Document:

DEBENTURE

THE  SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
IN  RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS.  THE
SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY NOT
BE  TRANSFERRED  OR  RESOLD  EXCEPT  AS  PERMITTED  UNDER  SUCH LAWS PURSUANT TO
REGISTRATION  OR  AN EXEMPTION THEREFROM.  THE SECURITIES HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE
MERITS  OF  THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING MATERIALS.
ANY  REPRESENTATION  TO  THE  CONTRARY  IS  UNLAWFUL.

AMOUNT                                             $250,000
DEBENTURE  NUMBER                                  August-2004-101
ISSUANCE  DATE                                     August  10,  2004
MATURITY  DATE                                     August  10,  2007

     FOR  VALUE  RECEIVED,  Nighthawk  Systems,  Inc., a Nevada corporation (the
"Company"), hereby promises to pay DUTCHESS PRIVATE EQUITIES FUND, II, L.P. (the
"Holder") on August 10, 2007, (the "Maturity Date"), the principal amount of Two
Hundred  Fifty  Thousand  Dollars  ($250,000)  U.S.,  and to pay interest on the
principal  amount  hereof,  in such amounts, at such times and on such terms and
conditions  as  are  specified  herein.

Article  1          Interest

     The  closing  shall  be deemed to have occurred on the date the funds (less
attorney  fees  and  those  amounts  payable  pursuant  to  the terms sheet) are
received  by the Company (the "Closing Date" or a "Closing").  The Company shall
pay  eight  percent  (8%)  annual  coupon on the unpaid principal amount of this
Debenture  (the  "Debenture")  at  such times and in such amounts as outlined in
this  section.  Prior  to  U.S.  Securities  and  Exchange  Commission  ("SEC")
declaring  the  registration  statement  for  shares  underlying  the  Debenture
("Registration  Statement")  effective ("Effective Date"), the Company will make
mandatory  prepaid  payments, in advance, on the coupon ("Coupon Payment")in the
amount  of  1/12th  (one-twelfth)  of the annual payment, per month, pursuant to
each  tranche.  The  Coupon  Payments  shall  start  on  August 15th, 2004,  and
include,  on  a pro rata basis, in arrears, any coupon accrued on funds financed
before  August  15th,  2004.  All subsequent Coupon Payments are due on the 15th
(fifteenth)  calendar  day  of  each  month  thereafter.

     For each subsequent Closing, prepaid Coupon Payments will start on the 15th
day  of the month and include, on a pro rata basis, any coupon accrued for funds
financed  before  the  15th of the month, and shall continue for each subsequent
month thereafter.  All Coupon Payments are to be due on the 15th calendar day of
each  month, until the Effective Date.  At such time as the SEC has declared the
Registration  Statement Effective, the coupon is to be paid, at the time of each
conversion  until  the  principal  amount  hereof  is  paid  in full or has been
converted,  in shares of registered common stock, par value $0.001 per share, of
the  Company  ("Common  Stock").   The  interest  paid in Common Stock, shall be
delivered to the Holder, or per Holder's instructions, within three (3) business
days  of  the  date  of  conversion.  The  Debentures  are  subject to automatic
conversion at the end of three (3) years from the date of issuance at which time
all  Debentures  outstanding  will  be  automatically  converted  based upon the
formula  set  forth  in  Section  3.2.

Article  2          Method  of  Payment

     This  Debenture  must be surrendered to the Company in order for the Holder
to  receive  payment of the principal amount hereof.  The Company shall have the
option  of  paying the interest on this Debenture in United States dollars or in
Common Stock upon conversion pursuant to Article 1 hereof.  The Company may draw
a check for the payment of interest to the order of the Holder of this Debenture
and  mail  it  to  the  Holder's address as shown on the Register (as defined in
Section  8.2  below).  Interest  and  principal  payments  shall  be  subject to
withholding  under  applicable  United  States  Federal Internal Revenue Service
Regulations.

Article  3          Conversion

Section  3.1     Conversion  Privilege

(a)     The  Holder  of  this  Debenture shall have the right to convert it into
shares  of  Common  Stock  at  any  time following the Closing Date and which is
before  the  close  of  business  on  the  Maturity Date, except as set forth in
Section  3.1(c)  below.  The  number of shares of Common Stock issuable upon the
conversion  of this Debenture is determined pursuant to Section 3.2 and rounding
the  result  to  the  nearest  whole  share.

(b)     This Debenture may not be converted, whether in whole or in part, except
     in  accordance  with  Article  3.

(c)     In the event all or any portion of this Debenture remains outstanding on
     the  Maturity  Date,  the  unconverted  portion  of  such  Debenture  will
automatically  be  converted  into  shares  of  Common Stock on such date in the
manner  set  forth  in  Section  3.2.

Section  3.2     Conversion  Procedure.

(a)     Conversion  Procedures.  The  face  amount  of  this  Debenture  may  be
converted,  in  whole  or  in  part,  any time following the Closing Date.  Such
conversion shall be effectuated by surrendering to the Company, or its attorney,
this Debenture to be converted together with a facsimile of the signed Notice of
Conversion  which  evidences  Holder's  intention to convert that portion of the
Debenture  indicated.  The  date  on which the Notice of Conversion is effective
("Conversion  Date")  shall  be  deemed  to  be the date on which the Holder has
delivered  to  the  Company  a  facsimile  or  original  of the signed Notice of
Conversion, as long as the original Debenture(s) to be converted are received by
the  Company  within  five  (5)  business days thereafter. At such time that the
original  Debenture  has  been  submitted  to  the Company, the Holder can elect
whether  a  reissuance of the debenture is warranted, or whether the Company can
retain the Debenture as to a continual conversion by Holder. Notwithstanding the
above,  any  Notice  of Conversion received by 5:00 P.M. EST, shall be deemed to
have  been  received the previous business day. Receipt being via a confirmation
of  time  of  facsimile  of  the  Holder.

(b)     Common Stock to be Issued.     Upon the conversion of any Debentures and
upon  receipt  by  the Company or its attorney of a facsimile of Holder's signed
Notice  of  Conversion  the  Company  shall instruct its transfer agent to issue
stock  certificates without restrictive legend or stop transfer instructions, if
at  that time the Registration Statement has been declared effective or pursuant
to  Rule  144A  (or with proper restrictive legend if the Registration Statement
has  not  as yet been declared effective), in such denominations to be specified
at  conversion  representing  the number of shares of Common Stock issuable upon
such  conversion,  as  applicable.  The Company shall act as Registrar and shall
maintain an appropriate ledger containing the necessary information with respect
to  each  Debenture. The Company warrants that no instructions, other than these
instructions,  have  been  given or will be given to the transfer agent and that
the  Common  Stock  shall otherwise be freely resold, except as may be set forth
herein.

(c)     Conversion  Rate.  Holder is entitled to convert the face amount of this
Debenture,  plus  accrued  interest,  anytime following the Closing Date, at the
lesser  of  (i)  75%  of  the  lowest  closing  bid  price  at  the time of each
conversion,  defined  as  standard  market  hours  from  9:30 AM to 4:00 PM EST,
partial trading days will not be counted for calculation purposes only ("Trading
Days")  prior  to  the Conversion Date or (ii) .125 (twelve and one-half cents),
each  being referred to as the "Conversion Price". No fractional shares or scrip
representing fractions of shares will be issued on conversion, but the number of
shares  issuable  shall  be rounded up, as the case may be, to the nearest whole
share.  The  Holder  shall  retain  all rights of conversions during any partial
trading  days.

(d)     Nothing  contained  in  this  Debenture  shall be deemed to establish or
require the payment of interest to the Holder at a rate in excess of the maximum
rate permitted by governing law. In the event that the rate of interest required
to  be  paid  exceeds  the  maximum rate permitted by governing law, the rate of
interest  required  to  be paid thereunder shall be automatically reduced to the
maximum rate permitted under the governing law and such excess shall be returned
with  reasonable  promptness  by  the  Holder  to  the  Company.

(e)     It  shall  be the Company's responsibility to take all necessary actions
and  to  bear  all  such  costs  to  issue  the Common Stock as provided herein,
including  the  responsibility and cost for delivery of an opinion letter to the
transfer  agent,  if  so  required.  The person in whose name the certificate of
Common  Stock is to be registered shall be treated as a shareholder of record on
and  after  the conversion date. Upon surrender of any Debentures that are to be
converted  in  part, the Company shall issue to the Holder a new Debenture equal
to  the  unconverted  amount,  if  so  requested  in  writing  by Holder. If the
Company's counsel fails to provide a Rule 144 opinion letter in a timely manner,
then  the  Company  shall:  (i)  pay the Holder's counsel to write said Rule 144
opinion  letter;  and (ii) instruct the designated transfer agent to accept same
Rule  144  opinion  letter.

(f)     Within  three  (3)  business  days  after  receipt  of the documentation
referred to above in Section 3.2(a), the Company shall deliver a certificate, in
accordance with Section 3.2(c) for the number of shares of Common Stock issuable
upon  the  conversion.  In  the  event the Company does not make delivery of the
Common  Stock, as instructed by Holder, within three (3) business days after the
Conversion  Date, then in such event the Company shall pay to Holder one percent
(1%)  in cash, of the dollar value of the Debentures being converted, compounded
daily,  per each day after the third (3rd) business day following the Conversion
Date  that  the  Common  Stock  is  not  delivered  to  the  Purchaser.

                The  Company acknowledges that its failure to deliver the Common
Stock  within  three  (3) business days after the Conversion Date will cause the
Holder  to  suffer  damages  in  an  amount that will be difficult to ascertain.
Accordingly,  the  parties  agree  that  it  is  appropriate  to include in this
Debenture a provision for liquidated damages.  The parties acknowledge and agree
that  the  liquidated damages provision set forth in this section represents the
parties' good faith effort to quantify such damages and, as such, agree that the
form  and  amount  of  such  liquidated  damages  are  reasonable  and  will not
constitute  a  penalty.  The payment of liquidated damages shall not relieve the
Company  from  its obligations to deliver the Common Stock pursuant to the terms
of  this  Debenture.

              To  the extent that the failure of the Company to issue the Common
Stock pursuant to this Section 3.2(f) is due to the unavailability of authorized
but unissued shares of Common Stock, the provisions of this Section 3.2(f) shall
not  apply  but  instead  the  provisions  of  Section  3.2(g)  shall  apply.

              The  Company  shall  make any payments incurred under this Section
3.2(f)  in  immediately  available funds within three (3) business days from the
date the Common Stock is fully delivered.  Nothing herein shall limit a Holder's
right  to  pursue  actual  damages  or  cancel  the conversion for the Company's
failure  to  issue  and  deliver  Common  Stock  to  the Holder within three (3)
business  days  after  the  Conversion  Date.

(g)     The  Company  shall  at  all  times reserve (or make alternative written
arrangements  for  reservation or contribution of shares) and have available all
Common  Stock  necessary  to meet conversion of the Debentures by all Holders of
the entire amount of Debentures then outstanding. If, at any time Holder submits
a  Notice  of Conversion and the Company does not have sufficient authorized but
unissued shares of Common Stock (or alternative shares of Common Stock as may be
contributed  by  Stockholders) available to effect, in full, a conversion of the
Debentures  (a  "Conversion Default", the date of such default being referred to
herein  as the "Conversion Default Date"), the Company shall issue to the Holder
all  of  the  shares  of  Common  Stock  which  are available, and the Notice of
Conversion as to any Debentures requested to be converted but not converted (the
"Unconverted  Debentures"), may be deemed null and void upon written notice sent
by  the  Holder  to  the  Company.  The  Company  shall  provide  notice of such
Conversion  Default  ("Notice of Conversion Default") to all existing Holders of
outstanding  Debentures,  by  facsimile,  within  three (3) business day of such
default  (with  the original delivered by overnight or two day courier), and the
Holder  shall  give notice to the Company by facsimile within five business days
of  receipt  of  the  original  Notice  of Conversion Default (with the original
delivered  by overnight or two day courier) of its election to either nullify or
confirm  the  Notice  of  Conversion.

     The Company agrees to pay to all Holders of outstanding Debentures payments
for  a  Conversion  Default  ("Conversion  Default  Payments")  in the amount of
(N/365)  x (.24) x the initial issuance price of the outstanding and/or tendered
but  not  converted  Debentures held by each Holder where N = the number of days
from the Conversion Default Date to the date (the "Authorization Date") that the
Company  authorizes  a  sufficient  number  of  shares of Common Stock to effect
conversion  of  all  remaining  Debentures.  The  Company  shall  send  notice
("Authorization  Notice")  to  each  Holder  of  outstanding  Debentures  that
additional  shares  of Common Stock have been authorized, the Authorization Date
and  the  amount  of Holder's accrued  Conversion Default Payments.  The accrued
Conversion  Default  shall  be  paid in cash or shall be convertible into Common
Stock  at  the  Conversion  Rate,  upon written notice sent by the Holder to the
Company, which Conversion Default shall be payable as follows:  (i) in the event
Holder  elects to take such payment in cash, cash payments shall be made to such
Holder  of  outstanding  Debentures  by  the fifth day of the following calendar
month,  or  (ii)  in  the event Holder elects to take such payment in stock, the
Holder  may  convert  such  payment amount into Common Stock  at  the conversion
rate  set  forth in Section 3.2(c) at any time after the 5th day of the calendar
month  following the month in which the Authorization Notice was received, until
the  expiration  of  the  mandatory  three  (3)  year  conversion  period.

