Document:

THE  SECURITIES   REPRESENTED  BY  THIS   CERTIFICATE  HAVE  NOT  BEEN
          REGISTERED  UNDER THE  SECURITIES ACT OF 1933, AS AMENDED (THE "ACT").
          THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE
          OF AN EFFECTIVE  REGISTRATION  STATEMENT FOR THE SECURITIES UNDER SAID
          ACT, OR AN OPINION OF COUNSEL IN FORM,  SUBSTANCE AND SCOPE  CUSTOMARY
          FOR OPINIONS OF COUNSEL IN COMPARABLE  TRANSACTIONS  THAT REGISTRATION
          IS NOT REQUIRED  UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE 144 OR
          REGULATION S UNDER SAID ACT.

                          SECURED CONVERTIBLE DEBENTURE

Rocklin, California
December 20, 2002                                                        $83,333

          FOR VALUE RECEIVED, PEABODYS COFFEE, INC., a Nevada corporation (d/b/a
Black Rhino Coffee) (hereinafter called the "BORROWER"),  hereby promises to pay
to the order of AJW Qualified Partners, LLC or registered assigns (the "HOLDER")
the sum of Eighty-Three  Thousand Three Hundred  Thirty-Three Dollars ($83,333),
on December 20, 2003 (the  "MATURITY  DATE"),  and to pay interest on the unpaid
principal  balance  hereof  at the rate of ten  percent  (10%)  per  annum  from
December  20, 2002 (the "ISSUE  DATE")  until the same  becomes due and payable,
whether at maturity or upon  acceleration  or by prepayment  or  otherwise.  Any
amount of  principal  or interest on this  Debenture  which is not paid when due
shall bear interest at the rate of fifteen  percent (15%) per annum from the due
date  thereof  until  the  same is paid  ("DEFAULT  INTEREST").  Interest  shall
commence accruing on the issue date, shall be computed on the basis of a 365-day
year and the actual  number of days elapsed and shall be payable,  at the option
of the Holder,  either quarterly on March 31, June 30, September 30 and December
31 of each year  beginning on December 31, 2002, or at the time of conversion of
the principal to which such interest relates in accordance with Article I below.
All payments due hereunder (to the extent not converted into common stock, $.001
par value per share, of the Borrower (the "COMMON STOCK") in accordance with the
terms  hereof) shall be made in lawful money of the United States of America or,
at the option of the Borrower, in whole or in part, in shares of Common Stock of
the Borrower valued at the then applicable Conversion Price (as defined herein).
All payments shall be made at such address as the Holder shall hereafter give to
the Borrower by written  notice made in accordance  with the  provisions of this
Debenture.  Whenever  any  amount  expressed  to be  due by the  terms  of  this
Debenture is due on any day which is not a business  day, the same shall instead
be due on the next  succeeding  day which is a business  day and, in the case of
any interest  payment date which is not the date on which this Debenture is paid
in full,  the  extension of the due date thereof shall not be taken into account
for purposes of determining  the amount of interest due on such date. As used in
this Debenture, the

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term "business day" shall mean any day other than a Saturday, Sunday or a day on
which  commercial  banks in the city of New  York,  New York are  authorized  or
required by law or executive order to remain closed.  Each capitalized term used
herein,  and not otherwise  defined,  shall have the meaning ascribed thereto in
that certain Securities Purchase Agreement, dated December 20, 2002, pursuant to
which this Debenture was originally issued (the "PURCHASE AGREEMENT").

     This Debenture is free from all taxes,  liens, claims and encumbrances with
respect to the issue  thereof and shall not be subject to  preemptive  rights or
other  similar  rights  of  shareholders  of the  Borrower  and will not  impose
personal  liability  upon the holder  thereof.  The  obligations of the Borrower
under this Debenture shall be secured by that certain  Security  Agreement dated
by and between the Borrower and the Holder of even date herewith.

     The following terms shall apply to this Debenture:

                          ARTICLE I. CONVERSION RIGHTS

          1.1  CONVERSION  RIGHT.  The Holder  shall have the right from time to
time,  and at any time on or prior to the earlier of (i) the  Maturity  Date and
(ii) the date of  payment of the  Default  Amount  (as  defined in Article  III)
pursuant to Section  1.6(a) or Article III, the Optional  Prepayment  Amount (as
defined in Section 5.1 or any payments  pursuant to Section 1.7, each in respect
of the remaining  outstanding  principal amount of this Debenture to convert all
or any part of the  outstanding  and unpaid  principal  amount of this Debenture
into fully paid and non-assessable  shares of Common Stock, as such Common Stock
exists on the Issue Date, or any shares of capital stock or other  securities of
the  Borrower  into  which  such  Common  Stock  shall  hereafter  be changed or
reclassified  at the conversion  price (the  "CONVERSION  PRICE")  determined as
provided herein (a "CONVERSION");  provided, however, that in no event shall the
Holder be entitled to convert  any portion of this  Debenture  in excess of that
portion of this Debenture upon  conversion of which the sum of (1) the number of
shares of Common  Stock  beneficially  owned by the  Holder  and its  affiliates
(other  than  shares of Common  Stock  which  may be deemed  beneficially  owned
through  the  ownership  of the  unconverted  portion of the  Debentures  or the
unexercised  or  unconverted  portion  of any  other  security  of the  Borrower
(including,  without limitation, the warrants issued by the Borrower pursuant to
the  Purchase  Agreement)  subject to a  limitation  on  conversion  or exercise
analogous to the limitations  contained  herein) and (2) the number of shares of
Common Stock  issuable upon the conversion of the portion of this Debenture with
respect to which the  determination  of this proviso is being made, would result
in  beneficial  ownership by the Holder and its  affiliates of more than 4.9% of
the  outstanding  shares of Common  Stock.  For  purposes  of the proviso to the
immediately  preceding  sentence,  beneficial  ownership  shall be determined in
accordance  with  Section  13(d) of the  Securities  Exchange  Act of  1934,  as
amended,  and  Regulations  13D-G  thereunder,  except as otherwise  provided in
clause  (1) of  such  proviso.  The  Holder  of this  Debenture  may  waive  the
limitations  set forth  herein by  sixty-one  (61)  days  written  notice to the
Company.  The number of shares of Common Stock to be issued upon each conversion
of this  Debenture  shall be  determined by dividing the  Conversion  Amount (as
defined  below) by the  applicable  Conversion  Price then in effect on the date
specified in the notice of conversion,  in the form attached hereto as Exhibit A
(the "NOTICE OF CONVERSION"), delivered to the Borrower by the Holder in

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<PAGE>

accordance  with Section 1.4 below;  provided  that the Notice of  Conversion is
submitted by facsimile (or by other means  resulting in, or reasonably  expected
to result in, notice) to the Borrower  before 6:00 p.m., New York, New York time
on such conversion date (the "CONVERSION  DATE").  The term "CONVERSION  AMOUNT"
means,  with respect to any  conversion  of this  Debenture,  the sum of (1) the
principal  amount of this Debenture to be converted in such  conversion plus (2)
accrued and unpaid  interest,  if any, on such principal  amount at the interest
rates  provided  in this  Debenture  to the  Conversion  Date  plus (3)  Default
Interest,  if any,  on the  amounts  referred  to in the  immediately  preceding
clauses (1) and/or (2) plus (4) at the Holder's option,  any amounts owed to the
Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section 2(c) of
that  certain  Registration  Rights  Agreement,  dated as of December  20, 2002,
executed in connection with the initial issuance of this Debenture and the other
Debentures issued on the Issue Date (the "REGISTRATION RIGHTS AGREEMENT").

          1.2  CONVERSION PRICE.

               (A) CALCULATION OF CONVERSION  PRICE.  The Conversion Price shall
be the lesser of (i) the Variable  Conversion Price (as defined herein) and (ii)
the Fixed  Conversion  Price (as  defined  herein)  (subject,  in each case,  to
equitable  adjustments for stock splits,  stock dividends or rights offerings by
the Borrower  relating to the  Borrower's  securities  or the  securities of any
subsidiary of the Borrower, combinations,  recapitalization,  reclassifications,
extraordinary distributions and similar events). The "VARIABLE CONVERSION PRICE"
shall mean the  Applicable  Percentage  (as defined  herein)  multiplied  by the
Market Price (as defined herein). "MARKET PRICE" means the average of the lowest
three (3) Trading  Prices (as  defined  below) for the Common  Stock  during the
twenty  (20)  Trading  Day period  ending one  Trading Day prior to the date the
Conversion  Notice is sent by the  Holder to the  Borrower  via  facsimile  (the
"CONVERSION DATE").  "TRADING PRICE" means, for any security as of any date, the
intraday trading price on the  Over-the-Counter  Bulletin Board (the "OTCBB") as
reported by a reliable  reporting  service mutually  acceptable to and hereafter
designated  by Holders of a  majority  in  interest  of the  Debentures  and the
Borrower or, if the OTCBB is not the principal trading market for such security,
the intraday trading price of such security on the principal securities exchange
or trading  market  where such  security  is listed or traded or, if no intraday
trading price of such security is available in any of the foregoing manners, the
average of the intraday  trading  prices of any market  makers for such security
that are listed in the "pink sheets" by the National  Quotation Bureau,  Inc. If
the Trading  Price cannot be  calculated  for such  security on such date in the
manner  provided  above,  the Trading  Price  shall be the fair market  value as
mutually determined by the Borrower and the holders of a majority in interest of
the Debentures being converted for which the calculation of the Trading Price is
required in order to determine the Conversion Price of such Debentures. "TRADING
DAY" shall  mean any day on which the  Common  Stock is traded for any period on
the OTCBB, or on the principal securities exchange or other securities market on
which the Common Stock is then being traded.  "APPLICABLE PERCENTAGE" shall mean
50.0%. The "FIXED CONVERSION PRICE" shall mean $.30.

