8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): October 12, 2007 (October 9, 2007)

NIGHTHAWK SYSTEMS, INC.

(Exact name of registrant as specified in charter)

Nevada	0-30786	87-0627349
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer  Identification No.)

10715 Gulfdale, Suite 200 San Antonio, TX 78216

(Address of principal executive offices)

(210) 341-4811

(Registrant’s Telephone Number, including Area Code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligations of the registrant under any of the following provisions (see General Instruction A.2. below):

o

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

ITEM 1.01

ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.

Asset Purchase Agreement

On October 11, 2007, Nighthawk Systems, Inc. (the “Company” or “Nighthawk”) entered into an Asset Purchase Agreement (the “Agreement”) with Eagle Broadband, Inc. (“Eagle Broadband”), pursuant to which Nighthawk purchased from Eagle Broadband, and Eagle Broadband sold and transferred to Nighthawk, all right, title, and interest in and to Eagle Broadband’s set-top box business (the “Business”), including without limitation, certain inventory equipment (as more fully described in the Agreement) all lists, records and other information pertaining to drawings, blueprints, work orders, product data, equipment, equipment maintenance, utilization, and all books, ledgers, files and business records pertaining to the Business, whether evidenced in writing, electronically (including, without limitation, by computer) or otherwise (collectively, with the Business, the “Purchased Assets”).  The set-top box Business pu rchased by Nighthawk allows for the delivery of High Definition, IP-based television and Internet services to the Hospitality industry.  The purchase price was $4,750,000 which was paid on the closing date of the Acquisition. Nighthawk assumed certain liabilities of Eagle Broadband relating to the Business.

A copy of the Agreement is filed herewith as Exhibit 10.1.

Customer Agreement

In connection with the Acquisition, the Company was assigned the rights and obligations relating to that certain Purchase Agreement entered into by and between Eagle Broadband and a leading hospitality solutions provider dated March 1, 2007 (“Customer Agreement”).  Pursuant to the Customer Agreement, the customer is to submit purchase orders to the Company, from time to time, for the Company’s high-definition set-top boxes known as MediaPro IP3000HD.

Preferred Stock Financing

In connection with the Acquisition described herein, on October 9, 2007, the Company issued to Dutchess Private Equities Fund, Ltd. (“Dutchess”) 600,000 shares of its Series B Convertible Preferred Stock, $0.001 par value per share, for a purchase price of $6,000,000 (the “Preferred Stock”). The Preferred Stock has certain preferences and rights as provided for in the Company’s Certificate of Designations, Preferences and Rights of Series B Preferred Stock (“Certificate of Designation”).

In connection with the issuance of the Debenture, the Company executed and delivered to Dutchess a Subscription Agreement and a seven (7) year Warrant to purchase 10,000,000 shares of the Company’s Common Stock at 5/100 per share ($0.05). Moreover, the Company agreed that all obligations pursuant to certain existing indebtedness the Company has with Dutchess, as evidenced by certain Debentures, and the Preferred Stock are to be secured pursuant to a Security Agreement.

A copy of the Subscription Agreement, Certificate of Designation, Security Agreement and Warrant are filed herewith as Exhibits 10.2, 10.3, 10.4 and 10.5.

ITEM 2.01

COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS

See Item 1.01 above.

ITEM 3.02

UNREGISTERED SALES OF EQUITY SECURITIES

See Item 1.01 above.

The Company claims an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Act”) for the private placement of these securities pursuant to Section 4(2) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among other things, the transaction does not involve a public offering, the Investor is an “accredited investor” and/or qualified institutional buyer, the Investor has access to information about the Company and its investment, the Investor will take the securities for investment and not resale, and the Company is taking appropriate measures to restrict the transfer of the securities.

ITEM 9.01

FINANCIAL STATEMENTS AND EXHIBITS.

(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.

Financial Statements for the acquisition described herein will be filed pursuant to an amendment to this Current Report.

(b) PRO FORMA FINANCIAL INFORMATION.

Not applicable.

(c) SHELL COMPANY TRANSACTIONS.

Not applicable.

(d) EXHIBITS.

Exhibit Number	Description
10.1	Asset Purchase Agreement dated October 10, 2007 by and between Nighthawk Systems, Inc. and Eagle Broadband, Inc.
10.2	Subscription Agreement, dated October 9, 2007 by and between Nighthawk Systems, Inc. and Dutchess Private Equities Fund, Ltd.
10.3	Certificate of Designations, Preferences and Rights of Series B Preferred Stock
10.4	Security Agreement, dated October 9, 2007 by and between Nighthawk Systems, Inc. and Dutchess Private Equities Fund, Ltd.
10.5	Warrant, issued by Nighthawk Systems, Inc. to Dutchess Private Equities Fund, Ltd., dated October 9, 2007

SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Current Report on Form 8-K to be signed on its behalf by the undersigned thereunto duly authorized.

		NIGHTHAWK SYSTEMS, INC.
Date:   October 12, 2007	By:	/s/ H. Douglas Saathoff
		H. Douglas Saathoff
		Chief Executive Officer

EX-10

Exhibit 10.1

ASSET PURCHASE AGREEMENT

This ASSET PURCHASE AGREEMENT (“Agreement”) is made as of October 11, 2007 (the “Effective Date”), by and among Eagle Broadband, Inc., a Texas corporation (“Seller”), and Nighthawk Systems, Inc., a Nevada corporation (“Buyer”).

BACKGROUND

WHEREAS, subject to the terms and conditions set forth herein, Buyer desires to acquire from Seller, and Seller desires to sell to Buyer, all of Seller’s set-top box business (the “Business”), together with all historical records and documents of the Business, including the right to use any assumed names, logos, or other identifiers associated with the Business (except for names, logos or other identifiers which are primarily associated with the Seller’s corporate image or non-set-top box businesses, including, but not limited to, the name “Eagle Broadband” and the Eagle Broadband logo.)

NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements set forth in this Agreement, and intending to be legally bound, the parties agree as follows:

1.

PURCHASE AND SALE OF THE BUSINESS.

1.1

Purchase of Business.  On the terms contained in this Agreement, Seller shall sell, transfer and deliver to Buyer, by appropriate instruments satisfactory to Buyer and its counsel, all right, title and interest of Seller and its Affiliates in and to the Business, including without limitation, all lists, records and other information pertaining to drawings, blueprints, work orders, product data, equipment, equipment maintenance, utilization, and all books, ledgers, files and business records pertaining to the Business, whether evidenced in writing, electronically (including, without limitation, by computer) or otherwise (“Purchased Assets”).  All such Purchased Assets are listed on Schedule 1.2.

1.2

Inventory and Equipment Consideration.  At the Closing (defined below), Buyer will purchase from Seller all assets of the Seller pertaining to the set-top box business, including all of the technical parts, supplies, inventory and equipment directly associated with the Business (the “Inventory”), including but not limited to the detailed inventory and fixed asset list which is attached as Schedule 1.2.

1.3

Limited Assumed Liabilities.  At the Closing (defined below), Buyer will assume and pay the obligations of Seller listed on Schedule 1.3 (the “Assumed Liabilities”).

1.4

Excluded Liabilities.  Except for the Assumed Liabilities described in Section 1.3 above, Buyer shall not assume or become liable for, and shall not be deemed to have assumed or have become liable for, any other debts, liabilities or obligations of Seller of any nature whatsoever, whether accrued, absolute or contingent, whether known or unknown, whether disclosed or undisclosed, whether due or to become due and regardless of when or by whom asserted (collectively, “Excluded Liabilities”).

1.5

Employees.  Starting on October 15, 2007, Buyer agrees to hire, on the same at-will employment terms as existed in recent times at Seller, the following individuals: Jon Hayden, Giang Dao, Dominic Kok and Marilyn Maddox.  All vacation time owed by Seller will be paid by Seller to these employees as they terminate their employment with the Seller at the Closing and they will start new accruals for vacation time with the Buyer.  Transferred employees will retain their years of service seniority entitlements with the Seller in their transfer to the Buyer, as if they had been employed by the Buyer from their individual employment start dates with the Seller.  Transferred employees will cease their benefit programs with the Seller at Closing and will enroll in Buyer benefit programs immediately following Closing.  If there are to be delays in the start of medical coverage, Buyer will reimburse transferred employee C OBRA payments to Seller for the medical transition period.

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2.

PURCHASE PRICE AND CLOSING

2.1

Purchase Price.  Subject to the conditions contained in this Agreement, in consideration for the transfer of the Business and Inventory, Buyer shall pay to Seller $4.75 million dollars ($4,750,000) (the “Purchase Price”).  

2.2

Closing.  The closing of the purchase and sale of the Business (the “Closing”) will take place on October 10, 2007 (the “Closing Date”), at the offices of Seller.  At the Closing, Buyer shall deliver to Seller the Purchase Price less the $250,000 deposit paid by Buyer on September 5, 2007, by wire transfer of immediately available funds to a bank account designated in writing by Seller.

2.3

Post-Closing Assistance.  Seller will make available to Buyer the services of Brian Morrow on up to a half-time basis for a period of ninety (90) days following the Closing.  Buyer will pay any expenses incurred by Mr. Morrow or Seller in connection with such assistance and will reimburse Seller for Mr. Morrow’s time at the rate of $110 per hour.

2.4

Definitions.  For purposes of this Agreement, the following terms have the meanings set forth below:

“Affiliate” means when used with respect to any Person, (a) if such Person is a corporation, any officer or director thereof and any Person which is, directly or indirectly, the beneficial owner (by itself or as part of any group) of more than twenty percent (20%) of any class of any equity security (as defined in Section 3(a)(ii) of the Securities Exchange Act of 1934, as amended) thereof, and, if such beneficial owner is a partnership, any general or limited partner thereof, or if such beneficial owner is a corporation, any Person controlling, controlled by or under common control with such beneficial owner, or any officer or director of such beneficial owner or of any corporation occupying any such control relationship, (b) if such Person is a partnership, any general or limited partner thereof and (c) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person.  For purposes of this definition, (i) “control” (including the correlative terms “controlling,” “controlled by” and “under common control with”), with respect to any Person, shall mean possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise; and (ii) all officers, directors, and stockholders of such party shall be considered an Affiliate of such party.

“Government Entity” means any public body or authority, including courts of competent jurisdiction, domestic or foreign.

“Person” means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof.

2.5

Allocation Reporting.  Buyer and Seller agree to allocate the payments set forth in Section 1 among the Purchased Assets in accordance with Section 1060 of the Code, which allocation shall be prepared by Buyer within ninety (90) days after the Closing Date.  If Seller disputes the allocation, Buyer and Seller shall cooperate in good faith to resolve any dispute.  Should the parties fail to reach an agreement within thirty (30) days after Buyer’s delivery of such allocation to Seller, the determination of the allocation shall be made by T.R. Moore whose decision shall be final.  Buyer and Seller, in connection with their respective U.S. federal, state, and local tax returns and other filings (including without limitation Internal Revenue Service Form 8594), shall not take any position inconsistent with such treatment and allocation.

3.

REPRESENTATIONS AND WARRANTIES CONCERNING SELLER.

As an inducement to Buyer to enter into this Agreement and to consummate these transactions, Seller represents and warrants to Buyer as follows:

3.1

Organization of Seller.  Seller is a corporation, formed and duly organized, validly existing and in good standing under the laws of the State of Texas.  Seller is duly qualified or licensed, as applicable, and authorized to conduct its Business in each state in which the nature of the Business of the Seller makes such qualification or license necessary.

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3.2

Authority of Seller.

Seller has full power and authority to enter into this Agreement, to consummate the transactions contemplated hereby and to comply with the terms, conditions and provisions hereof.  This Agreement and each other agreement or instrument of Seller contemplated by it will be, the legal, valid and binding agreement of Seller, enforceable against Seller in accordance with its terms, except where such enforceability is limited by any applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance or similar laws or equitable principles affecting the enforcement of creditor’s rights.  The execution, delivery and performance of this Agreement and the other agreements of Seller contemplated by it do not require any further authorization, the consent of or notice to any third party.  Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated herein will conflict w ith or result in any violation of or constitute a default under any term of any agreement, mortgage, debt instrument, indenture, or other instrument, judgment, decree, order, award, law or regulation by which Seller is bound, or result in the creation of any lien upon the Business.

3.3

Broker or Finder.  Neither Seller, nor any party acting on Seller’s behalf, has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated herein.

3.4

Options, Warrants and Rights of First Refusal.  No Person other than the Buyer has any option, warrant or right of first refusal to purchase the Business.

3.5

Litigation.  With respect to the Business and with the exception of information detailed on publicly disclosed SEC filings prior to the Effective Date, (i) there are no material orders, investigations or claims pending or, to the best knowledge of Seller, threatened against Seller, or pending or threatened by either Seller against any third party, at law or in equity, or before or by any Government Entity, (ii) neither Seller nor the Business are subject to any arbitration proceedings under collective bargaining agreements or otherwise or any governmental investigations or inquiries, and (iii) to the best knowledge of Seller, there is no basis for any of the foregoing.

3.6

Consents.  The execution and delivery of this Agreement by Seller does not, and the performance of this Agreement by Seller will not:  (i) require any authorization, approval, consent, waiver, amendment or other action by, or registration, declaration or filing with or notice to, any foreign, domestic, federal, territorial, state or local governmental authority (including the United States Federal Communications Committee relating to that certain high density copy protection license), quasi-governmental authority, instrumentality, court, arbitral panel, government or self-regulatory organization, commission, tribunal or organization or any regulatory, administrative or other agency, or any political or other subdivision, department or branch of any of the foregoing (each, a “Governmental Authority”); (ii) result in a violation of any statute, law, rule, regulation or ordinance (the foregoing, coll ectively, “Laws”), or of any order, writ, injunction, judgment decree or other requirement of any Governmental Authority (the foregoing, each an “Order”) applicable to Seller, the Business or the assets purchased hereunder; (iii) result in the creation of any Lien on any of the assets; or (iv) violate the articles (or certificate) of incorporation, bylaws or other organizational documents or instruments of Seller.

3.7

Intellectual Property.  Schedule 3.7 lists all items of Intellectual Property, as defined by inclusion in Schedule 3.7, of Seller necessary to the operation of the Business as now conducted, in each case free of any claims of infringement or any actual infringement.  No consent will be required for the use of any Intellectual Property by Buyer and no governmental registration of any of the Intellectual Property has lapsed or expired or been canceled, abandoned, opposed, or the subject of any reexamination request.  No current licenses for the use of any of the Intellectual Property have been granted by Seller to any third parties, and none of the Intellectual Property is being used by any other individual or entity.

3.8

Material Contracts.  True and correct copies of all Material Agreements (as defined below) as currently in effect have previously been delivered to Buyer.  The term “Material Agreement” means each contract, lease, undertaking, commitment, mortgage, indenture, note, security agreement, pledge agreement, guaranty, bond, letter of credit, lease or instrument creating any lien or claim on any of the assets used in the Business (other than unsecured trade accounts payable and incurred in the ordinary course of business), license and other agreement of Seller in effect on the date hereof which relates to the Business.

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3.9

Applicable Laws and Permits.  Schedule 3.9 sets forth a list of all of the licenses, permits, permit applications, qualifications, certificates, franchises, approvals, authorizations, exemptions, registrations, all applications therefor, and other documentation necessary to own and operate the Purchased Assets and to conduct the Business as it is currently being conducted, including without limitation any thereof required pursuant to any environmental law  (collectively, “Permits”).  Seller has heretofore delivered or caused to be delivered to Buyer true and correct copies of all such Permits as presently in effect.  Except as listed in Schedule 3.9:  (a) Seller has all such Permits, each of which is in full force and effect; (b) the Business is now being, and has at all times been, conducted and such assets and properties are being, and have at all times been, owned and o perated in material compliance with all applicable Laws and Orders and all such Permits; (c) the Business is now being operated in compliance with all pending Permit applications and the Seller has no reason to believe the governing agency will not approve such pending Permit applications; and (d) Seller has not received any notice of any violation, breach or default of any such Laws, Orders or Permits.

3.10

Product Liability.  There is no currently pending claim for product liability, warranty, material back-charge, material additional work, field repair or other claims by any third party (whether based on contract or tort and whether relating to personal injury, including death, property damage or economic loss) arising from: (a) services rendered by Seller in connection with the Business during periods through and including the Closing Date, (b) the sale, distribution, erection or installation of products by Seller in connection with the Business prior to the Closing Date, or the manufacture of products by Seller in connection with the Business, or (c) the operation of the Business or the ownership of the Purchased Assets during the period through and including the Closing Date.  All services rendered and products sold by Seller in connection with the Business have been in material conformity with all applicable contractu al commitments and all express and implied warranties, and Seller has no liability (and Seller has no knowledge of any basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand giving rise to any liability) for damages in connection therewith.  No services or products provided by Seller in connection with the Business are subject to any guaranty, warranty, or other indemnity beyond Seller’s standard terms and conditions of sale.

3.11

Insurance.  Seller has obtained and will maintain through the Closing Date insurance policies that provide coverage to insure the Purchased Assets and the Business against such risks and in such amounts as are prudent and customary in the industry in which Seller operates and all such policies are in full force and effect (the “Insurance Policies”).  None of the insurers under any of the Insurance Policies has rejected the defense or coverage of any claim purported to be covered by such insurer or has reserved the right to reject the defense or coverage of any claim purported to be covered by such insurer.

4.

REPRESENTATIONS AND WARRANTIES OF BUYER

As an inducement to Seller to enter into this Agreement and to consummate these transactions, Buyer represents, warrants and covenants to Seller as follows:

4.1

Organization of Buyer.  Buyer is a corporation, formed and duly organized under the laws of the State of Nevada, has the requisite power and authority to enter into this Agreement and to perform the terms of this Agreement.

4.2

Authority of Buyer.  Buyer has full power and authority to enter into this Agreement, to consummate the transactions contemplated hereby and to comply with the terms, conditions and provisions hereof.  This Agreement is, and each other agreement or instrument of Buyer contemplated by it will be, the legal, valid and binding agreement of Buyer, enforceable against Buyer in accordance with its terms, except where such enforceability is limited by any applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance or similar laws or equitable principles affecting the enforcement of creditor’s rights.  Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated by it will conflict with or result in any violation of or constitute a default under any term of the certificate of incorporation or bylaws of Buyer, or any agreement, mort gage, debt instrument, indenture, franchise, license, permit, authorization, lease or other instrument, judgment, decree, order, award, law or regulation by which Buyer is bound.

4.3

Broker or Finder.  Neither Buyer nor any party acting on its behalf has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of these transactions.

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4.4

Litigation.  There is no action, suit or proceeding pending or, to the knowledge of Buyer threatened to which Buyer is party that questions the legality or propriety of the transaction contemplated by this Agreement.  Buyer is not subject to any order, judgment or decree, or any other restriction, that is likely to prevent or hinder the transaction contemplated by this Agreement.

5.

COVENANTS

5.1

Consents; Failure to Obtain Consents.  After the Closing, Seller will use its reasonable best efforts to obtain or cause to be obtained any consents required in connection with the transactions contemplated hereby that are requested by Buyer and that have not been previously obtained prior to or at the Closing.  In the event any consent to the assignment of any Contract or Permit is required in connection with the transactions contemplated hereby and has not been obtained as of the Closing, then Seller shall continue to use their reasonable best efforts to obtain or cause to be obtained such consents and until all of such consents are obtained, shall cooperate in any arrangement reasonably satisfactory to Buyer designed to fulfill any Seller’s obligations thereunder and to afford Buyer the full benefits thereof.  Notwithstanding anything to the contrary set forth herein, this Agreement shall not constitute an assign ment or attempt to assign or transfer any interest in any instrument, contract, lease, permit or other agreement or arrangement of the Business or any claim, right or benefit arising thereunder or resulting therefrom, if an assignment or transfer without the consent of a third party would constitute a breach or violation thereof or adversely affect the rights of Buyer, the Purchased Assets or the Business.

5.2

Further Assistance.  Seller shall without further consideration execute and deliver or cause to be executed and delivered to Buyer, at the Closing or from time to time thereafter, any other instrument which may be reasonably requested by Buyer and which is reasonably appropriate to perfect or evidence any of the sales, assignments, transfers, conveyances, undertakings or agreements contemplated by this Agreement or to transfer any Purchased Assets identified after the Closing.

5.3

Tax Returns.  Seller shall duly file or cause to be filed all tax returns related to taxes of any nature with respect to the Business or the Purchased Assets for all periods ending on or prior to the Closing Date and pay all taxes due with respect to such periods.

5.4

Proration.  Notwithstanding anything herein to the contrary, any taxes imposed on the Purchased Assets and other expense items such as utilities and similar expenses with respect to the Purchased Assets that relate to a period beginning before the Closing Date and ending after the Closing Date shall be apportioned as of the Closing such that Seller shall be liable for (and shall reimburse Buyer to the extent that Buyer shall have paid) that portion of such taxes and other expense items relating to, or arising in respect of, periods through the Closing Date and Buyer shall be liable for (and shall reimburse Seller to the extent Seller shall have paid) that portion of such taxes and other expense items relating to, or arising in respect to, periods after the Closing Date.  Appropriate settlement of any such taxes or other expenses will be made within thirty (30) days after the amount of any such item is finally known.

5.5

Covenant Not to Compete.

(a)

Seller agrees that it will not during the period beginning on the Closing Date and ending on the fifth (5th) anniversary of the Closing Date, directly or indirectly, for any reason, for its own account, or on behalf of, or together with, any other person or entity, directly or indirectly, as principal, agent, shareholder, participant, partner, promoter, director, officer, manager, member, equity owner, employee, consultant, sales representative or otherwise:

(i)

own, control, manage, assist or otherwise participate in, engage in, carry on, or have a financial interest in, any business or entity that is engaged in the conduct of all or any portion of the Business;

(ii)

contact any natural person employed by Buyer (or any subsidiary or affiliate of Buyer) in the Business in any managerial or sales capacity with the purpose or intent of soliciting that person from the employ of Buyer (or such subsidiary or affiliate); or

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(iii)

contact any person or entity to whom Seller sold or provided any product or service in connection with the Business as of the Closing Date or during the two (2) year period prior to the Closing Date, for the purpose of soliciting or selling any product or service that is identical to or reasonably substitutable for any product or service sold by Seller with respect to the Business as of the date hereof.

(b)

Because of the difficulty in measuring the economic losses that may be incurred by Buyer as a result of any breach by Seller of any of its covenants in Section 5.5(a), and because of the immediate and irreparable damage that would be caused to Buyer for which it would have no other adequate remedy, Seller agrees that Buyer may enforce the provisions of Section 5.5(a) by any equitable or legal means, including by injunction or restraining order against Seller if Seller breaches or threatens to breach any provision of Section 5.5(a).

