Document:

AGREEMENT AND PLAN OF REORGANIZATION

12/8/2006

EGDI - MCM Agreement.DOC

AGREEMENT AND PLAN OF REORGANIZATION

AGREEMENT AND PLAN OF REORGANIZATION dated as of December 8, 2006 (this "Agreement") among ELGRANDE INTERNATIONAL, INC., a Nevada corporation ("EGDI") and MCM INTEGRATED TECHNOLOGIES, LTD., a British Columbia corporation (the "Company"), and the sole stockholder of the Company, Murat Erbatur  (the "Stockholder").

W I T N E S S E T H:

WHEREAS, upon the terms and subject to the conditions of this Agreement, the Stockholder will exchange 100 shares of common stock of the Company, constituting 100% of the issued and outstanding shares of the Company's common stock, for consideration as follows (the “Exchange”):

1.

at the Effective Time (as defined below in Section 1.02), EGDI will assume servicing the Company’s accounts payable and working capital requirements,

2.

Within 9 months of the Effective Time (or such later time as may be agreed in writing by each of the parties hereto), EGDI will assume the accounts payable loan guarantees currently provided by the Stockholder and in the amount as per the November 30, 2006 audited balance sheet of the Company.

3.

EGDI will issue the Stockholder 10,000,000 shares of EGDI’s common stock, par value $0.001 per share restricted under Rule 144 and a promissory note payable to the Stockholder in the amount of $Cdn 150,000 due 4 months following the Effective Time (or such later time as may be agreed in writing by each of the parties hereto).

As security for the indebtedness represented by the Note delivered by EGDI at the Closing under this Agreement, upon the delivery of the Note to the Stockholder, Stockholder shall deposit the stock certificate for the 100 shares of the Company and EGDI will deposit the stock certificate for 10,000,000 shares. with a Trustee to be agreed upon by the parties, to be held in Trust by the Trustee until (i) full payment of the principal amount of the Note and (ii) full payment to Stockholder of the principal amount of Seller's loan to the Company. In the event that EGDI fails to meet the dates specified in items 2 and 3 above (or such other dates as may be agreed in writing by each of the parties hereto), the shares of the Company will revert to the Stockholder, the shares of EGDI will revert to EGDI and all payments due under this Agreement will become null.

As a result of the Exchange EGDI will thus acquire 100% of the issued and outstanding securities of the Company, making EGDI the sole stockholder of the Company.

WHEREAS, for federal income tax purposes, the Exchange is intended to qualify as a reorganization under the provisions of section 368(a)(1)(B) of the United States Internal Revenue Code of 1986, as amended (the "Code"); and.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, EGDI, the Company and Stockholder hereby agree as follows:

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ARTICLE I:  THE EXCHANGE.

SECTION 1.01. The Exchange. Upon the terms and subject to the conditions set forth in Article VII, at the Effective Time (as defined below in Section 1.02), as a result of the Exchange, EGDI will become the sole shareholder of the Company.

SECTION 1.02. Effective Time; Closing. As promptly as practicable and in no event later than the fifth business day following the satisfaction or, if permissible, waiver of the conditions set forth in Article VII (or such other date as may be agreed in writing by each of the parties hereto), the parties hereto shall cause the Exchange to be consummated by Stockholder delivering to the Trustee, or its representatives, the certificates representing 100% of the outstanding Company Securities (as defined below in Section 2.01 (c)), duly endorsed (or with duly executed stock powers) so as to make EGDI the sole owner thereof free and clear of all claims and encumbrances except as specifically assumed by EGDI. The term "Effective Time" means the date and time of the Closing (or such later time as may be agreed in writing by each of the parties hereto) to be held at the offices of EGDI, Vancouver, British Columbia, Canada (or such other place as the parties may agree).

SECTION 1.03. Effect of the Exchange. At the Effective Time, the effect of the Exchange shall be that EGDI will become the 100% controlling shareholder of the Company.

ARTICLE II:  DELIVERY OF SECURITIES; EXCHANGE OF CERTIFICATES.

SECTION 2.01.  Delivery of Securities.  At the Effective Time, by virtue of the Exchange: 10,000,000 shares of common stock, at $0.001 par value , of EGDI (the "EGDI Common Stock") shall be issued in exchange for 100% of all outstanding shares of capital stock of the Company (the “Shares” or "Company Securities") issued and outstanding immediately prior to the Effective Time. Each share of Company Securities shall be converted, subject to Section 2.02(e), into the right to receive a ratable portion of 10,000 shares (the "Exchange Ratio") of EGDI Common Stock; provided, however, that, if between the date of this Agreement and the Effective Time the outstanding shares of EGDI Common Stock shall have been changed into a different number of shares or a different class, by reason of any stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares, the Exchange Ratio shall be correspondingly adjusted to the extent appropriate to reflect such stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares (all such shares of EGDI Common Stock being herein referred to as the "EGDI Securities" or the "Exchange Consideration"); and each Share held in the treasury of the Company immediately prior to the Effective Time shall be cancelled and extinguished without any conversion thereof and no payment or distribution shall be made with respect thereto.

SECTION 2.02.  Exchange of Certificates.

(a)

At the Closing, the Stockholder shall deliver to EGDI all certificates representing Company Securities (the "Certificates") delivered to it (together with any stock transfer tax stamps required by reason of the payment of the Exchange Consideration to a person other than the registered holder of the Certificate surrendered), together with such other customary documents as may reasonably be required by EGDI, in exchange for the Exchange Consideration. The certificate representing the Exchange Consideration shall be issued to the Stockholder. 

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(b)

All shares of EGDI Common Stock issued upon conversion of the Company Securities in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such Company Securities.

SECTION 2.03. Stock Transfer Books. At the Effective Time, the stock transfer books of the Company shall be closed and there shall be no further registration of transfers of Shares thereafter on the records of the Company.

From and after the Effective Time, the holders of Certificates representing Shares outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Shares, except as otherwise provided in this Agreement or by Law.

ARTICLE III:  REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

Except as set forth in this Agreement and disclosed in Exhibit A, the Company and the Stockholder hereby jointly and severally represent and warrant to EGDI that:

SECTION 3.01. Organization and Qualification; Subsidiaries. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the Province of British Columbia and has all requisite corporate power to own, lease and operate its properties and to carry on its business as it is now being conducted, except where the failure to be so organized, existing or in good standing or to have such corporate power, have not had, and could not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect (as defined below). The Company has no subsidiaries. The Company is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification or licensing necessary, except for such failures to be so qualified or licensed and in good standing that have not had, and could not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. The term "Company Material Adverse Effect" means any change in or effect on the business of the Company that is materially adverse to the financial condition or results of operations of the Company, except for any such changes or effects resulting from or arising in connection with (i) this Agreement or the transactions contemplated by this Agreement or the announcement hereof, (ii) any changes in economic, regulatory or political conditions or (iii) any issue or condition otherwise known to EGDI prior to the date of this Agreement. 

SECTION 3.02. Certificate of Incorporation and By-Laws. The Company has heretofore made available to EGDI a complete and correct copy of the Certificate of Incorporation and the By-Laws of the Company. Such Certificate of Incorporation and By-Laws are in full force and effect. The Company is not in violation of any of the provisions of its Certificate of Incorporation or By-Laws.

SECTION 3.03. Capitalization. Except as indicated on Exhibit A, (i) all Company Securities will be issued and outstanding and will be validly issued, fully paid and non-assessable and (ii) there are no outstanding options or warrants to purchase Company Securities no shares are reserved for future issuance pursuant to any such options or warrants. All shares of Company 

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Securities subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and non-assessable. There are no outstanding contractual obligations of the Company to repurchase, redeem or otherwise acquire any shares of Company Securities. There are no material outstanding contractual obligations of the Company to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any other person.