     The  Company  acknowledges that its failure to maintain a sufficient number
of authorized but unissued shares of Common Stock to effect in full a conversion
of the Debentures will cause the Holder to suffer damages in an amount that will
be  difficult  to  ascertain.  Accordingly,  the  parties  agree  that  it  is
appropriate  to  include  in  this Agreement a provision for liquidated damages.
The  parties  acknowledge  and  agree  that the liquidated damages provision set
forth in this section represents the parties' good faith effort to quantify such
damages  and, as such, agree that the form and amount of such liquidated damages
are  reasonable  and  will  not constitute a penalty.  The payment of liquidated
damages shall not relieve the Company from its obligations to deliver the Common
Stock  pursuant  to the terms of this Debenture.  Nothing herein shall limit the
Holder's  right to pursue actual damages for the Company's failure to maintain a
sufficient  number  of  authorized  shares  of  Common  Stock.

(h)     If,  by  the  third  (3rd) business day after the Conversion Date of any
portion  of  the  Debentures to be converted (the "Delivery Date"), the transfer
agent  fails  for  any reason to deliver the Common Stock upon conversion by the
Holder  and  after  such  Delivery Date, the Holder purchases, in an open market
transaction  or otherwise, shares of Common Stock (the "Covering Shares") solely
in  order  to  make  delivery  in  satisfaction of a sale of Common Stock by the
Holder (the "Sold Shares"), which delivery such Holder anticipated to make using
the Common Stock issuable upon conversion (a "Buy-In"), the Company shall pay to
the  Holder,  in  addition  to  any other amounts due to Holder pursuant to this
Debenture,  and  not  in  lieu thereof, 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 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 Holder from the sale of the Sold Shares.
The  Company shall pay the Buy-In Adjustment Amount to the Holder in immediately
available  funds  within five (5) business days of written demand by the Holder.
By  way  of  illustration  and not in limitation of the foregoing, if the 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  the  Company  will  be  required  to  pay  to  the Holder will be $1,000.

(i)     Prospectus and Other Documents. The Company shall furnish to Holder such
number of prospectuses and other documents incidental to the registration of the
shares  of Common Stock underlying the Debentures, including any amendment of or
supplements  thereto.

(j)     Limitation  on Issuance of Shares. If the Company's Common Stock becomes
listed  on  the Nasdaq SmallCap Market after the issuance of the Debentures, the
Company  may  be limited in the number of shares of Common Stock it may issue by
virtue  of  (X)  the number of authorized shares or (Y) the applicable rules and
regulations  of  the  principal  securities  market on which the Common Stock is
listed  or  traded,  including,  but  not  necessarily  limited  to, NASDAQ Rule
4310(c)(25)(H)(i)  or  Rule  4460(i)(1), as may be applicable (collectively, the
"Cap  Regulations").  Without  limiting  the  other  provisions thereof, (i) the
Company  will  take  all steps reasonably necessary to be in a position to issue
shares of Common Stock on conversion of the Debentures without violating the Cap
Regulations  and  (ii)  if,  despite taking such steps, the Company still cannot
issue  such  shares  of  Common Stock without violating the Cap Regulations, the
holder of a Debenture which cannot be converted as result of the Cap Regulations
(each  such Debenture, an "Unconverted Debenture") shall have the right to elect
either  of  the  following  remedies:

     (x)  if  permitted  by  the  Cap  Regulations, require the Company to issue
shares  of Common Stock in accordance with such holder's Notice of Conversion at
a  conversion  purchase  price equal to the average of the closing bid price per
share  of  Common  Stock  for  any five (5) consecutive Trading Days (subject to
certain  equitable  adjustments for certain events occurring during such period)
during the sixty (60) Trading Days immediately preceding the Conversion Date; or

     (y)  require the Company to redeem each Unconverted Debenture for an amount
(the  "Redemption Amount"), payable in cash, equal to the sum of (i) one hundred
thirty-three  percent  (133%) of the principal of an Unconverted Debenture, plus
(ii) any accrued but unpaid interest thereon through and including the date (the
"Redemption  Date")  on  which  the  Redemption  Amount  is  paid to the holder.

     The Holder of the Unconverted Debenture may elect one of the above remedies
with  respect  to  a  portion of such Unconverted Debenture and the other remedy
with  respect  to  other  portions of the Unconverted Debenture.  The Debentures
shall  contain  provisions  substantially  consistent with the above terms, with
such additional provisions as may be consented to by the Holder.  The provisions
of  this section are not intended to limit the scope of the provisions otherwise
included  in  the  Debentures.

(k)     Limitation  on  Amount  of  Conversion  and  Ownership.  Notwithstanding
anything  to  the  contrary  in  this Debenture, in no event shall the Holder be
entitled  to convert that amount of Debenture, and in no event shall the Company
permit  that  amount of conversion, into that number of shares, which when added
to  the sum of the number of shares of Common Stock beneficially owned, (as such
term  is  defined  under Section 13(d) and Rule 13d-3 of the Securities Exchange
Act  of  1934, as may be amended, (the "1934 Act")), by the Holder, would exceed
4.99%  of  the  number  of  shares of Common Stock outstanding on the Conversion
Date,  as  determined  in  accordance with Rule 13d-1(j) of the 1934 Act. In the
event  that  the  number  of shares of Common Stock outstanding as determined in
accordance  with  Section  13(d)  of the 1934 Act is different on any Conversion
Date  than it was on the Closing Date, then the number of shares of Common Stock
outstanding  on  such  Conversion  Date shall govern for purposes of determining
whether the Holder would be acquiring beneficial ownership of more than 4.99% of
     the  number  of shares of Common Stock outstanding on such Conversion Date.

(l)     Legend.  The  Holder acknowledges that each certificate representing the
Debentures,  and the Common Stock unless registered pursuant to the Registration
Rights  Agreement  or  pursuant to Rule 144A, Rule 144(k) or any other exemption
from  the  Act,  shall  be  stamped  or  otherwise  imprinted  with  a  legend
substantially  in  the  following  form:

THE  SECURITIES  EVIDENCED  BY  THIS  CERTIFICATE  MAY  NOT  BE OFFERED OR SOLD,
TRANSFERRED,  PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT (i) PURSUANT
TO  AN  EFFECTIVE  REGISTRATION  STATEMENT  UNDER THE SECURITIES ACT OF 1933, AS
AMENDED,  (ii)  TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR
RULE  UNDER  SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) IF AN
EXEMPTION  FROM  REGISTRATION  UNDER  SUCH  ACT  IS  AVAILABLE.

     (m)  Prior  to  conversion of all the Debentures, if at any time the Holder
decides  that  the  conversion  of  all  the  Debentures and exercise of all the
Warrants outstanding would result in an insufficient number of authorized shares
of  Common  Stock  being  available  to  cover all the conversions, then in such
event,  the  Company  will move to call and hold a shareholder's meeting or have
shareholder  action  with  written  consent of the proper number of shareholders
within  thirty  (30)  days  of  such  event,  or  such greater period of time if
statutorily required or reasonably necessary as regards standard brokerage house
and/or  SEC  requirements  and/or  procedures,  for  the  purpose of authorizing
additional  shares  of  Common Stock to facilitate the conversions.   In such an
event  management  of  the  Company  shall recommend to all shareholders to vote
their  shares  in  favor of increasing the authorized number of shares of Common
Stock. Management of the Company shall vote all of its shares of Common Stock in
favor  of  increasing  the number of shares of authorized Common Stock.  Company
represents  and  warrants  that  under  no circumstances will it deny or prevent
Holder's  right  to  convert the Debentures as permitted under the terms of this
Subscription  Agreement  or  the Registration Rights Agreement.  Nothing in this
Section shall limit the obligation of the Company to make the payments set forth
in  Section  3.2(g).  The  Holder,  at  their option, may request the company to
authorize  and  issue  additional shares if the Holder feels it is necessary for
conversions  in  the  future.  In  the event the Company's shareholder's meeting
does  not  result  in  the necessary authorization, the Company shall redeem the
outstanding  Debentures  for  an amount equal to (x) the sum of the principal of
the outstanding Debentures plus accrued interest thereon multiplied by (y) 120%.

Section  3.3     Fractional  Shares.  The  Company  shall  not  issue fractional
shares of Common Stock, or scrip representing fractions of such shares, upon the
conversion  of  this Debenture. Instead, the Company shall round up, as the case
maybe,  to  the  nearest  whole  share.

Section  3.4     Taxes  on  Conversion.  The  Company shall pay any documentary,
stamp  or  similar  issue  or  transfer tax due on the issue of shares of Common
Stock  upon the conversion of this Debenture.  However, the Holder shall pay any
such  tax  which  is  due because the shares are issued in a name other than its
name.

Section  3.5     Company to Reserve Stock.  The Company shall reserve the number
of  shares  of Common Stock required pursuant to and upon the terms set forth in
the  Subscription  Agreement  to  permit  the conversion of this Debenture.  All
shares of Common Stock which may be issued upon the conversion hereof shall upon
issuance  be  validly  issued,  fully  paid  and nonassessable and free from all
taxes,  liens  and  charges  with  respect  to  the  issuance  thereof.

Section  3.6     Restrictions  on  Sale.  This Debenture has not been registered
under  the  Securities  Act of 1933, as amended, (the "Act") and is being issued
under Section 4(2) of the Act and Rule 506 of Regulation D promulgated under the
Act.  This  Debenture  and the Common Stock issuable upon the conversion thereof
may  only  be  sold pursuant to registration under Rule 144 or an exemption from
the  Act.

Section  3.7     Mergers,  Etc.  If  the  Company  merges  or  consolidates with
another corporation or sells or transfers all or substantially all of its assets
to  another  person  and the holders of the Common Stock are entitled to receive
stock,  securities  or  property  in respect of or in exchange for Common Stock,
then  as  a  condition  of  such merger, consolidation, sale or transfer, it may
thereafter  be  converted  on  the terms and subject to the conditions set forth
above  into the kind and amount of stock, securities or property receivable upon
such merger, consolidation, sale or transfer by a holder of the number of shares
of  Common Stock into which this Debenture might have been converted immediately
before  such  merger,  consolidation,  sale  or transfer, subject to adjustments
which  shall  be  as  nearly  equivalent  as  may  be practicable to adjustments
provided  for  in  this  Article  3.

Article  4          Mergers

     The  Company  shall  not  consolidate  or  merge  into,  or transfer all or
substantially  all  of  its assets to, any person, unless such person assumes in
writing  the  obligations  of  the  Company under this Debenture and immediately
after  such transaction no Event of Default exists.  Any reference herein to the
Company  shall  refer  to  such  surviving  or  transferee  corporation  and the
obligations  of  the  Company  shall  terminate  upon  such  written assumption.

Article  5        Reports

     The  Company  will mail to the Holder hereof at its address as shown on the
Register  a  copy  of any annual, quarterly or current report that it files with
the  Securities  and Exchange Commission promptly after the filing thereof and a
copy  of  any annual, quarterly or other report or proxy statement that it gives
to  its  shareholders  generally at the time such report or statement is sent to
shareholders.