(c)

The parties hereto each agree that Sections 5.5(a) and (b) impose a reasonable restraint on Seller in light of the activities and Business of Seller on the date hereof, the current business and future business plans of Buyer, and the consideration to be received by Seller from Buyer as a result of the purchase of assets.  Notwithstanding anything herein to the contrary, it shall not be a breach of the covenant contained in Section 5.5(a)(i) above for a Seller to own, not more than two percent (2%) of the publicly traded equity interests of any entity.

(d)

The covenants in Section 5.5(a) are severable and separate, and the unenforceability of any specific covenant in Section 5.5(a) is not intended by any party hereto to, and shall not, affect the provisions of any other covenant in Section 5.5(a).  If any court of competent jurisdiction shall determine that the scope, time, or territorial restrictions set forth in Section 5.5(a) are unreasonable as applied to Seller, the parties hereto acknowledge their mutual intention and agreement that those restrictions be enforced to the fullest extent the court deems reasonable, and thereby shall be reformed to that extent as applied to Seller.

(e)

All of the covenants in Section 5.5 are intended by each party hereto to be, and shall be construed as, agreements independent of any other provision in this Agreement, and the existence of any claim or cause of action of Seller against Buyer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Buyer of any covenant in Section 5.5.  The covenants contained in Section 5.5(a) shall not be affected by any breach of any other provision hereof by either party to this Agreement.

(f)

Buyer and Seller hereby agree that Section 5.5 is a material and substantial part of the transactions contemplated hereby.

5.6

Transition Cooperation; Mail Received After Closing.

(a)

Seller agrees to cooperate with Buyer to facilitate the transfer of all utilities used exclusively by the Business into Buyer’s name.

(b)

Following the Closing, Buyer may receive and open all mail addressed to Seller at the Seller’s address, to the extent that such mail and the contents thereof relate to the Business or the Purchased Assets deal with the contents thereof at its discretion.  From and after the Closing, Seller shall promptly forward or cause to be forwarded to Buyer any mail received by Seller that relates to either the Business, the Purchased Assets, or the Assumed Liabilities.

(c)

Seller hereby grants to Buyer the power, right and authority, coupled with an interest, to receive, endorse, cash, deposit, and otherwise deal with, in the name of Seller, any checks, drafts, documents and instruments evidencing payment of the any notes or accounts receivable included in the Purchased Assets and which are payable to, payable to the order of, or endorsed in favor of, Seller, or any agent of Seller.

5.7

Confidentiality.  From and after the Closing Date for a period of five (5) years:  Seller will and its respective officers, directors and employees to, (a) keep in confidence and not disclose to any person or entity any Confidential Information (as defined below); (b) refrain from using any of the Confidential Information except as necessary to enable Seller to perform their obligations under this Agreement; and (c) deliver promptly to Buyer or destroy, at the request and option of Buyer, all written, electronic or magnetic material (or copies thereof) containing or reflecting any information contained in the Confidential Information (regardless of who prepared such material) and to not retain any copies, extracts or other reproductions in whole or in part thereof of the Confidential

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Information.  Notwithstanding the foregoing, any Confidential Information that constitutes a trade secret under applicable law shall not be disclosed or used in any way by Seller or its respective officers, directors and employees other than in accordance with this Agreement so long as such information remains a trade secret.  Notwithstanding the foregoing, the restrictions contained in this Section 5.7 shall not apply to any information that is generally known or available to the public other than as a result of unauthorized or unlawful disclosure directly or indirectly by Seller or any of its respective officers, directors and employees.  In the event that Seller is requested or required (by oral question or request for information or documents in any legal proceeding, interrogatory, subpoena, civil investigative demand, or similar process) to disclose any Confidential Information, Seller will notify Buyer promptl y of the request or requirement so that Buyer may seek an appropriate protective order or waive compliance with the provisions of this Section.  If, in the absence of a protective order or the receipt of a waiver hereunder, Seller is, on the advice of counsel, compelled to disclose any Confidential Information to any tribunal or else stand liable for contempt, Seller may disclose the Confidential Information to the tribunal.  As used herein, “Confidential Information” means any and all technical, business, and other information of, relating to or used in the Business which derives value, actual or potential, economic or otherwise, from not being generally known to the public or to other persons, including, without limitation, technical or non-technical data, compositions, devices, methods, techniques, drawings, inventions, processes, financial data, financial plans, product plans, lists of actual or potential customers or suppliers, information regarding the acquisition and investment plans and strategies, business plans or operations of the Business.  Confidential Information includes (i) information of third parties held by Seller in connection with the Business and that Seller is obligated to keep or treat as confidential, and (ii) information contained in any books and records, the originals of which are retained by Seller pursuant to this Agreement, to the extent otherwise satisfying the definition of Confidential Information.

5.8

Post-Closing Payments.  Seller agree promptly to endorse and pay over or cause to be endorsed and paid over to Buyer, without deduction or offset, the full amount of any payment received by Seller after the Closing in respect of goods sold or services rendered as part of the Business, except for payments regarding goods sold and shipped prior to the Effective Date.

5.9

Cooperation on Tax Matters.

(a)

Each of Buyer and Seller agree to furnish or cause to be furnished to the other, upon request, as promptly as practicable, such information (including access to books and records) and assistance relating to the Purchased Assets as is reasonably necessary for the filing of any Tax Return, the preparation for any Tax audit, or the prosecution or defense of any claim, suit or proceeding relating to any proposed Tax adjustment relating to the Purchased Assets.  Buyer and Seller shall keep all such information and documents received by them confidential unless otherwise required by law.

(b)

Buyer and Seller agree to retain or cause to be retained all books and records pertinent to the Purchased Assets until the applicable period for assessment of Taxes under applicable law has expired.  Buyer and Seller agree to give the other reasonable notice prior to transferring, discarding or destroying any such books and records relating to Tax matters and, if so requested, Buyer and Seller shall allow the requesting party to take possession of such books and records.

(c)

Buyer and Seller shall cooperate with each other in the conduct of any audit or other actions for any tax purposes relating to the Purchased Assets.

5.10

Delivery of Retained Records.  Seller agrees to give Buyer reasonable notice prior to transferring, discarding or destroying any books and records retained by Seller pursuant to this Agreement, and, if so requested by Buyer, to transfer possession of such books and records to Buyer without further consideration.

6.

CONDITIONS TO CLOSING

6.1

Buyer’s Conditions Precedent to Closing.  The completion by Buyer of the transactions contemplated by this Agreement is subject to the fulfillment prior to or at the Closing of each of the following conditions, any of which may be waived in writing by Buyer:

(a)

Buyer shall have determined in its sole discretion that the results of its due diligence review were satisfactory.

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(b)

Seller shall have delivered a Certificate of the Secretary of Seller, dated the Closing Date, certifying as to the organizational documents of Seller, the resolutions of the Board of Directors approving the execution, delivery and performance of this Agreement, and the incumbency of the officers of Seller executing any of this Agreement or other documents or instruments needed and required to effectuate the transactions contemplated by this Agreement.

(c)

(i) The representations and warranties of Seller contained in this Agreement (including any Schedules and Exhibits hereto) and in any other documents relating to the transaction contemplated by this Agreement, shall have been true and correct in all respects as of the date hereof and shall be true and correct in all respects as of the Closing Date; (ii) Seller shall have performed and complied with all covenants of this Agreement and in any other documents relating to the transaction contemplated by this Agreement to be performed or complied with by Seller at or prior to the Closing Date; (iii) Seller shall have procured (and delivered copies to Buyer of) all consents, approvals and waivers of third parties, including Governmental Authorities, whether required contractually or by applicable Law or otherwise necessary for the execution, delivery and performance of this Agreement by Seller, and all of such consents, approvals and waivers shall have been in full force and effect; and (iv) Seller shall have delivered a certificate of an executive officer of Seller with oversight responsibility for the Business, dated the Closing Date, to the foregoing effect.

(d)

Seller shall have executed and delivered a bill of sale, general assignment and conveyance in form and substance reasonably satisfactory to Buyer and its counsel.

 (f)

Seller shall execute and deliver or shall cause to be executed and delivered all such other documents and instruments necessary to consummate the transactions contemplated herein as reasonably required by Buyer and its counsel.

6.2

Seller’s Conditions Precedent to Closing.  The completion by Seller of the transactions contemplated by this Agreement is subject to the fulfillment prior to or at the Closing of each of the following conditions, any of which may be waived in writing by Seller:

(a)

Buyer shall have delivered the Certificate of the Secretary of Buyer, dated the Closing Date, certifying as to the articles and bylaws of Buyer, the resolutions of the Board of Directors of Buyer approving the execution, delivery and performance of this Agreement, and the incumbency of the officers of Buyer executing any of this Agreement or the in any other documents relating to the transaction contemplated by this Agreement.

(b)

(i) The representations and warranties of Buyer contained in this Agreement (including any Schedules and Exhibits hereto) and in any other documents relating to the transaction contemplated by this Agreement shall have been true and correct in all respects as of the date hereof and shall be true and correct in all respects as of the Closing Date; (ii) Buyer shall have performed and complied with all covenants of this Agreement and any in any other documents relating to the transaction contemplated by this Agreement to be performed or complied with by Buyer at or prior to the Closing Date; and (iii) Buyer shall have procured all consents, approvals and waivers of third parties, including Governmental Authorities, whether required contractually or by applicable Law or otherwise necessary for the execution, delivery and performance of this Agreement by Buyer, and all of such consents, approvals and waivers shall have been in full force and effec t.

(c)

Buyer shall have delivered to Seller the Purchase Price in accordance with Section 2.2.

7.

INDEMNIFICATION

7.1

Survival of Representations, Warranties, Etc.  The representations and warranties of Seller and Buyer contained in this Agreement shall survive the Closing and remain in full force and effect until one year after the Closing Date (the “Expiration Date”).  All representations and warranties contained in this Agreement and all claims with respect thereto shall terminate on the Expiration Date; provided that if notice of any claim for indemnification pursuant to Section 7.2(ii) or 7.3(ii) shall have been given prior to the Expiration Date and such notice describes with reasonable specificity or description the circumstances with respect to which such indemnification claim relates, such indemnification claim shall survive until such time as such claim is finally resolved.

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7.2

Seller Indemnification.  Seller agrees to indemnify Buyer and its officers, directors, employees, agents, representatives, Affiliates, successors and assigns (collectively, the “Buyer Parties”), and hold it and them harmless against any loss, liability, deficiency, damage or expense (including legal expenses and costs and including interest and penalties) (a “Loss”) that any of the Buyer Parties may suffer, sustain or become subject to, as a result of (i) any breach of any covenant or agreement of Seller herein; (ii) the inaccuracy or breach of any representation or warranty made by Seller in this Agreement; (iii) any claims of any brokers or finders claiming by, through or under Seller, (iv) the assertion against any of the Buyer Parties of any liability or claim relating to any Excluded Liability, or (v) the operation of the Business prior to the Closing Date.

7.3

Buyer Indemnification.  Buyer agrees to indemnify Seller and its officers, directors, employees, agents, representatives, Affiliates, successors and assigns (collectively, the “Seller Parties”) and hold the Seller Parties harmless against any Loss that any of the Seller Parties may suffer, sustain or become subject to, as the result of (i) any breach of any covenant or agreement of Buyer herein; (ii) the inaccuracy or breach of any representation or warranty made by Buyer in this Agreement; (iii) any claims of any brokers or finders claiming by, through or under Buyer, (iv) the assertion against any of the Seller Parties of any liability or claim relating to any Assumed Liability, or (v) the operation of the Business on and after the Closing Date.

7.4

Defense of Claims.  If a party hereto seeks indemnification under this Section 7, such party (the “Indemnified Party”) shall give written notice (“Notice of Loss”) to the other party (the “Indemnifying Party”) of the facts and circumstances giving rise to the claim.  In that regard, if any suit, action, claim, liability or obligation (a “Proceeding”) shall be brought or asserted by any third party which, if adversely determined, would entitle the Indemnified Party to indemnity pursuant to this Section 7, the Indemnified Party shall within 30 days notify the Indemnifying Party of the same in writing, specifying in detail the basis of such claim and the facts pertaining thereto; provided, that the failure to so notify an Indemnifying Party shall not relieve the Indemnifying Party of its obligations hereunder except to the extent such failure shall have harmed the Indemnifying Party.   ;The Indemnifying Party, if it so elects, shall assume and control the defense of such Proceeding (and shall consult with the Indemnified Party with respect thereto), including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of expenses; provided, however, that in the event any Proceeding shall be brought or asserted by any third party which, if adversely determined, would not entitle the Indemnified Party to full indemnity pursuant to Section 7, the Indemnified Party may elect to participate in a joint defense of such Proceeding (a “Joint Defense Proceeding”) for which the expenses of such joint defense will be shared equally by such parties and the employment of counsel shall be reasonably satisfactory to both parties.  If the Indemnifying Party elects to assume and control the defense of a Proceeding, it will provide notice thereof within 30 days after the Indemnified Party has given notice of the matter and if such Proceeding is not a Joint Defens e Proceeding, the Indemnified Party shall have the right to employ counsel separate from counsel employed by the Indemnifying Party in any such action and to participate in the defense thereof, but the fees and expenses of such counsel employed by the Indemnified Party shall be at the expense of the Indemnified Party unless (i) the employment thereof has been specifically authorized by the Indemnifying Party in writing, or (ii) the Indemnifying Party has failed to assume the defense and employ counsel.  The Indemnifying Party shall not be liable for any settlement of any Proceeding, the defense of which it has elected to assume, which settlement is effected without the written consent of the Indemnifying Party; provided that no settlement of a Joint Defense Proceeding may be effected without the written consent of both parties.  If there shall be a settlement to which the Indemnifying Party consents or a final judgment for the plaintiff in any Proceeding, the defense of which the Indemnifying Party has elected to assume, the Indemnifying Party shall indemnify the Indemnified Party with respect to the settlement or judgment.  If the Indemnifying Party elects to assume and control the defense or in the event of a Joint Defense Proceeding, the Indemnified Party shall take all reasonable efforts necessary to assist the Indemnifying Party in such defense.

7.5

Payments.  Any payment pursuant to a claim for indemnification shall be made as follows:

(a)

If the Notice of Loss with respect to a claim does not relate to a Proceeding brought by a third party, then the Indemnifying Party shall have 30 days to object to any of the subject matter and any of the amounts of the Losses set forth in the Notice of Loss, as the case may be, by delivering written notice of objection thereof to the Indemnified Party.  If the Indemnifying Party fails to send a notice of objection to the Notice of Loss within such 30 day period, then the Indemnifying Party shall be deemed to have agreed to the Notice of Loss and shall be obligated to immediately pay to the Indemnified Party the portion of the amount specified in the Notice of Loss to which the Indemnifying Party has not objected.  If the Indemnifying Party sends a timely notice of objection, then the

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Indemnifying Party and the Indemnified Party shall use their commercially reasonable efforts to settle (without an obligation to settle) such claim for indemnification.  If the Indemnifying Party and the Indemnified Party do not settle such dispute within 30 days after the Indemnified Party’s receipt of the Indemnifying Party’s notice of objection, then each of the Indemnifying Party and the Indemnified Party shall be entitled to seek enforcement of their respective rights under Section 7.

(b)

If the Notice of Loss with respect to a claim relates to a Proceeding brought by a third party, then the procedures set forth in Section 7.4 shall be applicable and payment shall be made not later than 30 days after the amount of the claim is finally determined.

7.6

Limitations.  In no event shall Seller or Buyer be liable for (i) any Loss unless and until the aggregate amount of all such Losses exceeds $10,000, in which case Seller or Buyer, as the case may be, shall be liable for all such Losses in excess of $10,000 or (ii) Losses that exceed a maximum aggregate liability of $1,000,000.

8.

GENERAL PROVISIONS; ADDITIONAL AGREEMENTS

8.1

Dispute Resolution.  All disputes or claims arising from this Agreement of any nature whatsoever shall be resolved by binding arbitration before JAMS in Houston, Texas.  The arbitrator shall have power to decide all matters, including arbitrability, but must decide all disputes in accordance with Texas law.  The arbitrator shall allow limited discovery to enable the parties to present their case, but will be mindful of the parties’ mutual desire to avoid the expense of broad discovery typically allowed in civil litigation.  Judgment on the arbitrator’s award shall be final and binding and may be entered in any competent court.  BY AGREEING TO ARBITRATE, ALL PARTIES ARE WAIVING ANY RIGHT TO A JURY TRIAL.

8.2

Public Announcements.  Neither Seller nor Buyer will, without the approval of the other (which may not be unreasonably withheld), make any press release or other public announcement concerning these transactions, except as and to the extent that such party will be so obligated by law, in which case the other party will be advised and Buyer and Seller will use their best efforts to cause a mutually agreeable release or announcement to be issued.

8.3

Assignment; Binding Effect.  This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of Buyer, Seller and their respective successors and assigns.  Neither this Agreement nor any rights, benefits or obligations set forth herein may be assigned by Seller or Buyer, except that either party may assign this Agreement and any of the provisions hereof to any Affiliate of such party without the consent of the other party.  

8.4

Governing Law.  This Agreement will be governed by, and construed and enforced in accordance with, the laws of the State of Texas, without regard to its conflicts of law provisions.

8.5

Notices.  All notices or other communications required or permitted hereunder will be in writing and will be deemed given when delivered personally, by registered or certified mail, by legible facsimile transmission, electronic mail or by prepaid overnight courier addressed as follows:

If to Buyer, to:

Nighthawk Systems, Inc.
10715 Gulfdale, Suite 200
San Antonio, TX 78216
Attention: H. Douglas Saathoff, Chief Executive Officer
Fax: (210) 341-2011
Email: dsaathoff@nighthawksystems.com

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If to Seller, to:

Eagle Broadband, Inc.
101 Courageous Drive
League City, TX 77573
Attention: Brian Morrow, Chief Operating Officer
Fax: (281) 538-4730
Email: bmorrow@eaglebroadband.com

Notice will be deemed received the same day (when delivered personally, via electronic mail or by facsimile transmission), 5 days after mailing (when sent by registered or certified mail) and the next business day (when delivered by overnight).  Any party to this Agreement may change its address to which all communications and notices may be sent by addressing notices of such change in the manner provided.

8.6

Specific Performance.  Seller and Buyer acknowledge and agree that the other party would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or are otherwise breached.  Accordingly, Seller and Buyer agree that the other party shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court in the United States or in any state having jurisdiction over the parties and the matter in addition to any other remedy to which they may be entitled pursuant hereto.

8.7

Entire Agreement; Amendments.  This Agreement is an integrated document, contains the entire agreement between the parties, wholly cancels, terminates and supersedes any and all previous and/or contemporaneous oral agreements, negotiations, commitments and writings between the parties hereto with respect to such subject matter, including without limitation, the letter of intent dated August 31, 2007, previously executed by Buyer and Seller.  No change, modification, extension, termination, notice of termination, discharge, abandonment or waiver of this Agreement or any of its provisions, nor any representation, promise or condition relating to this Agreement, will be binding upon any party unless made in writing and signed by such party.  The parties further agree that the prior drafts of this Agreement will not be used to interpret this Agreement and will not be admissible into evidence at any tim e.

8.8

Waivers.  Any term or provision of this Agreement may be waived, or the time for its performance may be extended, by the party or parties entitled to the benefit thereof, but any such waiver must be in writing.  The failure of any party to enforce at any time any provision of this Agreement will not be construed to be a waiver of such provision, nor in any way to affect the validity of this Agreement or any part of it or the right of any party thereafter to enforce each and every such provision.  No waiver of any breach of this Agreement will be held to constitute a waiver of any other or subsequent breach.

8.9

Expenses.  Except as otherwise provided in this Agreement, Buyer and Seller will each pay their own costs and expenses incident to its negotiation and preparation of this Agreement and to its performance and compliance with all agreements and conditions on its part to be performed or complied with, including the fees, expenses and disbursements of its counsel and accountants; provided that in any action to enforce the terms of this Agreement, the prevailing party in such action will be entitled to recover its reasonable attorneys’ fees and costs incurred in connection with such action, together with interest, plus the cost of collection thereof.

8.10

Partial Invalidity.  Wherever possible, each provision will be interpreted in such manner as to be effective and valid under applicable law, but in case any one or more of these provisions will, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provisions of this Agreement, and this Agreement will be construed as if such invalid, illegal or unenforceable provision or provisions had never been contained herein, unless the deletion of such provision or provisions would result in such a material change as to cause the completion of these transactions to be unreasonable.

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8.11

Further Assurances.  From time to time following the Closing, either party will: (a) promptly deliver to the other party any cash or other property that it may receive that is for the account of such other party; and (b) at the request of such other party and without further consideration, execute and deliver to such other party such other instruments of conveyance and transfer as such other party may reasonably request or as may be otherwise necessary to more effectively consummate the transactions contained herein.

8.12

Counterparts.  This Agreement may be executed in two or more counterparts, each of which will be considered an original instrument and all of which together will be considered one and the same agreement, and will become effective when counterparts, that together contain the signatures of each party hereto, will have been delivered to Buyer and Seller.  Delivery of executed signature pages by facsimile transmission will constitute effective and binding execution and delivery of this Agreement.

8.13

Third-Party Beneficiaries.  This Agreement will not confer any rights or remedies upon any Person other than the parties to this Agreement and their respective heirs, successors and permitted assigns.

8.14

Confidentiality.  After the Closing, Seller shall continue to maintain the confidentiality of all information, documents and materials relating to the Business, including all such materials which remain in the possession of Seller, except to the extent disclosure of any such information is required by law or authorized by Buyer or reasonably occurs in connection with disputes over the terms of this Agreement, and Buyer shall maintain the confidentiality of all information, documents and materials relating to Seller (other than that relating to the Business) which Buyer has obtained in connection with this Agreement or with the transactions contemplated herein, except to the extent disclosure of any such information is required by law or authorized by Seller or reasonably occurs in connection with disputes over the terms of this Agreement.  In the event that any party reasonably believes after consultation with counsel that it is required by law to disclose any confidential information described in this Section 9.14, the disclosing party will (a) provide the other party with prompt notice before such disclosure in order that any party may attempt to obtain a protective order or other assurance that confidential treatment will be accorded such confidential information, and (b) cooperate with the other party in attempting to obtain such order or assurance.  The provisions of this Section 9.14 shall not apply to any information, documents or materials which are, as shown by appropriate written evidence, in the public domain or, as shown by appropriate written evidence, shall come into the public domain, other than by reason of breach by the applicable party bound hereunder or its Affiliates.

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IN WITNESS WHEREOF, the parties have caused this Asset Purchase Agreement to be executed as of the date first above written.

