Document:

Exhibit
        10.1

       

      PURCHASE
        AGREEMENT

       

      THIS
        PURCHASE AGREEMENT (“Agreement”) is made as of July 18, 2005 by and between
        Bionutrics, Inc. (“Purchaser”) and John D. Copanos and John S. Copanos (each a
“Seller” and collectively “Sellers”).

       

      RECITALS

       

      WHEREAS,
        Sellers own all of the outstanding Units (the “Units”) of Kirk Pharmaceuticals,
        LLC, a Florida limited liability company, (“KIRK”) which is in the business of
        manufacturing generic and other drugs; and

       

      WHEREAS,
        Sellers desire to sell the Units to Purchaser, and Purchaser desires to purchase
        the Units from Sellers;

       

      AGREEMENTS

       

      NOW,
        THEREFORE, for good and valuable consideration, the receipt and sufficiency
        of
        which are hereby acknowledged, the parties agree as follows:

       

      SECTION
        I. DEFINITIONS

       

      1. Certain
        Definitions.
        In this
        Agreement, capitalized terms shall have the meanings set forth
        below:

       

      “Accounts
        Receivable” means the accounts receivable of KIRK.

       

      “Affiliate”
        means any person, partnership, joint venture, corporation or other form of
        enterprise which directly or indirectly controls, is controlled by, or is
        under
        common control with, a party. For purposes of the preceding sentence, “control”
        means possession, directly or indirectly, of the power to direct or cause
        direction of management and policies through ownership of voting securities,
        contract, voting trust or otherwise, and specifically includes Andapharm
        LLC.

       

      “Agreement”
        means this Agreement and, as the context requires, the Related Agreements
        and
        the Disclosure Schedule.

       

      “KIRK”
        means Kirk Pharmaceuticals, LLC, a Florida limited liability
        company.

       

      “Balance
        Sheet” means the balance sheet of KIRK at December 31, 2004, attached as Exhibit
        A.

       

      “Business”
        means KIRK’s business of manufacturing generic and other drugs.

       

      “CERCLA”
        means the Comprehensive Environmental Response, Compensation and Liability
        Act
        of 1980, as amended.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      “Claims”
        means claims, security interests, liens, pledges, charges, escrows, options,
        proxies, rights of first refusal, mortgages, indentures, security or other
        similar agreements or obligations, or any other encumbrances of any
        kind.

       

      “Closing”
        means the Closing of the transactions contemplated by this
        Agreement.

       

      “Closing
        Balance Sheet” means the balance sheet of KIRK as of the Closing Date prepared
        in accordance with generally accepted accounting principles, consistently
        applied.

       

      “Closing
        Date” means the date and the time at which the Closing actually takes place as
        agreed in the Cross Receipt and Certificate of Closing.

       

      “Code”
        means the Internal Revenue Code of 1986, as amended.

       

      “Cross
        Receipt and Certificate of Closing” means the Cross Receipt and Certificate of
        Closing, substantially in the form of Exhibit
        B.

       

      “Disclosure
        Schedule” means the disclosure schedule attached hereto and which is described
        in greater detail in Section Five.

       

      “Employees”
        means employees of KIRK employed in the Business.

       

      “Equipment”
        means the furniture, fixtures, equipment, hardware, machinery, tools, parts,
        supplies, automobiles, trucks and other tangible personalty of whatever kind
        and
        wherever located associated with the Business, including, but not limited
        to,
        the inventory of equipment, hardware, parts and supplies and the Equipment
        listed and described in Section 5.2.3(e) of the Disclosure
        Schedule.

       

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

       

      “Closing
        Date Working Capital” means KIRK’s Working Capital as of the Closing Date
        determined from the Closing Date Balance Sheet.

       

      “Financial
        Statements” means KIRK’s audited balance sheets as of December 31, 2003 and
        December 31, 2004, and the audited statements of earnings for the respective
        periods which ended on each such date and the related footnotes.

       

      “HSR
        Act”
        means the Hart Scott Rodino Antitrust Improvements Act of 1976, as
        amended.

       

      “Indemnifiable
        Claims” means all actions or causes of action, or proceedings which result in a
        claim for indemnification.

       

      “Indemnifiable
        Costs” means all assessments, liabilities, losses, fines, penalties, costs,
        damages and expenses, including, but not limited to, reasonable attorneys’ and
        expert witnesses’ fees.

       

      “Indemnified
        Party” means a party being indemnified hereunder.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      “Indemnifying
        Party” means a party against which a claim for indemnification is asserted
        hereunder.

       

      “IRS”
        means the Internal Revenue Service.

       

      “Leased
        Personalty” means all leasehold interests and improvements in personal property
        of which KIRK is lessor or lessee.

       

      “Leased
        Premises” means all leasehold interests in real property of which KIRK is lessor
        or lessee.

       

      “Lender”
        means a financial institution to be identified to Seller at or before the
        Closing.

       

      “Note”
        has the meaning given in Section Three.

       

      “PBGC”
        means the Pension Benefit Guaranty Corporation.

       

      “Plan”
        means any employee benefit or pension or welfare benefit plan (as those terms
        are used in ERISA) established, maintained or sponsored by KIRK or, participated
        in, contributed to, or in which an Employee participates or benefits or has
        participated or benefited.

       

      “Prime
        Rate” means Lender’s prime or reference rate, from time to time.

       

      “Property
        taxes” means all taxes in respect of real or personal property.

       

      “Purchase
        Price” has the meaning given in Section Three.

       

      “Purchaser”
        means Bionutrics, Inc., a Nevada corporation, or subsidiary designated as
        such
        at or prior to the Closing Date.

       

      “RCRA”
        means the Resource Conservation and Recovery Act of 1976, as
        amended.

       

      “Real
        Property” means the real property and all buildings, structures, fixtures and
        other improvements located thereon together with all rights appurtenant
        thereto.

       

      “Seller”
        means each, and “Sellers” means both, of John D. Copanos or John S. Copanos, as
        the context requires, with each holding the number of Units set forth on
        Schedule A.

       

      “Taxes”
        means any net income, alternative or add-on, minimum, gross income, gross
        receipts, sales, use, franchise, profits, license, withholding, payroll,
        employment, excise, severance, stamp, occupation, or premium (other than
        Property Taxes), liability arising from the recapture of credits, tax imposed
        on
        or measured by capital, custom duty or other tax, governmental fees or other
        like assessment or charge of any kind whatsoever, together with any interest
        and
        any penalty in addition to tax or additional amount imposed by any governmental
        authority responsible for the imposition of any such tax.

       

      “Third
        Party Claim” means a claim, action or proceeding brought by a third party which
        results in a claim for indemnification.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      “Units”
        mean the issued and outstanding ownership units of KIRK on the Closing Date,
        and, as the context requires, only those Units owned by a Seller.

       

      “Working
        Capital” means an amount equal to the sum of current assets less current
        liabilities determined in accordance with generally accepted accounting
        principles.

       

      SECTION
        II. PURCHASE AND SALE OF UNITS

       

      2.1 Agreement
        to Purchase and Sell.
        On the
        terms and subject to the conditions contained in this Agreement and upon
        the
        representations and warranties herein made by each of the parties to the
        other,
        on the Closing Date, Seller agrees to sell, transfer and deliver the Units
        to
        Purchaser, and Purchaser agrees to purchase and accept the Units from
        Seller.

       

      SECTION
        III. PURCHASE PRICE AND MANNER OF PAYMENT

       

      3.1 Purchase
        Price.
        The
“Purchase Price” for the Units shall be $12,000,000.00. Purchaser shall pay
        Sellers $9,000,000.00 at Closing, in federal or otherwise immediately available
        funds, and deliver a promissory note, substantially in the form of Exhibit
        C,
        in the
        amount of $3,000,000.00 (the “Note”), which shall be allocated to the Seller in
        accordance with Schedule A.

       

      3.2 Working
        Capital Verification.
        Immediately following the Closing, Purchaser and Seller shall cause MillerEllin
        Company LLP (“MillerEllin”) at joint expense, not to exceed $15,000,
        to
        prepare and within 30 days after the Closing deliver a Closing Date Balance
        Sheet, which shall have been prepared on the same basis as the Balance Sheet.
        Seller and Purchaser agree that from December 31, 2004 until the Closing
        Date,
        KIRK shall have been operated only in the usual and customary course and
        without
        the incurring of any debt, the payment of any dividends or any other
        transactions not in the usual and customary course of KIRK’s business. To the
        extent that any such transaction may have occurred, the Note shall be reduced
        to
        reflect any adverse economic impact of the transaction.

       

      3.3 Resolution.
        To the
        extent the parties disagree about the nature or financial impact of any
        transaction or other issue raised in the Closing Date Balance, the parties
        will
        attempt to resolve the issues identified by either party, and, failing
        agreement, any unresolved issues will be referred to an independent certified
        public accounting firm acceptable to both parties whose decision (which shall
        be
        rendered within thirty (30) days) on any such issues will be final. The costs
        and expenses of this accounting firm shall be shared equally by Purchaser
        (50%)
        and Sellers (50%). 

       

      SECTION
        IV. CLOSING

       

      4.1 Time
        and Place of Closing.
        The
        transactions contemplated by this Agreement shall take place at a closing
        at the
        offices of Alley, Maass, Rogers & Lindsay, P.A., 231 Royal Poinciana Plaza,
        South, Palm Beach, Florida, on such date and at such times as all actions
        necessary to be completed prior to closing have been completed, and all required
        approvals have been obtained. The date and time shall be certified by the
        parties in the Cross Receipt and Certificate of Closing.

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      SECTION
        V. REPRESENTATIONS AND WARRANTIES

       

      The
        parties make the representations and warranties to each other which are set
        forth in this Section. All of the representations and warranties shall survive
        the Closing (and none shall merge into any instrument of conveyance) regardless
        of any investigation or lack of investigation by any of the parties hereto.
        Unless expressly stated to be so intended, no specific representation or
        warranty shall limit the generality or applicability of a more general
        representation or warranty. John S. Copanos has delivered to Purchaser
        concurrently herewith, and identified by Purchaser’s written acceptance thereof,
        the Disclosure Schedule.

       

      5.1 Representations
        and Warranties of Purchaser.

       

      Purchaser
        represents and warrants to Sellers as follows:

       

      (a) Purchaser
        is a limited liability company duly organized, validly existing and in good
        standing under the laws of its state of organization with all requisite power
        and authority to own, lease and operate its assets and properties.

       

      (b) Purchaser
        has the requisite power and authority to enter into, deliver and perform
        this
        Agreement and to consummate the transactions contemplated herein and
        therein.

       

      (c) Except
        as
        may be required under the HSR Act, no consent, authorization, order or approval
        of, or filing or registration with, any governmental authority or other person
        is required for the execution and delivery of this Agreement or the Related
        Agreements by Purchaser or the consummation by Purchaser of any of the
        transactions contemplated by this Agreement.

       

      (d) The
        execution, delivery and performance of this Agreement by Purchaser and the
        consummation by Purchaser of the transactions contemplated herein and therein
        have been duly authorized by the Board of Directors of Purchaser, and no
        other
        corporate proceedings on the part of Purchaser are necessary to authorize
        this
        Agreement and the transactions contemplated herein. This Agreement has been
        duly
        executed and delivered by Purchaser and constitutes the legal, valid and
        binding
        obligations of Purchaser enforceable against it in accordance with its terms,
        except to the extent the enforcement of rights and remedies in respect thereof
        may be subject to bankruptcy, reorganization, insolvency, moratorium or similar
        laws affecting creditors’ rights generally.

       

      (e) Neither
        the execution and delivery of this Agreement by Purchaser, nor the consummation
        of the transactions contemplated hereby, will conflict with or result in
        a
        breach of any of the terms, conditions or provisions of Purchaser’s Certificate
        of Incorporation or By-Laws, or of any statue or administrative regulation,
        or
        of any order, writ, injunction, judgment or decree of any court or governmental
        authority or of any arbitration award.

       

      (f) Purchaser
        is not a party to any unexpired, undischarged or unsatisfied written or oral
        contract, agreement, commitment, pledge, license, indenture, mortgage,
        debenture, note or other instrument: (i) under the terms of which performance
        by
        Purchaser according to the terms of this Agreement would be a default; or
        (ii)
        whereby timely performance by Purchaser according to the terms of this Agreement
        may be prohibited, prevented or delayed.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (g) No
        broker
        or finder has acted directly or indirectly for Purchaser in connection with
        this
        Agreement or the transactions contemplated hereby, and no broker or finder
        is
        entitled to any brokerage or finder’s fee or other commission in respect thereof
        based in any way on agreements, arrangements or understandings made by or
        on
        behalf of Purchaser.

       

      5.2 Representations
        and Warranties of John
        S.
        Copanos.

       

      John
        S.
        Copanos represents and warrants to Purchaser as follows:

       

      (a) KIRK
        is a
        limited liability company duly organized, validly existing and in good standing
        under the laws of the state of its organization and has the requisite corporate
        power and authority to conduct the Business as the Business is now being
        conducted. Seller owns all of the issued and outstanding Units of KIRK. There
        are no outstanding securities convertible into or exchangeable for the Units
        of
        KIRK, and no person has any right to acquire either any Units of KIRK or
        any
        instrument or security which is convertible into Units or other securities
        of
        KIRK. Seller has previously delivered true and complete copies of the
        certificate of organization and operating agreement of KIRK as amended and
        in
        effect on the date hereof. Set forth in Section 5.2.1(a) of the Disclosure
        Schedule with respect to KIRK are the state of organization, number of Units
        outstanding, and jurisdictions in which KIRK has qualified as a foreign
        entity.

       

      (b) KIRK
        has
        duly qualified as a foreign entity and is in good standing in each jurisdiction
        where the character and the location or the nature of its activities makes
        such
        qualification necessary.

