved Amount. In the event a Holder shall sell or
otherwise transfer any of such Holder's Debentures, each transferee shall be
allocated a pro rata portion of such transferor's Maximum Share Amount and
Reserved Amount. Any portion of the Maximum Share Amount or Reserved Amount
which remains allocated to any person or entity which does not hold any
Debentures shall be allocated to the remaining Holders of Debentures, pro rata
based on the principal amount of such Debentures then held by such Holders.

         4.9 Damages Shares. The shares of Common Stock that may be issuable to
the Holder pursuant to Sections 1.3 and 1.4(g) hereof and pursuant to Section
2(c) of the Registration Rights Agreement ("Damages Shares") shall be treated as
Common Stock issuable upon conversion of this Debenture for all purposes hereof
and shall be subject to all of the limitations and afforded all of the rights of
the other shares of Common Stock issuable hereunder, including without
limitation, the right to be included in the Registration Statement filed
pursuant to the Registration Rights Agreement. For purposes of calculating
interest payable on the outstanding principal amount hereof, except as otherwise
provided herein, amounts convertible into Damages Shares ("Damages Amounts")
shall not bear interest but must be converted prior to the conversion of any
outstanding principal amount hereof, until the outstanding Damages Amounts is
zero.

         4.10 Denominations. At the request of the Holder, upon surrender of
this Debenture, the Borrower shall promptly issue new Debentures in the
aggregate outstanding principal amount hereof, in the form hereof, in such
denominations of at least $50,000 as the Holder shall request.

<PAGE>

         4.11 Purchase Agreement. By its acceptance of this Debenture, each
Holder agrees to be bound by the applicable terms of the Purchase Agreement.

         4.12 Notice of Corporate Events. Except as otherwise provided below,
the Holder of this Debenture shall have no rights as a Holder of Common Stock
unless and only to the extent that it converts this Debenture into Common Stock.
The Borrower shall provide the Holder with prior notification of any meeting of
the Borrower's shareholders (and copies of proxy materials and other information
sent to shareholders). In the event of any taking by the Borrower of a record of
its shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation,
reclassification or recapitalization) any share of any class or any other
securities or property, or to receive any other right, or for the purpose of
determining shareholders who are entitled to vote in connection with any
proposed sale, lease or conveyance of all or substantially all of the assets of
the Borrower or any proposed liquidation, dissolution or winding up of the
Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20)
days prior to the record date specified therein (or thirty (30) days prior to
the consummation of the transaction or event, whichever is earlier), of the date
on which any such record is to be taken for the purpose of such dividend,
distribution, right or other event, and a brief statement regarding the amount
and character of such dividend, distribution, right or other event to the extent
known at such time. The Borrower shall make a public announcement of any event
requiring notification to the Holder hereunder substantially simultaneously with
the notification to the Holder in accordance with the terms of this Section
4.12.

         4.13 Remedies. The Borrower acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder, by vitiating
the intent and purpose of the transaction contemplated hereby. Accordingly, the
Borrower acknowledges that the remedy at law for a breach of its obligations
under this Debenture will be inadequate and agrees, in the event of a breach or
threatened breach by the Borrower of the provisions of this Debenture, that the
Holder shall be entitled, in addition to all other available remedies at law or
in equity, and in addition to the penalties assessable herein, to an injunction
or injunctions restraining, preventing or curing any breach of this Debenture
and to enforce specifically the terms and provisions thereof, without the
necessity of showing economic loss and without any bond or other security being
required.

                         Article V. OPTIONAL PREPAYMENT

         5.1 Optional Prepayment. Notwithstanding anything to the contrary
contained in this Article V, so long as (i) no Event of Default or Trading
Market Prepayment Event shall have occurred and be continuing, (ii) the Borrower
has a sufficient number of authorized shares of Common Stock reserved for
issuance upon full conversion of the Debentures, then at any time after the
Issue Date, and (iii) the Common Stock is trading below $1.00 per share the
Borrower shall have the right, exercisable on not less than ten (10) Trading
Days prior written notice to the Holders of the Debentures (which notice may not
be sent to the Holders of the Debentures until the Borrower is permitted to
prepay the Debentures pursuant to this Section 5.1), to prepay all of the
outstanding Debentures in accordance with this Section 5.1. Any notice of
prepayment hereunder (an "Optional Prepayment") shall be delivered to the
Holders of the Debentures at their registered addresses appearing on the books
and records of the Borrower and shall state (1) that the Borrower is exercising
its right to prepay all of the Debentures issued on the Issue Date and (2) the
date of prepayment (the "Optional Prepayment Notice"). On the date fixed for
prepayment (the "Optional Prepayment Date"), the Borrower shall make payment of
the Optional Prepayment Amount (as defined below) to or upon the order of the
Holders as specified by the Holders in writing to the Borrower at least one (1)
business day prior to the Optional Prepayment Date. If the Borrower exercises
its right to prepay the Debentures, the Borrower shall make payment to the
holders of an amount in cash (the "Optional Prepayment Amount") equal to either
(i) 130% (for prepayments occurring within sixty (60) days of the Issue Date),
(ii) 140% (for prepayments occurring between sixty-one (61) and one hundred
twenty (120) days of the Issue Date) or (iii) 150% (for prepayments occurring
after the one hundred twentieth (120th) day following the Issue Date),
multiplied by the sum of (w) the then outstanding principal amount of this
Debenture plus (x) accrued and unpaid interest on the unpaid principal amount of
this Debenture to the Optional Prepayment Date plus (y) Default Interest, if
any, on the amounts referred to in clauses (w) and (x) plus (z) any amounts owed
to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section
2(c) of the Registration Rights Agreement (the then outstanding principal amount
of this Debenture to the date of payment plus the amounts referred to in clauses
(x), (y) and (z) shall collectively be known as the "Optional Prepayment Sum").
Notwithstanding notice of an Optional Prepayment, the Holders shall at all times
prior to the Optional Prepayment Date maintain the right to convert all or any
portion of the Debentures in accordance with Article I and any portion of
Debentures so converted after receipt of an Optional Prepayment Notice and prior
to the Optional Prepayment Date set forth in such notice and payment of the
aggregate Optional Prepayment Amount shall be deducted from the principal amount
of Debentures which are otherwise subject to prepayment pursuant to such notice.
If the Borrower delivers an Optional Prepayment Notice and fails to pay the
Optional Prepayment Amount due to the Holders of the Debentures within two (2)
business days following the Optional Prepayment Date, the Borrower shall forever
forfeit its right to redeem the Debentures pursuant to this Section 5.1.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

         IN WITNESS WHEREOF, Borrower has caused this Debenture to be signed in
its name by its duly authorized officer this 22nd day of April, 2003.

                                  PALLADIUM COMMUNICATIONS, INC.

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

<PAGE>

                                    EXHIBIT A

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

          The undersigned hereby irrevocably elects to convert $__________
principal amount of the Debenture (defined below) into shares of common stock,
par value $.001 per share ("Common Stock"), of Palladium Communications, Inc., a
Nevada corporation (the "Borrower") according to the conditions of the
convertible debentures of the Borrower dated as of April 22, 2003 (the
"Debentures"), as of the date written below. If securities are to be issued in
the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering herewith such
certificates. No fee will be charged to the Holder for any conversion, except
for transfer taxes, if any. A copy of each Debenture is attached hereto (or
evidence of loss, theft or destruction thereof).

             The Borrower shall electronically transmit the Common Stock
issuable pursuant to this Notice of Conversion to the account of the undersigned
or its nominee with DTC through its Deposit Withdrawal Agent Commission system
("DWAC Transfer").

         Name of DTC Prime Broker:
                                  ----------------------------------------------

         Account Number:
                        --------------------------------------------------------

             In lieu of receiving shares of Common Stock issuable pursuant to
this Notice of Conversion by way of a DWAC Transfer, the undersigned hereby
requests that the Borrower issue a certificate or certificates for the number of
shares of Common Stock set forth below (which numbers are based on the Holder's
calculation attached hereto) in the name(s) specified immediately below or, if
additional space is necessary, on an attachment hereto:

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

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

             The undersigned represents and warrants that all offers and sales
by the undersigned of the securities issuable to the undersigned upon conversion
of the Debentures shall be made pursuant to registration of the securities under
the Securities Act of 1933, as amended (the "Act"), or pursuant to an exemption
from registration under the Act.

                  Date of Conversion:___________________________
                  Applicable Conversion Price:____________________
                  Number of Shares of Common Stock to be Issued Pursuant to
                  Conversion of the Debentures:______________
                  Signature:___________________________________
                  Name:______________________________________
                  Address:____________________________________

The Borrower shall issue and deliver shares of Common Stock to an overnight
courier not later than three business days following receipt of the original
Debenture(s) to be converted, and shall make payments pursuant to the Debentures
for the number of business days such issuance and delivery is late.

<PAGE>

                                [FORM OF WARRANT]

         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 A SECURITIES PURCHASE
         AGREEMENT DATED AS OF APRIL 22, 2003, NEITHER THIS WARRANT NOR ANY OF
         SUCH SHARES MAY BE SOLD, TRANSFERRED OR ASSIGNED 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 OR
         REGULATION S UNDER SUCH ACT.

                                                                        Right to
                                                                Purchase 150,000
                                                                Shares of Common
                                                                Stock, $.001 par
                                                                 value per share

                             STOCK PURCHASE WARRANT

THIS CERTIFIES THAT, for value received, AJW Offshore, Ltd. or its registered
assigns, is entitled to purchase from PALLADIUM COMMUNICATIONS, INC., a Nevada
corporation (the "Company"), at any time or from time to time during the period
specified in Paragraph 2 hereof, One Hundred Fifty Thousand (150,000) fully paid
and nonassessable shares of the Company's Common Stock, $.001 par value per
share (the "Common Stock"), at a conversion price per share equal to the average
of the lowest three (3) Trading Prices (as defined below) during the twenty (20)
Trading Days (as defined below) immediately prior to the date of filing of the
Registration Statement (as defined in the Registration Rights Agreement referred
to in Section 7(a) below). "Trading Price" means, for any security as of any
date, the inter-day trading price on the Over-the-Counter Bulletin Board (the
"OTCBB") as reported by Bloomberg Financial Markets or an equivalent, reliable
reporting service mutually acceptable to and hereafter designated by Holders of
a majority in interest of the Debentures ("Bloomberg") or, if the OTCBB is not
the principal trading market for such security, the inter-day trading price of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg or, if no inter-day
trading price of such security is available in any of the foregoing manners, the
average of the inter-day trading prices of any market makers for such security
that are listed in the "pink sheets" by the National Quotation Bureau, Inc. If
the Trading Price cannot be calculated for such security on such date in the
manner provided above, the Trading Price shall be the fair market value as
mutually determined by the Corporation and the holders of a majority in interest
of the Debentures being converted for which the calculation of the Trading Price
is required in order to determine the Conversion Price of such Debentures.
"Trading Day" shall mean any day on which the Common Stock is traded for any
period on the OTCBB, or on the principal securities exchange or other securities
market on which the Common Stock is then being traded. (the "Exercise Price").
The term "Warrant Shares," as used herein, refers to the shares of Common Stock
purchasable hereunder. The Warrant Shares and the Exercise Price are subject to
adjustment as provided in Paragraph 4 hereof. The term "Warrants" means this
Warrant and the other warrants issued pursuant to that certain Securities
Purchase Agreement, dated April 22, 2003, by and among the Company and the
Buyers listed on the execution page thereof (the "Securities Purchase
Agreement"), including any additional warrants issuable pursuant to Section 4(l)
thereof.

<PAGE>

This Warrant is subject to the following terms, provisions, and conditions:

         1. Manner of Exercise; Issuance of Certificates; Payment for Shares.
Subject to the provisions hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "Exercise
Agreement"), to the Company during normal business hours on any business day at
the Company's principal executive offices (or such other office or agency of the
Company as it may designate by notice to the holder hereof), and upon (i)
payment to the Company in cash, by certified or official bank check or by wire
transfer for the account of the Company of the Exercise Price for the Warrant
Shares specified in the Exercise Agreement or (ii) if the resale of the Warrant
Shares by the holder is not then registered pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), delivery to the Company of a written notice of an election to
effect a "Cashless Exercise" (as defined in Section 11(c) below) for the Warrant
Shares specified in the Exercise Agreement. The Warrant Shares so purchased
shall be deemed to be issued to the holder hereof or such holder's designee, as
the record owner of such shares, as of the close of business on the date on
which this Warrant shall have been surrendered, the completed Exercise Agreement
shall have been delivered, and payment shall have been made for such shares as
set forth above. Certificates for the Warrant Shares so purchased, representing
the aggregate number of shares specified in the Exercise Agreement, shall be
delivered to the holder hereof within a reasonable time, not exceeding three (3)
business days, after this Warrant shall have been so exercised. The certificates
so delivered shall be in such denominations as may be requested by the holder
hereof and shall be registered in the name of such holder or such other name as
shall be designated by such holder. If this Warrant shall have been exercised
only in part, then, unless this Warrant has expired, the Company shall, at its
expense, at the time of delivery of such certificates, deliver to the holder a
new Warrant representing the number of shares with respect to which this Warrant
shall not then have been exercised. In addition to all other available remedies
at law or in equity, if the Company fails to deliver certificates for the
Warrant Shares within three (3) business days after this Warrant is exercised,
then the Company shall pay to the holder in cash a penalty (the "Penalty") equal
to 2% of the number of Warrant Shares that the holder is entitled to multiplied
by the Market Price (as hereinafter defined) for each day that the Company fails
to deliver certificates for the Warrant Shares. For example, if the holder is
entitled to 100,000 Warrant Shares and the Market Price is $2.00, then the
Company shall pay to the holder $4,000 for each day that the Company fails to
deliver certificates for the Warrant Shares. The Penalty shall be paid to the
holder by the fifth day of the month following the month in which it has
accrued.

             Notwithstanding anything in this Warrant to the contrary, in no
event shall the holder of this Warrant be entitled to exercise a number of
Warrants (or portions thereof) in excess of the number of Warrants (or portions
thereof) upon exercise of which the sum of (i) the number of shares of Common
Stock beneficially owned by the holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unexercised Warrants and the unexercised or unconverted portion of any other
securities of the Company (including the Debentures (as defined in the
Securities Purchase Agreement)) subject to a limitation on conversion or
exercise analogous to the limitation contained herein) and (ii) the number of
shares of Common Stock issuable upon exercise of the Warrants (or portions
thereof) with respect to which the determination described herein is being made,
would result in beneficial ownership by the holder and its affiliates of more
than 4.9% of the outstanding shares of Common Stock. For purposes of the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13D-G thereunder, except as otherwise provided in clause
(i) of the preceding sentence. The holder of this Warrant may waive the
limitations set forth herein by sixty-one (61) days written notice to the
Company. Notwithstanding anything to the contrary contained herein, the
limitation on exercise of this Warrant set forth herein may not be amended
without (i) the written consent of the holder hereof and the Company and (ii)
the approval of a majority of shareholders of the Company.

         2. Period of Exercise. This Warrant is exercisable at any time or from
time to time on or after the date on which this Warrant is issued and delivered
pursuant to the terms of the Securities Purchase Agreement and before 6:00 p.m.,
New York, New York time on the fifth (5th) anniversary of the date of issuance
(the "Exercise Period").

         3. Certain Agreements of the Company. The Company hereby covenants and
agrees as follows:

             (a) Shares to be Fully Paid. All Warrant Shares will, upon issuance
in accordance with the terms of this Warrant, be validly issued, fully paid, and
nonassessable and free from all taxes, liens, and charges with respect to the
issue thereof.

             (b) Reservation of Shares. During the Exercise Period, the Company
shall at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.

<PAGE>

             (c) Listing. The Company shall promptly secure the listing of the
shares of Common Stock issuable upon exercise of the Warrant upon each national
securities exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed (subject to official notice of issuance upon
exercise of this Warrant) and shall maintain, so long as any other shares of
Common Stock shall be so listed, such listing of all shares of Common Stock from
time to time issuable upon the exercise of this Warrant; and the Company shall
so list on each national securities exchange or automated quotation system, as
the case may be, and shall maintain such listing of, any other shares of capital
stock of the Company issuable upon the exercise of this Warrant if and so long
as any shares of the same class shall be listed on such national securities
exchange or automated quotation system.

             (d) Certain Actions Prohibited. The Company will not, by amendment
of its charter 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 to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above the Exercise Price then in effect, and (ii)
will take all such actions 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.

             (e) Successors and Assigns. This Warrant will be binding upon any
entity succeeding to the Company by merger, consolidation, or acquisition of all
or substantially all the Company's assets.

         4. Antidilution Provisions. During the Exercise Period, the Exercise
Price and the number of Warrant Shares shall be subject to adjustment from time
to time as provided in this Paragraph 4.

         In the event that any adjustment of the Exercise Price as required
herein results in a fraction of a cent, such Exercise Price shall be rounded up
to the nearest cent.

             (a) Adjustment of Exercise Price and Number of Shares upon Issuance
of Common Stock. Except as otherwise provided in Paragraphs 4(c) and 4(e)
hereof, if and whenever on or after the date of issuance of this Warrant, the
Company issues or sells, or in accordance with Paragraph 4(b) hereof is deemed
to have issued or sold, any shares of Common Stock for no consideration or for a
consideration per share (before deduction of reasonable expenses or commissions
or underwriting discounts or allowances in connection therewith) less than the
Market Price on the date of issuance (a "Dilutive Issuance"), then immediately
upon the Dilutive Issuance, the Exercise Price will be reduced to a price
determined by multiplying the Exercise Price in effect immediately prior to the
Dilutive Issuance by a fraction, (i) the numerator of which is an amount equal
to the sum of (x) the number of shares of Common Stock actually outstanding
immediately prior to the Dilutive Issuance, plus (y) the quotient of the
aggregate consideration, calculated as set forth in Paragraph 4(b) hereof,
received by the Company upon such Dilutive Issuance divided by the Market Price
in effect immediately prior to the Dilutive Issuance, and (ii) the denominator
of which is the total number of shares of Common Stock Deemed Outstanding (as
defined below) immediately after the Dilutive Issuance.

             (b) Effect on Exercise Price of Certain Events. For purposes of
determining the adjusted Exercise Price under Paragraph 4(a) hereof, the
following will be applicable:

<PAGE>

                (i) Issuance of Rights or Options. If the Company in any manner
issues or grants any warrants, rights or options, whether or not immediately
exercisable, to subscribe for or to purchase Common Stock or other securities
convertible into or exchangeable for Common Stock ("Convertible Securities")
(such warrants, rights and options to purchase Common Stock or Convertible
Securities are hereinafter referred to as "Options") and the price per share for
which Common Stock is issuable upon the exercise of such Options is less than
the Market Price on the date of issuance or grant of such Options, then the
maximum total number of shares of Common Stock issuable upon the exercise of all
such Options will, as of the date of the issuance or grant of such Options, be
deemed to be outstanding and to have been issued and sold by the Company for
such price per share. For purposes of the preceding sentence, the "price per
share for which Common Stock is issuable upon the exercise of such Options" is
determined by dividing (i) the total amount, if any, received or receivable by
the Company as consideration for the issuance or granting of all such Options,
plus the minimum aggregate amount of additional consideration, if any, payable
to the Company upon the exercise of all such Options, plus, in the case of
Convertible Securities issuable upon the exercise of such Options, the minimum
aggregate amount of additional consideration payable upon the conversion or
exchange thereof at the time such Convertible Securities first become
convertible or exchangeable, by (ii) the maximum total number of shares of
Common Stock issuable upon the exercise of all such Options (assuming full
conversion of Convertible Securities, if applicable). No further adjustment to
the Exercise Price will be made upon the actual issuance of such Common Stock
upon the exercise of such Options or upon the conversion or exchange of
Convertible Securities issuable upon exercise of such Options.

                (ii) Issuance of Convertible Securities. If the Company in any
manner issues or sells any Convertible Securities, whether or not immediately
convertible (other than where the same are issuable upon the exercise of
Options) and the price per share for which Common Stock is issuable upon such
conversion or exchange is less than the Market Price on the date of issuance,
then the maximum total number of shares of Common Stock issuable upon the
conversion or exchange of all such Convertible Securities will, as of the date
of the issuance of such Convertible Securities, be deemed to be outstanding and
to have been issued and sold by the Company for such price per share. For the
purposes of the preceding sentence, the "price per share for which Common Stock
is issuable upon such conversion or exchange" is determined by dividing (i) the
total amount, if any, received or receivable by the Company as consideration for
the issuance or sale of all such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to the Company
upon the conversion or exchange thereof at the time such Convertible Securities
first become convertible or exchangeable, by (ii) the maximum total number of
shares of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities. No further adjustment to the Exercise Price will be made
upon the actual issuance of such Common Stock upon conversion or exchange of
such Convertible Securities.

                (iii) Change in Option Price or Conversion Rate. If there is a
change at any time in (i) the amount of additional consideration payable to the
Company upon the exercise of any Options; (ii) the amount of additional
consideration, if any, payable to the Company upon the conversion or exchange of
any Convertible Securities; or (iii) the rate at which any Convertible
Securities are convertible into or exchangeable for Common Stock (other than
under or by reason of provisions designed to protect against dilution), the
Exercise Price in effect at the time of such change will be readjusted to the
Exercise Price which would have been in effect at such time had such Options or
Convertible Securities still outstanding provided for such changed additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold.

                (iv) Treatment of Expired Options and Unexercised Convertible
Securities. If, in any case, the total number of shares of Common Stock issuable
upon exercise of any Option or upon conversion or exchange of any Convertible
Securities is not, in fact, issued and the rights to exercise such Option or to
convert or exchange such Convertible Securities shall have expired or
terminated, the Exercise Price then in effect will be readjusted to the Exercise
Price which would have been in effect at the time of such expiration or
termination had such Option or Convertible Securities, to the extent outstanding
immediately prior to such expiration or termination (other than in respect of
the actual number of shares of Common Stock issued upon exercise or conversion
thereof), never been issued.

<PAGE>

                (v) Calculation of Consideration Received. If any Common Stock,
Options or Convertible Securities are issued, granted or sold for cash, the
consideration received therefor for purposes of this Warrant will be the amount
received by the Company therefor, before deduction of reasonable commissions,
underwriting discounts or allowances or other reasonable expenses paid or
incurred by the Company in connection with such issuance, grant or sale. In case
any Common Stock, Options or Convertible Securities are issued or sold for a
consideration part or all of which shall be other than cash, the amount of the
consideration other than cash received by the Company will be the fair value of
such consideration, except where such consideration consists of securities, in
which case the amount of consideration received by the Company will be the
Market Price thereof as of the date of receipt. In case any Common Stock,
Options or Convertible Securities are issued in connection with any acquisition,
merger or consolidation in which the Company is the surviving corporation, the
amount of consideration therefor will be deemed to be the fair value of such
portion of the net assets and business of the non-surviving corporation as is
attributable to such Common Stock, Options or Convertible Securities, as the
case may be. The fair value of any consideration other than cash or securities
will be determined in good faith by the Board of Directors of the Company.

                (vi) Exceptions to Adjustment of Exercise Price. No adjustment
to the Exercise Price will be made (i) upon the exercise of any warrants,
options or convertible securities granted, issued and outstanding on the date of
issuance of this Warrant; (ii) upon the grant or exercise of any stock or
options which may hereafter be granted or exercised under any employee benefit
plan, stock option plan or restricted stock plan of the Company now existing or
to be implemented in the future, so long as the issuance of such stock or
options is approved by a majority of the independent members of the Board of
Directors of the Company or a majority of the members of a committee of
independent directors established for such purpose; or (iii) upon the exercise
of the Warrants.

             (c) Subdivision or Combination of Common Stock. If the Company at
any time subdivides (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the shares of Common Stock
acquirable hereunder into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced. If the Company at any
time combines (by reverse stock split, recapitalization, reorganization,
reclassification or otherwise) the shares of Common Stock acquirable hereunder
into a smaller number of shares, then, after the date of record for effecting
such combination, the Exercise Price in effect immediately prior to such
combination will be proportionately increased.

             (d) Adjustment in Number of Shares. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Paragraph 4, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.

             (e) Consolidation, Merger or Sale. In case of any consolidation of
the Company with, or merger of the Company into any other corporation, or in
case of any sale or conveyance of all or substantially all of the assets of the
Company other than in connection with a plan of complete liquidation of the
Company, then as a condition of such consolidation, merger or sale or
conveyance, adequate provision will be made whereby the holder of this Warrant
will have the right to acquire and receive upon exercise of this Warrant in lieu
of the shares of Common Stock immediately theretofore acquirable upon the
exercise of this Warrant, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for the number of shares of
Common Stock immediately theretofore acquirable and receivable upon exercise of
this Warrant had such consolidation, merger or sale or conveyance not taken
place. In any such case, the Company will make appropriate provision to insure
that the provisions of this Paragraph 4 hereof will thereafter be applicable as
nearly as may be in relation to any shares of stock or securities thereafter
deliverable upon the exercise of this Warrant. The Company will not effect any
consolidation, merger or sale or conveyance unless prior to the consummation
thereof, the successor corporation (if other than the Company) assumes by
written instrument the obligations under this Paragraph 4 and the obligations to
deliver to the holder of this Warrant such shares of stock, securities or assets
as, in accordance with the foregoing provisions, the holder may be entitled to
acquire.

<PAGE>

             (f) Distribution of Assets. In case the Company shall declare or
make any distribution of its assets (including cash) to holders of Common Stock
as a partial liquidating dividend, by way of return of capital or otherwise,
then, after the date of record for determining shareholders entitled to such
distribution, but prior to the date of distribution, the holder of this Warrant
shall be entitled upon exercise of this Warrant for the purchase of any or all
of the shares of Common Stock subject hereto, to receive the amount of such
assets which would have been payable to the holder had such holder been the
holder of such shares of Common Stock on the record date for the determination
of shareholders entitled to such distribution.

             (g) Notice of Adjustment. Upon the occurrence of any event which
requires any adjustment of the Exercise Price, then, and in each such case, the
Company shall give notice thereof to the holder of this Warrant, which notice
shall state the Exercise Price resulting from such adjustment and the increase
or decrease in the number of Warrant Shares purchasable at such price upon
exercise, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Such calculation shall be certified
by the Chief Financial Officer of the Company.

             (h) Minimum Adjustment of Exercise Price. No adjustment of the
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.

             (i) No Fractional Shares. No fractional shares of Common Stock are
to be issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Market Price of a share of Common
Stock on the date of such exercise.

             (j) Other Notices. In case at any time:

                (i) the Company shall declare any dividend upon the Common Stock
payable in shares of stock of any class or make any other distribution
(including dividends or distributions payable in cash out of retained earnings)
to the holders of the Common Stock;

                (ii) the Company shall offer for subscription pro rata to the
holders of the Common Stock any additional shares of stock of any class or other
rights;

                (iii) there shall be any capital reorganization of the Company,
or reclassification of the Common Stock, or consolidation or merger of the
Company with or into, or sale of all or substantially all its assets to, another
corporation or entity; or

                (iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;then, in each such case, the Company
shall give to the holder of this Warrant (a) notice of the date on which the
books of the Company shall close or a record shall be taken for determining the
holders of Common Stock entitled to receive any such dividend, distribution, or
subscription rights or for determining the holders of Common Stock entitled to
vote in respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding-up and (b) in the case of any
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up, notice of the date (or, if not then known, a
reasonable approximation thereof by the Company) when the same shall take place.
Such notice shall also specify the date on which the holders of Common Stock
shall be entitled to receive such dividend, distribution, or subscription rights
or to exchange their Common Stock for stock or other securities or property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation, or winding-up, as the case may be. Such notice
shall be given at least 30 days prior to the record date or the date on which
the Company's books are closed in respect thereto. Failure to give any such
notice or any defect therein shall not affect the validity of the proceedings
referred to in clauses (i), (ii), (iii) and (iv) above.

<PAGE>

                (k) Certain Events. If any event occurs of the type contemplated
by the adjustment provisions of this Paragraph 4 but not expressly provided for
by such provisions, the Company will give notice of such event as provided in
Paragraph 4(g) hereof, and the Company's Board of Directors will make an
appropriate adjustment in the Exercise Price and the number of shares of Common
Stock acquirable upon exercise of this Warrant so that the rights of the holder
shall be neither enhanced nor diminished by such event.

                (l) Certain Definitions.

                    (i) "Common Stock Deemed Outstanding" shall mean the number
of shares of Common Stock actually outstanding (not including shares of Common
Stock held in the treasury of the Company), plus (x) pursuant to Paragraph
4(b)(i) hereof, the maximum total number of shares of Common Stock issuable upon
the exercise of Options, as of the date of such issuance or grant of such
Options, if any, and (y) pursuant to Paragraph 4(b)(ii) hereof, the maximum
total number of shares of Common Stock issuable upon conversion or exchange of
Convertible Securities, as of the date of issuance of such Convertible
Securities, if any.

                    (ii) "Market Price," as of any date, (i) means the average
of the last reported sale prices for the shares of Common Stock on the OTCBB for
the five (5) Trading Days immediately preceding such date as reported by
Bloomberg, or (ii) if the OTCBB is not the principal trading market for the
shares of Common Stock, the average of the last reported sale prices on the
principal trading market for the Common Stock during the same period as reported
by Bloomberg, or (iii) if market value cannot be calculated as of such date on
any of the foregoing bases, the Market Price shall be the fair market value as
reasonably determined in good faith by (a) the Board of Directors of the Company
or, at the option of a majority-in-interest of the holders of the outstanding
Warrants by (b) an independent investment bank of nationally recognized standing
in the valuation of businesses similar to the business of the corporation. The
manner of determining the Market Price of the Common Stock set forth in the
foregoing definition shall apply with respect to any other security in respect
of which a determination as to market value must be made hereunder.

                    (iii) "Common Stock," for purposes of this Paragraph 4,
includes the Common Stock, par value $.001 per share, and any additional class
of stock of the Company having no preference as to dividends or distributions on
liquidation, provided that the shares purchasable pursuant to this Warrant shall
include only shares of Common Stock, par value $.001 per share, in respect of
which this Warrant is exercisable, or shares resulting from any subdivision or
combination of such Common Stock, or in the case of any reorganization,
reclassification, consolidation, merger, or sale of the character referred to in
Paragraph 4(e) hereof, the stock or other securities or property provided for in
such Paragraph.

         5. Issue Tax. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.

         6. No Rights or Liabilities as a Shareholder. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.

         7. Transfer, Exchange, and Replacement of Warrant.

             (a) Restriction on Transfer. This Warrant and the rights granted to
the holder hereof are transferable, in whole or in part, upon surrender of this
Warrant, together with a properly executed assignment in the form attached
hereto, at the office or agency of the Company referred to in Paragraph 7(e)
below, provided, however, that any transfer or assignment shall be subject to
the conditions set forth in Paragraph 7(f) hereof and to the applicable
provisions of the Securities Purchase Agreement. Until due presentment for
registration of transfer on the books of the Company, the Company may treat the
registered holder hereof as the owner and holder hereof for all purposes, and
the Company shall not be affected by any notice to the contrary. Notwithstanding
anything to the contrary contained herein, the registration rights described in
Paragraph 8 are assignable only in accordance with the provisions of that
certain Registration Rights Agreement, dated April 22, 2003, by and among the
Company and the other signatories thereto (the "Registration Rights Agreement").

<PAGE>

             (b) Warrant Exchangeable for Different Denominations. This Warrant
is exchangeable, upon the surrender hereof by the holder hereof at the office or
agency of the Company referred to in Paragraph 7(e) below, for new Warrants of
like tenor representing in the aggregate the right to purchase the number of
shares of Common Stock which may be purchased hereunder, each of such new
Warrants to represent the right to purchase such number of shares as shall be
designated by the holder hereof at the time of such surrender.

             (c) Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.

             (d) Cancellation; Payment of Expenses. Upon the surrender of this
Warrant in connection with any transfer, exchange, or replacement as provided in
this Paragraph 7, this Warrant shall be promptly canceled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses (other than legal expenses, if any, incurred by the holder or
transferees) and charges payable in connection with the preparation, execution,
and delivery of Warrants pursuant to this Paragraph 7.

             (e) Register. The Companyshall maintain, at its principal executive
offices (or such other office or agency of the Company as it may designate by
notice to the holder hereof), a register for this Warrant, in which the Company
shall record the name and address of the person in whose name this Warrant has
been issued, as well as the name and address of each transferee and each prior
owner of this Warrant.

             (f) Exercise or Transfer Without Registration. If, at the time of
the surrender of this Warrant in connection with any exercise, transfer, or
exchange of this Warrant, this Warrant (or, in the case of any exercise, the
Warrant Shares issuable hereunder), shall not be registered under the Securities
Act of 1933, as amended (the "Securities Act") and under applicable state
securities or blue sky laws, the Company may require, as a condition of allowing
such exercise, transfer, or exchange, (i) that the holder or transferee of this
Warrant, as the case may be, furnish to the Company a written opinion of
counsel, which opinion and counsel are acceptable to the Company, to the effect
that such exercise, transfer, or exchange may be made without registration under
said Act and under applicable state securities or blue sky laws, (ii) that the
holder or transferee execute and deliver to the Company an investment letter in
form and substance acceptable to the Company and (iii) that the transferee be an
"accredited investor" as defined in Rule 501(a) promulgated under the Securities
Act; provided that no such opinion, letter or status as an "accredited investor"
shall be required in connection with a transfer pursuant to Rule 144 under the
Securities Act. The first holder of this Warrant, by taking and holding the
same, represents to the Company that such holder is acquiring this Warrant for
investment and not with a view to the distribution thereof.

         8. Registration Rights. The initial holder of this Warrant (and certain
assignees thereof) is entitled to the benefit of such registration rights in
respect of the Warrant Shares as are set forth in Section 2 of the Registration
Rights Agreement.

<PAGE>

         9. Notices. All notices, requests, and other communications required or
permitted to be given or delivered hereunder to the holder of this Warrant shall
be in writing, and shall be personally delivered, or shall be sent by certified
or registered mail or by recognized overnight mail courier, postage prepaid and
addressed, to such holder at the address shown for such holder on the books of
the Company, or at such other address as shall have been furnished to the
Company by notice from such holder. All notices, requests, and other
communications required or permitted to be given or delivered hereunder to the
Company shall be in writing, and shall be personally delivered, or shall be sent
by certified or registered mail or by recognized overnight mail courier, postage
prepaid and addressed, to the office of the Company at 416 W. Muhammad Ali
Boulevard, Louisville, Kentucky 40202, Attention: President and Chief Executive
Officer, or at such other address as shall have been furnished to the holder of
this Warrant by notice from the Company. Any such notice, request, or other
communication may be sent by facsimile, but shall in such case be subsequently
confirmed by a writing personally delivered or sent by certified or registered
mail or by recognized overnight mail courier as provided above. All notices,
requests, and other communications shall be deemed to have been given either at
the time of the receipt thereof by the person entitled to receive such notice at
the address of such person for purposes of this Paragraph 9, or, if mailed by
registered or certified mail or with a recognized overnight mail courier upon
deposit with the United States Post Office or such overnight mail courier, if
postage is prepaid and the mailing is properly addressed, as the case may be.

         10. Governing Law. THIS WARRANT 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 LOCATED IN NEW YORK,
NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS WARRANT, 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. 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 PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER
THIS WARRANT SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING
ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH
DISPUTE.

         11. Miscellaneous.

             (a) Amendments. This Warrant and any provision hereof may only be
amended by an instrument in writing signed by the Company and the holder hereof.

             (b) Descriptive Headings. The descriptive headings of the several
paragraphs of this Warrant are inserted for purposes of reference only, and
shall not affect the meaning or construction of any of the provisions hereof.

             (c) Cashless Exercise. Notwithstanding anything to the contrary
contained in thIis Warrant, if the resale of the Warrant Shares by the holder is
not then registered pursuant to an effective registration statement under the
Securities Act, this Warrant may be exercised by presentation and surrender of
this Warrant to the Company at its principal executive offices with a written
notice of the holder's intention to effect a cashless exercise, including a
calculation of the number of shares of Common Stock to be issued upon such
exercise in accordance with the 0terms hereof (a "Cashless Exercise"). In the
event of a Cashless Exercise, in lieu of paying the Exercise Price in cash, the
holder shall surrender this Warrant for that number of shares of Common Stock
determined by multiplying the number of Warrant Shares to which it would
otherwise be entitled by a fraction, the numerator of which shall be the
difference between the then current Market Price per share of the Common Stock
and the Exercise Price, and the denominator of which shall be the then current
Market Price per share of Common Stock. For example, if the holder is exercising
100,000 Warrants with a per Warrant exercise price of $0.75 per share through a
cashless exercise when the Common Stock's current Market Price per share is
$2.00 per share, then upon such Cashless Exercise the holder will receive 62,500
shares of Common Stock.

<PAGE>

             (d) Remedies. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the holder, by vitiating
the intent and purpose of the transaction contemplated hereby. Accordingly, the
Company acknowledges that the remedy at law for a breach of its obligations
under this Warrant will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Warrant, that the
holder shall be entitled, in addition to all other available remedies at law or
in equity, and in addition to the penalties assessable herein, to an injunction
or injunctions restraining, preventing or curing any breach of this Warrant and
to enforce specifically the terms and provisions thereof, without the necessity
of showing economic loss and without any bond or other security being required.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

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

                                      PALLADIUM COMMUNICATIONS, INC.

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

Dated as of April 22, 2003

<PAGE>

                           FORM OF EXERCISE AGREEMENT

                                                      Dated:  ________ __, 200_

To:      Palladium Communications, Inc.

         The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby agrees to purchase ________ shares of Common Stock covered by
such Warrant, and makes payment herewith in full therefor at the price per share
provided by such Warrant in cash or by certified or official bank check in the
amount of, or, if the resale of such Common Stock by the undersigned is not
currently registered pursuant to an effective registration statement under the
Securities Act of 1933, as amended, by surrender of securities issued by the
Company (including a portion of the Warrant) having a market value (in the case
of a portion of this Warrant, determined in accordance with Section 11(c) of the
Warrant) equal to $_________. Please issue a certificate or certificates for
such shares of Common Stock in the name of and pay any cash for any fractional
share to:

                           Name:    ___________________________

                           Signature:
                           Address:____________________________

                           Note:   The above signature should
                                   correspond exactly with the name
                                   on the face of the within Warrant,
                                   if applicable.

and, if said number of shares of Common Stock shall not be all the shares
purchasable under the within Warrant, a new Warrant is to be issued in the name
of said undersigned covering the balance of the shares purchasable thereunder
less any fraction of a share paid in cash.