Article  6          Defaults  and  Remedies

Section  6.1     Events  of  Default.  An  "Event  of Default" occurs if (a) the
Company  does  not  make  the  payment  of  the  principal  of this Debenture by
conversion  into  Common  Stock  within  three (3) business days of the Maturity
Date,  upon  redemption  or  otherwise, (b) the Company does not make a payment,
other  than  a  payment  of  principal,  for a period of three (3) business days
thereafter,  (c) any of the Company's representations or warranties contained in
the Subscription Agreement or this Debenture were false when made or the Company
fails  to  comply with any of its other agreements in the Subscription Agreement
or this Debenture and such failure continues for the period and after the notice
specified  below,  (d)  the  Company  pursuant  to  or within the meaning of any
Bankruptcy  Law  (as  hereinafter defined): (i) commences a voluntary case; (ii)
consents  to the entry of an order for relief against it in an involuntary case;
(iii)  consents to the appointment of a Custodian (as hereinafter defined) of it
or  for  all  or  substantially  all  of  its  property  or (iv) makes a general
assignment  for  the  benefit  of  its  creditors  or  (v)  a court of competent
jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for
relief  against  the Company in an involuntary case; (B) appoints a Custodian of
the  Company  or  for all or substantially all of its property or (C) orders the
liquidation  of  the  Company,  and  the order or decree remains unstayed and in
effect for sixty (60) calendar days, (e) the Company's Common Stock is suspended
or  no  longer  listed  on  any  recognized  exchange  including  electronic
over-the-counter  bulletin  board  for  in excess of two (2) consecutive Trading
Days,  (f)  default  on Coupon as outlined in Article 1. As used in this Section
7.1,  the  term "Bankruptcy Law" means Title 11 of the United States Code or any
similar  federal  or  state  law for the relief of debtors. The term "Custodian"
means  any receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy  Law.  A  default  under  clause (c) above is not an Event of Default
until  the  holders  of  at  least  25% of the aggregate principal amount of the
Debentures  outstanding  notify the Company of such default and the Company does
not  cure  it within thirty (30) business days after the receipt of such notice,
unless the Company commences to cure such default within such period, which must
specify  the  default, demand that it be remedied and state that it is a "Notice
of  Default".  Prior  to  the expiration of the time for curing a default as set
forth  in  the  preceding  sentence,  the  holders  of  a  majority in aggregate
principal  amount  of  the  Debentures  at  the  time  outstanding (exclusive of
Debentures  then  owned  by  the Company or any subsidiary or affiliate) may, on
behalf  of the holders of all of the Debentures, waive any past Event of Default
hereunder  (or  any past event which, with the lapse of time or notice and lapse
of  time  designated  in  subsection  (a),  would constitute an Event of Default
hereunder)  and  its  consequences,  except  a  default  in  the  payment of the
principal  of  or  interest  on  any  of the Debentures. In the case of any such
waiver,  such default or Event of Default shall be deemed to have been cured for
every  purpose  of  this  Debenture  and  the  Company  and  the  holders of the
Debentures  shall  be  restored  to their former positions and rights hereunder,
respectively; but no such waiver shall extend to any subsequent or other default
or  impair  any  right  consequent  thereon.

Section  6.2     Acceleration.  If an Event of Default occurs and is continuing,
the  Holder  hereof by notice to the Company may declare the remaining principal
amount  of this Debenture, together with all accrued interest and any liquidated
damages,  to be due and payable.  Upon such declaration, the remaining principal
amount  shall  be  due  and  payable  immediately.

Section  6.3     Seniority,  No  indebtedness  of  the Company is senior to this
Debenture in right of payment, whether with respect to interest, damages or upon
     liquidation  or  dissolution  or  otherwise.

Article  7          Registered  Debentures

Section  7.1     Record Ownership.  The Company, or its attorney, shall maintain
a register of the holders of the Debentures (the "Register") showing their names
     and  addresses  and  the serial numbers and principal amounts of Debentures
issued to them.  The Register may be maintained in electronic, magnetic or other
computerized form.  The Company may treat the person named as the Holder of this
Debenture  in  the Register as the sole owner of this Debenture.   The Holder of
this  Debenture  is  the  person  exclusively  entitled  to  receive payments of
interest  on  this  Debenture,  receive  notifications  with  respect  to  this
Debenture, convert it into Common Stock and otherwise exercise all of the rights
and  powers  as  the  absolute  owner  hereof.

Section  7.2     Worn  or  Lost  Debentures.  If  this  Debenture  becomes worn,
defaced  or  mutilated  but  is still substantially intact and recognizable, the
Company  or  its  agent  may  issue  a  new  Debenture  in  lieu hereof upon its
surrender.   Where  the  Holder  of this Debenture claims that the Debenture has
been  lost,  destroyed  or  wrongfully  taken,  the  Company  shall  issue a new
Debenture  in  place  of  the  original  Debenture  if the Holder so requests by
written  notice  to  the  Company  actually received by the Company before it is
notified  that  the Debenture has been acquired by a bona fide purchaser and the
Holder  has delivered to the Company an indemnity bond in such amount and issued
by  such  surety as the Company deems satisfactory together with an affidavit of
the Holder setting forth the facts concerning such loss, destruction or wrongful
     taking  and  such  other  information  in  such  form  with  such  proof or
verification  as  the  Company  may  request.

Article  8          Notice.

     Any  notices,  consents,  waivers  or  other  communications  required  or
permitted  to  be given under the terms of this Debenture must be in writing and
will  be  deemed  to  have  been  delivered  (i)  upon  receipt,  when delivered
personally;  (ii)  upon receipt, when sent by facsimile (provided a confirmation
of  transmission is mechanically or electronically generated and kept on file by
the  sending  party);  or  (iii)  one  (1)  day  after deposit with a nationally
recognized  overnight  delivery  service, in each case properly addressed to the
party  to  receive  the  same.  The  addresses  and  facsimile  numbers for such
communications  shall  be:
If  to  the  Company:

     Douglas  Saathoff
     Chief  Executive  Officer
     Nighthawk  Systems,  Inc.
     10715  Gulfdale,  Suite  200
     San  Antonio,  Texas  78216
     Telephone:  210-341-4811
     Facsimile:  210-341-2011

If  to  the  Holder:

     At  the  address  listed  in  the  Questionnaire.

     Each  party  shall provide five (5) business days prior notice to the other
party  of  any  change  in  address,  phone  number  or  facsimile  number.

Article  9          Time

     Where  this  Debenture  authorizes  or requires the payment of money or the
performance  of  a  condition  or obligation on a Saturday or Sunday or a public
holiday,  or authorizes or requires the payment of money or the performance of a
condition or obligation within, before or after a period of time computed from a
certain date, and such period of time ends on a Saturday or a Sunday or a public
holiday,  such  payment  may be made or condition or obligation performed on the
next  succeeding  business day, and if the period ends at a specified hour, such
payment  may  be made or condition performed, at or before the same hour of such
next  succeeding  business  day,  with  the  same force and effect as if made or
performed  in  accordance  with  the  terms of this Debenture.  A "business day"
shall  mean  a day on which the banks in New York are not required or allowed to
be  closed.

Article  10          No  Assignment

     This  Debenture  shall  not  be  assignable.

Article  11          Rules  of  Construction.

     In  this  Debenture,  unless  the  context otherwise requires, words in the
singular  number include the plural, and in the plural include the singular, and
words  of the masculine gender include the feminine and the neuter, and when the
sense  so  indicates,  words  of the neuter gender may refer to any gender.  The
numbers  and  titles  of  sections  contained  in the Debenture are inserted for
convenience  of  reference  only, and they neither form a part of this Debenture
nor are they to be used in the construction or interpretation hereof.  Wherever,
in  this  Debenture, a determination of the Company is required or allowed, such
determination  shall  be  made  by  a  majority of the Board of Directors of the
Company and if it is made in good faith, it shall be conclusive and binding upon
the  Company  and  the  Holder  of  this  Debenture.

Article  12          Governing  Law

      The  validity,  terms, performance and enforcement of this Debenture shall
be  governed  and  construed by the provisions hereof and in accordance with the
laws  of  the  Commonwealth  of  Massachusetts applicable to agreements that are
negotiated,  executed,  delivered  and  performed  solely in the Commonwealth of
Massachusetts.

Article  13          Litigation

DISPUTES  SUBJECT  TO  ARBITRATION  GOVERNED  BY  MASSACHUSETTS  LAW

     All  disputes  arising  under  this  agreement  shall  be  governed  by and
interpreted  in  accordance  with the laws of the Commonwealth of Massachusetts,
without regard to principles of conflict of laws.  The parties to this agreement
will  submit all disputes arising under this agreement to arbitration in Boston,
Massachusetts before a single arbitrator of the American Arbitration Association
("AAA").  The  arbitrator  shall  be selected by application of the rules of the
AAA, or by mutual agreement of the parties, except that such arbitrator shall be
an  attorney  admitted to practice law in the Commonwealth of Massachusetts.  No
party  to  this agreement will challenge the jurisdiction or venue provisions as
provided  in  this  section.

Article  14     Use  of  Proceeds

     The  Company  shall use the entire proceeds from this Debenture exclusively
to  further  the  growth  and interest of the Company. The Company shall not use
these proceeds as payment on any debts.  Any other use of the funds contemplated
herein,  shall  be  considered  a  breach  of  contract and an event of Default.

Article  15       Conditions  to  Closing

     The  Company  shall  sign  the  Investment Agreement for the Equity Line of
Credit  with  Dutchess  Private  Equities  Fund,  II,  L.P.

Article  16     Additional  Financing

     The  Company  shall not, directly nor indirectly, without the prior written
consent  of  Dutchess  Private  Equities  Fund, II, L.P., offer, sell, grant any
option  to purchase, or otherwise dispose of (or announce any offer, sale, grant
or  any  option  to  purchase  or  other disposition) any of its Common Stock or
securities  convertible  into  Common Stock, or file any registration statement,
including  those  on Form S-8, including the Current S-8 filed on March 5, 2004,
file  number  333-113305,  for  any  securities  for  a  period  of  180  (one
hundred-eighty)  days  after  the  Effective  Date.

     IN  WITNESS WHEREOF, the Company has duly executed this Debenture as of the
date  first  written  above.
                         NIGHTHAWK  SYSTEMS,  INC.

                         By: /s/ Douglas Saathoff
                       Name:      Douglas  Saathoff
                      Title:      Chief  Executive  Officer

                              DUTCHESS  PRIVATE  EQUITIES  FUND,  II,  L.P.
                              BY  ITS  GENERAL  PARTNER  DUTCHESS
                              CAPITAL  MANAGEMENT,  LLC

                          By: /s/ Douglas H. Leighton
                          Name:  Douglas  H.  Leighton
                         Title:  A  Managing  Member

 EXHIBIT  C

                                    Exhibit A

                              NOTICE OF CONVERSION

     (To be Executed by the Registered Owner in order to Convert Debenture)

     The  undersigned  hereby  irrevocably  elects,  as  of ________________, to
convert  $________________  of  its convertible debenture (the "Debenture") into
Common  Stock  of  Nighthawk  Systems,  Inc.  (the  "Company")  according to the
conditions  set  forth  in  the  Debenture  issued  by  the  Company.

Date  of  Conversion________________________________________________

Applicable  Conversion  Price________________________________________

Number  of  Debentures  Issuable  upon  this  Conversion_______________________

Name(Print)___________Dutchess  Private  Equities Fund, II, LP _________________

Address______________312  Stuart  St,  3rd  Floor____________________________

Phone_____617-960-3570_____________  Fax________617-960-3772___________

                    By:_______________________________________
                                                     Douglas  Leighton12
NIHK.SUB

                              ____________________

                             Nighthawk Systems, Inc.
                              ____________________

This offering consists of up to $250,000 of the Company's Three Year Convertible
                         Debentures convertible into the
                             Company's Common Stock.

                              ____________________

                             SUBSCRIPTION AGREEMENT

                              ___________________

<PAGE>

                             SUBSCRIPTION PROCEDURES

     Convertible  Debentures  of  Nighthawk,  Systems,  Inc. (the "Company") are
being offered (the "Debentures"). This offering is being made in accordance with
the  exemptions  from  registration  provided  for  under  Section  4(2)  of the
Securities Act of 1933, as amended (the "1933 Act") and Rule 506 of Regulation D
promulgated  under  the  1933  Act.

     In  order to purchase Debentures, each subscriber must complete and execute
a  questionnaire  (the  "Questionnaire")  and  a  subscription  agreement  (the
"Subscription  Agreement").  In  addition,  the  subscriber  must make a payment
pursuant to the Funds Authorization Distribution Agreement, for the amount being
purchased  or  directly  to  the  Purchaser.  All  subscriptions  are subject to
acceptance  by the Company, which shall not occur until the Company has returned
the  signed  Company  Signature  Page.

          The  Questionnaire  is designed to enable the Purchaser to demonstrate
the  minimum  legal  requirements  under  federal  and  state securities laws to
purchase  the  Debentures.  The  Signature  Page  for  the Questionnaire and the
Subscription  Agreement contain representations relating to the subscription and
should  be  reviewed  carefully  by  each  subscriber.

     If  you  are  a  foreign  person or foreign entity, you may be subject to a
withholding  tax equal to 30% of any dividends paid by the Company.  In order to
eliminate  or  reduce  such  withholding tax you must submit a properly executed
I.R.S.  Form  4224  (Exemption  from  Withholding  of  Tax on Income Effectively
Connected  with  the  Conduct  of  a  Trade or Business in the United States) or
I.R.S.  Form  1001  (Ownership Exemption or Reduced Trade Certificate), claiming
exemption  from  withholding or eligibility for treaty benefits in the form of a
lower  rate  of  withholding  tax  on  interest  or  dividends.