       

      (c) Except
        as
        disclosed on Section 5.2(c) of the Disclosure Schedule or as may be required
        under the HSR Act, no consent, authorization, order or approval of, or filing
        or
        registration with, any governmental authority or other person, is required
        for
        the execution and delivery of this Agreement by Seller or the consummation
        by
        Seller of any of the transactions contemplated by this Agreement.

       

      (d) Seller
        has the legal right to enter into, deliver and perform this Agreement and
        to
        consummate the transactions contemplated herein. This Agreement has been
        duly
        executed and delivered by Seller, and constitutes the legal, valid and binding
        obligations of Seller enforceable against them in accordance with its terms,
        except to the extent the enforcement of rights and remedies in respect thereof
        may be subject to bankruptcy, reorganization, insolvency, moratorium or similar
        laws affecting creditors’ rights generally.

       

      (e) Neither
        the execution and delivery of this Agreement by Seller, nor the consummation
        by
        Seller, of the transactions contemplated herein or therein, will conflict
        with
        or result in a breach of any of the terms, conditions or provisions of the
        articles of organization or operating agreement of KIRK or of any statue
        or
        administrative regulation, or of any order, writ, injunction, judgment or
        decree
        of any court or any governmental authority or of any arbitration
        award.

       

      (f) KIRK
        is
        not a party to any unexpired, undischarged or unsatisfied written or oral
        contract, agreement, indenture, mortgage, debenture, note or other instrument:
        (i) under the terms of which performance according to the terms of this
        Agreement would be a default; or (ii) whereby timely performance by Seller
        according to the terms of this Agreement may be prohibited, prevented or
        delayed.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (g) Each
        Seller is the lawful record and beneficial owner of the Units, which is duly
        authorized, issued and outstanding and fully paid and nonassessable. Seller
        has
        good and marketable title to the Units and the absolute right to sell, assign,
        transfer and deliver the Units to Purchaser pursuant to this Agreement. At
        the
        Closing, Seller will deliver to Purchaser good and clear title to and ownership
        of the Units, which will constitute all of the issued and outstanding units
        of
        KIRK, free and clear of all Claims.

       

      5.2.2 Financial.

       

      (a) KIRK’s
        books, accounts and records are, and have been, maintained in the usual,
        regular
        and ordinary manner in accordance with generally accepted accounting principles,
        consistently applied, and all material transactions to which it is or has
        been a
        party are properly reflected therein. Seller has provided to Purchaser complete
        and accurate copies of all attorneys’ responses to audit inquiry letters and all
        management letters from KIRK’s independent certified public accountants, issued
        since January 1, 2003.

       

      (b) The
        Financial Statements, complete and accurate copies of which have been furnished
        to Purchaser, have been prepared in accordance with generally accepted
        accounting principles from KIRK’s books and records and present fairly,
        accurately and completely KIRK’s financial position as of the dates thereof and
        the results of operations for the respective periods covered
        thereby.

       

      (c) None
        of
        the Accounts Receivable is subject to any counterclaim or set off. All of
        the
        Accounts Receivable arose out of bona fide, arms-length transactions for
        the
        sale of goods or performance of services, are good and collectible in the
        ordinary course of business and using normal collection practices at the
        aggregate recorded amounts thereof, less the amounts of allowances and discounts
        and of applicable reserves for doubtful accounts. All such reserves, allowances
        and discounts are adequate and consistent in extent with reserves, allowances
        and discounts previously maintained by KIRK. Since January 1, 2003, there
        has
        not been a material change in the aggregate amount of the Accounts Receivable
        or
        the aging thereof.

       

      (d) All
        of
        the inventories of KIRK reflected in the Financial Statements have been valued
        in accordance with past practice at the lower of cost on a last in first
        out
        basis or market value. All such inventories are properly valued with respect
        to
        quality and market conditions and will be saleable in the ordinary course
        of
        business within four (4) months after the Closing Date at prices which are
        substantially similar to prices heretofore charged by KIRK, and none of such
        inventories will be obsolete or below standard quality
        requirements.

       

      (e) KIRK
        has
        good and marketable title to all of its assets, free and clear of any Claims,
        except for liens for Taxes not yet delinquent. No unreleased mortgage, trust
        deed, chattel mortgage, security agreement, financing statement or other
        instrument encumbering any of KIRK’s assets has been recorded, filed, executed
        or delivered.

       

      (f) Except
        as
        set forth in Section 5.2.2(f) of the Disclosure Schedule, neither Seller
        nor any
        Affiliate has an interest, directly or indirectly: (i) in any business,
        corporate or otherwise, which is in competition with the Business or which
        is a
        party to any business arrangement with KIRK; or (ii) in any property which
        is
        the subject of business arrangements with KIRK.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (g) KIRK
        has
        properly completed and filed on a timely basis and in correct form all tax
        returns which have heretofore been required to have been filed by it. No
        extensions of time in which to file any such returns are in effect. All Taxes
        (whether or not requiring the filing of returns), including all deficiency
        assessments, additions to tax, penalties and interest of which notice has
        been
        received which shall accrue on or before the Closing Date, have been paid
        to the
        extent due or are being contested in the manner permitted by applicable law.
        There is no action, suit, claim or audit now pending with respect to any
        Taxes.
        KIRK is not subject to withholding under Section 1445 of the Code with regard
        to
        any transaction contemplated hereunder. KIRK is not a party to any pending
        action or proceeding by any governmental authority for assessment or collection
        of Taxes, and no Claims for assessment or collection of Tax have been asserted
        against KIRK. KIRK is not a party to any agreement for the sharing or allocation
        of Taxes.

       

      5.2.3 Conduct
        of Business.

       

      (a) Except
        as
        set forth in Section 5.2.3(a) of the Disclosure Schedule, since January 1,
        2003,
        KIRK has not:

       

      (i) sold
        or
        transferred any assets or property (including sales and transfers to Affiliates,
        if any);

       

      (ii) suffered
        any material loss, or interruption in use, of any asset or property (whether
        or
        not covered by insurance), on account of fire, flood, riot, strike or other
        hazard or act of God;

       

      (iii) written
        off any Equipment or inventory as unusable or obsolete or for any other
        reason;

       

      (iv) made
        any
        change in the conduct or nature of any aspect of the Business which, either
        individually or in the aggregate, had a material adverse effect on its business
        activities or financial condition;

       

      (v) waived
        any material right;

       

      (vi) incurred
        or committed to incur any capital expenditures in excess of $25,000 in the
        aggregate;

       

      (vii) either
        hired or increased the compensation payable or paid any bonus or made any
        other
        payments to any Employee;

       

      (viii) entered
        into any transaction other than in the usual and ordinary course of business;
        or

       

      (ix) incurred
        any debt.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (b) KIRK
        has
        complied and continues to be in compliance in all respects with all laws,
        regulations and orders applicable to it or the Business, the failure to comply
        with which would have a material adverse effect on KIRK or the Business.
        Except
        as set forth in Section 5.3(b) of the Disclosure Schedule, Seller is not
        the
        subject of any remedial or control action or order (or investigation in respect
        thereof) of any governmental agency to respond to an actual or threatened
        release, discharge, deposit, emission or spill of any hazardous substance,
        pollutant or contaminant.

       

      (c) Except
        as
        set forth in Section 5.2.3(c) of the Disclosure Schedule, since January 1,
        2003,
        KIRK has not suffered or, to the best of Seller’ knowledge, been threatened with
        any material adverse change in KIRK’s business or financial condition (including
        the threat of any labor dispute), or any material adverse change in, or loss
        of,
        any relationship between KIRK and any of its customers, suppliers or key
        Employees.

       

      (d) Every
        trademark, service mark, trade name, copyright, and patent and applications
        therefor, used by KIRK in connection with the Business is listed in Section
        5.2.3(d) of the Disclosure Schedule and shown as owned or licensed as the
        case
        may be. All of the foregoing are owned by or licensed to KIRK. None of the
        foregoing or any other intellectual property used by KIRK in connection with
        the
        Business, to Kirk’s knowledge, infringes or has infringed any patent, invention,
        copyright, trademark, trade name, or other right owned by any third person.
        None
        of the products or services sold, or processes used, or business practices
        followed by KIRK in connection with the Business, to Kirk’s knowledge, infringes
        or has infringed any patent, invention, copyright, trademark, trade name
        or
        other right owned by any third person, or constitutes unfair
        competition.

       

      (e) Set
        forth
        in Section 5.2.3(e) of the Disclosure Schedule is a list of the Equipment.
        All
        Equipment and the inventory of equipment, hardware, parts and supplies and
        any
        Leased Personalty and other tangible property owned by KIRK have been well
        maintained and are in good condition and repair and are not redundant or
        obsolete.

       

      5.2.4 Contracts,
        Insurance, Licenses.

       

      (a) Section
        5.2.4(a) of the Disclosure Schedule contains a true and correct list and
        description (including coverages) of all insurance policies which are owned
        by
        KIRK or which name KIRK as an insured and which pertain to KIRK, the Business
        or
        Employees. KIRK and the Business are insured in amounts deemed adequate by
        Seller and KIRK against those risks usually insured against by persons operating
        similar properties in the localities where such properties are located, under
        policies which are, to the best of Seller’s and KIRK’s knowledge and belief,
        valid and issued by reputable insurers. Neither Seller nor KIRK has received
        any
        notice from any carrier issuing such policies of any proposed termination
        of or
        amendment or that rates are to be increased or that such policies will not
        be
        renewed.

       

      (b) Except
        as
        set forth in Section 5.2.4(b) of the Disclosure Schedule, KIRK is not a party
        to, or bound by, or the issuer or beneficiary of, any undischarged written
        or
        oral:

       

      (i) contract
        for the employment for any period of time whatsoever, or in regard to the
        employment, or restricting the employment, of any Employee;

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (ii) collective
        bargaining agreement;

       

      (iii) plan
        or
        contract or arrangement providing for bonuses, options, vacations, severance,
        deferred compensation, retirement payments, profit sharing, medical and dental
        benefits or the like covering its Employees;

       

      (iv) contract
        for the purchase of Equipment or other materials having a price under any
        such
        contract in excess of $25,000;

       

      (v) contract
        or agreement restricting in any manner its right to compete with any other
        person or restricting its right to sell to or purchase from any other
        person;

       

      (vi) contract
        for the payment or receipt of license fees or royalties to or from any person
        or
        corporation;

       

      (vii) contract
        of agency, representation, distribution or franchise which cannot be cancelled
        by it, without payment or penalty upon notice of thirty (30) days or
        less;

       

      (viii) contract
        for the advertisement, display or promotion of any of its products or
        services;

       

      (ix) service
        contract affecting the Business where the annual service charge is in excess
        of
        $25,000 or has an unexpired term as of the Closing Date in excess of six
        (6)
        months;

       

      (x) guaranty,
        performance, bid or completion bond, or surety or indemnification
        agreement;

       

      (xi) lease
        or
        sublease, either as lessee, sublessee, lessor, or sublessor, of real or personal
        property, where the lease or sublease provides for an annual rent of more
        than
        $5,000 and has an unexpired term as of the Closing Date in excess of one
        (1)
        year;

       

      (xii) any
        other
        contract to which KIRK is a party and which provides for the receipt or
        expenditure by KIRK after this transaction of more than $25,000; or

       

      (xiii) any
        contract for the sale of goods or services after the Closing Date which cannot
        be completed on a profitable basis in accordance with its requirements or
        which
        requires material modification to present production activities or which
        requires the purchase of goods or services after the Closing Date in excess
        of
        theretofore reasonably anticipated needs.

       

      (c) True
        and
        complete copies of all contracts, leases, subleases or other instruments
        referred to in Sections 5.2.4(a) and (b) have been provided to Purchaser.
        All
        contracts, leases, subleases and other instruments referred to in Sections
        5.2.4(a) and (b) and all other contracts or instruments relating to KIRK
        and the
        Business to which KIRK is a party are in full force and binding upon the
        parties
        thereto. Except as set forth in Section 5.2.4(c) of the Disclosure Schedule,
        (i)
        no such contract, lease, sublease or other instrument is terminable as a
        result
        of the transactions contemplated hereby or otherwise requires the consent
        or
        other approval of any other person in order for KIRK to continue to enjoy
        all
        the rights and benefits thereof after the Closing Date; (ii) no default by
        KIRK
        has occurred and is continuing thereunder and, to the best knowledge of Seller,
        no default by the other contracting parties has occurred and is continuing
        thereunder; and (iii) no event, occurrence or condition exists which, with
        the
        lapse of time, the giving of notice or both, or the happening of any further
        event or condition, would result in a default by KIRK thereunder. KIRK has
        not
        released any of its rights under any contract, lease, sublease or other
        instrument.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (d) KIRK
        has
        all permits, licenses, certificates, bonds, approvals and authorizations,
        necessary in order to enable it to operate the Business as conducted on the
        date
        of this Agreement. Section 5.2.4(d) of the Disclosure Schedule contains a
        complete and correct list and summary description of such permits, licenses,
        certificates, bonds, approvals and authorizations, and every application
        for any
        permit, license, certificate, bond, approval or other authorization which
        is
        pending.

       

      5.2.5 Employees
        and Employee Benefits.

       

      (a) No
        union
        has requested or, to the best knowledge of Seller or KIRK, is planning to
        request the right to represent the Employees.

       

      (b) All
        of
        the Plans available to Employees are described in Section 5.2.4(b)(iii) of
        the
        Disclosure Schedule.

       

      (c) Each
        Plan
        and any related trust agreements or annuity contracts available to or for
        the
        benefit of Employees comply with and have been operated in all material respects
        in accordance with ERISA, the Code, other applicable federal statutes, state
        law
        (including, without limitation, state insurance law), and the regulations
        and
        rules promulgated pursuant to or in connection with each of the foregoing
        by
        each administrative agency or quasi-administrative agency to which enforcement,
        interpretive or regulatory authority has been delegated pursuant to or in
        connection with any of the foregoing. All legally necessary governmental
        approvals for the Plans have been obtained, a favorable determination as
        to the
        qualification under the Code of each of the Plans subject to the Code and
        each
        amendment thereto applicable to Employees has been made by the IRS, and all
        of
        the Plans applicable to Employees subject to the Code remain qualified under
        the
        Code.