<PAGE>

                               FORM OF ASSIGNMENT

         FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers all the rights of the undersigned under the within Warrant, with
respect to the number of shares of Common Stock covered thereby set forth
hereinbelow, to:

Name of Assignee                    Address                  No of Shares

, and hereby irrevocably constitutes and appoints_____________________________
as agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.

Dated:   ________ __, 200_

In the presence of:          _____________________________________

                        Name:_____________________________________

                        Signature:________________________________
                        Title of Signing Officer or Agent (if any):

                        Address: _________________________________

                         Note:    The  above   signature   should   correspond
                                  exactly  with  the  name on the  face of the
                                  within Warrant, if applicable.

<PAGE>

                               SECURITY AGREEMENT

         SECURITY AGREEMENT (this "Agreement"), dated as of April 22, 2003, by
and among Palladium Communications, Inc., a Nevada corporation ("Company"), and
the secured parties signatory hereto and their respective endorsees, transferees
and assigns (collectively, the "Secured Party").

                              W I T N E S S E T H:

         WHEREAS, pursuant to a Securities Purchase Agreement, dated the date
hereof between Company and the Secured Party (the "Purchase Agreement"), Company
has agreed to issue to the Secured Party and the Secured Party has agreed to
purchase from Company certain of Company's 12% Secured Convertible Debentures,
due one year from the date of issue (the "Debentures"), which are convertible
into shares of Company's Common Stock, par value $.001 per share (the "Common
Stock"). In connection therewith, Company shall issue the Secured Party certain
Common Stock purchase warrants dated as of the date hereof to purchase the
number of shares of Common Stock indicated below each Secured Party's name on
the Purchase Agreement (the "Warrants"); and

         WHEREAS, in order to induce the Secured Party to purchase the
Debentures, Company has agreed to execute and deliver to the Secured Party this
Agreement for the benefit of the Secured Party and to grant to it a first
priority security interest in certain property of Company to secure the prompt
payment, performance and discharge in full of all of Company's obligations under
the Debentures and exercise and discharge in full of Company's obligations under
the Warrants.

         NOW, THEREFORE, in consideration of the agreements herein contained and
for other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto hereby agree as follows:

          1. Certain Definitions. As used in this Agreement, the following terms
shall have the meanings set forth in this Section 1. Terms used but not
otherwise defined in this Agreement that are defined in Article 9 of the UCC
(such as "general intangibles" and "proceeds") shall have the respective
meanings given such terms in Article 9 of the UCC.

               (a) "Collateral" means the collateral in which the Secured Party
is granted a security interest by this Agreement and which shall include the
following, whether presently owned or existing or hereafter acquired or coming
into existence, and all additions and accessions thereto and all substitutions
and replacements thereof, and all proceeds, products and accounts thereof,
including, without limitation, all proceeds from the sale or transfer of the
Collateral and of insurance covering the same and of any tort claims in
connection therewith:

                    (i) All Goods of the Company, including, without
               limitations, all machinery, equipment, computers, motor vehicles,
               trucks, tanks, boats, ships, appliances, furniture, special and
               general tools, fixtures, test and quality control devices and
               other equipment of every kind and nature and wherever situated,
               together with all documents of title and documents representing
               the same, all

                    (ii) additions and accessions thereto, replacements
               therefor, all parts therefor, and all substitutes for any of the
               foregoing and all other items used and useful in connection with
               the Company's businesses and all improvements thereto
               (collectively, the "Equipment"); and

                    (iii) All Inventory of the Company; and

                    (iv) All of the Company's contract rights and general
               intangibles, including, without limitation, all partnership
               interests, stock or other securities, licenses, distribution and
               other agreements, computer software development rights, leases,
               franchises, customer lists, quality control procedures, grants
               and rights, goodwill, trademarks, service marks, trade styles,
               trade names, patents, patent applications, copyrights, deposit
               accounts, and income tax refunds (collectively, the "General
               Intangibles"); and

<PAGE>

                    (v) All Receivables of the Company including all insurance
               proceeds, and rights to refunds or indemnification whatsoever
               owing, together with all instruments, all documents of title
               representing any of the foregoing, all rights in any
               merchandising, goods, equipment, motor vehicles and trucks which
               any of the same may represent, and all right, title, security and
               guaranties with respect to each Receivable, including any right
               of stoppage in transit; and

                    (vi) All of the Company's documents, instruments and chattel
               paper, files, records, books of account, business papers,
               computer programs and the products and proceeds of all of the
               foregoing Collateral set forth in clauses (i)-(iv) above; and

                    (vii) All of the Company's shares of stock of the
               subsidiaries of the Company, including, without limitation, all
               of the Company's shares of stock of Peak Entertainment, Ltd.

               (b) "Company" shall mean, collectively, Company and all of the
subsidiaries of Company (including, without limitation, Peak Entertainment,
Ltd.), a list of which is contained in Schedule A, attached hereto.

               (c) "Obligations" means all of the Company's obligations under
this Agreement and the Debentures, in each case, whether now or hereafter
existing, voluntary or involuntary, direct or indirect, absolute or contingent,
liquidated or unliquidated, whether or not jointly owed with others, and whether
or not from time to time decreased or extinguished and later decreased, created
or incurred, and all or any portion of such obligations or liabilities that are
paid, to the extent all or any part of such payment is avoided or recovered
directly or indirectly from the Secured Party as a preference, fraudulent
transfer or otherwise as such obligations may be amended, supplemented,
converted, extended or modified from time to time.

               (d) "UCC" means the Uniform Commercial Code, as currently in
effect in the State of New York.

          2. Grant of Security Interest. As an inducement for the Secured Party
to purchase the Debentures and to secure the complete and timely payment,
performance and discharge in full, as the case may be, of all of the
Obligations, the Company hereby, unconditionally and irrevocably, pledges,
grants and hypothecates to the Secured Party, a continuing security interest in,
a continuing first lien upon, an unqualified right to possession and disposition
of and a right of set-off against, in each case to the fullest extent permitted
by law, all of the Company's right, title and interest of whatsoever kind and
nature (including, without limitation, all of Peak Entertainment Ltd.'s rights)
in and to the Collateral (the "Security Interest").

          3. Representations, Warranties, Covenants and Agreements of the
Company. The Company represents and warrants to, and covenants and agrees with,
the Secured Party as follows:

               (a) The Company has the requisite corporate power and authority
to enter into this Agreement and otherwise to carry out its obligations
thereunder. The execution, delivery and performance by the Company of this
Agreement and the filings contemplated therein have been duly authorized by all
necessary action on the part of the Company and no further action is required by
the Company. This Agreement constitutes a legal, valid and binding obligation of
the Company enforceable in accordance with its terms, except as enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting the enforcement of creditor's rights generally.

<PAGE>

               (b) The Company represents and warrants that it has no place of
business or offices where its respective books of account and records are kept
(other than temporarily at the offices of its attorneys or accountants) or
places where Collateral is stored or located, except as set forth on Schedule A
attached hereto;

               (c) The Company is the sole owner of the Collateral (except for
non-exclusive licenses granted by the Company in the ordinary course of
business), free and clear of any liens, security interests, encumbrances, rights
or claims, and is fully authorized to grant the Security Interest in and to
pledge the Collateral. There is not on file in any governmental or regulatory
authority, agency or recording office an effective financing statement, security
agreement, license or transfer or any notice of any of the foregoing (other than
those that have been filed in favor of the Secured Party pursuant to this
Agreement) covering or affecting any of the Collateral. So long as this
Agreement shall be in effect, the Company shall not execute and shall not
knowingly permit to be on file in any such office or agency any such financing
statement or other document or instrument (except to the extent filed or
recorded in favor of the Secured Party pursuant to the terms of this Agreement).

               (d) No part of the Collateral has been judged invalid or
unenforceable. No written claim has been received that any Collateral or the
Company's use of any Collateral violates the rights of any third party. There
has been no adverse decision to the Company's claim of ownership rights in or
exclusive rights to use the Collateral in any jurisdiction or to the Company's
right to keep and maintain such Collateral in full force and effect, and there
is no proceeding involving said rights pending or, to the best knowledge of the
Company, threatened before any court, judicial body, administrative or
regulatory agency, arbitrator or other governmental authority.

               (e) The Company shall at all times maintain its books of account
and records relating to the Collateral at its principal place of business and
its Collateral at the locations set forth on Schedule A attached hereto and may
not relocate such books of account and records or tangible Collateral unless it
delivers to the Secured Party at least 30 days prior to such relocation (i)
written notice of such relocation and the new location thereof (which must be
within the United States) and (ii) evidence that appropriate financing
statements and other necessary documents have been filed and recorded and other
steps have been taken to perfect the Security Interest to create in favor of the
Secured Party valid, perfected and continuing first priority liens in the
Collateral.

               (f) This Agreement creates in favor of the Secured Party a valid
security interest in the Collateral securing the payment and performance of the
Obligations and, upon making the filings described in the immediately following
sentence, a perfected first priority security interest in such Collateral.
Except for the filing of financing statements on Form-1 under the UCC with the
jurisdictions indicated on Schedule B, attached hereto, no authorization or
approval of or filing with or notice to any governmental authority or regulatory
body is required either (i) for the grant by the Company of, or the
effectiveness of, the Security Interest granted hereby or for the execution,
delivery and performance of this Agreement by the Company or (ii) for the
perfection of or exercise by the Secured Party of its rights and remedies
hereunder.

               (g) On the date of execution of this Agreement, the Company will
deliver to the Secured Party one or more executed UCC financing statements on
Form-1 with respect to the Security Interest for filing with the jurisdictions
indicated on Schedule B, attached hereto and in such other jurisdictions as may
be requested by the Secured Party.

               (h) The execution, delivery and performance of this Agreement
does not conflict with or cause a breach or default, or an event that with or
without the passage of time or notice, shall constitute a breach or default,
under any agreement to which the Company is a party or by which the Company is
bound. No consent (including, without limitation, from stock holders or
creditors of the Company) is required for the Company to enter into and perform
its obligations hereunder.

<PAGE>

               (i) The Company shall at all times maintain the liens and
Security Interest provided for hereunder as valid and perfected first priority
liens and security interests in the Collateral in favor of the Secured Party
until this Agreement and the Security Interest hereunder shall terminate
pursuant to Section 11. The Company hereby agrees to defend the same against any
and all persons. The Company shall safeguard and protect all Collateral for the
account of the Secured Party. At the request of the Secured Party, the Company
will sign and deliver to the Secured Party at any time or from time to time one
or more financing statements pursuant to the UCC (or any other applicable
statute) in form reasonably satisfactory to the Secured Party and will pay the
cost of filing the same in all public offices wherever filing is, or is deemed
by the Secured Party to be, necessary or desirable to effect the rights and
obligations provided for herein. Without limiting the generality of the
foregoing, the Company shall pay all fees, taxes and other amounts necessary to
maintain the Collateral and the Security Interest hereunder, and the Company
shall obtain and furnish to the Secured Party from time to time, upon demand,
such releases and/or subordinations of claims and liens which may be required to
maintain the priority of the Security Interest hereunder.

               (j) The Company will not transfer, pledge, hypothecate, encumber,
license (except for non-exclusive licenses granted by the Company in the
ordinary course of business), sell or otherwise dispose of any of the Collateral
without the prior written consent of the Secured Party.

               (k) The Company shall keep and preserve its Equipment, Inventory
and other tangible Collateral in good condition, repair and order and shall not
operate or locate any such Collateral (or cause to be operated or located) in
any area excluded from insurance coverage.

               (l) The Company shall, within ten (10) days of obtaining
knowledge thereof, advise the Secured Party promptly, in sufficient detail, of
any substantial change in the Collateral, and of the occurrence of any event
which would have a material adverse effect on the value of the Collateral or on
the Secured Party's security interest therein.

               (m) The Company shall promptly execute and deliver to the Secured
Party such further deeds, mortgages, assignments, security agreements, financing
statements or other instruments, documents, certificates and assurances and take
such further action as the Secured Party may from time to time request and may
in its sole discretion deem necessary to perfect, protect or enforce its
security interest in the Collateral including, without limitation, the execution
and delivery of a separate security agreement with respect to the Company's
intellectual property ("Intellectual Property Security Agreement") in which the
Secured Party has been granted a security interest hereunder, substantially in a
form acceptable to the Secured Party, which Intellectual Property Security
Agreement, other than as stated therein, shall be subject to all of the terms
and conditions hereof.

               (n) The Company shall permit the Secured Party and its
representatives and agents to inspect the Collateral at any time, and to make
copies of records pertaining to the Collateral as may be requested by the
Secured Party from time to time.

               (o) The Company will take all steps reasonably necessary to
diligently pursue and seek to preserve, enforce and collect any rights, claims,
causes of action and accounts receivable in respect of the Collateral.

               (p) The Company shall promptly notify the Secured Party in
sufficient detail upon becoming aware of any attachment, garnishment, execution
or other legal process levied against any Collateral and of any other
information received by the Company that may materially affect the value of the
Collateral, the Security Interest or the rights and remedies of the Secured
Party hereunder.

<PAGE>

               (q) All information heretofore, herein or hereafter supplied to
the Secured Party by or on behalf of the Company with respect to the Collateral
is accurate and complete in all material respects as of the date furnished.

               (r) Schedule A attached hereto contains a list of all of the
subsidiaries of Company.

          4. Defaults. The following events shall be "Events of Default":

               (a) The occurrence of an Event of Default (as defined in the
Debentures) under the Debentures;

               (b) Any representation or warranty of the Company in this
Agreement or in the Intellectual Property Security Agreement shall prove to have
been incorrect in any material respect when made;

               (c) The failure by the Company to observe or perform any of its
obligations hereunder or in the Intellectual Property Security Agreement for ten
(10) days after receipt by the Company of notice of such failure from the
Secured Party; and

               (d) Any breach of, or default under, the Warrants.

          5. Duty To Hold In Trust. Upon the occurrence of any Event of Default
and at any time thereafter, the Company shall, upon receipt by it of any
revenue, income or other sums subject to the Security Interest, whether payable
pursuant to the Debentures or otherwise, or of any check, draft, note, trade
acceptance or other instrument evidencing an obligation to pay any such sum,
hold the same in trust for the Secured Party and shall forthwith endorse and
transfer any such sums or instruments, or both, to the Secured Party for
application to the satisfaction of the Obligations.

          6. Rights and Remedies Upon Default. Upon occurrence of any Event of
Default and at any time thereafter, the Secured Party shall have the right to
exercise all of the remedies conferred hereunder and under the Debentures, and
the Secured Party shall have all the rights and remedies of a secured party
under the UCC and/or any other applicable law (including the Uniform Commercial
Code of any jurisdiction in which any Collateral is then located). Without
limitation, the Secured Party shall have the following rights and powers:

               (a) The Secured Party shall have the right to take possession of
the Collateral and, for that purpose, enter, with the aid and assistance of any
person, any premises where the Collateral, or any part thereof, is or may be
placed and remove the same, and the Company shall assemble the Collateral and
make it available to the Secured Party at places which the Secured Party shall
reasonably select, whether at the Company's premises or elsewhere, and make
available to the Secured Party, without rent, all of the Company's respective
premises and facilities for the purpose of the Secured Party taking possession
of, removing or putting the Collateral in saleable or disposable form.

               (b) The Secured Party shall have the right to operate the
business of the Company using the Collateral and shall have the right to assign,
sell, lease or otherwise dispose of and deliver all or any part of the
Collateral, at public or private sale or otherwise, either with or without
special conditions or stipulations, for cash or on credit or for future
delivery, in such parcel or parcels and at such time or times and at such place
or places, and upon such terms and conditions as the Secured Party may deem
commercially reasonable, all without (except as shall be required by applicable
statute and cannot be waived) advertisement or demand upon or notice to the
Company or right of redemption of the Company, which are hereby expressly
waived. Upon each such sale, lease, assignment or other transfer of Collateral,
the Secured Party may, unless prohibited by applicable law which cannot be
waived, purchase all or any part of the Collateral being sold, free from and
discharged of all trusts, claims, right of redemption and equities of the
Company, which are hereby waived and released.

<PAGE>

          7. Applications of Proceeds. The proceeds of any such sale, lease or
other disposition of the Collateral hereunder shall be applied first, to the
expenses of retaking, holding, storing, processing and preparing for sale,
selling, and the like (including, without limitation, any taxes, fees and other
costs incurred in connection therewith) of the Collateral, to the reasonable
attorneys' fees and expenses incurred by the Secured Party in enforcing its
rights hereunder and in connection with collecting, storing and disposing of the
Collateral, and then to satisfaction of the Obligations, and to the payment of
any other amounts required by applicable law, after which the Secured Party
shall pay to the Company any surplus proceeds. If, upon the sale, license or
other disposition of the Collateral, the proceeds thereof are insufficient to
pay all amounts to which the Secured Party is legally entitled, the Company will
be liable for the deficiency, together with interest thereon, at the rate of 15%
per annum (the "Default Rate"), and the reasonable fees of any attorneys
employed by the Secured Party to collect such deficiency. To the extent
permitted by applicable law, the Company waives all claims, damages and demands
against the Secured Party arising out of the repossession, removal, retention or
sale of the Collateral, unless due to the gross negligence or willful misconduct
of the Secured Party.

          8. Costs and Expenses. The Company agrees to pay all out-of-pocket
fees, costs and expenses incurred in connection with any filing required
hereunder, including without limitation, any financing statements, continuation
statements, partial releases and/or termination statements related thereto or
any expenses of any searches reasonably required by the Secured Party. The
Company shall also pay all other claims and charges which in the reasonable
opinion of the Secured Party might prejudice, imperil or otherwise affect the
Collateral or the Security Interest therein. The Company will also, upon demand,
pay to the Secured Party the amount of any and all reasonable expenses,
including the reasonable fees and expenses of its counsel and of any experts and
agents, which the Secured Party may incur in connection with (i) the enforcement
of this Agreement, (ii) the custody or preservation of, or the sale of,
collection from, or other realization upon, any of the Collateral, or (iii) the
exercise or enforcement of any of the rights of the Secured Party under the
Debentures. Until so paid, any fees payable hereunder shall be added to the
principal amount of the Debentures and shall bear interest at the Default Rate.

          9. Responsibility for Collateral. The Company assumes all liabilities
and responsibility in connection with all Collateral, and the obligations of the
Company hereunder or under the Debentures and the Warrants shall in no way be
affected or diminished by reason of the loss, destruction, damage or theft of
any of the Collateral or its unavailability for any reason.

          10. Security Interest Absolute. All rights of the Secured Party and
all Obligations of the Company hereunder, shall be absolute and unconditional,
irrespective of: (a) any lack of validity or enforceability of this Agreement,
the Debentures, the Warrants or any agreement entered into in connection with
the foregoing, or any portion hereof or thereof; (b) any change in the time,
manner or place of payment or performance of, or in any other term of, all or
any of the Obligations, or any other amendment or waiver of or any consent to
any departure from the Debentures, the Warrants or any other agreement entered
into in connection with the foregoing; (c) any exchange, release or
nonperfection of any of the Collateral, or any release or amendment or waiver of
or consent to departure from any other collateral for, or any guaranty, or any
other security, for all or any of the Obligations; (d) any action by the Secured
Party to obtain, adjust, settle and cancel in its sole discretion any insurance
claims or matters made or arising in connection with the Collateral; or (e) any
other circumstance which might otherwise constitute any legal or equitable
defense available to the Company, or a discharge of all or any part of the
Security Interest granted hereby. Until the Obligations shall have been paid and
performed in full, the rights of the Secured Party shall continue even if the
Obligations are barred for any reason, including, without limitation, the
running of the statute of limitations or bankruptcy. The Company expressly
waives presentment, protest, notice of protest, demand, notice of nonpayment and
demand for performance. In the event that at any time any transfer of any
Collateral or any payment received by the Secured Party hereunder shall be
deemed by final order of a court of competent jurisdiction to have been a
voidable preference or fraudulent conveyance under the bankruptcy or insolvency
laws of the United States, or shall be deemed to be otherwise due to any party
other than the Secured Party, then, in any such event, the Company's obligations
hereunder shall survive cancellation of this Agreement, and shall not be
discharged or satisfied by any prior payment thereof and/or cancellation of this
Agreement, but shall remain a valid and binding obligation enforceable in
accordance with the terms and provisions hereof. The Company waives all right to
require the Secured Party to proceed against any other person or to apply any
Collateral which the Secured Party may hold at any time, or to marshal assets,
or to pursue any other remedy. The Company waives any defense arising by reason
of the application of the statute of limitations to any obligation secured
hereby.

<PAGE>

          11. Term of Agreement. This Agreement and the Security Interest shall
terminate on the date on which all payments under the Debentures have been made
in full and all other Obligations have been paid or discharged. Upon such
termination, the Secured Party, at the request and at the expense of the
Company, will join in executing any termination statement with respect to any
financing statement executed and filed pursuant to this Agreement.

          12. Power of Attorney; Further Assurances.

               (a) The Company authorizes the Secured Party, and does hereby
make, constitute and appoint it, and its respective officers, agents, successors
or assigns with full power of substitution, as the Company's true and lawful
attorney-in-fact, with power, in its own name or in the name of the Company, to,
after the occurrence and during the continuance of an Event of Default, (i)
endorse any notes, checks, drafts, money orders, or other instruments of payment
(including payments payable under or in respect of any policy of insurance) in
respect of the Collateral that may come into possession of the Secured Party;
(ii) to sign and endorse any UCC financing statement or any invoice, freight or
express bill, bill of lading, storage or warehouse receipts, drafts against
debtors, assignments, verifications and notices in connection with accounts, and
other documents relating to the Collateral; (iii) to pay or discharge taxes,
liens, security interests or other encumbrances at any time levied or placed on
or threatened against the Collateral; (iv) to demand, collect, receipt for,
compromise, settle and sue for monies due in respect of the Collateral; and (v)
generally, to do, at the option of the Secured Party, and at the Company's
expense, at any time, or from time to time, all acts and things which the
Secured Party deems necessary to protect, preserve and realize upon the
Collateral and the Security Interest granted therein in order to effect the
intent of this Agreement, the Debentures and the Warrants, all as fully and
effectually as the Company might or could do; and the Company hereby ratifies
all that said attorney shall lawfully do or cause to be done by virtue hereof.
This power of attorney is coupled with an interest and shall be irrevocable for
the term of this Agreement and thereafter as long as any of the Obligations
shall be outstanding.

               (b) On a continuing basis, the Company will make, execute,
acknowledge, deliver, file and record, as the case may be, in the proper filing
and recording places in any jurisdiction, including, without limitation, the
jurisdictions indicated on Schedule B, attached hereto, all such instruments,
and take all such action as may reasonably be deemed necessary or advisable, or
as reasonably requested by the Secured Party, to perfect the Security Interest
granted hereunder and otherwise to carry out the intent and purposes of this
Agreement, or for assuring and confirming to the Secured Party the grant or
perfection of a security interest in all the Collateral.

               (c) The Company hereby irrevocably appoints the Secured Party as
the Company's attorney-in-fact, with full authority in the place and stead of
the Company and in the name of the Company, from time to time in the Secured
Party's discretion, to take any action and to execute any instrument which the
Secured Party may deem necessary or advisable to accomplish the purposes of this
Agreement, including the filing, in its sole discretion, of one or more
financing or continuation statements and amendments thereto, relative to any of
the Collateral without the signature of the Company where permitted by law.

<PAGE>

          13. Notices. All notices, requests, demands and other communications
hereunder shall be in writing, with copies to all the other parties hereto, and
shall be deemed to have been duly given when (i) if delivered by hand, upon
receipt, (ii) if sent by facsimile, upon receipt of proof of sending thereof,
(iii) if sent by nationally recognized overnight delivery service (receipt
requested), the next business day or (iv) if mailed by first-class registered or
certified mail, return receipt requested, postage prepaid, four days after
posting in the U.S. mails, in each case if delivered to the following addresses:

         If to the Company:             Palladium Communications, Inc.
                                        416 W. Muhammad Ali Boulevard
                                        Louisville, Kentucky 40202
                                        Attention:  President
                                        Telephone:  (502) 585-6364
                                        Facsimile:  (502) 585-6365

         With copies to:                Sichenzia Ross Friedman Ference LLP
                                        1065 Avenue of the Americas
                                        New York, New York 10018
                                        Attention:  Gregory Sichenzia, Esq.
                                        Telephone: (212) 930-9700
                                        Facsimile:  (212) 930-9725
                                        Email: gsichenzia@srfllp.net

         If to the Secured Party:       AJW Partners, LLC
                                        AJW Offshore, Ltd.
                                        AJW Qualified Partners, LLC
                                        New Millennium Capital Partners II, LLC
                                        1044 Northern Boulevard

                                        Suite 302
                                        Roslyn, New York  11576
                                        Attention:  Corey Ribotsky
                                        Facsimile:  516-739-7115

                                        With copies to:

                                        Ballard Spahr Andrews & Ingersoll, LLP
                                        1735 Market Street, 51st Floor
                                        Philadelphia, Pennsylvania  19103
                                        Attention:  Gerald J. Guarcini, Esq.
                                        Facsimile:  215-864-8999

          14. Other Security. To the extent that the Obligations are now or
hereafter secured by property other than the Collateral or by the guarantee,
endorsement or property of any other person, firm, corporation or other entity,
then the Secured Party shall have the right, in its sole discretion, to pursue,
relinquish, subordinate, modify or take any other action with respect thereto,
without in any way modifying or affecting any of the Secured Party's rights and
remedies hereunder.

          15. Miscellaneous.

               (a) No course of dealing between the Company and the Secured
Party, nor any failure to exercise, nor any delay in exercising, on the part of
the Secured Party, any right, power or privilege hereunder or under the
Debentures shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder or thereunder preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege.

               (b) All of the rights and remedies of the Secured Party with
respect to the Collateral, whether established hereby or by the Debentures or by
any other agreements, instruments or documents or by law shall be cumulative and
may be exercised singly or concurrently.

<PAGE>

               (c) This Agreement constitutes the entire agreement of the
parties with respect to the subject matter hereof and is intended to supersede
all prior negotiations, understandings and agreements with respect thereto.
Except as specifically set forth in this Agreement, no provision of this
Agreement may be modified or amended except by a written agreement specifically
referring to this Agreement and signed by the parties hereto.

               (d) In the event that any provision of this Agreement is held to
be invalid, prohibited or unenforceable in any jurisdiction for any reason,
unless such provision is narrowed by judicial construction, this Agreement
shall, as to such jurisdiction, be construed as if such invalid, prohibited or
unenforceable provision had been more narrowly drawn so as not to be invalid,
prohibited or unenforceable. If, notwithstanding the foregoing, any provision of
this Agreement is held to be invalid, prohibited or unenforceable in any
jurisdiction, such provision, as to such jurisdiction, shall be ineffective to
the extent of such invalidity, prohibition or unenforceability without
invalidating the remaining portion of such provision or the other provisions of
this Agreement and without affecting the validity or enforceability of such
provision or the other provisions of this Agreement in any other jurisdiction.

               (e) No waiver of any breach or default or any right under this
Agreement shall be considered valid unless in writing and signed by the party
giving such waiver, and no such waiver shall be deemed a waiver of any
subsequent breach or default or right, whether of the same or similar nature or
otherwise.

               (f) This Agreement shall be binding upon and inure to the benefit
of each party hereto and its successors and assigns.

               (g) Each party shall take such further action and execute and
deliver such further documents as may be necessary or appropriate in order to
carry out the provisions and purposes of this Agreement.

               (h) This Agreement shall be construed in accordance with the laws
of the State of New York, except to the extent the validity, perfection or
enforcement of a security interest hereunder in respect of any particular
Collateral which are governed by a jurisdiction other than the State of New York
in which case such law shall govern. Each of the parties hereto irrevocably
submit to the exclusive jurisdiction of any New York State or United States
Federal court sitting in Manhattan county over any action or proceeding arising
out of or relating to this Agreement, and the parties hereto hereby irrevocably
agree that all claims in respect of such action or proceeding may be heard and
determined in such New York State or Federal court. The parties hereto agree
that a final judgment in any such action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law. The parties hereto further waive any objection to venue
in the State of New York and any objection to an action or proceeding in the
State of New York on the basis of forum non conveniens.

               (i) EACH PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE
RIGHTS TO A JURY TRAIL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF THIS AGREEMENT. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING
OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT
MATER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION CONTRACT CLAIMS, TORT
CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.
EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR
EACH PARTY TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH PARTY HAS ALREADY
RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH PARTY WILL
CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY
FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL, AND THAT SUCH PARTY HAS KNOWINGLY AND VOLUNTARILY WAIVES ITS RIGHTS TO
A JURY TRIAL FOLLOWING SUCH CONSULTATION. THIS WAIVER IS IRREVOCABLE, MEANING
THAT, NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, IT MAY NOT BE MODIFIED
EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS AND SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. IN THE
EVENT OF A LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A
TRIAL BY THE COURT.

<PAGE>

             (j) This Agreement may be executed in any number of counterparts,
each of which when so executed shall be deemed to be an original and, all of
which taken together shall constitute one and the same Agreement. In the event
that any signature is delivered by facsimile transmission, such signature shall
create a valid binding obligation of the party executing (or on whose behalf
such signature is executed) the same with the same force and effect as if such
facsimile signature were the original thereof.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

         IN WITNESS WHEREOF, the parties hereto have caused this Security
Agreement to be duly executed on the day and year first above written.

                              PALLADIUM COMMUNICATIONS, INC.

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

                              AJW PARTNERS, LLC
                              By: SMS Group, LLC

                              By: /s/COREY S. RIBOTSKY
                                  Corey S. Ribotsky
                                  Manager

                              AJW OFFSHORE, LTD.

                              By:  First Street Manager II, LLC

                              By: /s/COREY S. RIBOTSKY
                                  Corey S. Ribotsky
                                  Manager

                              AJW QUALIFIED PARTNERS, LLC
                              By: AJW Manager, LLC

                              By:  /s/ COREY S. RIBOTSKY
                                   Corey S. Ribotsky
                                   Manager

                       [SIGNATURES CONTINUED ON NEXT PAGE]

<PAGE>

                              NEW MILLENNIUM CAPITAL PARTNERS II, LLC
                              By:  First Street Manager II, LLC

                              By:  /s/ COREY S. RIBOTSKY
                                   Corey S. Ribotsky
                                   Manager

<PAGE>

                    INTELLECTUAL PROPERTY SECURITY AGREEMENT

             Intellectual Property Security Agreement (this "Agreement" dated as
of April 22, 2003, by and among Palladium Communications, Inc., a Nevada
corporation (the "Company"), and the secured parties signatory hereto and their
respective endorsees, transferees and assigns (collectively, the "Secured
Party").

                              W I T N E S S E T H :

         WHEREAS, pursuant to a Securities Purchase Agreement, dated as of April
22, 2003 between Company and the Secured Party (the "Purchase Agreement"),
Company has agreed to issue to the Secured Party and the Secured Party has
agreed to purchase from Company certain of Company's 12% Secured Convertible
Debentures, due one year from the date of issue (the "Debentures"), which are
convertible into shares of Company's Common Stock, par value $.001 per share
(the "Common Stock"). In connection therewith, Company shall issue the Secured
Party certain Common Stock purchase warrants dated as of the date hereof to
purchase the number of shares of Common Stock indicated below each Secured
Party's name on the Purchase Agreement (the "Warrants"); and

         WHEREAS, in order to induce the Secured Party to purchase the
Debentures, Company has agreed to execute and deliver to the Secured Party this
Agreement for the benefit of the Secured Party and to grant to it a first
priority security interest in certain Intellectual Property (defined below) of
Company to secure the prompt payment, performance and discharge in full of all
of Company's obligations under the Debentures and exercise and discharge in full
of Company's obligations under the Warrants; and

         NOW, THEREFORE, in consideration of the agreements herein contained and
for other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto hereby agree as follows:

               1. Defined Terms. Unless otherwise defined herein, terms which
are defined in the Purchase Agreement and used herein are so used as so defined;
and the following terms shall have the following meanings:

                  "Company" shall mean, collectively, Company and all of the
subsidiaries of Company (including, without limitation, Peak Entertainment,
Ltd.), a list of which is contained in Schedule A, attached hereto.

                  "Copyrights" shall mean (a) all copyrights, registrations and
applications for registration, issued or filed, including any reissues,
extensions or renewals thereof, by or with the United States Copyright Office or
any similar office or agency of the United States, any state thereof, or any
other country or political subdivision thereof, or otherwise, including, all
rights in and to the material constituting the subject matter thereof,
including, without limitation, any referred to in Schedule B hereto, and (b) any
rights in any material which is copyrightable or which is protected by common
law, United States copyright laws or similar laws or any law of any State,
including, without limitation, any thereof referred to in Schedule B hereto.

<PAGE>

                  "Copyright License" shall mean any agreement, written or oral,
providing for a grant by the Company of any right in any Copyright, including,
without limitation, any thereof referred to in Schedule B hereto.

                  "Intellectual Property" shall means, collectively, the
Software Intellectual Property, Copyrights, Copyright Licenses, Patents, Patent
Licenses, Trademarks, Trademark Licenses and Trade Secrets.

                  "Obligations" means all of the Company's obligations under
this Agreement and the Debentures, in each case, whether now or hereafter
existing, voluntary or involuntary, direct or indirect, absolute or contingent,
liquidated or unliquidated, whether or not jointly owed with others, and whether
or not from time to time decreased or extinguished and later decreased, created
or incurred, and all or any portion of such obligations or liabilities that are
paid, to the extent all or any part of such payment is avoided or recovered
directly or indirectly from the Secured Party as a preference, fraudulent
transfer or otherwise as such obligations may be amended, supplemented,
converted, extendedb or modified from time to time.

                  "Patents" shall mean (a) all letters patent of the United
States or any other country or any political subdivision thereof, and all
reissues and extensions thereof, including, without limitation, any thereof
referred to in Schedule B hereto, and (b) all applications for letters patent of
the United States and all divisions, continuations and continuations-in-part
thereof or any other country or any political subdivision, including, without
limitation, any thereof referred to in Schedule B hereto.

                  "Patent License" shall mean all agreements, whether written or
oral, providing for the grant by the Company of any right to manufacture, use or
sell any invention covered by a Patent, including, without limitation, any
thereof referred to in Schedule B hereto.

                  "Security Agreement" shall mean the Security Agreement, dated
the date hereof between Company and the Secured Party.

                  "Software Intellectual Property"  shall mean:

                   (a) all software programs (including all source code, object
code and all related applications and data files), whether now owned, upgraded,
enhanced, licensed or leased or hereafter acquired by the Company, above;

                    (b) all computers and electronic data processing hardware
and firmware associated therewith;

                    (c) all documentation (including flow charts, logic
diagrams, manuals, guides and specifications) with respect to such software,
hardware and firmware described in the preceding clauses (a) and (b); and

                    (d) all rights with respect to all of the foregoing,
including, without limitation, any and all upgrades, modifications, copyrights,
licenses, options, warranties, service contracts, program services, test rights,
maintenance rights, support rights, improvement rights, renewal rights and
indemnifications and substitutions, replacements, additions, or model
conversions of any of the foregoing.

                  "Trademarks" shall mean (a) all trademarks, trade names,
corporate names, company names, business names, fictitious business names, trade
styles, service marks, logos and other source or business identifiers, and the
goodwill associated therewith, now existiI

                  "Trademark License" shall mean any agreement, written or oral,
providing for the grant by the Company of any right to use any Trademark,
including, without limitation, any thereof referred to in Schedule B hereto.

                  "Trade Secrets" shall mean common law and statutory trade
secrets and all other confidential or proprietary or useful information and all
know-how obtained by or used in or contemplated at any time for use in the
business of the Company (all of the foregoing being collectively called a "Trade
Secret"), whether or not such Trade Secret has been reduced to a writing or
other tangible form, including all documents and things embodying, incorporating
or referring in any way to such Trade Secret, all Trade Secret licenses,
including each Trade Secret license referred to in Schedule B hereto, and
including the right to sue for and to enjoin and to collect damages for the
actual or threatened misappropriation of any Trade Secret and for the breach or
enforcement of any such Trade Secret license.

<PAGE>

               2. Grant of Security Interest. In accordance with Section 3(m) of
the Security Agreement, to secure the complete and timely payment, performance
and discharge in full, as the case may be, of all of the Obligations, the
Company hereby, unconditionally and irrevocably, pledges, grants and
hypothecates to the Secured Party, a continuing security interest in, a
continuing first lien upon, an unqualified right to possession and disposition
of and a right of set-off against, in each case to the fullest extent permitted
by law, all of the Company's right, title and interest of whatsoever kind and
nature (including, without limitation, all of Peak Entertainment Ltd.'s rights)
in and to the Intellectual Property (the "Security Interest").

               3. Representations and Warranties. The Company hereby represents
and warrants, and covenants and agrees with, the Secured Party as follows:

                  (a) The Company has the requisite corporate power and
authority to enter into this Agreement and otherwise to carry out its
obligations thereunder. The execution, delivery and performance by the Company
of this Agreement and the filings contemplated therein have been duly authorized
by all necessary action on the part of the Company and no further action is
required by the Company. This Agreement constitutes a legal, valid and binding
obligation of the Company enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of creditor's rights
generally.

                  (b) The Company represents and warrants that it has no place
of business or offices where its respective books of account and records are
kept (other than temporarily at the offices of its attorneys or accountants) or
places where the Intellectual Property is stored or located, except as set forth
on Schedule A attached hereto;

                  (c) The Company is the sole owner of the Intellectual Property
(except for non-exclusive licenses granted by the Company in the ordinary course
of business), free and clear of any liens, security interests, encumbrances,
rights or claims, and is fully authorized to grant the Security Interest in and
to pledge the Intellectual Property. There is not on file in any governmental or
regulatory authority, agency or recording office an effective financing
statement, security agreement, license or transfer or any notice of any of the
foregoing (other than those that have been filed in favor of the Secured Party
pursuant to this Agreement) covering or affecting any of the Intellectual
Property. So long as this Agreement shall be in effect, the Company shall not
execute and shall not knowingly permit to be on file in any such office or
agency any such financing statement or other document or instrument (except to
the extent filed or recorded in favor of the Secured Party pursuant to the terms
of this Agreement), except for a financing statement covering assets acquired by
the Company after the date hereof, provided that the value of the Intellectual
Property covered by this Agreement along with the Collateral (as defined in the
Security Agreement) is equal to at least 150% of the Obligations.

                  (d) The Company shall at all times maintain its books of
account and records relating to the Intellectual Property at its principal place
of business and its Intellectual Property at the locations set forth on Schedule
A attached hereto and may not relocate such books of account and records unless
it delivers to the Secured Party at least 30 days prior to such relocation (i)
written notice of such relocation and the new location thereof (which must be
within the United States) and (ii) evidence that the necessary documents have
been filed and recorded and other steps have been taken to perfect the Security
Interest to create in favor of the Secured Party valid, perfected and continuing
first priority liens in the Intellectual Property to the extent they can be
perfected through such filings.