	EAGLE BROADBAND, INC.
By:
Name:	Brian Morrow
Title:	Chief Operating Officer
	NIGHTHAWK SYSTEMS, INC.
By:
Name:	H. Douglas Saathoff
Title:	Chief Executive Officer

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EX-10

SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT

THIS SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of October 9th, 2007, by and among Nighthawk Systems, Inc., a Nevada corporation, and its subsidiaries, and its subsidiaries (collectively, the “Company”), and the investors listed on Schedule 1 attached hereto (who shall execute this Agreement and who are collectively referred to as the “Investors”).

RECITALS

WHEREAS, the Company and the Investors are executing and delivering this Agreement in reliance upon an exemption from securities registration pursuant to Section 4(2) and/or Rule 506 of Regulation D (“Regulation D”) as promulgated by the United States Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Securities Act”);

WHEREAS, the Company desires to authorize, issue and sell shares of its Series B Convertible Preferred Stock, $0.001 par value per share (the “Series B Stock”) to the Investors, and the Investors desire to purchase shares of the Series B Stock, all on the terms and subject to the conditions herein set forth; and

WHEREAS, contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Security Agreement (the “Security Agreement”) pursuant to which the Company and its wholly-owned subsidiaries agree to provide the Investors a security interest in Pledged Collateral (as such term is defined therein) to secure the Company’s obligations under the Transaction Documents (as defined herein).

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

1.

Authorization of Securities.  The Company has authorized the number of shares of Series B Stock as provided herein, which shall be entitled to the rights, privileges and preferences set forth in the Company’s Articles of Incorporation as modified by the Certificate of Designation for the Series B Stock that has been filed by the Company with the Nevada Secretary of State on, before or within fifteen (15) days of the Closing.  As used in this Agreement, the term “Preferred Stock” shall mean the shares of Series B Stock issued and outstanding immediately after the closing described in Section 3 hereof and all shares of Series B Stock issued in exchange or substitution therefor.  The Series B Stock shall be convertible into shares of the Common Stock, $0.001 par value per share (the “Common Stock”), as set forth in the Articles of Incorporatio n.  The Company shall authorize and reserve a sufficient number of its previously authorized but unissued shares of Common Stock to satisfy the rights of conversion and purchase of the holders of the Series B Stock.  Any shares of Common Stock issuable upon conversion of the Series B Stock, when issued, shall be referred to as “Conversion Shares”.

2.

Sale and Purchase of Shares of the Series B Stock.  Subject to the terms and conditions herein, the Company agrees to sell to the Investors, and each of the Investors severally agrees to purchase from the Company on the date hereof in accordance with this Agreement, the number of shares of Series B Stock set forth opposite such Investor’s name on Schedule 1 at a purchase price of Ten Dollars ($10.00) per share (the “Purchase Commitment”).  The Company’s agreement with each Investor is a separate agreement, and the sale of the Series B Stock to each Investor is a separate sale.

3.

The Closing.  The closing of the sale of the Series B Stock shall take place at 10:00 a.m. Boston time (the “Closing”).  The date and time on which the Closing occurs shall be referred to as the “Closing Date”.  On the Closing Date, the Company shall deliver to each of the Investors purchasing shares of the Series B Stock on such date a stock certificate for the number of shares of Series B Stock being acquired by such Investor, which shares shall be registered in the Investor’s name or as otherwise designated by the Investor.  At the Closing, each Investor shall pay to the Company the purchase price for the Purchase Commitment set forth on Schedule 1 by wire transfer of immediately available funds or bank or cashier’s check payable to the Company.

1

4.

Representations and Warranties by the Company.  As a material inducement to each of the Investors to enter into this Agreement and to purchase the number of shares of the Series B Stock set forth after such Investor’s name on Schedule 1, with the understanding that each Investor will be relying thereon in consummating the transactions contemplated hereunder, the Company hereby represents and warrants to each Investor that, except as set forth (i) in the Disclosure Schedule attached hereto and prepared and delivered by the Company to the Investors on the date hereof (the “Disclosure Schedule”), or (ii) the SEC Documents (as defined herein), the statements contained in this Section 4 are true and correct.  The Disclosure Schedule is arranged in sections corresponding to the sections and subsections of this Section 4:

4.1.

Organization, Qualification and Power.  The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all requisite corporate power and authority, and all governmental licenses, governmental authorizations, governmental consents and governmental approvals, required to carry on its business as now conducted and to own, lease and operate the assets and properties of the Company as now owned, leased and operated.  The Company is duly qualified or licensed to do business as a foreign corporation and is in good standing in every jurisdiction in which the character or location of its properties and assets owned, leased or operated by the Company or the nature of the business conducted by the Company requires such qualification or licensing, except where the failure to be so qualified, licensed or in good standing in such other ju risdiction could not, individually or in the aggregate, have a Material Adverse Effect (as defined herein) on the Company.  The Company has heretofore delivered to the Investors complete and accurate copies of its Articles of Incorporation and Bylaws, as currently in effect. The Company has previously delivered to the Investors a complete and accurate list of all jurisdictions in which the Company is qualified or licensed to do business as of the date hereof.

4.2.

Authorization; Enforcement.  The Company has full power and authority to enter into this Agreement, the related Security Agreement, any and all agreements referenced herein or therein, and all agreements and documents related to the foregoing (collectively, the “Transaction Documents”) and to carry out the transactions contemplated in the Transaction Documents.  The Board of Directors of the Company and the Company’s stockholders have taken all action required by law, the Company’s charter documents and otherwise to duly and validly authorize and approve the execution, delivery and performance by the Company of the Transaction Documents and the consummation by the Company of the transactions contemplated in the Transaction Documents and no other corporate proceedings on the part of the Company are necessary to authorize the Transaction Documents or to consummate the tran sactions contemplated thereby.  The Transaction Documents have been duly and validly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company, enforceable against it in accordance with their respective terms, subject to laws of general application relating to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors’ rights generally and rules of law governing specific performance, injunctive relief or other equitable remedies.

4.3.

Capitalization of the Company.  The Company has authorized (a) 200,000,000 shares of Common Stock, 121,141,392 of which shares are issued and outstanding, and (b) 4,995,000 shares of series B Preferred Stock, 0 of which are issued and outstanding and (c) 5,000 shares of Series A Preferred Stock, all of which has been issued and subsequently converted to Common Stock (together with the Common Stock the “Capital Stock”).  All of the issued and outstanding shares of the Capital Stock are duly authorized, validly issued, fully paid, non-assessable and, except for the Series B Stock, free of preemptive rights.  There are no outstanding obligations of the Company to repurchase, redeem or otherwise acquire any of its securities excluding the Investors.  There are no stockholder agreements, voting trusts or other agreements or understandings to which the Company is a part y or by which it is bound relating to the voting or registration of any shares of Capital Stock.  As of the date hereof, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, (ii) there are no outstanding debt securities, (iii) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of their securi ties under the Securities Act, and (iv) there are no outstanding registration statements and there are no outstanding comment letters from the

2

Commission or any other regulatory agency.  There are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Preferred Stock as described in this Agreement.

4.4.

Non-Contravention.  Neither the execution, delivery and performance by the Company of the Transaction Documents nor the consummation of the transactions contemplated therein will (i) contravene or conflict with the charter documents of the Company, (ii) contravene or conflict with or constitute a violation of any provision of any Applicable Law (as defined herein) binding upon or applicable to the Company or any of the Company’s assets, (iii) result in the creation or imposition of any Lien (as defined herein) on any of the Company’s assets, other than Permitted Liens (as defined herein), (iv) be in conflict with, constitute (with or without due notice or lapse of time or both) a default under, result in the loss of any material benefit under, or give rise to any right of termination, cancellation, increased payments or acceleration under any terms, conditions or provisions of any material note , bond, lease, mortgage, indenture, license, contract, franchise, permit, instrument or other agreement or obligation to which the Company is a party, or by which any of its properties or assets may be bound, or (v) to the knowledge of the Company, disrupt or impair any business relationship with any material supplier, customer, distributor, sales representative or employee of the Company.  Neither the Company nor its subsidiaries is in violation of any term of or in default under its charter documents or any material contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its subsidiaries.  The business of the Company and its subsidiaries is not being conducted, and shall not be conducted in violation of any material law, ordinance, or regulation of any governmental entity.  Except as specifically contemplated by this Agreement and as required under the Securities Act and any Applicable Law, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under or contemplated by the Transaction Documents in accordance with the terms thereof.  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 and its subsidiaries are unaware of any facts or circumstance, which might give rise to any of the foregoing.

4.5.

Consents and Approvals.  No consent, approval, order or authorization of or from, or registration, notification, declaration or filing with (hereinafter sometimes separately referred to as a “Consent” and sometimes collectively as “Consents”), any Person, including, without limitation, any Governmental Authority (as defined herein), is required in connection with the execution, delivery or performance of the Transaction Documents by the Company or the consummation by the Company of the transactions contemplated therein.  To the knowledge of the Company, there are no facts relating to the identity or circumstances of the Company that would prevent or materially delay obtaining any of the Consents.

4.6.

Financial Statements; Undisclosed Liabilities.

(a)

The Company has previously delivered to the Investors complete and accurate copies of the audited balance sheet of the Company as of December 31, 2006 (the “Latest Balance Sheet”) and the unaudited statements of income of the Company quarter ended June 30, 2007 (such statements of income and the Latest Balance Sheet being herein referred to as the “Latest Financial Statements”).  The Latest Financial Statements are based upon the information contained in the books and records of the Company and fairly and accurately present the financial condition of the Company as of the dates thereof and results of operations for the periods referred to therein.  The Latest Financial Statements have been prepared in accordance with GAAP (as defined herein) applicable to unaudited interim financial statements (and thus may not contain all notes and may not contai n prior period comparative data which are required for compliance with GAAP), and reflect all adjustments necessary to a fair and accurate statement of the financial condition and results of operations of the Company for the interim periods presented.

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(b)

All accounts, books and ledgers related to the business of the Company and its subsidiaries are properly and accurately kept, are complete in all material respects, and there are no material inaccuracies or discrepancies of any kind contained or reflected therein.  Neither the Company nor its subsidiaries have any of its material records, systems, controls, data, or information recorded, stored, maintained, operated or otherwise wholly or partly dependent upon or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) which (including all means of access thereto and therefrom) are not under the exclusive ownership (excluding licensed software programs) and direct control of the Company or its subsidiaries.

(c)

Except as and to the extent reflected in the Latest Balance Sheet, the Company does not have any Liabilities (as defined herein) of any nature (whether accrued, absolute, contingent, unliquidated or otherwise, whether due or to become due, whether known or unknown, and regardless of when asserted), other than Liabilities incurred in the Ordinary Course of Business (as defined herein) since the date of the Latest Balance Sheet and Liabilities arising in connection with this Agreement and the transactions contemplated herein.

4.7.

Assets and Properties.

(a)

Except as previously disclosed in the SEC Filings, the Company has good and valid right, title and interest in and to or, in the case of leased properties or properties held under license, good and valid leasehold or license interests in, all of their assets and properties, including, but not limited to, all of the machinery, equipment, terminals, computers, vehicles, and all other assets and properties (real, personal or mixed, tangible or intangible) reflected in the Latest Balance Sheet and all of the assets purchased or otherwise acquired since the date of the Latest Balance Sheet, except those assets and properties disposed of in the Company’s ordinary course of business after the date of the Latest Balance Sheet.  The Company holds title to each such property and asset free and clear of all Liens, except Permitted Liens, and is in sole possession of, and has sole control of, its material asset s.

(b)

Except as previously disclosed in the SEC Filings, the material equipment owed by the Company has been properly maintained and is in good operating condition and repair and is adequate for the uses for which they are currently being put by the Company, normal wear and tear excepted.  To the knowledge of the Company, no such asset is in need of maintenance or repair, except for routine maintenance and repairs that are in the ordinary course.

(c)

Except as previously disclosed in the SEC Filings, the Company owns or has the right to use all material property, real or personal, tangible or intangible, which is necessary for the operation of its business in substantially the same manner as it has been conducted during the period covered by the Latest Balance Sheet.

4.8.

Compliance with Applicable Laws.  The Company has not violated or infringed, nor is it in violation or infringement of, any Applicable Law or any order, writ, injunction or decree of any Governmental Authority in connection with its activities.  The Company, and its officers, directors, agents and employees, have complied with all Applicable Laws.  No claims have been filed against the Company alleging a violation of any Applicable Law.

4.9.

Permits.  The Company has conducted its business in compliance with all material terms and conditions of all licenses, permits, quotas, authorizations, registrations and other approvals that are necessary to the operation of, or relate solely to, the Company’s business (collectively, the “Permits”).  Each Permit is valid and in full force and effect and none of the Permits will be terminated, revoked, modified or become terminable or impaired in any respect for any reason, except as would not have a Material Adverse Effect.

4.10.

Receivables.  The accounts receivable and other receivables reflected on the Latest Balance Sheet, and those arising after the date thereof, are valid receivables that have arisen from bona fide transactions in the Company’s ordinary course of business, are not subject to valid counterclaims or setoffs, and are collectible in accordance with their terms, except as and to the extent of the bad debt allowance reflected on the Latest Balance Sheet.

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4.11.

Litigation.  There are no (a) actions, suits, claims, hearings, arbitrations, proceedings (public or private) or governmental investigations that have been brought by or against any Governmental Authority or any other Person, nor any investigations or reviews by any Governmental Authority against or affecting the Company, pending or, to the Company’s knowledge, threatened, against or by the Company or any of its assets or which seek to enjoin or rescind the transactions contemplated by this Agreement; or (b) existing orders, judgments or decrees of any Governmental Authority naming the Company as an affected party or otherwise affecting any of the assets or the business of the Company.

4.12.

Labor and Employment Matters.  The Company has previously delivered to the Investors a complete and accurate list of all current employees, officers and directors of the Company, which list includes their base salaries and bonus.  All employees of the Company are employed on an at-will basis.  Neither the Company nor any of its subsidiaries is involved in any labor dispute nor, to the knowledge of the Company or any of its subsidiaries, is any such dispute threatened.  None of the Company’s or its subsidiaries’ employees is a member of a union and the Company and its subsidiaries believe that their relations with their employees are good.

4.13.

Tax Matters.  Except as otherwise noted in it’s filings with the SEC, as and with the exception of its corporate federal income tax return for the year ended December 31, 2006,  the Company has, or will have prior to Closing (a) properly completed and filed on a timely basis all tax returns (federal, provincial, state, county, local and other) relating to all excise, payroll, real estate, capital stock, intangible, value-added, income, sales, use, service, employment, property and, without limitation of the foregoing, all other taxes of every kind and nature which the Company is required to file in connection with its business prior to the Closing Date (i.e., the due date for such tax return being on or before the Closing Date) and for which the non-payment of, or failure to file, could result in a Lien on any of the Company’s assets, or result in the Investors becoming liable or responsib le therefor, and (b) paid in full all Taxes (as defined herein), interest, penalties, assessments or deficiencies shown to be due to any taxing authority on such returns.  The Company is not currently the beneficiary of any extension of time within which to file any such return.  The Company is not a party to any pending or, to the knowledge of the Company, any threatened action or proceeding against the Company for the assessment or collection of Taxes by any Governmental Authority, and there is no basis for any such action or proceeding.  There are no audits pending with respect to any liabilities for Taxes of the Company.

4.14.

Bank Accounts; Powers of Attorney.  The Company has previously delivered to the Investors a complete and accurate list of the names of all (i) financial institutions, investment banking and brokerage houses, and other similar institutions at which the Company maintains accounts, deposits, safe deposit boxes of any nature, and the names of all persons authorized to draw thereon or make withdrawals therefrom and a description of such accounts; and (ii) Persons holding general or special powers of attorney from the Company and copies thereof.

4.15.

Indemnification, Guarantee or Assumption of Liability Obligations.  The Company is not a party to any Contract that contains any provisions requiring the Company to indemnify, guarantee or assume liabilities of any Person.  There is no event, circumstance or other basis that could give rise to any indemnification, guarantee or assumption of liabilities obligation of the Company to its officers and directors under the Company’s Articles of Incorporation, Bylaws, similar governing documents, or any Contract between the Company and any of its officers or directors or to any other Person under any Contract.

4.16.

Employee Benefit Plans.  The Company does not have any liability arising directly or indirectly under Section 412 of the Code, or Section 302 of Title IV of ERISA. The Company does not have any liability arising directly or indirectly to or with respect to any “multiemployer plan” within the meaning of Section 4001(a)(3) of ERISA.  The Company does not have any liability arising under the Consolidated Omnibus Reconciliation Act of 1985, as amended, Section 4980B of the Code and Part 6 of Subtitle B of Title I of ERISA.  Nothing has occurred or failed to occur with respect to any the Company Pension Plan that could result in any liability to the Investors.

4.17.

Disclosure.  No representation or warranty by the Company in this Agreement and no statement contained or to be contained in any document, certificate or other writing furnished or to be furnished by the Company to the Investors, contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.  There is no fact that has not been disclosed to the Investors of which any

5

officer or director of the Company is aware which has or could reasonably be expected to have a Material Adverse Effect.

4.18.

Investigation by the Investors.  Notwithstanding anything to the contrary in this Agreement, (i) no investigation by the Investors shall affect the representations and warranties of the Company under any of the Transaction Document or contained in any other writing to be furnished to the Investors in connection with the transactions contemplated thereunder, and (ii) such representations and warranties shall not be affected or deemed waived by reason of the fact that the Investors knew or should have known that any of the same is or might be inaccurate in any respect.

4.19.

Environmental Laws.  The Company and its subsidiaries are (i) in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (“Environmental Laws”), (ii) have received all Permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses, and (iii) are in compliance with all terms and conditions of any such Permit, license or approval.

4.20.

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 been refused any insurance coverage sought or applied for and 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 materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company and its subsidiaries, taken as a whole.

4.21.

Regulatory Permits.  The Company and its subsidiaries possess all material certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit.

4.22.

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

4.23.

SEC Documents: Financial Statements.  Since the date hereof, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (all of the foregoing filed prior to the date hereof or amended after the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein, being hereinafter referred to as the “SEC Documents”).  The Company has delivered to the Investors or their representatives, or made available through the Commission’s website at www.sec.gov., complete and accurate copies of the SEC Documents.  As of their respective dates, the financial statements of the Company disclosed in the SEC Documents (the “Financial Sta tements”) complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission with respect thereto.  Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such Financial Statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and, fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments).  No other information provided by or on behalf of the Company to the Investor which is not included in the SEC Documents, including, without limitation, information refe rred to in the Transaction Documents, contains any untrue

6

statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

4.24.

10(b)-5.  The SEC Documents do not include any untrue statements of material fact, nor do they omit to state any material fact required to be stated therein necessary to make the statements made, in light of the circumstances under which they were made, not misleading.

4.25.

Acknowledgment Regarding Investor’s Purchase of the Preferred Stock.  The Company acknowledges and agrees that the Investors are acting solely in the capacity of an arm’s-length purchaser with respect to the Transaction Documents and the transactions contemplated thereby.  The Company further acknowledges that the Investors are not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated thereby and any advice given by the Investors or any of their respective representatives or agents in connection with the Transaction Documents and the transactions contemplated thereby is merely incidental to such Investor’s purchase of the Preferred Stock or the Conversion Shares.  The Company further represents to the Investor that the Company’s decision to enter into the Transaction Docum ents has been based solely on the independent evaluation by the Company and its representatives.

4.26.

No General Solicitation.  None of the Company, its subsidiaries or Affiliates (as defined herein), nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of the Preferred Stock.

4.27.

No Integrated Offering.  None of the Company, its subsidiaries or Affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of the Preferred Stock under the Securities Act or cause this offering of the Preferred Stock to be integrated with prior offerings by the Company for purposes of the Securities Act.

4.28.

Certain Transactions.  Except for arm’s-length transactions pursuant to which the Company makes payments in the ordinary course of business upon terms no less favorable than the Company could obtain from third parties and other than the grant of stock options disclosed in the SEC Documents, none of the officers, directors, or employees of the Company, its subsidiaries or Affiliates is presently a party to any transaction with the Company, its subsidiaries or Affiliates (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 s uch employee has a substantial interest or is an officer, director, trustee or partner.

4.29.

Fees and Rights of First Refusal.  The Company is not obligated to offer the securities offered hereunder on a right of first refusal basis or otherwise to any third parties, including but not limited to, current or former shareholders of the Company, its subsidiaries, Affiliates, underwriters, brokers, agents or other third parties.

4.30.

No Material Adverse Breaches, etc.  None of the Company, its subsidiaries or Affiliates 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 on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries.  None of the Company, its subsidiaries or Affiliates is in breach of any contract or agreement which breach, in the judgment of the Company’s officers, has or is expected to have a Material Adverse Effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries.

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4.31.

Use of Proceeds.  The Company shall use the proceeds from the sale of Preferred Stock for the following:

(a)

Four million five hundred thousand dollars ($4,500,000) for the purchase of the set-top box division of Eagle Broadband, Inc.

(b)

 Nine hundred and thirty-five thousand dollars ($935,000) for general working capital

(c)

Two Hundred and sixty thousand dollars ($260,000) for the repayment of the Debenture listed in 4.32 below.

(d)

Three hundred thousand dollars ($300,000) to a designee of the Investor.

(e)

Five thousand dollars ($5,000) to Gersten Savage, LLP to act as escrow agent.

                      4.32.    The Investor and the Company agree to cancel the Convertible Debenture between the Company and Dutchess Private Equities Fund, LTD dated September 4, 2007.

5.

Representations of the Investors.  Each of the Investors severally represents to the Company for such Investor that:

5.1.

Investment Intent.  The shares of the Series B Stock and the Conversion Shares into which such shares may be converted that are being acquired by the Investor are being purchased for investment for the Investor’s own account and not with the view to, or for resale in connection with, any distribution or public offering thereof.  The Investor has no present plan or intention to engage in a sale, exchange, transfer, distribution, redemption, reduction in any way of the Investor’s risk of ownership by short sale or otherwise, or other disposition, directly or indirectly of the Series B Stock being acquired by the Investor pursuant to the Transaction Documents or the Conversion Shares into which such shares may be converted.  The Investor is able to bear the economic risk of its investment and has the knowledge and experience in financial and business matters that it is capable of evaluating t he merits and risks (including tax considerations) of its investment, including the high degree of risk of loss of the Investor’s entire investment herein.

5.2.