SECTION 3.04. Authority Relative to This Agreement. The Company has all necessary corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the Exchange and the other transactions contemplated by this Agreement. The execution and delivery of this Agreement by the Company and the consummation by the Company of the Exchange and the other transactions contemplated by this Agreement have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the Exchange and the other transactions contemplated by this Agreement. This Agreement has been duly and validly executed and delivered by the Company and, assuming the due authorization, execution and delivery by EGDI, constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms.

SECTION 3.05. No Conflict; Required Filings and Consents.

(a)

Except as described on Exhibit A, the execution and delivery of this Agreement by the Company does not, and the performance of this Agreement by the Company will not, (i) conflict with or violate the Certificate of Incorporation or By-laws of the Company, (ii) assuming that all consents, approvals, authorizations and other actions described in Section 3.05(b) have been obtained and all filings and obligations described in Section 3.05(b) have been made, to the best knowledge of the Company after inquiry, conflict with or violate any foreign or domestic law, statute, ordinance, rule, regulation, order, judgment or decree ("Law") applicable to the Company or by which any property or asset of the Company is bound or affected, or (iii) result in any breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any right of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or other encumbrance on any property or asset of the Company pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation, except, with respect to clause (iii), for any such conflicts, violations, breaches, defaults or other occurrences that have not had, and could not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect, and that could not reasonably be expected to prevent or materially delay the consummation of the transactions contemplated by this Agreement.

(b)

Except as described on Exhibit A, the execution and delivery of this Agreement by the Company does not, and the performance of this Agreement by the Company will not, require any consent, approval, authorization or permit of, or filing with or notification to, any domestic or foreign governmental or regulatory authority ("Governmental Entity"), except (i) for applicable requirements, if any, of provincial securities or "blue sky" laws ("Blue Sky Laws"), provincial takeover laws, the filing and recordation of appropriate Exchange documents as required under the laws of its jurisdiction of organization and (ii) where failure to obtain such consents, approvals, authorizations or permits, or to make 

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such filings or notifications, has not had, and could not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect, and could not reasonably be expected to prevent or materially delay the consummation of the transactions contemplated by this Agreement.

SECTION 3.06. Absence of Certain Changes or Events. Since the date of its organization, except as contemplated by or as disclosed in this Agreement, the Company has conducted its business only in the ordinary course and in a manner consistent with past practice and, since such date, there has not been (a) any material change by the Company in its accounting methods, principles or practices, (b) any declaration, setting aside or payment of any dividend or distribution in respect of the Common Stock or any redemption, purchase or other acquisition of any of the Company's securities or (c) any increase in or establishment of any bonus, insurance, severance, deferred compensation, pension, retirement, profit sharing, stock option (including, without limitation, the granting of stock options, stock appreciation rights, performance awards or restricted stock awards), stock purchase or other employee benefit plan, or any other increase in the compensation payable or to become payable to any executive officers of the Company, except in the ordinary course of business.

SECTION 3.07. Absence of Litigation. Except as set forth on Exhibit A, as of the date of this Agreement, there is no litigation, suit, claim, action, proceeding or investigation pending or, to the knowledge of the Company, threatened against the Company, or any property or asset of the Company, before any court, arbitrator or governmental entity, domestic or foreign, which (i) has had, or could reasonably be expected to have, individually or in the aggregate, a material adverse effect on the Company or (ii) seeks to delay or prevent the consummation of any other material transaction contemplated by this Agreement.

As of the date of this Agreement, neither the Company nor any property or asset of the Company is subject to any continuing order of, consent decree, settlement agreement or other similar written agreement with, or, to the knowledge of the Company, continuing investigation by, any governmental entity, or any order, writ, judgment, injunction, decree, determination or award of any governmental entity or arbitrator having, individually or in the aggregate, a material adverse effect on the Company.

SECTION 3.08. Contracts. 

(a)

The Company has furnished to EGDI the following written contracts and agreements of the Company (such contracts and agreements being "Material Contracts"):  (i) each contract and agreement for the purchase or lease of personal property with any supplier or for the furnishing of services to the Company that in each case involves annual payment in excess of US$5,000;  (ii) all broker, exclusive dealing or exclusivity, distributor, dealer, manufacturer's representative, franchise, agency, sales promotion and market research agreements involving annual payments in excess of US$5,000, to which the Company is a party or any other material contract that compensates any person other than employees based on any sales by the Company;  (iii) all leases and subleases of real property;  (iv) all contracts and agreements relating to indebtedness for borrowed money other than trade indebtedness of the Company;  (v) all contracts and agreements involving annual payments in excess of $1,000 with any Governmental Entity to which 

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the Company is a party; and  (vi) any other material agreement of the Company which is terminable upon or prohibits a change of ownership or control of the Company.

(b)

Each Material Contract: (i) is valid and binding on the Company and, to the knowledge of the Company, on the other parties thereto, and is in full force and effect, and (ii) upon consummation of the transactions contemplated by this Agreement, shall continue in full force and effect without material penalty or other material adverse consequence. The Company is not in material breach of, or material default under, any Material Contract and, to the knowledge of the Company, no other party to any Material Contract is in material breach thereof or material default thereunder.

SECTION 3.9. Taxes. Except as for such matters that could not reasonably be expected to have a Company Material Adverse Effect, 

(a)

the Company has timely filed or will timely file all returns and reports required to be filed by it with any taxing authority with respect to Taxes for any period ending on or before the Effective Time, taking into account any extension of time to file granted to or obtained on behalf of the Company,

(b)

all Taxes shown to be payable on such returns or reports that are due prior to the Effective Time have been paid or will be paid, 

(c)

as of the date of this Agreement, no deficiency for any material amount of Tax has been asserted or assessed by a taxing authority against the Company, and 

(d)

the Company has provided adequate reserves in its financial statements for any Taxes that have not been paid in accordance with generally accepted accounting principles, whether or not shown as being due on any returns. 

As used in this Agreement, "Taxes" shall mean any and all taxes, fees, levies, duties, tariffs, imposts and other charges of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any government or taxing authority, including, without limitation: taxes or other charges on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, social security, workers' compensation, unemployment compensation or net worth; taxes or other charges in the nature of excise, withholding, ad valorem, stamp, transfer, value added or gains taxes; license, registration and documentation fees; and customers' duties, tariffs and similar charges.

SECTION 3.10. Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the Exchange or the other transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company.

SECTION 3.11. Financial Statements. The financial statements of the Company from October 2002 through September 2005 and the audited financial statements for October 2005 through September, 2006 (to be attached hereto as Exhibit C when the audited statements are available), have been prepared in accordance with Canadian generally accepted accounting principles consistently applied. Since the date of the last of the Financial Statements there have been no expenditures or purchases except in the ordinary course of business; and there have been no claims made against the Company, its principals or its assets. 

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SECTION 3.12. Business. The Company is a reseller of computer hardware, software, custom IT solutions and designs, supplies, installs home automation solutions (the “Business”) and has title free and clear of all liens, charges and liabilities to all assets used in the Business and has no liabilities other than those stated in the Financial Statements and those incurred in the ordinary course of business since the date of the last of the Financial Statements. 

ARTICLE IV:  REPRESENTATIONS AND WARRANTIES OF EGDI

Except as set forth in this Agreement and disclosed in Exhibit B, EGDI hereby represents and warrants to the Company that:  

SECTION 4.01. Organization and Qualification; Subsidiaries. EGDI is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Nevada and has all corporate requisite power and authority and all necessary governmental approvals to own, lease and operate its properties and to carry on its business as it is now being conducted, except where the failure to be so organized, existing or in good standing or to have such corporate power, authority and governmental approvals have not had, and could not reasonably be expected to have, individually or in the aggregate, a EGDI Material Adverse Effect (as defined below).  EGDI is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification or licensing necessary, except for such failures to be so qualified or licensed and in good standing that have not had, and could not reasonably be expected to have, individually or in the aggregate, a EGDI Material Adverse Effect. The term "EGDI Material Adverse Effect" means any change in or effect on the business of EGDI that is materially adverse to the financial condition or results of operations of EGDI, except for any such changes or effects resulting from or in connection with (i) this Agreement or the transactions contemplated by this Agreement or the announcement hereof, (ii) any changes in economic, regulatory or political conditions or (iii) any issue or condition otherwise known to the Company prior to the date of this Agreement.