<PAGE>

                  (e) This Agreement creates in favor of the Secured Party a
valid security interest in the Intellectual Property securing the payment and
performance of the Obligations and, upon making the filings required hereunder,
a perfected first priority security interest in such Intellectual Property to
the extent that it can be perfected through such filings.

                  (f) Upon request of the Secured Party, the Company shall
execute and deliver any and all agreements, instruments, documents, and papers
as the Secured Party may request to evidence the Secured Party's security
interest in the Intellectual Property and the goodwill and general intangibles
of the Company relating thereto or represented thereby, and the Company hereby
appoints the Secured Party its attorney-in-fact to execute and file all such
writings for the foregoing purposes, all acts of such attorney being hereby
ratified and confirmed; such power being coupled with an interest is irrevocable
until the Obligations have been fully satisfied and are paid in full.

                  (g) The execution, delivery and performance of this Agreement
does not conflict with or cause a breach or default, or an event that with or
without the passage of time or notice, shall constitute a breach or default,
under any agreement to which the Company is a party or by which the Company is
bound. No consent (including, without limitation, from stock holders or
creditors of the Company) is required for the Company to enter into and perform
its obligations hereunder.

                 (h) The Company shall at all times maintain the liens and
Security Interest provided for hereunder as valid and perfected first priority
liens and security interests in the Intellectual Property to the extent they can
be perfected by filing in favor of the Secured Party until this Agreement and
the Security Interest hereunder shall terminate pursuant to Section 11. The
Company hereby agrees to defend the same against any and all persons. The
Company shall safeguard and protect all Intellectual Property for the account of
the Secured Party. Without limiting the generality of the foregoing, the Company
shall pay all fees, taxes and other amounts necessary to maintain the
Intellectual Property and the Security Interest hereunder, and the Company shall
obtain and furnish to the Secured Party from time to time, upon demand, such
releases and/or subordinations of claims and liens which may be required to
maintain the priority of the Security Interest hereunder.

                  (i) The Company will not transfer, pledge, hypothecate,
encumber, license (except for non-exclusive licenses granted by the Company in
the ordinary course of business), sell or otherwise dispose of any of the
Intellectual Property without the prior written consent of the Secured Party.

                  (j) The Company shall, within ten (10) days of obtaining
knowledge thereof, advise the Secured Party promptly, in sufficient detail, of
any substantial change in the Intellectual Property, and of the occurrence of
any event which would have a material adverse effect on the value of the
Intellectual Property or on the Secured Party's security interest therein.

                  (k) The Company shall permit the Secured Party and its
representatives and agents to inspect the Intellectual Property at any time, and
to make copies of records pertaining to the Intellectual Property as may be
requested by the Secured Party from time to time.

                  (l) The Company will take all steps reasonably necessary to
diligently pursue and seek to preserve, enforce and collect any rights, claims,
causes of action and accounts receivable in respect of the Intellectual
Property.

                  (m) The Company shall promptly notify the Secured Party in
sufficient detail upon becoming aware of any attachment, garnishment, execution
or other legal process levied against any Intellectual Property and of any other
information received by the Company that may materially affect the value of the
Intellectual Property, the Security Interest or the rights and remedies of the
Secured Party hereunder.

<PAGE>

                  (n) All information heretofore, herein or hereafter supplied
to the Secured Party by or on behalf of the Company with respect to the
Intellectual Property is accurate and complete in all material respects as of
the date furnished.

                  (o) Schedule A attached hereto contains a list of all of the
subsidiaries of Company.

                    (p) Schedule B attached hereto includes all Licenses, and
all Patents and Patent Licenses, if any, owned by the Company in its own name as
of the date hereof. Schedule B hereto includes all Trademarks and Trademark
Licenses, if any, owned by the Company in its own name as of the date hereof.
Schedule B hereto includes all Copyrights and Copyright Licenses, if any, owned
by the Company in its own name as of the date hereof. Schedule B hereto includes
all Trade Secrets and Trade Secret Licenses, if any, owned by the Company as of
the date hereof. To the best of the Company's knowledge, each License, Patent,
Trademark, Copyright and Trade Secret is valid, subsisting, unexpired,
enforceable and has not been abandoned. Except as set forth in Schedule B, none
of such Licenses, Patents, Trademarks, Copyrights and Trade Secrets is the
subject of any licensing or franchise agreement. To the best of the Company's
knowledge, no holding, decision or judgment has been rendered by any
Governmental Body which would limit, cancel or question the validity of any
License, Patent, Trademark, Copyright and Trade Secrets . No action or
proceeding is pending (i) seeking to limit, cancel or question the validity of
any License, Patent, Trademark, Copyright or Trade Secret, or (ii) which, if
adversely determined, would have a material adverse effect on the value of any
License, Patent, Trademark, Copyright or Trade Secret. The Company has used and
will continue to use for the duration of this Agreement, proper statutory notice
in connection with its use of the Patents, Trademarks and Copyrights and
consistent standards of quality in products leased or sold under the Patents,
Trademarks and Copyrights.

                  (q) With respect to any Intellectual Property:

                         (i) such Intellectual Property is subsisting and has
                             not been adjudged invalid or unenforceable, in
                             whole or in part;

                        (ii) such Intellectual Property is valid and
                             enforceable;

                       (iii) the Company has made all necessary filings and
                             recordations to protect its interest in such
                             Intellectual Property, including, without
                             limitation, recordations of all of its interests in
                             the Patents, Patent Licenses, Trademarks and
                             Trademark Licenses in the United States Patent and
                             Trademark Office and in corresponding offices
                             throughout the world and its claims to the
                             Copyrights and Copyright Licenses in the United
                             States Copyright Office and in corresponding
                             offices throughout the world;

                        (iv) other than as set forth in Schedule B, the Company
                             is the exclusive owner of the entire and
                             unencumbered right, title and interest in and to
                             such Intellectual Property and no claim has been
                             made that the use of such Intellectual Property
                             infringes on the asserted rights of any third
                             party; and

<PAGE>

                        (v)  the Company has performed and will continue to
                             perform all acts and has paid all required fees and
                             taxes to maintain each and every item of
                             Intellectual Property in full force and effect
                             throughout the world, as applicable.

                  (r) Except with respect to any Trademark or Copyright that the
Company shall reasonably determine is of negligible economic value to the
Company, the Company shall

                        (i)  maintain each Trademark and Copyright in full force
                             free from any claim of abandonment for non-use,
                             maintain as in the past the quality of products and
                             services offered under such Trademark or Copyright;
                             employ such Trademark or Copyright with the
                             appropriate notice of registration; not adopt or
                             use any mark which is confusingly similar or a
                             colorable imitation of such Trademark or Copyright
                             unless the Secured Party shall obtain a perfected
                             security interest in such mark pursuant to this
                             Agreement; and not (and not permit any licensee or
                             sublicensee thereof to) do any act or knowingly
                             omit to do any act whereby any Trademark or
                             Copyright may become invalidated;

                       (ii)  not, except with respect to any Patent that it
                             shall reasonably determine is of negligible
                             economic value to it, do any act, or omit to do any
                             act, whereby any Patent may become abandoned or
                             dedicated; and (iii) notify the Secured Party
                             immediately if it knows, or has reason to know,
                             that any application or registration relating to
                             any Patent, Trademark or Copyright may become
                             abandoned or dedicated, or of any adverse
                             determination or development (including, without
                             limitation, the institution of, or any such
                             determination or development in, any proceeding in
                             the United States Patent and Trademark Office,
                             United States Copyright Office or any court or
                             tribunal in any country) regarding its ownership of
                             any Patent, Trademark or Copyright or its right to
                             register the same or to keep and maintain the same.

                  (s) Whenever the Company, either by itself or through any
agent, employee, licensee or designee, shall file an application for the
registration of any Patent, Trademark or Copyright with the United States Patent
and Trademark Office, United States Copyright Office or any similar office or
agency in any other country or any political subdivision thereof or acquire
rights to any new Patent, Trademark or Copyright whether or not registered,
report such filing to the Secured Party within five business days after the last
day of the fiscal quarter in which such filing occurs.

                  (t) The Company shall take all reasonable and necessary steps,
including, without limitation, in any proceeding before the United States Patent
and Trademark Office, United States Copyright Office or any similar office or
agency in any other country or any political subdivision thereof, to maintain
and pursue each application (and to obtain the relevant registration) and to
maintain each registration of the Patents, Trademarks and Copyrights, including,
without limitation, filing of applications for renewal, affidavits of use and
affidavits of incontestability.

<PAGE>

                 (u) In the event that any Patent, Trademark or Copyright
included in the Intellectual Property is infringed, misappropriated or diluted
by a third party, promptly notify the Secured Party after it learns thereof and
shall, unless it shall reasonably determine that such Patent, Trademark or
Copyright is of negligible economic value to it, which determination it shall
promptly report to the Secured Party, promptly sue for infringement,
misappropriation or dilution, to seek injunctive relief where appropriate and to
recover any and all damages for such infringement, misappropriation or dilution,
or take such other actions as it shall reasonably deem appropriate under the
circumstances to protect such Patent, Trademark or Copyright. If the Company
lacks the financial resources to comply with this Section 3(t), the Company
shall so notify the Secured Party and shall cooperate fully with any enforcement
action undertaken by the Secured Party on behalf of the Company.

               4. Defaults. The following events shall be "Events of Default":

                  (a) The occurrence of an Event of Default (as defined in the
Debentures) under the Debentures;

                  (b) Any representation or warranty of the Company in this
Agreement or in the Security Agreement shall prove to have been incorrect in any
material respect when made;

                  (c) The failure by the Company to observe or perform any of
its obligations hereunder or in the Security Agreement for ten (10) days after
receipt by the Company of notice of such failure from the Secured Party; and

                  (d) Any breach of, or default under, the Warrants.

               5. Duty To Hold In Trust. Upon the occurrence of any Event of
Default and at any time thereafter, the Company shall, upon receipt by it of any
revenue, income or other sums subject to the Security Interest, whether payable
pursuant to the Debentures or otherwise, or of any check, draft, note, trade
acceptance or other instrument evidencing an obligation to pay any such sum,
hold the same in trust for the Secured Party and shall forthwith endorse and
transfer any such sums or instruments, or both, to the Secured Party for
application to the satisfaction of the Obligations.

               6. Rights and Remedies Upon Default. Upon occurrence of any Event
of Default and at any time thereafter, the Secured Party shall have the right to
exercise all of the remedies conferred hereunder and under the Debentures, and
the Secured Party shall have all the rights and remedies of a secured party
under the UCC and/or any other applicable law (including the Uniform Commercial
Code of any jurisdiction in which any Intellectual Property is then located).
Without limitation, the Secured Party shall have the following rights and
powers:

                  (a) The Secured Party shall have the right to take possession
of the Intellectual Property and, for that purpose, enter, with the aid and
assistance of any person, any premises where the Intellectual Property, or any
part thereof, is or may be placed and remove the same, and the Company shall
assemble the Intellectual Property and make it available to the Secured Party at
places which the Secured Party shall reasonably select, whether at the Company's
premises or elsewhere, and make available to the Secured Party, without rent,
all of the Company's respective premises and facilities for the purpose of the
Secured Party taking possession of, removing or putting the Intellectual
Property in saleable or disposable form.

<PAGE>

                 (b) The Secured Party shall have the right to operate the
business of the Company using the Intellectual Property and shall have the right
to assign, sell, lease or otherwise dispose of and deliver all or any part of
the Intellectual Property, at public or private sale or otherwise, either with
or without special conditions or stipulations, for cash or on credit or for
future delivery, in such parcel or parcels and at such time or times and at such
place or places, and upon such terms and conditions as the Secured Party may
deem commercially reasonable, all without (except as shall be required by
applicable statute and cannot be waived) advertisement or demand upon or notice
to the Company or right of redemption of the Company, which are hereby expressly
waived. Upon each such sale, lease, assignment or other transfer of Intellectual
Property, the Secured Party may, unless prohibited by applicable law which
cannot be waived, purchase all or any part of the Intellectual Property being
sold, free from and discharged of all trusts, claims, right of redemption and
equities of the Company, which are hereby waived and released.

               7. Applications of Proceeds. The proceeds of any such sale, lease
or other disposition of the Intellectual Property hereunder shall be applied
first, to the expenses of retaking, holding, storing, processing and preparing
for sale, selling, and the like (including, without limitation, any taxes, fees
and other costs incurred in connection therewith) of the Intellectual Property,
to the reasonable attorneys' fees and expenses incurred by the Secured Party in
enforcing its rights hereunder and in connection with collecting, storing and
disposing of the Intellectual Property, and then to satisfaction of the
Obligations, and to the payment of any other amounts required by applicable law,
after which the Secured Party shall pay to the Company any surplus proceeds. If,
upon the sale, license or other disposition of the Intellectual Property, the
proceeds thereof are insufficient to pay all amounts to which the Secured Party
is legally entitled, the Company will be liable for the deficiency, together
with interest thereon, at the rate of 15% per annum (the "Default Rate"), and
the reasonable fees of any attorneys employed by the Secured Party to collect
such deficiency. To the extent permitted by applicable law, the Company waives
all claims, damages and demands against the Secured Party arising out of the
repossession, removal, retention or sale of the Intellectual Property, unless
due to the gross negligence or willful misconduct of the Secured Party.

               8. Costs and Expenses. The Company agrees to pay all
out-of-pocket fees, costs and expenses incurred in connection with any filing
required hereunder, including without limitation, any financing statements,
continuation statements, partial releases and/or termination statements related
thereto or any expenses of any searches reasonably required by the Secured
Party. The Company shall also pay all other claims and charges which in the
reasonable opinion of the Secured Party might prejudice, imperil or otherwise
affect the Intellectual Property or the Security Interest therein. The Company
will also, upon demand, pay to the Secured Party the amount of any and all
reasonable expenses, including the reasonable fees and expenses of its counsel
and of any experts and agents, which the Secured Party may incur in connection
with (i) the enforcement of this Agreement, (ii) the custody or preservation of,
or the sale of, collection from, or other realization upon, any of the
Intellectual Property, or (iii) the exercise or enforcement of any of the rights
of the Secured Party under the Debentures. Until so paid, any fees payable
hereunder shall be added to the principal amount of the Debentures and shall
bear interest at the Default Rate.

               9. Responsibility for Intellectual Property. The Company assumes
all liabilities and responsibility in connection with all Intellectual Property,
and the obligations of the Company hereunder or under the Debentures and the
Warrants shall in no way be affected or diminished by reason of the loss,
destruction, damage or theft of any of the Intellectual Property or its
unavailability for any reason.

<PAGE>

               10. Security Interest Absolute. All rights of the Secured Party
and all Obligations of the Company hereunder, shall be absolute and
unconditional, irrespective of: (a) any lack of validity or enforceability of
this Agreement, the Debentures, the Warrants or any agreement entered into in
connection with the foregoing, or any portion hereof or thereof; (b) any change
in the time, manner or place of payment or performance of, or in any other term
of, all or any of the Obligations, or any other amendment or waiver of or any
consent to any departure from the Debentures, the Warrants or any other
agreement entered into in connection with the foregoing; (c) any exchange,
release or nonperfection of any of the Intellectual Property, or any release or
amendment or waiver of or consent to departure from any other Intellectual
Property for, or any guaranty, or any other security, for all or any of the
Obligations; (d) any action by the Secured Party to obtain, adjust, settle and
cancel in its sole discretion any insurance claims or matters made or arising in
connection with the Intellectual Property; or (e) any other circumstance which
might otherwise constitute any legal or equitable defense available to the
Company, or a discharge of all or any part of the Security Interest granted
hereby. Until the Obligations shall have been paid and performed in full, the
rights of the Secured Party shall continue even if the Obligations are barred
for any reason, including, without limitation, the running of the statute of
limitations or bankruptcy. The Company expressly waives presentment, protest,
notice of protest, demand, notice of nonpayment and demand for performance. In
the event that at any time any transfer of any Intellectual Property or any
payment received by the Secured Party hereunder shall be deemed by final order
of a court of competent jurisdiction to have been a voidable preference or
fraudulent conveyance under the bankruptcy or insolvency laws of the United
States, or shall be deemed to be otherwise due to any party other than the
Secured Party, then, in any such event, the Company's obligations hereunder
shall survive cancellation of this Agreement, and shall not be discharged or
satisfied by any prior payment thereof and/or cancellation of this Agreement,
but shall remain a valid and binding obligation enforceable in accordance with
the terms and provisions hereof. The Company waives all right to require the
Secured Party to proceed against any other person or to apply any Intellectual
Property which the Secured Party may hold at any time, or to marshal assets, or
to pursue any other remedy. The Company waives any defense arising by reason of
the application of the statute of limitations to any obligation secured hereby.

               11. Term of Agreement. This Agreement and the Security Interest
shall terminate on the date on which all payments under the Debentures have been
made in full and all other Obligations have been paid or discharged. Upon such
termination, the Secured Party, at the request and at the expense of the
Company, will join in executing any termination statement with respect to any
financing statement executed and filed pursuant to this Agreement.

               12. Power of Attorney; Further Assurances.

                  (a) The Company authorizes the Secured Party, and does hereby
make, constitute and appoint it, and its respective officers, agents, successors
or assigns with full power of substitution, as the Company's true and lawful
attorney-in-fact, with power, in its own name or in the name of the Company, to,
after the occurrence and during the continuance of an Event of Default, (i)
endorse any notes, checks, drafts, money orders, or other instruments of payment
(including payments payable under or in respect of any policy of insurance) in
respect of the Intellectual Property that may come into possession of the
Secured Party; (ii) to sign and endorse any UCC financing statement or any
invoice, freight or express bill, bill of lading, storage or warehouse receipts,
drafts against debtors, assignments, verifications and notices in connection
with accounts, and other documents relating to the Intellectual Property; (iii)
to pay or discharge taxes, liens, security interests or other encumbrances at
any time levied or placed on or threatened against the Intellectual Property;
(iv) to demand, collect, receipt for, compromise, settle and sue for monies due
in respect of the Intellectual Property; and (v) generally, to do, at the option
of the Secured Party, and at the Company's expense, at any time, or from time to
time, all acts and things which the Secured Party deems necessary to protect,
preserve and realize upon the Intellectual Property and the Security Interest
granted therein in order to effect the intent of this Agreement, the Debentures
and the Warrants, all as fully and effectually as the Company might or could do;
and the Company hereby ratifies all that said attorney shall lawfully do or
cause to be done by virtue hereof. This power of attorney is coupled with an
interest and shall be irrevocable for the term of this Agreement and thereafter
as long as any of the Obligations shall be outstanding.

<PAGE>

                  (b) On a continuing basis, the Company will make, execute,
acknowledge, deliver, file and record, as the case may be, in the proper filing
and recording places in any jurisdiction, including, without limitation, the
jurisdictions indicated on Schedule C, attached hereto, all such instruments,
and take all such action as may reasonably be deemed necessary or advisable, or
as reasonably requested by the Secured Party, to perfect the Security Interest
granted hereunder and otherwise to carry out the intent and purposes of this
Agreement, or for assuring and confirming to the Secured Party the grant or
perfection of a security interest in all the Intellectual Property.

                  (c) The Company hereby irrevocably appoints the Secured Party
as the Company's attorney-in-fact, with full authority in the place and stead of
the Company and in the name of the Company, from time to time in the Secured
Party's discretion, to take any action and to execute any instrument which the
Secured Party may deem necessary or advisable to accomplish the purposes of this
Agreement, including the filing, in its sole discretion, of one or more
financing or continuation statements and amendments thereto, relative to any of
the Intellectual Property without the signature of the Company where permitted
by law.

               13. Notices. All notices, requests, demands and other
communications hereunder shall be in writing, with copies to all the other
parties hereto, and shall be deemed to have been duly given when (i) if
delivered by hand, upon receipt, (ii) if sent by facsimile, upon receipt of
proof of sending thereof, (iii) if sent by nationally recognized overnight
delivery service (receipt requested), the next business day or (iv) if mailed by
first-class registered or certified mail, return receipt requested, postage
prepaid, four days after posting in the U.S. mails, in each case if delivered to
the following addresses:

        If to the Company:           Palladium Communications, Inc.
                                     416 W. Muhammad Ali Boulevard
                                     Louisville, Kentucky 40202
                                     Attention:  President
                                     Telephone:  (502) 585-6364
                                     Facsimile:  (502) 585-6365

        With copies to:              Sichenzia Ross Friedman Ference LLP
                                     1065 Avenue of the Americas
                                     New York, New York 10018
                                     Attention:  Gregory Sichenzia, Esq.
                                     Telephone:  (212) 930-9700
                                     Facsimile:  (212) 930-9725
                                     Email:  gsichenzia@srfllp.net

        If to the Secured Party:     AJW Partners, LLC
                                     AJW Offshore, Ltd.
                                     AJW Qualified Partners, LLC
                                     New Millennium Capital Partners II, LLC
                                     1044 Northern Boulevard
                                     Suite 302
                                     Roslyn, New York  11576
                                     Attention:  Corey Ribotsky
                                     Facsimile:  516-739-7115

<PAGE>

        With copies to:              Ballard Spahr Andrews & Ingersoll, LLP
                                     1735 Market Street, 51st Floor
                                     Philadelphia, Pennsylvania  19103
                                     Attention:  Gerald J. Guarcini, Esquire
                                     Facsimile:  215-864-8999

               14. Other Security. To the extent that the Obligations are now or
hereafter secured by property other than the Intellectual Property or by the
guarantee, endorsement or property of any other person, firm, corporation or
other entity, then the Secured Party shall have the right, in its sole
discretion, to pursue, relinquish, subordinate, modify or take any other action
with respect thereto, without in any way modifying or affecting any of the
Secured Party's rights and remedies hereunder.

               15. Miscellaneous.

                  (a) No course of dealing between the Company and the Secured
Party, nor any failure to exercise, nor any delay in exercising, on the part of
the Secured Party, any right, power or privilege hereunder or under the
Debentures shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder or thereunder preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege.

                  b) All of the rights and remedies of the Secured Party with
respect to the Intellectual Property, whether established hereby or by the
Debentures or by any other agreements, instruments or documents or by law shall
be cumulative and may be exercised singly or concurrently.

                  (c) This Agreement and the Security Agreement constitute the
entire agreement of the parties with respect to the subject matter hereof and is
intended to supersede all prior negotiations, understandings and agreements with
respect thereto. Except as specifically set forth in this Agreement, no
provision of this Agreement may be modified or amended except by a written
agreement specifically referring to this Agreement and signed by the parties
hereto.

                  (d) In the event that any provision of this Agreement is held
to be invalid, prohibited or unenforceable in any jurisdiction for any reason,
unless such provision is narrowed by judicial construction, this Agreement
shall, as to such jurisdiction, be construed as if such invalid, prohibited or
unenforceable provision had been more narrowly drawn so as not to be invalid,
prohibited or unenforceable. If, notwithstanding the foregoing, any provision of
this Agreement is held to be invalid, prohibited or unenforceable in any
jurisdiction, such provision, as to such jurisdiction, shall be ineffective to
the extent of such invalidity, prohibition or unenforceability without
invalidating the remaining portion of such provision or the other provisions of
this Agreement and without affecting the validity or enforceability of such
provision or the other provisions of this Agreement in any other jurisdiction.

                  (e) No waiver of any breach or default or any right under this
Agreement shall be considered valid unless in writing and signed by the party
giving such waiver, and no such waiver shall be deemed a waiver of any
subsequent breach or default or right, whether of the same or similar nature or
otherwise.

                  (f) This Agreement shall be binding upon and inure to the
benefit of each party hereto and its successors and assigns.

<PAGE>

                  (g) Each party shall take such further action and execute and
deliver such further documents as may be necessary or appropriate in order to
carry out the provisions and purposes of this Agreement.

                  (h) This Agreement shall be construed in accordance with the
laws of the State of New York, except to the extent the validity, perfection or
enforcement of a security interest hereunder in respect of any particular
Intellectual Property which are governed by a jurisdiction other than the State
of New York in which case such law shall govern. Each of the parties hereto
irrevocably submit to the exclusive jurisdiction of any New York State or United
States Federal court sitting in Manhattan county over any action or proceeding
arising out of or relating to this Agreement, and the parties hereto hereby
irrevocably agree that all claims in respect of such action or proceeding may be
heard and determined in such New York State or Federal court. The parties hereto
agree that a final judgment in any such action or proceeding shall be conclusive
and may be enforced in other jurisdictions by suit on the judgment or in any
other manner provided by law. The parties hereto further waive any objection to
venue in the State of New York and any objection to an action or proceeding in
the State of New York on the basis of forum non conveniens.

                  (i) EACH PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE
RIGHTS TO A JURY TRAIL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF THIS AGREEMENT. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING
OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT
MATER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION CONTRACT CLAIMS, TORT
CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.
EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR
EACH PARTY TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH PARTY HAS ALREADY
RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH PARTY WILL
CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY
FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL, AND THAT SUCH PARTY HAS KNOWINGLY AND VOLUNTARILY WAIVES ITS RIGHTS TO
A JURY TRIAL FOLLOWING SUCH CONSULTATION. THIS WAIVER IS IRREVOCABLE, MEANING
THAT, NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, IT MAY NOT BE MODIFIED
EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS AND SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. IN THE
EVENT OF A LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A
TRIAL BY THE COURT.

                  (j) This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the day and year first above written.

                             PALLADIUM COMMUNICATIONS, INC.

                             By: /s/ WILF SHORROCKS

                                 Wilf Shorrocks
                                 President and Chief Executive Officer

                             AJW PARTNERS, LLC
                             By: SMS Group, LLC

                             By: /s/ COREY S. RIBOTSKY

                                 Corey S. Ribotsky
                                 Manager

                             AJW OFFSHORE, LTD.
                             By:  First Street Manager II, LLC

                             By: /s/ COREY S. RIBOTSKY

                                 Corey S. Ribotsky
                                 Manager

                             AJW QUALIFIED PARTNERS, LLC
                             By: AJW Manager, LLC

                             By: /s/ COREY S. RIBOTSKY

                                 Corey S. Ribotsky
                                 Manager

                             NEW MILLENNIUM CAPITAL
                             PARTNERS II, LLC
                             By:  First Street Manager II, LLC

                             By: /s/ COREY S. RIBOTSKY

                                 Corey S. Ribotsky
                                 Manager

<PAGE>

                          REGISTRATION RIGHTS AGREEMENT

         REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of April 22,
2003, by and among Palladium Communications, Inc., a Nevada corporation with its
headquarters located at 416 W. Muhammad Ali Boulevard, Louisville, Kentucky
40202 (the "Company"), and each of the undersigned (together with their
respective affiliates and any assignee or transferee of all of their respective
rights hereunder, the "Initial Investors").

         WHEREAS:

         A. In connection with the Securities Purchase Agreement by and among
the parties hereto of even date herewith (the "Securities Purchase Agreement"),
the Company has agreed, upon the terms and subject to the conditions contained
therein, to issue and sell to the Initial Investors (i) convertible debentures
in the aggregate principal amount of up to Seven Hundred Eighty-Five Thousand
Dollars ($785,000) (the "Debentures") that are convertible into shares of the
Company's common stock (the "Common Stock"), upon the terms and subject to the
limitations and conditions set forth in such Debentures and (ii) warrants (the
"Warrants") to acquire an aggregate of 1,570,000 shares of Common Stock, upon
the terms and conditions and subject to the limitations and conditions set forth
in the Warrants dated April 22, 2003; and

         B. To induce the Initial Investors to execute and deliver the
Securities Purchase Agreement, the Company has agreed to provide certain
registration rights under the Securities Act of 1933, as amended, and the rules
and regulations thereunder, or any similar successor statute (collectively, the
"1933 Act"), and applicable state securities laws;

         NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and each
of the Initial Investors hereby agree as follows:

         1. DEFINITIONS.

             a. As used in this Agreement, the following terms shall have the
following meanings:

             (i) "Investors" means the Initial Investors and any transferee or
assignee who agrees to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.

             (ii) "register," "registered," and "registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the 1933 Act and pursuant to Rule 415 under the
1933 Act or any successor rule providing for offering securities on a continuous
basis ("Rule 415"), and the declaration or ordering of effectiveness of such
Registration Statement by the United States Securities and Exchange Commission
(the "SEC").

             (iii) "Registrable Securities" means the Conversion Shares issued
or issuable upon conversion or otherwise pursuant to the Debentures and
Additional Debentures (as defined in the Securities Purchase Agreement)
including, without limitation, Damages Shares (as defined in the Debentures)
issued or issuable pursuant to the Debentures, shares of Common Stock issued or
issuable in payment of the Standard Liquidated Damages Amount (as defined in the
Securities Purchase Agreement), shares issued or issuable in respect of interest
or in redemption of the Debentures in accordance with the terms thereof) and
Warrant Shares issuable, upon exercise or otherwise pursuant to the Warrants and
Additional Warrants (as defined in the Securities Purchase Agreement), and any
shares of capital stock issued or issuable as a dividend on or in exchange for
or otherwise with respect to any of the foregoing.

             (iv) "Registration Statement" means a registration statement of the
Company under the 1933 Act.

         b. Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Securities Purchase Agreement or
the Convertible Debenture.

<PAGE>

         2. REGISTRATION.

         a. Mandatory Registration. The Company shall prepare, and, on or prior
to forty (40) days from the date of Closing (as defined in the Securities
Purchase Agreement) (the "Filing Date"), file with the SEC a Registration
Statement on Form S-3 (or, if Form S-3 is not then available, on such form of
Registration Statement as is then available to effect a registration of the
Registrable Securities, subject to the consent of the Initial Investors, which
consent will not be unreasonably withheld) covering the resale of the
Registrable Securities underlying the Debentures and Warrants issued or issuable
pursuant to the Securities Purchase Agreement, which Registration Statement, to
the extent allowable under the 1933 Act and the rules and regulations
promulgated thereunder (including Rule 416), shall state that such Registration
Statement also covers such indeterminate number of additional shares of Common
Stock as may become issuable upon conversion of or otherwise pursuant to the
Debentures and exercise of the Warrants to prevent dilution resulting from stock
splits, stock dividends or similar transactions. The number of shares of Common
Stock initially included in such Registration Statement shall be no less than an
amount equal to two (2) times the sum of the number of Conversion Shares that
are then issuable upon conversion of the Debentures and Additional Debentures
(based on the Variable Conversion Price as would then be in effect and assuming
the Variable Conversion Price is the Conversion Price at such time), and the
number of Warrant Shares that are then issuable upon exercise of the Warrants,
without regard to any limitation on the Investor's ability to convert the
Debentures or exercise the Warrants. The Company acknowledges that the number of
shares initially included in the Registration Statement represents a good faith
estimate of the maximum number of shares issuable upon conversion of the
Debentures and upon exercise of the Warrants.

         b. Underwritten Offering. If any offering pursuant to a Registration
Statement pursuant to Section 2(a) hereof involves an underwritten offering, the
Investors who hold a majority in interest of the Registrable Securities subject
to such underwritten offering, with the consent of a majority-in-interest of the
Initial Investors, shall have the right to select one legal counsel and an
investment banker or bankers and manager or managers to administer the offering,
which investment banker or bankers or manager or managers shall be reasonably
satisfactory to the Company.

         c. Payments by the Company. The Company shall use its best efforts to
obtain effectiveness of the Registration Statement as soon as practicable. If
(i) the Registration Statement(s) covering the Registrable Securities required
to be filed by the Company pursuant to Section 2(a) hereof is not filed by the
Filing Date or declared effective by the SEC on or prior to one hundred twenty
(120) days from the date of Closing (as defined in the Securities Purchase
Agreement), or (ii) after the Registration Statement has been declared effective
by the SEC, sales of all of the Registrable Securities cannot be made pursuant
to the Registration Statement, or (iii) the Common Stock is not listed or
included for quotation on the Nasdaq National Market ("Nasdaq"), the Nasdaq
SmallCap Market ("Nasdaq SmallCap"), the New York Stock Exchange (the "NYSE") or
the American Stock Exchange (the "AMEX") after being so listed or included for
quotation, or (iv) the Common Stock ceases to be traded on the Over-the-Counter
Bulletin Board (the "OTCBB") or any equivalent replacement exchange prior to
being listed or included for quotation on one of the aforementioned markets,
then the Company will make payments to the Investors in such amounts and at such
times as shall be determined pursuant to this Section 2(c) as partial relief for
the damages to the Investors by reason of any such delay in or reduction of
their ability to sell the Registrable Securities (which remedy shall not be
exclusive of any other remedies available at law or in equity). The Company
shall pay to each holder of the Debentures or Registrable Securities an amount
equal to the then outstanding principal amount of the Debentures (and, in the
case of holders of Registrable Securities, the principal amount of Debentures
from which such Registrable Securities were converted) ("Outstanding Principal
Amount"), multiplied by the Applicable Percentage (as defined below) times the
sum of: (i) the number of months (prorated for partial months) after the Filing
Date or the end of the aforementioned one hundred twenty (120) day period and
prior to the date the Registration Statement is declared effective by the SEC,
provided, however, that there shall be excluded from such period any delays
which are solely attributable to changes required by the Investors in the
Registration Statement with respect to information relating to the Investors,
including, without limitation, changes to the plan of distribution, or to the
failure of the Investors to conduct their review of the Registration Statement
pursuant to Section 3(h) below in a reasonably prompt manner; (ii) the number of
months (prorated for partial months) that sales of all of the Registrable
Securities cannot be made pursuant to the Registration Statement after the
Registration Statement has been declared effective (including, without
limitation, when sales cannot be made by reason of the Company's failure to
properly supplement or amend the prospectus included therein in accordance with
the terms of this Agreement, but excluding any days during an Allowed Delay (as
defined in Section 3(f)); and (iii) the number of months (prorated for partial
months) that the Common Stock is not listed or included for quotation on the
OTCBB, Nasdaq, Nasdaq SmallCap, NYSE or AMEX or that trading thereon is halted
after the Registration Statement has been declared effective. The term
"Applicable Percentage" means two hundredths (.02). (For example, if the
Registration Statement becomes effective one (1) month after the end of such one
hundred twenty-day period, the Company would pay $5,000 for each $250,000 of
Outstanding Principal Amount. If thereafter, sales could not be made pursuant to
the Registration Statement for an additional period of one (1) month, the
Company would pay an additional $5,000 for each $250,000 of Outstanding
Principal Amount.) Such amounts shall be paid in cash or, at each Investor's
option, in shares of Common Stock priced at the Conversion Price (as defined in
the Debentures) on such payment date.

<PAGE>

         d. Piggy-Back Registrations. Subject to the last sentence of this
Section 2(d), if at any time prior to the expiration of the Registration Period
(as hereinafter defined) the Company shall determine to file with the SEC a
Registration Statement relating to an offering for its own account or the
account of others under the 1933 Act of any of its equity securities (other than
on Form S-4 or Form S-8 or their then equivalents relating to equity securities
to be issued solely in connection with any acquisition of any entity or business
or equity securities issuable in connection with stock option or other bona
fide, employee benefit plans), the Company shall send to each Investor who is
entitled to registration rights under this Section 2(d) written notice of such
determination and, if within fifteen (15) days after the effective date of such
notice, such Investor shall so request in writing, the Company shall include in
such Registration Statement all or any part of the Registrable Securities such
Investor requests to be registered, except that if, in connection with any
underwritten public offering for the account of the Company the managing
underwriter(s) thereof shall impose a limitation on the number of shares of
Common Stock which may be included in the Registration Statement because, in
such underwriter(s)' judgment, marketing or other factors dictate such
limitation is necessary to facilitate public distribution, then the Company
shall be obligated to include in such Registration Statement only such limited
portion of the Registrable Securities with respect to which such Investor has
requested inclusion hereunder as the underwriter shall permit. Any exclusion of
Registrable Securities shall be made pro rata among the Investors seeking to
include Registrable Securities in proportion to the number of Registrable
Securities sought to be included by such Investors; provided, however, that the
Company shall not exclude any Registrable Securities unless the Company has
first excluded all outstanding securities, the holders of which are not entitled
to inclusion of such securities in such Registration Statement or are not
entitled to pro rata inclusion with the Registrable Securities; and provided,
further, however, that, after giving effect to the immediately preceding
proviso, any exclusion of Registrable Securities shall be made pro rata with
holders of other securities having the right to include such securities in the
Registration Statement other than holders of securities entitled to inclusion of
their securities in such Registration Statement by reason of demand registration
rights. No right to registration of Registrable Securities under this Section
2(d) shall be construed to limit any registration required under Section 2(a)
hereof. If an offering in connection with which an Investor is entitled to
registration under this Section 2(d) is an underwritten offering, then each
Investor whose Registrable Securities are included in such Registration
Statement shall, unless otherwise agreed by the Company, offer and sell such
Registrable Securities in an underwritten offering using the same underwriter or
underwriters and, subject to the provisions of this Agreement, on the same terms
and conditions as other shares of Common Stock included in such underwritten
offering. Notwithstanding anything to the contrary set forth herein, the
registration rights of the Investors pursuant to this Section 2(d) shall only be
available in the event the Company fails to timely file, obtain effectiveness or
maintain effectiveness of any Registration Statement to be filed pursuant to
Section 2(a) in accordance with the terms of this Agreement.

<PAGE>

         e. Eligibility for Form S-3, SB-2 or S-1; Conversion to Form S-3. The
Company represents and warrants that it meets the requirements for the use of
Form S-3, SB-2 or S-1 for registration of the sale by the Initial Investors and
any other Investors of the Registrable Securities. The Company agrees to file
all reports required to be filed by the Company with the SEC in a timely manner
so as to remain eligible or become eligible, as the case may be, and thereafter
to maintain its eligibility, for the use of Form S-3. If the Company is not
currently eligible to use Form S-3, not later than five (5) business days after
the Company first meets the registration eligibility and transaction
requirements for the use of Form S-3 (or any successor form) for registration of
the offer and sale by the Initial Investors and any other Investors of
Registrable Securities, the Company shall file a Registration Statement on Form
S-3 (or such successor form) with respect to the Registrable Securities covered
by the Registration Statement on Form SB-2 or Form S-1, whichever is applicable,
filed pursuant to Section 2(a) (and include in such Registration Statement on
Form S-3 the information required by Rule 429 under the 1933 Act) or convert the
Registration Statement on Form SB-2 or Form S-1, whichever is applicable, filed
pursuant to Section 2(a) to a Form S-3 pursuant to Rule 429 under the 1933 Act
and cause such Registration Statement (or such amendment) to be declared
effective no later than forty-five (45) days after filing. In the event of a
breach by the Company of the provisions of this Section 2(e), the Company will
be required to make payments pursuant to Section 2(c) hereof.