     Payment  must  be  made by wire transfer by Dutchess Private Equities Fund,
II, LP (the "Purchaser") per the wire instructions that will be established.  In
the  event  of a termination of the offering or the rejection of a subscription,
subscription  funds will be returned by the Company without interest or charges.

THE  SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
IN  RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS.  THE
SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT
BE  TRANSFERRED  OR  RESOLD  EXCEPT  AS  PERMITTED  UNDER  SUCH LAWS PURSUANT TO
REGISTRATION  OR  AN EXEMPTION THEREFROM.  THE SECURITIES HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE
MERITS  OF  THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING MATERIALS.
ANY  REPRESENTATION  TO  THE  CONTRARY  IS  UNLAWFUL.

                             SUBSCRIPTION AGREEMENT

To:     Nighthawk  Systems,  Inc.

     This  Subscription  Agreement  is  made  between Nighthawk Systems, Inc., a
Nevada  corporation,  (the "Company"), and the undersigned prospective purchaser
("Purchaser") who is subscribing hereby for the Company's convertible debentures
(the "Debentures"). This subscription is submitted to you in accordance with and
subject  to  the  terms and conditions described in this Subscription Agreement,
together  with any Exhibits thereto, relating to an offering (the "Offering") of
up  to  $250,000  of Debentures. The Offering is limited to accredited Investors
and  is  made  in  accordance with the exemptions from registration provided for
under  Section  4(2)  of  the  1933 Act and Rule 506 of Regulation D promulgated
under  the  1933  Act  ("Regulation  D").

1.     SUBSCRIPTION.

     (a)     The  closing shall be deemed to have occurred on the date the funds
(less  attorney  fees and those amounts payable pursuant to the terms sheet) are
received  by the Company (the "Closing Date" or a "Closing").  The Company shall
pay  eight  percent  (8%)  annual  coupon on the unpaid principal amount of this
Debenture  (the  "Debenture")  at  such times and in such amounts as outlined in
this  section.  Prior  to  U.S.  Securities  and  Exchange  Commission  ("SEC")
declaring  the  registration  statement  for  shares  underlying  the  Debenture
("Registration  Statement")  effective ("Effective Date"), the Company will make
mandatory  prepaid payments, in advance, on the coupon ("Coupon Payment") in the
amount  of  1/12th  (one-twelfth)  of the annual payment, per month, pursuant to
each  tranche.  The  Coupon  Payments  shall  start  on  August  15th, 2004, and
include,  on  a pro rata basis, in arrears, any coupon accrued on funds financed
before  August  15th,  2004.  All subsequent Coupon Payments are due on the 15th
(fifteenth)  calendar  day  of  each  month  thereafter.

     For each subsequent Closing, prepaid Coupon Payments will start on the 15th
day  of the month and include, on a pro rata basis, any coupon accrued for funds
financed  before  the  15th of the month, and shall continue for each subsequent
month thereafter.  All Coupon Payments are to be due on the 15th calendar day of
each  month, until the Effective Date.  At such time as the SEC has declared the
Registration  Statement Effective, the coupon is to be paid, at the time of each
conversion  until  the  principal  amount  hereof  is  paid  in full or has been
converted,  in shares of registered common stock, par value $0.001 per share, of
the  Company  ("Common  Stock").  The  interest  paid  in Common Stock, shall be
delivered to the Holder, or per Holder's instructions, within three (3) business
days  of  the  date  of  conversion.  The  Debentures  are  subject to automatic
conversion at the end of three (3) years from the date of issuance at which time
all  Debentures  outstanding  will  be  automatically  converted  based upon the
formula  set  forth  in  Section  3.2  of  the  Debenture  Agreement.

     (b)     Upon  receipt  by  the  Company  of  the  requisite payment for the
Debentures being purchased, the Debentures so purchased will be forwarded by the
Company to the Purchaser or its broker, as listed on the signature page, and the
name of such Purchaser will be registered on the Debenture transfer books of the
Company  as  the  record  owner  of  such  Debentures.

     (c)     As  long  as  the Purchaser owns the Debenture, the Purchaser shall
have  the  right  to  change  the terms for the balance of the Debenture it then
holds,  to  match  the  terms  of  any  other offering of securities made by the
Company.

     (d)  The  Purchasers  shall  fund  $100,000 upon the initial closing and an
additional  $100,000  on a pro-rata basis not later than three (3) business days
following  the  date  the registration statement covering this Offering is filed
with  the  United  States  Securities  and  Exchange  Commission ("SEC"), and an
additional  $50,000  on  a pro rata basis not later than three (3) business days
following the date the registration statement covering this Offering is declared
effective  by  the  SEC along with a letter to request acceleration submitted to
the  SEC.

2.     REPRESENTATIONS  AND  WARRANTIES.

     The  Purchaser  hereby  represents  and  warrants  to, and agrees with, the
Company  as  follows:

     (a)     The  Purchaser  has been furnished with, and has carefully read the
applicable Registration Rights Agreement, and the Debenture and is familiar with
and  understands  the  terms  of  the  Offering.  With  respect to tax and other
economic considerations involved in his investment, the Purchaser is not relying
on  the  Company.  The Purchaser has carefully considered and has, to the extent
the  Purchaser  believes such discussion necessary, discussed with the Purchaser
's professional legal, tax, accounting and financial advisors the suitability of
an investment in the Company, by purchasing the Debentures, for the Purchaser 's
particular  tax  and  financial situation and has determined that the investment
being  made  by  the  Purchaser  is  a  suitable  investment  for the Purchaser.

     (b)     The  Purchaser  acknowledges that all documents, records, and books
pertaining  to  this investment which the Purchaser has requested have been made
available  for  inspection  or  the  Purchaser  has  had  access  thereto.

     (c)     The  Purchaser has had a reasonable opportunity to ask questions of
and  receive  answers  from  a person or persons acting on behalf of the Company
concerning  the  Offering  and if such opportunity was taken, all such questions
have  been  answered  to  the  full  satisfaction  of  the  Purchaser.

     (d)     The Purchaser will not sell, or otherwise dispose of the Debentures
or  the  Common  Stock  issued  upon  conversion  of  the  Debentures  without
registration  under  the  1933  Act  or  applicable  state  securities  laws  or
compliance  with an exemption therefrom including but not limited to: Rule 144A,
144  (k)  (herein after referred to as an "Exemption").  The Debentures have not
been  registered  under  the 1933 Act or under the securities laws of any state.
Resales  of  the  Common Stock underlying the Debentures or issued in payment of
accrued  interest on the Debentures are to be registered by the Company pursuant
to  the  terms of the Registration Rights Agreement attached hereto as Exhibit B
and  incorporated  herein  and  made  a  part  hereof.

     (e)     The  Purchaser  recognizes  that  an  investment  in the Debentures
involves  substantial  risks,  including  loss  of  the  entire  amount  of such
investment.  Further,  the  Purchaser  has  carefully  read  and  considered the
schedule  entitled  Litigation  matters  attached  hereto  as  Schedule  3(h).

     (f)     The  Purchaser  acknowledges that each certificate representing the
Debentures  (and  the  shares  of  Common  Stock  issued  upon conversion of the
Debentures,  unless  registered or with an Exemption) or in payment of dividends
on  the  Debentures  shall  be  stamped  or  otherwise  imprinted  with a legend
substantially  in  the  following  form:

THE  SECURITIES  EVIDENCED  BY  THIS  CERTIFICATE  MAY  NOT  BE OFFERED OR SOLD,
TRANSFERRED,  PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT (i) PURSUANT
TO  AN  EFFECTIVE  REGISTRATION  STATEMENT  UNDER THE SECURITIES ACT OF 1933, AS
AMENDED,  (ii)  TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER THE ACT (OR
ANY  SIMILAR  RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR
(iii)  PURSUANT  TO  AN  AVAILABLE  EXEMPTION  FROM REGISTRATION UNDER SUCH ACT.

     If  Purchaser sends a Notice of Conversion (See Exhibit A attached hereto),
and  provided  a  registration  statement under the Securities Act of 1933 is in
effect  as  to  the sale, then in such event the Company shall have its transfer
agent  send  Purchaser  the appropriate number of shares of Common Stock without
restrictive  legends  and  not  subject  to  stop  transfer  instructions.

     (g)     The Purchaser acknowledges and agrees that it shall not be entitled
to  seek any remedies with respect to the Offering from any party other than the
Company.

     (h)     If  this Subscription Agreement is executed and delivered on behalf
of  a  corporation:  (i) such corporation has the full legal right and power and
all  authority  and  approval  required (a) to execute and deliver, or authorize
execution and delivery of, this Subscription Agreement and all other instruments
(including,  without limitation, the Registration Rights Agreement) executed and
delivered by or on behalf of such corporation in connection with the purchase of
the  Debentures  and  (b)  to  purchase  and  hold  the Debentures; and (ii) the
signature  of  the  party  signing on behalf of such corporation is binding upon
such  corporation.

     (i)     The Purchaser is not subscribing for the Debentures as a result of,
or  pursuant  to,  any  advertisement,  article,  notice  or other communication
published  in  any  newspaper,  magazine  or  similar  media  or  broadcast over
television  or  radio  or  presented  at  any  seminar  or  meeting.

      (j)     The Purchaser is purchasing the Debentures for its own account for
investment,  and  not  with  a  view  toward the resale or distribution thereof,
except pursuant to sales registered or exempted from registration under the 1933
Act.  The  Purchaser has not offered or sold any portion of the Debentures being
acquired  nor  does  the  Purchaser  have  any present intention of dividing the
Debentures with others or of selling, distributing or otherwise disposing of any
portion  of  the  Debentures either currently or after the passage of a fixed or
determinable  period  of  time  or  upon the occurrence or non-occurrence of any
predetermined  event  or  circumstance  in  violation  of the 1933 Act provided,
however,  that by making the representations herein, Purchaser does not agree to
hold  any  of the Debentures for any minimum or other specific term and reserves
the  right  to  dispose  of  the  Debentures  at  any time in accordance with or
pursuant  to  a  registration  statement  or  an  exemption  under the 1933 Act.
Purchaser  is  neither an underwriter of, nor a dealer in, the Debentures or the
Common  Stock  issuable upon conversion thereof or upon the payment of dividends
thereon and is not participating in the distribution or resale of the Debentures
or  the  Common  Stock  issuable  upon conversion or exercise thereof. Except as
provided  in the Registration Rights Agreement, the Company has no obligation to
register the Common Stock underlying Debentures and the Common Stock that may be
issued  in  lieu  of  cash  dividends.

     (k)     The  Purchaser  or the Purchaser's representatives, as the case may
be,  has such knowledge and experience in financial, tax and business matters so
as  to  enable  the  Purchaser  to utilize the information made available to the
Purchaser in connection with the Offering to evaluate the merits and risks of an
investment  in  the  Debentures and to make an informed investment decision with
respect  thereto.