SECTION 4.02. Certificate of Incorporation and By-Laws. EGDI has heretofore made available to the Company a complete and correct copy of the Certificate of Incorporation and the By-Laws of EGDI.

Such Certificate of Incorporation and By-Laws are in full force and effect.

EGDI is not violation of any of the provisions of its Certificate of Incorporation or By-Laws.

SECTION 4.03. Capitalization. The authorized capital stock of EGDI consists of (a) 500,000,000 shares of EGDI Common Stock, at par value $0.001, and (b) no shares of preferred stock. All shares of EGDI Common Stock subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and non-assessable. 

The shares of EGDI Common Stock to be issued pursuant to the Exchange in accordance with Section 2.01 (i) will be duly authorized, validly issued, fully paid and non-assessable and not 

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subject to preemptive rights created by statute, the EGDI' Certificate of Incorporation or By-Laws or any agreement to which the EGDI is a party or is bound and (ii) will, when issued, be exempt from registration under the Securities Act of 1933, as amended (together with the rules and regulations promulgated thereunder, the "Securities Act") and the Securities Exchange Act of 1934, as amended (together with the rules and regulations promulgated thereunder, the "Exchange Act") and exempt from registration under applicable Blue Sky Laws provided that the representations of the Stockholder as set out in this Agreement are accurate. The shares of EGDI Common Stock to be issued pursuant to the Exchange in accordance with Section 2.01 will bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the certificates for such EGDI Securities):  "The Securities represented by this certificate have not been registered under the Securities Act of 1933, as amended. The Securities may not be sold, transferred or assigned in the absence of an effective registration statement for the Securities under said Act, or an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, that registration is not required under said Act."  

SECTION 4.04. Authority Relative to This Agreement. EGDI has all necessary corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the Exchange and the other transactions contemplated by this Agreement, subject to the rules promulgated under the Exchange Act. The execution and delivery of this Agreement by EGDI and the consummation by EGDI of the Exchange and the other transactions contemplated by this Agreement have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of EGDI are necessary to authorize this Agreement or to consummate the Exchange and the other transactions contemplated by this Agreement. This Agreement has been duly and validly executed and delivered by EGDI and, assuming the due authorization, execution and delivery by the Company, constitutes a legal, valid and binding obligation of EGDI, enforceable against EGDI in accordance with its terms.

SECTION 4.05. No Conflict; Required Filings and Consents. 

(a)

The execution and delivery of this Agreement by EGDI does not, and the performance of this Agreement by EGDI will not,

(i)

conflict with or violate the Certificate of Incorporation or By-laws of EGDI, 

(ii)

assuming that all consents, approvals, authorizations and other actions described in Section 4.05(b) have been obtained and all filings and obligations described in Section 4.05(b) have been made, conflict with or violate any Law applicable to EGDI or by which any property or asset of EGDI is bound or affected, or 

(iii)

result in any breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any right of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or other encumbrance on any property or asset of EGDI pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation, except, with respect to clause (iii), for any such conflicts, violations, breaches, defaults, or other occurrences that have not had, and could not reasonably be expected to have, individually or in the aggregate, a EGDI Material Adverse Effect, and that could not reasonably be expected to prevent or materially delay the consummation of the transactions contemplated by this Agreement.

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(b)

The execution and delivery of this Agreement by EGDI does not, and the performance of this Agreement by EGDI will not, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity, except (i) for applicable requirements, if any, of the Exchange Act, Blue Sky Laws, the Securities Act, the OTC, state takeover laws, the filing and recordation of appropriate Exchange documents as required under the laws of its jurisdiction of organization and (ii) where failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, has not had, and could not reasonably be expected to have, individually or in the aggregate, a EGDI Material Adverse Effect, and could not reasonably be expected to prevent or materially delay the consummation of the transactions contemplated by this Agreement.

SECTION 4.06. Absence of Certain Changes or Events. Except as contemplated by or as disclosed in this Agreement, EGDI has conducted its business only in the ordinary course and in a manner consistent with past practice and, since such date, there has not been 

(a)

any EGDI Material Adverse Effect, 

(b)

any material change by EGDI in its accounting methods, principles or practices, 

(c)

any declaration, setting aside or payment of any dividend or distribution in respect of the Shares or any redemption, purchase or other acquisition of any of EGDI' securities or 

(d)

any increase in or establishment of any bonus, insurance, severance, deferred compensation, pension, retirement, profit sharing, stock option (including, without limitation, the granting of stock options, stock appreciation rights, performance awards or restricted stock awards), stock purchase or other employee benefit plan, or any other increase in the compensation payable or to become payable to any executive officers of EGDI, except in the ordinary course of business consistent with past practice.

SECTION 4.07. Absence of Litigation. As of the date of this Agreement, there is no litigation, suit, claim, action, proceeding or investigation pending or, to the knowledge of EGDI, threatened against EGDI, or any property or asset of EGDI, before any court, arbitrator or Governmental Entity, domestic or foreign, which (i) has had, or could reasonably be expected to have, individually or in the aggregate, a EGDI Material Adverse Effect or (ii) seeks to delay or prevent the consummation of the Exchange or any other material transaction contemplated by this Agreement.

As of the date of this Agreement, neither EGDI nor any property or asset of EGDI is subject to any continuing order of, consent decree, settlement agreement or other similar written agreement with, or, to the knowledge of EGDI, continuing investigation by, any Governmental Entity, or any order, writ, judgment, injunction, decree, determination or award of any Governmental Entity or arbitrator having, individually or in the aggregate, a EGDI Material Adverse Effect.

SECTION 4.08. Contracts. 

(a)

EGDI has furnished the Company each of the following written contracts and agreements of EGDI (such contracts and agreements being "Material Contracts"):  (i) each contract and agreement for the purchase or lease of personal property with any supplier or for the furnishing of services to EGDI;  (ii) all broker, exclusive dealing or exclusivity, distributor, dealer, manufacturer's representative, franchise, agency, sales promotion and 

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market research agreements, to which EGDI is a party or any other material contract that compensates any person other than employees based on any sales by EGDI;  (iii) all leases and subleases of real property;  (iv) all contracts and agreements relating to indebtedness for borrowed money other than trade indebtedness of EGDI;  (v) all contracts and agreements involving annual payments in excess of $10,000 with any Governmental Entity to which EGDI is a party; and  (iv) any other material agreement of EGDI which is terminable upon or prohibits a change of ownership or control of EGDI.

(b)

Each Material Contract: (i) is valid and binding on EGDI and, to the knowledge of EGDI, on the other parties thereto, and is in full force and effect, and (ii) upon consummation of the transactions contemplated by this Agreement, shall continue in full force and effect without material penalty or other material adverse consequence. EGDI is not in material breach of, or material default under, any Material Contract and, to the knowledge of EGDI, no other party to any Material Contract is in material breach thereof or material default thereunder.

SECTION 4.09. Taxes. Except for such matters that would not have a EGDI Material Adverse Effect, (a) EGDI has timely filed or will timely file all returns and reports required to be filed by it with any taxing authority with respect to Taxes for any period ending on or before the Effective Time, taking into account any extension of time to file granted to or obtained on behalf of EGDI, (b) all Taxes shown to be payable on such returns or reports that are due prior to the Effective Time have been paid or will be paid, (c) as of the date of this Agreement, no deficiency for any material amount of Tax has been asserted or assessed by a taxing authority against EGDI and (d) EGDI has provided adequate reserves in its financial statements for any Taxes that have not been paid in accordance with generally accepted accounting principles, whether or not shown as being due on any returns.

SECTION 4.10. Accounting and Tax Matters. To the knowledge of EGDI Resources, neither EGDI nor any of its affiliates has taken or agreed to take any action that would prevent the Exchange from constituting a transaction qualifying under Section 368(a) of the Code. EGDI is not aware of any agreement, plan or other circumstance that would prevent the Exchange from qualifying under Section 368(a) of the Code.