               (B) CONVERSION PRICE DURING MAJOR ANNOUNCEMENTS.  Notwithstanding
anything contained in Section 1.2(a) to the contrary,  in the event the Borrower
(i) makes a public announcement that it intends to consolidate or merge with any
other corporation (other than a merger in which the Borrower is the surviving or
continuing  corporation  and its capital stock is unchanged) or sell or transfer
all or substantially all of the

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<PAGE>

assets  of the  Borrower  or (ii) any  person,  group or entity  (including  the
Borrower)  publicly  announces  a tender  offer to  purchase  50% or more of the
Borrower's  Common  Stock  (or  any  other  takeover  scheme)  (the  date of the
announcement referred to in clause (i) or (ii) is hereinafter referred to as the
"ANNOUNCEMENT  DATE"),  then the  Conversion  Price  shall,  effective  upon the
Announcement  Date  and  continuing   through  the  Adjusted   Conversion  Price
Termination Date (as defined below), be equal to the lower of (x) the Conversion
Price  which  would  have been  applicable  for a  Conversion  occurring  on the
Announcement  Date and (y) the  Conversion  Price  that  would  otherwise  be in
effect.  From and after the Adjusted  Conversion  Price  Termination  Date,  the
Conversion  Price shall be determined as set forth in this Section  1.2(a).  For
purposes hereof,  "ADJUSTED  CONVERSION PRICE TERMINATION DATE" shall mean, with
respect to any proposed  transaction  or tender  offer (or takeover  scheme) for
which a public  announcement  as  contemplated  by this Section  1.2(b) has been
made,  the date upon which the Borrower (in the case of clause (i) above) or the
person,  group or  entity  (in the case of clause  (ii)  above)  consummates  or
publicly announces the termination or abandonment of the proposed transaction or
tender offer (or  takeover  scheme)  which caused this Section  1.2(b) to become
operative.

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

          If,  at any time a  Holder  of this  Debenture  submits  a  Notice  of
Conversion,  and the Borrower does not have  sufficient  authorized but unissued
shares of Common Stock  available to effect such  conversion in accordance  with
the  provisions of this Article I (a "CONVERSION  DEFAULT"),  subject to Section
4.8,  the  Borrower  shall issue to the Holder all of the shares of Common Stock
which  are then  available  to  effect  such  conversion.  The  portion  of this
Debenture which the Holder  included in its Conversion  Notice and which exceeds
the amount which is then  convertible into available shares of Common Stock (the
"EXCESS  AMOUNT")  shall,  notwithstanding  anything to the  contrary  contained
herein, not be convertible into Common

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<PAGE>

Stock in accordance  with the terms hereof until (and at the Holder's  option at
any time after) the date additional shares of Common Stock are authorized by the
Borrower  to permit  such  conversion,  at which  time the  Conversion  Price in
respect  thereof  shall  be  the  lesser  of (i)  the  Conversion  Price  on the
Conversion  Default Date (as defined below) and (ii) the Conversion Price on the
Conversion  Date  thereafter  elected  by the  Holder  in  respect  thereof.  In
addition,  the Borrower shall pay to the Holder  payments  ("CONVERSION  DEFAULT
PAYMENTS") for a Conversion Default in the amount of (x) the sum of (1) the then
outstanding  principal  amount of this  Debenture  plus (2)  accrued  and unpaid
interest  on  the  unpaid  principal  amount  of  this  Debenture   through  the
Authorization Date (as defined below) plus (3) Default Interest,  if any, on the
amounts referred to in clauses (1) and/or (2), multiplied by (y) .24, multiplied
by (z) (N/365),  where N = the number of days from the day the holder  submits a
Notice of  Conversion  giving  rise to a  Conversion  Default  (the  "CONVERSION
DEFAULT  DATE")  to the  date  (the  "AUTHORIZATION  DATE")  that  the  Borrower
authorizes a sufficient number of shares of Common Stock to effect conversion of
the full outstanding principal balance of this Debenture. The Borrower shall use
its best efforts to  authorize a sufficient  number of shares of Common Stock as
soon as  practicable  following  the  earlier  of (i) such time that the  Holder
notifies the Borrower or that the Borrower  otherwise  becomes  aware that there
are or likely will be insufficient  authorized and unissued shares to allow full
conversion thereof and (ii) a Conversion Default. The Borrower shall send notice
to the Holder of the  authorization  of additional  shares of Common Stock,  the
Authorization  Date  and the  amount  of  Holder's  accrued  Conversion  Default
Payments.  The accrued Conversion Default Payments for each calendar month shall
be paid in cash or shall be convertible into Common Stock (at such time as there
are sufficient  authorized shares of Common Stock) at the applicable  Conversion
Price, at the Holder's option, as follows:

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

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

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

          1.4 METHOD OF CONVERSION.

               (A)  MECHANICS  OF  CONVERSION.  Subject  to  Section  1.1,  this
Debenture  may be  converted  by the Holder in whole or in part at any time from
time to time after the Issue

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<PAGE>

Date, by (A)  submitting to the Borrower a Notice of Conversion (by facsimile or
other reasonable means of communication  dispatched on the Conversion Date prior
to 6:00  p.m.,  New York,  New York time) and (B)  subject  to  Section  1.4(b),
surrendering this Debenture at the principal office of the Borrower.

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

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

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

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<PAGE>

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

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

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

          1.5  CONCERNING  THE SHARES.  The shares of Common Stock issuable upon
conversion  of this  Debenture  may not be sold or  transferred  unless (i) such
shares are sold pursuant to an effective registration statement under the Act or
(ii) the  Borrower  or its  transfer  agent  shall have been  furnished  with an
opinion of counsel (which opinion shall be in form,

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<PAGE>

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

     "THE SECURITIES  REPRESENTED BY THIS  CERTIFICATE  HAVE NOT BEEN REGISTERED
     UNDER THE  SECURITIES  ACT OF 1933, AS AMENDED.  THE  SECURITIES MAY NOT BE
     SOLD,  TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE  REGISTRATION
     STATEMENT  FOR THE  SECURITIES  UNDER SAID ACT, OR AN OPINION OF COUNSEL IN
     FORM,  SUBSTANCE AND SCOPE  CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE
     TRANSACTIONS,  THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT UNLESS SOLD
     PURSUANT TO RULE 144 OR REGULATION S UNDER SAID ACT."

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

          1.6  EFFECT OF CERTAIN EVENTS.

               (A) EFFECT OF MERGER,  CONSOLIDATION,  ETC.  At the option of the
Holder,  the sale,  conveyance or disposition of all or substantially all of the
assets of the Borrower,  the  effectuation  by the Borrower of a transaction  or
series of related transactions in

                                       8
<PAGE>

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

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

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

                                       9
<PAGE>

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

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

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

                                       10
<PAGE>

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

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

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

          1.7 TRADING  MARKET  LIMITATIONS.  Unless  permitted by the applicable
rules and  regulations  of the principal  securities  market on which the Common
Stock is then  listed or  traded,  in no event  shall the  Borrower  issue  upon
conversion of or otherwise  pursuant to this Debenture and the other  Debentures
issued pursuant to the Purchase Agreement more than the maximum number of shares
of  Common  Stock  that  the  Borrower  can  issue  pursuant  to any rule of the
principal  United  States  securities  market on which the Common  Stock is then
traded  (the  "MAXIMUM  SHARE  AMOUNT"),  which,  as of the Issue  Date shall be
4,311,267  shares  (19.99% of the total shares  outstanding  on the Issue Date),
subject  to  equitable  adjustment  from  time to time for stock  splits,  stock
dividends,  combinations, capital reorganizations and similar events relating to
the Common Stock occurring after the date hereof.  Once the Maximum Share Amount
has been issued (the date of which is  hereinafter  referred to as the  "MAXIMUM
CONVERSION  DATE"),  if the Borrower fails to eliminate any  prohibitions  under
applicable law or the rules or regulations  of any stock  exchange,  interdealer
quotation system or other  self-regulatory  organization  with jurisdiction over
the Borrower or any of its securities on the Borrower's  ability to issue shares
of Common  Stock in excess  of the  Maximum  Share  Amount  (a  "TRADING  MARKET
PREPAYMENT EVENT"), in lieu of any further right to convert this Debenture,  and
in full

                                       11
<PAGE>

satisfaction of the Borrower's  obligations  under this Debenture,  the Borrower
shall pay to the  Holder,  within  fifteen  (15)  business  days of the  Maximum
Conversion Date (the "TRADING MARKET PREPAYMENT  DATE"), an amount equal to 130%
times the sum of (a) the then  outstanding  principal  amount of this  Debenture
immediately  following the Maximum  Conversion Date, plus (b) accrued and unpaid
interest on the unpaid  principal amount of this Debenture to the Trading Market
Prepayment Date, plus (c) Default  Interest,  if any, on the amounts referred to
in clause (a) and/or (b) above,  plus (d) any optional amounts that may be added
thereto at the  Maximum  Conversion  Date by the Holder in  accordance  with the
terms  hereof  (the  then   outstanding   principal  amount  of  this  Debenture
immediately  following the Maximum Conversion Date, plus the amounts referred to
in clauses  (b),  (c) and (d) above  shall  collectively  be  referred to as the
"REMAINING CONVERTIBLE AMOUNT"). With respect to each Holder of Debentures,  the
Maximum  Share  Amount  shall  refer to such  Holder's  pro rata  share  thereof
determined  in accordance  with Section 4.8 below.  In the event that the sum of
(x) the  aggregate  number of shares of Common Stock issued upon  conversion  of
this  Debenture  and  the  other  Debentures  issued  pursuant  to the  Purchase
Agreement  plus (y) the  aggregate  number of shares of Common Stock that remain
issuable upon  conversion  of this  Debenture  and the other  Debentures  issued
pursuant to the  Purchase  Agreement,  represents  at least one hundred  percent
(100%) of the Maximum Share Amount (the "TRIGGERING  EVENT"),  the Borrower will
use its best  efforts to seek and obtain  Shareholder  Approval  (or obtain such
other relief as will allow conversions  hereunder in excess of the Maximum Share
Amount) as soon as  practicable  following the  Triggering  Event and before the
Maximum Conversion Date. As used herein,  "SHAREHOLDER  APPROVAL" means approval
by the shareholders of the Borrower to authorize the issuance of the full number
of shares of Common Stock which would be issuable  upon full  conversion  of the
then outstanding Debentures but for the Maximum Share Amount.