       

      (d) Each
        Plan
        which is intended to be qualified under Section 401(a) of the Code is so
        qualified. None of the Plans or any Plan fiduciary has engaged in any
        transaction in violation of or prohibited by ERISA or the Code; neither Seller
        nor KIRK has incurred or suffered to exist any accumulated funding deficiency
        whether or not waived by the IRS, involving any Plan; and no withdrawals
        have
        occurred. With respect to the Plans, neither Seller nor KIRK has at any time
        engaged in a transaction which would subject KIRK to a tax, penalty or liability
        for prohibited transactions. None of the Seller or KIRK or any of their
        respective directors, officers or Employees has breached any of the
        responsibilities or obligations imposed upon fiduciaries under Title I or
        ERISA
        with respect to any Plan.

       

      (e) True
        and
        complete copies of the Plans, related trust agreements or annuity contracts,
        determination letters, summary plan description, annual reports for pension
        plans and welfare plans on Form 5500, actuarial reports filed for the past
        five
        (5) Plan years, have been furnished to Purchaser; the foregoing Plans,
        agreements and commitments are legal, valid, binding, in full force and effect,
        and there are no defaults thereunder. The annual reports on Form 5500 furnished
        to Purchaser fully and accurately set forth the financial condition of the
        Plans
        as of the period for which such reports were prepared, and none of the Seller
        or
        KIRK knows of any reason why the actuarial reports of such Plans are not
        correct
        in all respects. There has been no amendment to any such document which has
        not
        been furnished to Purchaser.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (f) The
        aggregate present value of all accrued (vested and non-vested) benefits pursuant
        to any Plan determined on the basis of current participation and compensation
        for active participants and the earnings, mortality and other actuarial
        assumptions used in the most recent actuarial statement of any such Plan,
        does
        not exceed the fair market value of the assets of that Plan.

       

      (g) KIRK
        has
        not been a party to a multi-employer plan, as that term is defined in ERISA,
        and
        has not incurred any liability to the PBGC as a result of the voluntary or
        involuntary termination of any Plan subject to Title IV of ERISA. KIRK has
        no
        current liability to the PBGC, nor will it incur any future liability, arising
        from actions prior to the Closing Date in respect of the voluntary or
        involuntary termination of any Plan or program, or under the terms of any
        collective bargaining agreement.

       

      (h) Except
        as
        set forth in Section 5.2.5(h) of the Disclosure Schedule, KIRK does not owe
        any
        past or present Employee any sum in excess of $150 individually and $1,000
        in
        the aggregate other than for accrued commissions, wages or salaries for the
        current payroll period or commission period, reimbursable expenses, accrued
        vacation, sick leave rights, and amounts payable under any Plan, and no Employee
        owes any sum to KIRK.

       

      (i) KIRK
        has
        complied with the Immigration Reform and Control Act of 1986, as amended,
        with
        respect to Employees.

       

      5.2.6 Litigation
        and Claims.

       

      (a) Except
        as
        set forth In Section 5.2.6(a) of the Disclosure Schedule, there is not pending,
        or to the best knowledge of KIRK or Seller threatened, any claim, litigation
        or
        governmental investigation or proceeding, at law or in equity, before any
        court,
        commission or administrative authority against KIRK or Seller with respect
        to or
        affecting KIRK or the Business, and neither Seller nor KIRK has received
        written
        notice nor has either any knowledge that there is a threat of any proceedings
        or
        governmental investigations with respect to or which may affect KIRK or the
        Business or the consummation of the transactions herein
        contemplated.

       

      (b) To
        the
        best knowledge or Seller, there are no facts which, if known to a potential
        claimant or governmental authority, would give rise to a claim or proceeding
        which, if asserted or conducted with results unfavorable to KIRK, would have
        a
        material adverse effect on KIRK or the Business, or the consummation of the
        transactions herein contemplated.

       

      (c) Except
        as
        set forth in Section 5.2.6(c) of the Disclosure Schedule, neither KIRK nor
        Seller with respect to KIRK are a party to any judgment, decree, order or
        arbitration award (or agreement entered into in any administrative, judicial
        or
        arbitration proceeding with any governmental authority) with respect to or
        affecting KIRK, the Business or the Employees.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (d) Neither
        KIRK nor Seller with respect to KIRK are in violation of, or delinquent in
        respect of, any judgment, decree, order or arbitration award or law, statute,
        or
        regulation of or agreement with, or any license or permit from, any federal,
        state or local governmental authority to which the properties, assets, personnel
        or business activities of KIRK are subject or to which KIRK is subject,
        including, but not limited to, laws, statutes and regulations relating to
        the
        environment, occupational health and safety, equal employment opportunities,
        fair employment practices, and sex, race, religious and age discrimination.
        All
        notices, inspection reports and complaints which KIRK or Seller with respect
        to
        KIRK has received in the last three (3) years of any violation of a type
        referred to in any portion of this paragraph, as well as any environmental
        reviews, reports and inspections are set forth in Section 5.2.6(d) of the
        Disclosure Schedule. Kirk has not received notice of any violation of a type
        referred to in any portion of this paragraph which has not been
        corrected.

       

      (e) Seller
        has provided to Purchaser a brief description of all product liability claims,
        workers’ compensation claims, automobile and general liability claims during the
        last three (3) years.

       

      5.2.7 Real
        Property.
        Kirk
        owns no Real Property. A complete and correct list of all Leased Premises
        is
        included in Section 5.2.4(b)(xi) of the Disclosure Schedule. The Leased Premises
        are leased to KIRK pursuant to written leases which are listed in Section
        5.2.4(b) of the Disclosure Schedule. To the best knowledge of Seller, none
        of
        the improvements comprising the Leased Premises (or the Business conducted
        thereon) are in violation of any building or use or occupancy restriction,
        limitation, condition or covenant of record or any zoning or building law,
        code
        or ordinance or public utility or other easements. KIRK is not in default
        under
        any term of any agreement relating to the Leased Premises nor, to the best
        knowledge of Seller, is any other party thereto in default thereunder. All
        of
        the Leased Premises have been well maintained, and no substantial or material
        capital expenditures are required (other than normal operating expenditures)
        for
        the repair or maintenance thereof. All options in favor of KIRK to purchase
        any
        of the Leased Premises are in full force and effect.

       

      5.2.8 Brokers.
        No
        broker or finder has acted directly or indirectly for Seller in connection
        with
        this Agreement or the transactions contemplated hereby, and no broker or
        finder
        is entitled to any brokerage or finder’s fee or other commission in respect
        thereof based in any way on agreements, arrangements or understandings made
        by
        or on behalf of Seller, except for International Brokerage, Inc., 9655 South
        Dixie Highway, Suite 211, Miami, Florida 33156, whose fee will be paid by
        Seller.

       

      5.2.9 General.

       

      (a) KIRK
        owns
        or has the right to use all of the assets which heretofore have been used
        in or
        comprise any part of the Business as currently conducted.

       

      (b) The
        copies of all documents furnished by Seller and/or KIRK pursuant to the terms
        of
        this Agreement are complete and accurate. True and correct copies of each
        document referenced in the Disclosure Schedule have been furnished to Purchaser.
        

       

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      5.3 Representations
        and Warranties of John D. Copanos.

       

      John
        D. Copanos, makes no representations and warranties, implied or expressed,
        except as follows;

       

      (a) John
        D. Copanos has the legal right to enter into, deliver and perform this Agreement
        and to consummate the transactions contemplated herein. This Agreement when
        duly
        executed and delivered by John D. Copanos, will constitute the legal, valid
        and
        binding obligation of John D. Copanos.

       

      (g) John
        D. Copanos is the lawful record and beneficial owner of 50 Units, which are
        duly
        authorized, issued and outstanding and fully paid and nonassessable. John
        D.
        Copanos has good and marketable title to the 50 Units and the absolute right
        to
        sell, assign, transfer and deliver the 50 Units to Purchaser pursuant to
        this
        Agreement. At the Closing, John D. Copanos will deliver to Purchaser good
        and
        clear title to and ownership of the 50 Units, free and clear of all Claims,
        which will, to the best of his knowledge, together with the Units held by
        John
        S. Copanos constitute all of the issued and outstanding units of
        KIRK.

       

      5.4 Effect
        and Survival of Representations and Warranties.

       

      (a) The
        representations and warranties of Sellers in this Agreement, and all
        representations, warranties and statements of John S. Copanos or KIRK contained
        in the Disclosure Schedule or in any exhibit to this Agreement delivered
        or
        caused to be delivered by Seller pursuant hereto or in connection herewith,
        do
        not omit to state a material fact necessary in order to make the
        representations, warranties or statements contained herein or therein not
        misleading.

       

      (b) All
        representations, warranties and covenants of Seller herein made with respect
        to
        or affecting KIRK, the Business or title to assets and Seller’s indemnification
        with respect to a failure or breach of any such representation, warranty
        or
        covenant, shall be deemed to be made to, and run in favor of, both the Purchaser
        and any institutional lender of Purchaser, as their respective interests
        may
        appear.

       

      (c) All
        representations, warranties, agreements, covenants and obligations made or
        undertaken by Sellers or the Purchaser in this Agreement, any of the Related
        Agreements, or in any certificate, instrument or other document delivered
        by or
        on behalf of any of the parties pursuant to this Agreement, (except for those
        in
        Sections 5.2.1(g), 5.2.2(g) and 5.2.5, which shall survive the Closing for
        the
        periods of the applicable statutes of limitation) shall survive the Closing
        for
        a period of two (2) years.

       

      SECTION
        VI. CONDITIONS TO CLOSING; CLOSING

       

      6.1 Obligations.
        Each
        party shall promptly give the other party written notice of the existence
        or
        occurrence of any condition which would make any representation or warranty
        herein contained of either party untrue or which might reasonably be expected
        to
        prevent the consummation of the transactions herein contemplated. At the
        Closing, the parties shall deliver the documents and shall perform or shall
        have
        performed the acts which are described in this Agreement which are required
        to
        be performed by them. All documents which the parties shall deliver shall
        be in
        form and substance specified herein or, if not so specified, in form and
        substance reasonably satisfactory to the other party and its
        counsel.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      6.2 Receipt
        of Approvals, etc.
        On or
        before the Closing Date, Purchaser and Seller, respectively, shall be satisfied
        that all of the approvals, authorizations and consents of any court,
        governmental authorities or third parties required to consummate the
        transactions contemplated hereby shall have been obtained; that no order
        of any
        court or administrative agency is in effect which seeks to restrain or prohibit
        the transactions contemplated hereby; and that no suit, action, investigation,
        inquiry or proceeding by any governmental body or other person or legal or
        administrative proceeding has been instituted or threatened which questions
        the
        validity or legality of the transactions contemplated hereby or seeks to
        impose
        any liability on the parties.

       

      6.3 Conditions
        or Closing; Deliveries to Purchaser.
        The
        obligations of Purchaser to consummate the transactions contemplated hereby
        are
        subject to the fulfillment on or prior to the Closing Date of all of the
        following conditions which are for the sole benefit of Purchaser and may
        only be
        waived by Purchaser and the delivery by Seller to Purchaser of the documents
        described in this Section.

       

      (a) Purchaser’s
        officers, employees, attorneys, consultants and accountants shall have been
        given reasonable access during normal business hours to all of the properties,
        books, contracts, documents and records of KIRK and of Seller relating to
        KIRK
        and shall have been furnished with such information as Purchaser may have
        reasonably requested with respect to KIRK, the Business, and the financial
        and
        legal condition of KIRK.

       

      (b) KIRK
        shall have carried on the Business in accordance with past practice and in
        the
        ordinary course, made all payments to be made, and performed all obligations
        to
        be performed and shall not have ordered or purchased or permitted to be ordered
        or purchased any products, equipment, leased personalty, or other items,
        or
        disposed of any of KIRK’s assets, or issued any quotations, or prepaid any
        obligations, or entered into any other transaction of any nature whatsoever,
        except in the ordinary course of business in accordance with past practices
        or
        as contemplated hereby. From January 1, 2003 through the Closing Date, there
        shall not have occurred any material adverse change in the Business or in
        the
        financial condition of KIRK.

       

      (c) KIRK
        or
        John S. Copanos in respect of KIRK shall have maintained in full force and
        effect the policies of insurance listed in Schedule 5.2.4(a) of the Disclosure
        Schedule.

       

      (d) Sellers
        shall deliver or execute and deliver to Purchaser all of the
        following:

       

      (i) certificates
        representing the Units, duly endorsed in blank or with appropriate powers
        executed in blank;

       

      (ii) certificates
        of good standing of KIRK, issued by the Secretary of State of the state of
        its
        organization and of each state, if any, in which it is registered;

       

      (iii) incumbency
        and specimen signature certificates with respect to the officers of any
        corporate Seller executing this Agreement;

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (iv) certified
        copies of resolutions of any corporate Seller authorizing the execution,
        delivery and performance of this Agreement;

       

      (v) powers
        of
        attorney in respect of any non-individual Seller;

       

      (vi) the
        Disclosure Schedule in form and substance acceptable to Purchaser in its
        sole
        discretion, as indicated by its endorsement thereof;

       

      (vii) copies,
        to the extent obtained, of any necessary consents to the transaction or
        permitted alternate arrangements with respect thereto;

       

      (viii) certificates
        of title or origin (or like documents) with respect to all vehicles for which
        a
        certificate of title or origin is required;

       

      (ix) Cross
        Receipt and Certificate of Closing;

       

      (x) an
        opinion of Charles J. Duffy, Esq., counsel to John S. Copanos and an opinion
        of
        W. Rogers Moore, Esq., counsel to the John D. Copanos, addressed to Purchaser
        and dated the Closing Date, in the form of Exhibits D
        and E,
        respectively; and

       

      (xi) all
        other
        documents reasonably required to consummate the transactions herein
        contemplated.

