Document:

EX-4.2 10% convertible debenture - Certain Wealth

Exhibit 4.2

    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.
      CW-1-1$200,000

     

    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
CERTAIN
      WEALTH, LTD. (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 Two Hundred Thousand Dollars ($200,000) 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 TAIB Bank, B.S.C. (c), 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:

            	
              Certain
                Wealth, Ltd.

              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. CW-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.EX-10.1 Securities Purchase Agreement - TAIB

Exhibit 10.1

    Execution
      Copy

    

    SECURITIES
      PURCHASE AGREEMENT

    

    THIS SECURITIES
      PURCHASE AGREEMENT
      (this
“Agreement”),
      dated
      as of October 31, 2006, by and among SMARTIRE
      SYSTEMS INC.,
      a
      corporation organized and existing under the laws of the Yukon Territory (the
      “Company”),
      and
      the Buyers listed on Schedule I attached hereto (individually, a
“Buyer”
or
      collectively “Buyers”).

     

    WITNESSETH

    

    WHEREAS,
      the
      Company and the Buyer(s) are executing and delivering this Agreement in reliance
      upon an exemption from securities registration pursuant to:

     

    
      	(i)  	
              Section
                4(2) and/or Rule 506 of Regulation D (“Regulation
                D”)
                as promulgated by the U.S. Securities and Exchange Commission (the
                “SEC”)
                under the Securities Act of 1933, as amended (the “Securities
                Act”);
                and

            

    

     

    
      	(ii)  	
              National
                Instrument 45-106 adopted by the British Columbia Securities Commission
                (the “BCSC”);

            

    

     

    WHEREAS,
      the
      parties desire that, upon the terms and subject to the conditions contained
      herein, the Company shall issue and sell to the Buyer(s), as provided herein,
      and the Buyer(s) shall purchase One Million Two Hundred Thousand Dollars
      ($1,200,000) of unsecured convertible debentures (the “Convertible
      Debentures”),
      which
      shall be convertible into shares of the Company’s common stock, no par value
      (the “Common
      Stock”)
      (as
      converted, the “Conversion
      Shares”)
      which
      shall be funded no later than on the fifth (5th)
      business day following the date hereof (the “Closing”),
      for a
      total purchase price of up to One Million Two Hundred Thousand Dollars
      ($1,200,000), (the “Purchase
      Price”)
      in the
      respective amounts set forth opposite each Buyer(s) name on Schedule I (the
      “Subscription
      Amount”);
      and

     

    WHEREAS,
      contemporaneously with the execution and delivery of this Agreement, the parties
      hereto are executing and delivering an Investor Registration Rights Agreement
      (the “Investor
      Registration Rights Agreement”)
      pursuant to which the Company has agreed to provide certain registration rights
      under the Securities Act and the rules and regulations promulgated there under,
      and applicable state securities laws; and

     

    WHEREAS,
      contemporaneously with the execution and delivery of this Agreement, the parties
      hereto are executing and delivering Irrevocable Transfer Agent Instructions
      (the
“Irrevocable
      Transfer Agent Instructions”)

     

    NOW,
      THEREFORE,
      in
      consideration of the mutual covenants and other agreements contained in this
      Agreement the Company and the Buyer(s) hereby agree as follows:

     

    1.  PURCHASE
      AND SALE OF CONVERTIBLE DEBENTURES.

     

    (a)  Purchase
      of Convertible Debentures.
      Subject
      to the satisfaction (or waiver) of the terms and conditions of this Agreement,
      each Buyer agrees, severally and not jointly, to purchase at each Closing and
      the Company agrees to sell and issue to each Buyer, severally and not jointly,
      at each Closing, Convertible Debentures in amounts corresponding with the
      Subscription Amount set forth opposite each Buyer’s name on Schedule I hereto.

     

    (b)  Closing
      Date.
      The
      Closing of the purchase and sale of the Convertible Debentures shall take place
      at 10:00 a.m. Eastern Standard Time no later than the fifth (5th)
      business day following the date hereof, subject to notification of satisfaction
      of the conditions to the Closing set forth herein and in Sections 6 and 7 below
      (or such later date as is mutually agreed to by the Company and the Buyer(s))
      (the “Closing
      Date”).
      The
      Closing shall occur on the Closing Date at the offices of Buyer(s) (or such
      other place as is mutually agreed to by the Company and the Buyer(s)).