3.     REPRESENTATIONS  AND  WARRANTIES  OF  THE  COMPANY.

     Except  as  set  forth  in  the  Schedules  attached  hereto,  the  Company
represents  and  warrants  to  the  Purchaser  that:

     a.     Organization  and Qualification.  The Company and its "SUBSIDIARIES"
(which for purposes of this Subscription Agreement means any entity in which the
Company,  directly  or  indirectly,  owns  capital  stock  or holds an equity or
similar  interest)  (a complete list of which is set forth in Schedule 3(a)) are
corporations duly organized and validly existing in good standing under the laws
of  the  respective jurisdictions of their incorporation, and have the requisite
corporate  power and authorization to own their properties and to carry on their
business  as  now  being  conducted. Each of the Company and its Subsidiaries is
duly  qualified  as a foreign corporation to do business and is in good standing
in  every  jurisdiction  in which its ownership of property or the nature of the
business  conducted  by  it  makes  such  qualification necessary, except to the
extent that the failure to be so qualified or be in good standing would not have
a  Material  Adverse  Effect.  As used in this Subscription Agreement, "MATERIAL
ADVERSE  EFFECT"  means any material adverse effect on the business, properties,
assets,  operations,  results of operations, financial condition or prospects of
the  Company  and  its  Subsidiaries,  if  any,  taken  as  a  whole,  or on the
transactions  contemplated  hereby  or  by  the agreements and instruments to be
entered  into  in  connection  herewith,  or  on the authority or ability of the
Company  to  perform its obligations under the Transaction Documents (as defined
in  Section  3(b)below).

     b.     Authorization;  Enforcement; Compliance with Other Instruments.  (i)
The  Company  has  the requisite corporate power and authority to enter into and
perform  this  Subscription Agreement, the Registration Rights Agreement and the
Form  of  Debenture  Agreement, and each of the other agreements entered into by
the  parties  hereto  in  connection  with the transactions contemplated by this
Subscription Agreement (collectively, the "TRANSACTION DOCUMENTS"), and to issue
the  Debentures  in  accordance  with  the  terms  hereof  and thereof, (ii) the
execution  and  delivery  of  the  Transaction  Documents by the Company and the
consummation  by  it  of  the  transactions  contemplated  hereby  and  thereby,
including  without  limitation  the reservation for issuance and the issuance of
the  Debentures  pursuant  to  this  Subscription  Agreement, have been duly and
validly authorized by the Company's Board of Directors and no further consent or
authorization  is  required  by  the  Company,  its  Board  of Directors, or its
shareholders,  (iii)  the  Transaction  Documents  have  been  duly  and validly
executed  and  delivered  by  the  Company,  and  (iv) the Transaction Documents
constitute  the valid and binding obligations of the Company enforceable against
the Company in accordance with their terms, except as such enforceability may be
limited  by  general  principles of equity or applicable bankruptcy, insolvency,
reorganization,  moratorium,  liquidation  or  similar  laws  relating  to,  or
affecting  generally,  the  enforcement  of  creditors'  rights  and  remedies.

     c.     Capitalization.  As of the date hereof, the authorized capital stock
of  the  Company  consists  of  50,000,000 shares of Common Stock authorized, of
which  as  of  the  date  hereof, approximately 25,659,235 shares are issued and
outstanding,  5,000,000  shares of Preferred Stock of which 3,000 are issued and
outstanding  and approximately (as of March 31, 2004) 5,022,874 shares of Common
Stock are issuable upon the exercise of options, warrants and conversion rights.
All  of  such  outstanding  shares  have been, or upon issuance will be, validly
issued  and  are  fully paid and nonassessable.  Except as disclosed in Schedule
3(c)  which  is  attached  hereto  and  made a part hereof, (i) no shares of the
Company's  capital  stock  are subject to preemptive rights or any other similar
rights  or  any liens or encumbrances suffered or permitted by the Company, (ii)
there  are no outstanding debt securities, (iii) there are no outstanding shares
of  capital  stock,  options,  warrants, scrip, rights to subscribe to, calls or
commitments  of  any  character  whatsoever relating to, or securities or rights
convertible  into,  any  shares  of  capital  stock of the Company or any of its
Subsidiaries, or contracts, commitments, understandings 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 or
options,  warrants,  scrip,  rights to subscribe to, calls or commitments of any
character  whatsoever relating to, or securities or rights convertible into, any
shares  of  capital  stock of the Company or any of its Subsidiaries, (iv) there
are  no  agreements  or  arrangements  under  which  the  Company  or any of its
Subsidiaries  is obligated to register the sale of any of their securities under
the  1933  Act  (except  the  Registration  Rights  Agreement), (v) there are no
outstanding  securities  of the Company or any of its Subsidiaries which contain
any  redemption  or similar provisions, and there are no contracts, commitments,
understandings  or  arrangements by which the Company or any of its Subsidiaries
is  or  may  become  bound  to  redeem  a  security of the Company or any of its
Subsidiaries,  (vi)  there  are  no  securities  or  instruments  containing
anti-dilution  or  similar  provisions that will be triggered by the issuance of
the  Securities  as  described in this Subscription Agreement, (vii) the Company
does  not  have  any  stock  appreciation  rights  or  "phantom  stock" plans or
agreements or any similar plan or agreement and (viii) there is no dispute as to
the  class  of  any  shares  of  the  Company's  capital  stock. The Company has
furnished  to  the  Purchaser, or the Purchaser has had access through EDGAR to,
true and correct copies of the Company's Articles of Incorporation, as in effect
on the date hereof (the "ARTICLES OF INCORPORATION"), and 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 and the material
rights  of  the  Purchaser  thereof  in  respect  thereto.

     d.     Issuance  of  Debentures.     A  sufficient  number  of  Debentures
issuable  pursuant  to  this Subscription Agreement, but not more than 19.99% of
the  shares  of  Common  Stock outstanding as of the date hereof (if the Company
becomes  listed  on  Nasdaq  or  the  American  Stock  Exchange),  has been duly
authorized  and  reserved  for issuance pursuant to this Subscription Agreement.
Upon  issuance  in  accordance  with this Subscription Agreement, the Debentures
will  be  validly  issued, fully paid and nonassessable and free from all taxes,
liens  and  charges  with respect to the issue thereof. In the event the Company
cannot  register  a  sufficient  number  of  shares  of Common Stock, due to the
remaining  number  of  authorized shares of Common Stock being insufficient, the
Company  will  use  its best efforts to register the maximum number of shares it
can  based  on  the remaining balance of authorized shares and will use its best
efforts  to  increase  the number of its authorized shares as soon as reasonably
practicable.

     e.     No  Conflicts.  The  execution,  delivery  and  performance  of  the
Transaction  Documents by the Company and the consummation by the Company of the
transactions  contemplated hereby and thereby will not (i) result in a violation
of  the  Articles of Incorporation, any Certificate of Designations, Preferences
and  Rights  of  any outstanding series of preferred stock of the Company or the
By-laws  or  (ii)  conflict  with, or constitute a material default (or an event
which  with  notice  or  lapse  of time or both would become a material default)
under,  or  give to others any rights of termination, amendment, acceleration or
cancellation  of,  any  material  agreement,  contract,  indenture  mortgage,
indebtedness  or instrument to which the Company or any of its Subsidiaries is a
party, or result in a violation of any law, rule, regulation, order, judgment or
decree,  including  United  States  federal  and  state  securities  laws  and
regulations  and  the rules and regulations of the principal securities exchange
or  trading market on which the Common Stock is traded or listed (the "Principal
Market"),  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  as  disclosed  in  Schedule 3(e), neither the Company nor its
Subsidiaries  is  in violation of any term of, or in default under, the Articles
of Incorporation, any Certificate of Designations, Preferences and Rights of any
outstanding  series  of  preferred  stock of the Company or the By-laws or their
organizational  charter  or  by-laws,  respectively, or any contract, agreement,
mortgage,  indebtedness, indenture, instrument, judgment, decree or order or any
statute,  rule  or  regulation  applicable  to  the Company or its Subsidiaries,
except  for  possible  conflicts,  defaults,  terminations,  amendments,
accelerations,  cancellations  and  violations that would not individually or in
the  aggregate  have  a Material Adverse Effect. The business of the Company and
its  Subsidiaries  is  not  being  conducted,  and  shall  not  be conducted, in
violation  of  any  law,  statute,  ordinance,  rule, order or regulation of any
governmental  authority  or  agency,  regulatory  or  self-regulatory agency, or
court,  except  for  possible  violations  the  sanctions  for  which  either
individually  or  in  the  aggregate  would  not have a Material Adverse Effect.
Except  as  specifically  contemplated  by  this  Subscription  Agreement and as
required  under the 1933 Act, the Company is not required to obtain any consent,
authorization,  permit  or  order of, or make any filing or registration (except
the filing of a registration statement)  with, any court, governmental authority
or  agency,  regulatory  or self-regulatory agency or other third party in order
for  it  to  execute,  deliver  or  perform  any  of  its  obligations under, or
contemplated  by,  the Transaction Documents in accordance with the terms hereof
or  thereof.  All  consents,  authorizations,  permits,  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 and are
in  full force and effect as of the date hereof. Except as disclosed in Schedule
3(e), the Company and its Subsidiaries are unaware of any facts or circumstances
which  might give rise to any of the foregoing. The Company is not, and will not
be,  in  violation  of  the  listing  requirements of the Principal Market as in
effect  on  the date hereof and on each of the Closing Dates and is not aware of
any  facts  which  would reasonably lead to delisting of the Common Stock by the
Principal  Market  in  the  foreseeable  future.

     f.     SEC  Documents;  Financial  Statements.  As  of  August 2, 2004, the
Company  has filed all reports, schedules, forms, statements and other documents
required  to  be filed by it with the Securities and Exchange Commission ("SEC")
pursuant  to  the  reporting  requirements of the Securities and Exchange Act of
1934  ("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 incorporated by reference therein being hereinafter referred to as the
"SEC  DOCUMENTS").  The  Company  has  delivered  to  the  Purchaser  or  its
representatives,  or  they  have  had access through EDGAR, to true and complete
copies  of  the  SEC  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 to make the statements
therein,  in  light  of  the  circumstances  under  which  they  were  made, not
misleading.  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  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 exclude
footnotes  or  may be condensed or summary statements) and fairly present in all
material  respects the financial position of the Company as of the dates thereof
and  the  results  of  its  operations and cash flows for the periods then ended
(subject,  in  the  case  of  unaudited  statements,  to  normal  year-end audit
adjustments).  No  other  written  information  provided  by or on behalf of the
Company  to the Purchaser which is not included in the SEC Documents, including,
without limitation, information referred to in Section 3(d) of this Subscription
Agreement,  contains  any  untrue statement of a material fact or omits to state
any  material fact necessary to make the statements therein, in the light of the
circumstance  under  which  they  are  or  were  made,  not  misleading.

     g.     Absence of Certain Changes.  Except as disclosed in Schedule 3(g) or
the  SEC  Documents filed at least five (5) days prior to the date hereof, since
August  2,  2004,  there  has  been  no  change  or development in the business,
properties,  assets,  operations,  financial condition, results of operations or
prospects  of  the Company or its Subsidiaries which has had or reasonably could
have  a  Material  Adverse Effect. The Company has not taken any steps, and does
not  currently  expect  to  take  any  steps, to seek protection pursuant to any
bankruptcy  law  nor  does the Company or its Subsidiaries have any knowledge or
reason  to  believe that its creditors intend to initiate involuntary bankruptcy
proceedings.

     h.     Absence  of  Litigation.  Except  as  set forth in the Company's SEC
filings,  there  is no action, suit, 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 executive officers of Company or any
of  its  Subsidiaries,  threatened  against or affecting the Company, the Common
Stock  or  any  of  the  Company's  Subsidiaries  or any of the Company's or the
Company's  Subsidiaries'  officers  or directors in their capacities as such, in
which  an  adverse  decision  could  have  a  Material  Adverse  Effect.

     i.     Acknowledgment  Regarding  the  Purchase of Debentures.  The Company
acknowledges  and  agrees that the Purchaser is acting solely in the capacity of
an  arm's  length  investor  with  respect  to the Transaction Documents and the
transactions  contemplated  hereby and thereby. The Company further acknowledges
that  the  Purchaser  is  not  acting as a financial advisor or fiduciary of the
Company  (or  in any similar capacity) with respect to the Transaction Documents
and the transactions contemplated hereby and thereby and any advice given by the
Purchaser  or any of its respective representatives or agents in connection with
the  Transaction  Documents and the transactions contemplated hereby and thereby
is  merely incidental to the Purchaser's purchase of the Debentures. The Company
further  represents  to  the Purchaser that the Company's decision to enter into
the Transaction Documents has been based solely on the independent evaluation by
the  Company  and  its  representatives.

     j.     Intentionally  omitted.

     k.     Employee Relations.  Neither the Company nor any of its Subsidiaries
is  involved  in any union labor dispute nor, to the knowledge of the Company or
any of its Subsidiaries, is any such dispute threatened. Neither the Company nor
any of its Subsidiaries is a party to a collective bargaining agreement, and the
Company  and  its  Subsidiaries  believe that relations with their employees are
good.  No  executive  officer  (as  defined  in Rule 501(f) of the 1933 Act) has
notified  the Company that such officer intends to leave the Company's employ or
otherwise  terminate  such  officer's  employment  with  the  Company.

     l.     Intellectual  Property  Rights.  All  patents,  patent applications,
trademark  registrations and applications for trademark registration held by the
Company  are  owned  free  and  clear  of  all  mortgages,  liens,  charges  or
encumbrances  whatsoever.  No  licenses  have been granted with respect to these
items  and  the  Company  and  its Subsidiaries do not have any knowledge of any
infringement by the Company or its Subsidiaries of trademark, trade name rights,
patents, patent rights, copyrights, inventions, licenses, service names, service
marks,  service  mark  registrations,  trade  secret  or other similar rights of
others,  and, except as set forth on Schedule 3(l), there is no claim, action or
proceeding  being  made or brought against, or to the Company's knowledge, being
threatened  against,  the Company or its Subsidiaries regarding trademark, trade
name,  patents,  patent  rights,  invention,  copyright, license, service names,
service  marks,  service mark registrations, trade secret or other infringement;
and  the  Company and its Subsidiaries are unaware of any facts or circumstances
which  might give rise to any of the foregoing. The Company and its Subsidiaries
have  taken reasonable security measures to protect the secrecy, confidentiality
and  value  of  all  of  their  intellectual  properties.