       

      6.4 Conditions
        to Closing; Deliveries to Seller.
        The
        obligations of Seller to consummate the transactions contemplated hereby
        are
        subject to fulfillment on or prior to the Closing Date of all of the following
        conditions which are for the sole benefit of and may only be waived by Seller
        and the delivery by Purchaser to Seller of the documents described in this
        Section.

       

      (a) Purchaser
        shall deliver or execute and deliver to Sellers all of the
        following:

       

      (i) the
        Purchase Price as provided in Section Three;

       

      (ii) certificate
        of good standing of Purchaser of recent date issued by the Secretary of State
        of
        the State of Nevada;

       

      (iii) an
        incumbency and specimen signature certificate with respect to the officers
        of
        Purchaser executing this Agreement;

       

      (iv) a
        certified copy of resolutions of Purchaser’s board of directors, authorizing the
        execution, delivery and performance of this Agreement;

       

      (v) Cross
        Receipt and Certificate of Closing;

       

      (vi) an
        opinion of Dwight A. Miller, Esq., counsel to Purchaser, addressed to Seller
        and
        dated the Closing Date, in the form of Exhibit F;
        and

       

      (vii) all
        other
        documents reasonably required to consummate the transactions herein
        contemplated.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      SECTION
        VII. POST-CLOSING AGREEMENTS

       

      7.1 Post-Closing
        Agreements.
        From
        and after the Closing Date, the parties shall have the respective rights
        and
        obligations which are set forth in the remainder of this Section.

       

      7.2 Inspection
        of Records.
        Seller
        and Purchaser shall each make their respective books and records available
        for
        inspection by the other party, or by its duly authorized representatives,
        for
        reasonable business purposes at all reasonable times during normal business
        hours, for a seven (7) year period after the Closing Date, with respect to
        all
        transactions contemplated by this Agreement. Neither party shall thereafter
        destroy or permit the destruction of such books and records without first
        offering such books and records to the other party. As used in this Section,
        the
        right of inspection includes the right to make extracts or copies. The
        representatives of a party inspecting the records of the other party shall
        be
        reasonably satisfactory to the other party.

       

      7.3 Confidentiality.
        Neither
        party shall communicate or disclose to any third party any confidential
        information regarding the other party or the business conducted or to be
        conducted by that party. Seller shall not disclose or use for the benefit
        of any
        entity other than Purchaser, its agents and representatives any of the trade
        secrets, methods, formulas, business and/or marketing plans, customer lists,
        processes or any other proprietary information concerning KIRK.

       

      7.4 Use
        of
        Trademarks.
        Seller
        shall not use and shall not license or permit any third party to use, any
        name
        or trademark which is included within or deceptively similar to any of the
        names
        or trademarks used by KIRK.

       

      7.5 Hiring
        Away Employees.
        Neither
        Seller nor any Affiliate of Seller shall take any action calculated to persuade
        any Employee to terminate his association with KIRK or the Business. For
        a
        period of three (3) years commencing on the Closing Date, neither Seller
        nor any
        Affiliate of Seller will, without Purchaser’s prior written consent, offer
        employment to or employ any person who was an Employee on the Closing
        Date.

       

      7.6 Access
        to Information.
        Each of
        the parties shall provide the other with such reasonable information,
        documentation and access to records and personnel as may be necessary or
        helpful
        in permitting the other party to pursue an audit or other proceeding involving
        a
        tax matter and otherwise as requested by that party.

       

      7.7 Payments
        of Accounts Receivable.
        In the
        event Seller shall receive any instrument of payment for any of the Accounts
        Receivable, Seller shall forthwith deliver it to Purchaser, endorsed where
        necessary, without recourse, in favor of Purchaser.

       

      7.8 Cooperation;
        Further Assurances.

       

      (a) The
        parties shall fully cooperate with each other and take such steps as may
        be
        required to cause the smooth transfer of the Business to Purchaser.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (b) The
        parties shall execute such other documents, and perform such other acts,
        as may
        be necessary to effect the transactions contemplated hereunder, on the terms
        herein contained, and otherwise to comply with the terms of this
        Agreement.

       

      7.9 Taxes
        of Seller and KIRK.
        The
        parties agree as follows with respect to the Taxes of Seller and
        KIRK:

       

      (a) All
        Property Taxes and similar obligations levied with respect to KIRK or the
        Business and the assessment period within which the Closing occurs shall
        be
        apportioned as of the Closing Date based on the number of days in any such
        period falling before and after the Closing Date and properly accrued on
        the
        Closing Date Balance Sheet.

       

      (b) Seller
        shall ensure that of all tax returns required by law to be filed in respect
        of
        KIRK for all periods ending on or before the Closing Date shall have been
        timely
        filed and the Taxes paid as required by law or, in the case of any extension,
        properly accrued on the Closing Date Balance Sheet. Purchaser shall be
        responsible for timely filing of all tax returns required by law to be filed
        in
        respect of KIRK for periods ending after the Closing Date. All Taxes indicated
        as due and payable on such returns will be paid by Purchaser as and when
        required by law, except for such Taxes as may be contested in good
        faith.

       

      SECTION
        VIII. INDEMNIFICATION

       

      8.1 General.
        From
        and after the Closing Date, the parties shall indemnify each other as provided
        in this Section. No specifically enumerated indemnification obligation with
        respect to a particular subject matter as set forth below shall limit or
        affect
        the applicability of a more general indemnification obligation as set forth
        below with respect to the same subject matter or the obligations of the parties
        pursuant to this Agreement.

       

      8.2 Indemnification
        Covenants of Seller.

       

      (a) With
        the
        understanding that the indemnification obligations of John D. Copanos are
        limited to those with respect to the representations and warranties made
        in
        Section 5.3, Sellers shall indemnify, save and keep Purchaser, and its
        respective officers, directors, agents, successors and assigns and lenders
        claiming by or through Purchaser, harmless from and against all Indemnifiable
        Claims or Indemnifiable Costs sustained or incurred by an Indemnified Party,
        as
        a result of or arising out of or by virtue of:

       

      (i) any
        inaccuracy in a representation or warranty made by the respective Seller
        herein;

       

      (ii) the
        failure of a Seller to comply with, or the breach by a Seller of, any of
        the
        covenants of this Agreement to be performed by a Seller (including, without
        limitation, this Section);

       

      (iii) all
        liabilities owed to a Seller or any Affiliate of a Seller;

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (iv) all
        liabilities for legal and accounting and audit fees and other expenses incurred
        by Sellers in connection with the negotiation of this Agreement and the sale
        of
        the Units;

       

      (v) all
        liabilities in respect of Taxes of Seller, including any Taxes arising as
        a
        result of the transactions contemplated herein;

       

      (vi) all
        liabilities in connection with claims, suits, actions or proceedings listed
        in
        Section 5.2.6 of the Disclosure Schedule or pending as of the Closing Date
        or
        arising after the Closing Date, with respect to periods ending on or before
        the
        Closing Date;

       

      (vii) all
        liabilities arising out of or in connection with any violation of a statute
        or
        governmental rule, regulation or directive, which violation occurred on or
        before the Closing Date;

       

      (viii) all
        liabilities arising under CERCLA or RCRA or other federal, state or local
        laws
        regulating the environment or under any application of common law for damage
        to
        the environment due to an act, occurrence or omission by Seller on or before
        the
        Closing Date with respect to the operations of KIRK;

       

      (ix) all
        liabilities or obligations to the extent that their existence or magnitude
        constitutes or results in a breach by Seller of their representations,
        warranties or covenants in this Agreement; and

       

      (x) all
        liabilities accrued on the Final Closing Date Balance Sheet (to the extent
        properly accrued) are excluded from the scope and operation of the foregoing
        indemnification obligations.

       

      8.3 Indemnification
        Covenants of Purchaser.

       

      (a) Purchaser
        shall indemnify, save and keep Seller and their respective successors and
        assigns, harmless from and against all Indemnifiable Claims and Indemnifiable
        Costs sustained or incurred by that Indemnified Party as a result of or arising
        out of or by virtue of:

       

      (i) any
        inaccuracy in a representation or warranty made by Purchaser
        herein;

       

      (ii) the
        failure of Purchaser to comply with, or the breach by Purchaser of, any of
        the
        covenants of this Agreement to be performed by Purchaser (including without
        limitation this Section );

       

      (iii) all
        liabilities for Taxes or Property Taxes of Purchaser or KIRK attributable
        to
        periods after the Closing Date;

       

      (iv) all
        liabilities or Claims in connection with KIRK arising after the Closing
        Date;

       

      (v) all
        liabilities of Purchaser to pay severance benefits or compensation to employees
        of KIRK after the Closing Date;

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (vi) all
        liabilities with respect to Employees, which arise by virtue of an employment
        relationship with KIRK after the Closing Date;

       

      (vii) all
        liabilities arising out of or in connection with any Plan or any other
        compensation program or fringe benefit plan or employment-related policy
        of KIRK
        after the Closing Date;

       

      (viii) all
        liabilities (including claims for consequential damages) for injury to or
        death
        of persons, or for medical, dental, or disability benefits accruing or based
        upon exposure to conditions after the Closing Date or for Claims incurred
        (including any workers’ compensation claims) or disabilities commencing after
        the Closing Date, which arise by virtue of an employment relationship with
        KIRK
        after the Closing Date;

       

      (ix) all
        liabilities arising out of or in connection with any violation by KIRK of
        a
        statute or governmental rule, regulation or directive, which violation occurred
        after the Closing Date;

       

      (x) all
        liabilities arising under CERCLA or RCRA or other federal, state or local
        laws
        regulating the environment or under any application of common law for damage
        to
        the environment due to an act, occurrence or omission by Purchaser or KIRK
        after
        the Closing Date with respect to the operations of KIRK; and

       

      (xi) all
        liabilities or obligations to the extent that their existence or magnitude
        constitutes or results in a breach by Purchaser of its representations,
        warranties or covenants in this Agreement or the Related
        Agreements.

       

      (b) If
        Purchaser shall deliver to Seller a certificate certifying that there are
        Indemnifiable Claims outstanding and the amount of the Indemnifiable Claims,
        the
        Purchaser’s obligation to make payments to Seller in respect of the Note (but
        only to the extent of the Indemnifiable Claims) shall be postponed until
        the
        amount of the Indemnifiable Claims are determined and paid. The rights of
        the
        parties to indemnification hereunder shall expire in accordance with the
        provisions of Section 5.3 hereof; provided, however, that if at any time
        prior
        to such date, one party shall deliver to the other a written statement
        certifying that there are Indemnifiable Costs, then the period of
        indemnification hereunder shall extend until the resolution of any such matter
        as provided herein.

       

      (c) In
        the
        event that a party asserts Indemnifiable Claims and Indemnifiable Costs with
        which the other does not agree, the matter shall be referred to a firm of
        independent public accountants selected by the parties for resolution of
        the
        matter pursuant to this Agreement which determination shall be finally binding
        on the parties to the same extent and effect as a final arbitration award
        or
        decision.

       

      8.4 Cooperation.
        The
        parties shall cooperate with each other with respect to the defense of any
        Claims or litigation which are not the subject of indemnification hereunder.
        An
        Indemnified Party shall have the right, at its own expense, to participate
        in
        the defense of any Third Party Claim which resulted in the claim for
        indemnification, and if said right is exercised, the parties shall cooperate
        in
        the defense of this action or proceeding.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      8.5 Subrogation.
        The
        Indemnifying Party shall not be entitled to require that any action be brought
        against any other person before action is brought against it hereunder by
        the
        Indemnified Party and shall not be subrogated to any right of action until
        it
        has paid in full or successfully defended against the claim for which
        indemnification is sought.

       

      8.6 Third
        Party Claims.
        Forthwith following the receipt of notice of a Third Party Claim, the party
        receiving the notice of the Third Party Claim shall notify the other party
        of
        its existence. Subject to the remaining provisions of this Section, if an
        Indemnified Party is entitled to indemnification against a Third Party Claim,
        the Indemnified Party shall have the right, without prejudice to its right
        of
        indemnification hereunder, in its discretion exercised in good faith and
        upon
        the advice of counsel, to defend against and settle any such Third Party
        Claim,
        either before or after the initiation of litigation, at such time and upon
        such
        terms as the Indemnified Party deems fair and reasonable, provided that at
        least
        ten (10) days prior to any settlement, written notice of its intention to
        settle
        is given to the Indemnifying Party. As long as the Indemnified Party retains
        its
        right to defend and (except as hereinafter provided) settle a Third Party
        Claim
        as hereinabove provided, the Indemnified Party shall be reimbursed by the
        Indemnifying Party for the attorneys’ fees and other expenses of defending the
        Third Party Claim which are incurred form time to time, forthwith following
        the
        presentation to the Indemnifying Party of itemized bills for the attorneys’ fees
        and other expenses. The Indemnified Party may also at any time, upon reasonable
        notice, tender the defense of a Third Party Claim to the Indemnifying Party.
        Notwithstanding the foregoing, if:

       

      (a) the
        defense of a Third Party Claim is so tendered; or

       

      (b) within
        thirty (30) days after the date on which written notice of a Third Party
        Claim
        has been given pursuant to this Section, the Indemnifying Party shall
        acknowledge without qualification its indemnification obligations as provided
        in
        this Section in writing to the Indemnified Party; then the Indemnified Party
        shall not have the right to defend or settle the Third Party Claim and the
        Indemnifying Party shall have the sole right to contest, defend, litigate
        and
        settle the Third Party Claim, and all expenses (including without limitation
        attorneys’ fees) incurred by the Indemnifying Party in connection therewith
        shall be paid by the Indemnifying Party. The Indemnified Party shall have
        the
        right to be represented by counsel at its own expense in any such contest,
        defense, litigation or settlement conducted by the Indemnifying Party, provided
        that the Indemnified Party shall be entitled to reimbursement therefor if
        the
        Indemnifying Party shall lose its right to defend and settle as herein provided.
        Notwithstanding the foregoing, the Indemnifying Party shall lose its right
        to
        defend and settle the Third Party Claim if it shall fail to contest diligently
        the Third Party Claim. So long as the Indemnifying Party has not lost its
        right
        and/or obligation to defend and settle as herein provided, the Indemnifying
        Party shall have the exclusive right, in its discretion exercised in good
        faith,
        and upon the advice of counsel, to settle any such matter, either before
        or
        after the initiation of litigation, at such time and upon such terms as it
        deems
        fair and reasonable, provided that at least ten (10) days prior to any such
        settlement, written notice of its intention to settle shall be given to the
        Indemnified Party. No failure by an Indemnifying Party to acknowledge in
        writing
        its indemnification obligations under this Section shall relieve it of such
        obligations to the extent they exist.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      SECTION
        IX. MISCELLANEOUS

       

      9.1 Termination.
        This
        Agreement may be terminated by either party which is not then in default
        hereunder effective upon delivery of written notice to the other party if
        the
        conditions to the obligations of the party delivering such notice (or such
        conditions as are set forth in Section 6.3 or 6.4, whichever is applicable)
        have
        not been satisfied, through no fault of its own, by June 1, 2006, and upon
        such
        termination the party delivering such notice shall have no further liability
        or
        obligation to the other party.