     

    (c)  Form
      of Payment.
      Subject
      to the satisfaction of the terms and conditions of this Agreement, on the
      Closing Date, (i) the Buyers shall deliver to the Company such aggregate
      proceeds for the Convertible Debentures to be issued and sold to such Buyer(s),
      minus the fees to be paid directly from the proceeds of the Closings as set
      forth herein, and (ii) the Company shall deliver to each Buyer, Convertible
      Debentures which such Buyer(s) is purchasing in amounts indicated opposite
      such
      Buyer’s name on Schedule I, duly executed on behalf of the Company.

     

    2.  BUYER’S
      REPRESENTATIONS AND WARRANTIES.

     

    Each
      Buyer represents and warrants, severally and not jointly, that:

     

    (a)  Investment
      Purpose.
      Each
      Buyer is acquiring the Convertible Debentures and, upon conversion of
      Convertible Debentures, the Buyer will acquire the Conversion Shares then
      issuable, for its own account for investment only and not with a view towards,
      or for resale in connection with, the public sale or distribution thereof,
      except pursuant to sales registered or exempted under the Securities Act;
      provided, however, that by making the representations herein, such Buyer
      reserves the right to dispose of the Conversion Shares at any time in accordance
      with or pursuant to an effective registration statement covering such Conversion
      Shares or an available exemption under the Securities Act.

     

    (b)  Accredited
      Investor Status.
      By
      completing the Questionnaires, the Buyer is an “Accredited
      Investor”
as
      that
      term is defined in Rule 501(a)(3) of Regulation D, and, in National Instrument
      45-106 adopted by the BCSC.

     

    (c)  Reliance
      on Exemptions.
      The
      Buyer understands that the Convertible Debentures are being offered and sold
      to
      it in reliance on specific exemptions from the registration requirements of
      United States federal and state securities laws and that the Company is relying
      in part upon the truth and accuracy of, and the Buyer’s compliance with, the
      representations, warranties, agreements, acknowledgments and understandings
      of
      the Buyer set forth herein and in the Questionnaires in order to determine
      the
      availability of such exemptions and the eligibility of the Buyer to acquire
      such
      securities. The Company has advised the Buyer that the Company is relying on
      an
      exemption from the requirements to provide the Buyer with a prospectus and
      to
      sell the Convertible Debentures through a person registered to sell securities
      under the Securities Act (British Columbia) (the “B.C.
      Act”)
      and as
      a consequence of acquiring Convertible Debentures pursuant to this exemption,
      certain protections, rights, and remedies provided by the B.C. Act, including
      statutory rights of rescission or damages, will not be available to the
      Buyer.

     

    (d)  Information.
      Each
      Buyer and its advisors (and his or, its counsel), if any, have been furnished
      with all materials relating to the business, finances and operations of the
      Company and information he deemed material to making an informed investment
      decision regarding his purchase of the Convertible Debentures and the Conversion
      Shares, which have been requested by such Buyer. Each Buyer and its advisors,
      if
      any, have been afforded the opportunity to ask questions of the Company and
      its
      management. Neither such inquiries nor any other due diligence investigations
      conducted by such Buyer or its advisors, if any, or its representatives shall
      modify, amend or affect such Buyer’s right to rely on the Company’s
      representations and warranties contained in Section 4 below. Each Buyer
      understands that its investment in the Convertible Debentures and the Conversion
      Shares involves a high degree of risk. Each Buyer is in a position regarding
      the
      Company, which, based upon employment, family relationship or economic
      bargaining power, enabled and enables such Buyer to obtain information from
      the
      Company in order to evaluate the merits and risks of this investment. Each
      Buyer
      has sought such accounting, legal and tax advice, as it has considered necessary
      to make an informed investment decision with respect to its acquisition of
      the
      Convertible Debentures and the Conversion Shares.