         3. OBLIGATIONS OF THE COMPANY.

         In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:

         a. The Company shall prepare promptly, and file with the SEC not later
than the Filing Date, a Registration Statement with respect to the number of
Registrable Securities provided in Section 2(a), and thereafter use its best
efforts to cause such Registration Statement relating to Registrable Securities
to become effective as soon as possible after such filing but in no event later
than one hundred twenty (120) days from the date of Closing), and keep the
Registration Statement effective pursuant to Rule 415 at all times until such
date as is the earlier of (i) the date on which all of the Registrable
Securities have been sold and (ii) the date on which the Registrable Securities
(in the opinion of counsel to the Initial Investors) may be immediately sold to
the public without registration or restriction (including without limitation as
to volume by each holder thereof) under the 1933 Act (the "Registration
Period"), which Registration Statement (including any amendments or supplements
thereto and prospectuses contained therein) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein, or necessary to make the statements therein not misleading.

         b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to the Registration
Statements and the prospectus used in connection with the Registration
Statements as may be necessary to keep the Registration Statements effective at
all times during the Registration Period, and, during such period, comply with
the provisions of the 1933 Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statements
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statements. In the event the number of
shares available under a Registration Statement filed pursuant to this Agreement
is insufficient to cover all of the Registrable Securities issued or issuable
upon conversion of the Debentures and exercise of the Warrants, the Company
shall amend the Registration Statement, or file a new Registration Statement (on
the short form available therefor, if applicable), or both, so as to cover all
of the Registrable Securities, in each case, as soon as practicable, but in any
event within fifteen (15) days after the necessity therefor arises (based on the
market price of the Common Stock and other relevant factors on which the Company
reasonably elects to rely). The Company shall use its best efforts to cause such
amendment and/or new Registration Statement to become effective as soon as
practicable following the filing thereof, but in any event within thirty (30)
days after the date on which the Company reasonably first determines (or
reasonably should have determined) the need therefor. The provisions of Section
2(c) above shall be applicable with respect to such obligation, with the one
hundred twenty (120) days running from the day the Company reasonably first
determines (or reasonably should have determined) the need therefor.

<PAGE>

         c. The Company shall furnish to each Investor whose Registrable
Securities are included in a Registration Statement and its legal counsel (i)
promptly (but in no event more than two (2) business days) after the same is
prepared and publicly distributed, filed with the SEC, or received by the
Company, one copy of each Registration Statement and any amendment thereto, each
preliminary prospectus and prospectus and each amendment or supplement thereto,
and, in the case of the Registration Statement referred to in Section 2(a), each
letter written by or on behalf of the Company to the SEC or the staff of the
SEC, and each item of correspondence from the SEC or the staff of the SEC, in
each case relating to such Registration Statement (other than any portion of any
thereof which contains information for which the Company has sought confidential
treatment), and (ii) promptly (but in no event more than two (2) business days)
after the Registration Statement is declared effective by the SEC, such number
of copies of a prospectus, including a preliminary prospectus, and all
amendments and supplements thereto and such other documents as such Investor may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such Investor. The Company will immediately notify each
Investor by facsimile of the effectiveness of each Registration Statement or any
post-effective amendment. The Company will promptly (but in no event more than
five (5) business days) respond to any and all comments received from the SEC
(which comments shall promptly be made available to the Investors upon request),
with a view towards causing each Registration Statement or any amendment thereto
to be declared effective by the SEC as soon as practicable, shall promptly file
an acceleration request as soon as practicable (but in no event more than two
(2) business days) following the resolution or clearance of all SEC comments or,
if applicable, following notification by the SEC that any such Registration
Statement or any amendment thereto will not be subject to review and shall
promptly file with the SEC a final prospectus as soon as practicable (but in no
event more than two (2) business days) following receipt by the Company from the
SEC of an order declaring the Registration Statement effective. In the event of
a breach by the Company of the provisions of this Section 3(c), the Company will
be required to make payments pursuant to Section 2(c) hereof.

         d. The Company shall use reasonable efforts to (i) register and qualify
the Registrable Securities covered by the Registration Statements under such
other securities or "blue sky" laws of such jurisdictions in the United States
as the Investors who hold a majority in interest of the Registrable Securities
being offered reasonably request, (ii) prepare and file in those jurisdictions
such amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and qualifications in
effect at all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable Securities
for sale in such jurisdictions; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to (a) qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this Section 3(d), (b) subject itself to general taxation in any such
jurisdiction, (c) file a general consent to service of process in any such
jurisdiction, (d) provide any undertakings that cause the Company undue expense
or burden, or (e) make any change in its charter or bylaws, which in each case
the Board of Directors of the Company determines to be contrary to the best
interests of the Company and its shareholders.

         e. In the event Investors who hold a majority-in-interest of the
Registrable Securities being offered in the offering (with the approval of a
majority-in-interest of the Initial Investors) select underwriters for the
offering, the Company shall enter into and perform its obligations under an
underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
underwriters of such offering.

<PAGE>

         f. As promptly as practicable after becoming aware of such event, the
Company shall notify each Investor of the happening of any event, of which the
Company has knowledge, as a result of which the prospectus included in any
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and use its best
efforts promptly to prepare a supplement or amendment to any Registration
Statement to correct such untrue statement or omission, and deliver such number
of copies of such supplement or amendment to each Investor as such Investor may
reasonably request; provided that, for not more than ten (10) consecutive
trading days (or a total of not more than twenty (20) trading days in any twelve
(12) month period), the Company may delay the disclosure of material non-public
information concerning the Company (as well as prospectus or Registration
Statement updating) the disclosure of which at the time is not, in the good
faith opinion of the Company, in the best interests of the Company (an "Allowed
Delay"); provided, further, that the Company shall promptly (i) notify the
Investors in writing of the existence of (but in no event, without the prior
written consent of an Investor, shall the Company disclose to such investor any
of the facts or circumstances regarding) material non-public information giving
rise to an Allowed Delay and (ii) advise the Investors in writing to cease all
sales under such Registration Statement until the end of the Allowed Delay. Upon
expiration of the Allowed Delay, the Company shall again be bound by the first
sentence of this Section 3(f) with respect to the information giving rise
thereto.

         g. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of any Registration
Statement, and, if such an order is issued, to obtain the withdrawal of such
order at the earliest possible moment and to notify each Investor who holds
Registrable Securities being sold (or, in the event of an underwritten offering,
the managing underwriters) of the issuance of such order and the resolution
thereof.

         h. The Company shall permit a single firm of counsel designated by the
Initial Investors to review such Registration Statement and all amendments and
supplements thereto (as well as all requests for acceleration or effectiveness
thereof) a reasonable period of time prior to their filing with the SEC, and not
file any document in a form to which such counsel reasonably objects and will
not request acceleration of such Registration Statement without prior notice to
such counsel. The sections of such Registration Statement covering information
with respect to the Investors, the Investor's beneficial ownership of securities
of the Company or the Investors intended method of disposition of Registrable
Securities shall conform to the information provided to the Company by each of
the Investors.

         i. The Company shall make generally available to its security holders
as soon as practicable, but not later than ninety (90) days after the close of
the period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the 1933 Act) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date of the Registration Statement.

         j. At the request of any Investor, the Company shall furnish, on the
date that Registrable Securities are delivered to an underwriter, if any, for
sale in connection with any Registration Statement or, if such securities are
not being sold by an underwriter, on the date of effectiveness thereof (i) an
opinion, dated as of such date, from counsel representing the Company for
purposes of such Registration Statement, in form, scope and substance as is
customarily given in an underwritten public offering, addressed to the
underwriters, if any, and the Investors and (ii) a letter, dated such date, from
the Company's independent certified public accountants in form and substance as
is customarily given by independent certified public accountants to underwriters
in an underwritten public offering, addressed to the underwriters, if any, and
the Investors.

<PAGE>

         k. The Company shall make available for inspection by (i) any Investor,
(ii) any underwriter participating in any disposition pursuant to a Registration
Statement, (iii) one firm of attorneys and one firm of accountants or other
agents retained by the Initial Investors, (iv) one firm of attorneys and one
firm of accountants or other agents retained by all other Investors, and (v) one
firm of attorneys retained by all such underwriters (collectively, the
"Inspectors") all pertinent financial and other records, and pertinent corporate
documents and properties of the Company, including without limitation, records
of conversions by other holders of convertible securities issued by the Company
and the issuance of stock to such holders pursuant to the conversions
(collectively, the "Records"), as shall be reasonably deemed necessary by each
Inspector to enable each Inspector to exercise its due diligence responsibility,
and cause the Company's officers, directors and employees to supply all
information which any Inspector may reasonably request for purposes of such due
diligence; provided, however, that each Inspector shall hold in confidence and
shall not make any disclosure (except to an Investor) of any Record or other
information which the Company determines in good faith to be confidential, and
of which determination the Inspectors are so notified, unless (a) the disclosure
of such Records is necessary to avoid or correct a misstatement or omission in
any Registration Statement, (b) the release of such Records is ordered pursuant
to a subpoena or other order from a court or government body of competent
jurisdiction, or (c) the information in such Records has been made generally
available to the public other than by disclosure in violation of this or any
other agreement. The Company shall not be required to disclose any confidential
information in such Records to any Inspector until and unless such Inspector
shall have entered into confidentiality agreements (in form and substance
satisfactory to the Company) with the Company with respect thereto,
substantially in the form of this Section 3(k). Each Investor agrees that it
shall, upon learning that disclosure of such Records is sought in or by a court
or governmental body of competent jurisdiction or through other means, give
prompt notice to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, the Records deemed confidential. Nothing herein (or in any other
confidentiality agreement between the Company and any Investor) shall be deemed
to limit the Investor's ability to sell Registrable Securities in a manner which
is otherwise consistent with applicable laws and regulations.

         l. The Company shall hold in confidence and not make any disclosure of
information concerning an Investor provided to the Company unless (i) disclosure
of such information is necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other order from a court
or governmental body of competent jurisdiction, or (iv) such information has
been made generally available to the public other than by disclosure in
violation of this or any other agreement. The Company agrees that it shall, upon
learning that disclosure of such information concerning an Investor is sought in
or by a court or governmental body of competent jurisdiction or through other
means, give prompt notice to such Investor prior to making such disclosure, and
allow the Investor, at its expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, such information.

         m. The Company shall (i) cause all the Registrable Securities covered
by the Registration Statement to be listed on each national securities exchange
on which securities of the same class or series issued by the Company are then
listed, if any, if the listing of such Registrable Securities is then permitted
under the rules of such exchange, or (ii) to the extent the securities of the
same class or series are not then listed on a national securities exchange,
secure the designation and quotation, of all the Registrable Securities covered
by the Registration Statement on Nasdaq or, if not eligible for Nasdaq, on
Nasdaq SmallCap or, if not eligible for Nasdaq or Nasdaq SmallCap, on the OTCBB
and, without limiting the generality of the foregoing, to arrange for at least
two market makers to register with the National Association of Securities
Dealers, Inc. ("NASD") as such with respect to such Registrable Securities.

         n. The Company shall provide a transfer agent and registrar, which may
be a single entity, for the Registrable Securities not later than the effective
date of the Registration Statement.

         o. The Company shall cooperate with the Investors who hold Registrable
Securities being offered and the managing underwriter or underwriters, if any,
to facilitate the timely preparation and delivery of certificates (not bearing
any restrictive legends) representing Registrable Securities to be offered
pursuant to a Registration Statement and enable such certificates to be in such
denominations or amounts, as the case may be, as the managing underwriter or
underwriters, if any, or the Investors may reasonably request and registered in
such names as the managing underwriter or underwriters, if any, or the Investors
may request, and, within three (3) business days after a Registration Statement
which includes Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel selected by the Company to
deliver, to the transfer agent for the Registrable Securities (with copies to
the Investors whose Registrable Securities are included in such Registration
Statement) an instruction in the form attached hereto as Exhibit 1 and an
opinion of such counsel in the form attached hereto as Exhibit 2.

<PAGE>

         p. At the request of the holders of a majority-in-interest of the
Registrable Securities, the Company shall prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to a
Registration Statement and any prospectus used in connection with the
Registration Statement as may be necessary in order to change the plan of
distribution set forth in such Registration Statement.

         q. From and after the date of this Agreement, the Company shall not,
and shall not agree to, allow the holders of any securities of the Company to
include any of their securities in any Registration Statement under Section 2(a)
hereof or any amendment or supplement thereto under Section 3(b) hereof without
the consent of the holders of a majority-in-interest of the Registrable
Securities.

         r. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Investors of Registrable Securities
pursuant to a Registration Statement.

         4. OBLIGATIONS OF THE INVESTORS.

         In connection with the registration of the Registrable Securities, the
Investors shall have the following obligations:

         a. It shall be a condition precedent to the obligations of the Company
to complete the registration pursuant to this Agreement with respect to the
Registrable Securities of a particular Investor that such Investor shall furnish
to the Company such information regarding itself, the Registrable Securities
held by it and the intended method of disposition of the Registrable Securities
held by it as shall be reasonably required to effect the registration of such
Registrable Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. At least three (3) business
days prior to the first anticipated filing date of the Registration Statement,
the Company shall notify each Investor of the information the Company requires
from each such Investor.

         b. Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statements hereunder, unless such Investor has notified the Company in writing
of such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statements.

         c. In the event Investors holding a majority-in-interest of the
Registrable Securities being registered (with the approval of the Initial
Investors) determine to engage the services of an underwriter, each Investor
agrees to enter into and perform such Investor's obligations under an
underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
managing underwriter of such offering and take such other actions as are
reasonably required in order to expedite or facilitate the disposition of the
Registrable Securities, unless such Investor has notified the Company in writing
of such Investor's election to exclude all of such Investor's Registrable
Securities from such Registration Statement.

         d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(f) or
3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.

<PAGE>

         e. No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements in usual and
customary form entered into by the Company, (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements, and (iii) agrees to pay its pro rata share of all underwriting
discounts and commissions and any expenses in excess of those payable by the
Company pursuant to Section 5 below.

         5. EXPENSES OF REGISTRATION.

         All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualification fees, printers and accounting fees, the
fees and disbursements of counsel for the Company, and the reasonable fees and
disbursements of one counsel selected by the Initial Investors pursuant to
Sections 2(b) and 3(h) hereof shall be borne by the Company.

         6. INDEMNIFICATION.

         In the event any Registrable Securities are included in a Registration
Statement under this Agreement:

         a. To the extent permitted by law, the Company will indemnify, hold
harmless and defend (i) each Investor who holds such Registrable Securities,
(ii) the directors, officers, partners, employees, agents and each person who
controls any Investor within the meaning of the 1933 Act or the Securities
Exchange Act of 1934, as amended (the "1934 Act"), if any, (iii) any underwriter
(as defined in the 1933 Act) for the Investors, and (iv) the directors,
officers, partners, employees and each person who controls any such underwriter
within the meaning of the 1933 Act or the 1934 Act, if any (each, an
"Indemnified Person"), against any joint or several losses, claims, damages,
liabilities or expenses (collectively, together with actions, proceedings or
inquiries by any regulatory or self-regulatory organization, whether commenced
or threatened, in respect thereof, "Claims") to which any of them may become
subject insofar as such Claims arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in a Registration
Statement or the omission or alleged omission to state therein a material fact
required to be stated or necessary to make the statements therein not
misleading; (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus if used prior to the effective date
of such Registration Statement, or contained in the final prospectus (as amended
or supplemented, if the Company files any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading; or
(iii) any violation or alleged violation by the Company of the 1933 Act, the
1934 Act, any other law, including, without limitation, any state securities
law, or any rule or regulation thereunder relating to the offer or sale of the
Registrable Securities (the matters in the foregoing clauses (i) through (iii)
being, collectively, "Violations"). Subject to the restrictions set forth in
Section 6(c) with respect to the number of legal counsel, the Company shall
reimburse the Indemnified Person, promptly as such expenses are incurred and are
due and payable, for any reasonable legal fees or other reasonable expenses
incurred by them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (i) shall not apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by any Indemnified Person
or underwriter for such Indemnified Person expressly for use in connection with
the preparation of such Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(c) hereof; (ii) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld; and
(iii) with respect to any preliminary prospectus, shall not inure to the benefit
of any Indemnified Person if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected on a timely basis in the
prospectus, as then amended or supplemented, such corrected prospectus was
timely made available by the Company pursuant to Section 3(c) hereof, and the
Indemnified Person was promptly advised in writing not to use the incorrect
prospectus prior to the use giving rise to a Violation and such Indemnified
Person, notwithstanding such advice, used it. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
the Indemnified Person and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9.

<PAGE>

         b. In connection with any Registration Statement in which an Investor
is participating, each such Investor agrees severally and not jointly to
indemnify, hold harmless and defend, to the same extent and in the same manner
set forth in Section 6(a), the Company, each of its directors, each of its
officers who signs the Registration Statement, each person, if any, who controls
the Company within the meaning of the 1933 Act or the 1934 Act, any underwriter
and any other shareholder selling securities pursuant to the Registration
Statement or any of its directors or officers or any person who controls such
shareholder or underwriter within the meaning of the 1933 Act or the 1934 Act
(collectively and together with an Indemnified Person, an "Indemnified Party"),
against any Claim to which any of them may become subject, under the 1933 Act,
the 1934 Act or otherwise, insofar as such Claim arises out of or is based upon
any Violation by such Investor, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished to the Company by such Investor expressly for use
in connection with such Registration Statement; and subject to Section 6(c) such
Investor will reimburse any legal or other expenses (promptly as such expenses
are incurred and are due and payable) reasonably incurred by them in connection
with investigating or defending any such Claim; provided, however, that the
indemnity agreement contained in this Section 6(b) shall not apply to amounts
paid in settlement of any Claim if such settlement is effected without the prior
written consent of such Investor, which consent shall not be unreasonably
withheld; provided, further, however, that the Investor shall be liable under
this Agreement (including this Section 6(b) and Section 7) for only that amount
as does not exceed the net proceeds to such Investor as a result of the sale of
Registrable Securities pursuant to such Registration Statement. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such Indemnified Party and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(b) with respect to any preliminary prospectus shall
not inure to the benefit of any Indemnified Party if the untrue statement or
omission of material fact contained in the preliminary prospectus was corrected
on a timely basis in the prospectus, as then amended or supplemented.

         c. Promptly after receipt by an Indemnified Person or Indemnified Party
under this Section 6 of notice of the commencement of any action (including any
governmental action), such Indemnified Person or Indemnified Party shall, if a
Claim in respect thereof is to be made against any indemnifying party under this
Section 6, deliver to the indemnifying party a written notice of the
commencement thereof, and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying party and
the Indemnified Person or the Indemnified Party, as the case may be; provided,
however, that an Indemnified Person or Indemnified Party shall have the right to
retain its own counsel with the fees and expenses to be paid by the indemnifying
party, if, in the reasonable opinion of counsel retained by the indemnifying
party, the representation by such counsel of the Indemnified Person or
Indemnified Party and the indemnifying party would be inappropriate due to
actual or potential differing interests between such Indemnified Person or
Indemnified Party and any other party represented by such counsel in such
proceeding. The indemnifying party shall pay for only one separate legal counsel
for the Indemnified Persons or the Indemnified Parties, as applicable, and such
legal counsel shall be selected by Investors holding a majority-in-interest of
the Registrable Securities included in the Registration Statement to which the
Claim relates (with the approval of a majority-in-interest of the Initial
Investors), if the Investors are entitled to indemnification hereunder, or the
Company, if the Company is entitled to indemnification hereunder, as applicable.
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or Indemnified
Party under this Section 6, except to the extent that the indemnifying party is
actually prejudiced in its ability to defend such action. The indemnification
required by this Section 6 shall be made by periodic payments of the amount
thereof during the course of the investigation or defense, as such expense,
loss, damage or liability is incurred and is due and payable.

<PAGE>

         7. CONTRIBUTION.

         To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6, (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any seller of Registrable Securities who was not
guilty of such fraudulent misrepresentation, and (iii) contribution (together
with any indemnification or other obligations under this Agreement) by any
seller of Registrable Securities shall be limited in amount to the net amount of
proceeds received by such seller from the sale of such Registrable Securities.

         8. REPORTS UNDER THE 1934 ACT.

         With a view to making available to the Investors the benefits of Rule
144 promulgated under the 1933 Act or any other similar rule or regulation of
the SEC that may at any time permit the investors to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees to:

         a. make and keep public information available, as those terms are
understood and defined in Rule 144;

         b. file with the SEC in a timely manner all reports and other documents
required of the Company under the 1933 Act and the 1934 Act so long as the
Company remains subject to such requirements (it being understood that nothing
herein shall limit the Company's obligations under Section 4(c) of the
Securities Purchase Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and

         c. furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the 1933 Act and
the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested to permit the Investors to
sell such securities pursuant to Rule 144 without registration.

         9. ASSIGNMENT OF REGISTRATION RIGHTS.

         The rights under this Agreement shall be automatically assignable by
the Investors to any transferee of all or any portion of Registrable Securities
if: (i) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned,
(iii) following such transfer or assignment, the further disposition of such
securities by the transferee or assignee is restricted under the 1933 Act and
applicable state securities laws, (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence, the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein, (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement, and (vi) such transferee shall be an "accredited investor" as that
term defined in Rule 501 of Regulation D promulgated under the 1933 Act.

<PAGE>

         10. AMENDMENT OF REGISTRATION RIGHTS.

         Provisions of this Agreement may be amended and the observance thereof
may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with written consent of the Company, each
of the Initial Investors (to the extent such Initial Investor still owns
Registrable Securities) and Investors who hold a majority interest of the
Registrable Securities. Any amendment or waiver effected in accordance with this
Section 10 shall be binding upon each Investor and the Company.

         11. MISCELLANEOUS.

         a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.

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

                           If to the Company:
                           Palladium Communications, Inc.
                           416 W. Muhammad Ali Boulevard
                           Louisville, Kentucky 40202
                           Attention:  President and Chief Executive Officer
                           Telephone: (502) 585-6364
                           Facsimile: (502) 585-6365

                           With copies to:

                           Sichenzia Ross Friedman Ference LLP
                           1065 Avenue of the Americas
                           New York, New York 10018
                           Attention:  Gregory Sichenzia, Esq.
                           Telephone:  (212) 930-9700
                           Facsimile:  (212) 930-9725
                           Email:  gsichenzia@srfllp.net

If to an Investor: to the address set forth immediately below such Investor's
name on the signature pages to the Securities Purchase Agreement.

                           With a copy to:

                           Ballard Spahr Andrews & Ingersoll, LLP
                           1735 Market Street
                           51st Floor
                           Philadelphia, Pennsylvania  19103
                           Attention:  Gerald J. Guarcini, Esq.
                           Telephone:  215-865-8625
                           Facsimile:  215-864-8999
                           Email:  guarcini@ballardspahr.com

         c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.

<PAGE>

         d. 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 LOCATED NEW YORK, 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. 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 PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER
THIS AGREEMENT SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING
ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH
DISPUTE.

         e. 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.

         f. This Agreement, the Warrants and the Securities Purchase Agreement
(including all schedules and exhibits thereto) constitute the entire agreement
among the parties hereto with respect to the subject matter hereof and thereof.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein and therein. This Agreement and the
Securities Purchase Agreement supersede all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof and thereof.

         g. Subject to the requirements of Section 9 hereof, this Agreement
shall be binding upon and inure to the benefit of the parties and their
successors and assigns.

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

         i. This Agreement may be executed in two 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.

         j. 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.

         k. Except as otherwise provided herein, all consents and other
determinations to be made by the Investors pursuant to this Agreement shall be
made by Investors holding a majority of the Registrable Securities, determined
as if the all of the Debentures then outstanding have been converted into for
Registrable Securities.

         l. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to each Investor by vitiating the intent
and purpose of the transactions contemplated hereby. Accordingly, the Company
acknowledges that the remedy at law for 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 any of the provisions under this Agreement, that each
Investor shall be entitled, in addition to all other available remedies in law
or in equity, and in addition to the penalties assessable herein, to an
injunction or injunctions restraining, preventing or curing any breach of this
Agreement and to enforce specifically the terms and provisions hereof, without
the necessity of showing economic loss and without any bond or other security
being required.

<PAGE>

         m. 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.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

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

PALLADIUM COMMUNICATIONS, INC.

/s/ WILF SHORROCKS

Wilf Shorrocks
President and Chief Executive Officer

AJW PARTNERS, LLC
By:  SMS Group, LLC

/s/ COREY S. RIBOTSKY

Corey S. Ribotsky
Manager

AJW OFFSHORE, LTD.
By:  First Street Manager II, LLC

/s/ COREY S. RIBOTSKY

Corey S. Ribotsky
Manager

AJW QUALIFIED PARTNERS, LLC
By:  AJW Manager, LLC

/s/ COREY S. RIBOTSKY

Corey S. Ribotsky
Manager

NEW MILLENNIUM CAPITAL PARTNERS II, LLC
By:  First Street Manager II, LLC

/s/ COREY S. RIBOTSKY

Corey S. Ribotsky
Manager

                                       89EXHIBIT 4.5

                          SECURITIES PURCHASE AGREEMENT

         SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of December
24, 2003, by and among Peak Entertainment Holdings, Inc., a Nevada corporation
(the "Company"), and the purchasers set forth on the signature page hereto (each
purchaser is a "Buyer" and are collectively referred to as the "Buyers").

                                    WHEREAS:

         A. The Company and Buyers 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. Buyers desire to purchase and the Company desires to issue and sell,
upon the terms and conditions set forth in this Agreement: (i) 8% convertible
debentures of the Company, in the form attached hereto as Exhibit A, in the
aggregate principal amount of One Million Dollars ($1,000,000) (together with
any debenture(s) issued in replacement thereof or as interest thereon or
otherwise with respect thereto in accordance with the terms thereof, the
"Debentures"), convertible into shares of common stock of the Company (the
"Common Stock"), upon the terms and subject to the limitations and conditions
set forth in such Debentures; and (ii) warrants, in the form attached hereto as
Exhibit B, to purchase 2,000,000 shares of the Company's Common Stock (the
"Warrants"); (the Common Stock and Warrants are sometimes referred to as the
"Securities")

         C. Buyers wish to purchase, upon the terms and conditions stated in
this Agreement, such principal amounts of Debentures and number of Warrants as
are set forth immediately below their names on the signature pages hereto;

         D. Contemporaneous with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement,
in the form attached hereto as Exhibit C (the "Registration Rights Agreement"),
pursuant to which the Company has agreed to provide certain registration rights
under the 1933 Act and the rules and regulations promulgated thereunder, and
applicable state securities laws; and

         E. The Closing of the sale and purchase of the Debentures and the
Warrants are subject to the conditions set forth herein and in the Escrow
Agreement attached hereto as Exhibit D.

<PAGE>

         NOW THEREFORE, the Company and Buyers hereby agree as follows:

         1. PURCHASE AND SALE OF DEBENTURES AND WARRANTS.

                  a. Purchase of Debentures and Warrants. On the Closing Date
(as defined below), the Company shall issue and sell to Buyers and Buyers agree
to purchase from the Company such principal amounts of Debentures and number of
Warrants as are set forth immediately below Buyers' names on the signature pages
hereto.

                  b. Form of Payment. Upon execution of this Agreement, (i)
Buyers shall pay the purchase price for the Debentures 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 to the Escrow Agent, in the
total amount of $500,000, in accordance with the written wiring instructions set
forth in the Escrow Agreement, and by delivery of promissory notes for a further
total of $500,000 in the form annexed hereto as Exhibit E, payable on the third
Business Day following the effectiveness of a registration statement for the
shares underlying the Debentures and Warrants, against delivery on the Closing
Date of the Debentures and the Warrants as is set forth immediately below
Buyers' names on the signature pages hereto, and (ii) the Company shall deliver
such Debentures and Warrants duly executed on behalf of the Company, to the
Escrow Agent, against delivery of such Purchase Price. The Purchase Price shall
be held in escrow by the Company pending the Closing.

                  c. Closing Date. Subject to the satisfaction (or written
waiver) of the conditions thereto set forth in Section 6 and Section 7 below and
in the Escrow Agreement, the date and time of the issuance and sale of the
Debentures and the Warrants pursuant to this Agreement (the "Closing Date")
shall be 12:00 noon, Eastern Standard Time on December __, 2003, subject to the
Company entering an agreement for the resolution of certain matters related to
the termination or redemption of outstanding convertible debentures, or such
other mutually agreed upon time. The closing of the transactions contemplated by
this Agreement (the "Closing") shall occur on the Closing Date at such location
as may be agreed to by the parties.

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

                  a. Investment Purpose. As of the date hereof, Buyer is
purchasing the Debentures and the shares of Common Stock issuable upon
conversion of or otherwise pursuant to the Debentures 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
Debentures, 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.

<PAGE>

                  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 received all documents, records,
books and other information pertaining to Buyer's investment in the Company that
has 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 in the Registration Rights Agreement, the sale or re-sale of the
Securities has not been and is not being registered under the 1933 Act or any
applicable state securities laws, and the Securities may not be transferred
unless (a) the Securities are sold pursuant to an effective registration
statement under the 1933 Act, (b) 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 register such Securities under the 1933 Act or any state
securities laws or to comply with the terms and conditions of any exemption
thereunder (in each case, other than pursuant to the Registration Rights
Agreement). Notwithstanding the foregoing or anything else contained herein to
the contrary, the Securities may be pledged as collateral in connection with a
bona fide margin account or other lending arrangement.

<PAGE>

                  g. Legends. Buyer understands that the Debentures and the
Warrants and, until such time as the Conversion Shares and Warrant Shares have
been registered under the 1933 Act as contemplated by the Registration Rights
Agreement or otherwise may be sold pursuant to Rule 144 without any restriction
as to the number of securities as of a particular date that can then be
immediately sold, the Conversion Shares and Warrant Shares may bear a
restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of the certificates for such Securities):

         "The securities represented by this certificate have not been
         registered under the Securities Act of 1933, as amended. The securities
         may not be sold, transferred or assigned in the absence of an effective
         registration statement for the securities under said Act, or an opinion
         of counsel, 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 and each
agreement attached as an Exhibit hereto which is required to be executed by
Buyer 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, 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.

                  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 of the Securities Act) of the
Company.

                  k. Absence of Conflicts. The execution and delivery of this
Agreement and each agreement which is attached as an Exhibit hereto and executed
by Buyer in connection herewith, and the consummation of the transactions
contemplated hereby and thereby, and compliance with the requirements hereof and
thereof by Buyer, will not violate any law, rule, regulation, order, writ,
judgment, injunction, decree or award binding on Buyer or (a) violate any
provision of any indenture, instrument or agreement to which Buyer is a party or
is subject, or by which Buyer or any of its assets is bound; (b) conflict with
or constitute a material default thereunder; (c) result in the creation or
imposition of any lien pursuant to the terms of any such indenture, instrument
or agreement, or constitute a breach of any fiduciary duty owed by Buyer to any
third party; or (d) require the approval of any non-governmental agency
third-party (which has not been obtained) pursuant to any material contract,
agreement, instrument, relationship or legal obligation to which Buyer is
subject or to which any of its assets, operations or management may be subject.

                  l. 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.

<PAGE>

                  m. No Finder. Buyer represents that, to Buyer's knowledge, no
finder is entitled to compensation for introducing Buyer to the Company.

         3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to Buyers that:

                  a. Organization and Qualification. The Company and each of its
subsidiaries, if any, is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction in which it is incorporated,
with full power and authority (corporate and other) to own, lease, use and
operate its properties and to carry on its business as and where now owned,
leased, used, operated and conducted. 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 any 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, the
Registration Rights Agreement, the Debentures, the Warrants, and the Escrow
Agreement, (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, subject to release from escrow.
The execution and delivery of this Agreement, the Registration Rights Agreement,
the Debentures, the Warrants, the Escrow Agreement, the Security Agreement, and
the Intellectual Property Security Agreement by the Company and the consummation
by it of the transactions contemplated hereby and thereby (including without
limitation, the issuance of the Debentures and the Warrants and the issuance and
reservation for issuance of the Conversion Shares and Warrant Shares issuable
upon conversion or exercise thereof), subject to release from escrow, 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, 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, and upon
execution and delivery by the Company of the Registration Rights Agreement, the
Debentures, the Warrants, and the Escrow Agreement, subject to release from
escrow, each of such instruments will constitute, a legal, valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms.

<PAGE>

                  c. Capitalization. As of the date hereof, the authorized
capital stock of the Company consists of 900,000,000 shares of Common Stock, of
which 21,190,760 shares are issued and outstanding as of September 30, 2003,
and, except as set forth in Schedule 3(c), no shares are currently reserved for
issuance pursuant to the Company's stock option plans, no shares are currently
reserved for issuance pursuant to securities exercisable for, or convertible
into or exchangeable for shares of Common Stock, and no shares of preferred
stock are issued and outstanding. All of such outstanding 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 disclosed in Schedule 3(c) and/or in filings with the
S.E.C., as of the effective date of this Agreement, (i) there are no outstanding
options, warrants, scrip, rights to subscribe for, puts, calls, rights of first
refusal, agreements, understandings, claims or other commitments or rights of
any character whatsoever relating to, or securities or rights convertible into
or exchangeable for any shares of capital stock of the Company or any of its
Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is
or may become bound to issue additional shares of capital stock of the Company
or any of its Subsidiaries, (ii) there are no agreements or arrangements under
which the Company or any of its Subsidiaries is obligated to register the sale
of any of its or their securities under the 1933 Act, and (iii) there are no
anti-dilution or price adjustment provisions contained in any security issued by
the Company (or in any agreement providing rights to security holders) that will
be triggered by the issuance of the Debentures, the Warrants, the Conversion
Shares or Warrant Shares.

                  d. Issuance of Shares. The Conversion Shares and Warrant
Shares are duly authorized and reserved for issuance and, upon conversion of the
Debentures 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
Debentures or exercise of the Warrants in accordance with this Agreement, the
Debentures 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.

<PAGE>

                  f. No Conflicts. The execution, delivery and performance of
this Agreement, the Registration Rights Agreement, the Debentures, the Warrants,
the Escrow Agreement, the Security Agreement, and the Intellectual Property
Security Agreement 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), subject to release from escrow, will not (i) conflict with or result in
a violation of any provision of the 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 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 Registration Rights Agreement, the
Debentures or the Warrants in accordance with the terms hereof or thereof or to
issue and sell the Debentures and Warrants in accordance with the terms hereof
and to issue the Conversion Shares upon conversion of the Debentures and the
Warrant Shares upon exercise of the Warrants.

                  g. SEC Documents; Financial Statements. Except as disclosed in
Schedule 3(g) and except as disclosed herein, the Company has timely filed all
reports, schedules, forms, statements and other documents required to be filed
by it with the SEC pursuant to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act") (all of the foregoing filed
prior to the date hereof and all exhibits included therein and financial
statements and schedules thereto and documents (other than exhibits to such
documents) incorporated by reference therein, being hereinafter referred to
herein as the "SEC Documents"). The Company's Form 10-QSB for the quarterly
period ended September 30, 2003 was not timely filed. Except as disclosed in
Schedule 3(g) and except as disclosed herein, the SEC Documents will, on or
before Closing hereof, comply in all material respects with the requirements of
the 1934 Act and the rules and regulations of the SEC promulgated thereunder
applicable to the SEC Documents, and none of the SEC Documents, to the best
knowledge of officers and directors of the Company, will contain any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The Company has
been advised by its accountants of certain changes they require in prior SEC
Documents, which SEC Documents the Company has undertaken to amend. Except as
disclosed in Schedule 3(g) and except as disclosed herein, as of their
respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto. Except as disclosed in Schedule 3(g) and except as disclosed
herein, such financial statements have been prepared in accordance with United
States generally accepted accounting principles, consistently applied, during
the periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may not include footnotes or may be condensed or
summary statements) and fairly present in all material respects the consolidated
financial position of the Company and its consolidated Subsidiaries as of the
dates thereof and the consolidated results of their operations and cash flows
for the periods then ended (subject, in the case of unaudited statements, to
normal year-end audit adjustments). Except as described herein and as set forth
in the financial statements of the Company included in the SEC Documents, as may
be amended, the Company has no liabilities, contingent or otherwise, other than
(i) liabilities incurred in the ordinary course of business subsequent to June
30, 2003 and (ii) obligations under contracts and commitments incurred in the
ordinary course of business and not required under generally accepted accounting
principles to be reflected in such financial statements, which, individually or
in the aggregate, are not material to the financial condition or operating
results of the Company.

<PAGE>

                  h. Absence of Certain Changes. Since June 30, 2003, 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 and in Schedule 3(h).

                  i. Absence of Litigation. There is no action, suit, claim,
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company or any of its Subsidiaries, threatened against or
affecting the Company or any of its Subsidiaries, or their officers or directors
in their capacity as such, that could have a Material Adverse Effect, except as
described in Schedule 3(i).

                  j. Intellectual Property. The Company has the rights stated 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 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
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 Debentures
shall be secured by that certain Security Agreement by and between the Company
and the Holder entered into in connection with the Debentures; the security
interest rights granted to the Buyers shall be on equal level to the security
interest rights granted to third party purchasers in the Company's sale of
debentures, on terms and conditions similar to the terms herein, in the
principal amount of $500,000 occurring on or about the same time as this
Agreement. The Company shall be entitled to grant security interest rights
senior to the rights of the Buyers to a financial institution, subject to the
approval of the Buyers, which shall not be unreasonably withheld. The Company
shall be entitled to grant security interest rights similar to the rights
granted to the Buyers to non-financial institution lender(s) hereafter providing
at least $1,500,000 or more in working capital, subject to the approval of the
Buyers, which shall not be unreasonably withheld.