       

      9.2 Expenses.
        Regardless whether or not the Closing occurs, each party will bear its own
        expenses in connection with this Agreement and the transactions herein
        contemplated, except to the extent resulting from a misrepresentation by
        either
        party or a breach by either party in performing its respective obligations
        hereunder.

       

      9.3 Headings.
        The
        headings used in this Agreement are for convenience of reference only and
        shall
        have no effect upon the construction or interpretation of this
        Agreement.

       

      9.4 Assignment.
        This
        Agreement and all the provisions hereof shall be binding upon and inure to
        the
        benefits of the parties and their respective successors and permitted
        assigns.

       

      9.5 Publicity.
        Neither
        party shall, without consent of the other, make any public announcement in
        connection with the transactions contemplated hereby, except as may be required
        by law.

       

      9.6 Notices.
        All
        notices required or permitted to be given hereunder shall be in writing and
        shall be deemed given when delivered in person, on the business day next
        following receipted facsimile transmission, or on the second day after
        consignment to an overnight courier such as Federal Express, addressed as
        follows:

       

      

        
          	
                  If
                    to Purchaser addressed to:

                	
                  Bionutrics,
                    Inc.

                
	 	
                  2415
                    East Camelback Road, Suite 700

                
	 	
                  Phoenix,
                    AZ 85016

                
	 	
                  Attn:
                    Ronald Howard Lane, Ph.D.

                
	 	
                  rhl@bionutrics.com 

                
	 	
                  Telephone:
                    (602) 508-6073

                
	 	
                  Facsimile:
                    (602) 508-0115

                
	 	 
	
                  With
                    a copy to:

                	
                  Dwight
                    A. Miller Esq.

                
	 	
                  340
                    Royal Poinciana Way, Suite 321

                
	 	
                  Palm
                    Beach, 37 Ferry Lane East, Westport, Connecticut 06880
                    33480

                
	 	
                  dwight.miller@amrl.com

                
	 	
                  Telephone:
                    (561) 804-4629

                
	 	
                  Facsimile:
                    (561) 833-2261

                

           

          
            
               

            

            
               

              
                

              

            

            
               

            

          

          
            	 	 
	
                    If
                      to Sellers addressed to:

                  	
                    Kirk
                      Pharmaceuticals

                  
	 	
                    5352
                      NW 35th Avenue

                  
	 	
                    Ft.
                      Lauderdale, FL 33309

                  
	 	
                    Attn:
                      John S. Copanos

                  
	 	
                    jhcopanos@aol.com

                  
	 	
                    Telephone:
                      (954) 653-0603 x 205

                  
	 	
                    Facsimile:
                      (954) 653-0607

                  
	 	 
	
                    With
                      a copy to:

                  	
                    Charles
                      J. Duffy, III, Esq.

                  
	 	
                    1151
                      Fort Lauderdale Beach Boulevard, Suite 12D

                  
	 	
                    Fort
                      Lauderdale, Florida 33304

                  
	 	
                    cduffyIII@msn.com

                  
	 	
                    Telephone:
                      (954) 566.0711

                  
	 	
                    Facsimile:
                      (954) 566.8912

                  
	 	 
	 	
                    W.
                      Rodgers Moore, Esq.

                  
	 	
                    W.
                      Rodgers Moore, P.A.

                  
	 	
                    One
                      Lincoln Place

                  
	 	
                    1900
                      Glades Road, Suite 401

                  
	 	
                    Boca
                      Raton, FL 33431

                  
	 	
                    Telephone:
                      (561) 394-7944

                  
	 	
                    Facsimile:
                      (561) 393-6541

                  

          

        

      

       

      or
        to
        such other addresses as may be designated by notice given in accordance with
        the
        provisions of this Section.

       

      9.7 Third
        Party Rights.
        Nothing
        in this Agreement is intended to create, nor shall anything in this Agreement
        be
        deemed to create or have created, any third party beneficiary rights. It
        is
        understood and agreed that Purchaser may make a security assignment of its
        rights under this Agreement to its lenders.

       

      9.8 Entire
        Agreement.
        This
        Agreement constitutes the entire agreement between the parties and shall
        be
        binding upon and inure to the benefit of the parties hereto and their respective
        legal representatives, successors and permitted assigns. Each exhibit, and
        the
        Disclosure Schedule, shall be considered incorporated into this
        Agreement.

       

      9.9 Amendment
        and Modification.
        Any
        amendment or modification to this Agreement must be made in writing and duly
        executed by an authorized representative of each of the parties
        hereto.

       

      9.10 Non-Waiver.
        The
        failure in any one or more instances of a party to insist upon performance
        of
        any of the terms, covenants or conditions of this Agreement, to exercise
        any
        right or privilege in this Agreement conferred, or to waive any breach of
        any of
        the terms, covenants or conditions of this Agreement, shall not be construed
        as
        a subsequent waiver of any such terms, covenants, conditions, rights or
        privileges, but the same shall continue and remain in full force and effect
        as
        if no such forbearance or waiver had occurred. No waiver shall be effective
        unless it is in writing and signed by an authorized representative of the
        waiving party. A breach of any representation, warranty or covenant shall
        not be
        affected by the fact that a more general or more specific representation,
        warranty or covenant was not also breached.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      9.11 Counterparts.
        This
        Agreement may be executed in counterparts, each of which shall be deemed
        to be
        an original, and all such counterparts shall constitute but one
        instrument.

       

      9.12 Governing
        Law.
        This
        Agreement shall be governed by and construed in accordance with the laws
        of the
        State of Arizona, without giving effect to the choice or conflict of law
        principles thereof.

       

      9.13 Purchaser
        Deposit.
        Purchaser
        shall deposit with Sellers $200,000 ninety (90) days following the execution
        of
        the Stock Purchase Agreement. The deposit will be credited against the purchase
        price at Closing, returned to the Purchaser if DEA does not approve a
        change-in-control and therefore this Agreement is terminated or paid to Sellers
        if DEA approves the change-in-control and Purchaser does not consummate the
        transaction contemplated by this Agreement for any other reason. 
        

      

       

      

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      IN
        WITNESS WHEREOF, the parties have executed this Agreement as of the date
        first
        above written.

       

      

        
          	
                  BIONUTRICS,
                    INC.

                   

                	 	
                  SELLERS

                   

                
	 	 	 
	
                  By:
                    

                	/s/
                  Ronald Howard Lane 	 	
                  /s/  
                    John S. Copanos 

                
	
                	
                  Ronald
                    Howard Lane, PhD.

                	 	
                  John
                    S. Copanos

                
	
                	
                  President

                	 	 
	 	 	 
	 	 	 
	 	 	
                  /s/  
                    John D. Copanos 

                
	 	 	
                  John
                    D. CopanosExhibit 10.102

                                                            Dated: July 21, 2005

      NEITHER THIS  DEBENTURE NOR THE  SECURITIES  INTO WHICH THIS  DEBENTURE IS
      CONVERTIBLE   HAVE  BEEN  REGISTERED  WITH  THE  SECURITIES  AND  EXCHANGE
      COMMISSION OR THE  SECURITIES  COMMISSION OF ANY STATE IN RELIANCE UPON AN
      EXEMPTION FROM  REGISTRATION  UNDER THE SECURITIES ACT OF 1933, AS AMENDED
      (THE  "SECURITIES  ACT"),  AND,  ACCORDINGLY,  MAY NOT BE  OFFERED OR SOLD
      EXCEPT  PURSUANT  TO  AN  EFFECTIVE   REGISTRATION   STATEMENT  UNDER  THE
      SECURITIES  ACT  OR  PURSUANT  TO AN  AVAILABLE  EXEMPTION  FROM,  OR IN A
      TRANSACTION  NOT  SUBJECT  TO,  THE   REGISTRATION   REQUIREMENTS  OF  THE
      SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.

No. 2                                                                 $8,000,000

                              AMENDED AND RESTATED

                              SMARTIRE SYSTEMS INC.

                              Convertible Debenture

                                Due June 23, 2008

      This  Convertible  Debenture  (this  "Debenture")  is issued  by  SMARTIRE
SYSTEMS INC, a corporation  organized  and existing  under the laws of the Yukon
Territory (the "Obligor"),  to Cornell Capital  Partners,  LP., in trust for LCC
Global  Limited,  a  corporation  organized  under  the  laws  of  Cyprus,  (the
"Holder"),   pursuant  to  that  certain  Securities   Purchase  Agreement  (the
"Securities Purchase Agreement") of even date herewith.

      FOR VALUE  RECEIVED,  the Obligor hereby  promises to pay to the Holder or
its  successors  and  assigns  the  principal  sum  of  Eight  Million   Dollars
($8,000,000), together with accrued but unpaid interest on the following terms:

      Payments.  Interest on the outstanding  principal  balance hereof shall be
due and payable monthly, in arrears ("Interest Payment"), commencing on July 23,
2005 and shall continue on the first day of each calendar month  thereafter that
any amounts under this Debenture are due and payable (each, an "Interest Payment
Date") as set forth on the Payment Schedule attached hereto.  Principal shall be
due and  payable  in five (5) equal  installments  as set  forth in the  Payment
Schedule attached hereto , ("Principal Payment").  The installments of principal
shall be due and payable commencing on June 23, 2006 and subsequent installments
shall be due and payable  every six (6) months  thereafter  on the twenty  third
(23rd)  day  of  the  calendar  month  ("Principal   Payment  Date")  until  the
outstanding  principal balance is paid in full (the "Maturity Date") as outlined
in the Payment  Schedule  attached hereto or this Debenture is converted in full
pursuant to Section 3. Upon any  conversion  in part by the Holder in accordance

                                       1
<PAGE>

with Section 3, the Holder and the Obligor shall in good faith  recalculate  the
outstanding  principal balance and the amounts of the Principal  Payments.  Upon
any full  conversion  by the Holder in  accordance  with Section 3 of all of the
Interest  and  Principal  amounts due  hereunder  all of the  Obligor's  payment
obligations  shall  terminate.  All  payments  in  respect  of the  indebtedness
evidenced  hereby  shall be made in  either  cash or  common  stock as  outlined
herein,  and shall be  applied in the  following  order:  to  accrued  interest,
principal,  and charges and  expenses  owing  under or in  connection  with this
Debenture.

      In the  event  the  Holder  has  elected  to  convert  a  portion  of this
Debenture, pursuant to Section 3, the Company, in lieu of making a Principal and
Interest  Payment as  outlined  above,  shall be  entitled  to an off-set of the
Principal  and  Interest  Payment due  pursuant to the Payment  Schedule and the
dollar amount of the Debenture which has been converted.

      Interest.  Interest  shall  accrue on the  outstanding  principal  balance
hereof at an annual rate equal to ten percent (10%) from the date  principal was
advanced in connection with this Debenture.  Interest shall be calculated on the
basis of a 360-day  year and the actual  number of days  elapsed,  to the extent
permitted by applicable  law.  Interest  hereunder will be paid to the Holder or
its assignee in whose name this  Debenture is  registered  on the records of the
Obligor  regarding  registration  and  transfers of Debentures  (the  "Debenture
Register")  as outlined  herein.  In the event the Holder has elected to convert
Interest due hereunder into shares of the Company's  Common Stock or the Company
has elected to make an Interest  Payment  hereunder  in shares of the  Company's
Common Stock the amount of stock to be issued will be calculated as follows: the
value of the  stock  shall be the  Closing  Bid  Price on the date the  interest
payment is due or the  conversion  is made.  A number of shares of Common  Stock
with a value equal to the amount of  interest  due shall be issued to the Holder
within five (5) days of the conversion date or on the Interest  Payment Date. No
fractional shares will be issued;  therefore, in the event that the value of the
Common Stock per share does not equal the total  interest due, the Company shall
round up the number of shares due. .