     

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

     

    (f)  Transfer
      or Resale.
      Each
      Buyer understands that except as provided in the Investor Registration Rights
      Agreement: (i) the Convertible Debentures have not been and are not being
      registered under the Securities Act or any state securities laws, and may not
      be
      offered for sale, sold, assigned or transferred unless (A) subsequently
      registered thereunder, or (B) such Buyer shall have delivered to the Company
      an
      opinion of counsel, in a generally acceptable form, to the effect that such
      securities to be sold, assigned or transferred may be sold, assigned or
      transferred pursuant to an exemption from such registration requirements; (ii)
      any sale of such securities made in reliance on Rule 144 under the Securities
      Act (or a successor rule thereto) (“Rule 144”)
      may be
      made only in accordance with the terms of Rule 144 and further, if Rule 144
      is
      not applicable, any resale of such securities under circumstances in which
      the
      seller (or the person through whom the sale is made) may be deemed to be an
      underwriter (as that term is defined in the Securities Act) may require
      compliance with some other exemption under the Securities Act or the rules
      and
      regulations of the SEC thereunder; and (iii) neither the Company nor any other
      person is under any obligation to register such securities under the Securities
      Act or any state securities laws or to comply with the terms and conditions
      of
      any exemption thereunder. 

     

    (g)  Legends.
      Each
      Buyer understands that the certificates or other instruments representing the
      Convertible Debentures and or the Conversion Shares shall bear a restrictive
      legend in substantially the following form (and a stop -transfer order may
      be
      placed against transfer of such stock certificates):

     

    THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
      SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
      SECURITIES HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT PURPOSES AND NOT WITH A
      VIEW
      TOWARD RESALE AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
      IN
      THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
      THE
      SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR
      AN
      OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
      REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS. 

     

    The
      legend set forth above shall be removed and the Company within two (2) business
      days shall issue a certificate without such legend to the holder of the
      Conversion Shares upon which it is stamped, if, unless otherwise required by
      state securities laws, (i) in connection with a sale transaction, provided
      the
      Conversion Shares are registered under the Securities Act or (ii) in connection
      with a sale transaction, after such holder provides the Company with an opinion
      of counsel, which opinion shall be in form, substance and scope customary for
      opinions of counsel in comparable transactions, to the effect that a public
      sale, assignment or transfer of the Conversion Shares may be made without
      registration under the Securities Act. 

     

    (h)  Authorization,
      Enforcement.
      This
      Agreement has been duly and validly authorized, executed and delivered on behalf
      of such Buyer and is a valid and binding agreement of such Buyer enforceable
      in
      accordance with its terms, except as such enforceability may be limited by
      general principles of equity or applicable bankruptcy, insolvency,
      reorganization, moratorium, liquidation and other similar laws relating to,
      or
      affecting generally, the enforcement of applicable creditors’ rights and
      remedies.

     

    (i)  Receipt
      of Documents.
      Each
      Buyer and his or its counsel has received and read in their entirety and
      otherwise fully acknowledges and agrees that: (i) this Agreement and each
      representation, warranty and covenant set forth herein and the Transaction
      Documents (as defined herein); (ii) all due diligence and other information
      necessary to verify the accuracy and completeness of such representations,
      warranties and covenants; (iii) the Company’s Form 10-KSB for the fiscal year
      ended July 31, 2005; (iv) the Company’s Form 10-QSBs for the fiscal quarters
      ended October 31, 2005, January 31, 2006 and April 30, 2006 and (v) answers
      to
      all questions each Buyer submitted to the Company regarding an investment in
      the
      Company; and each Buyer has relied on the information contained therein and
      has
      not been furnished any other documents, literature, memorandum or
      prospectus.

     

    (j)  Due
      Formation of Corporate and Other Buyers.
      If the
      Buyer(s) is a corporation, trust, partnership or other entity that is not an
      individual person, it has been formed and validly exists and has not been
      organized for the specific purpose of purchasing the Convertible Debentures
      and
      is not prohibited from doing so.

     

    (k)  No
      Legal Advice From the Company.
      Each
      Buyer acknowledges, that it had the opportunity to review this Agreement and
      the
      transactions contemplated by this Agreement with his or its own legal counsel
      and investment and tax advisors. Each Buyer is relying solely on such counsel
      and advisors and not on any statements or representations of the Company or
      any
      of its representatives or agents for legal, tax or investment advice with
      respect to this investment, the transactions contemplated by this Agreement
      or
      the securities laws of any jurisdiction. 