Restrictions on Resale, Rule 144.  The Investor understands that the shares of the Series B Stock have not been registered under the Securities Act or any state securities laws by reason of their contemplated issuance in transactions exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof or Rule 504, 505 or 506 promulgated under the Securities Act and applicable state securities laws, and that the reliance of the Company and others upon these exemptions is predicated in part upon this representation by the Investor.  The Investor further understands that the Series B Stock may not be transferred or resold without (i) registration under the Securities Act and any applicable state securities laws, or (ii) an exemption from the requirements of the Securities Act and applicable state securities laws.  The Investor also understands that the Conversion Shares will be issued without prior registration thereof under the Securities Act or applicable state securities laws in reliance upon Section 4(2) of the Securities Act and transactional exemptions from registration under applicable state securities laws based upon appropriate representations of the Investor.  As such, the Conversion Shares will be subject to transfer restrictions similar to restrictions applicable to the Series B Stock.  The Investor understands that (i) an exemption from such registration is not presently available pursuant to Rule 144 promulgated under the Securities Act by the Commission, (ii) the Company has made no commitment to become eligible for Rule 144, and (iii) in any event the Investor may not sell any securities acquired hereunder pursuant to Rule 144 prior to the expiration of a one-year period (or such other period as the Commission may hereafter adopt) after the Investor has acquired such securities.  The Investor understands that any sales pursuant to R ule 144 can be made only in full compliance with the provisions of Rule 144.

8

If so requested by the Investors, the Company shall instruct counsel to write a Rule 144 opinion letter provided the necessary paperwork has been submitted and the Exemption applies (as defined herein).  If the Company’s counsel fails to provide a Rule 144 opinion letter within three (3) days, then the Company shall: (a) pay the Investor’s counsel to write said Rule 144 opinion letter; and (b) instruct the designated transfer agent to accept and rely upon the Rule 144 Opinion letter.  .

5.3.

Location of Principal Office, Qualification as an Accredited Investor, etc.  The state in which the Investor’s principal office (or domicile, if the Investor is an individual) is located is the state set forth in the Investor’s address on Schedule 1.  The Investor by execution of this Agreement hereby represents that he, she or it qualifies as an “accredited investor” for purposes of Regulation D promulgated under the Securities Act.  The Investor (i) is an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, and bear the loss of its entire investment in the Series B Stock, and (ii) has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment to be made by it pursuant to this Agreement.  If other than an individual, the Investor a lso represents it has not been organized solely for the purpose of acquiring the Series B Stock or the Conversion Shares.

5.4.

Acts and Proceedings.  The Investor has full power and authority to enter into and perform under the Transaction Documents in accordance with their respective terms.  The Transaction Documents have been duly authorized by all necessary action on the part of the Investor, has been duly executed and delivered by the Investor, and is a valid and binding agreement of the Investor and enforceable against the Investor in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting the enforcement of creditors’ rights generally and to judicial limitations on the remedy of specific enforcement and other equitable remedies.

5.5.

Exculpation Among Investors.  The Investor acknowledges that in making the decision to invest in the Company, the Investor is not relying on any other Investor or upon any person, firm or company, other than the Company and its officers, employees and/or directors.  The Investor agrees that none of any of the other Investor, nor their partners, employees, officers or controlling persons, shall be liable for any actions taken by the Investor, or omitted to be taken by the Investor, in connection with such investment.

5.6.

Disclosure of Information.  The Investor represents that the Company has made available to the Investor at a reasonable time prior to the execution of the Transaction Documents the  opportunity to ask questions and receive answers from the Company’s management concerning the Company’s business, management and financial affairs, the terms and conditions of the offering of the Series B Stock and to obtain any additional information (that the Company possesses or can acquire without unreasonable effort or expense) as may be necessary to verify the accuracy of information furnished to such Investor.  Investor further represents that it, except as otherwise provided by law, is entering into the Transaction Documents and is acquiring the Series B Stock without any representation or warranty, express or implied, by the Company or any of its officers, directors, employees or affiliated, except as expressly set forth in this Agreement.  The foregoing, however, does not limit or modify the representations and warranties of the Company in the Transaction Documents or the right of the Investors to rely thereon.

5.7.

Legend; Stop Transfer.  The Series B Stock, and any Conversion Shares issued upon conversion thereof, shall bear a legend substantially similar to the following:

THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE BLUE SKY LAWS, AND ARE SUBJECT TO CERTAIN INVESTMENT REPRESENTATIONS.  THESE SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE ACT AND SUCH APPLICABLE BLUE SKY LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

9

The Company shall make a notation regarding the restrictions on transfer of the Series B Stock and any such Conversion Shares in its books and the Series B Stock and any such Conversion Shares shall be transferred on the books of the Company only if transferred or sold pursuant to an effective registration statement under the Securities Act covering the securities to be transferred or an opinion of counsel satisfactory to the Company that such registration is not required.

Any legend endorsed on a certificate pursuant to Section 5.7 hereof shall be removed, and the Company shall issue a certificate without such legend to the holder of such security, if such security is being disposed of pursuant to a registration under the Securities Act or pursuant to Rule 144 or any similar rule then in effect or if such holder provides the Company with an opinion of counsel satisfactory to the Company to the effect that a transfer of such securities may be made without registration.  In addition, if the holder of such securities delivers to the Company an opinion of such counsel to the effect that no subsequent transfer of such securities will require registration under the Securities Act, the Company will promptly upon such contemplated transfer deliver new certificates evidencing such security that do not bear the legend set forth in Section 5.7 hereof.

5.8.

No Brokers or Finders.  No person, firm or corporation has or will have, as a result of any contractual undertaking by the Investor, any right, interest or valid claim against the Investor or the Company for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by the Transaction Documents.  Each responsible Investor will indemnify and hold the Company harmless against any and all liability with respect to any such commission, fee or other compensation which may be payable or determined to be payable.

5.9.

No Governmental Review.  Each Investor understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Preferred Stock or the Conversion Shares, or the fairness or suitability of the investment in the Preferred Stock or the Conversion Shares, nor have such authorities passed upon or endorsed the merits of the offering of the Preferred Stock or the Conversion Shares.

5.10.

Receipt of Documents.  Each Investor and his or its counsel has received and read in their entirety: (i) the Transaction Documents and each representation, warranty and covenant set forth therein; (ii) all due diligence and other information necessary to verify the accuracy and completeness of such representations, warranties and covenants; (iii) the Company’s Form 10-KSB for the fiscal year ended December 31, 2006; (iv) the Company’s Form 10-QSB for the fiscal quarter ended June 30, 2007 and (v) answers to all questions each Investor submitted to the Company regarding an investment in the Company; and each Investor has relied on the information contained therein and has not been furnished any other documents, literature, memorandum or prospectus.

5.11.

Due Formation of Corporate and Other Investors.  If the Investors is a corporation, trust, partnership or other entity that is not an individual person, it has been formed and validly exists and has not been organized for the specific purpose of purchasing the Preferred Stock and is not prohibited from doing so.

5.12.

No Legal Advice From the Company.  Each Investor acknowledges, that it had the opportunity to review the Transaction Documents and the transactions contemplated thereby with his or its own legal counsel and investment and tax advisors.  Each Investor is relying solely on such counsel and advisors and not on any statements or representations of the Company, its subsidiaries, Affiliates or any of their respective representatives or agents for legal, tax or investment advice with respect to this investment, the transactions contemplated by the Transaction Documents or the securities laws of any jurisdiction.  

5.13.

Limitation on Amount of Conversion and Ownership.  Notwithstanding anything to the contrary in this Agreement, in no event shall the Investor be entitled to convert that amount of Series B Preferred Stock, and in no event shall the Company permit that amount of conversion, into that number of shares, which when added to the sum of the number of shares of Common Stock beneficially owned, (as such term is defined under Section 13(d) and Rule 13d-3 of the Securities Exchange Act of 1934, as may be amended, (the “Exchange Act”)), by the Investor, would exceed four and ninety-nine one hundredths percent (4.99%) of the number of shares of Common Stock outstanding on the Conversion Date, as determined in accordance with Rule 13d-1(j) of the Exchange Act.  In the event that the number of shares of Common Stock outstanding as determined in accordance with Section 13(d) of the Exchange Act is diff erent on any Conversion Date than it was on the Closing Date, then

10

the number of shares of Common Stock outstanding on such Conversion Date shall govern for purposes of determining whether the Investor would be acquiring beneficial ownership of more than four and ninety-nine one hundredths percent (4.99%) of the number of shares of Common Stock outstanding on such Conversion Date.  However, nothing in this Section 5.13 shall be read to reduce the amount of Common Stock, Dividends or penalties, if any, due to the Holder.

6.

Covenants.

6.1.

Best Efforts.  Each party shall use its best efforts to timely satisfy each of the conditions to be satisfied by it as provided in Sections 8 and 9 hereof.

6.2.

Reporting Status.  Until the earlier of (i) the date as of which the Investors may sell all of the Conversion Shares without restriction pursuant to Rule 144(k) promulgated under the Securities Act (or successor thereto), or (ii) the date on which (A) the Investors shall have sold all the Conversion Shares and (B) none of the Preferred Stock are outstanding (the “Registration Period”), the Company shall file in a timely manner all reports required to be filed with the Commission pursuant to the Exchange Act and the regulations of the Commission thereunder, and the Company shall not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and regulations thereunder would otherwise permit such termination.

6.3.

Registration of Shares.  As outlined in the Certificate of Designation.

6.4.

Reservation of Shares.  The Company shall take all action reasonably necessary to at all times have authorized, and reserved for the purpose of issuance, such number of shares of Common Stock as shall be necessary to effect the issuance of the Conversion Shares.  If at any time the Company does not have available such shares of Common Stock as shall from time-to-time be sufficient to effect the conversion of all of the Conversion Shares, then the Company and its management shall, upon the written request of the Investors, do the following: (i) call and hold a special meeting of the shareholders within thirty (30) days of such occurrence for the sole purpose of increasing the number of shares authorized, (ii) recommend to the shareholders that they vote in favor of increasing the number of shares of Common Stock authorized, and (iii) vote all of their shares in favor of increasing the number of authorized shares of Common Stock.

6.5.

Listings or Quotation.  If not already done prior to the Closing, the Company shall promptly secure the listing or quotation of the Conversion Shares upon each national securities exchange, automated quotation system or The National Association of Securities Dealers Inc.’s Over-The-Counter Bulletin Board (“OTCBB”) or other market, if any, upon which shares of Common Stock are then listed or quoted.  The Company shall use its best efforts to maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Conversion Shares from time-to-time issuable under the terms of this Agreement.  The Company shall maintain the Common Stock’s authorization for quotation on the OTCBB.

6.6.

Fees and Expenses.  Each of the Company and the Investors shall pay all costs and expenses incurred by such party in connection with the negotiation, investigation, preparation, execution and delivery of the Transaction Documents.

6.7.

Corporate Existence.  So long as any of the Preferred Stock remains outstanding, the Company shall not directly or indirectly consummate any merger, reorganization, restructuring, reverse stock split consolidation, sale of all or substantially all of the Company’s assets or any similar transaction or related transactions (each such transaction, an “Organizational Change”) unless, prior to the consummation an Organizational Change, the Company obtains the written consent of each Investor.  In any such case, the Company will make appropriate provision with respect to such holders’ rights and interests to insure that the provisions of this Section 6.8 will thereafter be applicable to the Preferred Stock.

6.8.

Transactions With Affiliates.  So long as any Preferred Stock is outstanding, the Company shall not, and shall cause each of its subsidiaries not to, enter into, amend, modify or supplement, or permit any subsidiary to enter into, amend, modify or supplement any agreement, transaction, commitment, or

11

arrangement with any of its or any subsidiary’s officers, directors, person who were officers or directors at any time during the previous two (2) years, stockholders who beneficially own five percent (5%) or more of the Common Stock, or Affiliates, or with any individual related by blood, marriage, or adoption to any such individual or with any entity in which any such entity or individual owns a five percent (5%) or more beneficial interest (each a “Related Party”), except for (i) customary employment arrangements and benefit programs on reasonable terms, (ii) any investment in an Affiliate of the Company, (iii) any agreement, transaction, commitment, or arrangement on an arms-length basis on terms no less favorable than terms which would have been obtainable from a person other than such Related Party, (iv) any agreement, transaction, commitment, or arrangement which is approved by a majo rity of the disinterested directors of the Company (for purposes hereof, any director who is also an officer of the Company or any subsidiary of the Company shall not be considered a disinterested director with respect to any such agreement, transaction, commitment, or arrangement).  Notwithstanding the foregoing, for purposes of this Section 6.9, the Investors and their respective Affiliates shall not be considered Affiliates of the Company.    

6.9.

Transfer Agent.  The Company covenants and agrees that, in the event that the Company’s agency relationship with the transfer agent should be terminated for any reason after the Closing Date, the Company shall immediately appoint a new transfer agent and shall require that the new transfer agent agree to be bound by the terms of any transfer agent instructions issued by the Company and in place as of the date hereof.

6.10.

Restriction on Issuance of the Capital Stock.  So long as any Preferred Stock is outstanding, the Company shall not, without the prior written consent of the Investors, (i) issue or sell shares of Common Stock or Preferred Stock without consideration or for a consideration per share less than the bid price of the Common Stock determined immediately prior to its issuance, (ii) issue any preferred stock, warrant, option, right, contract, call, or other security or instrument granting the holder thereof the right to acquire Common Stock without consideration or for a consideration less than such Common Stock’s Bid Price determined immediately prior to it’s issuance, (iii) enter into any security instrument granting the holder a security interest in any and all assets of the Company, or (iv) file any registration statement on Form S-8.

6.11.

Rights of First Refusal.  So long as any portion of Preferred Stock is outstanding, if the Company intends to raise additional capital by the issuance or sale of Capital Stock of the Company, including without limitation shares of any class of common stock, any class of preferred stock, options, warrants or any other securities convertible or exercisable into shares of common stock (whether the offering is conducted by the Company, underwriter, placement agent or any third-party) the Company shall be obligated to offer to the Investors such issuance or sale of capital stock, by providing in writing the principal amount of capital it intends to raise and outline of the material terms of such capital raise, prior to the offering such issuance or sale of capital stock  to any third parties including, but not limited to, current or former officers or directors, current or former shareholders and/or investors of the obligor, underwriters, brokers, agents or other third parties.  The Investors shall have ten (10) business days from receipt of such notice of the sale or issuance of capital stock to accept or reject all or a portion of such capital raising offer.

7.

Conditions To The Company’s Obligation To Sell.  The obligation of the Company hereunder to issue and sell the Preferred Stock to the Investors at the Closing(s) is subject to the satisfaction, at or before the Closing Date(s), of each of the following conditions, 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:

7.1.

Each Investor shall have executed the Transaction Documents and delivered them to the Company.

7.2.

The Investors shall have delivered to the Company the Purchase Price for Preferred Stock in respective amounts as set forth next to each Investor as outlined on Schedule 1 attached hereto, minus any fees to be paid directly from the proceeds of the Closings as set forth herein, by wire transfer of immediately available U.S. funds pursuant to the wire instructions provided by the Company.

7.3.

The representations and warranties of the Investors shall be true and correct in all material respects as of the date when made and as of the Closing Date(s) as though made at that time (except for representations and warranties that speak as of a specific date), and the Investors shall have performed, satisfied and

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complied in all material respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Investors at or prior to the Closing Date(s).  

8.

Conditions To The Investor’s Obligation To Purchase.  The obligation of the Investors hereunder to purchase the Preferred Stock at the Closing(s) is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for the Investors’ sole benefit and may be waived by the Investors at any time in their sole discretion:

8.1.

The Company shall have executed the Transaction Documents and delivered the same to the Investors.

8.2.

The Common Stock shall be authorized for quotation on the OTCBB, trading in the Common Stock shall not have been suspended for any reason, and all the Conversion Shares issuable upon the conversion of the Preferred Stock shall be approved by the OTCBB.  

8.3.

The representations and warranties of the Company shall be true and correct in all material respects (except to the extent that any of such representations and warranties is already qualified as to materiality in Section 4 hereof, in which case, such representations and warranties shall be true and correct without further qualification) 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 Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the Transaction Document to be performed, satisfied or complied with by the Company at or prior to the Closing Date.  If requested by the Investor, the Investor shall have received a certificate, executed by the President of the Company, dated as of the Closing Date, to the foregoing effe ct and as to such other matters as may be reasonably requested by the Investor.

8.4.

The Company shall have delivered to the Investors the Preferred Stock in the respective amounts set forth opposite each Investors name on Schedule 1 attached hereto.

8.5.

The Company shall have delivered to the Investors a certificate of good standing from the Nevada Secretary of State.

8.6.

The Company shall have filed a form UCC-1 or such other forms as may be required to perfect the Investor’s interest in the Pledged Collateral as described in the Security Agreement and delivered proof of such filing to the Investors.

8.7.

The Company shall have delivered to the Investor an acknowledgement, to the satisfaction of the Investor, from the Company’s independent certified public accountants as to its ability to provide all consents required in order to file a registration statement in connection with this transaction.

8.8.

The Company shall have reserved out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Preferred Stock, shares of Common Stock to effect the conversion of all of the Conversion Shares then outstanding.

8.9.

The Company shall have certified to the Investors that all conditions to the Closing have been satisfied and that the Company will file a registration statement with the Commission in compliance with the rules and regulations promulgated by the Commission for filing thereof two (2) business days after the Closing.  If requested by the Investor, the Investor shall have received a certificate, executed by the two officers of the Company, dated as of the Closing Date, to the foregoing effect.

8.10.

No Events of Default shall have occurred under the Transaction Documents.

9.

Indemnification.

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9.1.

In consideration of the Investor’s execution and delivery of this Agreement and acquiring the Preferred Stock and the Conversion Shares hereunder, and in addition to all of the Company’s other obligations under the Transaction Documents, the Company shall defend, protect, indemnify and hold harmless the Investors and each other holder of the Preferred Stock and the Conversion Shares, and all of their officers, directors, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by the Transaction Documents) (collectively, the “Investor Indemnitees”) from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Investor Indemnitee is a party to the action for which indemnification hereunder is soug ht), and including reasonable attorneys’ fees and disbursements (the “Indemnified Liabilities”), incurred by the Investor Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in the Transaction Documents or any other certificate, instrument or document contemplated thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in the Transaction Documents or any other certificate, instrument or document contemplated thereby, or (c) any cause of action, suit or claim brought or made against such Indemnitee and arising out of or resulting from the execution, delivery, performance or enforcement of the Transaction Documents or any other instrument, document or agreement executed pursuant thereto by any of the parties thereto, any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuanc e of the Preferred Stock or the Conversion Shares or the status of the Investor or holder of the Preferred Stock or the Conversion Shares.  To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law.

9.2.

In consideration of the Company’s execution and delivery of the Transaction Documents, and in addition to all of the Investor’s other obligations under the Transaction Documents, the Investor shall defend, protect, indemnify and hold harmless the Company and all of its officers, directors, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by the Transaction Documents) (collectively, the “Company Indemnitees”) from and against any and all Indemnified Liabilities incurred by the Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Investors in the Transaction Documents, instrument or document contemplated thereby or executed by the Investor, (b) any breach of any covenant, agreement or obligation of the Investors contained in the Transaction Documents or any other certificate, instrument or document contemplated thereby or executed by the Investor, or (c) any cause of action, suit or claim brought or made against such Company Indemnitee based on material misrepresentations or due to a material breach and arising out of or resulting from the execution, delivery, performance or enforcement of the Transaction Documents or any other instrument, document or agreement executed pursuant thereto by any of the parties thereto.  To the extent that the foregoing undertaking by each Investor may be unenforceable for any reason, each Investor shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law.

10.

Definitions.  The following terms, as used herein, have the following meanings:

10.1.

“Affiliate” means, with respect to any person or entity, another person or entity that, directly or indirectly, (i) has a ten percent (10%) or more equity interest in that person or entity, (ii) has ten percent (10%) or more common ownership with that person or entity, (iii) controls that person or entity, or (iv) shares common control with that person or entity.  “Control” or “controls” for purposes hereof means that a person or entity has the power, direct or indirect, to conduct or govern the policies of another person or entity.

10.2.

“Agreement” has the meaning set forth in the Introduction.

10.3.

“Applicable Law” means, with respect to any Person, any domestic or foreign, federal, state or local common law or duty, case law or ruling, statute, law, ordinance, policy, guidance, rule, administrative interpretation, regulation, code, order, writ, injunction, directive, judgment, decree or other requirement of any Governmental Authority applicable to such Person or any of its Affiliates or Plan Affiliates or any of their respective properties, assets, officers, directors, employees, consultants or agents (in connection with such officer’s, director’s, employee’s, consultant’s or agent’s activities on behalf of such Person or any of its Affiliates or Plan Affiliates).

14

10.4.

“Capital Stock” has the meaning set forth in Section 4.3 hereof.

10.5.

“Articles of Incorporation” means the Company’s Articles of Incorporation as filed with the Nevada Secretary of State, as may be amended from time to time.

10.6.

“Closing” has the meaning set forth in Section 3 hereof.

10.7.

“Closing Date” has the meaning set forth in Section 3 hereof.

10.8.

“Code” means the Internal Revenue Code of 1986, as amended, and the regulations or other binding pronouncements promulgated thereunder.

10.9.

“Common Stock” has the meaning set forth in Section 1 hereof.

10.10.

“Company” has the meaning set forth in the Introduction.

10.11.

“Compensation Plan” means any material benefit or arrangement that is not either a Pension Plan or a Welfare Plan, including, without limitation, (i) each employment or consulting agreement, (ii) each arrangement providing for insurance coverage or workers’ compensation benefits, (iii) each bonus, incentive bonus or deferred bonus arrangement, (iv) each arrangement providing termination allowance, severance or similar benefits, (v) each equity compensation plan, (vi) each current or deferred compensation agreement, arrangement or policy, (vii) each compensation policy and practice maintained by the Company or any ERISA Affiliate of the Company covering the employees, former employees, directors and former directors of the Company and the beneficiaries of any of them, and (viii) each agreement, arrangement or plan that provides for the payment of compensation to any person who provides services to th e Company and who is not an employee, former employee, director or former director of the Company.

10.12.

“Consent” or “Consents” have the meanings set forth in Section 4.5 hereof.

10.13.

“Contracts” means all contracts, agreements, options, leases, licenses, sales and accepted purchase orders, commitments and other instruments of any kind, whether written or oral, to which the Company is a party on the Closing Date, including the Scheduled Contracts.

10.14.

“Conversion Shares” has the meaning set forth in Section 1 hereof.

10.15.

“Disclosure Schedule” has the meaning set forth in Section 4 hereof.

10.16.

“Effective Date” has the meaning set forth in Section 6.3 hereof.

10.17.

“Employee Benefit Plan” means all Pension Plans, Welfare Plans and Compensation Plans.

10.18.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

10.19.