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

                                       12
<PAGE>

                         ARTICLE II. CERTAIN COVENANTS

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

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

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

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

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

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

                                       13
<PAGE>

                         ARTICLE III. EVENTS OF DEFAULT

          If any of  the  following  events  of  default  (each,  an  "EVENT  OF
DEFAULT") shall occur:

          3.1 FAILURE TO PAY  PRINCIPAL OR INTEREST.  The Borrower  fails to pay
the principal hereof or interest thereon when due on this Debenture,  whether at
maturity,  upon a Trading Market  Prepayment Event pursuant to Section 1.7, upon
acceleration or otherwise;

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

          3.3 FAILURE TO TIMELY FILE  REGISTRATION OR EFFECT  REGISTRATION.  The
Borrower fails to file the Registration  Statement within  thirty-five (35) days
following  the Closing  Date (as defined in the  Purchase  Agreement)  or obtain
effectiveness  with the Securities and Exchange  Commission of the  Registration
Statement within one hundred thirty-five (135) days following the Filing Date or
such Registration  Statement lapses in effect (or sales cannot otherwise be made
thereunder  effective,  whether by reason of the Borrower's  failure to amend or
supplement the prospectus  included  therein in accordance with the Registration
Rights  Agreement or otherwise)  for more than twenty (20)  consecutive  days or
forty (40) days in any twelve  month  period  after the  Registration  Statement
becomes effective;

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

          3.5 BREACH OF  REPRESENTATIONS  AND WARRANTIES.  Any representation or
warranty  of  the  Borrower  made  herein  or in  any  agreement,  statement  or
certificate  given  in  writing  pursuant  hereto  or  in  connection   herewith
(including,  without  limitation,  the Purchase  Agreement and the  Registration
Rights  Agreement),  shall be false or misleading  in any material  respect when
made and the  breach of which  has (or with the  passage  of time  will  have) a
material

                                       14
<PAGE>

adverse effect on the rights of the Holder with respect to this  Debenture,  the
Purchase Agreement or the Registration Rights Agreement;

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

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

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

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

          3.10 DEFAULT UNDER OTHER DEBENTURES.  An Event of Default has occurred
and is  continuing  under any of the other  Debentures  issued  pursuant  to the
Purchase Agreement,

then,  upon the occurrence and during the  continuation  of any Event of Default
specified in Section 3.1,  3.2,  3.3, 3.4, 3.5, 3.7, 3.9, or 3.10, at the option
of  the  Holders  of a  majority  of  the  aggregate  principal  amount  of  the
outstanding  Debentures  issued pursuant to the Purchase  Agreement  exercisable
through the  delivery of written  notice to the  Borrower by such  Holders  (the
"DEFAULT  NOTICE"),  and upon the occurrence of an Event of Default specified in
Section 3.6 or 3.8, the Debentures shall become  immediately due and payable and
the Borrower shall pay to the Holder,  in full  satisfaction  of its obligations
hereunder,  an amount  equal to the greater of (i) 130% times the sum of (w) the
then outstanding  principal amount of this Debenture plus (x) accrued and unpaid
interest on the unpaid principal amount of this Debenture to the date of payment
(the  "MANDATORY  PREPAYMENT  DATE") plus (y) Default  Interest,  if any, on the
amounts  referred to in clauses (w) and/or (x) plus (z) any amounts  owed to the
Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section 2(c) of
the Registration Rights Agreement (the then outstanding principal amount of this
Debenture  to the date of payment  plus the amounts  referred to in clauses (x),
(y) and (z)  shall  collectively  be  known  as the  "DEFAULT  SUM") or (ii) the
"parity  value" of the Default Sum to be prepaid,  where  parity value means (a)
the highest  number of shares of Common Stock  issuable  upon  conversion  of or
otherwise  pursuant to such Default Sum in  accordance  with Article I, treating
the Trading Day  immediately  preceding  the  Mandatory  Prepayment  Date as the
"Conversion Date" for purposes of determining the lowest  applicable  Conversion
Price,  unless the Default  Event arises as a result of a breach in respect of a
specific  Conversion  Date in  which  case  such  Conversion  Date  shall be the
Conversion  Date),  multiplied  by (b) the highest  Closing Price for the Common
Stock during the period  beginning on the date of first  occurrence of the Event
of Default and ending one day prior to the Mandatory

                                       15
<PAGE>

Prepayment Date (the "DEFAULT  AMOUNT") and all other amounts payable  hereunder
shall  immediately  become due and payable,  all without demand,  presentment or
notice,  all of which  hereby are  expressly  waived,  together  with all costs,
including,  without limitation,  legal fees and expenses, of collection, and the
Holder shall be entitled to exercise all other rights and remedies  available at
law or in equity.  If the Borrower  fails to pay the Default  Amount within five
(5) business  days of written  notice that such amount is due and payable,  then
the Holder shall have the right at any time, so long as the Borrower  remains in
default  (and so long and to the  extent  that there are  sufficient  authorized
shares), to require the Borrower,  upon written notice, to immediately issue, in
lieu of the Default Amount, the number of shares of Common Stock of the Borrower
equal to the Default Amount divided by the Conversion Price then in effect.

                           ARTICLE IV. MISCELLANEOUS

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

          4.2 NOTICES. Any notice herein required or permitted to be given shall
be in writing and may be  personally  served or  delivered by courier or sent by
United  States  mail and  shall be deemed to have been  given  upon  receipt  if
personally served (which shall include telephone line facsimile transmission) or
sent by courier or three (3) days after  being  deposited  in the United  States
mail, certified,  with postage pre-paid and properly addressed, if sent by mail.
For the  purposes  hereof,  the  address of the Holder  shall be as shown on the
records of the Borrower;  and the address of the Borrower shall be 3845 Atherton
Road,  Suite 9, Rocklin,  CA 95765,  facsimile  number:  916-632-6099.  Both the
Holder and the Borrower may change the address for service by service of written
notice to the other as herein provided.

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

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

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

                                       16
<PAGE>

          4.6 GOVERNING LAW. THIS DEBENTURE  SHALL BE ENFORCED,  GOVERNED BY AND
CONSTRUED IN  ACCORDANCE  WITH THE LAWS OF THE STATE OF NEW YORK  APPLICABLE  TO
AGREEMENTS MADE AND TO BE PERFORMED  ENTIRELY WITHIN SUCH STATE,  WITHOUT REGARD
TO THE  PRINCIPLES  OF  CONFLICT OF LAWS.  THE  BORROWER  HEREBY  SUBMITS TO THE
EXCLUSIVE  JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK,
NEW  YORK  WITH  RESPECT  TO ANY  DISPUTE  ARISING  UNDER  THIS  DEBENTURE,  THE
AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS  CONTEMPLATED
HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT
FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING.  BOTH PARTIES FURTHER AGREE
THAT  SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED
IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR
PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN
ANY  OTHER  MANNER   PERMITTED  BY  LAW.   BOTH  PARTIES   AGREE  THAT  A  FINAL
NON-APPEALABLE  JUDGMENT IN ANY SUCH SUIT OR PROCEEDING  SHALL BE CONCLUSIVE AND
MAY BE ENFORCED IN OTHER  JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER
LAWFUL  MANNER.  THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE  ARISING  UNDER
THIS  DEBENTURE  SHALL  BE  RESPONSIBLE  FOR ALL FEES  AND  EXPENSES,  INCLUDING
ATTORNEYS'  FEES,  INCURRED  BY THE  PREVAILING  PARTY IN  CONNECTION  WITH SUCH
DISPUTE.

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

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

                                       17
<PAGE>

remaining Holders of Debentures,  pro rata based on the principal amount of such
Debentures then held by such Holders.

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

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

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

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

          4.13 REMEDIES.  The Borrower  acknowledges  that a breach by it of its
obligations  hereunder will cause  irreparable harm to the Holder,  by vitiating
the intent and purpose of the transaction contemplated hereby. Accordingly,  the
Borrower acknowledges that

                                       18
<PAGE>

the remedy at law for a breach of its  obligations  under this Debenture will be
inadequate  and  agrees,  in the event of a breach or  threatened  breach by the
Borrower of the provisions of this Debenture, that the Holder shall be entitled,
in addition to all other available remedies at law or in equity, and in addition
to the penalties assessable herein, to an injunction or injunctions restraining,
preventing or curing any breach of this  Debenture  and to enforce  specifically
the terms and provisions thereof, without the necessity of showing economic loss
and without any bond or other security being required.