     m.     Environmental  Laws.  The  Company  and  its Subsidiaries (i) are in
compliance  with  any  and all applicable foreign, federal, state and local laws
and  regulations  relating  to  the  protection  of human health and safety, the
environment  or  hazardous  or  toxic  substances  or  wastes,  pollutants  or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or
other  approvals required of them under applicable Environmental Laws to conduct
their  respective  businesses  and  (iii)  are  in compliance with all terms and
conditions  of  any such permit, license or approval where, in each of the three
foregoing  cases,  the  failure  to so comply would have, individually or in the
aggregate,  a  Material  Adverse  Effect.

     n.     Title.  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(n)  or such as do not
materially  affect  the value of such property and do not interfere with the use
made  and  proposed  to  be  made  of such property by the Company or any of its
Subsidiaries.  Any  real property and facilities held under lease by the Company
or  any  of  its  Subsidiaries  are  held  by  them  under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with  the use made and proposed to be made of such property and buildings by the
Company  and  its  Subsidiaries.

     o.     Insurance.  The  Company  does  not  currently  have  insurance.

     p.     Regulatory  Permits.  The  Company and its Subsidiaries have in full
force  and  effect  all certificates, approvals, authorizations and permits from
the  appropriate  federal,  state,  local  or foreign regulatory authorities and
comparable foreign regulatory agencies, necessary to own, lease or operate their
respective  properties  and  assets and conduct their respective businesses, and
neither  the  Company  nor  any  such  Subsidiary  has  received  any  notice of
proceedings  relating to the revocation or modification of any such certificate,
approval,  authorization  or  permit,  except  for such certificates, approvals,
authorizations  or  permits  which  if  not  obtained,  or  such  revocations or
modifications  which,  would  not  have  a  Material  Adverse  Effect.

     q.     Internal  Accounting  Controls.  The  Company  and  each  of  its
Subsidiaries  maintain  a  system  of internal accounting controls sufficient to
provide  reasonable  assurance  that (i) transactions are executed in accordance
with  management's  general  or  specific  authorizations, (ii) transactions are
recorded  as  necessary  to  permit  preparation  of  financial  statements  in
conformity  with  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.

     r.     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.

     s.     Tax  Status.  The  Company's  consolidated  2002  federal income tax
return,  the  Company  and each of its Subsidiaries has made or filed all United
States  federal  and  state  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 provision reasonably adequate for the payment of
all  taxes  for periods subsequent to the periods to which such returns, reports
or declarations apply. Except for unpaid federal withholding taxes, 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.

     t.     Certain  Transactions.  Except  as set forth on Schedule 3(t) and in
the  SEC  Documents  filed at least ten days prior to the date hereof and except
for  arm's  length  transactions pursuant to which the Company makes payments in
the  ordinary  course  of business upon terms no less favorable than the Company
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.

     u.     Dilutive  Effect.  The Company understands and acknowledges that the
number  of  shares  of  Common  Stock  issuable  upon purchases pursuant to this
Subscription Agreement will increase in certain circumstances including, but not
necessarily limited to, the circumstance wherein the trading price of the Common
Stock  declines  following  the  effective  date  of  the registration statement
covering the Common Stock underlying the Debentures (the "Effective Date").  The
Company's executive officers and directors have studied and fully understand the
nature  of  the  transactions  contemplated  by  this Subscription Agreement and
recognize that they have 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, subject to such limitations as are expressly set forth in the
Transaction  Documents,  its  obligation  to  issue  shares of Common Stock upon
purchases  pursuant to this Subscription Agreement is absolute and unconditional
regardless  of  the dilutive effect that such issuance may have on the ownership
interests  of  other  shareholders  of  the  Company.

     v.   Additional Financings. The Company shall not, directly nor indirectly,
without  the  prior written consent of Dutchess Private Equities Fund, II, L.P.,
offer,  sell, grant any option to purchase, or otherwise dispose of (or announce
any  offer,  sale,  grant or any option to purchase or other disposition) any of
its  Common  Stock  or  securities  convertible  into  Common Stock, or file any
registration  statement,  including those on Form S-8, including the Current S-8
filed  on  March  5,  2004,  file  number  333-113305,  for  any  securities  (a
"SUBSEQUENT  FINANCING") for a period of 180 (one hundred-eighty) days after the
Effective  Date.

4.     COVENANTS  OF  THE  COMPANY

     a.     Best  Efforts.  The  Company  shall  use  its best efforts timely to
satisfy  each  of  the  conditions  to  be  satisfied  by it as provided in this
Subscription  Agreement.

     b.     Blue Sky.  The Company shall, at its sole cost and expense, make all
filings  and  reports  relating  to the offer and sale of the Debentures and the
Common  Stock  underlying  the  Debentures  as  required  under  the  applicable
securities  or  "Blue Sky" laws of such states of the United States as specified
by  the  Purchaser.

     c.     Reporting  Status.  Until  the  earlier  of  (i)  the  date that the
Purchaser  may  sell  all  of  the  Common  Stock underlying the shares acquired
pursuant  to  this  Subscription  Agreement without restriction pursuant to Rule
144(k)  promulgated  under the 1933 Act (or successor thereto), or (ii) the date
on  which  the  Purchaser  shall  have  sold all the Common Stock underlying the
Debentures, the Company shall file all reports required to be filed with the SEC
pursuant  to  the  1934 Act, and the Company shall not terminate its status as a
reporting  company  under  the  1934  Act.

     d.     Use  of Proceeds.     The Company shall use the entire proceeds from
this  Debenture  exclusively  to further the growth and interest of the Company.
The Company shall not use these proceeds as payment on any debts.  Any other use
of  the  funds contemplated herein, shall be considered a breach of contract and
an  event  of  Default.

     e.     Conditions  to  Closing,  The  Company  shall  sign  the  Investment
Agreement for the Equity Line of Credit with Dutchess Private Equities Fund, II,
L.P.

     f.     Financial  Information.  The Company agrees to make available to the
Purchaser via EDGAR or other electronic means the following: (i) within five (5)
business  days  after  the  filing  thereof  with  the SEC, a copy of its Annual
Reports  on  Form  10-KSB,  its  Quarterly  Reports  on Form 10-QSB, any Current
Reports on Form 8-K and any Registration Statements or amendments filed pursuant
to  the  1933 Act; (ii) on the same day as the release thereof, facsimile copies
of  all  press  releases issued by the Company or any of its Subsidiaries, (iii)
copies  of  any  notices  and  other  information made available or given to the
shareholders  of  the  Company  generally,  contemporaneously  with  the  making
available or giving thereof to the shareholders and (iv) within two (2) calendar
days  of filing or delivery thereof, copies of all documents filed with, and all
correspondence sent to, the Principal Market, any securities exchange or market,
or  the  National  Association  of  Securities  Dealers,  Inc.

     g.     Reservation of Common Stock.  Subject to the following sentence, the
Company  shall  take  all  action necessary 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 issuance of the Common Stock underlying the Debentures.
In  the  event  that  the  Company determines that it does not have a sufficient
number  of  authorized  shares of Common Stock to reserve and keep available for
issuance,  the  Company  shall  use  its  best efforts to increase the number of
authorized  shares  of  Common  Stock  by  seeking  shareholder approval for the
authorization  of  such additional shares. The Purchaser shall have the right to
determine  the  amount of shares to be re-registered to satisfy the terms of the
Agreement.  Such  amount  must  be  usual  or  customary.

     h.     Listing.  The  Company  shall  promptly secure the listing of all of
the  Common  Stock  underlying the Debentures upon the Principal Market and each
other  national securities exchange and automated quotation system, if any, upon
which  shares  of  Common  Stock  are then listed (subject to official notice of
issuance)  and  shall  maintain,  such  listing.  The Company shall maintain the
Common  Stock's  authorization for quotation on the Principal Market, unless the
Purchaser  and  the  Company agree otherwise, and the Company shall use its best
efforts  to  promptly  make  application  for  listing on the new Bulletin Board
Exchange  not  later  than  ninety (90) calendar days after the date the Company
receives  its  application  in  the  mail.  Neither  the  Company nor any of its
Subsidiaries  shall take any action which would be reasonably expected to result
in  the  delisting  or  suspension  of  the Common Stock on the Principal Market
(excluding  suspensions of not more than one trading day resulting from business
announcements  by  the  Company).  The  Company  shall  promptly  provide to the
Purchaser  copies of any notices it receives from the Principal Market regarding
the  continued  eligibility  of  the  Common Stock for listing on such automated
quotation  system  or  securities  exchange.  The Company shall pay all fees and
expenses  in  connection  with  satisfying  its  obligations under this Section.

     i.     Transactions  With  Affiliates.  Without  the  prior  consent  of
Purchaser,  which  consent shall not be unreasonably withheld, the Company shall
not,  and shall cause each of its Subsidiaries not to, enter into, amend, modify
or  supplement,  or  permit  any  Subsidiary  to  enter  into,  amend, modify or
supplement,  any  agreement,  transaction, commitment or arrangement with any of
its  or  any  Subsidiary's  officers,  directors,  persons  who were officers or
directors  at  any  time  during  the  previous  two  years,  shareholders  who
beneficially  own  5%  or  more  of  the Common Stock, or affiliates or with any
individual related by blood, marriage or adoption to any such individual or with
any  entity  in which any such entity or individual owns a 5% or more beneficial
interest  (each  a  "RELATED  PARTY"),  except  for  (i)  customary  employment
arrangements  and  benefit  programs  on  reasonable terms , (ii) any agreement,
transaction,  commitment or arrangement on an arms-length basis on terms no less
favorable  than  terms which would have been obtainable from a person other than
such  Related  Party,  or  (iii)  any  agreement,  transaction,  commitment  or
arrangement  which  is  approved by a majority of the disinterested directors of
the  Company.  For  purposes  hereof, any director who is also an officer of the
Company  or  any Subsidiary of the Company shall not be a disinterested director
with  respect  to  any  such  agreement, transaction, commitment or arrangement.
"AFFILIATE"  for  purposes  hereof  means, with respect to any person or entity,
another  person  or  entity  that,  directly or indirectly, (i) has a 5% or more
equity  interest  in that person or entity, (ii) has 5% or more common ownership
with that person or entity, (iii) Controls that person or entity, or (iv) shares
common control with that person or entity.  "CONTROL" or "CONTROLS" for purposes
hereof  means  that  a  person  or  entity has the power, direct or indirect, to
conduct  or  govern  the  policies  of  another  person  or  entity.

     j.     Corporate  Existence.  The  Company  shall  use  its best efforts to
preserve  and  continue  the  corporate  existence  of  the  Company.

     k.     Notice  of Certain Events Affecting Registration.  The Company shall
promptly  notify Purchaser upon the occurrence of any of the following events in
respect  of  a  registration statement or related prospectus covering the Common
Stock  underlying  the  Debentures:  (i)  receipt  of any request for additional
information  by  the  SEC  or  any other federal or state governmental authority
during  the period of effectiveness of the registration statement for amendments
or  supplements  to  the  registration statement or related prospectus; (ii) the
issuance  by the SEC or any other federal or state governmental authority of any
stop  order  suspending  the  effectiveness of any registration statement or the
initiation  of  any  proceedings  for  that  purpose;  (iii)  receipt  of  any
notification  with  respect  to the suspension of the qualification or exemption
from qualification of any of the Common Stock underlying the Debentures for sale
in  any jurisdiction or the initiation or threatening of any proceeding for such
purpose;  (iv)  the happening of any event that makes any statement made in such
registration  statement  or  related  prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that  requires  the making of any changes in the registration statement, related
prospectus  or  documents  so  that, in the case of a registration statement, 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  not misleading, and that in the case of the related prospectus, 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  the  light  of  the  circumstances under which they were made, not
misleading; and (v) the Company's reasonable determination that a post-effective
amendment  to  the  registration statement would be appropriate, and the Company
shall  promptly  make available to Purchaser any such supplement or amendment to
the  related  prospectus.