“ERISA Affiliate” means any “person,” within the meaning of Section 7701(a)(1) of the Code, that together with the Company is considered a single employer pursuant to Section 414(b), (c), (m) or (o) of the Code or Section 3(5) or 4001(b)(1) of ERISA.

10.20.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

10.21.

“Filing Date” has the meaning set forth in Section 6.3 hereof.

10.22.

“GAAP” means generally accepted accounting principles in the United States, consistently applied.

15

10.23.

“Governmental Authority” means any foreign, domestic, federal, territorial, state or local governmental authority, quasi-governmental authority, instrumentality, court, government or self-regulatory organization, commission, tribunal or organization or any regulatory, administrative or other agency, or any political or other subdivision, department or branch of any of the foregoing.

10.24.

“Intellectual Property” means all rights in patents, patent applications, trademarks (whether registered or not), trademark applications, service mark registrations and service mark applications, trade names, trade dress, logos, slogans, tag lines, uniform resource locators, Internet domain names, Internet domain name applications, corporate names, copyright applications, registered copyrighted works and commercially significant unregistered copyrightable works (including proprietary software, books, written materials, prerecorded video or audio tapes, and other copyrightable works), technology, software, trade secrets, know-how, technical documentation, specifications, data, designs and other intellectual property and proprietary rights used in or necessary to the conduct of the business of the Company, but excluding third-party off-the-shelf computer programs.

10.25.

“Investors” has the meaning set forth in the Introduction.

10.26.

“Latest Balance Sheet” has the meaning set forth in Section 4.6(a) hereof.

10.27.

“Latest Financial Statements” has the meaning set forth in Section 4.6(a) hereof.

10.28.

“Liability” or “Liabilities” means any liabilities, obligations or claims of any kind whatsoever whether absolute, accrued or un-accrued, fixed or contingent, matured or un-matured, asserted or unasserted, known or unknown, direct or indirect, contingent or otherwise and whether due or to become due, including without limitation any foreign or domestic tax liabilities or deferred tax liabilities incurred in respect of or measured by the Company’s income, or any other debts, liabilities or obligations relating to or arising out of any act, omission, transaction, circumstance, sale of goods or services, state of facts or other condition which occurred or existed on or before the date hereof, whether or not known, due or payable, whether or not the same is required to be accrued on the financial statements or is disclosed on the Disclosure Schedule.

10.29.

“Lien” means, with respect to any asset, any mortgage, title defect or objection, lien, pledge, charge, security interest, hypothecation, restriction, encumbrance, adverse claim or charge of any kind in respect of such asset.

10.30.

“Material Adverse Effect” means, with respect to the Company, an individual or cumulative adverse change in or effect on its business, customers, customer relations, operations, properties, working capital condition (financial or otherwise), assets, properties, liabilities or prospects (financial or otherwise) that (i) is reasonably expected to be materially adverse to its business, properties, working capital condition (financial or otherwise), assets, liabilities or prospects (financial or otherwise); or (ii) would prevent it from consummating the transactions contemplated hereby.

10.31.

“Material Customers” has the meaning set forth in Section 4.17 hereof.

10.32.

“Ordinary Course of Business” means any action taken by the Company that is (i) consistent with its past practices and is taken in the ordinary course of its normal day-to-day operations, and (ii) not required to be specifically authorized by its Board of Directors.

10.33.

“Penalty Date” has the meaning set forth in Section 6.3 hereof.

10.34.

“Pension Plan” means an “employee pension benefit plan” as such term is defined in Sections 3(2) or 3(3) of ERISA and all other material employee benefit arrangements or programs relating to the Company’s business, including, without limitation, any such arrangements or programs providing severance pay, sick leave, vacation pay, salary continuation for disability, retirement benefits, deferred compensation, bonus pay, incentive pay, stock options, hospitalization insurance, medical insurance and life insurance, sponsored or maintained by the Company or any Affiliate of the Company or to which the Company or any Affiliate of the

16

Company is obligated to contribute thereunder on behalf of any current or former employee who performed services with respect to the Company’s business.

10.35.

“Permits” has the meaning set forth in Section 4.9 hereof.

10.36.

“Permitted Liens” means (i) Liens for Taxes or governmental assessments, charges or claims the payment of which is not yet due, or for Taxes the validity of which are being contested in good faith by appropriate proceedings; (ii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and other similar Persons and other Liens imposed by Applicable Law incurred in the Ordinary Course of Business for sums not yet delinquent or being contested in good faith; (iii) Liens relating to deposits made in the Ordinary Course of Business in connection with workers’ compensation, unemployment insurance and other types of social security or to secure the performance of leases, trade contracts or other similar agreements; and (iii) other Liens set forth on the Disclosure Schedule; provided, however, that, with respect to each of clauses (i) through (iii), to the extent that a ny such Lien on that arose prior to the date of the Latest Balance Sheet and relates to, or secures the payment of, a Liability that is required to be accrued for under GAAP, such Lien shall not be a Permitted Lien unless all such Liabilities have been fully accrued or otherwise reflected on the Latest Balance Sheet.  Notwithstanding the foregoing, no Lien arising under the Code or ERISA with respect to the operation, termination, restoration or funding of any Employee Benefit Plan sponsored by, maintained by or contributed to by the Company or any of its ERISA Affiliates or arising in connection with any excise tax or penalty tax with respect to such Employee Benefit Plan shall be a Permitted Lien.

10.37.

“Person” means an individual, corporation, partnership, limited liability company, association, trust, estate or other entity or organization, including a Governmental Authority.

10.38.

“Plan Affiliate” means, with respect to any Person, any Employee Benefit Plan sponsored by, maintained by or contributed to by such Person, and with respect to any Employee Benefit Plan, any Person sponsoring, maintaining or contributing to such plan or arrangement.

10.39.

“Preferred Stock” has the meaning set forth in Section 1 hereof.

10.40.

“Purchase Commitment” has the meaning set forth in Section 2 hereof.

10.41.

“Scheduled Contracts” has the meaning set forth in Section 4.12 hereof.

10.42.

“SEC Documents” has the meaning set forth in Section 4.26 hereof.

10.43.

“Securities Act” means the Securities Act of 1933, as amended.

10.44.

Security Agreement” has the meaning set forth in the Recitals.

10.45.

“Series B Stock” has the meaning set forth in the Recitals.

10.46.

“Tax” or “Taxes” means all taxes imposed of any nature including federal, state, local or foreign net income tax, alternative or add-on minimum tax, profits or excess profits tax, franchise tax, gross income, adjusted gross income or gross receipts tax, employment related tax (including employee withholding or employer payroll tax, FICA or FUTA), real or personal property tax or ad valorem tax, sales or use tax, excise tax, stamp tax or duty, any withholding or back up withholding tax, value added tax, severance tax, prohibited transaction tax, premiums tax, environmental tax, intangibles tax or occupation tax, together with any interest or any penalty, addition to tax or additional amount imposed by any Governmental Authority (domestic or foreign) responsible for the imposition of any such tax.  The term Tax shall also include any Liability of the Company for the Taxes of an y other Person under U.S. Treasury Regulations Section 1.1502-6 (or similar provisions of state, local or foreign law), as a transferee or successor by contract or otherwise.

10.47.

“Tax Return” means all returns, declarations, reports, estimates, forms, information returns and statements or other information required to be filed with respect to any Tax.

17

10.48.

“Transaction Documents” has the meaning set forth in Section 4.2 hereof.

10.49.

“Welfare Plan” means an “employee welfare benefit plan” as such term is defined in Section 3(1) of ERISA (including without limitation a plan excluded from coverage by Section 4 of ERISA).

11.

Miscellaneous.

11.1.

Waivers, Amendments and Approvals.  In each case in which approval of the Investors is required by the terms of this Agreement, such requirement shall be satisfied by a vote or the written action of the Investors.  With the written consent of the Investors, the obligations of the Company under this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) and with the written approval of the Investors, the Company may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement; provided, however, that no such waiver or supplemental agreement shall amend the terms of the shares of the Series B Stock as set forth in the Articles of Incorporation (any such amendment to the terms of the shares of Series B Stock shall require the vote of the holders of sh ares of Series B Stock called for by the Articles of Incorporation).  

11.2.

Written Changes, Waivers, Etc.  Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, except by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, except to the extent provided in Section 11.1 hereof.

11.3.

Notices.  Any and all notices required or permitted to be given to a party pursuant to the provisions of this Agreement will be in writing and will be effective and deemed to provide such party sufficient notice under this Agreement on the earliest of the following: (i) at the time of personal delivery, if delivery is in person; (ii) one (1) business day after deposit with an express overnight courier for United States deliveries, or two (2) business days after such deposit for deliveries outside of the United States, with proof of delivery from the courier requested; or (iii) three (3) business days after deposit in the United States mail by certified mail (return receipt requested) for United States deliveries.  All notices for delivery outside the United States will be sent by express courier.  All notices not delivered personally will be sent with postage and/or other charges prepaid and pr operly addressed to the party or parties to be notified at such address or addresses as such party or parties may designate by one of the indicated means of notice herein to the other party or parties hereto.  

11.4.

Survival of Representations, Warranties, Etc.  All representations, warranties, covenants and agreements contained herein, including the indemnification obligations set forth in Section 9 hereof, shall survive after the execution and delivery of this Agreement or such certificate or document, as the case may be, for a period of two (2) years.

11.5.

Delays or Omissions.  Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any party under this Agreement shall impair any such right, power or remedy of such party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence thereto, or of a similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring.  Any waiver, permit, consent or approval of any kind or character on the part of any party hereto of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing.

11.6.

Other Remedies.  Any and all remedies herein expressly conferred upon a party shall be deemed cumulative with, and not exclusive of, any other remedy conferred hereby or by law on such party, and the exercise of anyone remedy shall not preclude the exercise of any other.

11.7.

Attorney Fees.  Should suit be brought to enforce or interpret any part of this Agreement, the prevailing party shall be entitled to recover, as an element of the costs of suit and not as damages, reasonable attorney fees to be fixed by the court (including, without limitation, costs, expenses and fees on any appeal).  The prevailing party shall be the party entitled to recover its costs of suit, regardless of whether such suit

18

proceeds to final judgment.  A party not entitled to recover its costs shall not be entitled to recover attorney fees.  No sum for attorney fees shall be counted in calculating the amount of a judgment for purposes of determining if a party is entitled to recover costs or attorney fees.

11.8.

Entire Agreement.  This Agreement, the exhibits hereto, the documents referenced herein and the exhibits thereto, constitute the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and thereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect hereto and thereto.  The express terms hereof control and supersede any course of performance or usage of the trade inconsistent with any of the terms hereof.

11.9.

Severability.  Should any one or more of the provisions of this Agreement or of any agreement entered into pursuant to this Agreement be determined to be illegal or unenforceable, all other provisions of this Agreement and of each other agreement entered into pursuant to this Agreement, shall be given effect separately from the provision or provisions determined to be illegal or unenforceable and shall not be affected thereby.  The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision which will achieve, to the extent possible, the economic, business and other purposes of the void or unenforceable provision.

11.10.

Successors and Assigns.  The terms and conditions of this Agreement shall inure to the benefit of and be binding upon and be enforceable by the successors and assigns of the parties hereto, including the holder(s) from time-to-time of any of the Series B Stock.  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.

11.11.

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

11.12.

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

11.13.

Publicity.  The Company and the Investors shall have the right to approve, before issuance any press release or any other public statement with respect to the transactions contemplated hereby made by any party; provided, however, that the Company shall be entitled, without the prior approval of the Investors, to issue any press release or other public disclosure with respect to such transactions required under applicable securities or other laws or regulations (the Company shall use its best efforts to consult the Investors in connection with any such press release or other public disclosure prior to its release and Investors shall be provided with a copy thereof upon release thereof).

11.14.

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.

11.15.

Tacking.  For purposes of calculating the holding period for the Preferred Stock purchased pursuant to this Agreement and the Common Shares underlying the Preferred Stock, Dutchess shall tack back to the Closing Date.  The Company shall not adopt a position inconsistent with the foregoing or contest such tacking for any reason, and the Company shall use its best efforts to cooperate with Dutchess in any efforts Dutchess may undertake to assert such tacking in connection with the future sale of the Preferred Stock purchased pursuant to this Agreement or any securities issued upon the conversion of such Preferred Stock or any other purpose.    

19

11.16.

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.

11.17.

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

11.18.

Disputes Under Debenture. All disputes arising under this Agreement shall be governed by and interpreted in accordance with the laws of the Commonwealth of Massachusetts, without regard to principles of conflict of laws.  The parties to this Agreement shall submit all disputes arising under this Agreement to arbitration in Boston, Massachusetts before a single arbitrator of the American Arbitration Association (the “AAA”).  The arbitrator shall be selected by application of the rules of the AAA, or by mutual agreement of the parties, except that such arbitrator shall be an attorney admitted to practice law in the Commonwealth of Massachusetts.  No party hereto will challenge the jurisdiction or venue provisions as provided in this section.  Nothing in this section shall limit the Holder's right to obtain an injunction for a breach of this Debenture from a court of law.  An y injunction obtained shall remain in full force and effect until the arbitrator, as set forth in herein, fully adjudicates the dispute.

20

IN WITNESS WHEREOF, the parties hereto have caused this Series B Convertible Preferred Stock Purchase Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first above written.

THE COMPANY:

NIGHTHAWK SYSTEMS, INC.

By:

_______________________

Name:  H. Douglas Saathoff

Its:       Chief Executive Officer

21

SCHEDULE 1

List of Investors, Signatures and Purchase Commitments

Name	Signature	Address/Facsimile Number of Investor	Purchase Commitment ($)	Purchase Commitment (# Shares)
Dutchess Private Equities Fund Ltd.	Douglas H. Leighton, Director	Douglas H. Leighton c/o Dutchess Capital Management 50 Commonwealth Ave., Suite 2 Boston, MA 02116 Tel:  617-301-4700 Fax:  617-249-0947	$6,000,000	600,000

22

DISCLOSURE SCHEDULE

23

EX-10

CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF

SERIES B PREFERRED STOCK, $0.001 PAR VALUE

OF

NIGHTHAWK SYSTEMS, INC.

The undersigned, H. Douglas Saathoff, Chief Executive Officer of Nighthawk Systems, Inc., (the “Corporation”), a corporation organized and existing under the laws of the State of Nevada, does hereby certify that, pursuant to the authority conferred upon the Board of Directors of the Corporation (the “Board”) by the Corporation's Articles of Incorporation to issue shares of preferred stock in series by distinct designation by the Board, and pursuant to the provisions of the Nevada Revised Statutes (“NRS”), the Board on October 9th, 2007 adopted the following resolution creating a series of One Million (1,000,000) shares of preferred stock designated as Series B Preferred Stock:

RESOLVED, that, pursuant to the authority vested in the Board in accordance with the provisions of the Corporation's Articles of Incorporation and the NRS, a series of Preferred Stock, $0.001 par value per share, of the Corporation be and it hereby is created, and that the designation and number of shares and relative rights and preferences thereof are as set forth below:

Terms of the Series B Preferred Stock,

$0.001 par value, of

Nighthawk Systems, Inc.

Series B Preferred Stock

(1)

Designation and Amount. There is hereby created a series of Preferred Shares that shall be designated as “Series B Preferred Stock,” par value $0.001 per share (the “Series B Preferred Stock”), and the number of shares constituting such series shall be One Million (1,000,000). Such number of shares may be increased or decreased by resolution of the Board; provided that no decrease shall reduce the number of shares of Series B Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation into Series B Preferred Stock.

(2)

Liquidation Preference. In the event of (a) a sale, financing or refinancing of all or substantially all of the assets of the Corporation, or (b) the liquidation of the Corporation, the holders of the Series B Preferred Stock, on a pro rata basis, shall (prior to any distribution on behalf of the holders of the Common Stock, $0.001 par value per share, of the Corporation (the “Common Stock”)) be entitled to a preferential distribution up to the amount of their unreturned capital contribution from the proceeds of such sale, financing, refinancing or liquidation net of expenses of the transaction, debt obligations of the Corporation, designated use of proceeds for the financing or refinancing, and any reserves deemed appropriate by the Board in its sole discretion (a “Preferred Distribution”).  Thereafter, all such distributions from such transaction shall be allocated pro rata to the holders of th e Series B Preferred Stock and the holder of the Common Stock according to their number of shares.  Except as may otherwise be provided by law or the Articles of Incorporation of the Corporation, any operating or other distributions shall be pro rata on a per share basis among all holders of Common Stock and the holders of Preferred Stock.

(3)

Anti-Dilution Protection. The Corporation intends to sell Series B Preferred Stock and/or Common Stock to Dutchess Private Equities Fund, Ltd. (“Dutchess”) through a private placement offering (the “Dutchess Offering”).  In the event the Corporation sells Series B Preferred Stock to a person or entity other than Dutchess (“Additional Stock”) at a per share value below the value paid by Dutchess in the Dutchess Offering, the Corporation will issue additional Series B Preferred Stock to Dutchess so the number of shares of Series B Preferred Stock owned by Dutchess shall be equivalent to the number of shares of Additional Stock purchased by such other person or entity with an investment identical in amount to such person or entity.  In the event a person or entity obtains warrants or other securities convertible into Series B Preferred Stock, such warrants or other secur ities shall be considered in determining the per share value of the Additional Stock for the purposes of this provision.

1

(4)

Voting Rights.  The Series B Preferred Stock shall have a series vote: (i) with regard to any items that any Series of Preferred Stock, either individually or jointly, has a series vote; (ii) as provided under “Protective Provisions” below; or (iii) as required by law.  Such series vote will require the approval of holders of fifty-one percent (51%) of the outstanding shares of Series B Preferred Stock.

(5)

Protective Provisions.  The Corporation hereby covenants that so long as any of the Series B Preferred Stock is outstanding, neither it nor any of its subsidiaries will, without the prior written approval of holders of at least fifty-one percent (51%) of the outstanding shares of Series B Preferred Stock, do or commit to do any of the actions described on Exhibit A attached hereto (either directly or by amendment, merger, consolidation, or otherwise).

(6)

Cumulative Dividend.  To each holder of Series B Preferred Stock, the Corporation shall pay an annual dividend equal to Twelve Percent (12%) of the per share price of each share of Series B Preferred Stock held by such holder (the “Dividend”).  One-quarter of the annual Dividend shall be paid within fifteen (15) days after the end of each of the Corporation’s fiscal quarters.  Declaration and payment of the Dividend shall be in accordance with the NRS.  The Dividend shall be paid in cash or shares of Series B Preferred Stock, at the sole option of the holder thereof.  In the event that the Corporation is unable to pay the full amount of the Dividend in any quarter as set forth in this provision and the holder of the Series B Preferred Stock has elected to receive such Dividend in cash, the unpaid amount of such cash Dividend, together with interest at the rate of Eight Percent (8%) per an num, shall be added to the following fiscal quarter’s Dividend.

(7)

Conversion.  

(a)

Mechanics of Conversion.  Each share of Series B Preferred Stock shall be convertible, at the sole option of the holder thereof, into share(s) of the Corporation’s Common Stock (such shares of Common Stock hereinafter being referred to as “Conversion Shares”) by the holder thereof sending to the Corporation a Conversion Notice (as defined below) for such shares.  The term “Conversion Notice” shall mean a written notice signed and dated (“Conversion Date”) by the holder of the Series B Preferred Stock wherein the holder has set forth the number of shares of Series B Preferred Stock that it intends to convert pursuant to the terms of this Certificate of Designation and computation of the number of Conversion Shares that the holder believes it is entitled to receive as a result of the application of the Conversion Formula (as defined below) to such conversion. &nbs p;The term “Conversion Formula” shall mean that number of Conversion Shares to be received by the holder of Series B Preferred Stock in exchange for each share of Series B Preferred Stock that such holder intends to covert pursuant to this provision, where such number of Conversion Shares shall be equal to the greater of (i) Thirteen Dollars ($13.00) worth of Common Stock based on the lowest closing bid price of the Corporation’s Common Stock during the Twenty (20) trading day period immediately preceding the date of the Conversion Notice, or (ii) one hundred (100) shares of Common Stock.    

(b)

Limitation.  Notwithstanding anything to the contrary in paragraph 7(a) above, in no event shall the holder of Series B Preferred Stock be entitled to convert that amount of Series B Preferred Stock into Conversion Shares, and in no event shall the Corporation permit the holder of Series B Preferred Stock to convert that amount of Series B Preferred Stock into Conversion Shares, which, when such Conversion Shares are added to the total number of shares of Common Stock beneficially owned (as such term is defined under Section 13(d) and Rule 13d-3 of the Securities Exchange Act of 1934, as such Conversion Shares are amended (the “Exchange Act”)) by such holder on the Conversion Date, would exceed 4.99% of the total number of shares of Common Stock issued and outstanding on the Conversion Date, as determined in accordance with Rule 13d-1(j) of the Exchange Act.  Notwithstanding the immediately preceding senten ce, nothing in this paragraph shall be interpreted to reduce the amount of Dividends due and payable to such holder or otherwise affect any right of such holder under this Certificate of Designation.  

2

(8)

Call Right.  The Corporation shall have the right, at its sole option, to request the holder of Series B Preferred Stock sell a specified number of its shares of Series B Preferred Stock back to the Corporation in exchange for payment by the Corporation of the Call Consideration (as defined below) in accordance with the terms of this provision.  In order to exercise such right, the Corporation shall remit to the holder of Series B Preferred Stock a Call Notice (as defined below) and the Call Consideration for such shares.  The term “Call Notice” shall mean a written notice signed and dated by the Corporation to each holder of the Series B Preferred Stock wherein the Corporation has set forth the number of shares of Series B Preferred Stock that it intends to purchase pursuant to the terms of this Certificate of Designation and computation of the Call Consideration.  The term “Call Consideration” shall mean the numbe r of shares of Series B Preferred that the Corporation thereof intends to purchase pursuant to this provision multiplied by the Call Price (as defined below).  The term “Call Price” shall mean Thirteen Dollars ($13.00) per share of Series B Preferred Stock.  Each holder of Series B Preferred Stock may, in its sole discretion, determine whether to accept or decline the Call Notice.  If holders of Series B Preferred Stock determine, in their sole discretion, to accept the Call Notice with respect to an aggregate number of shares of Series B Preferred Stock in excess of the amount set forth in the Call Notice, each electing holder shall be able to participate based upon the percentage of Series B Preferred Stock they agreed to sell of the total amount of holders of Series B Preferred Stock agreed to sell.   

(9)

Registration Rights.  