                         ARTICLE V. OPTIONAL PREPAYMENT

          5.1  OPTIONAL  PREPAYMENT.  Notwithstanding  anything to the  contrary
contained  in this  Article  V, so long as (i) no Event of  Default  or  Trading
Market Prepayment Event shall have occurred and be continuing, (ii) the Borrower
has a  sufficient  number of  authorized  shares of Common  Stock  reserved  for
issuance  upon full  conversion  of the  Debentures,  then at any time after the
Issue  Date,  and (iii) the common  stock is trading  below  $1.00 per share the
Borrower  shall have the right,  exercisable  on not less than ten (10)  Trading
Days prior written notice to the Holders of the Debentures (which notice may not
be sent to the Holders of the  Debentures  until the  Borrower is  permitted  to
prepay  the  Debentures  pursuant  to this  Section  5.1),  to prepay all of the
outstanding  Debentures  in  accordance  with this  Section  5.1.  Any notice of
prepayment  hereunder  (an  "OPTIONAL  PREPAYMENT")  shall be  delivered  to the
Holders of the Debentures at their registered  addresses  appearing on the books
and records of the Borrower and shall state (1) that the Borrower is  exercising
its right to prepay all of the  Debentures  issued on the Issue Date and (2) the
date of prepayment  (the "OPTIONAL  PREPAYMENT  NOTICE").  On the date fixed for
prepayment (the "OPTIONAL  PREPAYMENT DATE"), the Borrower shall make payment of
the Optional  Prepayment  Amount (as defined  below) to or upon the order of the
Holders as  specified by the Holders in writing to the Borrower at least one (1)
business day prior to the Optional  Prepayment  Date. If the Borrower  exercises
its right to prepay the  Debentures,  the  Borrower  shall  make  payment to the
holders of an amount in cash (the "OPTIONAL  PREPAYMENT AMOUNT") equal to either
(i) 130% (for prepayments  occurring within thirty (30) days of the Issue Date),
(ii) 140% (for  prepayments  occurring  between  thirty-one (31) and ninety (90)
days of the Issue  Date) or (iii)  150%  (for  prepayments  occurring  after the
ninetieth (90th) day following the Issue Date), multiplied by the sum of (w) the
then outstanding  principal amount of this Debenture plus (x) accrued and unpaid
interest  on the  unpaid  principal  amount of this  Debenture  to the  Optional
Prepayment Date plus (y) Default Interest, if any, on the amounts referred to in
clauses (w) and (x) plus (z) any amounts owed to the Holder pursuant to Sections
1.3 and 1.4(g)  hereof or pursuant to Section  2(c) of the  Registration  Rights
Agreement (the then  outstanding  principal amount of this Debenture to the date
of  payment  plus the  amounts  referred  to in clauses  (x),  (y) and (z) shall
collectively be known as the "OPTIONAL PREPAYMENT SUM").  Notwithstanding notice
of an Optional Prepayment,  the Holders shall at all times prior to the Optional
Prepayment  Date  maintain  the  right  to  convert  all or any  portion  of the
Debentures  in  accordance  with  Article I and any  portion  of  Debentures  so
converted  after  receipt  of an  Optional  Prepayment  Notice  and prior to the
Optional  Prepayment  Date set forth in such notice and payment of the aggregate
Optional  Prepayment  Amount  shall be  deducted  from the  principal  amount of
Debentures which are otherwise subject to prepayment pursuant to such notice. If
the  Borrower  delivers  an  Optional  Prepayment  Notice  and  fails to pay the
Optional  Prepayment  Amount due to the Holders of the Debentures within two (2)
business days

                                       19
<PAGE>

following the Optional  Prepayment  Date, the Borrower shall forever forfeit its
right to redeem the Debentures pursuant to this Section 5.1.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       20
<PAGE>

     IN WITNESS WHEREOF,  Borrower has caused this Debenture to be signed in its
name by its duly authorized officer this 20th day of December, 2002.

                                        PEABODYS COFFEE, INC.

                                        By: ______________________________
                                            Todd N. Tkachuk
                                            President

                                       21
<PAGE>

                                    EXHIBIT A

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

     The undersigned hereby irrevocably elects to convert $__________  principal
amount of the Debenture  (defined below) into shares of common stock,  par value
$.001 per share ("COMMON STOCK"), of Peabodys Coffee, Inc., a Nevada corporation
(the  "Borrower")  according to the conditions of the convertible  debentures of
the Borrower  dated as of December 20, 2002 (the  "Debentures"),  as of the date
written below. If securities are to be issued in the name of a person other than
the  undersigned,  the  undersigned  will pay all  transfer  taxes  payable with
respect  thereto and is delivering  herewith such  certificates.  No fee will be
charged to the Holder for any  conversion,  except for transfer taxes, if any. A
copy of each  Debenture  is  attached  hereto  (or  evidence  of loss,  theft or
destruction thereof).

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

     Name of DTC Prime Broker: ____________________________________________
     Account Number: ______________________________________________________

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

     Name: ________________________________________________________________
     Address: _____________________________________________________________

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

     Date of Conversion:_____________________________________
     Applicable Conversion Price:____________________________
     Number of Shares of Common Stock to be Issued Pursuant to
     Conversion of the Debentures:___________________________
     Signature:______________________________________________
     Name:___________________________________________________
     Address:________________________________________________

                                       22
<PAGE>

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

                                       23
<PAGE>SECURITIES PURCHASE AGREEMENT

     SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"),  dated as of December 20,
2002, by and among  Peabodys  Coffee,  Inc., a Nevada  corporation  (d/b/a Black
Rhino  Coffee),  with  headquarters  located  at 3845  Atherton  Road,  Suite 9,
Rocklin,  CA 95765 (the "COMPANY"),  and each of the purchasers set forth on the
signature pages hereto (the "BUYERS").

     WHEREAS:

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

     B.  Buyers  desire to purchase  and the Company  desires to issue and sell,
upon the terms and conditions  set forth in this  Agreement (i) 10%  convertible
debentures of the Company,  in the form  attached  hereto as EXHIBIT "A", in the
aggregate  principal amount of Seven Hundred Fifty Thousand  Dollars  ($750,000)
(together with any debenture(s)  issued in replacement  thereof or as a dividend
thereon or otherwise with respect  thereto in accordance with the terms thereof,
the "DEBENTURES"),  convertible into shares of common stock, par value $.001 per
share,  of the Company (the "COMMON  STOCK"),  upon the terms and subject to the
limitations  and conditions set forth in such  Debentures and (ii) warrants,  in
the form  attached  hereto as EXHIBIT "B", to purchase One Million Eight Hundred
Seventy-Five Thousand (1,875,000) shares of Common Stock (the "WARRANTS").

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

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

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

     1.   PURCHASE AND SALE OF DEBENTURES AND WARRANTS.

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

          B. FORM OF PAYMENT.  On the Closing Date (as defined below),  (i) each
Buyer shall pay the  purchase  price for the  Debentures  and the Warrants to be
issued and

<PAGE>

sold to it at the  Closing (as defined  below)  (the  "PURCHASE  PRICE") by wire
transfer of immediately  available funds to the Company,  in accordance with the
Company's written wiring instructions, against delivery of the Debentures in the
principal  amount equal to the  Purchase  Price and the number of Warrants as is
set forth immediately below such Buyer's name on the signature pages hereto, and
(ii) the Company  shall  deliver such  Debentures  and Warrants duly executed on
behalf of the Company, to such Buyer, against delivery of such Purchase Price.

          C. CLOSING DATE.  Subject to the  satisfaction  (or written waiver) of
the conditions  thereto set forth in Section 6 and Section 7 below, the date and
time of the issuance  and sale of the  Debentures  and the Warrants  pursuant to
this Agreement (the "CLOSING DATE") shall be 12:00 noon,  Eastern  Standard Time
on December 20, 2002 or such other mutually agreed upon time. The closing of the
transactions  contemplated by this Agreement (the "CLOSING")  shall occur on the
Closing Date at such location as may be agreed to by the parties.

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

          A. INVESTMENT  PURPOSE. As of the date hereof, the Buyer is purchasing
the  Debentures  and the shares of Common Stock  issuable upon  conversion of or
otherwise  pursuant  to the  Debentures  (including,  without  limitation,  such
additional  shares of Common  Stock,  if any, as are  issuable (i) on account of
interest on the Debentures, (ii) as a result of the events described in Sections
1.3 and 1.4(g) of the  Debentures  and Section 2(c) of the  Registration  Rights
Agreement  or (iii) in payment of the  Standard  Liquidated  Damages  Amount (as
defined in Section 2(f) below) pursuant to this Agreement, such shares of Common
Stock being collectively  referred to herein as the "CONVERSION SHARES") and the
Warrants  and the shares of Common Stock  issuable  upon  exercise  thereof (the
"WARRANT SHARES" and, collectively with the Debentures,  Warrants and Conversion
Shares,  the  "SECURITIES")  for its own  account  and not with a  present  view
towards  the public  sale or  distribution  thereof,  except  pursuant  to sales
registered or exempted from registration under the 1933 Act; provided,  however,
that by making the representations  herein, the Buyer does not agree to hold any
of the  Securities for any minimum or other specific term and reserves the right
to dispose of the  Securities  at any time in  accordance  with or pursuant to a
registration statement or an exemption under the 1933 Act.

          B. ACCREDITED  INVESTOR STATUS. The Buyer is an "accredited  investor"
as  that  term is  defined  in  Rule  501(a)  of  Regulation  D (an  "ACCREDITED
INVESTOR").

          C. RELIANCE ON EXEMPTIONS.  The Buyer  understands that the Securities
are being offered and sold to it in reliance upon specific  exemptions  from the
registration requirements of United States federal and state securities laws and
that the  Company is relying  upon the truth and  accuracy  of, and the  Buyer's
compliance with, the representations,  warranties,  agreements,  acknowledgments
and  understandings  of the  Buyer set forth  herein in order to  determine  the
availability  of such exemptions and the eligibility of the Buyer to acquire the
Securities.

          D. INFORMATION. The Buyer and its advisors, if any, have been, and for
so long as the Debentures and Warrants remain  outstanding  will continue to be,
furnished

                                        2
<PAGE>

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

          E.  GOVERNMENTAL  REVIEW.  The Buyer understands that no United States
federal  or state  agency or any other  government  or  governmental  agency has
passed upon or made any recommendation or endorsement of the Securities.