     

    (l)  Further
      Representations by Foreign Buyers.
      If the
      Buyer is not a U.S. Person (as defined below), the Buyer hereby represents
      that
      it is in compliance with and in full observance of the laws of the Buyer’s
      jurisdiction in connection with any invitation to subscribe for the securities
      or any use of this Agreement, including: (i) the legal requirements of its
      jurisdiction for the purchase of the securities, (ii) any foreign exchange
      restrictions applicable to such purchase, (iii) any governmental or other
      consents that may need to be obtained, and (iv) the income tax and other tax
      consequences, if any, which may be relevant to the purchase, holding,
      redemption, sale, or transfer of the securities. The Buyer’s subscription and
      payment for, and the Buyer’s continued beneficial ownership of, the securities
      will not violate any applicable securities or other laws of the Buyer’s
      jurisdiction. The term “U.S. Person” as used herein shall mean any person who is
      a citizen or resident of the United States or Canada, or any state, territory
      or
      possession thereof, including, but not limited to, any estate of any such
      person, or any corporation, partnership, trust or other entity created or
      existing under the laws thereof, or any entity controlled or owned by any of
      the
      foregoing.

     

    (m)  B.C.
      Exemption. If
      the
      Buyer is purchasing the Convertible Debentures pursuant to Section 74(2)(4)
      of
      the B.C. Act, then the Buyer additionally represents, warrants and covenants
      to
      the Company (which representations, warrants and covenants shall survive
      closing) that: 

     

    (i)  the
      Buyer
      is purchasing as principal for its own account, and not for the benefit of
      any
      other person, or company, a sufficient number of Convertible Debentures such
      that the aggregate acquisition cost to the Buyer is not less than
      CDN$97,000;

     

    (ii)  if
      the
      Buyer is not an individual or a corporation, each member of the partnership,
      syndicate or other unincorporated organization which is the purchaser, or each
      beneficiary of the trust which is the purchaser, as the case may be, is an
      individual who has an aggregate acquisition cost for the Convertible Debentures
      of not less than CDN $97,000;

     

    (iii)  neither
      the Buyer nor any party on whose behalf the Buyer is acting has been created,
      established formed or incorporated solely, or is used primarily to acquire
      securities or to permit the purchase of the Convertible Debentures without
      a
      prospectus in reliance on an exemption from the prospectus requirements of
      applicable securities legislation; and 

     

    (iv)  
      if the
      Buyer is purchasing pursuant to the exemption from prospectus requirements
      available under subsection 74(2)(4) of the B.C. Act and is not purchasing for
      its own account: then

     

    A. the
      Buyer
      is:

     

    I. a
      trust
      company or an insurer which has received a business authorization under the
      Financial Institutions Act (British Columbia) or is a trust company or an
      insurer authorized under the laws of another province or territory of Canada
      to
      carry on such business in such province or territory, and the Buyer is
      purchasing the Convertible Debentures as an agent or trustee for accounts that
      are fully managed by the Buyer; or 

     

    II. an
      advisor who manages the investment portfolios of clients through discretionary
      authority granted by one or more clients and the Buyer is;

     

    i. registered
      as an advisor under the B.C. Act or the laws of another province or territory
      of
      Canada or the Buyer is exempt from such registration and the Buyer is purchasing
      the Convertible Debentures as an agent for accounts that are fully managed
      by
      the Buyer; or

     

    ii.
      carrying on the business of an advisor outside of Canada in which
      case:

     

    (1)  it
      was
      not created solely or primarily for the purpose of purchasing Convertible
      Debentures of the Company;

     

    (2)  the
      total
      asset value of the investment portfolios it manages on behalf of clients is
      not
      less than CDN$20,000,000; or

     

    (3)  it
      does
      not believe and has no reasonable grounds to believe that any resident of
      British Columbia or any directors, senior officers or other insiders of the
      Company or any persons carrying on investor relations activities for the Company
      has a beneficial interest in any of the managed accounts for which it is
      purchasing, and

     

    B.
      the
      aggregate acquisition cost for the Convertible Debentures is not less than
      CDN$97,000.

     

    3.  BRITISH
      COLUMBIA RESALE RESTRICTIONS

     

    (a)  The
      Buyer
      acknowledges that the Convertible Debentures are subject to resale restrictions
      in British Columbia and may not be traded in British Columbia except as
      permitted by the B.C. Act and the rules made thereunder.