(a)

Piggyback Registration Rights.  The Corporation shall notify all holders of Series B Preferred Stock in writing at least thirty (30) days prior to filing any registration statement under the Securities Act of 1933, as amended, for purposes of effecting a public offering of securities of the Corporation (including, but not limited to, registration statements relating to secondary offerings of securities of the Corporation) and will afford each such holder a reasonable opportunity to include in such registration statement all or any part of the Conversion Shares then held by such holder.  Each holder of Series B Preferred Stock desiring to include in any such registration statement all or any part of its Conversion Shares then held by such holder shall, within twenty (20) days after receipt of the above-described notice from the Corporation, so notify the Corporation in writing, and in such notice shall inform the Corporation of the n umber of Conversion Shares such holder desires to include in such registration statement.  If a holder of Series B Preferred Stock decides not to include all of its Conversion Shares in any registration statement thereafter filed by the Corporation, such holder shall nevertheless continue to have the right to include any Conversion Shares in any subsequent registration statement or registration statements as may be filed by the Corporation with respect to offerings of its securities, all upon the terms and conditions set forth in this paragraph.  The Corporation alone shall bear all costs and expenses incurred by the Corporation in connection with the preparation and filing of any registration statements pursuant to this paragraph.

(b)

Demand Registration Rights.  After the first anniversary of the initial closing of the Dutchess Offering, if the Corporation shall receive a written request from the holders of at least fifty-one percent (51%) of the issued and outstanding shares of Series B Preferred Stock then outstanding that the Corporation file a registration statement under the Securities Act of 1933, as amended, covering the registration of all or any part of the Conversion Shares then held by such holders, then the Corporation shall, within ten (10) business days of the receipt of such written request, (i) give written notice of such request (“Request Notice”) to all holders of Series B Preferred Stock and will afford each such holder a reasonable opportunity to include in such registration statement all or any part of the Conversion Shares then held by such holder, and (ii) effect, as soon as practicable thereafter, the registration under the Securities Act of 1933, as amended, of the Conversion Shares to be so registered.  Each holder of Series B Preferred Stock desiring to include in any such registration statement all or any part of its Conversion Shares then held by such holder shall, within twenty (20) days after receipt of the above-described notice from the Corporation, so notify the Corporation in writing, and in such notice shall inform the Corporation of the number of Conversion Shares such holder desires to include in such registration statement.  If a holder of Series B Preferred Stock decides not to include all of its Conversion Shares in any registration statement thereafter filed by the Corporation, such holder shall nevertheless continue to have the right to include any Conversion Shares in any subsequent registration statement or registration statements as may be filed by the Corporation with respect to offerings of its securities, all upon the terms and conditions set forth in this paragraph.  The Corporation alone shall bear all costs and expenses incurred by the Corporation in connection with the preparation and filing of any registration statements pursuant to this paragraph.

3

IN WITNESS WHEREOF, I have hereunto subscribed my name as of this 9th day

of October, 2007.

____________________________

H. Douglas Saathoff,

Chief Executive Officer

4

EXHIBIT A

Protective Provisions

(i)

sell all or any portion of the Corporation or any subsidiary, whether by sale of equity interests, merger (other than a merger in which the Corporation is the surviving entity and no change of control occurs as a result of such merger), reorganization, consolidation, refinancing or recapitalization that results in a change in controlling equity ownership of the Corporation or any subsidiary or sale, lease, exchange, transfer or other disposition of all or substantially all of the assets of the Corporation or such subsidiary;

(ii)

incur any indebtedness for borrowed money or grant, create or permit the imposition of any lien, charge, security interest or other encumbrance upon any of the assets or properties of the Corporation or any subsidiary or guaranty or provide surety for the obligations of any third-party, other than (a) ordinary course trade payables, (b) financings of budgeted capital expenditures reflected in annual budgets approved by the Board, and (c) not more than five thousand dollars ($5,000) of traditional working capital financing from commercial lenders based on a borrowing base and secured only by the Corporation’s accounts receivable;

(iii)

amend or modify (a) the Articles of Incorporation, Bylaws or similar governing instrument(s) of the Corporation or any of its subsidiaries, or (b) documentation relating to indebtedness for borrowed money of the Corporation or any subsidiary, other than indebtedness permitted under clause (ii) above;

(iv)

enter into any transaction between or among the Corporation and/or any subsidiary, on the one hand, and any of their respective equity owners, directors, officers, employees or affiliates, on the other hand; provided, however, that nothing in this clause (iv) shall be deemed to prohibit (a) normal and customary employment and benefit programs on terms approved by the Board (including at least a majority of the directors designated by the holders of the Series B Preferred), or (b) transactions between the Corporation and its wholly-owned subsidiaries (or between such subsidiaries) and transactions that are on terms no less favorable to the Corporation and/or its subsidiaries than those the Corporation and/or its subsidiaries could otherwise receive in an arms length transaction from an unaffiliated third-party;

(v)

make any payment on account of, or set aside any assets for a sinking or other analogous fund for, the purchase redemption, defeasance, retirement or other acquisition of any equity interest of the Corporation or any subsidiary, except other redemptions from officers, directors, employees or consultants to the Corporation upon termination of their employment or association with the Corporation pursuant to agreements between such persons and the Corporation approved by the Board;

(vi)

voluntarily liquidate, wind-up, dissolve or commence any bankruptcy, insolvency, reorganization, debt arrangement or other case or proceeding under any bankruptcy or insolvency law or make a general assignment for the benefit of creditors with respect to the Corporation or any of its subsidiaries;

(vii)

commence or settle any material litigation or similar action to which the Corporation or any subsidiary is a party or could otherwise be bound;

(viii)

make any investment in one or more persons or entities in excess of five thousand dollars ($5,000) individually;

(ix)

change the line of business of the Corporation or any subsidiary;

(x)

increase the size of the Board beyond four (4) directors;

(xi)

change the independent auditors of the Corporation;

(xii)

authorize, issue or agree to issue any equity securities (including convertible and exchangeable securities) of the Corporation or any subsidiary;

5

(xiii)

pay or make any dividends or distributions to its equity holders, other than distributions by subsidiaries of the Corporation to the Corporation and/or distributions in respect of the Series B Preferred Stock; or

(xiv)

adopt any equity based or phantom incentive plan or program for the Corporation or any subsidiary.

6

EX-10

Exhibit 10.4

SECURITY AGREEMENT

THIS SECURITY AGREEMENT (this “Agreement”) is made as of the 9th day of October, 2007, by NIGHTHAWK SYSTEMS, INC., a Nevada corporation, having a mailing address at 10715 Gulfdale, Suite. 200, San Antonio, Texas  78216,  (the “Company”), (together with all subsidiaries and divisions, individually and collectively, the “Debtors”), for the benefit and security of DUTCHESS PRIVATE EQUITIES FUND, LTD., having a mailing address at 50 Commonwealth Avenue, Suite 2, Boston, Massachusetts  02116 (the “Secured Party”).

RECITALS

WHEREAS, the Company has previously executed and delivered to Dutchess one or more debentures, notes or other instruments in favor of the Secured Party, including, without limitation, the following: (i) that certain Debenture, with an issuance date of March 17, 2006 in the principal balance, excluding accrued interest, of $145,070, (ii) that certain Debenture with an issuance date of April 20, 2006 in the principal balance, excluding accrued interest, of $175,000, (iii) that certain Debenture with an issuance date of June 16, 2006 in the principal amount, excluding accrued interest, of $205,000, (iv) that certain Debenture with an issuance date of July 5, 2006 in the principal amount, excluding accrued interest, of $135,000, (v) that certain Debenture with an issuance date of August 22, 2006 in the principal amount, excluding accrued interest, of $109,941, (vi) that certain Debenture with an issuance date of September 22, 2006 in the principal amount, exc luding accrued interest, of $185,000, (vii) that certain Debenture with an issuance date of October 9, 2006 in the principal amount, excluding accrued interest, of $36,551, (viii) that certain Debenture with an issuance date June 27, 2007 in the principal amount, excluding accrued interest, of $500,000, (as amended or otherwise modified from time-to-time, collectively, the “Existing Debentures”);

WHEREAS, concurrently with the execution of this Agreement the Company has executed and delivered to Secured Party a Securities Purchase Agreement for the Company’s Series B Preferred Stock or instruments, including, without limitation, dated October 9th, 2007 from the Company in favor of the Secured Party (the “Preferred”) pursuant to which the Secured Party has agreed to make certain loans and other financial accommodations to the Company;

WHEREAS, the obligations of the Company under the Preferred and the Existing Debentures (“Preferred and Debentures”) and the obligations under the Preferred are to be secured pursuant to this Agreement;

NOW, THEREFORE, for and in consideration of any loan, advance or other financial accommodation heretofore or hereafter made to or for the benefit of the Company under or in connection with the Preferred, Debentures or any other Finance Documents (as defined herein), and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto intending to be legally bound hereby agree as follows:

ARTICLE I

CONSTRUCTION AND DEFINED TERMS

1.01

Article and Section Headings.  Article and Section headings and captions in this Agreement are for convenience only and shall not affect the construction or interpretation of this Agreement.  Unless otherwise expressly stated in this Agreement, references in this Agreement to Sections shall be read as Sections of this Agreement.

1.02

Schedules and Exhibits.  The references in this Agreement to specific Schedules and Exhibits shall be read as references to such specific Schedules or Exhibits attached, or intended to be attached, to this Agreement and any counterpart of this Agreement and regardless of whether they are in fact attached to this Agreement, and including any amendments, supplements and replacements to such Schedules and Exhibits from time to time.

1.03

Defined Terms.  Unless otherwise expressly stated in this Agreement, (a) capitalized terms which are not otherwise defined herein shall have the respective meanings assigned thereto in the UCC (as defined below); and (b) the following terms used in this Agreement shall have the following meanings:

“Collateral” means, with respect to any Debtor, all property and rights of such Debtor in which a security interest is granted hereunder.

“Computer Hardware and Software” means, with respect to any Debtor, all of such Debtor's rights (including rights as licensee and lessee) with respect to (i) computer and other electronic data processing hardware, including all integrated computer systems, central processing units, memory units, display terminals, printers, computer elements, card readers, tape drives, hard and soft disk drives, cables, electrical supply hardware, generators, power equalizers, accessories, peripheral devices and other related computer hardware; (ii) all software programs designed for use on the computers and electronic data processing hardware described in clause (i) above, including all operating system software, utilities and application programs in whatsoever form (source code and object code in magnetic tape, disk or hard copy format or any other listings whatsoever); (iii) any firmware associated with any of the foregoing; and (iv) any documentation for hardware, software and firmware described in clauses (i), (ii) and (iii) above, including flow charts, logic diagrams, manuals, specifications, training materials, charts and pseudo codes.

“Equity Interest”  With respect to any Person, any ownership interest in such Person, including shares, partnership interests, joint venture interests, membership interests, limited liability company interests, unit interests and any other equity or ownership interests of any kind, and any subscriptions, options, warrants, commitments, purchase rights, preemptive rights or agreements of any kind (including any stockholders’ or voting trust agreements) for the issuance, sale, registration or voting of, or for securities convertible into, any shares, partnership interests, joint venture interests, membership interests, limited liability company interests, and any other equity or ownership interests in such Person.

“Finance Documents” mean, collectively, the Debentures, the Preferred, and any other documents or agreements executed in connection therewith or herewith and pertaining to the Secured Obligations.

“Lien”  Any security interest (including security interest within the definition of “security interest” in the UCC), encumbrance, lien (including any judgment lien, any contract lien, any lien arising or resulting from nonpayment of any tax, assessment, charge or other imposition, and any lien arising or resulting from nonpayment for labor, materials, or supplies), security agreement (including any agreement that creates or provides for a security interest), deed of trust, mortgage, grant, pledge, assignment, hypothecation, title retention contract, or other arrangement for security purposes, and any agricultural lien (including any agricultural lien within the definition of “agricultural lien” in the UCC), and including any of the foregoing arising by operation of statute or other law or the application of equitable principles, whether perfected or unperfected, avoidable or unavoidable , consensual or nonconsensual, and any financing statement or other similar notice document, whether or not filed, and any agreement to give a financing statement or other similar notice document.

“Lien Proceeding”  Any action taken (including self help) or proceeding (judicial or otherwise) commenced by any Person other than Secured Party for the purpose of enforcing or protecting any actual or alleged Lien upon any of the Collateral, and including any foreclosure, repossession, attachment, execution or other process regarding any of the Collateral.

“Permitted Lien” means those Liens described on Schedule 3.07.  The Permitted Liens shall not exceed an aggregate amount of more than one twenty-five thousand dollars ($125,000) by those combined creditors listed in Schedule 3.07

“Person”  Any natural person, corporation, limited liability company, partnership, joint venture, entity, association, joint-stock company, trust or unincorporated organization and any Governmental Authority, including any receiver, debtor-in-possession, trustee, custodian, conservator, or liquidator.

“Secured Obligations” All indebtedness, liabilities and obligations which are now or may at any time hereafter be due, owing or incurred in any manner whatsoever to Secured Party by any Debtor, whether under this Agreement, any Debenture, Preferred or any other Finance Document, in each case howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, whether at stated maturity, by acceleration or otherwise (including, without limitation, the payment of interest and other amounts which would accrue and become due but for the filing of a petition in bankruptcy or the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. § 362(a)), including, without limitation, all charges, fees, expenses, commissions, reimbursements, premiums, indemnities and other payments related to or in respect of such obligations.

 “UCC” means the Uniform Com­mercial Code as in effect in the Commonwealth of Massachusetts on the date of this Agreement, as may be amended or modified from time to time after the date hereof; provided that, "UCC" shall also mean the Uniform Commercial Code as in effect from time to time in any applicable jurisdiction.

ARTICLE II

SECURITY INTEREST;  PERFECTION

2.01

Security Interest.  To secure the full and timely payment, performance and satisfaction of the Secured Obligations, each Debtor hereby collaterally assigns to Secured Party, and grants Secured Party a security interest in, all of such Debtor’s property, whether now owned or hereafter existing or acquired, regardless of where located including, without limitation, all of such Debtor’s:

(a)

Accounts;

(b)

Chattel Paper, including Electronic Chattel Paper;

(c)

Computer Hardware and Software and all rights with respect thereto, including, any and all licenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications, and any substitutions, replacements, additions or model conversions of any of the foregoing

(d)

Commercial Tort Claims now or hereafter identified on Schedule 2.01(d) to this Agreement;

(e)

Deposit Accounts;

(f)

Documents;

(g)

Financial Assets;

(h)

General Intangibles;

(i)

Goods (including all of its Equipment, Fix­tures and Inventory), and all embedded software, accessions, additions, attachments, improvements, substitutions and replacements thereto and therefor);

(j)

Instruments;

(k)

Intellectual Property;

(l)

Investment Property;

(m)

Letter of Credit Rights;

(n)

money (of every jurisdiction whatsoever);

(o)

Security Entitlements;

(p)

Supporting Obligations

(q)

with respect to each Person (as hereinafter defined) listed in Schedule 2.01(q) hereto and each other corporation hereafter acquired or formed by such Debtor, the Equity Interests from time to time issued and outstanding, including the certificates, if any, representing the Equity Interests and any interest of such Debtor in the entries on the books of the issuer thereof or any financial intermediary pertaining to the Equity Interests, together with all dividends, cash, options, warrants, rights, instruments, distributions, returns of capital or principal, income, interest, profits and other property, interests (debt or equity) or proceeds as a result of a split, revision, reclassification, consolidation, merger or other like change of the Equity Interests or any issuer thereof, from time to time received, receivable or otherwise distributed to such Debtor in respect of or in exchange for any or all of the Equity Interests;

(r)

all promissory notes or intercompany notes and and all certificates or instruments evidencing such promissory notes or intercompany notes; and to the extent not included in the foregoing, other personal property of any kind or description, together with all books, records, writings, data bases, information and other property relating to, used or useful in connection with, or evidencing, embodying, incorporating or referring to any of the foregoing, and all Proceeds, products, rents, issues, profits and returns of and from any of the foregoing; provided that to the extent that the provisions of any lease or license of Computer Hardware and Software or Intellectual Property expressly prohibit (which prohibition is enforceable under applicable law) the assignment thereof, and the grant of a security interest therein, the Secured Party will not enforce its security inter est (other than in respect of the Proceeds thereof) for so long as such prohibition continues, it being understood that upon request of the Secured Party, such Debtor will in good faith use reasonable efforts to obtain consent for the creation of a security interest in favor of the Secured Party (and to Secured Party’s enforcement of such security interest) in such Debtor's rights under such lease or license.

2.02

Intentionally Omitted.

2.03

Perfection by Filing.

(a)

Each Debtor authorizes Secured Party to file any financing statement and agrees to execute, in recordable form, and deliver to Secured Party any other document or instrument, and to cause any third party to execute and deliver to Secured Party any other document (including financing statement termination statements), requested by Secured Party to perfect the security interests created under this Agreement and to establish, maintain, and continue the first priority of the security interests created under this Agreement.

(b)

Each Debtor hereby appoints Secured Party as such Debtor’s attorney-in-fact, with power of substitution, which appointment is irrevocable and coupled with an interest, to execute in the name of Debtor, and to transmit to, or file, record, or register with, any Person, and at any time, any document or instrument that Secured Party may deem necessary or advisable for the purpose of creating, enforcing, defending, protecting, perfecting, continuing, or maintaining any security interest, or the perfection or priority of any security interest, created under this Agreement.  

(c)

Secured Party shall not be required to obtain Debtor’s consent or authorization for Secured Party to file, and Secured Party shall be entitled to file, with or without execution by Debtor (or by Secured Party as Debtor’s attorney-in-fact), any financing statement, amendment, or other record that

Secured Party may be authorized to file in accordance with the terms of the UCC with respect to the security interests created under this Agreement.  

(d)

Any financing statement or other document filed to perfect the security interests evidenced by this Agreement may, at Secured Party’s option, describe or indicate the Collateral in the manner that the Collateral is described in this Agreement, or as all assets of Debtor, or as all personal property of Debtor, or by any other description or indication of the Collateral that may be sufficient for a financing statement under the UCC.

(e)

If prior to Debtor’s execution of this Agreement, Secured Party shall have filed in any jurisdiction, or with any governmental authority, any financing statement, amendment, or other document describing or indicating the Collateral, or containing a description or indication of all assets of Debtor or all personal property of Debtor comprising the Collateral, or containing any other description or indication of the Collateral, Debtor, by executing this Agreement, irrevocably (i) authorizes, ratifies, confirms, and adopts (A) each such previously filed financing statement, amendment or other document, and (B) the filing of each such previously filed financing statement, amendment, or other document, and (ii) agrees that each such previously filed financing statement, amendment, or other document is valid and effective as though it had been authorized by Debt or and filed with Debtor’s authorization.

2.04

Perfection by Possession.  If Collateral is of a type as to which it is necessary, desirable, or advisable, as determined by Secured Party, for Secured Party to take possession of such Collateral in order to protect, perfect, or maintain the first priority of Secured Party’s security interest or other Lien (subject only to Permitted Security) in such (or any other) Collateral, then, promptly upon Secured Party’s request, Debtor shall deliver such Collateral to Secured Party.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

Debtor makes the following representations and warranties to Secured Party, which shall each be continuing and in effect at all times, and Secured Party shall be entitled to rely upon the truth, accuracy, and completeness of the following representations and warranties without regard to any other information that may be now or hereafter known by or disclosed to Secured Party or any of Secured Party’s directors, officers, employees, agents, attorneys or other advisors:

3.01

Debtor’s Name and Identification Number.  The name of each Debtor set forth on the first page and the signature page of this Agreement is Debtor’s correct and complete legal name.  The street address for Debtor in this Agreement is Debtor’s mailing address.  Such Debtor's chief executive office and principal place of business are as set forth on Schedule 3.01 hereto (and such Debtor has not maintained its chief executive office and principal place of business at any other location during the five (5) years preceding the date hereof, and each other location where such Debtor maintains a place of business is also set forth on Schedule 3.01 hereto

3.02

Permitted Liens; Collateral. (a) No financing statement (other than Permitted Liens) covering any of such Debtor’s rights in the Collateral is on file in any public office; (b) Secured Party’s security interest in the Collateral is a first priority perfected security interest, subject to no Liens other than Permitted Liens; (c) such Debtor is and will be the lawful owner of all Collateral, free of all liens, claims, security interests and encumbrances whatsoever, other than the security interest hereunder and Permitted Liens, with full power and authority to execute this Agreement and perform such Debtor's obligations hereunder, and to subject the Collateral to the security interest hereunder and (d) all information with respect to the Collateral set forth in any schedule, certificate or other writing at any time heretofo re or hereafter furnished by such Debtor to the Secured Party is and will be true and correct in all material respects as of the date furnished.

3.03

Authorization and No Conflicts.  (a) Each Debtor is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation as listed on the first page of this Agreement; (b) the execution and delivery of this Agreement and the performance by such Debtor of its obligations hereunder are within such Debtor's corporate powers, have been duly authorized by all necessary corporate action, have received all necessary govern­mental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law or of the articles of incorporation or by-laws of such Debtor or of any material agreement, indenture, instrument or other document, or any material judgment, order or decree, which is binding upon such Debtor; and (c) this Agreement is a legal, valid and binding obligation of such Debtor, enfor ceable in accordance with its terms, except that the enforceability of this Agreement may be limited by bankruptcy, insolvency, fraudulent conveyance, fraudulent transfer, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law).

3.04

Tangible Collateral. Schedule 3.04 hereto contains a complete listing of such Debtor’s tangible Collateral located with any bailee, warehousemen or other third parties and all of such Debtor’s Collateral which is subject to certificate of title statutes.  

3.05

Deposit Accounts.  Except as listed on Schedule 2.02, Debtor has no Deposit Accounts and is not a party to or otherwise bound by any Deposit Account Agreement.  

3.06

Leases.  Except as listed on Schedule 3.06 (which schedule contains a true, accurate and complete list and description of all leases to which Debtor is a lessor, lessee, or other party or otherwise bound), Debtor is not a lessor or lessee under, or a party to, or otherwise bound by the terms of, any lease.

3.07

Commercial Tort Claims.  Except as listed on Schedule 2.01(d), Debtor has no Commercial Tort Claims.

3.08

Subsidiaries.  Schedule 3.08 lists all of the subsidiaries of Debtors.