          F.  TRANSFER  OR  RE-SALE.  The Buyer  understands  that (i) except as
provided  in the  Registration  Rights  Agreement,  the sale or  re-sale  of the
Securities  has not been and is not being  registered  under the 1933 Act or any
applicable  state  securities  laws,  and the  Securities may not be transferred
unless  (a) the  Securities  are  sold  pursuant  to an  effective  registration
statement  under the 1933 Act, (b) the Buyer shall have delivered to the Company
an opinion of counsel that shall be in form,  substance and scope  customary for
opinions of counsel in comparable transactions to the effect that the Securities
to be sold or transferred  may be sold or  transferred  pursuant to an exemption
from such registration,  which opinion shall be accepted by the Company, (c) the
Securities are sold or  transferred  to an  "affiliate"  (as defined in Rule 144
promulgated  under the 1933 Act (or a successor rule) ("RULE 144")) of the Buyer
who agrees to sell or otherwise  transfer the Securities only in accordance with
this Section 2(f) and who is an Accredited Investor, (d) the Securities are sold
pursuant to Rule 144, or (e) the  Securities  are sold  pursuant to Regulation S
under the 1933 Act (or a successor rule)  ("REGULATION  S"), and the Buyer shall
have  delivered  to the  Company an  opinion  of counsel  that shall be in form,
substance and scope customary for opinions of counsel in corporate transactions,
which opinion shall be accepted by the Company; (ii) any sale of such Securities
made in  reliance on Rule 144 may be made only in  accordance  with the terms of
said Rule and  further,  if said Rule is not  applicable,  any  re-sale  of such
Securities  under  circumstances in which the seller (or the person through whom
the sale is made) may be deemed to be an underwriter (as that term is defined in
the 1933 Act) may require  compliance  with some other  exemption under the 1933
Act or the rules and  regulations of the SEC  thereunder;  and (iii) neither the
Company nor any other person is under any obligation to register such Securities
under the 1933 Act or any state  securities laws or to comply with the terms and
conditions of any exemption thereunder (in each case, other than pursuant to the
Registration  Rights Agreement).  Notwithstanding the foregoing or anything else
contained herein to the contrary, the Securities may be pledged as collateral in
connection with a bona fide margin account or other lending arrangement.  In the
event that the Company  does not accept the  opinion of counsel  provided by the
Buyer with respect to the transfer of Securities  pursuant to an exemption  from
registration,  such as Rule 144 or  Regulation S, within three (3) business days
of delivery of the opinion to the  Company,  the Company  shall pay to the Buyer
liquidated  damages  of three  percent  (3%) of the  outstanding  amount  of the
Debentures  per month  plus  accrued  and  unpaid  interest  on the  Debentures,
prorated for partial months, in cash or shares

                                       3
<PAGE>

at the option of the Buyer ("STANDARD  LIQUIDATED DAMAGES AMOUNT"). If the Buyer
elects to be paid the  Standard  Liquidated  Damages  Amount in shares of Common
Stock,  such  shares  shall be  issued  at the  Conversion  Price at the time of
payment.

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

          "The  securities   represented  by  this  certificate  have  not  been
          registered  under  the  Securities  Act  of  1933,  as  amended.   The
          securities may not be sold,  transferred or assigned in the absence of
          an effective registration statement for the securities under said Act,
          or an opinion of counsel,  in form,  substance and scope customary for
          opinions of counsel in comparable  transactions,  that registration is
          not  required  under said Act or unless  sold  pursuant to Rule 144 or
          Regulation S under said Act."

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

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

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

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

                                       4
<PAGE>

          A.  ORGANIZATION  AND  QUALIFICATION.  The  Company  and  each  of its
Subsidiaries  (as defined  below),  if any,  is a  corporation  duly  organized,
validly  existing and in good  standing  under the laws of the  jurisdiction  in
which it is incorporated, with full power and authority (corporate and other) to
own,  lease,  use and operate its properties and to carry on its business as and
where now owned, leased, used, operated and conducted.  SCHEDULE 3(A) sets forth
a list of all of the  Subsidiaries of the Company and the  jurisdiction in which
each is incorporated. The Company and each of its Subsidiaries is duly qualified
as a  foreign  corporation  to do  business  and is in good  standing  in  every
jurisdiction  in which its  ownership  or use of  property  or the nature of the
business  conducted by it makes such  qualification  necessary  except where the
failure to be so qualified or in good standing would not have a Material Adverse
Effect.  "MATERIAL  ADVERSE  EFFECT"  means any material  adverse  effect on the
business, operations, assets, financial condition or prospects of the Company or
its Subsidiaries,  if any, taken as a whole, or on the transactions contemplated
hereby or by the  agreements  or  instruments  to be entered into in  connection
herewith.  "SUBSIDIARIES"  means any corporation or other organization,  whether
incorporated  or  unincorporated,   in  which  the  Company  owns,  directly  or
indirectly, any equity or other ownership interest.

          B.  AUTHORIZATION;  ENFORCEMENT.  (i) The  Company  has all  requisite
corporate  power and  authority  to enter into and perform this  Agreement,  the
Registration Rights Agreement, the Debentures and the Warrants and to consummate
the transactions contemplated hereby and thereby and to issue the Securities, in
accordance with the terms hereof and thereof, (ii) the execution and delivery of
this  Agreement,  the  Registration  Rights  Agreement,  the  Debentures and the
Warrants  by  the  Company  and  the  consummation  by  it of  the  transactions
contemplated hereby and thereby (including without  limitation,  the issuance of
the Debentures and the Warrants and the issuance and reservation for issuance of
the Conversion  Shares and Warrant Shares  issuable upon  conversion or exercise
thereof) have been duly  authorized  by the Company's  Board of Directors and no
further consent or authorization of the Company, its Board of Directors,  or its
shareholders  is  required,  (iii) this  Agreement  has been duly  executed  and
delivered by the Company by its authorized  representative,  and such authorized
representative  is the true and official  representative  with authority to sign
this Agreement and the other documents executed in connection  herewith and bind
the Company accordingly, and (iv) this Agreement constitutes, and upon execution
and delivery by the Company of the Registration Rights Agreement, the Debentures
and the Warrants,  each of such instruments will constitute,  a legal, valid and
binding obligation of the Company  enforceable against the Company in accordance
with its terms.

          C. CAPITALIZATION. As of the date hereof, the authorized capital stock
of the Company  consists of: (i)  50,000,000  shares of Common  Stock,  of which
21,567,120 shares are issued and outstanding,  5,481,336 shares are reserved for
issuance  pursuant to the Company's  stock option plans,  no shares are reserved
for issuance pursuant to securities (other than the Debentures and the Warrants)
exercisable  for, or convertible into or exchangeable for shares of Common Stock
and  12,083,333  shares  are  reserved  for  issuance  upon  conversion  of  the
Debentures  and the  Additional  Debentures  (as  defined in  Section  4(l)) and
exercise of the  Warrants  and the  Additional  Warrants  (as defined in Section
4(l))  (subject to adjustment  pursuant to the  Company's  covenant set forth in
Section  4(h)  below);  and  (ii) no  shares  of  preferred  stock.  All of such
outstanding  shares  of  capital  stock  are,  or upon  issuance  will be,  duly
authorized,  validly issued, fully paid and nonassessable.  No shares of capital
stock of the

                                       5
<PAGE>

Company  are subject to  preemptive  rights or any other  similar  rights of the
shareholders  of the Company or any liens or  encumbrances  imposed  through the
actions or failure to act of the Company.  Except as disclosed in SCHEDULE 3(C),
as of the  effective  date of  this  Agreement,  (i)  there  are no  outstanding
options,  warrants, scrip, rights to subscribe for, puts, calls, rights of first
refusal,  agreements,  understandings,  claims or other commitments or rights of
any character  whatsoever  relating to, or securities or rights convertible into
or  exchangeable  for any shares of capital  stock of the  Company or any of its
Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is
or may become bound to issue  additional  shares of capital stock of the Company
or any of its Subsidiaries,  (ii) there are no agreements or arrangements  under
which the Company or any of its  Subsidiaries  is obligated to register the sale
of any of its or their  securities  under the 1933 Act (except the  Registration
Rights  Agreement)  and (iii)  there are no  anti-dilution  or price  adjustment
provisions  contained in any security issued by the Company (or in any agreement
providing rights to security  holders) that will be triggered by the issuance of
the  Debentures,  the Warrants,  the Conversion  Shares or Warrant  Shares.  The
Company  has  furnished  to the Buyer true and correct  copies of the  Company's
Articles  of  Incorporation  as in  effect  on the  date  hereof  ("ARTICLES  OF
INCORPORATION"),  the  Company's  By-laws,  as in effect on the date hereof (the
"BY-LAWS"),  and the terms of all securities convertible into or exercisable for
Common  Stock of the Company and the material  rights of the holders  thereof in
respect  thereto.  The Company shall provide the Buyer with a written  update of
this  representation  signed by the Company's Chief Executive or Chief Financial
Officer on behalf of the Company as of the Closing Date.