<PAGE>

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

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

                  m. Absence of Certain Company Control Person Actions or
Events. None of the following has occurred during the past ten (10) years with
respect to a Company Control Person, except as set forth in Schedule 3(m):

                                    (1) A petition under the federal bankruptcy
                  laws or any state insolvency law was filed by or against, or a
                  receiver, fiscal agent or similar officer was appointed by a
                  court for the business or property of such Company Control
                  Person, or any partnership in which he was a general partner
                  at or within two years before the time of such filing, or any
                  corporation or business association of which he was an
                  executive officer at or within two years before the time of
                  such filing;

                           (2) Such Company Control Person was convicted in a
                  criminal proceeding or is a named subject of a pending
                  criminal proceeding (excluding traffic violations and other
                  minor offenses);

<PAGE>

                           (3) Such Company Control Person was the subject of
                  any order, judgment or decree, not subsequently reversed,
                  suspended or vacated, of any court of competent jurisdiction,
                  permanently or temporarily enjoining him from, or otherwise
                  limiting, the following activities:

                                    (i) acting, as an investment advisor,
                           underwriter, broker or dealer in securities, or as an
                           affiliated person, director or employee of any
                           investment company, bank, savings and loan
                           association or insurance company, as a futures
                           commission merchant, introducing broker, commodity
                           trading advisor, commodity pool operator, floor
                           broker, any other Person regulated by the Commodity
                           Futures Trading Commission ("CFTC") or engaging in or
                           continuing any conduct or practice in connection with
                           such activity;

                                    (ii) engaging in any type of business
                           practice; or

                                    (iii) engaging in any activity in connection
                           with the purchase or sale of any security or
                           commodity or in connection with any violation of
                           federal or state securities laws or federal
                           commodities laws;

                           (4) Such Company Control Person was the subject of
                  any order, judgment or decree, not subsequently reversed,
                  suspended or vacated, of any federal or state authority
                  barring, suspending or otherwise limiting for more than 60
                  days the right of such Company Control Person to engage in any
                  activity described in paragraph (3) of this item, or to be
                  associated with Persons engaged in any such activity; or

                           (5) Such Company Control Person was found by a court
                  of competent jurisdiction in a civil action or by the CFTC or
                  SEC to have violated any federal or state securities law, and
                  the judgment in such civil action or finding by the CFTC or
                  SEC has not been subsequently reversed, suspended, or vacated.

                  n. No Integrated Offering. Neither the Company nor any of its
Affiliates nor any person acting on its or their behalf has, directly or
indirectly, at any time since May 1, 2003, made any offer or sales of any
security or solicited any offers to buy any security under circumstances that
would eliminate the availability of the exemption from registration under
Regulation D in connection with the offer and sale of the Securities as
contemplated hereby.

                  o. Dilution. The number of Shares issuable upon conversion of
the Debentures may have a dilutive effect on the ownership interests of the
other shareholders (and Persons having the right to become shareholders) of the
Company. The Company's executive officers and directors have studied and fully
understand the nature of the Securities being sold hereby and recognize that
they have such a potential dilutive effect. The board of directors of the
Company has concluded, in its good faith business judgment, that such issuance
is in the best interests of the Company. The Company specifically acknowledges
that its obligation to issue the Shares upon conversion of the Debentures and
upon exercise of the Warrants is binding upon the Company and enforceable
regardless of the dilution such issuance may have on the ownership interests of
other shareholders of the Company, and the Company will honor every Notice of
Conversion (as defined in the Debentures) relating to the conversion of the
Debentures, and every Notice of Exercise (as contemplated by the Warrants),
unless the Company is subject to an injunction (which injunction was not sought
by the Company) prohibiting the Company from doing so.

<PAGE>

                  p. 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), Buyers 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.

                  q. Fees to Brokers, Finders and Others. The Company has taken
no action which would give rise to any claim by any Person for brokerage
commission, finder's fees or similar payments by Buyers relating to this
Agreement or the transactions contemplated hereby. Buyers shall have no
obligation with respect to such fees or with respect to any claims made by or on
behalf of other Persons for fees of a type contemplated in this paragraph that
may be due in connection with the transactions contemplated hereby. The Company
shall indemnify and hold harmless each of Buyers, their employees, officers,
directors, agents, and partners, and their respective Affiliates, from and
against all claims, losses, damages, costs (including the costs of preparation
and attorney's fees) and expenses suffered in respect of any such claimed or
existing fees, as and when incurred.

             4. COVENANTS.

                  a. Reporting Status. The Company's Common Stock is registered
under Section 12(g) of the 1934 Act. So long as Buyers beneficially own 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 required to file
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 Debentures and the Warrants for its working capital and/or to
retire existing debt.

                  c. Authorization and Reservation of Shares. The Company shall
use reasonable best efforts to at all times have authorized, and reserved for
the purpose of issuance, a sufficient number of shares of Common Stock to
provide for the full conversion or exercise of the outstanding Debentures and
Warrants and issuance of the Conversion Shares and Warrant Shares in connection
therewith (based on the Conversion Price of the Debentures or Exercise Price of
the Warrants in effect from time to time) and as otherwise required by the
Debentures. The Company shall use reasonable best efforts to at all times
maintain the number of shares of Common Stock so reserved for issuance at an
amount ("Reserved Amount") equal to no less than two (2) times the number that
is then actually issuable upon full conversion of the Debentures and Additional
Debentures and upon exercise of the Warrants and the Additional Warrants (based
on the Conversion Price of the Debentures or the Exercise Price of the Warrants
in effect from time to time). If at any time the number of shares of Common
Stock authorized and reserved for issuance ("Authorized and Reserved Shares") is
below the Reserved Amount, the Company will use reasonable best efforts to
promptly take all corporate action necessary to authorize and reserve a
sufficient number of shares, including, without limitation, calling a special
meeting of shareholders to authorize additional shares to meet the Company's
obligations under this Section 4(e), in the case of an insufficient number of
authorized shares, obtain shareholder approval of an increase in such authorized
number of shares, and voting the management shares of the Company in favor of an
increase in the authorized shares of the Company to ensure that the number of
authorized shares is sufficient to meet the Reserved Amount.

<PAGE>

                  d. Listing. The Company will use best efforts, so long as
Buyers own 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 Buyers beneficially own any
Debentures 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. Future Plans. At such future date when the Company has at
least $750,000 in working capital in excess of then existing commitments, the
Company will undertake to implement an investor relations program.

                  g. The Company covenants that, with respect to the Securities,
other than the stop transfer instructions to give effect to Section 2(g) hereof,
it will give its transfer agent no instructions inconsistent with instructions
to issue Common Stock from time to time upon conversion of the Debentures in
such amounts as specified from time to time by the Company to the transfer
agent, bearing the restrictive legend specified in Section 2(g) of this
Agreement prior to registration of the Shares under the 1933 Act, registered in
the name of the Buyers or their nominees and in such denominations to be
specified by the Buyer in connection with each conversion of the Debentures.
Except as so provided, the Shares shall otherwise be freely transferable on the
books and records of the Company as and to the extent provided in this Agreement
and the Registration Rights Agreement. Nothing in this Section shall affect in
any way the Buyers' obligations and agreement to comply with all applicable
securities laws upon resale of the Securities. If the Buyers provide the Company
with an opinion of counsel reasonably satisfactory to the Company that
registration of a resale by the Buyers of any of the Securities is not required
under the 1933 Act, the Company shall (except as provided in clause (2) of
Section 4(a) of this Agreement) permit the transfer of the Securities and, in
the case of the Conversion Shares, promptly instruct the Company's transfer
agent to issue one or more certificates for Common Stock without legend in such
name and in such denominations as specified by the Buyer.

<PAGE>

                  h. Reimbursement. If (i) any Buyer, other than by reason of
its gross negligence or willful misconduct, becomes involved in any capacity in
any action, proceeding or investigation brought by any shareholder of the
Company, in connection with or as a result of the consummation of the
transactions contemplated by the Transaction Agreements, or if the Buyer is
impleaded in any such action, proceeding or investigation by any Person, or (ii)
the Buyer, other than by reason of its gross negligence or willful misconduct or
by reason of its trading of the Common Stock in a manner that is illegal under
the federal securities laws, becomes involved in any capacity in any action,
proceeding or investigation brought by the SEC against or involving the Company
or in connection with or as a result of the consummation of the transactions
contemplated by the Transaction Agreements, or if the Buyer is impleaded in any
such action, proceeding or investigation by any Person, then in any such case,
the Company will reimburse the Buyer for its reasonable legal and other expenses
(including the cost of any investigation and preparation) incurred in connection
therewith, as such expenses are incurred. In addition, other than with respect
to any matter in which Buyer is a named party, the Company will pay to the Buyer
the charges, as reasonably determined by Buyer, for the time of any officers or
employees of the Buyer devoted to appearing and preparing to appear as
witnesses, assisting in preparation for hearings, trials or pretrial matters, or
otherwise with respect to inquiries, hearing, trials, and other proceedings
relating to the subject matter of this Agreement. The reimbursement obligations
of the Company under this section shall be in addition to any liability which
the Company may otherwise have, shall extend upon the same terms and conditions
to any Affiliates of the Buyer who or which are actually named in such action,
proceeding or investigation, and partners, directors, agents, employees and
controlling persons (if any), as the case may be, of Buyer and any such
affiliate, and shall be binding upon and inure to the benefit of any successors,
assigns, heirs and personal representatives of the Company, Buyer and any such
affiliate and any such person. The Company also agrees that neither the Buyer
nor any such affiliate, partner, director, agent, employee or controlling person
shall have any liability to the Company or any Person asserting claims on behalf
of or in right of the Company in connection with or as a result of the
consummation of any of the Transaction Agreements, except as may be expressly
and specifically provided in or contemplated by this Agreement.

                  i. Available Shares. The Company shall have at all times
authorized and reserved for issuance, free from preemptive rights, a number of
shares (the "Minimum Available Shares") at least equal to the sum of (x) one
hundred percent (100%) of the number of shares of Common Stock issuable as may
be required to satisfy the conversion rights of the Holders of all outstanding
Convertible Debentures, plus (y) the number of shares issuable upon exercise of
all outstanding Warrants held by all Holders (in each case, whether such
Convertible Debentures or Warrants were originally issued to the Holder, the
Buyers or to any other Holder or Buyer). For the purposes of such calculations,
the Company should assume that all such Debentures were then convertible and all
Warrants were then exercisable without regard to any restrictions which might
limit any Buyer's right to convert any of the Convertible Debentures or exercise
any of the Warrants held by any Holder.

<PAGE>

         6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation of
the Company hereunder to issue and sell the Debentures and Warrants to Buyers 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. Buyers shall have executed this Agreement, the Registration
Rights Agreement, and the Escrow Agreement, and delivered the same to the
Company in escrow.

                  b. Buyers shall have delivered the Purchase Price in
accordance with Section 1.

                  c. The representations and warranties of Buyers 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 Buyers 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 Buyers 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.

         7. CONDITIONS TO BUYERS' OBLIGATION TO PURCHASE. The obligation of
Buyers to purchase the Debentures and Warrants 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 Buyers' sole benefit and may be waived by
Buyers at any time in their sole discretion:

                  a. The Company shall have executed this Agreement, the
Registration Rights Agreement, and the Escrow Agreement, and delivered the same
to Buyers in escrow.

                  b. The Company shall have delivered to Buyers in escrow duly
executed Debentures (in such denominations as Buyers shall request) and Warrants
in accordance with Section 1 above.

<PAGE>

                  c. 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.

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

                  e. No material undisclosed event shall have occurred which
could reasonably be expected to have a Material Adverse Effect on the Company.

         8. 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. 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 the Buyers 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.

<PAGE>

                  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:

                                    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

<PAGE>

                                    If to a Buyer:

                                    At the address and facsimile number listed
                                    on the signature page hereof.

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

                                    Krieger & Prager LLP, Esqs.
                                    39 Broadway
                                    Suite 1440
                                    New York, NY 10006
                                    Attn: Samuel M. Krieger, Esq.
                                    Telephone No.: (212) 363-2900
                                    Telecopier No.  (212) 363-2999

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 from a Buyer or to any of its "affiliates," as that term is defined
under the 1934 Act.

                  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 Buyers 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
Buyers shall be entitled, in addition to all other available remedies at law or
in equity.

<PAGE>

                  l. Survival. The representations, warranties and covenants
made by each of the Company and Buyers 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.

                  m. Indemnification.

                           (a) The Company hereby agrees to indemnify and hold
harmless Buyers and their respective 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) Buyers hereby agree 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 Buyers pursuant to this
Agreement; or

                                    (ii) any material failure by Buyers 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 Buyers pursuant to this Agreement.

<PAGE>

                           (c) Promptly after receipt by either party hereto
seeking indemnification pursuant to this Section 8(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 8(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 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.

                            [signature page follows]

<PAGE>

         IN WITNESS WHEREOF, the undersigned Buyers 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

BUYERS:                             Platinum Partners Global Macro Fund LP

                                    By:  /s/ Mark Nordlicht
                                         -------------------------------
                                         Name:  Mark Nordlicht
                                         Title:  General Partner

                                    ADDRESS: 152 West 57th Street
                                             54th Floor
                                             New York, NY 10019

                                    TELEPHONE:_____________________
                                    FACSIMILE:_____________________

                                    SUBSCRIPTION AMOUNT:
                                    Debentures: $750,000
                                    Warrants: 1,500,000

                                    [__________________________]

                                    By:  /s/ Gary Barnett
                                         -------------------------------
                                         Name:  Gary Barnett
                                         Title:

                                    STATE OF RESIDENCE: New York
                                    ADDRESS:            225 West 86th St.
                                                        New York, NY 10024

                                    TELEPHONE:_____________________
                                    FACSIMILE:_____________________

<PAGE>

                                    Millstone Brands Inc.

                                    By:      /s/ Uri Evan
                                         -------------------------------
                                         Name:  Uri Evan
                                         Title:  Director

                                    STATE OF RESIDENCE:   N.J.
                                    ADDRESS:              1735 Jersy Av
                                                          North Brunswick
                                                          NJ. 08902

                                    TELEPHONE:_____________________
                                    FACSIMILE:_____________________

                                    SUBSCRIPTION AMOUNT:
                                    Debentures: $125,000
                                    Warrants:  250,000

                                    Note:  Two separate Buyers for $125,000
                                    Debentures and 250,000 warrants.

<PAGE>

                                  SCHEDULE 3(c)

Securities and rights issued in connection with the Securities Purchase
Agreement dated as of April 22, 2003

Securities and rights issued in connection with Securities Purchase Agreement
dated as of February 28, 2002, as amended March 14, 2003, and as amended June
17, 2003

Term Sheet Agreement with the holders of the securities issued under the
Securities Purchase Agreement dated as of April 22, 2003 and the Securities
Purchase Agreement dated as of February 28, 2002, as amended. Terms of Term
Sheet Agreement more fully set forth in a Settlement Agreement and Release dated
as of December 22, 2003, subject to closing.

Warrants to purchase 750,000 shares of the Company's common stock, exercisable
for five years at $0.35 per share issued pursuant to a consulting agreement.

Warrants to purchase 240,000 shares of common stock, exercisable for three years
at $0.50 per share pursuant to an amended consulting agreement with Jack
Kuessous.

Loan of $100,000 from Jack Kuessous exchanged for 583,333 shares of common stock
and common stock purchase warrants to purchase 150,000 shares of common stock,
exercisable for three years at an exercise price of $0.50 per share.

Stock Option Plan, which may be subdivided as appropriate, for Employees,
Management and other persons entitled to participate in an amount of up to 10%
of the Company's common stock.

Securities and rights issued in connection with a Securities Purchase Agreement
dated as of December 24, 2003 for an aggregate amount of $500,000.

<PAGE>

                                  SCHEDULE 3(g)

Consulting Agreement with POW! Entertainment LLC and Stan Lee Consulting
Agreement with Jack Kuessous, as amended Loan of $100,000 Jack Kuessous
cancelled in exchange for securities

Term Sheet Agreement with the holders of the securities issued under the
Securities Purchase Agreement dated as of April 22, 2003 and the Securities
Purchase Agreement dated as of February 28, 2002, as amended, for the resolution
of issues and return of securities in connection with securities and rights
issued in connection with the Securities Purchase Agreement dated as of April
22, 2003, and Securities and rights issued in connection with Securities
Purchase Agreement dated as of February 28, 2002, as amended March 14, 2003, and
as amended June 17, 2003. Terms of Term Sheet Agreement more fully set forth in
a Settlement Agreement and Release dated as of December 22, 2003, subject to
closing.

Items listed in Schedule 3(c) are incorporated by reference herein.

The Company intends to amend the following SEC Documents:

         1.       Form 8-K/A filed July 2, 2003

         2.       Amendment and/or withdrawal of the registration statement for
                  the resale of the common stock underlying presently
                  outstanding debentures.

The Company has submitted on November 24, 2003 an amendment to the Form 10-QSB
for the period ended June 30, 2003.

<PAGE>

                                  SCHEDULE 3(h)

Consulting Agreement with POW! Entertainment LLC and Stan Lee
Consulting Agreement with Jack Kuessous, as amended
Loan of $100,000 Jack Kuessous cancelled in exchange for securities
Items listed in Schedule 3(c) are incorporated by reference herein.
Items listed in Schedule 3(g) are incorporated by reference herein.

Term Sheet Agreement with the holders of the securities issued under the
Securities Purchase Agreement dated as of April 22, 2003 and the Securities
Purchase Agreement dated as of February 28, 2002, as amended, for the resolution
of issues and return of securities in connection with securities and rights
issued in connection with the Securities Purchase Agreement dated as of April
22, 2003, and Securities and rights issued in connection with Securities
Purchase Agreement dated as of February 28, 2002, as amended March 14, 2003, and
as amended June 17, 2003. Terms of Term Sheet Agreement more fully set forth in
a Settlement Agreement and Release dated as of December 22, 2003, subject to
closing.

<PAGE>

                                  SCHEDULE 3(i)

Term Sheet Agreement with the holders of the securities issued under the
Securities Purchase Agreement dated as of April 22, 2003 and the Securities
Purchase Agreement dated as of February 28, 2002, as amended, for the resolution
of issues and return of securities in connection with securities and rights
issued in connection with the Securities Purchase Agreement dated as of April
22, 2003, and Securities and rights issued in connection with Securities
Purchase Agreement dated as of February 28, 2002, as amended March 14, 2003, and
as amended June 17, 2003. The holders of such securities may have claims related
to breaches of certain provisions of the aforementioned agreements. Terms of
Term Sheet Agreement more fully set forth in a Settlement Agreement and Release
dated as of December 22, 2003, subject to closing.

<PAGE>

                                  SCHEDULE 3(m)

None.

<PAGE>

                                                                       EXHIBIT A

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). 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.

                        Peak Entertainment Holdings, Inc.

                  8% CONVERTIBLE DEBENTURE DUE JANUARY 5, 2007

Debenture No. __

         THIS DEBENTURE is issued by Peak Entertainment Holdings, Inc., a
corporation organized and existing under the laws of the State of Nevada (the
"Company") and is designated as its 8% Convertible Debenture Due January 5, 2007
(the "Debentures").

         FOR VALUE RECEIVED, the Company promises to pay to ___________________
(the "Holder"), the principal sum of __________________________________
($___________) on January 5, 2007 (the "Maturity Date") and to pay interest on
the principal sum outstanding from time to time annually in arrears at the rate
of eight percent (8%) per annum accruing from the date of initial issuance. The
Company will pay the principal of, and any accrued but unpaid interest due upon
this Debenture on the Maturity Date, by check or wire transfer to the person who
is the registered holder of this Debenture as of the tenth day prior to the
Maturity Date and addressed to such holder at the last address appearing on the
Debenture Register. The forwarding of such check or money order shall constitute
a payment of principal and interest hereunder and shall satisfy and discharge
the liability for principal and interest on this Debenture to the extent of the
sum represented by such check or wire transfer plus any amounts so deducted. The
obligations of the Company under this Debenture shall be secured by that certain
Security Agreement by and between the Company and the Holder entered into in
connection with these Debentures.

         This Debenture is subject to the following additional provisions:

         1. The Company shall be entitled to withhold from all payments of
interest on this Debenture any amounts required to be withheld under the
applicable provisions of the United States income tax laws or other applicable
laws at the time of such payments, and the Holder shall execute and deliver all
required documentation in connection therewith.

         2. This Debenture has been issued subject to investment representations
of the original purchaser hereof and may be transferred or exchanged only in
compliance with the Securities Act of 1933, as amended (the "Act"), and other
applicable state and foreign securities laws. The Holder shall deliver written
notice to the Company of any proposed transfer of this Debenture. In the event
of any proposed transfer of this Debenture, the Company may require, prior to
issuance of a new Debenture in the name of such other person, that it receive
reasonable transfer documentation including legal opinions that the issuance of
the Debenture in such other name does not and will not cause a violation of the
Act or any applicable state or foreign securities laws. Prior to due presentment
for transfer of this Debenture, the Company and any agent of the Company may
treat the person in whose name this Debenture is duly registered on the
Company's Debenture Register as the owner hereof for the purpose of receiving
payment as herein provided and for all other purposes, whether or not this
Debenture be overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary. This Debenture has been executed and
delivered pursuant to the Securities Purchase Agreement, dated as of December
24, 2003 between the Company and the Holder (the "Securities Purchase
Agreement"), and is subject to the terms and conditions of the Securities
Purchase Agreement, which are, by this reference, incorporated herein and made a
part hereof. Capitalized terms used and not otherwise defined herein shall have
the meanings set forth for such terms in the Securities Purchase Agreement.

<PAGE>

         3. The Holder of this Debenture is entitled, at its option, to convert
at any time commencing on the earlier of the date of effectiveness of the
registration statement or failure to materially fulfill the Registration Rights
Agreement, the principal amount of this Debenture or any portion thereof, plus,
at the Holder's election, any accrued and unpaid interest, into shares of Common
Stock of the Company ("Conversion Shares") at a conversion price for each share
of Common Stock ("Conversion Price") of $0.30 per share, subject to adjustment
for stock splits and the like. If, upon any conversion of this Debenture, the
Company's issuance of Conversion Shares would cause it to violate any listing
requirement of the OTCBB or other public market through which the Company's
Common Stock is listed or quoted, then in lieu of such stock issuance, the
Company shall pay the Holder cash in an amount equal to the closing price of the
Common Stock on the Conversion Date multiplied by the number of shares which
would otherwise have been issuable upon such conversion within five (5) calendar
days.

                  In case of any stock split or reverse stock split, stock
dividend, reclassification of the common stock, recapitalization, merger or
consolidation, or like capital adjustment affecting the Common Stock of the
Company, the provisions of this Section 3 shall be applied in a fair, equitable
and reasonable manner so as to give effect, as nearly as may be, to the purposes
hereof.

                  For a two year period from issuance, the Conversion Price
shall be adjusted for dilutive issuances of securities for value by the Company
which shall constitute an Adjustment Event, as defined herein. The term
"Adjustment Event" shall mean any issuance by the Company for the Company's
common stock or convertible in to the Company's common stock (excluding
securities issued to the Company's employees, directors, consultants and others
similarly situtated in the ordinary course of business and not for capital
raising purposes) below the lower of (a) $.50 per common share, or (b) fair
market value for such securities as determined at the time of issuance. Upon the
occurrence of an Adjustment Event, appropriate and proportionate adjustments
shall be made to the Conversion Price on a penny for penny basis. 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.

         4. The rate of interest on this Debenture shall be eight percent (8%),
per annum, on the outstanding principal until paid or converted. If any interest
payment date or the Maturity Date is not a business day in the State of New
York, then such payment shall be made on the next succeeding business day.
Accrual of interest shall commence on the first business day to occur after the
date of Closing and continue until payment in full of the principal sum has been
made or duly provided for. Annual interest payments shall be due and payable on
January 5 of each year, commencing with January 5, 2005, provided, however, that
at the option of the Company, interest payments may be accrued beyond the annual
interest payment date, in which event the Holder shall have the option to (a)
accrue the interest payment then due for another interest payment period, or (b)
cause the Company to issue Common Stock in exchange for interest otherwise
payable in cash pursuant to this Debenture, the exact number of shares of Common
Stock into which such interest payment is convertible shall be based on the
average of the closing bid prices of the Common Stock over the twenty (20)
trading days immediately prior to the interest payment date.

         5. On the Maturity Date, the Company will pay the principal of, and any
accrued but unpaid interest due upon, this Debenture, less any amounts required
by law to be deducted, to the registered holder of this Debenture and addressed
to such holder at the last address appearing on the Debenture Register.

         6. (a) Conversion or all or a part of this Debenture shall be
effectuated by surrendering this Debenture to the Company (if such Conversion
will convert all outstanding principal) together with the form of conversion
notice attached hereto as Exhibit A (the "Notice of Conversion"), executed by
the Holder of this Debenture evidencing such Holder's intention to convert this
Debenture or a specified portion (as above provided) hereof, and accompanied, if
required by the Company, by proper assignment hereof in blank. Interest accrued
or accruing from the date of issuance to the date of conversion shall be paid as
set forth above. 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 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 Holder
faxes the Notice of Conversion duly executed to the Company. Facsimile delivery
of the Notice of Conversion shall be accepted by the Company at facsimile number
+44(0)1629 813539, Attn.: Wilfred Shorrocks, President, or such other facsimile
number provided, in writing, by the Company. Certificates representing Common
Stock upon conversion will be delivered to the Holder within three (3) Trading
Days from the date the Notice of Conversion is delivered to the Company
("Delivery Date"). Delivery of shares upon conversion shall be made to the
address specified by the Holder in the Notice of Conversion.

<PAGE>

                  (b) The Company understands that a delay in the issuance of
the Shares of Common Stock beyond the Delivery Date could result in economic
loss to the Lender. As compensation to the Lender for such loss, the Company
agrees to pay late payments to the Lender for late issuance of Shares upon
Conversion in accordance with the following schedule (where "No Business Days
Late" refers to the number of business days which is beyond two (2) business
days after the Delivery Date):1

<TABLE>
<CAPTION>
                                                          Late Payment For Each $10,000
                                                          of Debenture Principal or Interest
              No. Business Days Late                      Amount Being Converted
              ----------------------                      ----------------------
<S>                                                       <C>
                       1                                           $100
                       2                                           $200
                       3                                           $300
                       4                                           $400
                       5                                           $500
                       6                                           $600
                       7                                           $700
                       8                                           $800
                       9                                           $900
                       10                                          $1,000
                       >10                                         $1,000 +$200 for each Business
                                                                   Day Late beyond 10 days
</TABLE>

The Company shall pay any payments incurred under this Section in immediately
available funds upon demand as the Lender's exclusive remedy (other than the
following provisions of this Section 6 for such delay). Furthermore, in addition
to any other remedies which may be available to the Lender, in the event that
the Company fails for any reason to effect delivery of such shares of Common
Stock by close of business on the Delivery Date, the Lender will be entitled to
revoke the relevant Notice of Conversion by delivering a notice to such effect
to the Company, whereupon the Company and the Lender shall each be restored to
their respective positions immediately prior to delivery of such Notice of
Conversion; provided, however, that an amount equal to any payments contemplated
by this Section 6 (b) which have accrued through the date of such revocation
notice shall remain due and owing to the Converting Holder notwithstanding such
revocation. Anything in the foregoing provisions of this paragraph (b) to the
contrary notwithstanding, the total amount payable by the Company under this
paragraph (b) shall be reduced by an amount equal to fifty percent (50%) of any
Buy-In Adjustment Amount (as defined below) actually paid by the Company to the
Holder (but not by more than the total amount due without regard to the
provisions of this sentence).

--------
1 Example: Notice of Conversion is delivered on Monday, October 3, 2003. The
Delivery Date would be Thursday, October 6 (the third business day after such
delivery). If the certificate is delivered by Monday October 10 (2 business days
after the Delivery Date), no payment under this provision is due. If the
certificates are delivered on October 11, that is 1 "Business Day Late" in the
table below; if delivered on October 18, that is 6 "Business Days Late" in the
table.

<PAGE>

                  (c) If, by the relevant Delivery Date, the Company fails for
any reason to deliver the Shares to be issued upon conversion of a Debenture and
after such Delivery Date, the Holder of the Debentures being converted (a
"Converting Holder") purchases, in an arm's-length open market transaction or
otherwise, shares of Common Stock (the "Covering Shares") in order to make
delivery in satisfaction of a sale of Common Stock by the Converting Holder (the
"Sold Shares"), which delivery such Converting Holder anticipated to make using
the Shares to be issued upon such conversion (a "Buy-In"), the Converting Holder
shall have the right, to require the Company to pay to the Converting Holder, in
addition to and not in lieu of the amounts due under Section 5(b) hereof (but in
addition to all other amounts contemplated in other provisions of the
Transaction Agreements, and not in lieu of any such other amounts), the Buy-In
Adjustment Amount (as defined below). The "Buy-In Adjustment Amount" is the
amount equal to the excess, if any, of (x) the Converting Holder's total
purchase price (including brokerage commissions, if any) for the Covering Shares
over (y) the net proceeds (after brokerage commissions, if any) received by the
Converting Holder from the sale of the Sold Shares. The Company shall pay the
Buy-In Adjustment Amount to the Company in immediately available funds
immediately upon demand by the Converting Holder. By way of illustration and not
in limitation of the foregoing, if the Converting Holder purchases shares of
Common Stock having a total purchase price (including brokerage commissions) of
$11,000 to cover a Buy-In with respect to shares of Common Stock it sold for net
proceeds of $10,000, the Buy-In Adjustment Amount which Company will be required
to pay to the Converting Holder will be $1,000.

                  (d) In lieu of delivering physical certificates representing
the Common Stock issuable upon conversion, provided the Company's transfer agent
is participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer program, upon request of the Holder and its compliance with
the provisions contained in this paragraph, so long as the certificates therefor
do not bear a legend and the Holder thereof is not obligated to return such
certificate for the placement of a legend thereon, the Company shall use its
best efforts to cause its transfer agent to electronically transmit the Common
Stock issuable upon conversion to the Holder by crediting the account of
Holder's Prime Broker with DTC through its Deposit Withdrawal Agent Commission
system.

                  (e) The holder of any Debentures shall be entitled to exercise
its conversion privilege with respect to the Debentures notwithstanding the
commencement of any case under 11 U.S.C. ss.101 et seq. (the "Bankruptcy Code").
In the event the Company is a debtor under the Bankruptcy Code, the Company
hereby waives, to the fullest extent permitted, any rights to relief it may have
under 11 U.S.C. ss.362 in respect of such holder's conversion privilege. The
Company hereby waives, to the fullest extent permitted, any rights to relief it
may have under 11 U.S.C. ss.362 in respect of the conversion of the Debentures.
The Company agrees, without cost or expense to such holder, to take or to
consent to any and all action reasonably necessary to effectuate relief under 11
U.S.C. ss.362.

                  (f) The Company will authorize its transfer agent to give
information relating to the Company directly to the Lender or the Lender's
representatives upon the request of the Lender or any such representative, to
the extent such information relates to (i) the status of shares of Common Stock
issued or claimed to be issued to the Lender in connection with a Notice of
Conversion or exercise of a Warrant, or (ii) the number of outstanding shares of
Common Stock of all shareholders as of a current or other specified date. On the
Closing Date, the Company will provide the Lender with a copy of the
authorization so given to the transfer agent.

         7. No provision of this Debenture shall alter or impair the obligation
of the Company, which is absolute and unconditional, to pay the principal of,
and interest on, this Debenture at the time, place, and rate, and in the coin or
currency or shares of Common Stock herein prescribed. This Debenture is a direct
obligation of the Company.

         8. No recourse shall be had for the payment of the principal of, or the
interest on, this Debenture, or for any claim based hereon, or otherwise in
respect hereof, against any incorporator, shareholder, employee, officer or
director, as such, past, present or future, of the Company or any successor
corporation, whether by virtue of any constitution, statute or rule of law, or
by the enforcement of any assessment or penalty or otherwise, all such liability
being, by the acceptance hereof and as part of the consideration for the issue
hereof, expressly waived and released.

         9. (a) In case of any (1) merger or consolidation of the Company with
or into another third party entity, excluding non-material transactions with
parent, subsidiaries or affiliates, or (2) sale by the Company of more than
one-half of the assets of the Company (on an as valued basis) in one or a series
of related transactions, the Holder shall have the right to (A) deem such an
occurrence an Event of Default and exercise its rights of prepayment pursuant to
Paragraph 12 herein, (B) convert its aggregate principal amount of this
Debenture then outstanding into the shares of stock and other securities, cash
and property receivable upon or deemed to be held by holders of Common Stock
following such merger, consolidation or sale, and the Holder shall be entitled
upon such event or series of related events to receive such amount of
securities, cash and property as the shares of Common Stock into which such
aggregate principal amount of this Debenture could have been converted
immediately prior to such merger, consolidation or sales would have been
entitled, or (C) in the case of a merger or consolidation, (x) require the
surviving entity to issue convertible debentures with such aggregate stated
value or in such face amount, as the case may be, equal to the aggregate
principal amount of this Debenture then held by the Holder, plus all accrued and
unpaid interest and other amounts owing thereon, which newly issued debentures
shall have terms identical (including with respect to conversion) to the terms
of this Debenture and shall be entitled to all of the rights and privileges of
the Holder of this Debenture set forth herein and the agreements pursuant to
which this Debenture was issued (including, without limitation, as such rights
relate to the acquisition, transferability, registration and listing of such
shares of stock and other securities issuable upon conversion thereof), and (y)
simultaneously with the issuance of such convertible debentures, shall have the
right to convert such instrument only into shares of stock and other securities,
cash and property receivable upon or deemed to be held by holders of Common
Stock following such merger or consolidation. In the case of clause (C), the
conversion price applicable for the newly convertible debentures shall be based
upon the amount of securities, cash and property that each share of Common Stock
would receive in such transaction and the Conversion Price in effect immediately
prior to the effectiveness or closing date for such transaction. The terms of
any such merger, sale or consolidation shall include such terms so as to
continue to give the Holder the right to receive the securities, cash and
property set forth in this Paragraph upon any conversion or redemption following
such event. This Paragraph shall similarly apply to successive such events.

<PAGE>

                  (b) If, at any time while any portion of this Debenture
remains outstanding, the Company spins off or otherwise divests itself of a part
of its business or operations or disposes of all or of a part of its assets in a
transaction (the "Spin Off") in which the Company, in addition to or in lieu of
any other compensation received and retained by the Company for such business,
operations or assets, causes securities of another entity (the "Spin Off
Securities") to be issued to security holders of the Company, 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 Debentures
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 Debentures") been converted 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 conversion of all
or any of the Outstanding Debentures, 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 principal amount of the Outstanding Debentures
then being converted, and (II) the denominator is the principal amount of the
Outstanding Debentures.

         10. The Holder of the Debenture, by acceptance hereof, agrees that this
Debenture is being acquired for investment and that such Holder will not offer,
sell or otherwise dispose of this Debenture or the Conversion Shares except
under circumstances which will not result in a violation of the Act or any
applicable state Blue Sky or foreign laws or similar laws relating to the sale
of securities.

         11. This Debenture shall be governed by and construed in accordance
with the laws of the State of New York. Each of the parties consents to the
jurisdiction of the federal courts and the state courts located in New York
County in the State of New York in connection with any dispute arising under
this Agreement and hereby waives, to the maximum extent permitted by law, any
objection, including any objection based on forum non conveniens, to the
bringing of any such proceeding in such jurisdictions.

         12. The following shall constitute an "Event of Default":

                  a. The Company shall default in the payment of principal or
interest on this Debenture and same shall continue for a period of twenty
business days; or

                  b. Any of the material representations or warranties made by
the Company herein, in the Securities Purchase Agreement, the Registration
Rights Agreement, or in any agreement, certificate or financial statements
heretofore or hereafter furnished by the Company in connection with the
execution and delivery of this Debenture or the Securities Purchase Agreement
shall be false or misleading in any material respect at the time made; or

                  c. The Company 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 Debenture, fails to transfer or to cause its
Transfer Agent to transfer any certificate for shares of Common Stock issued to
the Holder upon conversion of this Debenture as and when required by this
Debenture or the Registration Rights Agreement, and such transfer is otherwise
lawful, or fails to remove any restrictive legend or to cause its Transfer Agent
to transfer any certificate or any shares of Common Stock issued to the Holder
upon conversion of this Debenture as and when required by this Debenture, the
Securities Purchase Agreement or the Registration Rights Agreement and such
legend removal is otherwise lawful, and any such failure shall continue uncured
for twenty business days; or

<PAGE>

                  d. The Company shall, without cause, fail to perform or
observe, in any material respect, any other material covenant, term, provision,
condition, agreement or obligation of the Company under the Securities Purchase
Agreement, the Registration Rights Agreement or this Debenture and such failure
shall continue uncured for a period of thirty days after written notice from the
Holder of such failure; or

                  e. The Company shall (1) admit in writing its inability to pay
its debts generally as they mature; (2) make an assignment for the benefit of
creditors or commence proceedings for its dissolution; or (3) apply for or
consent to the appointment of a trustee, liquidator or receiver for its or for a
substantial part of its property or business; or

                  f. A trustee, liquidator or receiver shall be appointed for
the Company or for a substantial part of its property or business without its
consent and shall not be discharged within sixty (60) days after such
appointment; or

                  g. Any governmental agency or any court of competent
jurisdiction at the instance of any governmental agency shall assume custody or
control of the whole or any substantial portion of the properties or assets of
the Company and shall not be dismissed within sixty (60) days thereafter; or

                  h. Any money judgment, writ or warrant of attachment, or
similar process in excess of One Hundred Thousand ($100,000) Dollars in the
aggregate shall be entered or filed against the Company or any of its properties
or other assets and shall remain unpaid, unvacated, unbonded or unstayed for a
period of sixty (60) days or in any event later than five (5) days prior to the
date of any proposed sale thereunder; or

                  i. Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Company and, if
instituted against the Company, shall not be dismissed within sixty (60) days
after such institution or the Company shall by any action or answer approve of,
consent to, or acquiesce in any such proceedings or admit the material
allegations of, or default in answering a petition filed in any such proceeding;

                  j. Subject to the Company's reasonable efforts to obtain
effectiveness of the Registration Statement, the Registration Statement is not
declared effective by the Commission within one hundred eighty (180) days from
the Closing Date;

                  k. Upon a properly noticed Notice of Conversion, the Company
fails to deliver Conversion Shares, when lawful to do so, within 10 Trading Days
of such Notice of Conversion; and

                  l. The Company shall have its Common Stock suspended or
delisted from trading on the OTCBB or other quotation service, exchange or
public market on which the Company's Common Stock is then quoted or listed for
in excess of twenty business days, and the Company does not obtain listing or
quotation of its Common Stock with a comparable quotation service, exchange or
public market.

         Then, or at any time thereafter, and in each and every such case,
unless such Event of Default shall have been waived in writing by the Holder
(which waiver shall not be deemed to be a waiver of any subsequent default), at
the option of the Holder, and in the Holder's sole discretion, the Holder may
consider this Debenture immediately due and payable, without presentment,
demand, protest or notice of any kind, all of which are hereby expressly waived,
anything herein or in any note or other instruments contained to the contrary
notwithstanding, and the Holder may immediately enforce any and all of the
Holder's rights and remedies provided herein or any other rights or remedies
afforded by law.

<PAGE>

         13. Nothing contained in this Debenture shall be construed as
conferring upon the Holder the right to vote or to receive dividends or to
consent or receive notice as a shareholder in respect of any meeting of
shareholders or any rights whatsoever as a shareholder of the Company, unless
and to the extent converted in accordance with the terms hereof.