     l.  Indemnification.  In  consideration  of  the  Purchaser's execution and
delivery  of  this Agreement and the Registration Rights Agreement and acquiring
the  Debentures  hereunder  and  in  addition  to  all  of  the  Company's other
obligations  under the Transaction Documents, the Company shall defend, protect,
indemnify  and  hold  harmless  the  Purchaser  and  all  of their shareholders,
officers,  directors,  employees and direct or indirect investors and any of the
foregoing  person's  agents  or  other  representatives  (including,  without
limitation,  those  retained in connection with the transactions contemplated by
this  Agreement)  (collectively, the "Indemnitees") from and against any and all
actions,  causes  of  action,  suits,  claims,  losses,  costs, penalties, fees,
liabilities  and  damages, and expenses in connection therewith (irrespective of
whether  any  such Indemnitee is a party to the action for which indemnification
hereunder is sought), and including reasonable attorneys' fees and disbursements
(the  "Indemnified  Liabilities"), incurred by any Indemnitee as a result of, or
arising  out  of,  or  relating  to  (i)  any misrepresentation or breach of any
representation  or  warranty made by the Company in the Transaction Documents or
any  other  certificate,  instrument or document contemplated hereby or thereby,
(ii)  any  breach  of  any  covenant,  agreement  or  obligation  of the Company
contained  in  the Transaction Documents or any other certificate, instrument or
document  contemplated  hereby  or  thereby,  (iii) any cause of action, suit or
claim  brought  or made against such Indemnitee by a third party and arising out
of  or resulting from the execution, delivery, performance or enforcement of the
Transaction  Documents  or  any  other  certificate,  instrument  or  document
contemplated  hereby or thereby, (iv) any transaction financed or to be financed
in  whole  or in part, directly or indirectly, with the proceeds of the issuance
of  the  Debentures  or  (v)  the  status of the Purchaser as an investor in the
Company,  except insofar as any such untrue statement, alleged untrue statement,
omission  or  alleged  omission  is made in reliance upon and in conformity with
written  information  furnished  to  the  Company  by  the  Purchaser  which  is
specifically  intended  by  the Purchaser for use in the preparation of any such
Registration Statement, preliminary prospectus or prospectus. To the extent that
the  foregoing  undertaking  by the Company may be unenforceable for any reason,
the  Company shall make the maximum contribution to the payment and satisfaction
of  each  of  the  Indemnified Liabilities which is permissible under applicable
law. The indemnity provisions contained herein shall be in addition to any cause
of action or similar rights the Purchaser may have, and any liabilities to which
the  Purchaser  may  be  subject.

     m.     Reimbursement.  If  (i) Purchaser, 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 Documents, or if Purchaser is impleaded in any
such action, proceeding or investigation by any person, or (ii) Purchaser, 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 Documents, or if Purchaser is impleaded in any
such  action,  proceeding or investigation by any person, then in any such case,
the Company will reimburse Purchaser 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  Purchaser  is a named party, the Company will pay to
Purchaser  the  charges,  as reasonably determined by Purchaser, for the time of
any  officers  or  employees  of Purchaser 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 Subscription 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 Purchaser that are actually named
in  such  action,  proceeding or investigation, and partners, directors, agents,
employees, attorneys, accountants, auditors and controlling persons (if any), as
the  case may be, of Purchaser and any such affiliate, and shall be binding upon
and  inure  to  the  benefit of any successors of the Company, Purchaser and any
such  affiliate  and  any  such  person.

5.     OPINION  LETTER/BOARD  RESOLUTION

     Prior  to or on the Closing Date the Company shall deliver to the Purchaser
an  opinion letter signed by counsel for the Company in the form attached hereto
as  Exhibit  D.  If  the  Company's  counsel fails to provide a Rule 144 opinion
letter  in  a  timely  manner,  then  the  Company shall: (a) pay the Investor's
counsel  to  write said Rule 144 opinion letter; and (b) instruct the designated
transfer agent to accept same Rule 144 Opinion letter.  Also, prior to or on the
Closing  Date  the  Company  shall  deliver  to  the  Purchaser  a  signed Board
Resolution  authorizing this Offering, which shall be attached hereto as Exhibit
E.

6.     DELIVERY  INSTRUCTIONS;  FEES

     The  Debentures  being  purchased  hereunder shall be delivered to Dutchess
Private  Equities  Fund, L.P., II, on the Closing Date at which time funds (less
fees  and  those amount payable pursuant to the Funds Authorization Distribution
Agreement)  will be wired to the Company and the Debentures will be delivered to
the  Purchaser,  per  the  Purchaser's  instructions.

7.     UNDERSTANDINGS.

     The  undersigned  understands,  acknowledges and agrees with the Company as
follows:

FOR  ALL  SUBSCRIBERS:

     a.     This  Subscription  may  be  rejected,  in  whole or in part, by the
Company  in its sole and absolute discretion at any time before the date set for
closing  unless  the Company has given notice of acceptance of the undersigned's
subscription  by  signing  this  Subscription  Agreement  and  delivering  it to
Purchaser.

     b.     No  U.S.  federal  or  state  agency  or  any  agency  of  any other
jurisdiction  has  made  any  finding or determination as to the fairness of the
terms  of  the  Offering for investment nor any recommendation or endorsement of
the  Debentures  or  the  Company.

     c.     The  representations,  warranties  and agreements of the undersigned
and  the  Company  contained  herein  shall  be true and correct in all material
respects  on  and as of the date of the sale of the Debentures as if made on and
as  of  such  date  and  shall  survive  the  execution  and  delivery  of  this
Subscription  Agreement  and  the  purchase  of  the  Debentures.

     d.     In  making an investment decision, purchasers must rely on their own
examination  of  the company and the terms of the offering, including the merits
and  risks  involved.  The  shares  have  not been recommended by any federal or
state securities commission or regulatory authority.  Furthermore, the foregoing
authorities  have  not confirmed the accuracy or determined the adequacy of this
document.  Any  representation  to  the  contrary  is  a  criminal  offense.

     e.     The Offering is intended to be exempt from registration by virtue of
Section  4(2)  of  the  1933  Act and the provisions of Regulation D thereunder,
which  is  in  part  dependent  upon the truth, completeness and accuracy of the
statements  made  by  the  undersigned  herein  and  in  the  Questionnaire.

     f.     It  is  understood  that  in  order not to jeopardize the Offering's
exempt status under Section 4(2) of the 1933 Act and Regulation D, any purchaser
may,  at a minimum, be required to fulfill the investor suitability requirements
thereunder.

     g.     The  shares  may  not  be  resold  except  as  permitted  under  the
securities act and applicable state securities laws, pursuant to registration or
exemption  therefrom.  Purchasers  should be aware that they will be required to
bear  the  financial  risks of this investment for an indefinite period of time.

8.     DISPUTES  SUBJECT  TO  ARBITRATION  GOVERNED  BY  MASSACHUSETTS  LAW

     a.     All  disputes  arising under this agreement shall be governed by and
interpreted  in  accordance  with the laws of the Commonwealth of Massachusetts,
without regard to principles of conflict of laws.  The parties to this agreement
will  submit all disputes arising under this agreement to arbitration in Boston,
Massachusetts before a single arbitrator of the American Arbitration Association
("AAA").  The  arbitrator  shall  be selected by application of the rules of the
AAA, or by mutual agreement of the parties, except that such arbitrator shall be
an  attorney  admitted to practice law in the Commonwealth of Massachusetts.  No
party  to  this agreement will challenge the jurisdiction or venue provisions as
provided  in  this  section.

9.     MISCELLANEOUS.

     a.     Any  notices,  consents, waivers or other communications required or
permitted  to be given under the terms of this Subscription Agreement must be in
writing  and  will  be  deemed  to  have  been  delivered (i) upon receipt, when
delivered  personally;  (ii)  upon  receipt,  when sent by facsimile (provided a
confirmation  of  transmission  is  mechanically or electronically generated and
kept  on  file  by the sending party); or (iii) one (1) day after deposit with a
nationally  recognized  overnight  delivery  service,  in  each  case  properly
addressed to the party to receive the same.  The addresses and facsimile numbers
for  such  communications  shall  be:

If  to  the  Company:

     Douglas  Saathoff
     Chief  Executive  Officer
     Nighthawk  Systems,  Inc.
     10715  Gulfdale,  Suite  200
     San  Antonio,  Texas  78216
     Telephone:  210-341-4811
     Facsimile:  210-341-2011

If  to  the  Purchaser:

     At  the  address  listed  in  the  Questionnaire.

     Each  party  shall provide five (5) business days prior notice to the other
party  of  any  change  in  address,  phone  number  or  facsimile  number.

     b.     All  pronouns and any variations thereof used herein shall be deemed
to  refer  to  the  masculine,  feminine, impersonal, singular or plural, as the
identity  of  the  person  or  persons  may  require.

     c.     Neither  this  Subscription Agreement nor any provision hereof shall
be  waived,  modified,  changed,  discharged,  terminated,  revoked or canceled,
except  by  an  instrument  in  writing  signed  by the party effecting the same
against  whom  any  change,  discharge  or  termination  is  sought.

     d.     Notices  required  or  permitted  to  be given hereunder shall be in
writing  and  shall be deemed to be sufficiently given when personally delivered
or  sent  by  facsimile  transmission:  (i) if to the Company, at it's executive
offices or (ii) if to the Purchaser, at the address for correspondence set forth
in  the  Questionnaire,  or  at such other address as may have been specified by
written  notice  given  in  accordance  with  this  paragraph.

     e.     This  Subscription  Agreement  shall  be  enforced,  governed  and
construed  in  all  respects  in accordance with the laws of the Commonwealth of
Massachusetts  ,  as such laws are applied by Massachusetts courts to agreements
entered  into, and to be performed in, Massachusetts by and between residents of
Massachusetts,  and  shall  be  binding  upon the undersigned, the undersigned's
heirs,  estate  and  legal representatives and shall inure to the benefit of the
Company  and its successors.  If any provision of this Subscription Agreement is
invalid  or  unenforceable under any applicable statue or rule of law, then such
provisions  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 that may prove invalid or unenforceable under any law
shall  not  affect the validity or enforceability of any other provision hereof.

     f.     This  Agreement  shall  not  be  assignable.

     g.     This Subscription Agreement, together with Exhibits A, B, C, D and E
attached  hereto and made a part hereof, constitute the entire agreement between
the  parties hereto with respect to the subject matter hereof and may be amended
only  by  a  writing  executed  by  both  parties  hereto.

     h.     This  Subscription  Agreement  may  be  executed  in  two  or  more
counterparts,  all  of  which  taken  together  shall constitute one instrument.
Execution  and  delivery of this Subscription Agreement by exchange of facsimile
copies  bearing  the facsimile signature of a party shall constitute a valid and
binding  execution  and  delivery  of this Subscription Agreement by such party.
Such  facsimile  copies  shall  constitute  enforceable  original  documents.

          [BALANCE  OF  PAGE  INTENTIONALLY  LEFT  BLANK)

<PAGE>
Nighthawk  Systems,  Inc.
QUESTIONNAIRE

     The information contained in this Questionnaire is being furnished in order
to  determine  whether the undersigned's subscription to purchase the Debentures
described  in  the  Subscription  Agreement  may  be  accepted.

     ALL  INFORMATION  CONTAINED  IN  THIS  QUESTIONNAIRE  WILL  BE  TREATED
CONFIDENTIALLY.  The  undersigned  understands,  however,  that  the Company may
present  this  Questionnaire  to  such parties as it deems appropriate if called
upon  to  establish that the proposed offer and sale of the Securities is exempt
from  registration  under  the  1933  Act, as amended.  Further, the undersigned
understands  that  the offering is required to be reported to the Securities and
Exchange  Commission,  NASDAQ  and  to  various  state securities and "blue sky"
regulators.

     IN ADDITION TO SIGNING THE SIGNATURE PAGE, IF REQUESTED BY THE COMPANY, THE
UNDERSIGNED  MUST  COMPLETE  FORM  W-9.

I.     PLEASE  CHECK  EACH  OF  THE  STATEMENTS  BELOW  THAT  APPLIES.

          1.     The  undersigned: (a) has total assets in excess of $5,000,000;
(b)  was not formed for the specific purpose of acquiring the securities and (c)
has  its  principal  place  of  business  in  ___________.

     2.     The  undersigned  is a natural person whose individual net worth* or
joint  net  worth  with  his  or  her  spouse  exceeds  $1,000,000.

     3.     The undersigned is a natural person who had an individual income* in
excess  of  $200,000  in  each  of  the two most recent years and who reasonably
expects  an  individual  income in excess of $200,000 in the current year.  Such
income  is  solely  that  of  the  undersigned  and  excludes  the income of the
undersigned's  spouse.

     4.     The  undersigned  is  a natural person who, together with his or her
spouse, has had a joint income* in excess of $300,000 in each of of the two most
recent  years and who reasonably expects a joint income in excess of $300,000 in
the  current  year.

*     For  purposes of this Questionnaire, the term "net worth" means the excess
of  total  assets  over total liabilities.  In determining "income", an investor
should  add  to  his  or  her  adjusted gross income any amounts attributable to
tax-exempt  income  received, losses claimed as a limited partner in any limited
partnership,  deductions  claimed  for  depletion, contributions to IRA or Keogh
retirement  plan, alimony payments and any amount by which income from long-term
capital  gains  has  been  reduced  in  arriving  at  adjusted  gross  income.