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

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

          F. NO  CONFLICTS.  The  execution,  delivery and  performance  of this
Agreement, the Registration Rights Agreement, the Debentures and the Warrants by
the Company and the consummation by the Company of the transactions contemplated
hereby and thereby (including,  without limitation, the issuance and reservation
for issuance of the Conversion  Shares and Warrant Shares) will not (i) conflict
with or result in a violation of any provision of the Articles of  Incorporation
or  By-laws  or (ii)  violate  or  conflict  with,  or result in a breach of any
provision of, or constitute a default (or an event which with notice or lapse of
time or both  could  become a  default)  under,  or give to others any rights of
termination,   amendment,   acceleration  or  cancellation  of,  any  agreement,
indenture, patent, patent license or instrument to

                                       6
<PAGE>

which the Company or any of its  Subsidiaries  is a party,  or (iii) result in a
violation of any law, rule,  regulation,  order,  judgment or decree  (including
federal  and  state  securities  laws and  regulations  and  regulations  of any
self-regulatory  organizations  to  which  the  Company  or its  securities  are
subject)  applicable to the Company or any of its  Subsidiaries  or by which any
property or asset of the Company or any of its Subsidiaries is bound or affected
(except for such conflicts, defaults, terminations,  amendments,  accelerations,
cancellations  and  violations as would not,  individually  or in the aggregate,
have a Material Adverse Effect). Neither the Company nor any of its Subsidiaries
is  in   violation  of  its   Articles  of   Incorporation,   By-laws  or  other
organizational  documents and neither the Company nor any of its Subsidiaries is
in default (and no event has occurred which with notice or lapse of time or both
could put the Company or any of its  Subsidiaries in default) under, and neither
the Company nor any of its  Subsidiaries  has taken any action or failed to take
any action  that would  give to others  any  rights of  termination,  amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its  Subsidiaries  is a party or by which any  property or
assets of the Company or any of its  Subsidiaries  is bound or affected,  except
for possible  defaults as would not,  individually  or in the aggregate,  have a
Material Adverse Effect. The businesses of the Company and its Subsidiaries,  if
any, are not being conducted, and shall not be conducted so long as a Buyer owns
any of the Securities,  in violation of any law,  ordinance or regulation of any
governmental entity.  Except as specifically  contemplated by this Agreement and
as required under the 1933 Act and any  applicable  state  securities  laws, the
Company is not  required to obtain any  consent,  authorization  or order of, or
make any filing or registration with, any court, governmental agency, regulatory
agency, self regulatory organization or stock market or any third party in order
for  it to  execute,  deliver  or  perform  any of its  obligations  under  this
Agreement,  the Registration Rights Agreement, the Debentures or the Warrants in
accordance  with the terms hereof or thereof or to issue and sell the Debentures
and Warrants in  accordance  with the terms  hereof and to issue the  Conversion
Shares upon conversion of the Debentures and the Warrant Shares upon exercise of
the   Warrants.   Except  as  disclosed   in  SCHEDULE   3(F),   all   consents,
authorizations,  orders, filings and registrations which the Company is required
to obtain  pursuant to the preceding  sentence have been obtained or effected on
or prior to the date  hereof.  The  Company is not in  violation  of the listing
requirements of the  Over-the-Counter  Bulletin Board (the "OTCBB") and does not
reasonably anticipate that the Common Stock will be delisted by the OTCBB in the
foreseeable future. The Company and its Subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing.

          G.  SEC  DOCUMENTS;  FINANCIAL  STATEMENTS.  Except  as  disclosed  in
SCHEDULE  3(G),  the Company has timely  filed all  reports,  schedules,  forms,
statements and other documents  required to be filed by it with the SEC pursuant
to the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "1934  ACT") (all of the  foregoing  filed prior to the date hereof and all
exhibits  included  therein and financial  statements and schedules  thereto and
documents  (other than  exhibits to such  documents)  incorporated  by reference
therein,  being  hereinafter  referred  to herein as the "SEC  DOCUMENTS").  The
Company  has  delivered  to each  Buyer  true  and  complete  copies  of the SEC
Documents,  except for such  exhibits and  incorporated  documents.  As of their
respective  dates, the SEC Documents  complied in all material respects with the
requirements  of the  1934  Act  and  the  rules  and  regulations  of  the  SEC
promulgated  thereunder  applicable  to the SEC  Documents,  and none of the SEC
Documents,  at the time they  were  filed  with the SEC,  contained  any  untrue
statement of a material  fact or omitted to state a material fact required to be
stated therein or necessary in order to make the

                                       7
<PAGE>

statements  therein,  in light of the circumstances  under which they were made,
not misleading. None of the statements made in any such SEC Documents is, or has
been,  required to be amended or updated under  applicable  law (except for such
statements as have been amended or updated in subsequent  filings prior the date
hereof).  As of their respective dates, the financial  statements of the Company
included in the SEC Documents  complied as to form in all material respects with
applicable  accounting  requirements  and the published rules and regulations of
the SEC with respect  thereto.  Such financial  statements have been prepared in
accordance  with  United  States  generally  accepted   accounting   principles,
consistently  applied,  during  the  periods  involved  (except  (i)  as  may be
otherwise  indicated in such financial  statements or the notes thereto, or (ii)
in the case of unaudited interim statements,  to the extent they may not include
footnotes or may be condensed or summary  statements)  and fairly present in all
material  respects the  consolidated  financial  position of the Company and its
consolidated  Subsidiaries as of the dates thereof and the consolidated  results
of their  operations and cash flows for the periods then ended (subject,  in the
case of unaudited statements,  to normal year-end audit adjustments).  Except as
set  forth  in the  financial  statements  of the  Company  included  in the SEC
Documents, the Company has no liabilities,  contingent or otherwise,  other than
(i) liabilities  incurred in the ordinary course of business subsequent to March
31, 2002 and (ii)  obligations  under contracts and commitments  incurred in the
ordinary course of business and not required under generally accepted accounting
principles to be reflected in such financial statements,  which, individually or
in the  aggregate,  are not  material to the  financial  condition  or operating
results of the Company.

          H. ABSENCE OF CERTAIN  CHANGES.  Except as set forth on SCHEDULE 3(H),
since March 31, 2002,  there has been no material adverse change and no material
adverse   development  in  the  assets,   liabilities,   business,   properties,
operations,  financial  condition,  results of  operations  or  prospects of the
Company or any of its Subsidiaries.

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

          J.   PATENTS, COPYRIGHTS, ETC.

               (i) The Company and each of its  Subsidiaries  owns or  possesses
the requisite licenses or rights to use all patents, patent applications, patent
rights, inventions, know-how, trade secrets, trademarks, trademark applications,
service  marks,  service  names,  trade  names  and  copyrights   ("INTELLECTUAL
PROPERTY")  necessary to enable it to conduct its business as now operated (and,
except  as set  forth in  SCHEDULE  3(J)  hereof,  to the best of the  Company's
knowledge,  as presently contemplated to be operated in the future); there is no
claim or action by any person  pertaining to, or proceeding  pending,  or to the
Company's knowledge threatened,  which challenges the right of the Company or of
a Subsidiary with respect to any Intellectual Property necessary to enable it to
conduct its business as now operated (and, except

                                       8
<PAGE>

as set forth in SCHEDULE 3(J) hereof, to the best of the Company's knowledge, as
presently  contemplated  to be  operated  in the  future);  to the  best  of the
Company's  knowledge,  the Company's or its  Subsidiaries'  current and intended
products, services and processes do not infringe on any Intellectual Property or
other  rights  held by any  person;  and the  Company is unaware of any facts or
circumstances  which  might give rise to any of the  foregoing.  The Company and
each of its Subsidiaries have taken reasonable  security measures to protect the
secrecy, confidentiality and value of their Intellectual Property.

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

          K. NO MATERIALLY ADVERSE  CONTRACTS,  ETC. Neither the Company nor any
of its  Subsidiaries  is  subject  to any  charter,  corporate  or  other  legal
restriction,  or any judgment,  decree,  order,  rule or regulation which in the
judgment of the  Company's  officers  has or is expected in the future to have a
Material  Adverse Effect.  Neither the Company nor any of its  Subsidiaries is a
party to any  contract  or  agreement  which in the  judgment  of the  Company's
officers has or is expected to have a Material Adverse Effect.

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

                                       9
<PAGE>

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

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

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

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

                                       10
<PAGE>

          Q. NO BROKERS.  Except as set forth on Schedule  3(q), the Company has
taken no action  which would give rise to any claim by any person for  brokerage
commissions,  transaction fees or similar payments relating to this Agreement or
the transactions contemplated hereby.

          R. PERMITS; COMPLIANCE. The Company and each of its Subsidiaries is in
possession  of  all  franchises,  grants,  authorizations,   licenses,  permits,
easements, variances, exemptions,  consents, certificates,  approvals and orders
necessary to own,  lease and operate its properties and to carry on its business
as it is now being conducted (collectively, the "COMPANY PERMITS"), and there is
no action  pending or, to the  knowledge  of the Company,  threatened  regarding
suspension or  cancellation of any of the Company  Permits.  Neither the Company
nor any of its  Subsidiaries is in conflict with, or in default or violation of,
any of  the  Company  Permits,  except  for  any  such  conflicts,  defaults  or
violations  which,  individually  or in the  aggregate,  would not reasonably be
expected to have a Material  Adverse Effect.  Since March 31, 2002,  neither the
Company nor any of its Subsidiaries  has received any notification  with respect
to possible  conflicts,  defaults or violations of applicable  laws,  except for
notices relating to possible conflicts, defaults or violations, which conflicts,
defaults or violations would not have a Material Adverse Effect.

          S. ENVIRONMENTAL MATTERS.

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

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

                                       11
<PAGE>

or used by the Company or any of its  Subsidiaries,  except in the normal course
of the Company's or any of its Subsidiaries' business.

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

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

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

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

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

                                       12
<PAGE>

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

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

          Z. BREACH OF  REPRESENTATIONS  AND  WARRANTIES BY THE COMPANY.  If the
Company  breaches any of the  representations  or  warranties  set forth in this
Section  3, and in  addition  to any  other  remedies  available  to the  Buyers
pursuant  to this  Agreement,  the Company  shall pay to the Buyer the  Standard
Liquidated  Damages Amount in cash or in shares of Common Stock at the option of
the  Buyer,  until  such  breach is cured.  If the  Buyers  elect to be paid the
Standard Liquidated Damages Amounts in shares of Common Stock, such shares shall
be issued at the Conversion Price at the time of payment.