     

    (b)  Pursuant
      to National Instrument 645-102, as adopted by the BCSC, effective March 30,
      2004, a subsequent trade in the Conversion Shares will be a distribution subject
      to prospectus and registration requirements of applicable Canadian securities
      legislation (including the B.C. Act) unless certain conditions are met,
      including the following:

     

    (i)  at
      least
      twelve (12) months (the “Canadian
      Hold Period”)
      shall
      have elapsed from the date on which the Convertible Debentures were issued
      to
      the Buyer;

     

    (ii)  during
      the currency of the Canadian Hold Period, any certificate representing the
      Convertible Debentures is imprinted with a legend (the “Canadian
      Legend”)
      stating: 

     

    “Unless
      permitted under securities legislation,

    the
      holder of the securities shall not trade the

    securities
      before [insert the date that is four

    months
      and a day after the distribution date.”

    

     

    (iii)  the
      trade
      is not a control distribution (as defined in National Instrument
      45-102);

     

    (iv)  no
      unusual effort is made to prepare the market or to create a demand for the
      Conversion Shares that are the subject of the trade; 

     

    (v)  no
      extraordinary commission or consideration is paid to a person or company in
      respect of the trade.; and

     

    (vi)  if
      the
      selling security holder is an insider or officer of the Company, the selling
      security holder has no reasonable grounds to believe that the Company is in
      default of securities legislation.

     

    (c)  By
      executing and delivering this Agreement, the Buyer will have directed the
      Company not to include the Canadian Legend on any certificates representing
      the
      Conversion Shares to be issued to the Buyer,

     

    (d)  As
      a
      consequence, the Buyer will not be able to rely on the resale provisions of
      National Instrument 45-102, and any subsequent trade in the Conversion Shares
      during or after the Canadian Hold Period will be distribution subject to the
      prospectus and registration requirements of Canadian securities legislation,
      to
      the extent that the trade at that time is subject to any such Canadian
      securities legislation.

     

    4.  REPRESENTATIONS
      AND WARRANTIES OF THE COMPANY.

     

    The
      Company represents and warrants as of the date hereof to each of the Buyers
      that, except as set forth in the SEC Documents (as defined herein) or in the
      Disclosure Schedule attached hereto (the “Disclosure
      Schedule”):

     

    (a)  Organization
      and Qualification.
      The
      Company and its subsidiaries are corporations duly organized and validly
      existing in good standing under the laws of the jurisdiction in which they
      are
      incorporated, and have the requisite corporate power to own their properties
      and
      to carry on their business as now being conducted. Each of the Company and
      its
      subsidiaries is duly qualified as a foreign corporation to do business and
      is in
      good standing in every jurisdiction in which the nature of the business
      conducted by it makes such qualification necessary, except to the extent that
      the failure to be so qualified or be in good standing would not have a material
      adverse effect on the Company and its subsidiaries taken as a
      whole.

     

    (b)  Authorization,
      Enforcement, Compliance with Other Instruments.
      (i) The Company has the requisite corporate power and authority to enter
      into and perform this Agreement, the Convertible Debentures, the Investor
      Registration Rights Agreement, and the Irrevocable Transfer Agent Agreement,
      and
      any related agreements (collectively the “Transaction
      Documents”)
      and to
      issue the Convertible Debentures and the Conversion Shares in accordance with
      the terms hereof and thereof, (ii) the execution and delivery of the Transaction
      Documents by the Company and the consummation by it of the transactions
      contemplated hereby and thereby, including, without limitation, the issuance
      of
      the Convertible Debentures the Conversion Shares and the reservation for
      issuance and the issuance of the Conversion Shares issuable upon conversion
      or
      exercise thereof, have been duly authorized by the Company’s Board of Directors
      and no further consent or authorization is required by the Company, its Board
      of
      Directors or its stockholders, (iii) the Transaction Documents have been duly
      executed and delivered by the Company, and (iv) the Transaction Documents
      constitute the valid and binding obligations of the Company enforceable against
      the Company in accordance with their terms, except as such enforceability may
      be
      limited by general principles of equity or applicable bankruptcy, insolvency,
      reorganization, moratorium, liquidation or similar laws relating to, or
      affecting generally, the enforcement of creditors’ rights and remedies. The
      authorized officer of the Company executing the Transaction Documents knows
      of
      no reason why the Company cannot file the registration statement as required
      under the Investor Registration Rights Agreement or perform any of the Company’s
      other obligations under such documents. 