SECTION 4.11. Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the Exchange or the other transactions contemplated by this Agreement based upon arrangements made by or on behalf of EGDI.

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ARTICLE V:  CONDUCT OF BUSINESSES PENDING THE EXCHANGE

SECTION 5.01. Conduct of Business by the Company Pending the Exchange.  The Company agrees that, between the date of this Agreement and the Effective Time, except as contemplated by any other provision of this Agreement, unless EGDI shall otherwise consent in writing:  

(a)

the businesses of the Company shall be conducted only in, and the Company shall not take any action except in, the ordinary course of business and in a manner consistent with past practice; and

(b)

the Company shall use its reasonable best efforts to preserve substantially intact its business organization, to keep available the services of the current officers, employees and consultants of the Company and to preserve the current relationships of the Company with customers, suppliers and other persons with which the Company has significant business relations.

By way of amplification and not limitation, except as contemplated by this Agreement, the Company shall not, between the date of this Agreement and the Effective Time, directly or indirectly, do, or propose to do, any of the following without the prior written consent of EGDI:  

(a)

amend or otherwise change its Certificate of Incorporation or By-Laws or equivalent organizational documents;  

(b)

issue, sell, pledge, dispose of, grant, encumber, or authorize the issuance, sale, pledge, disposition, grant or encumbrance of, (i) any shares of its capital stock of any class, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of such capital stock, or any other ownership interest (including, without limitation, any phantom interest), of the Company or (ii) any material assets of the Company;  

(c)

declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock;  

(d)

reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock;  

(e)

(i) acquire (including, without limitation, by Exchange, consolidation, or acquisition of stock or assets) any interest in any corporation, partnership, other business organization or any division thereof or any assets, other than acquisitions of assets in the ordinary course of business consistent with past practice;  (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of any person, or make any loans or advances, except for indebtedness incurred in the ordinary course of business and consistent with past practice;  (iii) enter into any contract or agreement material to the business, results of operations or financial condition of the Company; or  (iv) enter into or amend any contract, agreement, commitment or arrangement that, if fully performed, would not be permitted under this Section 5.01(e);  

(f)

increase the compensation payable or to become payable to its employees, or enter into any employment or severance agreement with, any director or employee of the Company, or establish, adopt, enter into or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, 

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deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any director or employee; or  

(g)

take any action, other than reasonable and usual actions in the ordinary course of business and consistent with past practice, with respect to accounting policies or procedures.

SECTION 5.02. Conduct of Business by EGDI. EGDI agrees that, except as contemplated by this Agreement, EGDI shall not, between the date of this Agreement and the Effective Time, directly or indirectly, do, or propose to do, any of the following without the prior written consent of the Company:  

(a)

amend or otherwise change its Certificate of Incorporation or By-Laws or equivalent organizational documents;  

(b)

issue, sell, pledge, dispose of, grant, encumber, or authorize the issuance, sale, pledge, disposition, grant or encumbrance of, (i) any shares of its capital stock of any class, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of such capital stock, or any other ownership interest (including, without limitation, any phantom interest), of EGDI, or (ii) any material assets of EGDI;  

(c)

declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock;  

(d)

reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock;  

(e)

(i) acquire (including, without limitation, by Exchange, consolidation, or acquisition of stock or assets) any interest in any corporation, partnership, other business organization or any division thereof or any assets, other than acquisitions of assets in the ordinary course of business consistent with past practice;  (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of any person, or make any loans or advances, except for indebtedness incurred in the ordinary course of business and consistent with past practice;  (iii) enter into any contract or agreement material to the business, results of operations or financial condition of EGDI; or  (iv) enter into or amend any contract, agreement, commitment or arrangement that, if fully performed, would not be permitted under this Section 5.02(e);  

(f)

increase the compensation payable or to become payable to its officers or employees, or grant any severance or termination pay to, or enter into any employment or severance agreement with, any director, officer or other employee of EGDI, or establish, adopt, enter into or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any director, officer or employee; or  

(g)

take any action, other than reasonable and usual actions in the ordinary course of business and consistent with past practice, with respect to accounting policies or procedures.

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(h)

ARTICLE VI:  ADDITIONAL AGREEMENTS

SECTION 6.01. Filing of Form 8-K. Not later than four business days after the execution of this Agreement, EGDI will procure the prompt preparation and file with the Securities and Exchange Commission appropriate notice describing this Agreement on Form 8-K, and otherwise comply with the provisions of the Exchange Act. 

SECTION 6.02. Filing of Amended Form 8-K. Not later than seventy-five days after the Effective Time (provided the Form 8-K referred to in Section 6.01 is filed on or before December 14, 2006, and if after that date, then not later than four business days after the Effective Date), EGDI will procure the prompt preparation and file with the Securities and Exchange Commission appropriate report describing this transaction on Form 8-K and including required financial statements, and otherwise comply with the provisions of the Exchange Act. 

SECTION 6.03. Access to Information; Confidentiality. Except as required pursuant to any confidentiality agreement or similar agreement or arrangement to which EGDI or the Company is a party or pursuant to applicable Law, from the date of this Agreement to the Effective Time, EGDI and the Company shall: (i) provide to the other (and its officers, directors, employees, accountants, consultants, legal counsel, agents and other representatives, collectively, "Representatives") access at reasonable times upon prior notice to the officers, employees, agents, properties, offices and other facilities of the other and to the books and records thereof and (ii) furnish promptly such information concerning the business, properties, contracts, assets, liabilities, personnel and other aspects of the other party as the other party or its Representatives may reasonably request.

SECTION 6.04. Obligations of EGDI.   EGDI shall take all action necessary to cause the EGDI to perform its obligations under this Agreement and to consummate the Exchange on the terms and subject to the conditions set forth in this Agreement.

SECTION 6.05. Obligations of the Company. The Company shall take all action necessary to cause the Company to perform its obligations under this Agreement and to consummate the Exchange on the terms and subject to the conditions set forth in this Agreement.

SECTION 6.06. Further Action; Consents; Filings. Upon the terms and subject to the conditions hereof, each of the parties hereto shall use its reasonable best efforts to (i) take, or cause to be taken, all appropriate action and do, or cause to be done, all things necessary, proper or advisable under applicable law or otherwise to consummate and make effective the Exchange and the other transactions contemplated by this Agreement, (ii) obtain from Governmental Entities any consents, licenses, permits, waivers, approvals, authorizations or orders required to be obtained or made by EGDI or the Company in connection with the authorization, execution and delivery of this Agreement and the consummation of the Exchange and the other transactions contemplated by this Agreement and (iii) make all necessary filings, and thereafter make any other required submissions, with respect to this Agreement, the Exchange and the other transactions contemplated by this Agreement required under (A) the Exchange Act and the Securities Act and the rules and regulations thereunder and any other applicable federal or state securities laws and (B) any other applicable Law. The parties hereto shall cooperate with each other in connection with the making of all such filings, including by providing copies of all such 

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documents to the non-filing party and its advisors prior to filing and, if requested, by accepting all reasonable additions, deletions or changes suggested in connection therewith.

SECTION 6.07. Plan of Exchange. This Agreement is intended to constitute a "plan of reorganization" within the meaning of section 1.368-2(g) of the income tax regulations promulgated under the Code. From and after the date of this Agreement and until the Effective Time, each party hereto shall use its reasonable best efforts to cause the Exchange to qualify, and will not knowingly take any action, cause any action to be taken, fail to take any action or cause any action to fail to be taken which action or failure to act could prevent the Exchange from qualifying, as a reorganization under the provisions of section 368(a) of the Code. Following the Effective Time, neither EGDI nor any of its affiliates shall knowingly take any action, cause any action to be taken, fail to take any action or cause any action to fail to be taken, which action or failure to act could cause the Exchange to fail to qualify as a reorganization under section 368(a) of the Code.