     4.   COVENANTS.

          A. BEST  EFFORTS.  The parties shall use their best efforts to satisfy
timely each of the conditions described in Section 6 and 7 of this Agreement.

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

          C.  REPORTING  STATUS;  ELIGIBILITY TO USE FORM S-3, SB-2 OR FORM S-1.
The Company's  Common Stock is  registered  under Section 12(g) of the 1934 Act.
The Company  represents and warrants that it meets the  requirements for the use
of Form S-3 (or if the Company is not eligible for the use of Form S-3 as of the
Filing Date (as defined in the Registration  Rights Agreement),  the Company may
use the  form of  registration  for  which  it is  eligible  at that  time)  for
registration of the sale by the Buyer of the Registrable  Securities (as defined
in the Registration  Rights  Agreement).  So long as the Buyer beneficially owns
any of the

                                       13
<PAGE>

Securities,  the Company shall timely file all reports required to be filed with
the SEC pursuant to the 1934 Act, and the Company shall not terminate its status
as an issuer required to file reports under the 1934 Act even if the 1934 Act or
the rules and regulations thereunder would permit such termination.  The Company
further agrees to file all reports  required to be filed by the Company with the
SEC in a timely manner so as to become eligible,  and thereafter to maintain its
eligibility,  for the use of Form S-3. The Company  shall issue a press  release
describing the materials terms of the transaction contemplated hereby as soon as
practicable  following  the  Closing  Date  but in no  event  more  than two (2)
business days of the Closing Date, which press release shall be subject to prior
review by the Buyers.  The  Company  agrees  that such press  release  shall not
disclose the name of the Buyers unless expressly  consented to in writing by the
Buyers or unless required by applicable law or regulation,  and then only to the
extent of such requirement.

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

          E. FUTURE  OFFERINGS.  Subject to the exceptions  described below, the
Company will not, without the prior written consent of a majority-in-interest of
the Buyers,  not to be  unreasonably  withheld,  negotiate or contract  with any
party to obtain  additional  equity financing  (including debt financing with an
equity  component)  that involves (A) the issuance of Common Stock at a discount
to the market  price of the Common  Stock on the date of issuance  (taking  into
account the value of any  warrants or options to acquire  Common Stock issued in
connection  therewith) or (B) the issuance of  convertible  securities  that are
convertible  into an  indeterminate  number of shares of Common Stock or (C) the
issuance of warrants during the period (the "LOCK-UP  PERIOD")  beginning on the
Closing Date and ending on the later of (i) two hundred  seventy (270) days from
the  Closing  Date and (ii) one  hundred  eighty  (180)  days  from the date the
Registration  Statement  (as defined in the  Registration  Rights  Agreement) is
declared effective (plus any days in which sales cannot be made thereunder).  In
addition,  subject to the  exceptions  described  below,  the  Company  will not
conduct any equity financing  (including debt with an equity component) ("FUTURE
OFFERINGS")  during the period  beginning on the Closing Date and ending two (2)
years after the end of the Lock-up  Period unless it shall have first  delivered
to each Buyer,  at least twenty (20)  business days prior to the closing of such
Future  Offering,  written  notice  describing  the  proposed  Future  Offering,
including the terms and conditions thereof and proposed definitive documentation
to be entered into in connection  therewith,  and providing each Buyer an option
during the fifteen (15) day period following delivery of such notice to purchase
its pro rata share (based on the ratio that the  aggregate  principal  amount of
Debentures  purchased by it hereunder bears to the aggregate principal amount of
Debentures  purchased  hereunder) of the securities  being offered in the Future
Offering  on the  same  terms  as  contemplated  by such  Future  Offering  (the
limitations  referred  to in  this  sentence  and  the  preceding  sentence  are
collectively referred to as the "CAPITAL RAISING LIMITATIONS"). In the event the
terms and  conditions of a proposed  Future  Offering are amended in any respect
after  delivery  of the  notice to the Buyers  concerning  the  proposed  Future
Offering,  the Company shall deliver a new notice to each Buyer  describing  the
amended  terms and  conditions  of the proposed  Future  Offering and each Buyer
thereafter shall have an option during

                                       14
<PAGE>

the fifteen  (15) day period  following  delivery of such new notice to purchase
its pro  rata  share  of the  securities  being  offered  on the  same  terms as
contemplated  by such  proposed  Future  Offering,  as  amended.  The  foregoing
sentence shall apply to successive amendments to the terms and conditions of any
proposed Future Offering. The Capital Raising Limitations shall not apply to any
transaction   involving  (i)  issuances  of  securities  in  a  firm  commitment
underwritten  public offering  (excluding a continuous offering pursuant to Rule
415 under the 1933 Act) or (ii) issuances of securities as  consideration  for a
merger, consolidation or purchase of assets, or in connection with any strategic
partnership  or joint  venture  (the  primary  purpose  of which is not to raise
equity  capital),  or in connection  with the  disposition  or  acquisition of a
business,  product or license by the Company.  The Capital  Raising  Limitations
also shall not apply to the issuance of  securities  upon exercise or conversion
of the Company's options,  warrants or other convertible  securities outstanding
as of the date hereof or to the grant of additional options or warrants,  or the
issuance of additional securities,  under any Company stock option or restricted
stock plan approved by the shareholders of the Company.

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

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

          H.  AUTHORIZATION AND RESERVATION OF SHARES.  The Company shall at all
times have  authorized,  and reserved for the purpose of issuance,  a sufficient
number of shares of Common Stock to provide for the full  conversion or exercise
of the outstanding Debentures and Warrants and issuance of the Conversion Shares
and Warrant Shares in connection therewith (based on the Conversion Price of the
Debentures or Exercise Price of the Warrants in effect from time to time) and as
otherwise required by the Debentures. The Company shall not reduce the number of
shares of Common Stock  reserved for issuance upon  conversion of Debentures and
exercise of the Warrants without the consent of each Buyer. The Company shall at
all times

                                       15
<PAGE>

maintain  the number of shares of Common  Stock so reserved  for  issuance at an
amount  ("RESERVED  AMOUNT") equal to no less than two (2) times the number that
is then actually  issuable upon full conversion of the Debentures and Additional
Debentures and upon exercise of the Warrants and the Additional  Warrants (based
on the Conversion  Price of the Debentures or the Exercise Price of the Warrants
in  effect  from time to  time).  If at any time the  number of shares of Common
Stock authorized and reserved for issuance ("AUTHORIZED AND RESERVED SHARES") is
below the Reserved  Amount,  the Company will promptly take all corporate action
necessary to authorize  and reserve a  sufficient  number of shares,  including,
without  limitation,  calling a special  meeting of  shareholders  to  authorize
additional shares to meet the Company's  obligations under this Section 4(h), in
the case of an  insufficient  number of authorized  shares,  obtain  shareholder
approval  of an  increase in such  authorized  number of shares,  and voting the
management  shares of the  Company  in favor of an  increase  in the  authorized
shares  of the  Company  to  ensure  that the  number  of  authorized  shares is
sufficient  to meet the  Reserved  Amount.  If the Company  fails to obtain such
shareholder  approval  within  thirty (30) days  following the date on which the
number of  Authorized  and  Reserved  Shares  exceeds the Reserved  Amount,  the
Company shall pay to the Borrower the Standard  Liquidated  Damages  Amount,  in
cash or in shares  of Common  Stock at the  option  of the  Buyer.  If the Buyer
elects to be paid the  Standard  Liquidated  Damages  Amount in shares of Common
Stock,  such  shares  shall be  issued  at the  Conversion  Price at the time of
payment.  In order to ensure that the Company has authorized a sufficient amount
of shares to meet the Reserved Amount at all times,  the Company must deliver to
the Buyer at the end of every month a list  detailing (1) the current  amount of
shares  authorized by the Company and reserved for the Buyer;  and (2) amount of
shares  issuable  upon  conversion  of the  Debentures  and upon exercise of the
Warrants and as payment of interest  accrued on the  Debentures for one year. If
the Company  fails to provide such list within five (5) business days of the end
of each month, the Company shall pay the Standard  Liquidated Damages Amount, in
cash or in shares of Common Stock at the option of the Buyer,  until the list is
delivered. If the Buyer elects to be paid the Standard Liquidated Damages Amount
in shares of Common Stock,  such shares shall be issued at the Conversion  Price
at the time of payment.

          I.  LISTING.  The  Company  shall  promptly  secure the listing of the
Conversion Shares and Warrant Shares upon each national  securities  exchange or
automated  quotation  system, if any, upon which shares of Common Stock are then
listed  (subject to official  notice of issuance) and, so long as any Buyer owns
any of the  Securities,  shall  maintain,  so long as any other shares of Common
Stock  shall be so listed,  such  listing of all  Conversion  Shares and Warrant
Shares from time to time issuable upon  conversion of the Debentures or exercise
of the  Warrants.  The Company will obtain and, so long as any Buyer owns any of
the  Securities,  maintain  the listing  and trading of its Common  Stock on the
OTCBB  or any  equivalent  replacement  exchange,  the  Nasdaq  National  Market
("NASDAQ"),  the Nasdaq SmallCap Market ("NASDAQ SMALLCAP"),  the New York Stock
Exchange  ("NYSE"),  or the American Stock Exchange  ("AMEX") and will comply in
all respects with the Company's  reporting,  filing and other  obligations under
the bylaws or rules of the National  Association of Securities  Dealers ("NASD")
and such exchanges,  as applicable.  The Company shall promptly  provide to each
Buyer copies of any notices it receives  from the OTCBB and any other  exchanges
or  quotation  systems on which the Common  Stock is then listed  regarding  the
continued  eligibility  of the Common  Stock for listing on such  exchanges  and
quotation systems.