          5.     The  undersigned  is:

     (a)     a  bank  as  defined  in  Section  3(a)(2)  of  the  1933  Act;  or

     (b)     a  savings  and loan association or other institution as defined in
Section 3(a)(5)(A) of the 1933 Act whether acting in its individual or fiduciary
capacity;  or

     (c)     a  broker  or  dealer registered pursuant to Section 15 of the 1934
Act;  or

     (d)     an  insurance  company as defined in Section 2(13) of the 1933 Act;
or

     (e)     An  investment  company registered under the Investment Company Act
of  1940 or a business development company as defined in Section 2(a)(48) of the
Investment  Company  Act  of  1940;  or

     (f)     a  small  business  investment  company  licensed by the U.S. Small
Business  Administration  under  Section  301  (c)  or (d) of the Small Business
Investment  Act  of  1958;  or

     6.     The  undersigned  is an entity in which all of the equity owners are
accredited  investors.

<PAGE>
II.     PURCHASER  INFORMATION.

(a)     IF  THE  UNDERSIGNED  IS  AN  INDIVIDUAL:

     Name  _________________________________________

     Street  Address  __________________________________

     City,  State,  Zip  Code  _____________________________

     Phone  ____________________  Fax  _________________

     Social  Security  Number  ___________________________

     Send  Correspondence  to:
          _______________________________________________
     _______________________________________________
     _______________________________________________

(b)     IF  THE  UNDERSIGNED  IS  NOT  AN  INDIVIDUAL:

     Name  of  Entity  ____Dutchess  Private  Equities  Fund,  II,  L.P._

     Person's  Name  Douglas  Leighton  Title:_Managing  Member

     State  of  Organization  ____Delaware___________________

     Principal  Business  Address  ___312  Stuart  St,  Third  Floor__

     City,  State,  Zip  Code  ______Boston,  MA  02116__________

     Taxpayer  Identification  Number  _____________________

-     Phone  __617-960-3570________  Fax  ___617-960-3772___

     Send  Correspondence  to:
          _______________________________________________
     _______________________________________________
     _______________________________________________

<PAGE>
Nighthawk  Systems,  Inc.
SIGNATURE  PAGE

     Your  signature on this Signature Page evidences your agreement to be bound
by  the Questionnaire, Subscription Agreement and Registration Rights Agreement.

     1.     The undersigned hereby represents that (a) the information contained
in  the  Questionnaire  is  complete  and  accurate and (b) the undersigned will
notify  Nighthawk Systems, Inc. immediately if any material change in any of the
information occurs prior to the acceptance of the undersigned's subscription and
will  promptly send Nighthawk Systems, Inc. written confirmation of such change.

     2.     The  undersigned signatory hereby certifies that he/she has read and
understands  the  Subscription  Agreement  and  Questionnaire,  and  the
representations  made  by  the  undersigned  in  the  Subscription Agreement and
Questionnaire  are  true  and  accurate.

                $250,000
______________________________               8.10.04
Amount  of  Debentures  being  purchased                    Date

                                   By:  /s/ Douglas H. Leighton
                                             (Signature)

                                   Name: Douglas H. Leighton
                                        (Please  Type  or  Print)

<PAGE>

COMPANY  ACCEPTANCE  PAGE

This  Subscription  Agreement  accepted  and  agreed
to  this 10th  day  of  August,  2004.

Nighthawk  Systems,  Inc.

By:  /s/ Douglas Saathoff
     Douglas  Saathoff,  President

LIST  OF  EXHIBITS
-----------------

EXHIBIT  A               Notice  of  Conversion
EXHIBIT  B               Registration  Rights  Agreement
EXHIBIT  C               Debenture
EXHIBIT  D               Opinion  of  Company's  Counsel
EXHIBIT  E               Board  Resolution

LIST  OF  SCHEDULES
-----------------

Schedule  3(a)     Subsidiaries
Schedule  3(c)     Capitalization
Schedule  3(e)     Conflicts
Schedule  3(g)     Material  Changes
Schedule  3(h)     Litigation
Schedule  3(l)     Intellectual  Property
Schedule  3(n)     Liens
Schedule  3(t)     Certain  Transactions

Exhibit  A

NOTICE  OF  CONVERSION

(To  be  Executed  by  the  Registered  Owner  in  order  to  Convert Debenture)

     The  undersigned  hereby  irrevocably  elects,  as  of ________________, to
convert  $________________  of  its convertible debenture (the "Debenture") into
Common  Stock  of  Nighthawk  Systems,  Inc.  (the  "Company")  according to the
conditions  set  forth  in  the  Debenture  issued  by  the  Company.

Date  of  Conversion________________________________________________

Applicable  Conversion  Price________________________________________

Number  of  Debentures  Issuable  upon  this  Conversion_______________________

Name(Print)___________Dutchess  Private  Equities Fund, II, LP _________________

Address______________312  Stuart  St,  3rd  Floor____________________________

Phone_____617-960-3570_____________  Fax________617-960-3772___________

                    By:_______________________________________

<PAGE>
EXHIBIT  D

August  10,  2004

Re:     Nighthawk  Systems,  Inc.

Ladies  and  Gentlemen:

     As  counsel  to Nighthawk Systems, Inc. (the "Company"), I am familiar with
its  Articles  of  Incorporation  and  Bylaws and with the corporate proceedings
taken  by  it  in  connection with the proposed issuance and sale of convertible
debentures  (the  "Securities")  pursuant  to the related Subscription Agreement
(including all Exhibits and Appendices thereto) (collectively the "Agreements").

     I  have been furnished with copies, certified or otherwise identified to my
satisfaction,  of  the  Agreements,  and  have  examined  such  other documents,
agreements  and  records  as I deemed necessary to render the opinions set forth
below.

     In  conducting my examination, I have assumed the following:  (i) that each
of  the  Agreements has been executed by each of the parties thereto in the same
form  as  the  forms  which  we  have  examined,  (ii)  the  genuineness  of all
signatures, the legal capacity of natural persons, the authenticity and accuracy
of  all  documents submitted to me as originals, and the conformity to originals
of  all  documents submitted to me as copies, (iii) that each of  the Agreements
has  been  duly  and  validly authorized, executed and delivered by the party or
parties  thereto  other  than  the Company, and (iv) that each of the Agreements
constitutes  the  valid  and  binding  agreement of the party or parties thereto
other  than the Company, enforceable against such party or parties in accordance
with  the  Agreements'  terms.

     Subject  to  the  foregoing,  I  am  of  the  opinion  that:

     1.     The  Company has been duly incorporated and is validly existing as a
corporation  in good standing under the laws of the State of Nevada, and has all
requisite  corporate  power  and authority to own its properties and conduct its
business.

     2.     The  authorized  capital stock of the Company consists of 50,000,000
shares  of  Common  Stock,  $0.001  par  value  per  share, ("Common Stock") and
5,000,000  Preferred  Stock,  par  value  $0.001  per  share;

     3.     The  Common Stock is registered pursuant to Section 12(b) or Section
12(g)  of  the  Securities Exchange Act of 1934, as amended, and the Company has
timely filed all the material required to be filed pursuant to Sections 13(a) or
15(d)  of  such  Act  for  a period of at least twelve months preceding the date
hereof;

     4.     When  duly  countersigned  by  the  Company's  transfer  agent  and
registrar, and delivered to you or upon your order against payment of the agreed
consideration therefore in accordance with the provisions of the Agreements, the
Securities  as  described  in  the  Agreements  represented thereby will be duly
authorized  and  validly  issued,  fully  paid  and  nonassessable;

     5     The  Company has the requisite corporate power and authority to enter
into  the  Subscription Agreement and to sell and deliver the Securities and the
Common  Stock to be issued upon the conversion of the Securities as described in
the  Agreements;  each of the Agreements has been duly and validly authorized by
all  necessary corporate action by the Company.  To my knowledge, no approval of
any  governmental  or  other  body is required for the execution and delivery of
each  of  the  Agreements by the Company or the consummation of the transactions
contemplated  thereby; each of the Agreements has been duly and validly executed
and  delivered  by  and  on  behalf  of  the Company, and is a valid and binding
agreement  of  the  Company, enforceable in accordance with its terms, except as
enforceability  may  be  limited  by  general  equitable principles, bankruptcy,
insolvency,  fraudulent  conveyance,  reorganization,  moratorium  or other laws
affecting  creditors rights generally, and except as to compliance with federal,
state,  and  foreign  securities  laws,  as  to  which  no opinion is expressed;

     6.     To  the  best  of  our  knowledge, after due inquiry, the execution,
delivery  and  performance  of  the Subscription Agreement and Securities by the
Company  and  the  performance of its obligations thereunder do not and will not
constitute  a  breach  or  violation  of  any of the terms and provisions of, or
constitute  a default under or conflict with or violate any provision of (i) the
Company's Certificate of Incorporation or By-Laws, (ii) any indenture, mortgage,
deed of trust, agreement or other instrument to which the Company is party or by
which  it  or  any  of  its  property  is bound, (iii) any applicable statute or
regulation,  (iv)  or any judgment, decree or order of any court or governmental
body  having  jurisdiction  over  the  Company  or  any  of  its  property.

     7.     To the best of our knowledge, after due inquiry, there is no pending
or  threatened  litigation,  investigation  or  other  proceedings  against  the
Company,  except  as  described  in  Schedule 3(h), attached to the Subscription
Agreement.

     8.     The  Company  complies with the eligibility requirements for the use
of  Form  SB-2,  under  the  Securities  Act  of  1933,  as  amended.

     This  opinion  is  rendered  only with regard to the matters set out in the
numbered  paragraphs  above.  No  other opinions are intended nor should they be
inferred.  This  opinion  is based solely upon the laws of the United States and
does not include an interpretation or statement concerning the laws of any other
state  or  jurisdiction.

     The  opinions  expressed  herein  are  given  to you solely for your use in
connection  with  the transaction contemplated by the Subscription Agreement and
Securities  and  may not be relied upon by any other person or entity or for any
other  purpose  without  our  prior  consent.

                                   Very  truly  yours,

                              By:     /s/ Raymond G. Romero
                                   Raymond  G.  Romero,  Esq.
                                   Licensed  in  the  State  of  Illinois
                                   Reg.  No.  3128503

<PAGE>

SCHEDULE  3(a)  SUBSIDIARIES

     Peregrine  Control  Technologies,  Inc.  (a  Colorado  corporation).

SCHEDULE  3(c)  CAPITALIZATION

SCHEDULE  3(e)  CONFLICTS

SCHEDULE  3(g)  MATERIAL  CHANGES

NONE

SCHEDULE  3(h)  LITIGATION

1.     Charles  R.  McCarthy vs. Nighthawk Systems, Inc., Case No. CV03-5406, In
the  Second  District  Court  of  the  State of Nevada, In the County of Washoe.
2.     Lawrence  J.  Brady  and  Mark  A.  Brady  vs.  Nighthawk  Systems, Inc.,
Peregrine  Control  Technologies,  Inc.,  et  al.,  Case  No. 2004CV2569, In the
District  Court,  City  &  County  of  Denver,  Colorado.

SCHEDULE  3(l)  INTELLECTUAL  PROPERTY

                    NONE

SCHEDULE  3(n)  LIENS

The  following  Lien  is  held  by Tomas Revesz pursuant to a secured promissory
note;

All  presently  owned  and  hereafter  acquired  inventory of Debtor (including,
without limitation, all raw materials and goods now or hereafter held for sale),
(ii)  All rights of Debtor for payments of goods sold or leased, or to be leased
or  sold,  or  for  services  rendered,  or to be rendered, however evidenced or
incurred, including without limitation all accounts, instruments, chattel paper,
and  general  intangibles,  including  without  limitation  all  trade names and
trademark,  and  all  books,  records, computer tapes, programs and ledger books
arising  therefrom or relating thereto, whether now owned or hereafter acquired;
(iii)  All  of  Debtor's  machinery, equipment, furniture and fixtures, (iv) All
insurance policies relating in whole or in part to any of the foregoing, (v) All
proceeds  from any of the foregoing, (vi) All substitutions for and replacements
of  and  all  additions  and  accessions  to  any  of  the  foregoing, (vii) All
guarantees  and  security  for  any  of the foregoing, (viii) Accounts, accounts
receivable,  reimbursements,  notes,  contracts, contract rights, chattel paper,
cash,  checks,  drafts,  documents, instruments, all rights of Debtor to receive
payment  in  money  or  kind, and other evidence of indebtedness owed to Debtor;
(ix)  Customer  lists,  all documents containing the names, addresses, telephone
numbers,  and  other  information regarding the Debtor's customers, subscribers,
tapes,  programs, printouts, disks, and other material and documents relating to
the recording, billing or analyzing of any of the foregoing, and any other right
to  payment; (x) Any and all contract and lease rights, and (xiii)  All products
and  proceeds  (cash  and  non-cash)  of  all  of  the foregoing, and increases,
accessions,  renewals,  replacements  and substitutions of all of the foregoing.

SCHEDULE  3(t)  CERTAIN  TRANSACTIONS

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