ARTICLE IV

AFFIRMATIVE COVENANTS

Debtor covenants and agrees to the following:

4.01

Account Debtors.  The Secured Party may, at any time that an Event of Default exists, whether before or after any revocation of such power and authority or the maturity of any of the Secured Obligations, notify an Account Debtor or other Person obligated on Collateral to make payment or otherwise render performance to or for the benefit of the Secured Party and enforce, by suit or otherwise the obligations of an Account Debtor or other Person obligated on Collateral and exercise the rights of such Debtor with respect to the obligation of the Account Debtor or other Person obligated on Collateral to make payment or otherwise render performance to such Debtor, and with respect to any property that secures the obligations of the Account Debtor or other Person obligated on the Collateral.  In connection with exercise of such rights and remedies, the Secured Party may surre nder, release or exchange all or any part thereof, or compromise or extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder or evidenced thereby.  Upon the request of the Secured Party during the existence of an Event of Default, each Debtor will, at its own expense, notify any or all parties obligated on any of the Collateral to make payment to the Secured Party of any amounts due or to become due thereunder.  Upon request by the Secured Party during the existence of an Event of Default, each Debtor will forthwith, upon receipt, transmit and deliver to the Secured Party, in the form received, all cash, checks, drafts and other instruments or writings for the payment of money (properly endorsed, where required, so that such items may be collected by the Secured Party) which may be received by such Debtor at any time in full or partial payment or otherwise as proceeds of any of the Collateral.  Except as the Secured Party may otherwise consent in writing, any such items which may be so received by any Debtor will not be commingled with any other of its funds or property, but will be held separate and apart from its own funds or property and upon express trust for the Secured Party until delivery is

made to the Secured Party.  Each Debtor will comply with the terms and conditions of any consent given by the Secured Party pursuant to the foregoing sentence.  

4.02

Additional Covenants.  Each Debtor:  

(a) will, at the Secured Party’s request, at any time and from time to time, execute and deliver to the Secured Party such financing statements, amendments and other documents and do such acts as the Secured Party deems necessary in order to establish and maintain valid, attached and perfected first priority security interests in the Collateral in favor of the Secured Party, free and clear of all Liens and claims and rights of third parties whatsoever except Permitted Liens; each Debtor hereby irrevocably authorizes the Secured Party at any time, and from time to time, to file in any jurisdiction any initial financing statements and amendments thereto that (i) indicate the Collateral (x) as all assets of such Debtor or words of similar effect, regardless of whether any particular asset comprised in the Collateral falls within the scope of Article 9 of the UCC of the jurisdiction wherein such financing st atement or amendment is filed, or (y) as being of an equal or lesser scope or with greater detail;

(b) will keep all its Inventory at, and will not maintain any place of business at any location other than, its address(es) shown on Schedule 3.01 hereto or at such other addresses of which such Debtor shall have given the Secured Party not less than 30 days' prior written notice;

(c) will keep its records concerning the Collateral in such a manner as will enable the Secured Party or its designees to determine at any time the status of the Collateral;

(d) will furnish the Secured Party such information concerning such Debtor, the Collateral and the Account Debtors as the Secured Party may from time to time reasonably request;

(e) will permit the Secured Party and its designees, from time to time, on reasonable notice and at reasonable times and intervals during normal business hours (or at any time without notice during the existence of an Event of Default) to inspect such Debtor's Inventory and other Goods, and to inspect, audit and make copies of and extracts from all records and other papers in the possession of such Debtor pertaining to the Collateral and the Account Debtors, and will, upon request of the Secured Party during the existence of an Event of Default, deliver to the Secured Party all of such records and papers;

(f) will, upon request of the Secured Party, stamp on its records concerning the Collateral, and add on all Chattel Paper and Instruments constituting a portion of the Collateral, a notation, in form satisfactory to the Secured Party, of the security interest of the Secured Party hereunder;

(g) except for the sale or lease of Inventory in the ordinary course of its business and sales of Equipment which is no longer useful in its business or which is being replaced by similar Equipment, will not sell, lease, assign or create or permit to exist any Lien on any Collateral other than Permitted Liens;

(h) will at all times keep all of its Inventory and other Goods insured under policies maintained with reputable, financially sound insurance companies against loss, damage, theft and other risks to such extent as is customarily maintained by companies similarly situated, and cause all such policies to provide that loss thereunder shall be payable to the Secured Party as its interest may appear (it being understood that (A) so long as no Event of Default shall be existing, the Secured Party shall deliver any proceeds of such insurance which may be received by it to such Debtor and (B) whenever an Event of Default shall be existing, the Secured Party may apply any proceeds of such insurance which may be received by it toward payment of the Secured Obligations, whether or not due, in such order of application as the Secured Party may determine), and such policies or certificates thereof shall, if the Secured Pa rty so requests, be deposited with or furnished to the Secured Party;

(i) will take such actions as are reasonably necessary to keep its Goods in good repair and condition;

(j) will take such actions as are reasonably necessary to keep its Equipment in good repair and condition and in good working order, ordinary wear and tear excepted;

 (k) will promptly pay when due all license fees, registration fees, taxes, assessments and other charges which may be levied upon or assessed against the ownership, operation, possession, maintenance or use of its Equipment and other Goods;

 (l) will take all steps reasonably necessary to protect, preserve and maintain all of its rights in the Collateral and will keep all of the tangible Collateral in the United States;

(m)

will promptly notify the Secured Party in writing upon acquiring or otherwise obtaining any Collateral after the date hereof consisting of Deposit Accounts, Investment Property, Letter-of-Credit Rights or Electronic Chattel Paper and, upon the request of the Secured Party, will promptly execute such other documents, and do such other acts or things deemed appropriate by the Secured Party to confer upon the Secured Party control (as defined in the UCC) with respect to such Collateral;

(o) promptly notify the Secured Party in writing upon acquiring or otherwise obtaining any Collateral after the date hereof consisting of Documents or Instruments and, upon the request of the Secured Party, will promptly execute such other documents, and do such other acts or things deemed appropriate by the Secured Party to deliver to the Secured Party possession of such Documents which are negotiable and Instruments, and, with respect to nonnegotiable Documents, to have such nonnegotiable Documents issued in the name of the Secured Party;

(p) promptly notify the Secured Party in writing upon incurring or otherwise obtaining a Commercial Tort Claim after the date hereof against any third party, and, upon the request of the Secured Party, will promptly enter into an amendment to this Agreement, and do such other acts or things deemed appropriate by the Secured Party to give the Secured Party a security interest in such Commercial Tort Claim; and

(q) further agrees to take other action reasonably requested by the Secured Party to insure the attachment, perfection and first priority of, and the ability of the Secured Party to enforce, the security interests in any and all of the Collateral including, without limitation, (i) executing, delivering and, where appropriate, filing financing statements and amendments relating thereto under the UCC, to the extent, if any, that the Debtor’s signature thereon is required therefor, (ii) complying with any provision of any statute, regulation or treaty of the United States as to any Collateral if compliance with such provision is a condition to attachment, perfection or priority of, or ability of the Secured Party to enforce, the security interests in such Collateral, (iii) obtaining governmental and other third party consents and approvals, including without limitation any consent of any licensor, lessor or other Person obligated on Collateral, (iv) obtaining waivers from mortgagees and landlords in form and substance satisfactory to the Secured Party, and (v) taking all actions required by the UCC in effect from time to time or by other law, as applicable in any relevant UCC jurisdiction, or by other law as applicable in any foreign jurisdiction.

4.03

Taxes, Assessments, Charges, and Other Impositions.   Debtor shall pay and discharge promptly, on or before the date due, all taxes, assessments, charges, and other impositions imposed by any governmental authority on Debtor, or on the Collateral, relating to the ownership or use of the Collateral, or relating to any sale, lease, license or other disposition of the Collateral; provided, however, Debtor shall not be required to pay or discharge, or to cause to be paid or discharged, any such tax, assessment, charge, or other imposition so long as (a) the validity of such tax, assessment, charge or other imposition is being contested in good faith by Debtor by appropriate proceedings.

4.04

Notice of Lien Proceeding.   Debtor shall give Secured Party immediate written notice of the threat by any Person to commence any proceedings on a material portion of the Collateral or any other Lien Proceeding.

4.05

Delivery of Certificated Equity Interests. All certificates, agreements or instruments representing or evidencing the pledged Equity Interests, to the extent not previously delivered to the Secured Party, shall promptly upon receipt thereof by any Debtor be delivered to and held by the Secured Party pursuant hereto. All such certificated Collateral shall be in suitable form for transfer by delivery or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to the Secured Party. Security Party shall have the right, at any time after the occurrence and during the continuance of any Event of Default, to exchange certificates representing or evidencing such pledged Equity Interests for certificates of smaller or larger denominations.  If any issuer of pledged Equity Interests is organized in a juris diction which does not permit the use of certificates to evidence equity ownership, or if any of such pledged Equity Interests are at any time not evidenced by certificates of ownership, then each applicable Debtor shall, to the extent permitted by applicable law, record such pledge on the equityholder register or the books of the issuer, execute any customary pledge forms or other documents necessary or appropriate to complete the pledge and give the Secured Party the right to transfer such pledged Equity Interests.

4.06

Voting Rights: Distributions: etc.  So long as no Event of Default shall have occurred and be continuing, (i) each Debtor shall be entitled to exercise any and all voting and other consensual rights pertaining to the pledged Equity Interests or any part thereof for any purpose not inconsistent with the terms or purposes of this Agreement; provided, however, that no Debtor shall in any event exercise such rights in any manner which may have an adverse effect on the security intended to be provided by this Agreement and (ii) each Debtor shall be entitled to receive and retain any and all distributions with respect to such pledged Equity Interests.  Upon the occurrence and during the continuance of any Event of Default, upon written notice from the Secured Party, all rights of each Debtor to exercise such voting and other consensual rights it would otherwise be entitled to exercise hereunder and all rights of such Debtor to receive distributions otherwise permitted hereunder shall cease, and all such rights shall thereupon become vested in the Secured Party.  Any distributions which are received by any Debtor in violation of the provisions of this Agreement shall be received in trust for the benefit of the Secured Party, shall be segregated from other funds of such Debtor and shall immediately be paid over to the Secured Party as Collateral in the same form as so received (with any necessary endorsement).

ARTICLE V

NEGATIVE COVENANTS

Debtor covenants and agrees to the following:

5.01

Identity.  Debtor shall not change Debtor’s name or corporate structure.  If Debtor is organized solely under the law of a single state or the United States and as to which the state or the United States must maintain a public record showing the organization to have been organized, Debtor shall not organize under the laws of another jurisdiction.

5.02

Deposit Accounts.  Debtor shall not open or close any Deposit Account or modify, terminate, or supplement any Deposit Account Control Agreement, or waive any material rights under any Deposit Account Control Agreement, without prior written notice to the Secured Party.

5.03

Liens.  Debtor shall not create, incur, assume or suffer to exist any Liens upon any Collateral of Debtor other than Permitted Liens.

ARTICLE VI

EVENT OF DEFAULT; ENFORCEMENT OF SECURITY INTEREST

6.01

Any one or more of the following events (regardless of the reason therefor) shall constitute an "Event of Default" hereunder:

(a)

Any default or event of default shall occur under any of the Debentures, Preferred or any other Finance Documents.

(b)

Any Debtor shall fail or neglect to perform, keep or observe any provision of this Agreement or any other Finance Document and the same shall remain unremedied for a period of ten (10) days after notice is given to such Debtor by the Secured Party.

(c)

The Secured Party shall fail to have an enforceable first priority lien on and security interest in the Collateral.

(d)

Any Debtor files a bankruptcy petition, a bankruptcy petition is filed against any Debtor which remains undismissed or unstayed for 30 consecutive days, or any Debtor makes a general assignment for the benefit of creditors.

6.02

Right to Enforce Claim;  Secured Party in Possession or Control.  

(a)

Upon the occurrence of an Event of Default and during the continuance thereof, and in addition to such other rights and remedies as Secured Party may have under other provisions of this Agreement or any other Finance Document, or under common or statutory law, Secured Party may reduce a claim to judgment, foreclose, or otherwise enforce the claim, security interest, or agricultural lien by any available judicial procedure, and if the Collateral is Documents, Secured Party may proceed either as to the Documents or as to the Goods the Documents cover.

(b)

If Secured Party has possession of Collateral, (i) reasonable expenses, including the cost of insurance and payment of taxes or other charges, incurred in the custody, preservation, use, or operation of the Collateral are chargeable to Debtor and are secured by the Collateral, (ii) the risk of accidental loss or damage is upon Debtor to the extent of a deficiency in any effective insurance coverage, (iii) Secured Party shall keep the Collateral identifiable, but fungible Collateral may be commingled, and (iv) Secured Party may use or operate the Collateral (A) for the purpose of preserving the Collateral or its value, or (B) as permitted by an order of a court having competent jurisdiction, or (C) for the purpose of transporting the Collateral, or (D) for the purposes of demonstrating the use or operation of the Collateral.

(c)

If Secured Party has possession of Collateral or control of Collateral that is Deposit Accounts, Electronic Chattel Paper, Investment Property, or Letter-of-credit rights, then Secured Party (i) may hold as additional security any Proceeds, except money or funds, received from the Collateral, (ii) shall apply money or funds received from the Collateral to reduce the Secured Obligations unless remitted to Debtor, and (iii) may create a security interest in the Collateral.

(d)

If Secured Party has possession of Collateral that is Chattel Paper or an Instrument, then as to any such Chattel Paper or Instrument, Secured Party shall not be obligated to take any necessary steps to preserve rights against prior parties.

6.03

Collection and Enforcement. After the occurrence of an Event of Default and during the continuance thereof (in accordance with the Facilities Agreement), Secured Party may:  

(a)

notify any Account Debtor or other Person obligated on Collateral to make payment or otherwise render performance to or for the benefit of Secured Party;

(b)

take any Proceeds to which Secured Party is entitled under Section 9-315 of Article 9 of the UCC;

(c)

enforce the obligations of any Debtor or other Person obligated on Collateral and exercise the rights of Debtor with respect to the obligations of the Debtor or other Person obligated on Collateral to make payment or otherwise render performance to Debtor, and with respect to any property that secures the obligations of the Debtor or other Person obligated on the Collateral;

(d)

if Secured Party is a Bank and holds a security interest in a Deposit Account maintained with Secured Party, apply the balance of the Deposit Account to the obligation secured by the Deposit Account; and

(e)

if Secured Party holds a security interest in a Deposit Account perfected by control pursuant to an agreement among Debtor, Secured Party and the Bank with which the Deposit Account is maintained, or if Secured Party becomes the Bank’s customer with respect to the Deposit Account, instruct the Bank with which the Deposit Account is maintained to pay the balance of the Deposit Account to or for the benefit of Secured Party.

6.04

Possession of Collateral.

(a)

After the occurrence of an Event of Default and during the continuance thereof, Secured Party may require Debtor to assemble the Collateral and make the Collateral available to Secured Party at a place designated by Secured Party which is reasonably convenient to Secured Party and Debtor.  If Secured Party requires Debtor to assemble the Collateral and make the Collateral available to Secured Party, as described in the preceding sentence, Debtor shall do so promptly, and in any event within ten (10) days after Secured Party gives Debtor a notice requesting Debtor to assemble the Collateral and make the Collateral available to Secured Party at the place designated by Secured Party.  Without limiting Secured Party’s right to designate any place which is reasonably convenient to Debtor for making Collateral available to Secured Party, Debtor agrees that any place desig nated by Secured Party and located within one hundred (100) miles of any place where Debtor stores, uses, sells, leases, licenses, or maintains Collateral in the ordinary course of Debtor’s business shall be conclusively deemed to be a place reasonably convenient to Debtor for making the Collateral available to Secured Party.

(b)

After the occurrence of an Event of Default and during the continuance thereof, Secured Party may, pursuant to judicial process, or without judicial process if Secured Party proceeds without breach of peace, (1) take possession of the Collateral and, (2) without removal, render Equipment unusable and dispose of Collateral on Debtor’s premises.

6.05

Disposition of Collateral.

(a)

After the occurrence of an Event of Default and during the continuance thereof, Secured Party may sell, lease, license, or otherwise dispose of any or all of the Collateral in its present condition or following any commercially reasonable preparation or processing.

(b)

Secured Party may dispose of Collateral by public or private proceedings, by one or more contracts, as a unit or in parcels, and at any time and place and on any terms.

(c)

Secured Party may purchase Collateral (1) at a public disposition or (2) if the Collateral is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations, at a private disposition.

(d)

A contract for sale, lease, license, or other disposition includes the warranties relating to title, possession, quiet enjoyment, and the like which by operation of law accompany a voluntary disposition of property of the kind subject to the contract; provided, however, Secured Party may disclaim or modify such warranties (1) in a manner that would be effective to disclaim or modify the warranties in a voluntary disposition of property of the kind subject to the contract of disposition, or (2) by communicating to the purchaser a Record evidencing the contract for disposition and including an express disclaimer or modification of the warranties, and provided further that a Record is sufficient to disclaim such warranties if such Record indicates “There is no warranty relating to title, possession, quiet enjoyment, or the like in this disposition” or uses words o f similar import.

(e)

Prior to a disposition of Collateral, Secured Party shall give Debtor, and any other parties required to receive notice under Article 9 of the UCC, notification as required under Article 9 of the UCC before a sale, lease, license, or other disposition of Collateral.

6.06

Additional Provisions Regarding Sales and Other Dispositions.  In the event that Secured Party shall sell or otherwise dispose of the Collateral, or any part thereof in accordance with this Agreement, the following additional provisions shall be applicable to such sale or other disposition:

(a)

Such sale or other disposition may be at public or private sale (or at any broker’s board or on any securities exchange) for cash, upon credit or for future delivery as Secured Party shall deem appropriate.  Secured Party shall be authorized at any such sale (if Secured Party deems it advisable to do so with regard to any type or item of Collateral) to restrict the prospective bidders or purchasers to Persons who will represent and agree that they are purchasing the Collateral for their own use (or for their own account for investment, as applicable) and not with a view to the distribution or sale thereof, and upon consummation of any such sale, Secured Party shall have the right to assign, transfer and deliver to the purchaser or purchasers thereof the Collateral so sold.  Each such purchaser at any such sale shall hold the property sold absolutely, free from any c laim or right on the part of Debtor, and Debtor hereby waives (to the extent permitted by law) all rights of redemption, stay and appraisal which Debtor now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted.  Secured Party shall give Debtor at least ten (10) days’ written notice (which Debtor agrees is reasonable notice) of Secured Party’s intention to make any sale of Collateral owned by Debtor.  Such notice, in the case of a public sale, shall state the time and place for such sale and, in the case of a sale at a broker’s board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Collateral, or portion thereof, will first be offered for sale at such board or exchange.  Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as Secured Party may fix and state in the notice of such sale, and Sec ured Party shall not be obligated to make any sale of any Collateral if Secured Party shall determine not to do so, regardless of the fact that notice of sale of such Collateral shall have been given, and Secured Party may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice to Debtor or anyone else, be made at the time and place to which the same was so adjourned.

(b)

In case any sale of all or any part of the Collateral is made on credit or for future delivery, the Collateral so sold may be retained by Secured Party until the sale price is paid by the purchaser or purchasers thereof, but Secured Party shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for Collateral so sold and, in case of any such failure, such of the Collateral may be sold again upon notice to Debtor as set forth in this Section.  

(c)

At any public sale, Secured Party may bid for or purchase, free (to the extent permitted by law) from any right of redemption, stay or appraisal on the part of Debtor (all said rights being also hereby waived and released to the extent permitted by law), the Collateral or any part thereof offered for

sale and may make payment on account thereof by using any claim then due and payable to Secured Party from Debtor as a credit against the purchase price, and Secured Party may, upon compliance with the terms of sale, hold, retain and dispose of such property without further accountability to Debtor therefor.  

(d)

For purposes of any sale of Collateral in accordance with this Agreement, a written agreement to purchase the Collateral or any portion thereof shall be treated as a sale thereof.  Secured Party shall be free to carry out such sale pursuant to such agreement, and Debtor shall not be entitled to the return of the Collateral or any portion thereof subject thereto, notwithstanding the fact that after Secured Party shall have entered into such an agreement, all Events of Default shall have been remedied and the Secured Obligations paid in full.

(e)

Upon any sale of Collateral by Secured Party (including a sale pursuant to a power of sale granted by statute or under a judicial proceeding), the receipt of Secured Party or of the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Collateral being sold, and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to Secured Party or such officer or be answerable in any way for the misapplication thereof.  

ARTICLE VII

ARTICLE VIIIPOWER OF ATTORNEY

8.01

Power of Attorney;  Collections by Secured Party.

(a)

Debtor hereby appoints Secured Party as Debtor’s attorney-in-fact, with power of substitution, which appointment is irrevocable and coupled with an interest, to do each of the following in the name of Debtor or in the name of Secured Party or otherwise, for the use and benefit of Secured Party, but at the cost and expense of Debtor, and with or without notice to Debtor:  (i) notify the Account Debtors and insurers to make payments directly to Secured Party, and to take control of the cash and non-cash Proceeds of any Collateral or insurance; (ii) renew, extend or compromise any of the Collateral or deal with the same as Secured Party may deem advisable; (iii) release, exchange, substitute, or surrender all or any part of the Collateral; (iv) remove from Debtor’s places of business all Collateral Records without cost or expense to Secured Party; ( v) make such use of Debtor’s places of business as may be reasonably necessary to administer, control and collect the Collateral; (vi) repair, alter or supply Goods, if any, necessary to fulfill in whole or in part the purchase order or similar order of any Account Debtor; (vii) demand, collect, give receipt for, and give renewals, extensions, discharges and releases of any of the Collateral; (viii) institute and prosecute legal and equitable proceedings to enforce collection of, or realize upon, any of the Collateral; (ix) settle, renew, extend, compromise, compound, exchange or adjust claims with respect to any of the Collateral or any legal proceedings brought with respect thereto; (x) indorse the name of Debtor upon any item of payment relating to the Collateral or upon any proof of claim in bankruptcy against any Collateral; and (xi) institute and prosecute legal and equitable proceedings to reclaim any of the Goods sold to any Account Debtor obligated on an Accou nt at a time when such Account Debtor was insolvent.  Secured Party agrees that it shall not exercise any power or authority granted under this power of attorney unless an Event of Default has occurred and is continuing.  The foregoing power of attorney is in addition to any other power of attorney that may be granted to Secured Party under any Finance Document.

(b)

NONE OF SECURED PARTY OR ITS AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES SHALL BE RESPONSIBLE TO DEBTOR FOR ANY ACT OR FAILURE TO ACT UNDER ANY POWER OF ATTORNEY OR OTHERWISE, EXCEPT IN RESPECT OF DAMAGES ATTRIBUTABLE SOLELY TO THEIR OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AS FINALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION, NOR FOR ANY PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES.

ARTICLE IX

GENERAL PROVISIONS

9.01

Remedies Cumulative.  Upon the occurrence and during the continuance of any Event of Default, and in addition to such other rights and remedies as Secured Party may have under other provisions of this Agreement or any other Finance Document, Secured Party may exercise any one or more of its rights and remedies under common or statutory law.  No failure or delay on the part of Secured Party in exercising any right, power or privilege hereunder or under any other Finance Document and no course of dealing between Debtor or any other Obligor or other Person and Secured Party shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Finance Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder.  The rights and remedies provided in this Agreement are cumulative and not exclusive of any rights or remedies which Secured Party would otherwise have and may be exercised simultaneously.  No notice to or demand on Debtor in any case shall entitle Debtor or any other obligor or any other Person to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of Secured Party to any other or further action in any circumstances without notice or demand.