     

    (c)  Capitalization.
      The
      authorized capital stock of the Company consists of an unlimited number of
      shares of Common Stock and 100,000 shares of Preferred Stock, no par value
      (“Preferred
      Stock”),
      of
      which, as of October 13, 2006, 315,774,656 shares of Common Stock and 23,894
      shares of Preferred Stock were issued and outstanding. All of such outstanding
      shares have been validly issued and are fully paid and nonassessable. No shares
      of Common Stock are subject to preemptive rights or any other similar rights
      or
      any liens or encumbrances suffered or permitted by the Company. As of the date
      of this Agreement, (i) there are no outstanding options, warrants, scrip, rights
      to subscribe to, calls or commitments of any character whatsoever relating
      to,
      or securities or rights convertible into, any shares of capital stock of the
      Company or any of its subsidiaries, or contracts, commitments, understandings
      or
      arrangements by which the Company or any of its subsidiaries is or may become
      bound to issue additional shares of capital stock of the Company or any of
      its
      subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
      commitments of any character whatsoever relating to, or securities or rights
      convertible into, any shares of capital stock of the Company or any of its
      subsidiaries, (ii) there are no outstanding debt securities and (iii) there
      are
      no agreements or arrangements under which the Company or any of its subsidiaries
      is obligated to register the sale of any of their securities under the
      Securities Act (except pursuant to the Investor Registration Rights Agreement)
      and (iv) there are no outstanding registration statements and there are no
      outstanding comment letters from the SEC or any other regulatory agency to
      a
      registration statement that has not been withdrawn. There are no securities
      or
      instruments containing anti-dilution or similar provisions that will be
      triggered by the issuance of the Convertible Debentures as described in this
      Agreement. 

     

    (d)  Issuance
      of Securities.
      The
      Convertible Debentures are duly authorized and, upon issuance in accordance
      with
      the terms hereof, shall be duly issued, fully paid and nonassessable, are free
      from all taxes, liens and charges with respect to the issue thereof. The
      Conversion Shares issuable upon conversion of the Convertible Debentures have
      been duly authorized and reserved for issuance. Upon conversion or exercise
      in
      accordance with the Convertible Debentures, the Conversion Shares will be duly
      issued, fully paid and nonassessable.

     

    (e)  No
      Conflicts.
      The
      execution, delivery and performance of the Transaction Documents by the Company
      and the consummation by the Company of the transactions contemplated hereby
      will
      not (i) result in a violation of the Articles of Incorporation, any certificate
      of designations of any outstanding series of preferred stock of the Company
      or
      the By-laws or (ii) conflict with 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 rights of termination, amendment, acceleration or cancellation of,
      any agreement, indenture or instrument to which the Company or any of its
      subsidiaries is a party, or result in a violation of any law, rule, regulation,
      order, judgment or decree (including federal and state securities laws and
      regulations and the rules and regulations of The National Association of
      Securities Dealers Inc.’s OTC Bulletin Board on which the Common Stock is
      quoted) applicable to the Company or any of its subsidiaries or by which any
      property or asset of the Company or any of its subsidiaries is bound or
      affected. Neither the Company nor its subsidiaries is in violation of any term
      of or in default under its Articles of Incorporation or By-laws or their
      organizational charter or by-laws, respectively, or any material contract,
      agreement, mortgage, indebtedness, indenture, instrument, judgment, decree
      or
      order or any statute, rule or regulation applicable to the Company or its
      subsidiaries. The business of the Company and its subsidiaries is not being
      conducted, and shall not be conducted in violation of any material law,
      ordinance, or regulation of any governmental entity. Except as specifically
      contemplated by this Agreement and as required under the Securities Act and
      any
      applicable state securities laws, the Company is not required to obtain any
      consent, authorization or order of, or make any filing or registration with,
      any
      court or governmental agency in order for it to execute, deliver or perform
      any
      of its obligations under or contemplated by this Agreement or the Investor
      Registration Rights Agreement in accordance with the terms hereof or thereof.
      All consents, authorizations, orders, filings and registrations which the
      Company is required to obtain pursuant to the preceding sentence have been
      obtained or effected on or prior to the date hereof. The Company and its
      subsidiaries are unaware of any facts or circumstance, which might give rise
      to
      any of the foregoing.