      Consent  of  Holder to Sell  Capital  Stock or Grant  Security  Interests.
Except  for the  capital  stock to be  issued  pursuant  to the  Standby  Equity
Distribution  Agreement  dated June 23, 2005 between the  Obligator  and Cornell
Capital Partners,  LP,  ("Cornell") the convertible  debenture issued to Cornell
dated May 20, 2005 pursuant to the Securities  Purchase  Agreement dated May 20,
2005, the Series A Preferred  Shares issued and outstanding to Cornell  pursuant
to the  Investment  Agreement  dated March 22, 2005, or pursuant to a commitment
arising  prior to the date  hereof,  so long as any of the  principal  amount or
interest on this  Debenture  remains unpaid and  unconverted,  the Obligor shall
not, without the prior consent of the Holder, (i) issue or sell any common stock
or  preferred  stock  with or  without  consideration,  (ii)  issue  or sell any
preferred stock, warrant,  option, right,  contract,  call, or other security or
instrument granting the holder thereof the right to acquire common stock with or
without  consideration,  (iii) enter into any security  instrument  granting the
holder a security interest in any of the assets of the Obligor, or (iv) file any
registration  statements on Form S-8.  Provided the Obligor gives the Holder two

                                       2
<PAGE>

(2) days prior written notice, the foregoing  restriction shall exclude options,
warrants or other securities  convertible or exchangeable  into shares of common
stock of the Obligor that were outstanding prior to the date hereof.

      This Debenture is subject to the following additional provisions:

      Section 1. This Debenture is exchangeable for an equal aggregate principal
amount of Debentures of different authorized denominations,  as requested by the
Holder  surrendering  the  same.  No  service  charge  will  be  made  for  such
registration of transfer or exchange.

      Section 2. Events of Default.

      (a) An "Event of  Default",  wherever  used  herein,  means any one of the
following  events  (whatever  the reason and  whether it shall be  voluntary  or
involuntary or effected by operation of law or pursuant to any judgment,  decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):

            (i) Any default in the payment of the principal  of,  interest on or
other charges in respect of this Debenture,  free of any claim of subordination,
as and when the same shall become due and payable (whether on an installment,  a
Principal  Payment  Date,  an Interest  Payment  Date, a Conversion  Date or the
Maturity  Date or by  acceleration  or otherwise)  which  remains  uncured for a
period of ten (10) days after such default;

            (ii)  The  Obligor  shall  fail to  observe  or  perform  any  other
covenant,  agreement or warranty contained in, or otherwise commit any breach or
default of any provision of this Debenture  (except as may be covered by Section
2(a)(i)  hereof or any  Transaction  Document (as defined in Section 4) which is
not cured with in the time prescribed;

            (iii) The Obligor or any  subsidiary of the Obligor shall  commence,
or there shall be commenced against the Obligor or any subsidiary of the Obligor
under any applicable bankruptcy or insolvency laws as now or hereafter in effect
or any  successor  thereto,  or the  Obligor or any  subsidiary  of the  Obligor
commences any other proceeding under any reorganization, arrangement, adjustment
of debt,  relief of debtors,  dissolution,  insolvency or liquidation or similar
law of any  jurisdiction  whether  now or  hereafter  in effect  relating to the
Obligor or any  subsidiary  of the  Obligor or there is  commenced  against  the
Obligor or any  subsidiary  of the Obligor any such  bankruptcy,  insolvency  or
other proceeding which remains  undismissed for a period of ninety (90) days; or
the  Obligor or any  subsidiary  of the  Obligor  is  adjudicated  insolvent  or
bankrupt;  or any  order of  relief or other  order  approving  any such case or
proceeding is entered;  or the Obligor or any subsidiary of the Obligor  suffers
any  appointment of any custodian,  private or court  appointed  receiver or the
like for it or any substantial part of its property which continues undischarged
or unstayed for a period of ninety (90) days;  or the Obligor or any  subsidiary
of the Obligor makes a general  assignment for the benefit of creditors;  or the
Obligor or any  subsidiary  of the Obligor shall call a meeting of its creditors
with a view to  arranging a  composition,  adjustment  or  restructuring  of its
debts;  or any  corporate  or  other  action  is  taken  by the  Obligor  or any
subsidiary of the Obligor for the purpose of effecting any of the foregoing;

            (iv) The Obligor or any  subsidiary  of the Obligor shall default in
any of its  obligations  under  any  other  Debenture  or any  mortgage,  credit
agreement or other facility,  indenture agreement,  factoring agreement or other

                                       3
<PAGE>

instrument under which there may be issued,  or by which there may be secured or
evidenced any  indebtedness  for borrowed money or money due under any long term
leasing or factoring arrangement of the Obligor or any subsidiary of the Obligor
in an amount exceeding  $250,000,  whether such indebtedness now exists or shall
hereafter be created and such default shall result in such indebtedness becoming
or being declared due and payable prior to the date on which it would  otherwise
become due and payable;

            (v) The Common  Stock shall cease to be quoted for trading or listed
for trading on the Nasdaq OTC Bulletin Board ("OTC"),  Nasdaq  SmallCap  Market,
New York Stock  Exchange,  American Stock Exchange or the Nasdaq National Market
(each,  a  "Subsequent  Market")  and shall  not  again be quoted or listed  for
trading thereon within twenty (20) Trading Days of such delisting;

            (vi) The Obligor or any  subsidiary  of the Obligor shall be a party
to any Change of Control Transaction (as defined in Section 4);

            (vii)  The  Obligor  shall  fail  to  file  the  Underlying   Shares
Registration Statement (as defined in Section 4) with the Commission (as defined
in Section 4), or the Underlying  Shares  Registration  Statement shall not have
been declared effective by the Commission,  in each case within the time periods
set forth in the Investor  Registration  Rights  Agreement of even date herewith
between the Obligor and the Holder;

            (viii) If the  effectiveness of the Underlying  Shares  Registration
Statement  lapses for any reason or the Holder  shall not be permitted to resell
the shares of Common Stock underlying this Debenture under the Underlying Shares
Registration  Statement,  in either  case,  for more  than five (5)  consecutive
Trading  Days  or an  aggregate  of  eight  Trading  Days  (which  need  not  be
consecutive Trading Days);

            (ix) The Obligor  shall fail for any reason to deliver  Common Stock
certificates to a Holder prior to the fifth (5th) Trading Day after a Conversion
Date or the Obligor  shall  provide  notice to the Holder,  including  by way of
public  announcement,  at any time, of its intention not to comply with requests
for conversions of this Debenture in accordance with the terms hereof;

            (x) The Obligor  shall fail for any reason to deliver the payment in
cash pursuant to a Buy-In (as defined herein) within three (3) days after notice
is claimed delivered hereunder;

      (b) During the time that any portion of this Debenture is outstanding,  if
any Event of Default has occurred,  the full principal amount of this Debenture,
together with interest and other amounts owing in respect  thereof,  to the date
of  acceleration  shall become at the  Holder's  election,  immediately  due and
payable in cash,  provided  however,  the Holder may request  (but shall have no
obligation  to request)  payment of such amounts in Common Stock of the Obligor.
If an Event of Default occurs and remains uncured, the Conversion Price shall be
reduced to [TWENTY PERCENT (20% of the VWAP on the Closing Date] _____ ($_____).
In addition to any other remedies,  the Holder shall have the right (but not the
obligation)  to convert this Debenture at any time after (x) an Event of Default
or (y) the Maturity Date at the Conversion Price then in-effect. The Holder need

                                       4
<PAGE>

not provide and the Obligor hereby waives any  presentment,  demand,  protest or
other notice of any kind, and the Holder may immediately and without  expiration
of any grace period enforce any and all of its rights and remedies hereunder and
all other remedies available to it under applicable law. Such declaration may be
rescinded and annulled by Holder at any time prior to payment hereunder. No such
rescission or annulment  shall affect any subsequent  Event of Default or impair
any right  consequent  thereon.  Upon an Event of Default,  notwithstanding  any
other provision of this Debenture or any Transaction Document,  the Holder shall
have no obligation to comply with or adhere to any  limitations,  if any, on the
conversion of this Debenture or the sale of the Underlying Shares.

      Section 3. Conversion.

      (a) (i) Conversion at Option of Holder.

            (A) This Debenture shall be convertible  into shares of Common Stock
at the  option of the  Holder,  in whole or in part at any time and from time to
time,  after the  Original  Issue Date (as defined in Section 4) (subject to the
limitations on conversion set forth in Section 3(a)(ii)  hereof).  The number of
shares of Common Stock  issuable upon a conversion  hereunder  equals the sum of
(i) the  quotient  obtained  by  dividing  (x) the  outstanding  amount  of this
Debenture  to be converted  by (y) the  Conversion  Price (as defined in Section
3(c)(i)).  The Obligor shall  deliver  Common Stock  certificates  to the Holder
prior to the Fifth (5th) Trading Day after a Conversion Date.

            (B) Notwithstanding anything to the contrary contained herein, if on
any  Conversion  Date:  (1) the  number of  shares  of Common  Stock at the time
authorized, unissued and unreserved for all purposes, or held as treasury stock,
is  insufficient  to pay  principal  and interest  hereunder in shares of Common
Stock; (2) the Common Stock is not listed or quoted for trading on the OTC or on
a  Subsequent  Market;  (3)  the  Obligor  has  failed  to  timely  satisfy  its
conversion; or (4) the issuance of such shares of Common Stock would result in a
violation of Section 3(a)(ii),  then, at the option of the Holder,  the Obligor,
in lieu of  delivering  shares of Common Stock  pursuant to Section  3(a)(i)(A),
shall deliver, within three (3) Trading Days of each applicable Conversion Date,
an amount in cash equal to the product of the outstanding principal amount to be
converted  plus any interest  due therein  divided by the  Conversion  Price and
multiplied by the highest closing price of the stock from date of the conversion
notice till the date that such cash payment is made.

      Further,  if the Obligor shall not have  delivered any cash due in respect
of conversion of this  Debenture or as payment of interest  thereon by the fifth
(5th) Trading Day after the  Conversion  Date,  the Holder may, by notice to the
Obligor, require the Obligor to issue shares of Common Stock pursuant to Section
3(c), except that for such purpose the Conversion Price applicable thereto shall
be the lesser of the Conversion  Price on the Conversion Date and the Conversion
Price on the date of such Holder demand.  Any such shares will be subject to the
provisions of this Section.

            (C) The Holder shall effect conversions by delivering to the Obligor
a  completed  notice in the form  attached  hereto as  Exhibit A (a  "Conversion
Notice").  The date on which a Conversion Notice is delivered is the "Conversion
Date." Unless the Holder is converting the entire principal  amount  outstanding
under this  Debenture,  the Holder is not required to physically  surrender this

                                       5
<PAGE>

Debenture to the Obligor in order to effect conversions.  Conversions  hereunder
shall have the  effect of  lowering  the  outstanding  principal  amount of this
Debenture plus all accrued and unpaid interest thereon in an amount equal to the
applicable conversion. The Holder and the Obligor shall maintain records showing
the principal amount converted and the date of such conversions. In the event of
any dispute or  discrepancy,  the records of the Holder shall be controlling and
determinative in the absence of manifest error.

            (ii) Certain Conversion Restrictions.

                  (A) A Holder may not convert this  Debenture or receive shares
of Common Stock as payment of interest  hereunder to the extent such  conversion
or receipt of such interest  payment  would result in the Holder,  together with
any affiliate  thereof,  beneficially  owning (as determined in accordance  with
Section  13(d) of the  Exchange  Act and the rules  promulgated  thereunder)  in
excess of 4.9% of the then  issued  and  outstanding  shares  of  Common  Stock,
including  shares of Common Stock  issuable upon  conversion  of, and payment of
interest on, this  Debenture or upon  exercise of, or  conversion  of, any other
security of the Obligor,  held by such Holder after application of this Section.
Since the Holder  will not be  obligated  to report to the Obligor the number of
shares of Common Stock it may hold at the time of a conversion hereunder, unless
the  conversion  at issue would result in the issuance of shares of Common Stock
in excess of 4.9% of the then outstanding  shares of Common Stock without regard
to any  other  shares  which  may be  beneficially  owned  by the  Holder  or an
affiliate  thereof,  the  Holder  shall have the  authority  and  obligation  to
determine  whether the  restriction  contained  in this  Section  will limit any
particular  conversion  hereunder  and to the extent that the Holder  determines
that the limitation  contained in this Section  applies,  the  determination  of
which portion of the principal amount of this Debenture is convertible  shall be
the  responsibility  and obligation of the Holder. If the Holder has delivered a
Conversion Notice for a principal amount of this Debenture that,  without regard
to any other  shares that the Holder or its  affiliates  may  beneficially  own,
would result in the issuance in excess of the permitted  amount  hereunder,  the
Obligor shall notify the Holder of this fact and shall honor the  conversion for
the maximum  principal  amount permitted to be converted on such Conversion Date
in  accordance  with the periods  described  in Section  3(a)(i)(A)  and, at the
option of the Holder, either retain any principal amount tendered for conversion
in excess of the permitted  amount  hereunder for future  conversions  or return
such excess principal  amount to the Holder.  The provisions of this Section may
be waived by a Holder (but only as to itself and not to any other  Holder)  upon
not less  than 65 days  prior  notice to the  Obligor.  Other  Holders  shall be
unaffected by any such waiver.

      (b) (i)  Nothing  herein  shall  limit a Holder's  right to pursue  actual
damages  or declare  an Event of  Default  pursuant  to Section 2 herein for the
Obligor 's failure to deliver  certificates  representing shares of Common Stock
upon conversion  within the period  specified  herein and such Holder shall have
the right to pursue all remedies  available to it at law or in equity including,
without limitation,  a decree of specific  performance and/or injunctive relief,
in each case  without  the need to post a bond or provide  other  security.  The
exercise  of any such  rights  shall not  prohibit  the Holder  from  seeking to
enforce damages pursuant to any other Section hereof or under applicable law.