SECTION 6.08. Public Announcements. The initial press release relating to this Agreement shall be a joint press release the text of which has been agreed to by each of EGDI and the Company.

SECTION 6.09. Restricted Stock. The Stockholder acknowledges that all EGDI shares issued in consideration of the acquisition of the Company will be restricted stock bearing a restrictive legend and there is no obligation on EGDI to register the shares for resale by the Stockholder. Stockholder acknowledges it will obtain legal advice prior to sale of any EGDI shares. 

ARTICLE VII:  CONDITIONS TO THE EXCHANGE

SECTION 7.01. Conditions to the Obligations of Each Party. The obligations of the Company, EGDI and Stockholder to consummate the Exchange are subject to the satisfaction or waiver (where permissible) of the following conditions:  

(a)

this Agreement and the issuance of the Exchange Consideration pursuant to the terms of the Exchange, as the case may be, contemplated hereby shall have been approved and adopted by the requisite affirmative vote of the board of directors of EGDI in accordance with the laws of the State of Nevada;  

(b)

no Governmental Entity or court of competent jurisdiction located or having jurisdiction in the United States or Canada shall have enacted, issued, promulgated, enforced or entered any law, rule, regulation, judgment, decree, executive order or award (an "Order") which is then in effect and has the effect of making the Exchange illegal or otherwise prohibiting consummation of the Exchange; and  

(c)

all consents, approvals and authorizations legally required to be obtained to consummate the Exchange shall have been obtained from and made with all Governmental Entities.

SECTION 7.02. Conditions to the Obligations of EGDI . The obligations of EGDI to consummate the Exchange are subject to the satisfaction or waiver (where permissible) of the following additional conditions:  

(a)

to the best of the Company's knowledge and belief, each of the representations and warranties of the Company contained in this Agreement shall be true and correct as of the Effective Time as though made on and as of the Effective Time, except where failure to be so true and correct would not have a Company Material Adverse Effect, and except 

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that those representations and warranties which address matters only as of a particular date shall remain true and correct as of such date, except where failure to be so true and correct would not have a Company Material Adverse Effect, and EGDI shall have received a certificate of the Chief Executive Officer of the Company to such effect;  

(b)

the Company shall have performed or complied with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Effective Time, except where the failure to so comply would not have a Company Material Adverse Effect; 

(c)

the Stockholder will have provided evidence satisfactory to EGDI that it is an “Accredited Investor” as determined under the Securities Act of 1933 or that the Exchange is an exempt transaction under the Securities Act; and

(d)

EGDI will have received a valuation of the Company from a business valuator in form and substance and indicating a value of the Company satisfactory to EGDI. 

SECTION 7.03. Conditions to the Obligations of the Company. The obligations of the Company to consummate the Exchange are subject to the satisfaction or waiver (where permissible) of the following additional conditions:  

(a)

each of the representations and warranties of EGDI contained in this Agreement shall be true and correct as of the Effective Time, as though made on and as of the Effective Time, except where the failure to be so true and correct would not have a EGDI Material Adverse Effect, and except that those representations and warranties which address matters only as of a particular date shall remain true and correct as of such date, except where the failure to be so true and correct would not have a EGDI Material Adverse Effect, and the Company shall have received a certificate of the Chief Executive Officer or Chief Financial Officer of EGDI to such effect;  

(b)

EGDI shall have performed or complied with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Effective Time, except where the failure to comply would not have a EGDI Material Adverse Effect;

ARTICLE VIII:  TERMINATION, AMENDMENT AND WAIVER

SECTION 8.01. Termination. This Agreement may be terminated and the Exchange and the other transactions contemplated by this Agreement may be abandoned at any time prior to the Effective Time, notwithstanding any requisite approval and adoption of this Agreement and the transactions contemplated by this Agreement, as follows:

(a)

by mutual written consent duly authorized by the Boards of Directors of each of EGDI and the Company;

(b)

by either EGDI or the Company if the Effective Time shall not have occurred on or before December 14, 2006; provided, however, that the right to terminate this Agreement under this Section 8.01(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date;  

(c)

there shall be any Order which is final and non-appealable preventing the consummation of the Exchange;  

(d)

by EGDI upon a breach of any material representation, warranty, covenant or agreement on the part of the Company set forth in this Agreement, or if any representation or warranty of the Company shall have become untrue, in either case such that the conditions set forth in Section 7.02(a) and Section 7.02(b) would not be satisfied 

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("Terminating Company Breach"); provided, however, that, if such Terminating Company Breach is curable by the Company through the exercise of its best efforts and for so long as the Company continues to exercise such best efforts, EGDI may not terminate this Agreement under this Section 8.01(d).  

(e)

by the Company upon a breach of any material representation, warranty, covenant or agreement on the part of EGDI set forth in this Agreement, or if any representation or warranty of EGDI shall have become untrue, in either case such that the conditions set forth in Section 7.03(a) and Section 7.03(b) would not be satisfied ("Terminating EGDI Breach"); provided, however, that, if such Terminating Company Breach is curable by EGDI through the exercise of its best efforts and for so long as EGDI continues to exercise such best efforts, the Company may not terminate this Agreement under this Section 8.01(e).

SECTION 8.02. Effect of Termination. Except as provided in Section 9.01, in the event of termination of this Agreement pursuant to Section 8.01, this Agreement shall forthwith become void, there shall be no liability under this Agreement on the part of EGDI or the Company or any of their respective officers or directors, and all rights and obligations of each party hereto shall cease, provided, however, that nothing herein shall relieve any party from liability for the willful breach of any of its representations, warranties, covenants or agreements set forth in this Agreement.

SECTION 8.03. Amendment. This Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time. This Agreement may not be amended except by an instrument in writing signed by the parties hereto.

SECTION 8.04. Waiver. At any time prior to the Effective Time, any party hereto may (a) waive any inaccuracy in the representations and warranties contained herein or in any document delivered pursuant hereto, and (b) waive compliance with any agreement or condition contained herein. Any such extension or waiver shall be valid if set forth in an instrument in writing signed by the party or parties to be bound thereby.

SECTION 8.05. Expenses. All Expenses (as defined below) incurred in connection with this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such expenses, whether or not the Exchange or any other transaction is consummated. "Expenses" as used in this Agreement shall include all reasonable out-of-pocket expenses (including, without limitation, all fees and expenses of counsel, accountants, investment bankers, experts and consultants to a party hereto and its affiliates) incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance of this Agreement and all other matters related to the closing of the Exchange and the other transactions contemplated by this Agreement.

ARTICLE IX:  GENERAL PROVISIONS

SECTION 9.01. Survival of Representations, Warranties and Agreements. The representations, warranties and agreements in this Agreement and in any certificate delivered pursuant hereto shall survive until the date that is One Hundred Eighty (180) days after the Effective Time, and the agreements set forth in Articles I and II and Sections 6.01 and 6.02 and 

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this Article IX shall survive the Effective Time.  The agreements set forth in Sections 8.02 and 8.05 and this Article IX shall survive termination.

SECTION 9.02. Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by cable, telecopy, facsimile, telegram or telex or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 9.02):  

if to EGDI:  

Elgrande International, Inc.

1450 Kootenay St. 

Vancouver, British Columbia

Canada V5K 4R1

Attn: Michael F. Holloran 

Facsimile: (604) 689 0808

if to the Company:  

MCM Integrated Technologies, Ltd.

#221 – 2323 Quebec St.

Vancouver, British Columbia

Canada V5T 3A3

Attn: Murat Erbatur

Facsimile: (604) 876 7432

with a copy to (which shall not constitute notice to such party):  

Jackson & Campbell, P.C.

Attn:  Michael Paige, Counsel

1120 20th Street, N.W. 