                                       16
<PAGE>

          J.  CORPORATE  EXISTENCE.  So long as a Buyer  beneficially  owns  any
Debentures or Warrants,  the Company shall maintain its corporate  existence and
shall not sell all or substantially all of the Company's  assets,  except in the
event of a merger or consolidation  or sale of all or  substantially  all of the
Company's  assets,  where the surviving or successor  entity in such transaction
(i) assumes the Company's  obligations  hereunder and under the  agreements  and
instruments  entered into in connection  herewith and (ii) is a publicly  traded
corporation  whose  Common  Stock is listed for  trading  on the OTCBB,  Nasdaq,
Nasdaq SmallCap, NYSE or AMEX.

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

          L. SUBSEQUENT INVESTMENT.  The Company and the Buyers agree that, upon
filing by the Company of the Registration  Statement to be filed pursuant to the
Registration  Rights  Agreement (the "FILING  DATE"),  the Buyers shall purchase
additional debentures ("FILING DEBENTURES") in the aggregate principal amount of
Two Hundred Fifty  Thousand  Dollars  ($250,000)  and  additional  warrants (the
"FILING  WARRANTS") to purchase an aggregate of 625,000  shares of Common Stock,
for  an  aggregate   purchase  price  of  Two  Hundred  Fifty  Thousand  Dollars
($250,000),  with the closing of such purchase to occur within fifteen (15) days
of the Filing Date;  provided,  however,  that the  obligation  of each Buyer to
purchase  the  Filing  Debentures  and the  Filing  Warrants  is  subject to the
satisfaction,  at or before  the  closing  of such  purchase  and  sale,  of the
conditions  set forth in Section 7. The  Company  and the Buyers  further  agree
that, upon the declaration of effectiveness of the Registration  Statement to be
filed pursuant to the Registration  Rights Agreement (the "EFFECTIVE DATE"), the
Buyers shall purchase additional debentures (the "EFFECTIVENESS DEBENTURES" and,
collectively  with the Filing  Debentures,  the "ADDITIONAL  DEBENTURES") in the
aggregate  principal amount of Two Hundred Fifty Thousand Dollars ($250,000) and
additional  warrants (the  "EFFECTIVENESS  WARRANTS" and,  collectively with the
Filing Warrants,  the "ADDITIONAL WARRANTS") to purchase an aggregate of 625,000
shares of Common  Stock,  for an aggregate  purchase  price of Two Hundred Fifty
Thousand Dollars  ($250,000),  with the closing of such purchase to occur within
five (5)  business  days of the  Effective  Date;  provided,  however,  that the
obligation  of each  Buyer to  purchase  the  Effectiveness  Debentures  and the
Effectiveness Warrants is subject to the satisfaction,  at or before the closing
of such  purchase  and sale,  of the  conditions  set forth in  Section  7; and,
provided,  further,  that there shall not have been a Material Adverse Effect as
of  such  effective  date.  The  terms  of the  Additional  Debentures  and  the
Additional  Warrants  shall be  identical  to the  terms of the  Debentures  and
Warrants, as the case may be, to be issued on the Closing Date. The Common Stock
underlying  the  Additional  Debentures  and the  Additional  Warrants  shall be
Registrable  Securities (as defined in the  Registration  Rights  Agreement) and
shall be  included in the  Registration  Statement  to be filed  pursuant to the
Registration Rights Agreement.

          M. BREACH OF COVENANTS.  If the Company  breaches any of the covenants
set forth in this Section 4, and in addition to any other remedies  available to
the Buyers pursuant to this  Agreement,  the Company shall pay to the Buyers the
Standard  Liquidated Damages Amount, in cash or in shares of Common Stock at the
option of the Buyer,

                                       17
<PAGE>

until  such  breach  is  cured.  If the  Buyers  elect to be paid  the  Standard
Liquidated  Damages  Amount  in  shares,  such  shares  shall be  issued  at the
Conversion Price at the time of payment.

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

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

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

                                       18
<PAGE>

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

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

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

     7.  CONDITIONS TO EACH BUYER'S  OBLIGATION TO PURCHASE.  The  obligation of
each Buyer  hereunder to purchase the  Debentures and Warrants at the Closing is
subject  to the  satisfaction,  at or  before  the  Closing  Date of each of the
following  conditions,  provided that these conditions are for such Buyer's sole
benefit and may be waived by such Buyer at any time in its sole discretion:

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

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

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

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

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

                                       19
<PAGE>

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

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

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

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

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

     8.   GOVERNING LAW; MISCELLANEOUS.

          A. GOVERNING LAW. THIS  AGREEMENT  SHALL BE ENFORCED,  GOVERNED BY AND
CONSTRUED IN  ACCORDANCE  WITH THE LAWS OF THE STATE OF NEW YORK  APPLICABLE  TO
AGREEMENTS MADE AND TO BE PERFORMED  ENTIRELY WITHIN SUCH STATE,  WITHOUT REGARD
TO THE  PRINCIPLES OF CONFLICT OF LAWS.  THE PARTIES HERETO HEREBY SUBMIT TO THE
EXCLUSIVE  JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK,
NEW  YORK  WITH  RESPECT  TO ANY  DISPUTE  ARISING  UNDER  THIS  AGREEMENT,  THE
AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS  CONTEMPLATED
HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT
FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING.  BOTH PARTIES FURTHER AGREE
THAT  SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED
IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR
PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN
ANY  OTHER  MANNER   PERMITTED  BY  LAW.   BOTH  PARTIES   AGREE  THAT  A  FINAL
NON-APPEALABLE  JUDGMENT IN ANY SUCH SUIT OR PROCEEDING  SHALL BE CONCLUSIVE AND
MAY BE ENFORCED IN OTHER  JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER
LAWFUL  MANNER.  THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE  ARISING  UNDER
THIS  AGREEMENT  SHALL  BE  RESPONSIBLE  FOR ALL FEES  AND  EXPENSES,  INCLUDING
ATTORNEYS'  FEES,  INCURRED  BY THE  PREVAILING  PARTY IN  CONNECTION  WITH SUCH
DISPUTE.

          B.  COUNTERPARTS;  SIGNATURES  BY  FACSIMILE.  This  Agreement  may be
executed in one or more counterparts,  each of which shall be deemed an original
but all of which shall  constitute  one and the same  agreement and shall become
effective when  counterparts have been signed by each party and delivered to the
other party. This Agreement, once executed by a

                                       20
<PAGE>

party, may be delivered to the other party hereto by facsimile transmission of a
copy of this  Agreement  bearing the signature of the party so  delivering  this
Agreement.

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

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

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

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

                    If to the Company:

                         Peabodys Coffee, Inc.
                         3845 Atherton Road, Suite 9
                         Rocklin, CA 95765
                         Attention:  Todd N. Tkachuk
                         Telephone: 916-632-6090
                         Facsimile:  916-632-6099

                                       21
<PAGE>

                    With a copy to:

                         Sichenzia Ross Friedman Ference LLP
                         1065 Avenue of the Americas, 21st Floor
                         New York, New York 10018
                         Attention:  Gregory Sichenzia, Esq.
                         Telephone:  212-930-9700
                         Facsimile:   212-930-9725
                         Email: GSichenzia@srfllp.net

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

                    With copy to:

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

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

          G.  SUCCESSORS AND ASSIGNS.  This Agreement  shall be binding upon and
inure to the benefit of the parties and their  successors  and assigns.  Neither
the  Company  nor any  Buyer  shall  assign  this  Agreement  or any  rights  or
obligations   hereunder   without  the  prior  written  consent  of  the  other.
Notwithstanding the foregoing, subject to Section 2(f), any Buyer may assign its
rights  hereunder  to  any  person  that  purchases   Securities  in  a  private
transaction from a Buyer or to any of its  "affiliates," as that term is defined
under the 1934 Act, without the consent of the Company.

          H. THIRD PARTY  BENEFICIARIES.  This  Agreement  is  intended  for the
benefit of the parties  hereto and their  respective  permitted  successors  and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.

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

                                       22
<PAGE>

Agreement  or  the  Registration  Rights  Agreement,  including  advancement  of
expenses as they are incurred.

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

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

          L. NO STRICT CONSTRUCTION. The language used in this Agreement will be
deemed to be the language  chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party.

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

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       23
<PAGE>

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

PEABODYS COFFEE, INC.

______________________________________
Todd N. Tkachuk
President

AJW PARTNERS, LLC
By:  SMS Group, LLC

______________________________________
Corey S. Ribotsky
Manager

RESIDENCE:  Delaware

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

AGGREGATE SUBSCRIPTION AMOUNT:

         Aggregate Principal Amount of Debentures:            $83,334
         Number of Warrants:                                  208,336
         Aggregate Purchase Price:                            $83,334

                                       24
<PAGE>

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

______________________________________
Corey S. Ribotsky
Manager

RESIDENCE:  Cayman Islands

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

AGGREGATE SUBSCRIPTION AMOUNT:

         Aggregate Principal Amount of Debentures:            $83,333
         Number of Warrants:                                  208,332
         Aggregate Purchase Price:                            $83,333

                                       25
<PAGE>

AJW QUALIFIED PARTNERS, LLC
By:  AJW Manager, LLC

____________________________________
Corey S. Ribotsky
Manager

RESIDENCE:  New York

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

AGGREGATE SUBSCRIPTION AMOUNT:

         Aggregate Principal Amount of Debentures:            $83,333
         Number of Warrants:                                  208,332
         Aggregate Purchase Price:                            $83,333

                                       26
<PAGE>

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