                                       6
<PAGE>

            (ii) In addition to any other rights available to the Holder, if the
Obligor fails to deliver to the Holder such certificate or certificates pursuant
to Section 3(a)(i)(A) by the fifth Trading Day after the Conversion Date, and if
after such fifth  (5th)  Trading  Day the Holder  purchases  (in an open  market
transaction or otherwise)  Common Stock to deliver in  satisfaction of a sale by
such Holder of the Underlying Shares which the Holder anticipated receiving upon
such  conversion  (a  "Buy-In"),  then the Obligor  shall (A) pay in cash to the
Holder (in addition to any  remedies  available to or elected by the Holder) the
amount by which (x) the  Holder's  total  purchase  price  (including  brokerage
commissions,  if any) for the Common Stock so purchased  exceeds (y) the product
of (1) the  aggregate  number of shares of Common  Stock that such Holder  would
have received from the conversion at issue multiplied by (2) the market price of
the Common Stock at the time of the sale giving rise to such purchase obligation
and (B) at the option of the Holder, either reissue a Debenture in the principal
amount equal to the principal  amount of the attempted  conversion or deliver to
the Holder the number of shares of Common  Stock that would have been issued had
the  Obligor  timely  complied  with its  delivery  requirements  under  Section
3(a)(i)(A).  For example,  if the Holder  purchases  Common Stock having a total
purchase  price of Eleven  Thousand  Dollars  ($11,000)  to cover a Buy-In  with
respect to an  attempted  conversion  of  Debentures  with  respect to which the
market price of the  Underlying  Shares on the date of conversion was a total of
Ten Thousand  Dollars  ($10,000) under clause (A) of the  immediately  preceding
sentence,  the Obligor shall be required to pay the Holder One Thousand  Dollars
($1,000).  The Holder shall provide the Obligor  written  notice  indicating the
amounts payable to the Holder in respect of the Buy-In.

      (c) (i) The  conversion  price (the  "Conversion  Price") in effect on any
Conversion Date shall be equal to $0.1125, which may be adjusted pursuant to the
other terms of this Debenture.

            (ii)  If  the  Obligor,   at  any  time  while  this   Debenture  is
outstanding,  shall (a) pay a stock dividend or otherwise make a distribution or
distributions  on  shares  of its  Common  Stock or any  other  equity or equity
equivalent   securities  payable  in  shares  of  Common  Stock,  (b)  subdivide
outstanding  shares of Common Stock into a larger number of shares,  (c) combine
(including  by way of reverse  stock split)  outstanding  shares of Common Stock
into a smaller number of shares, or (d) issue by  reclassification  of shares of
the Common Stock any shares of capital stock of the Obligor, then the Conversion
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  outstanding after such event. Any adjustment 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, combination or re-classification.

            (iii) Except for shares of capital stock or  securities  convertible
into or exercisable  for shares of capital stock issued pursuant to a commitment
dated prior to the date hereof, if the Obligor, at any time while this Debenture
is outstanding, shall issue rights, options or warrants to all holders of Common
Stock (and not to the Holder) entitling them to subscribe for or purchase shares
of  Common  Stock at a price per share  less than the  Closing  Bid Price at the
record date mentioned below,  then the Conversion Price shall be multiplied by a
fraction,  of which the denominator  shall be the number of shares of the Common
Stock (excluding treasury shares, if any) outstanding on the date of issuance of
such rights or warrants  (plus the number of  additional  shares of Common Stock
offered for  subscription or purchase),  and of which the numerator shall be the
number  of  shares of the  Common  Stock  (excluding  treasury  shares,  if any)

                                       7
<PAGE>

outstanding on the date of issuance of such rights or warrants,  plus the number
of shares which the  aggregate  offering  price of the total number of shares so
offered would purchase at such Closing Bid Price.  Such adjustment shall be made
whenever  such  rights  or  warrants  are  issued,  and shall  become  effective
immediately after the record date for the determination of stockholders entitled
to receive such rights, options or warrants. However, upon the expiration of any
such  right,  option or  warrant  to  purchase  shares of the  Common  Stock the
issuance of which resulted in an adjustment in the Conversion  Price pursuant to
this  Section,  if any such right,  option or warrant shall expire and shall not
have been exercised, the Conversion Price shall immediately upon such expiration
be recomputed and effective immediately upon such expiration be increased to the
price  which it would have been (but  reflecting  any other  adjustments  in the
Conversion  Price made  pursuant to the  provisions  of this  Section  after the
issuance of such rights or warrants) had the adjustment of the Conversion  Price
made upon the  issuance of such  rights,  options or  warrants  been made on the
basis of offering for subscription or purchase only that number of shares of the
Common Stock  actually  purchased  upon the exercise of such rights,  options or
warrants actually exercised.

            (iv) Except for shares of capital  stock or  securities  convertible
into or exercisable  for shares of capital stock issued pursuant to a commitment
dated prior to the date hereof,  if the Obligor or any  subsidiary  thereof,  as
applicable,  with respect to Common Stock Equivalents (as defined below), at any
time while this Debenture is outstanding,  shall issue shares of Common Stock or
rights, warrants,  options or other securities or debt that are convertible into
or  exchangeable  for  shares  of  Common  Stock  ("Common  Stock  Equivalents")
entitling  any Person to acquire  shares of Common  Stock,  at a price per share
less than the  Conversion  Price (if the  holder of the  Common  Stock or Common
Stock  Equivalent so issued shall at any time,  whether by operation of purchase
price adjustments, reset provisions,  floating conversion,  exercise or exchange
prices or  otherwise,  or due to warrants,  options or rights per share which is
issued in connection with such issuance, be entitled to receive shares of Common
Stock at a price  per  share  which  is less  than the  Conversion  Price,  such
issuance shall be deemed to have occurred for less than the  Conversion  Price),
then, at the sole option of the Holder,  the Conversion  Price shall be adjusted
to mirror the  conversion,  exchange or purchase  price for such Common Stock or
Common Stock Equivalents (including any reset provisions thereof) at issue. Such
adjustment shall be made whenever such Common Stock or Common Stock  Equivalents
are issued.  The Obligor shall notify the Holder in writing,  no later than five
(5)  business  days  following  the issuance of any Common Stock or Common Stock
Equivalent subject to this Section,  indicating therein the applicable  issuance
price, or of applicable reset price, exchange price,  conversion price and other
pricing  terms.  No  adjustment  under this Section shall be made as a result of
issuances and exercises of options to purchase shares of Common Stock issued for
compensatory  purposes  pursuant to any of the  Obligor's  stock option or stock
purchase plans.

            (v) If the Obligor, at any time while this Debenture is outstanding,
shall  distribute  to all  holders  of  Common  Stock  (and  not to the  Holder)
evidences of its  indebtedness  or assets or rights or warrants to subscribe for
or purchase any security,  then in each such case the Conversion  Price at which
this  Debenture  shall   thereafter  be  convertible   shall  be  determined  by
multiplying the Conversion 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 Closing Bid Price determined as
of the record date  mentioned  above,  and of which the numerator  shall be such
Closing Bid Price on such  record  date less the then fair market  value at such

                                       8
<PAGE>

record  date of the  portion  of such  assets or  evidence  of  indebtedness  so
distributed  applicable  to  one  outstanding  share  of  the  Common  Stock  as
determined  by the  Board  of  Directors  in good  faith.  In  either  case  the
adjustments  shall be  described  in a  statement  provided to the Holder of the
portion  of  assets  or  evidences  of   indebtedness  so  distributed  or  such
subscription  rights  applicable to one share of Common Stock.  Such  adjustment
shall be made whenever any such  distribution is made and shall become effective
immediately after the record date mentioned above.

            (vi) In case of any  reclassification  of the  Common  Stock  or any
compulsory  share exchange  pursuant to which the Common Stock is converted into
other securities,  cash or property,  the Holder shall have the right thereafter
to, at its option, (A) convert the then outstanding  principal amount,  together
with all accrued but unpaid  interest and any other amounts then owing hereunder
in respect of this Debenture into the shares of stock and other securities, cash
and property receivable upon or deemed to be held by holders of the Common Stock
following  such  reclassification  or share  exchange,  and the  Holder  of this
Debenture  shall  be  entitled  upon  such  event  to  receive  such  amount  of
securities,  cash or property  as the shares of the Common  Stock of the Obligor
into which the then outstanding principal amount,  together with all accrued but
unpaid  interest and any other  amounts then owing  hereunder in respect of this
Debenture could have been converted  immediately prior to such  reclassification
or share exchange would have been entitled, or (B) require the Obligor to prepay
the outstanding principal amount of this Debenture,  plus all interest and other
amounts due and payable  thereon.  The entire  prepayment price shall be paid in
cash. This provision shall  similarly apply to successive  reclassifications  or
share exchanges.

            (vii) All  calculations  under this Section 3 shall be rounded up to
the nearest $0.001 of a share.

            (viii)  Whenever the  Conversion  is adjusted  pursuant to Section 3
hereof, the Obligor shall promptly mail to the Holder a notice setting forth the
Conversion  Price after such  adjustment and setting forth a brief  statement of
the facts requiring such adjustment.

            (ix) If (A) the  Obligor  shall  declare  a  dividend  (or any other
distribution)  on the Common  Stock;  (B) the  Obligor  shall  declare a special
nonrecurring  cash  dividend on or a  redemption  of the Common  Stock;  (C) the
Obligor  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;  (D) the  approval of any  stockholders  of the Obligor
shall be required in connection with any  reclassification  of the Common Stock,
any  consolidation  or  merger  to which  the  Obligor  is a party,  any sale or
transfer  of all or  substantially  all of the  assets  of the  Obligor,  of any
compulsory  share  exchange  whereby the Common  Stock is  converted  into other
securities,  cash or property;  or (E) the Obligor shall authorize the voluntary
or  involuntary  dissolution,  liquidation  or winding up of the  affairs of the
Obligor;  then, in each case, the Obligor shall cause to be filed at each office
or agency maintained for the purpose of conversion of this Debenture,  and shall
cause to be mailed to the Holder at its last address as it shall appear upon the
stock  books of the  Obligor,  at  least  ten (10)  calendar  days  prior to the
applicable record or effective date hereinafter  specified, a notice stating (x)

                                       9
<PAGE>

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 the 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 the Common Stock
of record  shall be entitled to exchange  their  shares of the Common  Stock for
securities,  cash or other  property  deliverable  upon  such  reclassification,
consolidation,  merger,  sale,  transfer or share exchange,  provided,  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.  The Holder is entitled to convert  this  Debenture  during the
10-day calendar period  commencing the date of such notice to the effective date
of the event triggering such notice.

            (x) In case of any (1) merger or consolidation of the Obligor or any
subsidiary  of the  Obligor  with or into  another  Person,  or (2)  sale by the
Obligor or any  subsidiary of the Obligor of more than one-half of the assets of
the Obligor in one or a series of related transactions,  a Holder shall have the
right to (A) exercise any rights under Section  2(b),  (B) convert the aggregate
amount of this  Debenture  then  outstanding  into the shares of stock and other
securities, cash and property receivable upon or deemed to be held by holders of
Common Stock following such merger, consolidation or sale, and such Holder shall
be entitled  upon such event or series of related  events to receive such amount
of  securities,  cash and property as the shares of Common Stock into which such
aggregate   principal  amount  of  this  Debenture  could  have  been  converted
immediately  prior to such  merger,  consolidation  or  sales  would  have  been
entitled, or (C) in the case of a merger or consolidation, require the surviving
entity to issue to the Holder a convertible  Debenture  with a principal  amount
equal to the  aggregate  principal  amount of this  Debenture  then held by such
Holder,  plus all accrued and unpaid  interest and other amounts owing  thereon,
which such  newly  issued  convertible  Debenture  shall  have  terms  identical
(including with respect to conversion) to the terms of this Debenture, and shall
be entitled to all of the rights and  privileges of the Holder of this Debenture
set forth  herein and the  agreements  pursuant  to which this  Debentures  were
issued. In the case of clause (C), the conversion price applicable for the newly
issued shares of convertible preferred stock or convertible  Debentures shall be
based upon the amount of securities, cash and property that each share of Common
Stock  would  receive in such  transaction  and the  Conversion  Price in effect
immediately prior to the effectiveness or closing date for such transaction. The
terms of any such merger,  sale or consolidation  shall include such terms so as
to  continue to give the Holder the right to receive  the  securities,  cash and
property set forth in this Section upon any  conversion or redemption  following
such event. This provision shall similarly apply to successive such events.

      (d) The  Obligor  covenants  that it will at all  times  reserve  and keep
available out of its authorized  and unissued  shares of Common Stock solely for
the  purpose of  issuance  upon  conversion  of this  Debenture  and  payment of
interest on this Debenture, each as herein provided, free from preemptive rights
or any other actual contingent purchase rights of persons other than the Holder,

                                       10
<PAGE>

not less than such number of shares of the Common Stock as shall (subject to any
additional  requirements  of the  Obligor as to  reservation  of such shares set
forth in this  Debenture) be issuable  (taking into account the  adjustments and
restrictions  of Sections 2(b) and 3(c)) upon the conversion of the  outstanding
principal  amount of this  Debenture  and  payment of  interest  hereunder.  The
Obligor  covenants  that all shares of Common  Stock  that shall be so  issuable
shall,  upon  issue,  be duly and  validly  authorized,  issued and fully  paid,
nonassessable  and, if the  Underlying  Shares  Registration  Statement has been
declared  effective  under the  Securities  Act,  registered  for public sale in
accordance with such Underlying Shares Registration Statement.

      (e) Upon a conversion hereunder the Obligor shall not be required to issue
stock certificates representing fractions of shares of the Common Stock, but may
if otherwise permitted,  make a cash payment in respect of any final fraction of
a share based on the Closing Bid Price at such time. If the Obligor  elects not,
or is unable,  to make such a cash  payment,  the Holder  shall be  entitled  to
receive,  in lieu of the final  fraction  of a share,  one whole share of Common
Stock.