     

    (f)  SEC
      Documents: Financial Statements.
      Since
      May 6, 1998, the Company has filed all reports, schedules, forms, statements
      and
      other documents required to be filed by it with the SEC under the Securities
      Exchange Act of 1934, as amended (the “Exchange
      Act”)
      (all
      of the foregoing filed prior to the date hereof or amended after the date hereof
      and all exhibits included therein and financial statements and schedules thereto
      and documents incorporated by reference therein, and the Company’s Annual Report
      on Form 10-KSB for the fiscal year ended July 31, 2006, being hereinafter
      referred to as the “SEC
      Documents”).
      The
      Company has delivered to the Buyers or their representatives, or made available
      through the SEC’s website at http://www.sec.gov., true and complete copies of
      the SEC Documents. As of their respective dates, the financial statements of
      the
      Company disclosed in the SEC Documents (the “Financial
      Statements”)
      complied as to form in all material respects with applicable accounting
      requirements and the published rules and regulations of the SEC with respect
      thereto. Such financial statements have been prepared in accordance with
      generally accepted accounting principles, consistently applied, during the
      periods involved (except (i) as may be otherwise indicated in such Financial
      Statements or the notes thereto, or (ii) in the case of unaudited interim
      statements, to the extent they may exclude footnotes or may be condensed or
      summary statements) and, fairly present in all material respects the financial
      position of the Company as of the dates thereof and the results of its
      operations and cash flows for the periods then ended (subject, in the case
      of
      unaudited statements, to normal year-end audit adjustments). No other
      information provided by or on behalf of the Company to the Buyer which is not
      included in the SEC Documents, including, without limitation, information
      referred to in this Agreement, contains any untrue statement of a material
      fact
      or omits to state any material fact necessary in order to make the statements
      therein, in the light of the circumstances under which they were made, not
      misleading.

     

    (g)  10(b)-5.
      Neither
      the Transaction Documents nor the SEC Documents include any untrue statements
      of
      material fact, nor do they omit to state any material fact required to be stated
      therein necessary to make the statements made, in light of the circumstances
      under which they were made, not misleading.

     

    (h)  Absence
      of Litigation.
      There
      is no action, suit, proceeding, inquiry or investigation before or by any court,
      public board, government agency, self-regulatory organization or body pending
      against or affecting the Company, the Common Stock or any of the Company’s
      subsidiaries, wherein an unfavorable decision, ruling or finding would (i)
      have
      a material adverse effect on the transactions contemplated hereby (ii) adversely
      affect the validity or enforceability of, or the authority or ability of the
      Company to perform its obligations under, this Agreement or any of the documents
      contemplated herein, or (iii) have a material adverse effect on the business,
      operations, properties, financial condition or results of operations of the
      Company and its subsidiaries taken as a whole.

     

    (i)  Acknowledgment
      Regarding Buyer’s Purchase of the Convertible Debentures.
      The
      Company acknowledges and agrees that the Buyer(s) is acting solely in the
      capacity of an arm’s length purchaser with respect to this Agreement and the
      transactions contemplated hereby. The Company further acknowledges that the
      Buyer(s) is not acting as a financial advisor or fiduciary of the Company (or
      in
      any similar capacity) with respect to this Agreement and the transactions
      contemplated hereby and any advice given by the Buyer(s) or any of their
      respective representatives or agents in connection with this Agreement and
      the
      transactions contemplated hereby is merely incidental to such Buyer’s purchase
      of the Convertible Debentures or the Conversion Shares. The Company further
      represents to the Buyer that the Company’s decision to enter into this Agreement
      has been based solely on the independent evaluation by the Company and its
      representatives.

     

    (j)  No
      General Solicitation.
      Neither
      the Company, nor any of its affiliates, nor any person acting on its or their
      behalf, has engaged in any form of general solicitation or general advertising
      (within the meaning of Regulation D under the Securities Act) in connection
      with
      the offer or sale of the Convertible Debentures or the Conversion
      Shares.

     

    (k)  No
      Integrated Offering.
      Neither
      the Company, nor any of its affiliates, nor any person acting on its or their
      behalf has, directly or indirectly, made any offers or sales of any security
      or
      solicited any offers to buy any security, under circumstances that would require
      registration of the Convertible Debentures or the Conversion Shares under the
      Securities Act or cause this offering of the Convertible Debentures or the
      Conversion Shares to be integrated with prior offerings by the Company for
      purposes of the Securities Act.