South Tower

Washington, D.C. 20036

Facsimile: (202) 457-1678

SECTION 9.03.  Certain Definitions.  For purposes of this Agreement, the term

(a)

"affiliate" of a specified person means a person who directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with such specified person;  

(b)

"control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, as trustee or executor, by contract or credit arrangement or otherwise;  

(c)

"knowledge" means, with respect to any matter in question, that the executive officers of the Company or EGDI, as the case may be, have actual knowledge of such matter;  

(d)

"person" means an individual, corporation, partnership, limited partnership, syndicate, person (including, without limitation, a "person" as defined in section 

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13(d)(3) of the Exchange Act), trust, association or entity or government, political subdivision, agency or instrumentality of a government; and  

(e)

"subsidiary" or "subsidiaries" of any person means any corporation, partnership, joint venture or other legal entity of which such person (either alone or through or together with any other subsidiary) owns, directly or indirectly, more than 50% of the stock or other equity interests, the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity.

SECTION 9.04. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated by this Agreement is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated by this Agreement be consummated as originally contemplated to the fullest extent possible.

SECTION 9.05. Assignment; Binding Effect; Benefit. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns.

SECTION 9.06. Incorporation of Documents and Exhibits. All documents furnished by the Company pursuant to Section 3.10 and all documents furnished by EGDI pursuant to Section 4.11 and all exhibits attached hereto and referred to herein are hereby incorporated herein and made a part hereof for all purposes as if fully set forth herein.

SECTION 9.07. Specific Performance. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or in equity.

SECTION 9.08. Governing Law; Forum. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Nevada and the province of British Columbia.

SECTION 9.09.  Headings.  The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement.

SECTION 9.10. Counterparts. This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed and delivered shall be deemed to be an original but all of which taken together shall constitute one and the same agreement.

SECTION 9.11. Entire Agreement. This Agreement (including the Exhibits) constitutes the entire agreement among the parties with respect to the subject matter hereof and supersede all 

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prior agreements and understandings among the parties with respect thereto. No addition to or modification of any provision of this Agreement shall be binding upon any party hereto unless made in writing and signed by all parties hereto.

IN WITNESS WHEREOF, EGDI, the Stockholder and the Company have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized.

ATTEST: ELGRANDE INTERNATIONAL, INC.

_/S/__Michael F. Holloran___________________________________ 

Michael F. Holloran, President

ATTEST:  MCM INTEGRATED TECHNOLOGIES, LTD.

_/S/__Murat Erbatur___________________________________ 

Murat Erbatur, President

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EXHIBIT A

None.

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EXHIBIT B

None.

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EXHIBIT C

Financial Statements

For the years ending September 30, 2002 through 2006

To be appended when audited statements are available

Page 22EX-4.1 10% convertible debenture - TAIB

Exhibit 4.1

    Execution
      Copy

     

    

     

    Dated:
      October 31, 2006

     

    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.
      TAIB-1-1$1,000,000

     

    SMARTIRE
      SYSTEMS INC.

     

    Convertible
      Debenture

     

    Due:
      October 31, 2008

     

    This
      Convertible Debenture (the “Debenture”)
      is
      issued by SMARTIRE
      SYSTEMS, INC., a
      corporation organized and existing under the laws of the Yukon Territory (the
      “Company”),
      to
TAIB
      BANK B.S.C. (c) (the
      “Holder”),
      pursuant to that certain Securities Purchase Agreement (the “Securities
      Purchase Agreement”)
      dated
      October 31, 2006. 

     

    FOR
      VALUE RECEIVED,
      the
      Company hereby promises to pay to the Holder or its successors and assigns
      the
      principal sum of One Million Dollars ($1,000,000) together with accrued but
      unpaid interest on or before October 31, 2008 (the “Maturity
      Date”)
      in
      accordance with the following terms:

     

    Section
      1. General
      Terms

     

    (a) Interest.
      Interest shall accrue on the outstanding principal balance hereof at an annual
      rate equal to ten percent (10%). Interest shall be calculated on the basis
      of a
      365-day year and the actual number of days elapsed, to the extent permitted
      by
      applicable law. Interest hereunder shall be paid on the Maturity Date (or sooner
      as provided herein) to the Holder or its assignee in whose name this Debenture
      is registered on the records of the Company regarding registration and transfers
      of Debentures in cash or in Common Stock (valued at the Closing Bid Price on
      the
      Trading Day immediately prior to the date paid) at the option of the Company.
      

     

    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 (not waived by the Holder) in the payment of the principal of, interest
      on or other charges in respect of this Debenture, or any convertible debenture
      issued by the Company to Certain Wealth, Ltd., free of any claim of
      subordination, as and when the same shall become due and payable whether upon
      an
      Optional Redemption (as defined in Section
      3(a)),
      the
      Maturity Date, by acceleration, or otherwise;

     

    (ii)  The
      Company or any subsidiary of the Company shall commence, or there shall be
      commenced against the Company or any subsidiary of the Company under any
      applicable bankruptcy or insolvency laws as now or hereafter in effect or any
      successor thereto, or the Company or any subsidiary of the Company 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 Company or
      any
      subsidiary of the Company or there is commenced against the Company or any
      subsidiary of the Company any such bankruptcy, insolvency or other proceeding
      which remains undismissed for a period of 61 days; or the Company or any
      subsidiary of the Company is adjudicated insolvent or bankrupt; or any order
      of
      relief or other order approving any such case or proceeding is entered; or
      the
      Company or any subsidiary of the Company 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 sixty one (61) days; or the Company or any subsidiary of the Company
      makes a general assignment for the benefit of creditors; or the Company or
      any
      subsidiary of the Company shall fail to pay, or shall state that it is unable
      to
      pay, or shall be unable to pay, its debts generally as they become due; or
      the
      Company or any subsidiary of the Company shall call a meeting of its creditors
      with a view to arranging a composition, adjustment or restructuring of its
      debts; or the Company or any subsidiary of the Company shall by any act or
      failure to act expressly indicate its consent to, approval of or acquiescence
      in
      any of the foregoing; or any corporate or other action is taken by the Company
      or any subsidiary of the Company for the purpose of effecting any of the
      foregoing;

     

    (iii)  The
      Company or any subsidiary of the Company 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 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 Company or any subsidiary of the Company in an amount
      exceeding $100,000, 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;

     

    (iv)  The
      Common Stock shall cease to be quoted for trading or listing for trading on
      any
      of (a) the American Stock Exchange, (b) New York Stock Exchange, (c) the Nasdaq
      National Market, (d) the Nasdaq Capital Market, or (e) the Nasdaq OTC Bulletin
      Board (“OTC”)
      (each,
      a “Primary
      Market”)
      and
      shall not again be quoted or listed for trading on any Primary Market within
      five (5) Trading Days of such delisting;

     

    (v)  The
      Company or any subsidiary of the Company shall be a party to any Change of
      Control Transaction (as defined in Section
      6);
      

     

    (vi)  The
      Company shall fail to file the Underlying Shares Registration Statement (as
      defined in Section
      6)
      with
      the Commission (as defined in Section
      6),
      or the
      Underlying Shares Registration Statement shall not have been declared effective
      by the Commission, in each case as the direct result of the Company’s failure to
      use its best efforts under Section 2(b) of the Registration Rights Agreement
      (defined below), within the time periods set forth in the Investor Registration
      Rights Agreement (“Registration
      Rights Agreement”)
      dated
      October 31, 2006 between the Company and the Holder;

     

    (vii)  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);

     

    (viii)  The
      Company 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 Company 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 in accordance with the terms hereof;

     

    (ix)  The
      Company 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; 

     

    (x)  The
      Company shall fail to observe or perform any other material covenant, agreement
      or warranty contained in, or otherwise commit any material breach or default
      of
      any provision of this Debenture (except as may be covered by Section
      2(a)(i) through 2(a)(ix)
      hereof)
      or any Transaction Document (as defined in Section
      6)
      which
      is not cured with in the time prescribed, or an Event of Default under any
      other
      debenture issued to the Holder in connection with the Securities Purchase
      Agreement shall occur;

     

    (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 Company. Furthermore, 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 not provide and
      the
      Company 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. Except with respect to the limitation set forth in Section
      4(b)(i) hereof 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. Redemptions.