      (f) The  issuance  of  certificates  for  shares  of the  Common  Stock on
conversion of this Debenture  shall be made without charge to the Holder thereof
for any documentary stamp or similar taxes that may be payable in respect of the
issue or delivery of such  certificate,  provided  that the Obligor shall not be
required to pay any tax that may be payable in respect of any transfer  involved
in the issuance and delivery of any such  certificate  upon conversion in a name
other than that of the Holder of such  Debenture  so  converted  and the Obligor
shall not be required to issue or deliver such certificates  unless or until the
person or persons requesting the issuance thereof shall have paid to the Obligor
the  amount of such tax or shall have  established  to the  satisfaction  of the
Obligor  that  such  tax  has  been  paid.  The  Holder  shall  pay  any and all
withholding  taxes assessed in connection with the transactions  contemplated by
this debenture.

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

If to the Company, to:   SmarTire Systems Inc.
                         Richmond Corporate Centre
                         Suite 150-13151 Vanier Place
                         Richmond, British Columbia
                         Canada V6V 2J1
                         Attention: Robert Rudman - President
                         Telephone: (604) 276-9884
                         Facsimile: (604) 276-2353

                                       11
<PAGE>

With a copy to:          Greenberg Traurig, LLP
                         200 Park Avenue
                         New York, NY  10166
                         Attention: Spencer G. Feldman, Esq.
                         Telephone: (212) 801-9200
                         Facsimile: (212) 801-6400

If to the Holder:        Cornell Capital Partners, LP
                         101 Hudson Street - Suite 3700
                         Jersey City, NJ 07030
                         Attention: Mark Angelo
                         Telephone: (212) 985-8300
                         Facsimile: (212) 985-8266

With a copy to:          David Gonzalez, Esq.
                         101 Hudson Street - Suite 3700
                         Jersey City, NJ 07030
                         Telephone: (201) 985-8300
                         Facsimile: (201) 985-8744

or at such other address and/or facsimile number and/or to the attention of such
other person as the  recipient  party has  specified by written  notice given to
each other  party three (3)  business  days prior to the  effectiveness  of such
change.  Written  confirmation  of receipt  (i) given by the  recipient  of such
notice,   consent,   waiver  or  other   communication,   (ii)  mechanically  or
electronically  generated by the sender's facsimile machine containing the time,
date,  recipient  facsimile  number  and an  image  of the  first  page  of such
transmission  or (iii) provided by a nationally  recognized  overnight  delivery
service, shall be rebuttable evidence of personal service,  receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.

      Section 4. Definitions. For the purposes hereof, the following terms shall
have the following meanings:

      "Business  Day"  means any day except  Saturday,  Sunday and any day which
shall be a federal  legal holiday in the United States or a day on which banking
institutions  are  authorized or required by law or other  government  action to
close.

      "Change of Control Transaction" means the occurrence of (a) an acquisition
after the date hereof by an  individual or legal entity or "group" (as described
in Rule  13d-5(b)(1)  promulgated  under the Exchange Act) of effective  control
(whether through legal or beneficial  ownership of capital stock of the Obligor,
by  contract or  otherwise)  of in excess of fifty  percent  (50%) of the voting
securities of the Obligor (except that the  acquisition of voting  securities by
the Holder  shall not  constitute a Change of Control  Transaction  for purposes
hereof), (b) a replacement at one time or over time of more than one-half of the
members of the board of  directors  of the  Obligor  which is not  approved by a
majority of those  individuals  who are members of the board of directors on the

                                       12
<PAGE>

date hereof (or by those  individuals who are serving as members of the board of
directors on any date whose nomination to the board of directors was approved by
a majority of the members of the board of directors  who are members on the date
hereof), (c) the merger, consolidation or sale of fifty percent (50%) or more of
the assets of the Obligor or any subsidiary of the Obligor in one or a series of
related  transactions  with or into another entity,  or (d) the execution by the
Obligor of an agreement to which the Obligor is a party or by which it is bound,
providing for any of the events set forth above in (a), (b) or (c).

      "Commission" means the Securities and Exchange Commission.

      "Common  Stock" means the common stock,  no par value,  of the Obligor and
stock of any other  class into which  shares of Common  Stock may  hereafter  be
changed or reclassified.

      "Exchange Act" means the Securities Exchange Act of 1934, as amended.

      "Original  Issue Date"  shall mean the date of the first  issuance of this
Debenture  regardless of the number of transfers and regardless of the number of
instruments, which may be issued to evidence such Debenture.

      "Closing Bid Price" means the price per share in the last  reported  trade
of the  Common  Stock on the OTC or on the  Subsequent  Market  which the Common
Stock is then listed as quoted by Bloomberg, LP.

      "Person" means a corporation, an association, a partnership, organization,
a business,  an individual,  a government or political  subdivision thereof or a
governmental agency.

      "Securities  Act" means the  Securities  Act of 1933, as amended,  and the
rules and regulations promulgated thereunder.

      "Trading  Day" means a day on which the shares of Common  Stock are quoted
on the OTC or quoted or traded on such Subsequent  Market on which the shares of
Common  Stock are then  quoted or listed;  provided,  that in the event that the
shares of Common  Stock are not listed or quoted,  then Trading Day shall mean a
Business Day.

      "Transaction  Documents"  means the Securities  Purchase  Agreement or any
other agreement  delivered in connection with the Securities Purchase Agreement,
including, without limitation the Investor Registration Rights Agreement.

      "Underlying  Shares"  means  the  shares  of Common  Stock  issuable  upon
conversion of this  Debenture or as payment of interest in  accordance  with the
terms hereof.

      "Underlying Shares Registration  Statement" means a registration statement
meeting  the  requirements  set  forth  in the  Registration  Rights  Agreement,
covering among other things the resale of the  Underlying  Shares and naming the
Holder as a "selling stockholder" thereunder.

      Section 5. Except as  expressly  provided  herein,  no  provision  of this
Debenture  shall  alter or impair  the  obligations  of the  Obligor,  which are
absolute and unconditional,  to pay the principal of, interest and other charges
(if any) on, this  Debenture at the time,  place,  and rate,  and in the coin or
currency,  herein  prescribed.  This  Debenture  is a direct  obligation  of the

                                       13
<PAGE>

Obligor.  This  Debenture  ranks  pari passu  with all other  Debentures  now or
hereafter issued under the terms set forth herein.  As long as this Debenture is
outstanding,  the Obligor shall not and shall cause their  subsidiaries  not to,
without the consent of the Holder,  (i) amend its certificate of  incorporation,
bylaws or other  charter  documents so as to adversely  affect any rights of the
Holder;  (ii)  repay,  repurchase  or offer to repay,  repurchase  or  otherwise
acquire shares of its Common Stock or other equity  securities  other than as to
the Underlying  Shares to the extent permitted or required under the Transaction
Documents;  or  (iii)  enter  into  any  agreement  with  respect  to any of the
foregoing.

      Section  6. This  Debenture  shall not  entitle  the  Holder to any of the
rights of a stockholder of the Obligor,  including without limitation, the right
to vote, to receive dividends and other distributions,  or to receive any notice
of, or to attend,  meetings  of  stockholders  or any other  proceedings  of the
Obligor,  unless  and to the extent  converted  into  shares of Common  Stock in
accordance with the terms hereof.

      Section 7. If this Debenture is mutilated,  lost, stolen or destroyed, the
Obligor shall  execute and deliver,  in exchange and  substitution  for and upon
cancellation of the mutilated Debenture,  or in lieu of or in substitution for a
lost, stolen or destroyed Debenture, a new Debenture for the principal amount of
this Debenture so mutilated,  lost, stolen or destroyed but only upon receipt of
evidence  of such  loss,  theft or  destruction  of such  Debenture,  and of the
ownership hereof, and indemnity,  if requested,  all reasonably  satisfactory to
the Obligor.

      Section 8. No  indebtedness  of the Obligor is senior to this Debenture in
right of payment, whether with respect to interest,  damages or upon liquidation
or dissolution or otherwise.  Without the Holder's consent, the Obligor will not
and will not permit any of their subsidiaries to, directly or indirectly,  enter
into, create,  incur, assume or suffer to exist any indebtedness of any kind, on
or with respect to any of its property or assets now owned or hereafter acquired
or any  interest  therein or any income or profits  there from that is senior in
any respect to the obligations of the Obligor under this Debenture.

      Section 9. This Debenture shall be governed by and construed in accordance
with the laws of the State of New Jersey,  without giving effect to conflicts of
laws thereof.  Each of the parties  consents to the jurisdiction of the Superior
Courts of the State of New Jersey sitting in Hudson  County,  New Jersey and the
U.S. District Court for the District of New Jersey sitting in Newark, New Jersey
in connection  with any dispute  arising under this Debenture and hereby waives,
to the maximum extent  permitted by law, any objection,  including any objection
based on forum non  conveniens  to the bringing of any such  proceeding  in such
jurisdictions.

      Section 10. If the Obligor fails to strictly comply with the terms of this
Debenture,  then the Obligor shall  reimburse the Holder  promptly for all fees,
costs and expenses, including, without limitation,  attorneys' fees and expenses
incurred  by the  Holder  in any  action  in  connection  with  this  Debenture,
including, without limitation, those incurred: (i) during any workout, attempted
workout,  and/or in  connection  with the  rendering  of legal  advice as to the
Holder's rights, remedies and obligations, (ii) collecting any sums which become
due  to the  Holder,  (iii)  defending  or  prosecuting  any  proceeding  or any
counterclaim to any proceeding or appeal;  or (iv) the protection,  preservation
or enforcement of any rights or remedies of the Holder.

                                       14
<PAGE>

      Section 11. Any waiver by the Holder of a breach of any  provision of this
Debenture  shall  not  operate  as or be  construed  to be a waiver of any other
breach  of such  provision  or of any  breach  of any  other  provision  of this
Debenture. The failure of the Holder to insist upon strict adherence to any term
of this Debenture on one or more  occasions  shall not be considered a waiver or
deprive that party of the right  thereafter  to insist upon strict  adherence to
that term or any other term of this Debenture. Any waiver must be in writing.

      Section 12. If any  provision  of this  Debenture  is invalid,  illegal or
unenforceable,  the balance of this Debenture shall remain in effect, and if any
provision is inapplicable to any person or circumstance,  it shall  nevertheless
remain applicable to all other persons and  circumstances.  If it shall be found
that any interest or other amount deemed  interest due  hereunder  shall violate
applicable laws governing  usury,  the applicable rate of interest due hereunder
shall  automatically be lowered to equal the maximum permitted rate of interest.
The Obligor  covenants  (to the extent that it may lawfully do so) that it shall
not at any time insist upon,  plead, or in any manner  whatsoever  claim or take
the benefit or advantage of, any stay, extension or usury law or other law which
would  prohibit  or forgive  the  Obligor  from paying all or any portion of the
principal of or interest on this  Debenture  as  contemplated  herein,  wherever
enacted,  now or at any time  hereafter  in  force,  or  which  may  affect  the
covenants or the performance of this  indenture,  and the Obligor (to the extent
it may lawfully do so) hereby  expressly waives all benefits or advantage of any
such law,  and  covenants  that it will not, by resort to any such law,  hinder,
delay or impeded the  execution of any power herein  granted to the Holder,  but
will  suffer and permit  the  execution  of every such as though no such law has
been enacted.

      Section 13.  Whenever any payment or other  obligation  hereunder shall be
due on a day other than a Business  Day,  such payment shall be made on the next
succeeding Business Day.

      Section 14. THE PARTIES HEREBY  KNOWINGLY,  VOLUNTARILY AND  INTENTIONALLY
WAIVE  THE  RIGHT  ANY OF THEM  MAY HAVE TO A TRIAL  BY JURY IN  RESPECT  OF ANY
LITIGATION  BASED  HEREON OR ARISING OUT OF,  UNDER OR IN  CONNECTION  WITH THIS
AGREEMENT  OR ANY  TRANSACTION  DOCUMENT  OR ANY  COURSE OF  CONDUCT,  COURSE OF
DEALING,  STATEMENTS  (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY.  THIS
PROVISION  IS  A  MATERIAL  INDUCEMENT  FOR  THE  PARTIES'  ACCEPTANCE  OF  THIS
AGREEMENT.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       15
<PAGE>

      IN WITNESS WHEREOF,  the Obligor has caused this Convertible  Debenture to
be duly executed by a duly authorized officer as of the date set forth above.

                                        SMARTIRE SYSTEMS INC.

                                        By:    /s/ Jeff Finkelstein
                                               ---------------------------------
                                        Name:  Jeff Finkelstein
                                        Title: Chief Financial Officer

                                       16
<PAGE>

                                   EXHIBIT "A"

                              NOTICE OF CONVERSION

        (To be executed by the Holder in order to Convert the Debenture)

TO:

      The undersigned hereby irrevocably elects to convert $____________________
of the principal  amount of the above  Debenture  into Shares of Common Stock of
SmarTire  Systems Inc.,  according to the conditions  stated therein,  as of the
Conversion Date written below.

Conversion Date:                   _____________________________________________

Applicable Conversion Price:       _____________________________________________

Signature:                         _____________________________________________

Name:                              _____________________________________________

Address:                           _____________________________________________

Amount to be converted:            $____________________________________________

Amount of Debenture unconverted:   $____________________________________________

Conversion Price per share:        $____________________________________________

Number of shares of Common Stock
to be issued:                      _____________________________________________

Amount of Interest Converted:      $____________________________________________

Conversion Price per share:        $____________________________________________

Number of shares of Common Stock
to be issued:                      _____________________________________________

Please issue the shares of Common
Stock in the following name and
to the following address:          _____________________________________________

Issue to:                          _____________________________________________

Authorized Signature:              _____________________________________________

Name:                              _____________________________________________

Title:                             _____________________________________________

Phone Number:                      _____________________________________________

Broker DTC Participant Code:       _____________________________________________

Account Number:                    _____________________________________________

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