         14. In no event shall the Holder be permitted to convert this Debenture
for shares of Common Stock to the extent that (x) the number of shares of Common
Stock beneficially owned by such Holder (other than shares of Common Stock
issuable upon conversion of this Debenture) plus (y) the number of shares of
Common Stock issuable upon conversion of this Debenture, would be equal to or
exceed 4.9% of the number of shares of Common Stock then issued and outstanding,
including shares issuable upon conversion of this Debenture held by such Holder
after application of this Paragraph 14. 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 Paragraph 14 applies, the determination of
whether this Debenture is convertible (in relation to other securities owned by
the Holder) and of which a portion of this Debenture is convertible shall be in
the sole discretion of such Holder, and the submission of a Notice of Conversion
shall be deemed to be such Holder's determination of whether this Debenture is
convertible (in relation to other securities owned by such holder) and of which
portion of this Debenture is convertible, 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 convert this Debenture into shares
of Common Stock at such time as such conversion will not violate the provisions
of this Paragraph 14. The provisions of this Paragraph 14 may be waived by the
Holder of this Debenture upon, at the election of the Holder, not less than 75
days' prior notice to the Company, and the provisions of this Paragraph 14 shall
continue to apply until such 75th day (or such later date as may be specified in
such notice of waiver). No conversion of this Debenture in violation of this
Paragraph 14 but otherwise in accordance with this Debenture shall affect the
status of the Common Stock issued upon such conversion as validly issued,
fully-paid and nonassessable. If instead of receiving cash on the Maturity Date
the Holder instead exercises its right to convert this Debenture into Common
Stock pursuant to Paragraph 3 by delivery of a Notice of Conversion prior to
receipt of payment, and such conversion would cause the limit contained in the
first sentence of this Paragraph 14 to be exceeded, such conversion of this
Debenture shall occur up to such limit and the remaining unconverted portion of
this Debenture shall be converted into Common Stock (1) in accordance with one
or more Notices of Conversion delivered by the Holder, or (2) 65 days after the
Maturity Date, whichever is earlier. Notwithstanding anything contained herein
to the contrary, no interest shall accrue after the Maturity Date on any such
unconverted portion of this Debenture.

         15. By its acceptance of this Debenture, the Holder agrees to be bound
by the applicable terms of the Securities Purchase Agreement.

                            [signature page follows]

<PAGE>

         IN WITNESS WHEREOF, Borrower has caused this Debenture to be signed in
its name by its duly authorized officer this _______ day of December, 2003.

                                    Peak Entertainment Holdings, Inc.

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

<PAGE>

                                    EXHIBIT A

                              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 Debenture No. ___ 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:________________________________________________________________________

<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.

      Right to Purchase _________ Shares of Common Stock at $0.50 Per Share

                        Peak Entertainment Holdings, Inc.

                             STOCK PURCHASE WARRANT

         THIS CERTIFIES THAT, for value received, _______________________ (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 dated as of December 24, 2003 (the "Initial Exercise Date")
and on or prior to the close of business on January 5, 2007 (the "Termination
Date"), but not thereafter, to subscribe for and purchase from Peak
Entertainment Holdings, Inc., a Nevada corporation (the "Company"), up to
___________ fully paid and nonassessable shares of the Company's Common Stock
(the "Common Stock"), at the exercise price of $0.50 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, dated as of December 24, 2003, by and among the Company and Buyer
listed on the execution page thereof (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 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.

<PAGE>

         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 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.

<PAGE>

                  (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.

<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.

<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, $3.00 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 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.

<PAGE>

                  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 Section 8 of 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 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.

<PAGE>

                  (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.

                            [signature page follows]

<PAGE>

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

Dated:  December __, 2003

                                    Peak Entertainment Holdings, Inc.

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

<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 $0.50 per share, of Peak
Entertainment Holdings, Inc. pursuant to the terms of the attached Warrant, 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

<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.

<PAGE>

                                                                       EXHIBIT C

                          REGISTRATION RIGHTS AGREEMENT

         REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of December
24, 2003, by and among Peak Entertainment Holdings, Inc., a Nevada corporation
(the "Company"), and the investors signatory hereto (collectively, the "Buyer").

         WHEREAS, in connection with the Securities Purchase Agreement by and
among the parties hereto of even date herewith (the "Securities Purchase
Agreement"), the Company has agreed, upon the terms and subject to the
conditions contained therein, to issue and sell to Buyer (i) convertible
debentures in the aggregate principal amount of One Million Dollars ($1,000,000)
(the "Debentures") that are convertible into shares of the Company's common
stock (the "Common Stock"), upon the terms and subject to the limitations and
conditions set forth in such Convertible Debenture, and (ii) warrants (the
"Warrants") to acquire an aggregate of 2,000,000 shares of Common Stock, upon
the terms and conditions and subject to the limitations and conditions set forth
in such Warrants; and

         WHEREAS, the Company desires to grant to Buyer the registration rights
set forth herein with respect to the shares of Common Stock issuable upon
conversion of the Convertible Debenture and the shares of Common Stock issuable
upon exercise of the Warrants issued to Buyer.

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

         1.       DEFINITIONS.

                  a. As used in this Agreement, the following terms shall have
the following meanings:

                           (i) "Buyer" means the Buyer and any transferee or
assignee who agrees to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.

                           (ii) "register," "registered," and "registration"
refer to a registration effected by preparing and filing a Registration
Statement or Statements in compliance with the 1933 Act and pursuant to Rule 415
under the 1933 Act or any successor rule providing for offering securities on a
continuous basis ("Rule 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").

                           (iii) "Registrable Securities" means the Conversion
Shares issued or issuable upon conversion or otherwise pursuant to the
Convertible Debentures, and Warrant Shares issuable, upon exercise or otherwise
pursuant to the Warrants, and any shares of capital stock issued or issuable as
a dividend on or in exchange for or otherwise with respect to any of the
foregoing.

                           (iv) "Registration Statement" means a registration
statement of the Company under the 1933 Act.

                  b. Capitalized terms used herein and not otherwise defined
herein shall have the respective meanings set forth in the Securities Purchase
Agreement, the Convertible Debentures, or the Warrants.

         2.       REGISTRATION.

                  a. The Company shall prepare, and, use reasonable efforts to
file within one month from the date of Closing (as defined in the Securities
Purchase Agreement) (the "Filing Date") with the SEC a Registration Statement on
Form SB-2 or such form of Registration Statement as is then available to effect
a registration of the Registrable Securities, covering the resale of the
Registrable Securities underlying the Debentures and Warrants issued or issuable
pursuant to the Securities Purchase Agreement, which Registration Statement, to
the extent allowable under the 1933 Act and the rules and regulations
promulgated thereunder (including Rule 416), shall state that such Registration
Statement also covers, to the extent permissible, such indeterminate number of
additional shares of Common Stock as may become issuable upon conversion of or
otherwise pursuant to the Convertible Debentures and exercise of the Warrants to
prevent dilution resulting from stock splits, stock dividends or similar
transactions. The number of shares of Common Stock initially included in such
Registration Statement shall be no less than 6,700,000 shares, without regard to
any limitation on Buyer's ability to convert the Convertible Debentures or
exercise the Warrants. The Company acknowledges that the number of shares
initially included in the Registration Statement shall represent a good faith
estimate of the maximum number of shares issuable upon conversion of Convertible
Debentures and upon exercise of the Warrants of this type issued at this time to
investors. In the event that the Securities and Exchange Commission restricts or
prohibits the inclusion of any part of the common stock included in the
Registration Statement on the basis that such securities are not deemed owned or
paid for or any similar reason, the Company shall register the maximum number of
the Registrable Securities that the Commission will permit, and such occurrence
shall not be deemed a breach of any provision of this Agreement, the Securities
Purchase Agreement of which this Agreement is a part, or any other agreement
that is a part of the Securities Purchase Agreement.

<PAGE>

                  b. The Company shall use reasonable efforts to obtain
effectiveness of the Registration Statement as soon as practicable. In the event
that the Registration Statement contemplated by Section 2(a) above is not
declared effectiveness within four months from the date hereof, then Buyer shall
be entitled to receive shares of the Company's unregistered and restricted
common stock in the amount of, on a pro rata basis, 100,000 shares for each
$500,000 in principal amount of debentures purchased for each subsequent month
period in which the Registration Statement has not been declared effective. The
Company shall include in its Registration Statement shares representing a
potential issuance of four months of such issued shares pursuant to this
provision, and the Company will subsequently seek effectiveness of a separate
registration statement or an amended Registration Statement to include all
shares actually issued pursuant to this provision.

                  c. Subject to the last sentence of this Section 2(c), if at
any time prior to the expiration of the Registration Period (as hereinafter
defined) the Company shall determine to file with the SEC a Registration
Statement relating to an underwritten offering for its own account or the
account of others under the 1933 Act of any of its equity securities (other than
on Form S-4 or Form S-8 or their then equivalents relating to equity securities
to be issued solely in connection with any acquisition of any entity or business
or equity securities issuable in connection with stock option or other bona
fide, employee benefit plans), the Company shall send to Buyer who is entitled
to registration rights under this Section 2(c) written notice of such
determination and, if within fifteen (15) days after the effective date of such
notice, Buyer shall so request in writing, the Company shall include in such
Registration Statement all or any part of the Registrable Securities Buyer
requests to be registered, except that if, in connection with any underwritten
public offering for the account of the Company the managing underwriter(s)
thereof shall impose a limitation on the number of shares of Common Stock which
may be included in the Registration Statement because, in such underwriter(s)'
judgment, marketing or other factors dictate such limitation is necessary to
facilitate public distribution, then the Company shall be obligated to include
in such Registration Statement only such limited portion of the Registrable
Securities with respect to which Buyer has requested inclusion hereunder as the
underwriter shall permit. Any exclusion of Registrable Securities shall be made
pro rata among Buyers seeking to include Registrable Securities in proportion to
the number of Registrable Securities sought to be included by Buyer; provided,
however, that the Company shall not exclude any Registrable Securities unless
the Company has first excluded all outstanding securities, the holders of which
are not entitled to inclusion of such securities in such Registration Statement
or are not entitled to pro rata inclusion with the Registrable Securities; and
provided, further, however, that, after giving effect to the immediately
preceding proviso, any exclusion of Registrable Securities shall be made pro
rata with holders of other securities having the right to include such
securities in the Registration Statement other than holders of securities
entitled to inclusion of their securities in such Registration Statement by
reason of demand registration rights. No right to registration of Registrable
Securities under this Section 2(c) shall be construed to limit any registration
required under Section 2(a) hereof. If an offering in connection with which
Buyer is entitled to registration under this Section 2(c) is an underwritten
offering, then Buyer whose Registrable Securities are included in such
Registration Statement shall, unless otherwise agreed by the Company, offer and
sell such Registrable Securities in an underwritten offering using the same
underwriter or underwriters and, subject to the provisions of this Agreement, on
the same terms and conditions as other shares of Common Stock included in such
underwritten offering. Notwithstanding anything to the contrary set forth
herein, the registration rights of Buyer pursuant to this Section 2(c) shall
only be available in the event the Company fails to timely file, obtain
effectiveness or maintain effectiveness of any Registration Statement to be
filed pursuant to Section 2(a) in accordance with the terms of this Agreement.

<PAGE>

                  d. The Company represents and warrants that it meets the
requirements for the use of Form SB-2 for registration of the resale by Buyer of
the Registrable Securities. The Company agrees to file all reports required to
be filed by the Company with the SEC in a timely manner so as to remain eligible
or become eligible, as the case may be, and thereafter to maintain its
eligibility for the use of Form S-3, provided that if the Company is not
currently eligible to use Form S-3, not later than 20 business days after the
Company first meets the registration eligibility and transaction requirements
for the use of Form S-3 (or any successor form) for registration of the offer
and sale by Buyer and any other Buyer of Registrable Securities, the Company
shall file a Registration Statement on Form S-3 (or such successor form) with
respect to the Registrable Securities covered by the Registration Statement on
Form SB-2, or other applicable form, filed pursuant to Section 2(a) (and include
in such Registration Statement the information required by Rule 429 under the
1933 Act) or convert the Registration Statement on Form SB-2, or other
applicable form, filed pursuant to Section 2(a) to a Form S-3 pursuant to Rule
429 under the 1933 Act and cause such Registration Statement (or such amendment)
to be declared effective no later than forty-five (45) days after filing, to the
extent feasible.

         3. OBLIGATIONS OF THE COMPANY. In connection with the registration of
the Registrable Securities, the Company shall have the following obligations:

                  a. The Company shall use reasonable best efforts to prepare
promptly, and file with the SEC not later than the Filing Date, a Registration
Statement with respect to the number of Registrable Securities provided in
Section 2(a), and thereafter use its best efforts to cause such Registration
Statement relating to Registrable Securities to become effective as soon as
possible after such filing, and keep the Registration Statement effective
pursuant to Rule 415 until such date as is the earlier of (i) the date on which
at least two-thirds of the Registrable Securities have been sold or (ii) the
date on which the Registrable Securities may be immediately sold to the public
without registration or restriction (including without limitation as to volume
by each holder thereof) under the 1933 Act (the "Registration Period"), which
Registration Statement (including any amendments or supplements thereto and
prospectuses contained therein) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein not misleading.

                  b. The Company shall prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to the
Registration Statements and the prospectus used in connection with the
Registration Statements as may be necessary to keep the Registration Statements
effective at all times during the Registration Period, and, during such period,
comply with the provisions of the 1933 Act with respect to the disposition of
all Registrable Securities of the Company covered by the Registration Statements
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller thereof as set
forth in the Registration Statements. In the event the number of shares
available under a Registration Statement filed pursuant to this Agreement is
insufficient to cover all of the Registrable Securities issued or issuable upon
conversion of the Convertible Debentures and exercise of the Warrants, the
Company shall amend the Registration Statement, or file a new Registration
Statement, so as to cover all of the Registrable Securities, in each case, as
soon as practicable, after the necessity therefor arises. The Company shall use
reasonable efforts to cause such amendment and/or new Registration Statement to
become effective as soon as practicable following the filing thereof.

                  c. Permit a single firm of counsel designated by the Initial
Investors (which, until further notice, shall be deemed to be Krieger & Prager
LLP, Attn: Samuel Krieger, Esq., which firm has requested to receive such
notification; each, an "Investor's Counsel") to review the Registration
Statement and all amendments and supplements thereto a reasonable period of time
(but not less than three (3) business days) prior to their filing with the SEC,
and not file any document in a form to which such counsel reasonably objects;

<PAGE>

                  d. Notify each Investor and the Investor's Counsel and any
managing underwriters immediately (and, in the case of (i)(A) below, not less
than three (3) business days prior to such filing) and (if requested by any such
person) confirm such notice in writing no later than one (1) business day
following the day (i)(A) when a Prospectus or any Prospectus supplement or
post-effective amendment to the Registration Statement is proposed to be filed;
(B) whenever the SEC notifies the Company whether there will be a "review" of
such Registration Statement; (C) whenever the Company receives (or a
representative of the Company receives on its behalf) any oral or written
comments from the SEC in respect of a Registration Statement (copies or, in the
case of oral comments, summaries of such comments shall be promptly furnished by
the Company to the Investors); and (D) with respect to the Registration
Statement or any post-effective amendment, when the same has become effective;
(ii) of any request by the SEC or any other Federal or state governmental
authority for amendments or supplements to the Registration Statement or
Prospectus or for additional information; (iii) of the issuance by the SEC of
any stop order suspending the effectiveness of the Registration Statement
covering any or all of the Registrable Securities or the initiation of any
proceedings for that purpose; (iv) if at any time any of the representations or
warranties of the Company contained in any agreement (including any underwriting
agreement) contemplated hereby ceases to be true and correct in all material
respects; (v) of the receipt by the Company of any notification with respect to
the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction, or the initiation or
threatening of any proceeding for such purpose; and (vi) of the occurrence of
any event that to the best knowledge of the Company makes any statement made in
the Registration Statement or Prospectus or any document incorporated or deemed
to be incorporated therein by reference untrue in any material respect or that
requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. In addition, the Company shall furnish the Investor's
Counsel with copies of all intended written responses to the comments
contemplated in clause (C) of this Section 3(d) not later than one (1) business
day in advance of the filing of such responses with the SEC so that the
Investors shall have the opportunity to comment thereon;

                  e. The Company shall use reasonable efforts to (i) register
and qualify the Registrable Securities covered by the Registration Statements
under such other securities or "blue sky" laws of such jurisdictions in the
United States as Buyer reasonably requests, (ii) prepare and file in those
jurisdictions such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof during the Registration Period, (iii) take
such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and (iv)
take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (a) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (b) subject itself
to general taxation in any such jurisdiction, (c) file a general consent to
service of process in any such jurisdiction, (d) provide any undertakings that
cause the Company undue expense or burden, or (e) make any change in its charter
or bylaws, which in each case the Board of Directors of the Company determines
to be contrary to the best interests of the Company and its shareholders.

                  f. As promptly as practicable, after becoming aware of such
event, the Company shall notify Buyer of the happening of any event, of which
the Company has knowledge, as a result of which the prospectus included in any
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and use its best
efforts promptly to prepare a supplement or amendment to any Registration
Statement to correct such untrue statement or omission, provided that, the
Company may delay the disclosure of material non-public information concerning
the Company (as well as prospectus or Registration Statement updating) the
disclosure of which at the time is not, in the good faith opinion of the
Company, in the best interests of the Company (an "Allowed Delay"); provided,
further, that the Company shall promptly (i) notify Buyer in writing of the
existence of (but in no event, without the prior written consent of Buyer, shall
the Company disclose to Buyer any of the facts or circumstances regarding)
material non-public information giving rise to an Allowed Delay, and (ii) advise
Buyer in writing to cease all sales under such Registration Statement until the
end of the Allowed Delay. Upon expiration of the Allowed Delay, the Company
shall again be bound by the first sentence of this Section 3(e) with respect to
the information giving rise thereto.

<PAGE>

                  g. Notwithstanding the foregoing, if at any time or from time
to time after the date of effectiveness of the Registration Statement, the
Company notifies the Buyers in writing that the effectiveness of the
Registration Statement is suspended for any reason, whether due to a Potential
Material Event or otherwise, the Buyers shall not offer or sell any Registrable
Securities, or engage in any other transaction involving or relating to the
Registrable Securities, from the time of the giving of such notice until such
Buyer receives written notice from the Company that such the effectiveness of
the Registration Statement has been restored, whether because the Potential
Material Event has been disclosed to the public or it no longer constitutes a
Potential Material Event or otherwise; provided, however, that the Company may
not so suspend the right to such holders of Registrable Securities during the
periods the Registration Statement is required to be in effect other than during
a Permitted Suspension Period (and the applicable provisions of Section 2(b)
shall apply with respect to any such suspension other than during a Permitted
Suspension Period) . The term "Permitted Suspension Period" means up to two such
suspension periods during any consecutive 12-month period, each of which
suspension period shall not either (i) be for more than ten (10) days or (ii)
begin less than ten (10) business days after the last day of the preceding
suspension (whether or not such last day was during or after a Permitted
Suspension Period);

                  h. Use its reasonable efforts to secure and maintain the
designation of all the Registrable Securities covered by the Registration
Statement on the Principal Trading Market within the meaning of Rule 11Aa2-1 of
the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the quotation of the Registrable Securities on the Principal Trading
Market;

                  i. The Company shall use its best efforts to prevent the
issuance of any stop order or other suspension of effectiveness of any
Registration Statement, and, if such an order is issued, to obtain the
withdrawal of such order at the earliest possible moment and to notify Buyer who
holds Registrable Securities being sold of the issuance of such order and the
resolution thereof.

                  j. The Company shall permit Buyer to review such Registration
Statement and all amendments and supplements thereto (as well as all requests
for acceleration or effectiveness thereof) within a reasonable period of time
prior to their filing with the SEC, and shall not file any document in a form to
which Buyer reasonably objects and will not request acceleration of such
Registration Statement without prior notice to Buyer. The sections of such
Registration Statement covering information with respect to Buyer, Buyer's
beneficial ownership of securities of the Company or Buyer intended method of
disposition of Registrable Securities shall conform to the information provided
to the Company by Buyer, provided that such information provided by Buyer is
correct and truthful.

                  k. The Company shall hold in confidence and not make any
disclosure of information concerning Buyer provided to the Company unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction, or (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement. The Company agrees that
it shall, upon learning that disclosure of such information concerning Buyer is
sought in or by a court or governmental body of competent jurisdiction or
through other means, give prompt notice to Buyer prior to making such
disclosure, and allow Buyer, at its expense, to undertake appropriate action to
prevent disclosure of, or to obtain a protective order for, such information.

                  l. The Company shall provide a transfer agent and registrar,
which may be a single entity, for the Registrable Securities not later than the
effective date of the Registration Statement.

                  m. At the request of Buyer, the Company shall prepare and file
with the SEC such amendments (including post-effective amendments) and
supplements to a Registration Statement and any prospectus used in connection
with the Registration Statement which the Company may agree to be necessary in
order to change the plan of distribution set forth in such Registration
Statement.

         4. OBLIGATIONS OF BUYER. In connection with the registration of the
Registrable Securities, Buyer shall have the following obligations:

                  a. It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of Buyer that Buyer shall furnish to the Company such
information regarding itself, the Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as shall
be reasonably required to effect the registration of such Registrable
Securities, and shall execute such documents in connection with such
registration as the Company may reasonably request. At least three (3) business
days prior to the first anticipated filing date of the Registration Statement,
the Company shall notify Buyer of the information the Company requires from
Buyer.

<PAGE>

                  b. Buyer agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statements hereunder, unless Buyer has notified the Company in
writing of Buyer's election to exclude all of Buyer's Registrable Securities
from the Registration Statements.

                  c. In the event the Company or Buyer determines to engage the
services of an underwriter, Buyer agrees to enter into and perform Buyer's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless Buyer has notified the Company
in writing of Buyer's election to exclude all of Buyer's Registrable Securities
from such Registration Statement.

                  d. Buyer agrees that, upon receipt of notice from the Company,
of the happening of any event of the kind such as described in Section 3(e),
Buyer will immediately discontinue disposition of Registrable Securities
pursuant to the Registration Statement covering such Registrable Securities
until Buyer's receipt of the copies of the supplemented or amended prospectus
and, if so directed by the Company, Buyer shall deliver to the Company or
destroy (and deliver to the Company a certificate of destruction) all copies in
Buyer's possession, of the prospectus covering such Registrable Securities
current at the time of receipt of such notice.

                  e. Buyer may not participate in any underwritten registration
hereunder unless Buyer (i) agrees to sell Buyer's Registrable Securities on the
basis provided in any underwriting arrangements in usual and customary form
entered into by the Company, (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
reasonably required under the terms of such underwriting arrangements, and (iii)
agrees to pay its pro rata share of all underwriting discounts and commissions
and any expenses in excess of those payable by the Company pursuant to Section 5
below.

         5. EXPENSES OF REGISTRATION; INCLUDABLE SECURITIES.

                  a. All reasonable expenses, other than underwriting discounts
and commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3 herein, including, without
limitation, all registration, listing and qualification fees, printers and
accounting fees, and the fees and disbursements of counsel for the Company,
shall be borne by the Company.

                  b. Except as and to the extent specifically set forth in
Schedule 5(b) attached hereto, neither the Company nor any of its subsidiaries
has, as of the date hereof, nor shall the Company nor any of its subsidiaries,
on or after the date of this Agreement, enter into any agreement with respect to
its securities that is inconsistent with the rights granted to the Holders in
this Agreement or otherwise conflicts with the provisions hereof. Except as and
to the extent specifically set forth in Schedule 5(b) attached hereto, neither
the Company nor any of its subsidiaries has previously entered into any
agreement granting any registration rights with respect to any of its securities
to any Person. Without limiting the generality of the foregoing, without the
written consent of the Buyers of a majority of the then outstanding Registrable
Securities, the Company shall not grant to any person the right to request the
Company to register any securities of the Company under the Securities Act
unless the rights so granted are subject in all respects to the prior rights in
full of the Holders set forth herein, and are not otherwise in conflict or
inconsistent with the provisions of this Agreement.

<PAGE>

         6. INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:

                  a. To the extent permitted by law, the Company will indemnify,
hold harmless and defend (i) Buyer who holds such Registrable Securities, (ii)
the directors, officers, partners, employees, agents and each person who
controls Buyer within the meaning of the 1933 Act or the Securities Exchange Act
of 1934, as amended (the "1934 Act"), if any, (iii) any underwriter (as defined
in the 1933 Act) for Buyer, and (iv) the directors, officers, partners,
employees and each person who controls any such underwriter within the meaning
of the 1933 Act or the 1934 Act, if any (each, an "Indemnified Person"), against
any joint or several losses, claims, damages, liabilities or expenses
(collectively, together with actions, proceedings or inquiries by any regulatory
or self-regulatory organization, whether commenced or threatened, in respect
thereof, "Claims") to which any of them may become subject insofar as such
Claims arise out of or are based upon: (i) any untrue statement or alleged
untrue statement of a material fact in a Registration Statement or the omission
or alleged omission to state therein a material fact required to be stated or
necessary to make the statements therein not misleading; (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus if used prior to the effective date of such Registration
Statement, or contained in the final prospectus (as amended or supplemented, if
the Company files any amendment thereof or supplement thereto with the SEC) or
the omission or alleged omission to state therein any material fact necessary to
make the statements made therein, in light of the circumstances under which the
statements therein were made, not misleading; or (iii) any violation or alleged
violation by the Company of the 1933 Act, the 1934 Act, any other law,
including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of the Registrable
Securities (the matters in the foregoing clauses (i) through (iii) being,
collectively, "Violations"). Subject to the restrictions set forth in Section
6(c) with respect to the number of legal counsel, the Company shall reimburse
the Indemnified Person, promptly as such expenses are incurred and are due and
payable, for any reasonable legal fees or other reasonable expenses incurred by
them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (i) shall not apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by any Indemnified Person
or underwriter for such Indemnified Person expressly for use in connection with
the preparation of such Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(c) hereof; (ii) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld; and
(iii) with respect to any preliminary prospectus, shall not inure to the benefit
of any Indemnified Person if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected on a timely basis in the
prospectus, as then amended or supplemented, such corrected prospectus was
timely made available by the Company pursuant to Section 3(c) hereof, and the
Indemnified Person was promptly advised in writing not to use the incorrect
prospectus prior to the use giving rise to a Violation and such Indemnified
Person, notwithstanding such advice, used it. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
the Indemnified Person and shall survive the transfer of the Registrable
Securities by Buyer pursuant to Section 9.

                  b. In connection with any Registration Statement in which
Buyer is participating, Buyer agrees severally and not jointly to indemnify,
hold harmless and defend, to the same extent and in the same manner set forth in
Section 6(a), the Company, each of its directors, each of its officers, each
person, if any, who controls the Company within the meaning of the 1933 Act or
the 1934 Act, any underwriter and any other shareholder selling securities
pursuant to the Registration Statement or any of its directors or officers or
any person who controls such shareholder or underwriter within the meaning of
the 1933 Act or the 1934 Act (collectively and together with an Indemnified
Person, an "Indemnified Party"), against any Claim to which any of them may
become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such
Claim arises out of or is based upon any Violation by Buyer, in each case to the
extent (and only to the extent) that such Violation occurs in reliance upon and
in conformity with written information furnished to the Company by Buyer
expressly for use in connection with such Registration Statement; and subject to
Section 6(c) Buyer will reimburse any legal or other expenses (promptly as such
expenses are incurred and are due and payable) reasonably incurred by them in
connection with investigating or defending any such Claim; provided, however,
that the indemnity agreement contained in this Section 6(b) shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of Buyer, which consent shall not be unreasonably
withheld; provided, further, however, that Buyer shall be liable under this
Agreement (including this Section 6(b) and Section 7) for only that amount as
does not exceed the net proceeds to Buyer as a result of the sale of Registrable
Securities pursuant to such Registration Statement. Such indemnity shall remain
in full force and effect regardless of any investigation made by or on behalf of
such Indemnified Party and shall survive the transfer of the Registrable
Securities by Buyer pursuant to Section 9. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(b) with respect to any preliminary prospectus shall not inure to the
benefit of any Indemnified Party if the untrue statement or omission of material
fact contained in the preliminary prospectus was corrected on a timely basis in
the prospectus, as then amended or supplemented.

<PAGE>

                  c. Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; provided, however, that an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the fees and expenses to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding. The indemnifying party shall pay for only one
separate legal counsel for the Indemnified Persons or the Indemnified Parties,
as applicable, and such legal counsel shall be selected by Buyer holding a
majority-in-interest of the Registrable Securities included in the Registration
Statement to which the Claim relates (with the approval of a
majority-in-interest of Buyer), if Buyer are entitled to indemnification
hereunder, or the Company, if the Company is entitled to indemnification
hereunder, as applicable. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is actually prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be made
by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.

         7. CONTRIBUTION. To the extent any indemnification by an indemnifying
party is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 6 to the fullest extent permitted by law; provided,
however, that (i) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 6, (ii) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any seller of Registrable Securities
who was not guilty of such fraudulent misrepresentation, and (iii) contribution
(together with any indemnification or other obligations under this Agreement) by
any seller of Registrable Securities shall be limited in amount to the net
amount of proceeds received by such seller from the sale of such Registrable
Securities.

         8. REPORTS UNDER THE 1934 ACT. With a view to making available to Buyer
the benefits of Rule 144 promulgated under the 1933 Act or any other similar
rule or regulation of the SEC that may at any time permit Buyer to sell
securities of the Company to the public without registration ("Rule 144"), the
Company agrees that hereafter it will:

                  a. make and keep public information available, as those terms
are understood and defined in Rule 144;

                  b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to such requirements and the filing of such reports
and other documents is required for the applicable provisions of Rule 144; and

                  c. furnish to Buyer so long as Buyer owns Registrable
Securities, promptly upon request, such documents and/or information as may be
reasonably requested to permit Buyer to sell such securities pursuant to Rule
144 without registration.

                  d. at the request of any Buyer holding Registrable Securities
(a "Holder"), give its Transfer Agent instructions to the effect that, upon the
Transfer Agent's receipt from such Holder of

<PAGE>

                  (i)      a certificate (a "Rule 144 Certificate") certifying
                           (A) that the Holder's holding period (as determined
                           in accordance with the provisions of Rule 144) for
                           the shares of Registrable Securities which the Holder
                           proposes to sell (the "Securities Being Sold") is not
                           less than (1) year and (B) as to such other matters
                           as may be appropriate in accordance with Rule 144
                           under the Securities Act, and

                  (ii)     an opinion of counsel acceptable to the Company (for
                           which purposes it is agreed that the initial Buyer's
                           Counsel shall be deemed acceptable) that, based on
                           the Rule 144 Certificate, Securities Being Sold may
                           be sold pursuant to the provisions of Rule 144, even
                           in the absence of an effective Registration
                           Statement,

the Transfer Agent is to effect the transfer of the Securities Being Sold and
issue to the buyer(s) or transferee(s) thereof one or more stock certificates
representing the transferred Securities Being Sold without any restrictive
legend and without recording any restrictions on the transferability of such
shares on the Transfer Agent's books and records (except to the extent any such
legend or restriction results from facts other than the identity of the Holder,
as the seller or transferor thereof, or the status, including any relevant
legends or restrictions, of the shares of the Securities Being Sold while held
by the Holder). If the Transfer Agent reasonably requires any additional
documentation at the time of the transfer, the Company shall deliver or cause to
be delivered all such reasonable additional documentation as may be necessary to
effectuate the issuance of an unlegended certificate.

         9. ASSIGNMENT OF REGISTRATION RIGHTS. The rights under this Agreement
shall be automatically assignable by Buyer to any transferee of all or any
portion of Registrable Securities if: (i) Buyer agrees in writing with the
transferee or assignee to assign such rights, and a copy of such agreement is
furnished to the Company within a reasonable time after such assignment; (ii)
the Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of (a) the name and address of such transferee or
assignee, and (b) the securities with respect to which such registration rights
are being transferred or assigned; (iii) following such transfer or assignment,
the further disposition of such securities by the transferee or assignee is
restricted under the 1933 Act and applicable state securities laws; (iv) at or
before the time the Company receives the written notice contemplated by clause
(ii) of this sentence, the transferee or assignee agrees in writing with the
Company to be bound by all of the provisions contained herein; (v) such transfer
shall have been made in accordance with the applicable requirements of the
Securities Purchase Agreement; and (vi) such transferee shall be an "accredited
investor" as that term defined in Rule 501 of Regulation D promulgated under the
1933 Act.

         10. AMENDMENT OF REGISTRATION RIGHTS. Provisions of this Agreement may
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with
written consent of the Company and Buyer. Any amendment or waiver effected in
accordance with this Section 10 shall be binding upon Buyer and the Company.

         11. MISCELLANEOUS.

                  a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.

                  b. Any notices required or permitted to be given under the
terms hereof 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:

<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.

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

                           Krieger & Prager LLP, Esqs.
                           39 Broadway
                           Suite 1440
                           New York, NY 10006
                           Attn: Samuel M. Krieger, Esq.
                           Telephone No.: (212) 363-2900
                           Telecopier No.  (212) 363-2999

                  c. Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.

                  d. 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 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. NOTHING HEREIN
SHALL AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED
BY LAW. The Company and the 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.

                  e. 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.

                  f. This Agreement, the Convertible Debentures, the Warrants
and the Securities Purchase Agreement (including all schedules and exhibits
thereto) constitute the entire agreement among the parties hereto with respect
to the subject matter hereof and thereof. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein and
therein. This Agreement and the Securities Purchase Agreement supersede all
prior agreements and understandings among the parties hereto with respect to the
subject matter hereof and thereof.

<PAGE>

                  g. Subject to the requirements of Section 9 hereof, this
Agreement shall be binding upon and inure to the benefit of the parties and
their successors and assigns.

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

                  i. This Agreement may be executed in two 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.

                  j. 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.

                  k. Except as otherwise provided herein, all consents and other
determinations to be made by Buyer pursuant to this Agreement shall be made by
Buyers holding two-thirds of the Registrable Securities, determined as if all of
the Convertible Debentures then outstanding have been converted into Registrable
Securities.

                  l. 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.

                            [signature page follows]

<PAGE>

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

THE COMPANY:                        Peak Entertainment Holdings, Inc.

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

THE BUYER:                          Platinum Partners Global Macro Fund LP

                                    By:
                                         -------------------------------------
                                         Name:  Mark Nordlicht
                                         Title:  General Partner

                                    ADDRESS:   152 West 57th Street
                                               54th Floor
                                               New York, NY 10019

                                    TELEPHONE:____________________________
                                    FACSIMILE:____________________________

                                    [                                        ]

                                    By:
                                         -------------------------------------
                                         Name:
                                         Title:

                                    ADDRESS:_____________________________
                                            _____________________________
                                            _____________________________

                                    TELEPHONE:____________________________
                                    FACSIMILE:____________________________

<PAGE>

                                  SCHEDULE 5(b)

Warrants to purchase 750,000 shares of the Company's common stock, exercisable
for five years at $0.35 per share issued pursuant to a consulting agreement.

Warrants to purchase 240,000 shares of common stock, exercisable for three years
at $0.50 per share pursuant to an amended consulting agreement with Jack
Kuessous.

Loan of $100,000 from Jack Kuessous exchanged for 583,333 shares of common stock
and common stock purchase warrants to purchase 150,000 shares of common stock,
exercisable for three years at an exercise price of $0.50 per share.

Stock Option Plan, which may be subdivided as appropriate, for Employees,
Management and other persons entitled to participate in an amount of up to 10%
of the Company's common stock.

Securities and rights issued in connection with a Securities Purchase Agreement
dated as of December 24, 2003 for an aggregate amount of $500,000.

<PAGE>

                                                                       EXHIBIT E

                                 PROMISSORY NOTE

Promissory Note, Note No. __

$[375,000/125,000]                                              December__, 2003

         FOR VALUE RECEIVED, and intending to be legally bound, the undersigneds
(the "Maker"), hereby unconditionally and irrevocably promises to pay to the
order of PEAK ENTERTAINMENT HOLDINGS, INC. (the "Payee"), in lawful money of the
United States of America, the principal sum of $[375,000/125,000] in payment for
the securities subscribed for by Payee pursuant to the Securities Purchase
Agreement dated as of December __, 2003 entered into by and among the Maker and
the Payee.

         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.

         Payee will inform Maker of the date of effectiveness of the
registration statement pursuant to the Securities Purchase Agreement. This
Promissory Note shall mature on the third business day following such notice to
Maker (the "Maturity Date"), and shall be immediately payable without any
further demand by Payee.

         For purposes of this Promissory Note, an "Event of Default" shall occur
if Maker shall: (i) fail to pay the entire principal amount of this Promissory
when due and payable, (ii) admit in writing its inability to pay any of its
monetary obligations under this Promissory Note, (iii) make a general assignment
of its assets for the benefit of creditors, or (iv) allow any proceeding to be
instituted by or against it seeking relief from or by creditors, including,
without limitation, any bankruptcy proceedings.

         In the event that an Event of Default has occurred, Payee or any other
holder of this Promissory Note may, by notice to Maker, declare this entire
Promissory Note to be forthwith due and payable one business day after such
Event of Default. In the event that an Event of Default consisting of a
voluntary or involuntary bankruptcy filing has occurred, then this entire
Promissory Note shall automatically become due and payable without any notice or
other action by Payee. In the Event of Default, interest shall accrue on the
outstanding principal balance of this Promissory Note on the basis of a 360-day
year daily from the date of issuance until paid in full at the rate of eight
percent (8%) per annum.

         The nonexercise or delay by the Payee or any other holder of this
Promissory Note of any of its rights hereunder in any particular instance shall
not constitute a waiver thereof in that or any subsequent instance. No waiver of
any right shall be effective unless in writing signed by the Payee, and no
waiver on one (1) or more occasions shall be conclusive as a bar to or waiver of
any right on any other occasion.

<PAGE>

         Should any part of the indebtedness evidenced hereby be collected by
law or through an attorney-at-law, Payee or any other holder of this Promissory
Note shall, if permitted by applicable law, be entitled to collect from Maker
all reasonable costs of collection, including, without limitation, attorneys'
fees.

         Maker hereby forever waives presentment, demand, presentment for
payment, protest, notice of protest, and notice of dishonor of this Promissory
Note and all other demands and notices in connection with the delivery,
acceptance, performance and enforcement of this Promissory Note.

         This Promissory Note shall be binding upon the successors and assigns
of Maker, and shall be binding upon, and inure to the benefit of, the successors
and assigns of Payee.

         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 Maker at the address set forth
below or to the Payee at Bagshaw Hall, Bagshaw Hill, Bakewell, Derbyshire, UK
DE45 1DL, telephone number: +44(0)1629 814555, facsimile: +44(0)1629 813539.
Such notice shall be deemed given when actually received. Both Maker and Payee
may change the address and fax number for notices by service of notice to the
other as herein provided.