     

    (a) Company’s
      Optional Cash Redemption.
      The
      Company at its option shall have the right to redeem (“Optional
      Redemption”)
      a
      portion or all amounts outstanding under this Debenture prior to the Maturity
      Date provided
      that
      as of
      the date of the Holder’s receipt of a Redemption Notice (as defined herein) (i)
      the Closing Bid Price of the of the Common Stock, as reported by Bloomberg,
      LP,
      is less than the Conversion Price, (ii) the Underlying Share Registration
      Statement is effective, and (iii) no Event of Default has occurred. The Company
      shall pay an amount equal to the principal amount being redeemed plus a
      redemption premium (“Redemption
      Premium”)
      equal
      to twenty percent (20%) of the principal amount being redeemed, and accrued
      interest, (collectively referred to as the “Redemption
      Amount”).
      In
      order to make a redemption, the Company shall first provide written notice
      to
      the Holder of its intention to make a redemption (the “Redemption
      Notice”)
      setting forth the amount of principal it desires to redeem. After receipt of
      the
      Redemption Notice the Holder shall have three (3) business days to elect to
      convert all or any portion of this Debenture, subject to the limitations set
      forth in Section
      4(b).
      On the
      fourth (4th)
      business day after the Redemption Notice, the Company shall deliver to the
      Holder the Redemption Amount with respect to the principal amount redeemed
      after
      giving effect to conversions effected during the three (3) business day period.
      

     

    Section
      4. Conversion.

     

    (a) Conversion
      at Option of Holder.

     

    (i) 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
      6)
      (subject to the limitations on conversion set forth in Section
      4(b)
      hereof).
      The number of shares of Common Stock issuable upon a conversion hereunder equals
      the quotient obtained by dividing (x) the outstanding amount of this Debenture
      to be converted by (y) the Conversion Price (as defined in Section
      4(c)(i)).
      The
      Company shall deliver Common Stock certificates to the Holder prior to the
      Fifth
      (5th)
      Trading
      Day after a Conversion Date.

     

    (ii) Notwithstanding
      anything to the contrary contained herein, if on any Conversion Date or with
      respect thereto: (1) the number of shares of Common Stock authorized and
      unissued, or held as treasury stock, is insufficient to satisfy the payment
      of
      all principal and interest hereunder in shares of Common Stock; (2) the Common
      Stock is not listed or quoted for trading on a Primary Market; or (3) the
      Company has failed to timely satisfy a conversion; then, at the option of the
      Holder, the Company, in lieu of delivering shares of Common Stock pursuant
      to
Section
      4(a)(i),
      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 divided by the applicable Conversion Price, and multiplied by the
      highest Closing Bid Price of the stock from the date of the Conversion Notice
      till the date that such cash payment is made.

     

    Further,
      if the Company shall not have delivered any cash due in respect of conversion
      of
      this Debenture pursuant to the previous paragraph by the fifth (5th)
      Trading
      Day after the Conversion Date, the Holder may, by notice to the Company, require
      the Company to issue shares of Common Stock pursuant to Section
      4(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.

     

    (iii) The
      Holder shall effect conversions by delivering to the Company a completed notice
      in the form attached hereto as Exhibit A (a “Conversion
      Notice”).
      The
      date stated 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 Debenture
      to
      the Company 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 Company 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.

     

    (b) Certain
      Conversion Restrictions.

     

    (i) The
      Company shall not effect any conversions of this Debenture and the Holder shall
      not have the right to convert any portion of this Debenture or receive shares
      of
      Common Stock as payment of interest hereunder to the extent that after giving
      effect to such such conversion or receipt of such interest payment, the Holder,
      together with any affiliate thereof, would beneficially own (as determined
      in
      accordance with Section 13(d) of the Exchange Act and the rules promulgated
      thereunder) in excess of 4.99% of the number of shares of Common Stock
      outstanding immediately after giving effect to such conversion or receipt of
      shares as payment of interest. Since the Holder will not be obligated to report
      to the Company 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 4.99% 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 sole and exclusive 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 Company 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 provisions hereunder )
      and any
      principal amount tendered for conversion in excess of the permitted amount
      hereunder shall remain outstanding under this Debenture. 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 Company. Other Holders
      shall be unaffected by any such waiver. 

     

    (c) Conversion
      Price and Adjustments to Conversion Price.

     

    (i) The
      conversion price in effect on any Conversion Date shall be equal to the lesser
      of (a) $0.0573 (the “Fixed
      Conversion Price”)
      or (b)
      eighty percent (80%) of the lowest Volume Weighted Average Price of the
      Common Stock during the thirty (30) trading days immediately preceding the
      Conversion Date as quoted by Bloomberg, LP (the “Market
      Conversion Price”).
      The
      Fixed Conversion Price and the Market Conversion Price are collectively referred
      to as the “Conversion
      Price.”
The
      Conversion Price may be adjusted pursuant to the other terms of this
      Debenture.

     

    (ii) If
      the
      Company, 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 Company, 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) If
      the
      Company, 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 Conversion Price, 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) 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 the Conversion 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) If
      the
      Company or any subsidiary thereof, as applicable, 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 Company shall notify the Holder in writing, no later than two
      (2) 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 of Excluded Securities.

     

    (v) If
      the
      Company, 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
      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 Company 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 Company 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) Whenever
      the Conversion Price is adjusted pursuant to Section
      4
      hereof,
      the Company 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.

     

    (viii) If
      (A)
      the Company shall declare a dividend (or any other distribution) on the Common
      Stock; (B) the Company shall declare a special nonrecurring cash dividend on
      or
      a redemption of the Common Stock; (C) the Company shall authorize the granting
      to all holders of the Common Stock rights or warrants to subscribe for or
      purchase any shares of capital stock of any class or of any rights; (D) the
      approval of any stockholders of the Company shall be required in connection
      with
      any reclassification of the Common Stock, any consolidation or merger to which
      the Company is a party, any sale or transfer of all or substantially all of
      the
      assets of the Company, of any compulsory share exchange whereby the Common
      Stock
      is converted into other securities, cash or property; or (E) the Company shall
      authorize the voluntary or involuntary dissolution, liquidation or winding
      up of
      the affairs of the Company; then, in each case, the Company 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 Company, at least twenty (20) calendar
      days prior to the applicable record or effective date hereinafter specified,
      a
      notice stating (x) the date on which a record is to be taken for the purpose
      of
      such dividend, distribution, redemption, rights or warrants, or if a record
      is
      not to be taken, the date as of which the holders of 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 20-day calendar period commencing the date of such notice to the
      effective date of the event triggering such notice.

     

    (ix) In
      case
      of any (1) merger or consolidation of the Company or any subsidiary of the
      Company with or into another Person, or (2) sale by the Company or any
      subsidiary of the Company of more than one-half of the assets of the Company
      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) Other
      Provisions.

     

    (i) The
      Company shall at all times reserve and keep available out of its authorized
      Common Stock the full number of shares of Common Stock issuable upon conversion
      of all outstanding amounts under this Debenture; and within three (3) Business
      Days following the receipt by the Company of a Holder's notice that such minimum
      number of Underlying Shares is not so reserved, the Company shall promptly
      reserve a sufficient number of shares of Common Stock to comply with such
      requirement.

     

    (ii) All
      calculations under this Section
      4
      shall be
      rounded up to the nearest $0.0001 or whole share.

     

    (iii) The
      Company 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, not less
      than such number of shares of the Common Stock as shall (subject to any
      additional requirements of the Company as to reservation of such shares set
      forth in this Debenture or in the Transaction Documents) be issuable (taking
      into account the adjustments and restrictions set forth herein) upon the
      conversion of the outstanding principal amount of this Debenture and payment
      of
      interest hereunder. The Company 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.

     

    (iv) Upon
      a
      conversion hereunder the Company 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 Company 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.

     

    (v) 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 Company 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 Company 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 Company the amount of
      such tax or shall have established to the satisfaction of the Company that
      such
      tax has been paid.

     

    (vi) 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 Company '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. 