ARTICLE X

MISCELLANEOUS

10.01

Each of the Debtors agrees to pay all expenses, including reasonable attorney's fees and charges (including time charges of attorneys who are employees of Secured Party) paid or incurred by Secured Party in endeavoring to collect the Secured Obligations of such Debtor, or any part thereof, and in enforcing this Agreement against such Debtor, and such obligations will themselves be Secured Obligations.

10.02

No delay on the part of Secured Party in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by Secured Party of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy.

10.03

This Security Agreement shall remain in full force and effect until all Secured Obligations have been paid in full.  If at any time all or any part of any payment theretofore applied by the Secured Party to any of the Secured Obligations is or must be rescinded or returned by the Secured Party for any reason whatsoever (including the insolvency, bankruptcy or reorganization of any Debtor), such Secured Obligations shall, for the purposes of this Agreement, to the extent that such payment is or must be rescinded or returned, be deemed to have continued in existence, notwithstanding such application by the Secured Party, and this Agreement shall continue to be effective or be reinstated, as the case may be, as to such Secured Obligations, all as though such application by the Secured Party had not been made.

10.04

The rights and privileges of Secured Party hereunder shall inure to the benefit of its successors and assigns.

10.05

Secured Party’s Rights to Release Obligors; etc.  Secured Party may take or release other security, may release any party primarily or secondarily liable for any Secured Obligations or other indebtedness to Secured Party, may grant extensions, renewals or indulgences with respect to such Secured Obligations or other indebtedness and may apply any other security therefor held by Secured Party to the satisfaction of such Secured Obligations or other indebtedness, all without prejudice to any of Secured Party’s rights under this Agreement.

10.06

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

If to any Debtor:

H. Douglas Saathoff

Chief Executive Officer

Nighthawk Systems, Inc.

10715 Gulfdale, Ste. 200

San Antonio, Texas  78216

Phone: (210) 341-4811

Fax (efax): (210) 855-8030

If to the Secured Party:

Dutchess Capital Management, LLC
Douglas Leighton
50 Commonwealth Ave, Suite 2
Boston, MA 02116
Telephone: (617) 301-4700
Facsimile: (617) 249-0947

10.07

Term.  The term of this Agreement shall commence with the date of this Agreement and shall continue in full force and effect and be binding upon Debtor until all Secured Obligations of Debtor to Secured Party shall have been fully paid and satisfied and Secured Party shall have given Debtor written notice of the termination of this Agreement (excluding provisions that by their terms survive termination of other provisions of this Agreement or survive the termination of the security interest created under this Agreement). Secured Party shall not be obligated to give Debtor written notice of termination of this Agreement, or to terminate any financing statements or other Lien Notices, until all Secured Obligations of Debtor to Secured Party shall have been fully paid and satisfied and there is no commitment on the part of Secured Party to make an advance, incur an obligation or otherwise give value, and Debtor shall have given Secured Party a written demand requesting the termination of this Agreement and any financing statements at which time Secured Party shall execute and deliver such documents, at Debtor’s expense, as are necessary to release Secured Party’s liens in the Collateral.  Notwithstanding anything to the contrary in this Agreement or any other Finance Documents, this Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any amount received by Secured Party in respect of the Secured Obligations is rescinded or must otherwise be restored or returned by Secured Party upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of Debtor or upon the appointment of any intervenor or conservator of, or trustee or similar official for, Debtor or any substantial part of Debtor’s assets, or otherwise, all as though such payments had not been made.

10.08

Further Assurances.  Debtor shall execute and deliver to Secured Party such further assurances and take such other further actions as Secured Party may from time to time request to further the intent and purpose of this Agreement and to maintain and protect the rights and remedies intended to be created in favor of Secured Party under this Agreement.

10.09

Amendments, Waivers and Consents;  Successors and Assigns.  Neither this Agreement nor any other Finance Document nor any of the terms hereof or thereof may be amended, modified, changed, waived, discharged or terminated, nor shall any consent be given, unless such amendment, modification, change, waiver, discharge, termination or consent is in writing signed by Secured Party and Debtor.  This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until the Secured Obligations have been fully paid and satisfied and this Agreement has been terminated, (ii) be binding upon Debtor and its successors and assigns, and (iii) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party and Secured Party’s successors, tr ansferees and assigns.  This Agreement may not be assigned by Debtor without prior written consent of Secured Party, which consent may be withheld in Secured Party’s sole discretion.

10.10

Entire Agreement.  This Agreement and any other Finance Documents are a complete and exclusive expression of all the terms of the matters expressed therein, and all prior agreements, statements, and representations, whether written or oral, which relate thereto in any way are hereby superseded and shall be given no force and effect.  No promise, inducement, or representation has been made to Debtor which relates in any way to the matters expressed in this Agreement and in any other Finance Documents, other than what is expressly stated herein and in such Finance Documents.

10.11

No Strict Construction.  The parties hereto have participated jointly in the negotiation and drafting of this Agreement.  In the event of any ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement.

10.12

Governing Law.  This Agreement and all related instruments and documents and the rights and obligations of the parties hereunder and thereunder shall, in all respects, be governed by, and construed in accordance with, the internal laws of the Commonwealth of Massachusetts, without regard to conflicts of law principles, regardless of the location of the Collateral, excepting, however, that the Uniform Commercial Code (or decisional law) of a jurisdiction other than the Commonwealth of Massachusetts may provide the method of perfection, the effect of perfection or non-perfection, or the priority of liens and security interests created under this Agreement.

10.13

DISPUTES SUBJECT TO ARBITRATION.  The parties to this Agreement will submit all disputes arising under it to arbitration in Boston, Massachusetts before a single arbitrator of the American Arbitration Association (“AAA”).  The arbitrator shall be selected by application of the rules of the AAA, or by mutual agreement of the parties, except that such arbitrator shall be an attorney admitted to practice law in the Commonwealth of Massachusetts.  No party to this agreement will challenge the jurisdiction or venue provisions as provided in this section.  Nothing in this section shall limit the Secured Party’s right to obtain an injunction for a breach of this Agreement from a court of law.

10.14

Severability.  Any provision of this Agreement, or of any other Finance Document, that is prohibited by, or unenforceable under, the laws of any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability, without invalidating the remaining provisions of this Agreement, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.  To the extent permitted by applicable law, Debtor hereby waives any provision of law which renders any provision of this Agreement or any other Finance Document prohibited or unenforceable in any respect.

10.15

Counterparts.  This Agreement may be executed in counterparts and each shall be effective as an original, and a photocopy, facsimile or telecopy of this executed Agreement shall be effective as an original.  In making proof of this Agreement, it shall not be necessary to produce more than one counterpart, photocopy, facsimile, or telecopy of this executed Agreement.

10.16

Time.  Time is of the essence of this Agreement.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, and intending to be legally bound hereby, each Debtor has executed this Agreement as of the date first above written.

	DEBTOR:
	NIGHTHAWK SYSTEMS, INC.
By:
Name:
Title:
	SECURED PARTY:
	DUTCHESS PRIVATE EQUITIES FUND, LTD
By:
Name:
Title:

EX-10

WARRANT

THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND MAY NOT BE TRANSFERRED UNLESS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, A "NO-ACTION" LETTER FROM THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE “COMMISSION” OR THE “SEC”) WITH RESPECT TO SUCH TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE COMMISSION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION.

Nighthawk Systems, Inc.

WARRANT NO. October 2007 101

Dated: October 9, 2007

Nighthawk Systems, Inc., a corporation organized under the laws of the State of Nevada (the “Company”), hereby certifies that, for value received from Dutchess Private Equities Fund, Ltd., a Cayman Island exempted company (the “Holder”), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of ten million (10,000,000) shares of the common stock, $0.001 par value per share (the “Common Stock”), of the Company (the “Warrant Shares”), at an exercise price equal to 5/100 ($.05) per share (the “Exercise Price”).  This Warrant may be exercised on a cashless basis anytime after issuance through and including the seventh (7th) anniversary of its original issuance as noted above (the “Expiration Date”), subject to the following terms and conditions:

1.

Registration of Warrant.  The Company shall, from time to time and whenever requested by the Holder, register this Warrant in conformity with records to be maintained by the Company for such purpose (the “Warrant Register”) in the name of the Holder.  The Company shall treat the registered Holder of this Warrant as the absolute owner hereof for any and all purposes, including the exercise hereof or any distribution to the Holder, and the Company shall not be affected by notice to the contrary.

2.

Registration of Transfers and Exchanges.  

(a)

The Company or the transfer agent shall enter or record the transfer of all or any portion of this Warrant in the Warrant Register, upon surrender of this Warrant to the Company at the office specified herein or pursuant to Section 11 hereof.  Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant hereinafter referred to as a “New Warrant”), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the Holder.  The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant.

(b)

This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company specified herein or pursuant to Section 3(b) hereof for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder.  Any such New Warrant shall be dated as of the date of such exchange.

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3.

Duration and Exercise of Warrants.  

(a)

This Warrant shall be exercisable by the registered Holder on any business day before 5:00 P.M., Boston time, at any time and from time to time on or after the date hereof to and including the Expiration Date.  At 5:00 P.M., Boston time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value.  Prior to the Expiration Date, the Company may not call or otherwise redeem this Warrant without the prior written consent of the Holder, which consent shall be given or withheld at the sole and absolute discretion of the Holder.

(b)

Subject to Section 2(b), Section 6 and Section 10 hereof, upon: (x) surrender of this Warrant, together with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its address for notice set forth in Section 11 hereof; and (y) payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than five (5) business days after the Date of Exercise (as defined below)) issue or cause to be issued and cause to be delivered to the Holder in such name(s) as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise and free of restrictive legends unless (i) a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stock holder thereunder is not then effective or the Warrant Shares are not freely transferable without volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act then the Warrant Shares will bear a Securities Act restrictive legend, or (ii) this Warrant shall have been issued pursuant to a written agreement between the original Holder and the Company, as required by such agreement.  Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant.  A “Date of Exercise” means the date on which the Company shall have received (I) this Warrant (or any New Warrant, as applicable), together with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed; and (II) payment of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased.

(c)

This Warrant shall be exercisable in its entirety or, from time to time, for a portion of the number of Warrant Shares.  If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant.  In the event the Common Stock representing the Warrant Shares is not delivered per the written instructions of the Holder within five (5) business days after the Notice of Election and Warrant is received by the Company (the “Delivery Date”), then the Company shall pay to Holder in cash two percent (2.0%) of the dollar value of the Warrant Shares to be issued per each day after the Delivery Date that the Warrant Shares are not delivered.  The Company acknowledges that its failure to deliver the Warrant Shares by the Delivery Date will cause the Holder to suffer damages in an amount that will be difficult to ascertain.  Accordingly, the parties hereto agree that it is appropriate to include in this Warrant this provision for liquidated damages.  The parties hereto acknowledge and agree that the liquidated damages provision set forth in this section represents the parties’ good faith effort to quantify such damages and therefore agree that the form and amount of such liquidated damages are reasonable and will not constitute a penalty.  Notwithstanding the foregoing, the payment of liquidated damages shall not relieve the Company from its obligations to deliver the Common Stock pursuant to the terms of this Warrant.  The Company shall make any payments incurred under this Section 3 in immediately available funds within five (5) business days from the date of issuance of the applicable Warrant Shares.  Nothing herein shall limit Holder’s right to pursue actual damages or cancel the Notice of Election for the Company’s failure to issue and deliver Common Stock to the Holder within seven (7) business days following the Delivery Date.

2

4.

Registration Rights.  During the term of this Warrant, the Company agrees to use its best efforts to file a registration statement with the SEC covering the resale of the Warrant Shares and naming the Holder as a selling stockholder (unless the Warrant Shares are otherwise freely transferable without volume restrictions pursuant to Rule 144(k) or Rule 144A promulgated under the Securities Act). The registration rights granted to the Holder pursuant to this Section shall continue until all of the Holder's Warrant Shares have been sold in accordance with an effective registration statement or upon the Expiration Date, or as otherwise provided in the Debenture Registration Rights Agreement entered into between the Company and the original Holder as of the original issuance date hereof.  The Company will pay all registration expenses in connection therewith.

5.      Payment of Taxes.  Upon the exercise of this Warrant, the Company will pay all documentary stamp taxes attributable to the issuance of Warrant Shares; provided, however, that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder.  The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof.

6.

Replacement of Warrant.  If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, satisfactory to it.  Applicants for a New Warrant under such circumstances shall comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe.

7.

Reservation of Warrant Shares.  The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 8 hereof).  The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable.  If the Company does not have a sufficient amount of Common Stock authorized to reserve for the Warrant Shares, it shall, as soon as reasonably practicable, use its best efforts to increase the number of its authorized shares such that the Company will have a sufficient amount of Common Stock authorized to reserve for the Warrant Shares.

8.

Certain Adjustments.  The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 8.  Upon each such adjustment of the Exercise Price pursuant to this Section 8, the Holder shall thereafter but prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment.  

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(a)

An adjustment shall be made, if the Company, at any time while this Warrant is outstanding (i) pays a stock dividend (except scheduled dividends paid on outstanding preferred stock as of the date hereof which contain a stated dividend rate) or otherwise make distribution(s) on shares of its Common Stock or on any other class of capital stock and not the Common Stock payable in shares of Common Stock; (ii) subdivides outstanding shares of Common Stock into a larger number of shares; or (iii) combines outstanding shares of Common Stock into a smaller number of shares.  If either (i), (ii) or (iii) above occurs, the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event.  Any adjustme nt made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination, and shall apply to successive subdivisions and combinations.

(b)

In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another entity, the sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange.  The terms of any such consolid ation, merger, sale, transfer or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 8(b) upon any exercise following any such reclassification, consolidation, merger, sale, transfer or share exchange.  

(c)

 At any time while this Warrant is outstanding, if the Company distributes to all holders of Common Stock (and not to holders of this Warrant) evidence of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Section 8(a), Section 8(b) and Section 8(d) hereof), then in each such case the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise Price on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Company's independent certified public accountants that regularly examines the financial statements of the Company (the “Appraiser”).

(d)

If, at any time while this Warrant is outstanding, the Company shall issue or cause to be issued rights or warrants to acquire or otherwise sell or distribute shares of Common Stock for a consideration per share less than the lower of the Exercise Price then in effect and the then fair market value of the Common Stock, then, forthwith upon such issue or sale, the Exercise Price shall be reduced to the price (calculated to the nearest one hundredth of a cent) determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issuance, and (ii) the number of shares of Common Stock which the aggregate consideration received (or to be received, assuming exercise or conversion in full of such rights, warrants and convertible securities) for the issuance of such additional shares of Common Stock would purchase at the Exercise Price, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately after the issuance of such additional shares.  Such adjustment shall be made successively whenever such an issuance is made.

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(e)

For the purposes of this Section 8, the following clauses shall also be applicable:

(i)  Record Date.  In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in securities convertible or exchangeable into shares of Common Stock, or (B) to subscribe for or purchase Common Stock or securities convertible or exchangeable into shares of Common Stock, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.

(ii)  Treasury Shares.  The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock.

(f)

All calculations under this Section 8 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be.

(g)

Whenever the Exercise Price is adjusted pursuant to Section 8(c) hereof, the Holder, after receipt of the determination by the Appraiser, shall have the right to select an additional appraiser (which shall be a nationally recognized accounting firm), in which case the adjustment shall be equal to the average of the adjustments recommended by each of the Appraiser and such additional appraiser appointed under this Section 8(g).  The Holder shall promptly mail or cause to be mailed to the Company, a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.  Such adjustment shall become effective immediately after the record date mentioned above, if:

(i)

the Company shall declare a dividend (or any other distribution) on its Common Stock;

(ii)

the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock;

(iii)

the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights;

(iv)

the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or

(v)

the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to the Holder at their last addresses as they shall appear upon the Warrant Register, at least thirty (30) calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shar es of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice.

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9.

Payment of Exercise Price.  The Holder, at its sole election, may pay the Exercise Price in one of the following manners:

(a)

Cash Exercise.  The Holder shall deliver immediately available funds; or

(b)

Cashless Exercise. If at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering the resale of the Warrant Shares by the Holder at such time, this Warrant may also be exercised at such time by means of a cashless exercise.  In such event, the Holder shall surrender this Warrant to the Company, together with a notice of cashless exercise, and the Company shall issue to the Holder the number of Warrant Shares determined as follows:

X = Y (A-B)/A

where:

X = the number of Warrant Shares to be issued to the Holder.

Y = the number of Warrant Shares with respect to which this Warrant is being exercised.

A = the average closing bid price of the Common Stock for the five (5) trading days

 immediately prior to the Date of Exercise.

B = the Exercise Price.

For purposes of Rule 144 of the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have been commenced, on the issue date.

(c)

Notwithstanding anything in this Warrant to the contrary, the Holder is limited in the amount of this Warrant it may exercise.  In no event shall the Holder be entitled to exercise any amount of this Warrant in excess of that amount upon exercise of which the sum of (1) the number of shares of Common Stock beneficially owned (as such term is defined under Section 13(d) and Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) by the Holder, and (2) the number of Warrant Shares issuable upon the exercise of any Warrants then owned by Holder, would result in beneficial ownership by the Holder of more than four and ninety-nine one hundredths percent (4.99%) of the outstanding shares of Common Stock of the Company, as determined in accordance with Rule13d-1(j) of the Exchange Act.  Furthermore, the Company shall not process any exercise that would result in beneficial ownership by the Holder of more tha n four and ninety-nine one hundredths percent (4.99%) of the outstanding shares of Common Stock of the Company.  

10.

Fractional Shares.  The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant.  The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented.  If any fraction of a Warrant Share would, except for the provisions of this Section 10, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction.

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11.

Notices.  Any and all notices or other communications or deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:00 p.m. Boston time on a business day, (ii) the business day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:00 p.m. Boston time on any date and earlier than 11:59 p.m. Boston time on such date, (iii) the business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given.  The addresses for such communications shall be:

If to the Company:

H Douglas Saathoff

Nighthawk Systems, Inc.

10715 Gulfdale, Suite 200

San Antonio, Texas 78216

Telephone: 210-341-4811

Facsimile: 210-341-2011

If to the Holder:

Dutchess Capital Management, LLC

50 Commonwealth Ave, Suite 2

Boston, MA  02116

Attention: Douglas Leighton

Telephone: 617-301-4700

Facsimile: 617-249-0947

12.

Warrant Agent.  The Company shall serve as warrant agent under this Warrant.  Upon thirty (30) days notice to the Holder, the Company may appoint a new warrant agent.  Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further action.  Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register.

13.

Miscellaneous.

(a)

This Warrant shall be binding on and inure to the benefit of the parties hereto.  This Warrant may be amended only in writing signed by the Company and the Holder.

(b)

Nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant.  This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder.

(c)

This Warrant shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Massachusetts without regard to the principles of conflicts of law thereof.  

(d)

The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof.

(e)

In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant.

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(f)

The Company hereby represent and warrants to the Holder that: (i) it is voluntarily issuing this Warrant of its own freewill, (ii) it is not issuing this Warrant under economic duress, (iii) the terms of this Warrant are reasonable and fair to the Company, and (iv) the Company has had independent legal counsel of its own choosing review this Warrant, advise the Company with respect to this Warrant, and represent the Company in connection with its issuance of this Warrant.

(g)

Any capitalized term used but not defined in this Warrant shall have the meaning ascribed to it in the Transaction Documents (as such term is defined in that certain Debenture Registration Rights Agreement, of even date herewith,  by and between the Company and the Holder).

(h)

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

(i)

This Warrant and the obligations of the Company hereunder shall not be assignable by the Company.

(j)

Notwithstanding anything in this Warrant to the contrary, the parties hereto hereby acknowledge and agree to the following: (i) the Holder makes no representations or covenants that it will not engage in trading in the securities of the Company; (ii) the Company shall, by 8:30 a.m. Boston Time on the trading day following the date hereof, file a current report on Form 8-K disclosing the material terms of the transactions contemplated hereby and in the other Transaction Documents; (iii) the Company has not and shall not provide material non-public information to the Holder unless prior thereto the Holder Party shall have executed a written agreement regarding the confidentiality and use of such information; and (iv) the Company understands and confirms that the Holder will be relying on the acknowledgements set forth in clauses (i) through (iii) above if the Holder effects any transactions in the securities of the Company.

14.

Disputes Under This Agreement.

All disputes arising under this Warrant shall be governed by and interpreted in accordance with the laws of the Commonwealth of Massachusetts, without regard to principles of conflict of laws.  The parties hereto will submit all disputes arising under this Agreement to arbitration in Boston, Massachusetts before a single arbitrator of the American Arbitration Association (the “AAA”).  The arbitrator shall be selected by application of the rules of the AAA, or by mutual agreement of the parties, except that such arbitrator shall be an attorney admitted to practice law in the Commonwealth of Massachusetts.  No party hereto will challenge the jurisdiction or venue provisions provided in this Section 14.  Nothing in this Section 14 shall limit the Holder's right to obtain an injunction for a breach of this Agreement from a court of law.  Any injunction obtained shall remain in full force and effect until the arbitrator, as set forth in this Section 14 fully adjudicates the dispute.

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IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above.

	NIGHTHAWK SYSTEMS, INC.
By:	/s/ H. Douglas Saathoff
	H. Douglas Saathoff
	Chief Executive Officer

	DUTCHESS PRIVATE EQUITIES FUND, LTD.
By:	/s/ Douglas H. Leighton
	Douglas H. Leighton
	Director

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EXHIBIT A

FORM OF ELECTION TO PURCHASE

Re: Intention to Exercise Right to Purchase Shares of Common Stock Under the Warrant

Gentlemen:

In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase _________________shares of Common Stock, $0.001 par value per share, of Nighthawk Systems and, if such Holder is not utilizing the cashless exercise provisions set forth in the Warrant, encloses herewith $________ in cash, certified or official bank check(s), which sum represents the aggregate Exercise Price for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant.  Any capitalized terms used but not defined in this Form of Election to Purchase shall have the meaning ascribed to them in the accompanying Warrant.

The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of:

(Please insert SS# or FEIN #)

(Please print name and address)

If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to:

(Please print name and address)

		Name of Holder:
Dated:	Signed:
	Print Name:
	Title:

(Signature must conform in all respects to name of Holder as specified on the face of the Warrant)

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