         This Promissory Note shall be governed by and construed in accordance
with the internal laws of the State of New York. All disputes between Maker and
Payee relating in any way to this Promissory Note shall be resolved only by
state and federal courts located in New York County in the State of New York,
and the courts to which an appeal therefrom may be taken.

<PAGE>

         IN WITNESS WHEREOF, the undersigned Maker has executed this Promissory
Note as of December __, 2003.

MAKER:                              [___________________]

                                    By:_____________________________
                                         Name:
                                         Title:

                                    STATE OF RESIDENCE:
                                    ADDRESS:
                                    TELEPHONE:_____________________________
                                    FACSIMILE:_____________________________

<PAGE>

                                                                       EXHIBIT D

                                ESCROW AGREEMENT

         THIS ESCROW AGREEMENT (this "Agreement") is made as of December 24,
2003, by and among Peak Entertainment Holdings, Inc., a corporation incorporated
under the laws of the State of Nevada (the "Company"), the investors signatory
hereto (collectively, "Investor"), and Law Offices of Dan Brecher (the "Escrow
Agent"). Capitalized terms used but not defined herein shall have the meanings
set forth in the Securities Purchase Agreement referred to in the first recital.

                              W I T N E S S E T H:

         WHEREAS, the Investor will be purchasing from the Company Convertible
Debentures with an aggregate principal amount of $1,000,000, at the Purchase
Price as set forth in the Securities Purchase Agreement (the "Securities
Purchase Agreement") dated the date hereof between the Investor and the Company,
which will be issued as per the terms contained herein and in the Securities
Purchase Agreement; and

         WHEREAS, it is intended that the purchase of the securities pursuant to
the Securities Purchase Agreement be consummated in accordance with the
requirements set forth by Sections 4(2) and/or 4(6) and/or Regulation D
promulgated under the Securities Act of 1933, as amended; and

         WHEREAS, the Company and the Investor have requested that the Escrow
Agent hold the initial $500,000 cash portion of the Purchase Price with respect
to the Closing of the Securities Purchase Agreement in escrow until (i) the
Escrow Agent has received the Convertible Debentures, the Warrants, certain
other closing documents specified herein, and (ii) until the earlier of (A)
March 22, 2004 or (B) the effectiveness of the Registration Statement referenced
in the Registration Rights Agreement and Securities Purchase Agreement, and
(iii)certain conditions to closing as set forth herein and in the Securities
Purchase Agreement have been satisfied;

         NOW, THEREFORE, in consideration of the covenants and mutual promises
contained herein and other good and valuable consideration, the receipt and
legal sufficiency of which are hereby acknowledged and intending to be legally
bound hereby, the parties agree as follows:

                                    ARTICLE 1

                               TERMS OF THE ESCROW

         1.1 The parties hereby agree to establish an escrow account with the
Escrow Agent whereby the Escrow Agent shall hold the funds for the purchase of
the Convertible Debentures and Warrants at the Closing as contemplated by the
Securities Purchase Agreement.

         1.2 At the Closing, upon the Escrow Agent's receipt of the cash portion
of the Purchase Price for the Closing into its escrow account, together with
executed counterparts of this Agreement, the Securities Purchase Agreement, the
Registration Rights Agreement, the Debentures, and the Warrants, the Escrow
Agent shall telephonically advise the parties, or the parties' designated
attorney or agent, of the amount of funds it has received into its account.

                  Wire transfers to the Escrow Agent shall be made as follows:

                           LAW OFFICES OF DAN BRECHER,
                           ESCROW ACCOUNT ACC. 37242193
                           CITIBANK, N.A.
                           CITICORP CENTER
                           153 EAST 53RD STEET
                           NEW YORK, NY 10043
                           ABA NO. 021000089

<PAGE>

         1.3. Once Escrow Agent confirms the validity of the issuance of the
applicable Convertible Debentures and the Warrants by means of its receipt of a
Release Notice in the form attached hereto as Exhibit X executed by the Company
and Investor, and provided that there has been receipt of the debentures for
which the Company is paying $1,000,000 plus 1,000,000 shares of unregistered
common stock and, upon the earlier of March 22, 2004 or the effectiveness of the
Registration Statement referenced in the Registration Rights Agreement and
Securities Purchase Agreement, the Escrow Agent shall then deliver to the
Company the cash portion Purchase Price per the written wire or other delivery
instructions of the Company, net of legal, administrative and escrow costs
incurred in connection with the Securities Purchase Agreement (which shall be
the obligation of the Company) and net of any outstanding balance, if any, as of
the Closing, for legal and administrative fees, costs and expenses incurred by
the Company to it. At the Closing, the Escrow Agent shall then arrange to have
the applicable Convertible Debentures and the Warrants delivered as per
instructions from the Investor against payment of consideration therefor.

                                    ARTICLE 2

                                  MISCELLANEOUS

         2.1. No waiver or any breach of any covenant or provision herein
contained shall be deemed a waiver of any preceding or succeeding breach
thereof, or of any other covenant or provision herein contained. No extension of
time for performance of any obligation or act shall be deemed any extension of
the time for performance of any other obligation or act.

         2.2. All notices or other communications required or permitted
hereunder shall be in writing, and shall be sent as set forth in the Securities
Purchase Agreement.

         2.3. This Escrow Agreement shall be binding upon and shall inure to the
benefit of the permitted successors and permitted assigns of the parties hereto.

         2.4. This Escrow Agreement is the final expression of, and contains the
entire agreement between, the parties with respect to the subject matter hereof
and supersedes all prior understandings with respect thereto. This Escrow
Agreement may not be modified, changed, supplemented or terminated, nor may any
obligations hereunder be waived, except by written instrument signed by the
parties to be charged or by its agent duly authorized in writing or as otherwise
expressly permitted herein.

         2.5. Whenever required by the context of this Escrow Agreement, the
singular shall include the plural and masculine shall include the feminine. This
Escrow Agreement shall not be construed as if it had been prepared by one of the
parties, but rather as if both parties had prepared the same. Unless otherwise
indicated, all references to Articles are to this Escrow Agreement.

         2.6. The parties hereto expressly agree that this Escrow Agreement
shall be governed by, interpreted under and construed and enforced in accordance
with the laws of the State of New York. Any action to enforce, arising out of,
or relating in any way to, any provisions of this Escrow Agreement shall only be
brought in a state or Federal court sitting in New York County in the State of
New York.

         2.7. The Escrow Agent's duties hereunder may be altered, amended,
modified or revoked only by a writing signed by the Company, the Investor and
the Escrow Agent.

         2.8. The Escrow Agent shall be obligated only for the performance of
such duties as are specifically set forth herein and may rely and shall be
protected in relying or refraining from acting on any instrument reasonably
believed by the Escrow Agent to be genuine and to have been signed or presented
by the proper party or parties. The Escrow Agent shall not be personally liable
for any act the Escrow Agent may do or omit to do hereunder as the Escrow Agent
while acting in good faith, and any act done or omitted by the Escrow Agent
pursuant to the advice of the Escrow Agent's attorneys-at-law shall be
conclusive evidence of such good faith.

         2.9. The Escrow Agent is hereby expressly authorized to disregard any
and all warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law and is hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case the Escrow Agent obeys or complies with any such order, judgment
or decree, the Escrow Agent shall not be liable to any of the parties hereto or
to any other person, firm or corporation by reason of such decree being
subsequently reversed, modified, annulled, set aside, vacated or found to have
been entered without jurisdiction.

<PAGE>

         2.10. The Escrow Agent shall not be liable in any respect on account of
the identity, authorization or rights of the parties executing or delivering or
purporting to execute or deliver the Securities Purchase Agreement or any
documents or papers deposited or called for thereunder.

         2.11. The Escrow Agent shall be entitled to employ such legal counsel
and other experts as the Escrow Agent may deem necessary properly to advise the
Escrow Agent in connection with the Escrow Agent's duties hereunder, may rely
upon the advice of such counsel, and may pay such counsel reasonable
compensation therefor. The Escrow Agent has acted as legal counsel for the
Company, and may continue to act as legal counsel for the Company, from time to
time, notwithstanding its duties as the Escrow Agent hereunder. The Investor
consents to the Escrow Agent in such capacity as legal counsel for the Company
and waives any claim that such representation represents a conflict of interest
on the part of the Escrow Agent. The Investor understands that the Company and
the Escrow Agent are relying explicitly on the foregoing provision in entering
into this Escrow Agreement.

         2.12. The Escrow Agent's responsibilities as escrow agent hereunder
shall terminate if the Escrow Agent shall resign by written notice to the
Company and the Investor. In the event of any such resignation, the Investor and
the Company shall appoint a successor Escrow Agent.

         2.13. If the Escrow Agent reasonably requires other or further
instruments in connection with this Escrow Agreement or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such instruments.

         2.14. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the documents
or the escrow funds held by the Escrow Agent hereunder, the Escrow Agent is
authorized and directed in the Escrow Agent's sole discretion (1) to retain in
the Escrow Agent's possession without liability to anyone all or any part of
said documents or the escrow funds until such disputes shall have been settled
either by mutual written agreement of the parties concerned by a final order,
decree or judgment or a court of competent jurisdiction after the time for
appeal has expired and no appeal has been perfected, but the Escrow Agent shall
be under no duty whatsoever to institute or defend any such proceedings or (2)
to deliver the escrow funds and any other property and documents held by the
Escrow Agent hereunder to a state or Federal court having competent subject
matter jurisdiction and located in the City of New York in accordance with the
applicable procedure therefor.

         2.15. The Company and the Investor agree jointly and severally to
indemnify and hold harmless the Escrow Agent and its partners, employees, agents
and representatives from any and all claims, liabilities, costs or expenses in
any way arising from or relating to the duties or performance of the Escrow
Agent hereunder or the transactions contemplated hereby or by the Securities
Purchase Agreement other than any such claim, liability, cost or expense to the
extent the same shall have been determined by final, unappealable judgment of a
court of competent jurisdiction to have resulted from the gross negligence or
willful misconduct of the Escrow Agent.

                            [signature page follows]

<PAGE>

      IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
this ______ day of December, 2003

THE COMPANY:                        Peak Entertainment Holdings, Inc.

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

THE INVESTORS:                      Platinum Partners Global Macro Fund LP

                                    By:
                                         -------------------------------------
                                         Name:  Mark Nordlicht
                                         Title:  General Partner

                                    [__________________________]

                                    By:
                                         -------------------------------------
                                         Name:
                                         Title:

ESCROW AGENT:

LAW OFFICES OF DAN BRECHER

By:___________________________________
     Dan Brecher, Authorized Signatory

<PAGE>

                                  Exhibit X to
                                Escrow Agreement

                                 RELEASE NOTICE

         The UNDERSIGNED, pursuant to the Escrow Agreement, dated as of December
21, 2003 among Peak Entertainment Holdings, Inc., the Investor signatory thereto
and Law Offices of Dan Brecher, as Escrow Agent (the "Escrow Agreement";
capitalized terms used herein and not defined shall have the meaning ascribed to
such terms in the Escrow Agreement), hereby notify the Escrow Agent that each of
the conditions precedent to the purchase and sale of the Convertible Debenture
and Warrants set forth in the Securities Purchase Agreement have been satisfied.
The Company and the undersigned Investor hereby confirm that all of their
respective representations and warranties contained in the Securities Purchase
Agreement remain true and correct and authorize the release by the Escrow Agent
of the funds and documents to be released at the Closing as described in the
Escrow Agreement. This Release Notice shall not be effective until executed by
the Company and the Investor.

         This Release Notice may be signed in one or more counterparts, each of
which shall be deemed an original.

                            [signature page follows]

<PAGE>

      IN WITNESS WHEREOF, the undersigned have caused this Release Notice to be
duly executed and delivered as of this __ day of ___________, 2003.

THE COMPANY:                        Peak Entertainment Holdings, Inc.

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

THE INVESTOR:                       Platinum Partners Global Macro Fund LP

                                    By:
                                         -------------------------------------
                                         Name:  Mark Nordlicht
                                         Title:  General Partner

                                    [__________________________]

                                    By:
                                         -------------------------------------
                                         Name:
                                         Title:

<PAGE>

                               SECURITY AGREEMENT

         SECURITY AGREEMENT (this "Agreement"), dated as of December 24, 2003,
by and among Peak Entertainment Holdings, Inc., a Nevada corporation (the
"Company"), and the secured parties signatory hereto and their respective
endorsees, transferees and assigns (collectively, the "Secured Party").

                              W I T N E S S E T H:

         WHEREAS, pursuant to a Securities Purchase Agreement between the
Company and the Secured Party (the "Purchase Agreement"), the Company has agreed
to issue to the Secured Party and the Secured Party has agreed to purchase from
the Company certain of the Company's 8% Secured Convertible Debentures (the
"Debentures"), which are convertible into shares of the Company's Common Stock,
par value $.001 per share (the "Common Stock"), and in connection therewith, the
Company shall issue the Secured Party certain Common Stock purchase warrants
(the "Warrants"); and

         WHEREAS, in order to induce the Secured Party to purchase the
Debentures, the Company has agreed to execute and deliver to the __________ as
Agent for Secured Party (the Agent") this Agreement for the benefit of the
Secured Party and to grant to it a priority security interest in certain
property of the Company to secure the prompt payment, performance and discharge
in full of all of the Company's obligations under the Debentures and exercise
and discharge in full of the Company's obligations under the Warrants.

         NOW, THEREFORE, in consideration of the agreements herein contained and
for other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto hereby agree as follows:

         1. Certain Definitions. As used in this Agreement, the following terms
shall have the meanings set forth in this Section 1. Terms used but not
otherwise defined in this Agreement that are defined in Article 9 of the UCC
(such as "general intangibles" and "proceeds") shall have the respective
meanings given such terms in Article 9 of the UCC.

                  (a) "Collateral" means the collateral in which the Secured
         Party is granted a security interest by this Agreement and which shall
         include the following, whether presently owned or existing or hereafter
         acquired or coming into existence, and all additions and accessions
         thereto and all substitutions and replacements thereof, and all
         proceeds, products and accounts thereof, including, without limitation,
         all proceeds from the sale or transfer of the Collateral and of
         insurance covering the same and of any tort claims in connection
         therewith:

<PAGE>

                           (i) All Goods of the Company, including, without
                  limitations, all machinery, equipment, computers, motor
                  vehicles, trucks, tanks, boats, ships, appliances, furniture,
                  special and general tools, fixtures, test and quality control
                  devices and other equipment of every kind and nature and
                  wherever situated, together with all documents of title and
                  documents representing the same, all additions and accessions
                  thereto, replacements therefor, all parts therefor, and all
                  substitutes for any of the foregoing and all other items used
                  and useful in connection with the Company's businesses and all
                  improvements thereto (collectively, the "Equipment");

                           (ii) All Inventory of the Company, less inventory to
                  the extent that CK's Supermarket Limited of 64/65 The
                  Kingsway, Swansea SA1 5HW maintains security interests in
                  pursuant to an agreement for a loan made July 10, 2002;

                           (iii) All of the Company's contract rights and
                  general intangibles, including, without limitation, all
                  partnership interests, stock or other securities, licenses,
                  distribution and other agreements, computer software
                  development rights, leases, franchises, customer lists,
                  quality control procedures, grants and rights, goodwill,
                  trademarks, service marks, trade styles, trade names, patents,
                  patent applications, copyrights, deposit accounts, and income
                  tax refunds (collectively, the "General Intangibles");

                           (iv) All Receivables of the Company including all
                  insurance proceeds, and rights to refunds or indemnification
                  whatsoever owing, together with all instruments, all documents
                  of title representing any of the foregoing, all rights in any
                  merchandising, goods, equipment, motor vehicles and trucks
                  which any of the same may represent, and all right, title,
                  security and guaranties with respect to each Receivable,
                  including any right of stoppage in transit;

                           (v) All of the Company's documents, instruments and
                  chattel paper, files, records, books of account, business
                  papers, computer programs and the products and proceeds of all
                  of the foregoing Collateral set forth in clauses (i)-(iv)
                  above; and

                           (vi) All of the Company's shares of stock of the
                  subsidiaries of the Company, including, without limitation,
                  all of the Company's shares of stock of Peak Entertainment,
                  Ltd.

                  (b) "Company" shall mean, collectively, the Company and all of
         the subsidiaries of the Company.

                  (c) "Obligations" means all of the Company's obligations under
         this Agreement and the Debentures, in each case, whether now or
         hereafter existing, voluntary or involuntary, direct or indirect,
         absolute or contingent, liquidated or unliquidated, whether or not
         jointly owed with others, and whether or not from time to time
         decreased or extinguished and later decreased, created or incurred, and
         all or any portion of such obligations or liabilities that are paid, to
         the extent all or any part of such payment is avoided or recovered
         directly or indirectly from the Secured Party as a preference,
         fraudulent transfer or otherwise as such obligations may be amended,
         supplemented, converted, extended or modified from time to time.

<PAGE>

                  (d) "UCC" means the Uniform Commercial Code, as currently in
         effect in the State of New York.

         2. Grant of Security Interest. As an inducement for the Secured Party
to purchase the Debentures and to secure the complete and timely payment,
performance and discharge in full, as the case may be, of all of the
Obligations, the Company hereby, unconditionally and irrevocably, pledges,
grants and hypothecates to the Secured Party, a continuing security interest in,
a continuing lien upon, a right to possession and disposition of and a right of
set-off against, in each case to the fullest extent permitted by law, all of the
Company's right, title and interest of whatsoever kind and nature (including,
without limitation, all of Peak Entertainment Ltd.'s rights) in and to the
Collateral (the "Security Interest"). The Security Interest rights herein shall
be on equal level to the security interest rights granted to third party
purchasers in the Company's sale of debentures, on terms and conditions similar
to the terms herein, in the aggregate principal amount of $500,000 occurring on
or about the same time as this Agreement. The Company shall be entitled to grant
security interest rights senior to the rights of the Buyers to a financial
institution, subject to the approval of the Buyers, which shall not be
unreasonably withheld. The Company shall be entitled to grant security interest
rights similar to the rights granted to the Buyers to non-financial institution
lender(s) hereafter providing at least $1,500,000 or more in working capital,
subject to the approval of the Buyers, which shall not be unreasonably withheld.

         3. Representations, Warranties, Covenants and Agreements of the
Company. The Company represents and warrants to, and covenants and agrees with,
the Secured Party as follows:

                  (a) This Agreement constitutes a legal, valid and binding
         obligation of the Company enforceable in accordance with its terms,
         except as enforceability may be limited by bankruptcy, insolvency,
         reorganization, moratorium or similar laws affecting the enforcement of
         creditor's rights generally.

                  (b) The Company represents and warrants that its principal
         place of business is set forth in the Company's filings with the
         Securities and Exchange Commission that that it has no place of
         business or offices where its respective books of account and records
         are kept (other than temporarily at the offices of its attorneys or
         accountants) or places where Collateral is stored or located;

                  (c) The Company is the sole owner of the Collateral (except
         for non-exclusive licenses granted by the Company in the ordinary
         course of business), free and clear of any liens, security interests,
         encumbrances, rights or claims, and is fully authorized to grant the
         Security Interest in and to pledge the Collateral, subject to the
         surrender and cancellation of previously issued debentures. Subject to
         the surrender and cancellation of previously issued debentures, there
         is not on file in any governmental or regulatory authority, agency or
         recording office an effective financing statement, security agreement,
         license or transfer or any notice of any of the foregoing (other than
         those that have been filed in favor of any secured party pursuant to
         this Agreement or similar agreements) covering or affecting any of the
         Collateral. So long as this Agreement shall be in effect, the Company
         shall not execute and shall not knowingly permit to be on file in any
         such office or agency any such financing statement or other document or
         instrument (except to the extent filed or recorded in favor of the
         Secured Party pursuant to the terms of this Agreement).

<PAGE>

                  (d) No part of the Collateral has been judged invalid or
         unenforceable. No written claim has been received that any Collateral
         or the Company's use of any Collateral violates the rights of any third
         party. There has been no adverse decision to the Company's claim of
         ownership rights in or exclusive rights to use the Collateral in any
         jurisdiction or to the Company's right to keep and maintain such
         Collateral in full force and effect, and there is no proceeding
         involving said rights pending or, to the best knowledge of the Company,
         threatened before any court, judicial body, administrative or
         regulatory agency, arbitrator or other governmental authority.

                  (e) The Company shall at all times maintain its books of
         account and records relating to the Collateral at its principal place
         of business and may not relocate such books of account and records or
         tangible Collateral unless it delivers to the Secured Party at least 30
         days prior to such relocation (i) written notice of such relocation and
         the new location thereof (which must be within the United States) and
         (ii) evidence that appropriate financing statements and other necessary
         documents have been filed and recorded and other steps have been taken
         to perfect the Security Interest to create in favor of the Secured
         Party valid, perfected and continuing priority liens in the Collateral.

                  (f) This Agreement creates in favor of the Secured Party a
         valid security interest in the Collateral securing the payment and
         performance of the Obligations and, upon making the filings described
         in the immediately following sentence, a perfected priority security
         interest in such Collateral. Subject to the surrender and cancellation
         of previously issued debentures, except for the filing of financing
         statements on Form-1 under the UCC with the appropriate jurisdictions,
         no authorization or approval of or filing with or notice to any
         governmental authority or regulatory body is required either (i) for
         the grant by the Company of, or the effectiveness of, the Security
         Interest granted hereby or for the execution, delivery and performance
         of this Agreement by the Company or (ii) for the perfection of or
         exercise by the Secured Party of its rights and remedies hereunder.

                  (g) The Company will prepare and deliver to the Agent Secured
         Party one or more executed UCC financing statements on Form-1 with
         respect to the Security Interest for filing with the appropriate
         jurisdictions at the expense of the Company.

                  (h) The execution, delivery and performance of this Agreement
         does not conflict with or cause a breach or default, or an event that
         with or without the passage of time or notice, shall constitute a
         breach or default, under any agreement to which the Company is a party
         or by which the Company is bound. No consent (including, without
         limitation, from stockholders or creditors of the Company) is required
         for the Company to enter into and perform its obligations hereunder.

<PAGE>

                  (i) The Company shall at all times maintain the liens and
         Security Interest provided for hereunder as valid and perfected
         priority liens and security interests in the Collateral in favor of the
         Secured Party until this Agreement and the Security Interest hereunder
         shall terminate pursuant to Section 11. The Company hereby agrees to
         defend the same against any and all persons. The Company shall
         safeguard and protect all Collateral for the account of the Secured
         Party. At the request of the Secured Party, the Company will sign and
         deliver to the Secured Party at any time or from time to time one or
         more financing statements pursuant to the UCC (or any other applicable
         statute) in form reasonably satisfactory to the Secured Party and will
         pay the cost of filing the same in all public offices wherever filing
         is, or is deemed by the Secured Party to be, necessary or desirable to
         effect the rights and obligations provided for herein. Without limiting
         the generality of the foregoing, the Company shall pay all fees, taxes
         and other amounts necessary to maintain the Collateral and the Security
         Interest hereunder, and the Company shall obtain and furnish to the
         Secured Party from time to time, upon demand, such releases and/or
         subordinations of claims and liens which may be required to maintain
         the priority of the Security Interest hereunder.

                  (j) The Company will not transfer, pledge, hypothecate,
         encumber, license (except for non-exclusive licenses granted by the
         Company in the ordinary course of business), sell or otherwise dispose
         of any of the Collateral without the prior written consent of the
         Secured Party.

                  (k) The Company shall keep and preserve its Equipment,
         Inventory and other tangible Collateral in good condition, repair and
         order and shall not operate or locate any such Collateral (or cause to
         be operated or located) in any area excluded from insurance coverage.

                  (l) The Company shall, within ten (10) days of obtaining
         knowledge thereof, advise the Secured Party promptly, in sufficient
         detail, of any substantial change in the Collateral, and of the
         occurrence of any event which would have a material adverse effect on
         the value of the Collateral or on the Secured Party's security interest
         therein.

                  (m) The Company shall promptly execute and deliver to the
         Secured Party such further deeds, mortgages, assignments, security
         agreements, financing statements or other instruments, documents,
         certificates and assurances and take such further action as the Secured
         Party may from time to time request and may in its sole discretion deem
         necessary to perfect, protect or enforce its security interest in the
         Collateral including, without limitation, the execution and delivery of
         a separate security agreement with respect to the Company's
         intellectual property ("Intellectual Property Security Agreement") in
         which the Secured Party has been granted a security interest hereunder,
         substantially in a form acceptable to the Secured Party, which
         Intellectual Property Security Agreement, other than as stated therein,
         shall be subject to all of the terms and conditions hereof.

<PAGE>

                  (n) The Company shall permit the Secured Party and its
         representatives and agents to inspect the Collateral at any time, and
         to make copies of records pertaining to the Collateral as may be
         requested by the Secured Party from time to time.

                  (o) The Company will take all steps reasonably necessary to
         diligently pursue and seek to preserve, enforce and collect any rights,
         claims, causes of action and accounts receivable in respect of the
         Collateral.

                  (p) The Company shall promptly notify the Secured Party in
         sufficient detail upon becoming aware of any attachment, garnishment,
         execution or other legal process levied against any Collateral and of
         any other information received by the Company that may materially
         affect the value of the Collateral, the Security Interest or the rights
         and remedies of the Secured Party hereunder.

                  (q) All information heretofore, herein or hereafter supplied
         to the Secured Party by or on behalf of the Company with respect to the
         Collateral is accurate and complete in all material respects as of the
         date furnished.

         4. Defaults. The following events shall be "Events of Default":

                  (a) The occurrence of an Event of Default (as defined in the
         Debentures) under the Debentures;

                  (b) Any representation or warranty of the Company in this
         Agreement or in the Intellectual Property Security Agreement shall
         prove to have been incorrect in any material respect when made;

                  (c) The failure by the Company to observe or perform any of
         its obligations hereunder or in the Intellectual Property Security
         Agreement for ten (10) days after receipt by the Company of notice of
         such failure from the Secured Party; and

                  (d) Any breach of, or default under, the Warrants.

         5. Duty To Hold In Trust. Upon the occurrence of any Event of Default
and at any time thereafter, the Company shall, upon receipt by it of any
revenue, income or other sums subject to the Security Interest, whether payable
pursuant to the Debentures or otherwise, or of any check, draft, note, trade
acceptance or other instrument evidencing an obligation to pay any such sum,
hold the same in trust for the Secured Party and shall forthwith endorse and
transfer any such sums or instruments, or both, to the Secured Party for
application to the satisfaction of the Obligations.

         6. Rights and Remedies Upon Default. Upon occurrence of any Event of
Default and at any time thereafter, the Secured Party shall have the right to
exercise all of the remedies conferred hereunder and under the Debentures, and
the Secured Party shall have all the rights and remedies of a secured party
under the UCC and/or any other applicable law (including the Uniform Commercial
Code of any jurisdiction in which any Collateral is then located). Without
limitation, the Secured Party shall have the following rights and powers:

<PAGE>

                  (a) The Secured Party shall have the right to take possession
         of the Collateral and, for that purpose, enter, with the aid and
         assistance of any person, any premises where the Collateral, or any
         part thereof, is or may be placed and remove the same, and the Company
         shall assemble the Collateral and make it available to the Secured
         Party at places which the Secured Party shall reasonably select,
         whether at the Company's premises or elsewhere, and make available to
         the Secured Party, without rent, all of the Company's respective
         premises and facilities for the purpose of the Secured Party taking
         possession of, removing or putting the Collateral in saleable or
         disposable form.

                  (b) The Secured Party shall have the right to operate the
         business of the Company using the Collateral and shall have the right
         to assign, sell, lease or otherwise dispose of and deliver all or any
         part of the Collateral, at public or private sale or otherwise, either
         with or without special conditions or stipulations, for cash or on
         credit or for future delivery, in such parcel or parcels and at such
         time or times and at such place or places, and upon such terms and
         conditions as the Secured Party may deem commercially reasonable, all
         without (except as shall be required by applicable statute and cannot
         be waived) advertisement or demand upon or notice to the Company or
         right of redemption of the Company, which are hereby expressly waived.
         Upon each such sale, lease, assignment or other transfer of Collateral,
         the Secured Party may, unless prohibited by applicable law which cannot
         be waived, purchase all or any part of the Collateral being sold, free
         from and discharged of all trusts, claims, right of redemption and
         equities of the Company, which are hereby waived and released.

         7. Applications of Proceeds. The proceeds of any such sale, lease or
other disposition of the Collateral hereunder shall be applied first, to the
expenses of retaking, holding, storing, processing and preparing for sale,
selling, and the like (including, without limitation, any taxes, fees and other
costs incurred in connection therewith) of the Collateral, to the reasonable
attorneys' fees and expenses incurred by the Secured Party in enforcing its
rights hereunder and in connection with collecting, storing and disposing of the
Collateral, and then to satisfaction of the Obligations, and to the payment of
any other amounts required by applicable law, after which the Secured Party
shall pay to the Company any surplus proceeds. If, upon the sale, license or
other disposition of the Collateral, the proceeds thereof are insufficient to
pay all amounts to which the Secured Party is legally entitled, the Company will
be liable for the deficiency, together with interest thereon, at the rate of 15%
per annum (the "Default Rate"), and the reasonable fees of any attorneys
employed by the Secured Party to collect such deficiency. To the extent
permitted by applicable law, the Company waives all claims, damages and demands
against the Secured Party arising out of the repossession, removal, retention or
sale of the Collateral, unless due to the gross negligence or willful misconduct
of the Secured Party.

         8. Costs and Expenses. The Company agrees to pay all out-of-pocket
fees, costs and expenses incurred in connection with any filing required
hereunder, including without limitation, any financing statements, continuation
statements, partial releases and/or termination statements related thereto or
any expenses of any searches reasonably required by the Secured Party. The
Company shall also pay all other claims and charges which in the reasonable
opinion of the Secured Party might prejudice, imperil or otherwise affect the
Collateral or the Security Interest therein. The Company will also, upon demand,
pay to the Secured Party the amount of any and all reasonable expenses,
including the reasonable fees and expenses of its counsel and of any experts and
agents, which the Secured Party may incur in connection with (i) the enforcement
of this Agreement, (ii) the custody or preservation of, or the sale of,
collection from, or other realization upon, any of the Collateral, or (iii) the
exercise or enforcement of any of the rights of the Secured Party under the
Debentures. Until so paid, any fees payable hereunder shall be added to the
principal amount of the Debentures and shall bear interest at the Default Rate.

<PAGE>

         9. Responsibility for Collateral. The Company assumes all liabilities
and responsibility in connection with all Collateral, and the obligations of the
Company hereunder or under the Debentures and the Warrants shall in no way be
affected or diminished by reason of the loss, destruction, damage or theft of
any of the Collateral or its unavailability for any reason.

         10. Security Interest Absolute. All rights of the Secured Party and all
Obligations of the Company hereunder, shall be absolute and unconditional,
irrespective of: (a) any lack of validity or enforceability of this Agreement,
the Debentures, the Warrants or any agreement entered into in connection with
the foregoing, or any portion hereof or thereof; (b) any change in the time,
manner or place of payment or performance of, or in any other term of, all or
any of the Obligations, or any other amendment or waiver of or any consent to
any departure from the Debentures, the Warrants or any other agreement entered
into in connection with the foregoing; (c) any exchange, release or
nonperfection of any of the Collateral, or any release or amendment or waiver of
or consent to departure from any other collateral for, or any guaranty, or any
other security, for all or any of the Obligations; (d) any action by the Secured
Party to obtain, adjust, settle and cancel in its sole discretion any insurance
claims or matters made or arising in connection with the Collateral; or (e) any
other circumstance which might otherwise constitute any legal or equitable
defense available to the Company, or a discharge of all or any part of the
Security Interest granted hereby. Until the Obligations shall have been paid and
performed in full, the rights of the Secured Party shall continue even if the
Obligations are barred for any reason, including, without limitation, the
running of the statute of limitations or bankruptcy. The Company expressly
waives presentment, protest, notice of protest, demand, notice of nonpayment and
demand for performance. In the event that at any time any transfer of any
Collateral or any payment received by the Secured Party hereunder shall be
deemed by final order of a court of competent jurisdiction to have been a
voidable preference or fraudulent conveyance under the bankruptcy or insolvency
laws of the United States, or shall be deemed to be otherwise due to any party
other than the Secured Party, then, in any such event, the Company's obligations
hereunder shall survive cancellation of this Agreement, and shall not be
discharged or satisfied by any prior payment thereof and/or cancellation of this
Agreement, but shall remain a valid and binding obligation enforceable in
accordance with the terms and provisions hereof. The Company waives all right to
require the Secured Party to proceed against any other person or to apply any
Collateral which the Secured Party may hold at any time, or to marshal assets,
or to pursue any other remedy. The Company waives any defense arising by reason
of the application of the statute of limitations to any obligation secured
hereby.

<PAGE>

         11. Term of Agreement. This Agreement and the Security Interest shall
terminate on the date on which all payments under the Debentures have been made
in full and all other Obligations have been paid or discharged. Upon such
termination, the Secured Party, at the request and at the expense of the
Company, will join in executing any termination statement with respect to any
financing statement executed and filed pursuant to this Agreement.

         12. Power of Attorney; Further Assurances.

                  (a) The Company authorizes the Secured Party, and does hereby
         make, constitute and appoint it, and its respective officers, agents,
         successors or assigns with full power of substitution, as the Company's
         true and lawful attorney-in-fact, with power, in its own name or in the
         name of the Company, to, after the occurrence and during the
         continuance of an Event of Default, (i) endorse any notes, checks,
         drafts, money orders, or other instruments of payment (including
         payments payable under or in respect of any policy of insurance) in
         respect of the Collateral that may come into possession of the Secured
         Party; (ii) to sign and endorse any UCC financing statement or any
         invoice, freight or express bill, bill of lading, storage or warehouse
         receipts, drafts against debtors, assignments, verifications and
         notices in connection with accounts, and other documents relating to
         the Collateral; (iii) to pay or discharge taxes, liens, security
         interests or other encumbrances at any time levied or placed on or
         threatened against the Collateral; (iv) to demand, collect, receipt
         for, compromise, settle and sue for monies due in respect of the
         Collateral; and (v) generally, to do, at the option of the Secured
         Party, and at the Company's expense, at any time, or from time to time,
         all acts and things which the Secured Party deems necessary to protect,
         preserve and realize upon the Collateral and the Security Interest
         granted therein in order to effect the intent of this Agreement, the
         Debentures and the Warrants, all as fully and effectually as the
         Company might or could do; and the Company hereby ratifies all that
         said attorney shall lawfully do or cause to be done by virtue hereof.
         This power of attorney is coupled with an interest and shall be
         irrevocable for the term of this Agreement and thereafter as long as
         any of the Obligations shall be outstanding.

                  (b) On a continuing basis, the Company will make, execute,
         acknowledge, deliver, file and record, as the case may be, in the
         proper filing and recording places in any jurisdiction, all such
         instruments, and take all such action as may reasonably be deemed
         necessary or advisable, or as reasonably requested by the Secured
         Party, to perfect the Security Interest granted hereunder and otherwise
         to carry out the intent and purposes of this Agreement, or for assuring
         and confirming to the Secured Party the grant or perfection of a
         security interest in all the Collateral.

                  (c) The Company hereby irrevocably appoints the Secured Party
         as the Company's attorney-in-fact, with full authority in the place and
         stead of the Company and in the name of the Company, from time to time
         in the Secured Party's discretion, to take any action and to execute
         any instrument which the Secured Party may deem necessary or advisable
         to accomplish the purposes of this Agreement, including the filing, in
         its sole discretion, of one or more financing or continuation
         statements and amendments thereto, relative to any of the Collateral
         without the signature of the Company where permitted by law.

<PAGE>

         13. Notices. All notices, requests, demands and other communications
hereunder shall be in writing, with copies to all the other parties hereto, and
shall be deemed to have been duly given when (i) if delivered by hand, upon
receipt, (ii) if sent by facsimile, upon receipt of proof of sending thereof,
(iii) if sent by nationally recognized overnight delivery service (receipt
requested), the next business day or (iv) if mailed by first-class registered or
certified mail, return receipt requested, postage prepaid, four days after
posting in the U.S. mails, in each case if delivered to the following addresses:

                                    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

                                    If to the Secured Party:

                                    At the address and facsimile number listed
                                    on the signature page hereof.

                                    If to the Agent:

                                    At the address and facsimile number listed
                                    on the signature page hereof.

         14. Other Security. To the extent that the Obligations are now or
hereafter secured by property other than the Collateral or by the guarantee,
endorsement or property of any other person, firm, corporation or other entity,
then the Secured Party shall have the right, in its sole discretion, to pursue,
relinquish, subordinate, modify or take any other action with respect thereto,
without in any way modifying or affecting any of the Secured Party's rights and
remedies hereunder.

         15.      Miscellaneous.

                  (a) No course of dealing between the Company and the Secured
         Party, nor any failure to exercise, nor any delay in exercising, on the
         part of the Secured Party, any right, power or privilege hereunder or
         under the Debentures shall operate as a waiver thereof; nor shall any
         single or partial exercise of any right, power or privilege hereunder
         or thereunder preclude any other or further exercise thereof or the
         exercise of any other right, power or privilege.

                  (b) All of the rights and remedies of the Secured Party with
         respect to the Collateral, whether established hereby or by the
         Debentures or by any other agreements, instruments or documents or by
         law shall be cumulative and may be exercised singly or concurrently.

                  (c) This Agreement constitutes the entire agreement of the
         parties with respect to the subject matter hereof and is intended to
         supersede all prior negotiations, understandings and agreements with
         respect thereto. Except as specifically set forth in this Agreement, no
         provision of this Agreement may be modified or amended except by a
         written agreement specifically referring to this Agreement and signed
         by the parties hereto.

<PAGE>

                  (d) In the event that any provision of this Agreement is held
         to be invalid, prohibited or unenforceable in any jurisdiction for any
         reason, unless such provision is narrowed by judicial construction,
         this Agreement shall, as to such jurisdiction, be construed as if such
         invalid, prohibited or unenforceable provision had been more narrowly
         drawn so as not to be invalid, prohibited or unenforceable. If,
         notwithstanding the foregoing, any provision of this Agreement is held
         to be invalid, prohibited or unenforceable in any jurisdiction, such
         provision, as to such jurisdiction, shall be ineffective to the extent
         of such invalidity, prohibition or unenforceability without
         invalidating the remaining portion of such provision or the other
         provisions of this Agreement and without affecting the validity or
         enforceability of such provision or the other provisions of this
         Agreement in any other jurisdiction.

                  (e) No waiver of any breach or default or any right under this
         Agreement shall be considered valid unless in writing and signed by the
         party giving such waiver, and no such waiver shall be deemed a waiver
         of any subsequent breach or default or right, whether of the same or
         similar nature or otherwise.

                  (f) This Agreement shall be binding upon and inure to the
         benefit of each party hereto and its successors and assigns.