     

    (vii) In
      addition to any other rights available to the Holder, if the Company fails
      to
      deliver to the Holder such certificate or certificates pursuant to Section
      4(a)(i) by
      the
      fifth (5th)
      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 Company 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 anticipated receiving 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 Company timely
      complied with its delivery requirements under Section
      4(a)(i).
      For
      example, if the Holder purchases Common Stock having a total purchase price
      of
      $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 $10,000 under clause (A) of the immediately preceding
      sentence, the Company shall be required to pay the Holder $1,000. The Holder
      shall provide the Company written notice indicating the amounts payable to
      the
      Holder in respect of the Buy-In.

     

    Section
      5. Notices.
       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: Jeff
                Finkelstein 

            
	 	
              Telephone: (604)
                276-9884

            
	 	
              Facsimile: (604)
                276-2353

            
	 	 
	
              With
                a copy to:

            	
              Greenberg
                Traurig, LLP

            
	 	
              200
                Park Avenue

            
	 	
              New
                York, NY 10166

            
	 	
              Attention:
                Michael Helsel, Esq.

            
	 	
              Telephone:
                (212) 801-9200

            
	 	
              Facsimile:
                (212) 801-6400

            

    

    

    
      	
              If
                to the Holder:

            	
              TAIB
                Bank B.S.C. (c)

              c/o
                TAIB Securities, Inc.

            
	 	
              450
                Park Avenue - Suite 1902

            
	 	
              New
                York, NY 10022

            
	 	
              Attention: Larry
                Chaleff 

            
	 	
              Telephone: (212)
                832-7137 

            
	 	
              Facsimile:
                (212) 832-7122

            
	 	 

    

    

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

     

    “Approved
      Stock Plan”
means
      any stock option plan that has been approved by the Board of Directors of the
      Company, pursuant to which the Company’s securities may be issued only to any
      employee, officer or director for services provided to the Company.

     

    “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 Company, by contract or otherwise) of in
      excess of fifty percent (50%) of the voting securities of the Company (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 Company which is not approved by a majority of those individuals who
      are
      members of the board of directors on the 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
      Company or any subsidiary of the Company in one or a series of related
      transactions with or into another entity, or (d) the execution by the Company
      of
      an agreement to which the Company is a party or by which it is bound, providing
      for any of the events set forth above in (a), (b) or (c).

     

    “Closing
      Bid Price”
means
      the price per share in the last reported trade of the Common Stock on a Primary
      Market or on the exchange which the Common Stock is then listed as quoted by
      Bloomberg, LP.

     

    “Commission”
means
      the Securities and Exchange Commission.

     

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

     

    “Conversion
      Date”
shall
      mean the date upon which the Holder gives the Company notice of their intention
      to effectuate a conversion of this Debenture into shares of the Company’s Common
      Stock as outlined herein.

     

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

     

    “Excluded
      Securities”
means,
      (a) shares, options or other securities or interests issued or deemed to have
      been issued by the Company pursuant to an Approved Stock Plan, (b) shares of
      Common Stock issued or deemed to be issued by the Company upon the conversion,
      exchange or exercise of any right, option, warrant, obligation or security
      outstanding on the date immediately prior to date of the Securities Purchase
      Agreement, including, pursuant to the convertible debentures dated May 20,
      2005
      issued to Cornell Capital Partners, LP and Highgate House Funds, Ltd, the
      convertible debentures dated June 23, 2005, later amended and restated on
      December 30, 2005, issued to Xentenial Holdngs Limited, the convertible
      debentures dated June 23, 2005, later amended and restated on December 30,
      2005,
      issued to Staraim Enterprises Limited, the convertible debentures dated June
      23,
      2005, later amended and restated on December 30, 2005, issued to Starome
      Investments Limited, the Series A Preferred Shares of stock issued to Cornell
      Capital Partners, LP, and all warrants issued by the Company in connection
      with
      the foregoing, and the Standby Equity Distribution Agreement dated December
      30,
      2005 by and between the Company and Cornell Capital Partners, LP (collectively,
      the “Previous
      Financing Documents”),
      provided (excluding any right, option, warrant, obligation or security issued
      pursuant to the Previous Financing Documents) that the terms of such right,
      option, warrant, obligation or security are not amended or otherwise modified
      on
      or after the date of the Securities Purchase Agreement, and provided (excluding
      any right, option, warrant, obligation or security issued pursuant to the
      Previous Financing Documents) that the conversion price, exchange price,
      exercise price or other purchase price is not reduced, adjusted or otherwise
      modified and the number of shares of Common Stock issued or issuable is not
      increased (whether by operation of, or in accordance with, the relevant
      governing documents or otherwise) on or after the date of the Securities
      Purchase Agreement, and (c) the shares of Common Stock issued or deemed to
      be issued by the Company upon conversion of this Debenture.

     

    “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.

     

    “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 Primary 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
      Irrevocable Transfer Agent Instructions, and the 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
      7. Except
      as
      expressly provided herein, no provision of this Debenture shall alter or impair
      the obligations of the Company, 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 Company. 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 Company 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
      8. This
      Debenture shall not entitle the Holder to any of the rights of a stockholder
      of
      the Company, 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 Company, unless and
      to
      the extent converted into shares of Common Stock in accordance with the terms
      hereof.

     

    Section
      9. If
      this
      Debenture is mutilated, lost, stolen or destroyed, the Company 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
      Company.

     

    Section
      10. No
      indebtedness of the Company is senior to this Debenture in right of payment,
      whether with respect to interest, damages or upon liquidation or dissolution
      or
      otherwise. Without the Holder’s consent, the Company 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 Company under this Debenture.

     

    Section
      11. 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
      12. If
      the
      Company fails to strictly comply with the terms of this Debenture, then the
      Company 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.

     

    Section
      13. 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
      14. 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 Company 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 Company 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 Company (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
      15. 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
      16. 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
      17. 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 INTENTIONLLY LEFT BLANK]

     

    
      
        18

        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

     

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

     

    

    
      	 	
              COMPANY:

            
	 	
              SMARTIRE
                SYSTEMS INC. 

            
	 	 
	 	
              By:     
                /s/ Jeff Finkelstein      

            
	 	
              Name: 
                Jeff Finkelstein 

            
	 	
              Title: 
                Chief Financial Officer

            
	 	 

    

    

    

    
      
        18

        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    EXHIBIT
      A

     

     

    FORM
      OF CONVERSION NOTICE

     

    Reference
      is made to the Securities Purchase Agreement (the “Securities
      Purchase Agreement”)
      between SmarTire Systems Inc., (the “Company”),
      and
      the Buyers set forth on Schedule I attached thereto dated October ____ 2006.
      In
      accordance with and pursuant to the Securities Purchase Agreement, the
      undersigned hereby elects to convert Debenture No. TAIB-1-1 into shares of
      common stock, no par value per share (the “Common
      Stock”),
      of
      the Company for the amount indicated below as of the date specified
      below.

     

    
      	
              Conversion
                Date:

            	 
	 	 
	
              Amount
                to be converted:

            	
              $     

            
	 	 
	
              Conversion
                Price:

            	
              $     

            
	 	 
	
              Shares
                of Common Stock Issuable:

            	 
	 	 
	
              Amount
                of Debenture unconverted:

            	
              $     

            
	 	 
	
              Amount
                of Interest Converted:

            	
              $     

            
	 	 
	
              Conversion
                Price of Interest:

            	
              $     

            
	 	 
	
              Shares
                of Common Stock Issuable:

            	 
	 	 
	
              Amount
                of Liquidated Damages:

            	
              $     

            
	 	 
	
              Conversion
                Price of Liquidated Damages:

            	
              $     

            
	 	 
	
              Shares
                of Common Stock Issuable:

            	 
	 	 
	
              Total
                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
                #:

            	 
	 	 
	
              Broker
                DTC Participant Code:

            	 
	 	 
	
              Account
                Number*:

            	 
	 	 

    

    

    

    *
      Note that the receiving broker must initiate transaction on DWAC
      System.

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