                  (g) Each party shall take such further action and execute and
         deliver such further documents as may be necessary or appropriate in
         order to carry out the provisions and purposes of this Agreement.

                  (h) This Agreement shall be construed in accordance with the
         laws of the State of New York, except to the extent the validity,
         perfection or enforcement of a security interest hereunder in respect
         of any particular Collateral which are governed by a jurisdiction other
         than the State of New York in which case such law shall govern. Each of
         the parties hereto irrevocably submit to the exclusive jurisdiction of
         any state or federal court sitting in New York County in the State of
         New York over any action or proceeding arising out of or relating to
         this Agreement, and the parties hereto hereby irrevocably agree that
         all claims in respect of such action or proceeding may be heard and
         determined in such state or federal court. The parties hereto agree
         that a final judgment in any such action or proceeding shall be
         conclusive and may be enforced in other jurisdictions by suit on the
         judgment or in any other manner provided by law. The parties hereto
         further waive any objection to venue in the State of New York and any
         objection to an action or proceeding in the State of New York on the
         basis of forum non conveniens.

<PAGE>

                  (i) EACH PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE
         RIGHTS TO A JURY TRAIL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
         ARISING OUT OF THIS AGREEMENT. THE SCOPE OF THIS WAIVER IS INTENDED TO
         BE ALL ENCOMPASSING OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND
         THAT RELATE TO THE SUBJECT MATER OF THIS AGREEMENT, INCLUDING WITHOUT
         LIMITATION CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL
         OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES
         THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR EACH PARTY TO ENTER INTO
         A BUSINESS RELATIONSHIP, THAT EACH PARTY HAS ALREADY RELIED ON THIS
         WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH PARTY WILL
         CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH
         PARTY FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER
         WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY HAS KNOWINGLY AND
         VOLUNTARILY WAIVES ITS RIGHTS TO A JURY TRIAL FOLLOWING SUCH
         CONSULTATION. THIS WAIVER IS IRREVOCABLE, MEANING THAT, NOTWITHSTANDING
         ANYTHING HEREIN TO THE CONTRARY, IT MAY NOT BE MODIFIED EITHER ORALLY
         OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT
         AMENDMENTS, RENEWALS AND SUPPLEMENTS OR MODIFICATIONS TO THIS
         AGREEMENT. IN THE EVENT OF A LITIGATION, THIS AGREEMENT MAY BE FILED AS
         A WRITTEN CONSENT TO A TRIAL BY THE COURT.

                  (j) This Agreement may be executed in any number of
         counterparts, each of which when so executed shall be deemed to be an
         original and, all of which taken together shall constitute one and the
         same Agreement. In the event that any signature is delivered by
         facsimile transmission, such signature shall create a valid binding
         obligation of the party executing (or on whose behalf such signature is
         executed) the same with the same force and effect as if such facsimile
         signature were the original thereof.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

         IN WITNESS WHEREOF, the parties hereto have caused this Security
Agreement to be duly executed on the day and year first above written.

THE COMPANY:                        PEAK ENTERTAINMENT HOLDINGS, INC.

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

THE SECURED PARTY:                  Platinum Partners Global Macro Fund LP

                                    By:
                                         -------------------------------------
                                         Name:  Mark Nordlicht
                                         Title:  General Partner

                                    STATE OF RESIDENCE:   New York
                                    ADDRESS:              152 West 57th Street
                                                          54th Floor
                                                          New York, NY 10019

                                    TELEPHONE:____________________________
                                    FACSIMILE:____________________________

                                    [__________________________]

                                    By:
                                         -------------------------------------
                                         Name:
                                         Title:

                                    STATE OF RESIDENCE:

                                    ADDRESS:______________________________
                                            ______________________________
                                            ______________________________
                                    TELEPHONE:____________________________
                                    FACSIMILE:____________________________

THE AGENT;                          NAME___________________________________

                                    SIGNATURE:

                                    ADDRESS:______________________________
                                            ______________________________
                                            ______________________________
                                    TELEPHONE:____________________________
                                    FACSIMILE:____________________________

<PAGE>

                    INTELLECTUAL PROPERTY SECURITY AGREEMENT

         Intellectual Property Security Agreement (this "Agreement") dated as of
December 24, 2003, by and among Peak Entertainment Holdings, a Nevada
corporation (the "Company"), and ____________ as Agent for the secured parties
signatory hereto and their respective endorsees, transferees and assigns
(collectively, the "Secured Party").

                              W I T N E S S E T H :

         WHEREAS, pursuant to a Securities Purchase Agreement between the
Company and the Secured Party (the "Purchase Agreement"), the Company has agreed
to issue to the Secured Party and the Secured Party has agreed to purchase from
the Company certain of the Company's 8% Secured Convertible Debentures (the
"Debentures"), which are convertible into shares of the Company's Common Stock,
par value $.001 per share (the "Common Stock"), and in connection therewith, the
Company shall issue the Secured Party certain Common Stock purchase warrants
(the "Warrants"); and

         WHEREAS, in order to induce the Secured Party to purchase the
Debentures, the Company has agreed to execute and deliver to _______ as Agent
for the Secured Party jointly this Agreement for the benefit of the Secured
Party and to grant to it a priority security interest in certain Intellectual
Property (defined below) of the Company to secure the prompt payment,
performance and discharge in full of all of the Company's obligations under the
Debentures and exercise and discharge in full of the Company's obligations under
the Warrants.

         NOW, THEREFORE, in consideration of the agreements herein contained and
for other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto hereby agree as follows:

         1. Defined Terms. Unless otherwise defined herein, terms which are
defined in the Purchase Agreement and used herein are so used as so defined; and
the following terms shall have the following meanings:

                  "Company" shall mean, collectively, the Company and all of the
         subsidiaries of the Company (including, without limitation, Peak
         Entertainment, Ltd.).

                  "Copyrights" shall mean (a) all copyrights, registrations and
         applications for registration, issued or filed, including any reissues,
         extensions or renewals thereof, by or with the United States Copyright
         Office or any similar office or agency of the United States, any state
         thereof, or any other country or political subdivision thereof, or
         otherwise, including, all rights in and to the material constituting
         the subject matter thereof, and (b) any rights in any material which is
         copyrightable or which is protected by common law, United States
         copyright laws or similar laws or any law of any State.

<PAGE>

                  "Copyright License" shall mean any agreement, written or oral,
         providing for a grant by the Company of any right in any Copyright.

                  "Intellectual Property" shall means, collectively, the
         Software Intellectual Property, Copyrights, Copyright Licenses,
         Patents, Patent Licenses, Trademarks, Trademark Licenses and Trade
         Secrets, as set forth in Schedule A hereto.

                  "Obligations" means all of the Company's obligations under
         this Agreement and the Debentures, in each case, whether now or
         hereafter existing, voluntary or involuntary, direct or indirect,
         absolute or contingent, liquidated or unliquidated, whether or not
         jointly owed with others, and whether or not from time to time
         decreased or extinguished and later decreased, created or incurred, and
         all or any portion of such obligations or liabilities that are paid, to
         the extent all or any part of such payment is avoided or recovered
         directly or indirectly from the Secured Party as a preference,
         fraudulent transfer or otherwise as such obligations may be amended,
         supplemented, converted, extended or modified from time to time.

                  "Patents" shall mean (a) all letters patent of the United
         States or any other country or any political subdivision thereof, and
         all reissues and extensions thereof, and (b) all applications for
         letters patent of the United States and all divisions, continuations
         and continuations-in-part thereof or any other country or any political
         subdivision.

                  "Patent License" shall mean all agreements, whether written or
         oral, providing for the grant by the Company of any right to
         manufacture, use or sell any invention covered by a Patent.

                  "Security Agreement" shall mean the Security Agreement, dated
         the date hereof between the Company and the Secured Party.

                  "Software Intellectual Property" shall mean:

                           (a) all software programs (including all source code,
                  object code and all related applications and data files),
                  whether now owned, upgraded, enhanced, licensed or leased or
                  hereafter acquired by the Company, above;

                           (b) all computers and electronic data processing
                  hardware and firmware associated therewith;

                           (c) all documentation (including flow charts, logic
                  diagrams, manuals, guides and specifications) with respect to
                  such software, hardware and firmware described in the
                  preceding clauses (a) and (b); and

                           (d) all rights with respect to all of the foregoing,
                  including, without limitation, any and all upgrades,
                  modifications, copyrights, licenses, options, warranties,
                  service contracts, program services, test rights, maintenance
                  rights, support rights, improvement rights, renewal rights and
                  indemnifications and substitutions, replacements, additions,
                  or model conversions of any of the foregoing.

<PAGE>

                  "Trademarks" shall mean all trademarks, trade names, corporate
         names, the Company names, business names, fictitious business names,
         trade styles, service marks, logos and other source or business
         identifiers, and the goodwill associated therewith, now existing.

                  "Trademark License" shall mean any agreement, written or oral,
         providing for the grant by the Company of any right to use any
         Trademark.

                  "Trade Secrets" shall mean common law and statutory trade
         secrets and all other confidential or proprietary or useful information
         and all know-how obtained by or used in or contemplated at any time for
         use in the business of the Company (all of the foregoing being
         collectively called a "Trade Secret"), whether or not such Trade Secret
         has been reduced to a writing or other tangible form, including all
         documents and things embodying, incorporating or referring in any way
         to such Trade Secret, all Trade Secret licenses, and including the
         right to sue for and to enjoin and to collect damages for the actual or
         threatened misappropriation of any Trade Secret and for the breach or
         enforcement of any such Trade Secret license.

         2. Grant of Security Interest. In accordance with Section 3(m) of the
Security Agreement, to secure the complete and timely payment, performance and
discharge in full, as the case may be, of all of the Obligations, the Company
hereby, unconditionally and irrevocably, pledges, grants and hypothecates to the
Secured Party, a continuing security interest in, a continuing lien upon, an
unqualified right to possession and disposition of and a right of set-off
against, in each case to the fullest extent permitted by law, all of the
Company's right, title and interest of whatsoever kind and nature (including,
without limitation, all of Peak Entertainment Ltd.'s rights) in and to the
Intellectual Property (the "Security Interest"). The Security Interest rights
herein shall be on equal level to the security interest rights granted to third
party purchasers in the Company's sale of debentures, on terms and conditions
similar to the terms herein, in the aggregate principal amount of $500,000
occurring on or about the same time as this Agreement. The Company shall be
entitled to grant security interest rights senior to the rights of the Buyers to
a financial institution, subject to the approval of the Buyers, which shall not
be unreasonably withheld. The Company shall be entitled to grant security
interest rights similar to the rights granted to the Buyers to non-financial
institution lender(s) hereafter providing at least $1,500,000 or more in working
capital, subject to the approval of the Buyers, which shall not be unreasonably
withheld.

         3. Representations and Warranties. The Company hereby represents and
warrants, and covenants and agrees with, the Secured Party as follows:

<PAGE>

                  (a) The Company has the requisite corporate power and
         authority to enter into this Agreement and otherwise to carry out its
         obligations thereunder. The execution, delivery and performance by the
         Company of this Agreement and the filings contemplated therein have
         been duly authorized by all necessary action on the part of the Company
         and no further action is required by the Company. This Agreement
         constitutes a legal, valid and binding obligation of the Company
         enforceable in accordance with its terms, except as enforceability may
         be limited by bankruptcy, insolvency, reorganization, moratorium or
         similar laws affecting the enforcement of creditor's rights generally.

                  (b) The Company represents and warrants that it has no place
         of business or offices where its respective books of account and
         records are kept (other than temporarily at the offices of its
         attorneys or accountants) or places where the Intellectual Property is
         stored or located.

                  (c) The Company is the sole owner of the Intellectual Property
         (except for non-exclusive licenses granted by the Company in the
         ordinary course of business), free and clear of any liens, security
         interests, encumbrances, rights or claims, and is fully authorized to
         grant the Security Interest in and to pledge the Intellectual Property,
         subject to the surrender and cancellation of previously issued
         debentures. Subject to the surrender and cancellation of previously
         issued debenture, there is not on file in any governmental or
         regulatory authority, agency or recording office an effective financing
         statement, security agreement, license or transfer or any notice of any
         of the foregoing (other than those that have been filed in favor of the
         Secured Party pursuant to this Agreement) covering or affecting any of
         the Intellectual Property. So long as this Agreement shall be in
         effect, the Company shall not execute and shall not knowingly permit to
         be on file in any such office or agency any such financing statement or
         other document or instrument (except to the extent filed or recorded in
         favor of the Secured Party pursuant to the terms of this Agreement).

                  (d) The Company shall at all times maintain its books of
         account and records relating to the Intellectual Property at its
         principal place of business and may not relocate such books of account
         and records unless it delivers to the Secured Party at least 30 days
         prior to such relocation (i) written notice of such relocation and the
         new location thereof (which must be within the United States) and (ii)
         evidence that the necessary documents have been filed and recorded and
         other steps have been taken to perfect the Security Interest to create
         in favor of the Secured Party valid, perfected and continuing priority
         liens in the Intellectual Property to the extent they can be perfected
         through such filings.

                  (e) This Agreement creates in favor of the Secured Party a
         valid security interest in the Intellectual Property securing the
         payment and performance of the Obligations and, upon making the filings
         required hereunder, a perfected priority security interest in such
         Intellectual Property to the extent that it can be perfected through
         such filings.

                  (f) Upon request of the Secured Party, the Company shall
         execute and deliver any and all agreements, instruments, documents, and
         papers as the Secured Party may request to evidence the Secured Party's
         security interest in the Intellectual Property and the goodwill and
         general intangibles of the Company relating thereto or represented
         thereby, and the Company hereby appoints the Secured Party its
         attorney-in-fact to execute and file all such writings for the
         foregoing purposes, all acts of such attorney being hereby ratified and
         confirmed; such power being coupled with an interest is irrevocable
         until the Obligations have been fully satisfied and are paid in full.

<PAGE>

                  (g) The execution, delivery and performance of this Agreement
         does not conflict with or cause a breach or default, or an event that
         with or without the passage of time or notice, shall constitute a
         breach or default, under any agreement to which the Company is a party
         or by which the Company is bound. No consent (including, without
         limitation, from stock holders or creditors of the Company) is required
         for the Company to enter into and perform its obligations hereunder.

                  (h) The Company shall at all times maintain the liens and
         Security Interest provided for hereunder as valid and perfected
         priority liens and security interests in the Intellectual Property to
         the extent they can be perfected by filing in favor of the Secured
         Party until this Agreement and the Security Interest hereunder shall
         terminate pursuant to Section 11. The Company hereby agrees to defend
         the same against any and all persons. The Company shall safeguard and
         protect all Intellectual Property for the account of the Secured Party.
         Without limiting the generality of the foregoing, the Company shall pay
         all fees, taxes and other amounts necessary to maintain the
         Intellectual Property and the Security Interest hereunder, and the
         Company shall obtain and furnish to the Secured Party from time to
         time, upon demand, such releases and/or subordinations of claims and
         liens which may be required to maintain the priority of the Security
         Interest hereunder.

                  (i) The Company will not transfer, pledge, hypothecate,
         encumber, license (except for non-exclusive licenses granted by the
         Company in the ordinary course of business), sell or otherwise dispose
         of any of the Intellectual Property without the prior written consent
         of the Secured Party.

                  (j) The Company shall, within ten (10) days of obtaining
         knowledge thereof, advise the Secured Party promptly, in sufficient
         detail, of any substantial change in the Intellectual Property, and of
         the occurrence of any event which would have a material adverse effect
         on the value of the Intellectual Property or on the Secured Party's
         security interest therein.

                  (k) The Company shall permit the Secured Party and its
         representatives and agents to inspect the Intellectual Property at any
         time, and to make copies of records pertaining to the Intellectual
         Property as may be requested by the Secured Party from time to time.

                  (l) The Company will take all steps reasonably necessary to
         diligently pursue and seek to preserve, enforce and collect any rights,
         claims, causes of action and accounts receivable in respect of the
         Intellectual Property.

                  (m) The Company shall promptly notify the Secured Party in
         sufficient detail upon becoming aware of any attachment, garnishment,
         execution or other legal process levied against any Intellectual
         Property and of any other information received by the Company that may
         materially affect the value of the Intellectual Property, the Security
         Interest or the rights and remedies of the Secured Party hereunder.

<PAGE>

                  (n) All information heretofore, herein or hereafter supplied
         to the Secured Party by or on behalf of the Company with respect to the
         Intellectual Property is accurate and complete in all material respects
         as of the date furnished.

                  (o) With respect to any Intellectual Property:

                           (i) such Intellectual Property is subsisting and has
                  not been adjudged invalid or unenforceable, in whole or in
                  part;

                           (ii) such Intellectual Property is valid and
                  enforceable;

                           (iii) the Company has made all necessary filings and
                  recordations to protect its interest in such Intellectual
                  Property, including, without limitation, recordations of all
                  of its interests in the Patents, Patent Licenses, Trademarks
                  and Trademark Licenses in the United States Patent and
                  Trademark Office and in corresponding offices throughout the
                  world and its claims to the Copyrights and Copyright Licenses
                  in the United States Copyright Office and in corresponding
                  offices throughout the world;

                           (iv) the Company is the exclusive owner of the entire
                  and unencumbered right, title and interest in and to such
                  Intellectual Property and no claim has been made that the use
                  of such Intellectual Property infringes on the asserted rights
                  of any third party; and

                           (v) the Company has performed and will continue to
                  perform all acts and has paid all required fees and taxes to
                  maintain each and every item of Intellectual Property in full
                  force and effect throughout the world, as applicable.

                  (p) Except with respect to any Trademark or Copyright that the
         Company shall reasonably determine is of negligible economic value to
         the Company, the Company shall

                                    (i) maintain each Trademark and Copyright in
                  full force free from any claim of abandonment for non-use,
                  maintain as in the past the quality of products and services
                  offered under such Trademark or Copyright; employ such
                  Trademark or Copyright with the appropriate notice of
                  registration; not adopt or use any mark which is confusingly
                  similar or a colorable imitation of such Trademark or
                  Copyright unless the Secured Party shall obtain a perfected
                  security interest in such mark pursuant to this Agreement; and
                  not (and not permit any licensee or sublicensee thereof to) do
                  any act or knowingly omit to do any act whereby any Trademark
                  or Copyright may become invalidated;

<PAGE>

                           (ii) not, except with respect to any Patent that it
                  shall reasonably determine is of negligible economic value to
                  it, do any act, or omit to do any act, whereby any Patent may
                  become abandoned or dedicated; and (iii) notify the Secured
                  Party immediately if it knows, or has reason to know, that any
                  application or registration relating to any Patent, Trademark
                  or Copyright may become abandoned or dedicated, or of any
                  adverse determination or development (including, without
                  limitation, the institution of, or any such determination or
                  development in, any proceeding in the United States Patent and
                  Trademark Office, United States Copyright Office or any court
                  or tribunal in any country) regarding its ownership of any
                  Patent, Trademark or Copyright or its right to register the
                  same or to keep and maintain the same.

                  (q) Whenever the Company, either by itself or through any
         agent, employee, licensee or designee, shall file an application for
         the registration of any Patent, Trademark or Copyright with the United
         States Patent and Trademark Office, United States Copyright Office or
         any similar office or agency in any other country or any political
         subdivision thereof or acquire rights to any new Patent, Trademark or
         Copyright whether or not registered, report such filing to the Secured
         Party within five business days after the last day of the fiscal
         quarter in which such filing occurs.

                  (r) The Company shall take all reasonable and necessary steps,
         including, without limitation, in any proceeding before the United
         States Patent and Trademark Office, United States Copyright Office or
         any similar office or agency in any other country or any political
         subdivision thereof, to maintain and pursue each application (and to
         obtain the relevant registration) and to maintain each registration of
         the Patents, Trademarks and Copyrights, including, without limitation,
         filing of applications for renewal, affidavits of use and affidavits of
         incontestability.

                  (s) In the event that any Patent, Trademark or Copyright
         included in the Intellectual Property is infringed, misappropriated or
         diluted by a third party, promptly notify the Secured Party after it
         learns thereof and shall, unless it shall reasonably determine that
         such Patent, Trademark or Copyright is of negligible economic value to
         it, which determination it shall promptly report to the Secured Party,
         promptly sue for infringement, misappropriation or dilution, to seek
         injunctive relief where appropriate and to recover any and all damages
         for such infringement, misappropriation or dilution, or take such other
         actions as it shall reasonably deem appropriate under the circumstances
         to protect such Patent, Trademark or Copyright. If the Company lacks
         the financial resources to comply with this Section 3(s), the Company
         shall so notify the Secured Party and shall cooperate fully with any
         enforcement action undertaken by the Secured Party on behalf of the
         Company.

         4. Defaults. The following events shall be "Events of Default":

                  (a) The occurrence of an Event of Default (as defined in the
         Debentures) under the Debentures;

<PAGE>

                  (b) Any representation or warranty of the Company in this
         Agreement or in the Security Agreement shall prove to have been
         incorrect in any material respect when made;

                  (c) The failure by the Company to observe or perform any of
         its obligations hereunder or in the Security Agreement for ten (10)
         days after receipt by the Company of notice of such failure from the
         Secured Party; and

                  (d) Any breach of, or default under, the Warrants.

         5. Duty To Hold In Trust. Upon the occurrence of any Event of Default
and at any time thereafter, the Company shall, upon receipt by it of any
revenue, income or other sums subject to the Security Interest, whether payable
pursuant to the Debentures or otherwise, or of any check, draft, note, trade
acceptance or other instrument evidencing an obligation to pay any such sum,
hold the same in trust for the Secured Party and shall forthwith endorse and
transfer any such sums or instruments, or both, to the Secured Party for
application to the satisfaction of the Obligations.

         6. Rights and Remedies Upon Default. Upon occurrence of any Event of
Default and at any time thereafter, the Secured Party shall have the right to
exercise all of the remedies conferred hereunder and under the Debentures, and
the Secured Party shall have all the rights and remedies of a secured party
under the UCC and/or any other applicable law (including the Uniform Commercial
Code of any jurisdiction in which any Intellectual Property is then located).
Without limitation, the Secured Party shall have the following rights and
powers:

                  (a) The Secured Party shall have the right to take possession
         of the Intellectual Property and, for that purpose, enter, with the aid
         and assistance of any person, any premises where the Intellectual
         Property, or any part thereof, is or may be placed and remove the same,
         and the Company shall assemble the Intellectual Property and make it
         available to the Secured Party at places which the Secured Party shall
         reasonably select, whether at the Company's premises or elsewhere, and
         make available to the Secured Party, without rent, all of the Company's
         respective premises and facilities for the purpose of the Secured Party
         taking possession of, removing or putting the Intellectual Property in
         saleable or disposable form.

                  (b) The Secured Party shall have the right to operate the
         business of the Company using the Intellectual Property and shall have
         the right to assign, sell, lease or otherwise dispose of and deliver
         all or any part of the Intellectual Property, at public or private sale
         or otherwise, either with or without special conditions or
         stipulations, for cash or on credit or for future delivery, in such
         parcel or parcels and at such time or times and at such place or
         places, and upon such terms and conditions as the Secured Party may
         deem commercially reasonable, all without (except as shall be required
         by applicable statute and cannot be waived) advertisement or demand
         upon or notice to the Company or right of redemption of the Company,
         which are hereby expressly waived. Upon each such sale, lease,
         assignment or other transfer of Intellectual Property, the Secured
         Party may, unless prohibited by applicable law which cannot be waived,
         purchase all or any part of the Intellectual Property being sold, free
         from and discharged of all trusts, claims, right of redemption and
         equities of the Company, which are hereby waived and released.

<PAGE>

         7. Applications of Proceeds. The proceeds of any such sale, lease or
other disposition of the Intellectual Property hereunder shall be applied first,
to the expenses of retaking, holding, storing, processing and preparing for
sale, selling, and the like (including, without limitation, any taxes, fees and
other costs incurred in connection therewith) of the Intellectual Property, to
the reasonable attorneys' fees and expenses incurred by the Secured Party in
enforcing its rights hereunder and in connection with collecting, storing and
disposing of the Intellectual Property, and then to satisfaction of the
Obligations, and to the payment of any other amounts required by applicable law,
after which the Secured Party shall pay to the Company any surplus proceeds. If,
upon the sale, license or other disposition of the Intellectual Property, the
proceeds thereof are insufficient to pay all amounts to which the Secured Party
is legally entitled, the Company will be liable for the deficiency, together
with interest thereon, at the rate of 15% per annum (the "Default Rate"), and
the reasonable fees of any attorneys employed by the Secured Party to collect
such deficiency. To the extent permitted by applicable law, the Company waives
all claims, damages and demands against the Secured Party arising out of the
repossession, removal, retention or sale of the Intellectual Property, unless
due to the gross negligence or willful misconduct of the Secured Party.

         8. Costs and Expenses. The Company agrees to pay all out-of-pocket
fees, costs and expenses incurred in connection with any filing required
hereunder, including without limitation, any financing statements, continuation
statements, partial releases and/or termination statements related thereto or
any expenses of any searches reasonably required by the Secured Party. The
Company shall also pay all other claims and charges which in the reasonable
opinion of the Secured Party might prejudice, imperil or otherwise affect the
Intellectual Property or the Security Interest therein. The Company will also,
upon demand, pay to the Secured Party the amount of any and all reasonable
expenses, including the reasonable fees and expenses of its counsel and of any
experts and agents, which the Secured Party may incur in connection with (i) the
enforcement of this Agreement, (ii) the custody or preservation of, or the sale
of, collection from, or other realization upon, any of the Intellectual
Property, or (iii) the exercise or enforcement of any of the rights of the
Secured Party under the Debentures. Until so paid, any fees payable hereunder
shall be added to the principal amount of the Debentures and shall bear interest
at the Default Rate.

         9. Responsibility for Intellectual Property. The Company assumes all
liabilities and responsibility in connection with all Intellectual Property, and
the obligations of the Company hereunder or under the Debentures and the
Warrants shall in no way be affected or diminished by reason of the loss,
destruction, damage or theft of any of the Intellectual Property or its
unavailability for any reason.

<PAGE>

         10. Security Interest Absolute. All rights of the Secured Party and all
Obligations of the Company hereunder, shall be absolute and unconditional,
irrespective of: (a) any lack of validity or enforceability of this Agreement,
the Debentures, the Warrants or any agreement entered into in connection with
the foregoing, or any portion hereof or thereof; (b) any change in the time,
manner or place of payment or performance of, or in any other term of, all or
any of the Obligations, or any other amendment or waiver of or any consent to
any departure from the Debentures, the Warrants or any other agreement entered
into in connection with the foregoing; (c) any exchange, release or
nonperfection of any of the Intellectual Property, or any release or amendment
or waiver of or consent to departure from any other Intellectual Property for,
or any guaranty, or any other security, for all or any of the Obligations; (d)
any action by the Secured Party to obtain, adjust, settle and cancel in its sole
discretion any insurance claims or matters made or arising in connection with
the Intellectual Property; or (e) any other circumstance which might otherwise
constitute any legal or equitable defense available to the Company, or a
discharge of all or any part of the Security Interest granted hereby. Until the
Obligations shall have been paid and performed in full, the rights of the
Secured Party shall continue even if the Obligations are barred for any reason,
including, without limitation, the running of the statute of limitations or
bankruptcy. The Company expressly waives presentment, protest, notice of
protest, demand, notice of nonpayment and demand for performance. In the event
that at any time any transfer of any Intellectual Property or any payment
received by the Secured Party hereunder shall be deemed by final order of a
court of competent jurisdiction to have been a voidable preference or fraudulent
conveyance under the bankruptcy or insolvency laws of the United States, or
shall be deemed to be otherwise due to any party other than the Secured Party,
then, in any such event, the Company's obligations hereunder shall survive
cancellation of this Agreement, and shall not be discharged or satisfied by any
prior payment thereof and/or cancellation of this Agreement, but shall remain a
valid and binding obligation enforceable in accordance with the terms and
provisions hereof. The Company waives all right to require the Secured Party to
proceed against any other person or to apply any Intellectual Property which the
Secured Party may hold at any time, or to marshal assets, or to pursue any other
remedy. The Company waives any defense arising by reason of the application of
the statute of limitations to any obligation secured hereby.

         11. Term of Agreement. This Agreement and the Security Interest shall
terminate on the date on which all payments under the Debentures have been made
in full and all other Obligations have been paid or discharged. Upon such
termination, the Secured Party, at the request and at the expense of the
Company, will join in executing any termination statement with respect to any
financing statement executed and filed pursuant to this Agreement.

         12. Power of Attorney; Further Assurances.

                  (a) The Company authorizes the Secured Party, and does hereby
         make, constitute and appoint it, and its respective officers, agents,
         successors or assigns with full power of substitution, as the Company's
         true and lawful attorney-in-fact, with power, in its own name or in the
         name of the Company, to, after the occurrence and during the
         continuance of an Event of Default, (i) endorse any notes, checks,
         drafts, money orders, or other instruments of payment (including
         payments payable under or in respect of any policy of insurance) in
         respect of the Intellectual Property that may come into possession of
         the Secured Party; (ii) to sign and endorse any UCC financing statement
         or any invoice, freight or express bill, bill of lading, storage or
         warehouse receipts, drafts against debtors, assignments, verifications
         and notices in connection with accounts, and other documents relating
         to the Intellectual Property; (iii) to pay or discharge taxes, liens,
         security interests or other encumbrances at any time levied or placed
         on or threatened against the Intellectual Property; (iv) to demand,
         collect, receipt for, compromise, settle and sue for monies due in
         respect of the Intellectual Property; and (v) generally, to do, at the
         option of the Secured Party, and at the Company's expense, at any time,
         or from time to time, all acts and things which the Secured Party deems
         necessary to protect, preserve and realize upon the Intellectual
         Property and the Security Interest granted therein in order to effect
         the intent of this Agreement, the Debentures and the Warrants, all as
         fully and effectually as the Company might or could do; and the Company
         hereby ratifies all that said attorney shall lawfully do or cause to be
         done by virtue hereof. This power of attorney is coupled with an
         interest and shall be irrevocable for the term of this Agreement and
         thereafter as long as any of the Obligations shall be outstanding.

<PAGE>

                  (b) On a continuing basis, the Company will make, execute,
         acknowledge, deliver, file and record, as the case may be, in the
         proper filing and recording places in any jurisdiction, all such
         instruments, and take all such action as may reasonably be deemed
         necessary or advisable, or as reasonably requested by the Secured
         Party, to perfect the Security Interest granted hereunder and otherwise
         to carry out the intent and purposes of this Agreement, or for assuring
         and confirming to the Secured Party the grant or perfection of a
         security interest in all the Intellectual Property.

                  (c) The Company hereby irrevocably appoints the Secured Party
         as the Company's attorney-in-fact, with full authority in the place and
         stead of the Company and in the name of the Company, from time to time
         in the Secured Party's discretion, to take any action and to execute
         any instrument which the Secured Party may deem necessary or advisable
         to accomplish the purposes of this Agreement, including the filing, in
         its sole discretion, of one or more financing or continuation
         statements and amendments thereto, relative to any of the Intellectual
         Property without the signature of the Company where permitted by law.

         13. Notices. All notices, requests, demands and other communications
hereunder shall be in writing, with copies to all the other parties hereto, and
shall be deemed to have been duly given when (i) if delivered by hand, upon
receipt, (ii) if sent by facsimile, upon receipt of proof of sending thereof,
(iii) if sent by nationally recognized overnight delivery service (receipt
requested), the next business day or (iv) if mailed by first-class registered or
certified mail, return receipt requested, postage prepaid, four days after
posting in the U.S. mails, in each case if delivered to the following addresses:

                                    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

                                    If to the Secured Party:

                                    At the address and facsimile number listed
                                    on the signature page hereof.

                                    If to the Agent:

                                    At the address and facsimile number listed
                                    on the signature page hereof.

<PAGE>

         14. Other Security. To the extent that the Obligations are now or
hereafter secured by property other than the Intellectual Property or by the
guarantee, endorsement or property of any other person, firm, corporation or
other entity, then the Secured Party shall have the right, in its sole
discretion, to pursue, relinquish, subordinate, modify or take any other action
with respect thereto, without in any way modifying or affecting any of the
Secured Party's rights and remedies hereunder.

         15.      Miscellaneous.

                  (a) No course of dealing between the Company and the Secured
         Party, nor any failure to exercise, nor any delay in exercising, on the
         part of the Secured Party, any right, power or privilege hereunder or
         under the Debentures shall operate as a waiver thereof; nor shall any
         single or partial exercise of any right, power or privilege hereunder
         or thereunder preclude any other or further exercise thereof or the
         exercise of any other right, power or privilege.

                  (b) All of the rights and remedies of the Secured Party with
         respect to the Intellectual Property, whether established hereby or by
         the Debentures or by any other agreements, instruments or documents or
         by law shall be cumulative and may be exercised singly or concurrently.

                  (c) This Agreement and the Security Agreement constitute the
         entire agreement of the parties with respect to the subject matter
         hereof and is intended to supersede all prior negotiations,
         understandings and agreements with respect thereto. Except as
         specifically set forth in this Agreement, no provision of this
         Agreement may be modified or amended except by a written agreement
         specifically referring to this Agreement and signed by the parties
         hereto.

                  (d) In the event that any provision of this Agreement is held
         to be invalid, prohibited or unenforceable in any jurisdiction for any
         reason, unless such provision is narrowed by judicial construction,
         this Agreement shall, as to such jurisdiction, be construed as if such
         invalid, prohibited or unenforceable provision had been more narrowly
         drawn so as not to be invalid, prohibited or unenforceable. If,
         notwithstanding the foregoing, any provision of this Agreement is held
         to be invalid, prohibited or unenforceable in any jurisdiction, such
         provision, as to such jurisdiction, shall be ineffective to the extent
         of such invalidity, prohibition or unenforceability without
         invalidating the remaining portion of such provision or the other
         provisions of this Agreement and without affecting the validity or
         enforceability of such provision or the other provisions of this
         Agreement in any other jurisdiction.

                  (e) No waiver of any breach or default or any right under this
         Agreement shall be considered valid unless in writing and signed by the
         party giving such waiver, and no such waiver shall be deemed a waiver
         of any subsequent breach or default or right, whether of the same or
         similar nature or otherwise.

<PAGE>

                  (f) This Agreement shall be binding upon and inure to the
         benefit of each party hereto and its successors and assigns.

                  (g) Each party shall take such further action and execute and
         deliver such further documents as may be necessary or appropriate in
         order to carry out the provisions and purposes of this Agreement.

                  (h) This Agreement shall be construed in accordance with the
         laws of the State of New York, except to the extent the validity,
         perfection or enforcement of a security interest hereunder in respect
         of any particular Intellectual Property which are governed by a
         jurisdiction other than the State of New York in which case such law
         shall govern. Each of the parties hereto irrevocably submit to the
         exclusive jurisdiction of any state or federal court sitting in the
         County of New York in the State of New York over any action or
         proceeding arising out of or relating to this Agreement, and the
         parties hereto hereby irrevocably agree that all claims in respect of
         such action or proceeding may be heard and determined in such state or
         federal court. The parties hereto agree that a final judgment in any
         such action or proceeding shall be conclusive and may be enforced in
         other jurisdictions by suit on the judgment or in any other manner
         provided by law. The parties hereto further waive any objection to
         venue in the State of New York and any objection to an action or
         proceeding in the State of New York on the basis of forum non
         conveniens.

                  (i) EACH PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE
         RIGHTS TO A JURY TRAIL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
         ARISING OUT OF THIS AGREEMENT. THE SCOPE OF THIS WAIVER IS INTENDED TO
         BE ALL ENCOMPASSING OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND
         THAT RELATE TO THE SUBJECT MATER OF THIS AGREEMENT, INCLUDING WITHOUT
         LIMITATION CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL
         OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES
         THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR EACH PARTY TO ENTER INTO
         A BUSINESS RELATIONSHIP, THAT EACH PARTY HAS ALREADY RELIED ON THIS
         WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH PARTY WILL
         CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH
         PARTY FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER
         WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY HAS KNOWINGLY AND
         VOLUNTARILY WAIVES ITS RIGHTS TO A JURY TRIAL FOLLOWING SUCH
         CONSULTATION. THIS WAIVER IS IRREVOCABLE, MEANING THAT, NOTWITHSTANDING
         ANYTHING HEREIN TO THE CONTRARY, IT MAY NOT BE MODIFIED EITHER ORALLY
         OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT
         AMENDMENTS, RENEWALS AND SUPPLEMENTS OR MODIFICATIONS TO THIS
         AGREEMENT. IN THE EVENT OF A LITIGATION, THIS AGREEMENT MAY BE FILED AS
         A WRITTEN CONSENT TO A TRIAL BY THE COURT.

<PAGE>

                  (j) This Agreement may be executed in any number of
         counterparts, each of which when so executed shall be deemed to be an
         original and, all of which taken together shall constitute one and the
         same Agreement. In the event that any signature is delivered by
         facsimile transmission, such signature shall create a valid binding
         obligation of the party executing (or on whose behalf such signature is
         executed) the same with the same force and effect as if such facsimile
         signature were the original thereof.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the day and year first above written.

THE COMPANY:                        PEAK ENTERTAINMENT HOLDINGS, INC.

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

THE SECURED PARTY:                  Platinum Partners Global Macro Fund LP

                                    By:
                                         -------------------------------------
                                         Name:  Mark Nordlicht
                                         Title:  General Partner

                                    STATE OF RESIDENCE:   New York
                                    ADDRESS:              152 West 57th Street
                                                          54th Floor
                                                          New York, NY 10019

                                    TELEPHONE:____________________________
                                    FACSIMILE:____________________________

                                    [___________________]

                                    By:
                                         -------------------------------------
                                         Name:
                                         Title:

                                    STATE OF RESIDENCE:

                                    ADDRESS:_____________________________
                                            _____________________________
                                            _____________________________

                                    TELEPHONE:____________________________
                                    FACSIMILE:____________________________

THE AGENT:                          NAME____________________________________

                                    ADDRESS:_____________________________
                                            _____________________________
                                            _____________________________

                                    TELEPHONE:____________________________
                                    FACSIMILE:____________________________

<PAGE>

                                   SCHEDULE A

A.    Software Intellectual Property:    None.

B.    Copyrights:                        None, other than any, if any, disclosed
                                         in filings with the S.E.C.

C.    Copyright Licenses:                None, other than any, if any, disclosed
                                         in filings with the S.E.C.

D.    Patents:                           None.

E.    Patent Licenses:                   None.

F.    Trademarks:                        None, other than any, if any, disclosed
                                         in filings with the S.E.C.

G.    Trademark Licenses:                None, other than any, if any, disclosed
                                         in filings with the S.E.C.

H.    Trade Secrets:                     None.

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