     

    (l)  Employee
      Relations.
      Neither
      the Company nor any of its subsidiaries is involved in any labor dispute nor,
      to
      the knowledge of the Company or any of its subsidiaries, is any such dispute
      threatened. None of the Company’s or its subsidiaries’ employees is a member of
      a union and the Company and its subsidiaries believe that their relations with
      their employees are good.

     

    (m)  Intellectual
      Property Rights.
      The
      Company and its subsidiaries own or possess adequate rights or licenses to
      use
      all trademarks, trade names, service marks, service mark registrations, service
      names, patents, patent rights, copyrights, inventions, licenses, approvals,
      governmental authorizations, trade secrets and rights necessary to conduct
      their
      respective businesses as now conducted. The Company and its subsidiaries do
      not
      have any knowledge of any infringement by the Company or its subsidiaries of
      trademark, trade name rights, patents, patent rights, copyrights, inventions,
      licenses, service names, service marks, service mark registrations, trade secret
      or other similar rights of others, and, to the knowledge of the Company there
      is
      no claim, action or proceeding being made or brought against, or to the
      Company’s knowledge, being threatened against, the Company or its subsidiaries
      regarding trademark, trade name, patents, patent rights, invention, copyright,
      license, service names, service marks, service mark registrations, trade secret
      or other infringement; and the Company and its subsidiaries are unaware of
      any
      facts or circumstances which might give rise to any of the
      foregoing.

     

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

     

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

     

    (p)  Insurance.
      The
      Company and each of its subsidiaries are insured by insurers of recognized
      financial responsibility against such losses and risks and in such amounts
      as
      management of the Company believes to be prudent and customary in the businesses
      in which the Company and its subsidiaries are engaged. Neither the Company
      nor
      any such subsidiary has been refused any insurance coverage sought or applied
      for and neither the Company nor any such subsidiary has any reason to believe
      that it will not be able to renew its existing insurance coverage as and when
      such coverage expires or to obtain similar coverage from similar insurers as
      may
      be necessary to continue its business at a cost that would not materially and
      adversely affect the condition, financial or otherwise, or the earnings,
      business or operations of the Company and its subsidiaries, taken as a
      whole.

     

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

     

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

     

    (s)  No
      Material Adverse Breaches, etc.
      Neither
      the Company nor any of its subsidiaries is subject to any charter, corporate
      or
      other legal restriction, or any judgment, decree, order, rule or regulation
      which in the judgment of the Company’s officers has or is expected in the future
      to have a material adverse effect on the business, properties, operations,
      financial condition, results of operations or prospects of the Company or its
      subsidiaries. Neither the Company nor any of its subsidiaries is in breach
      of
      any contract or agreement which breach, in the judgment of the Company’s
      officers, has or is expected to have a material adverse effect on the business,
      properties, operations, financial condition, results of operations or prospects
      of the Company or its subsidiaries.

     

    (t)  Tax
      Status.
      The
      Company and each of its subsidiaries has made and filed all federal and state
      income and all other tax returns, reports and declarations required by any
      jurisdiction to which it is subject and (unless and only to the extent that
      the
      Company and each of its subsidiaries has set aside on its books provisions
      reasonably adequate for the payment of all unpaid and unreported taxes) has
      paid
      all taxes and other governmental assessments and charges that are material
      in
      amount, shown or determined to be due on such returns, reports and declarations,
      except those being contested in good faith and has set aside on its books
      provision reasonably adequate for the payment of all taxes for periods
      subsequent to the periods to which such returns, reports or declarations apply.
      There are no unpaid taxes in any material amount claimed to be due by the taxing
      authority of any jurisdiction, and the officers of the Company know of no basis
      for any such claim.

     

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

     

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

     

    5.  COVENANTS.

     

    (a)  Reasonable
      Best Efforts.
      Each
      party shall use its reasonable best efforts to timely satisfy each of the
      conditions to be satisfied by it as provided in Sections 6 and 7 of this
      Agreement.

     

    (b)  Form
      D.
      The
      Company agrees to file a Form D with respect to the Conversion Shares as
      required under Regulation D and to provide a copy thereof to the Buyer promptly
      after such filing. The Company shall, on or before the Closing Date, take such
      action as the Company shall reasonably determine is necessary to qualify the
      Conversion Shares, or obtain an exemption for the Conversion Shares for sale
      to
      the Buyers at the Closing pursuant to this Agreement under applicable securities
      or “Blue Sky” laws of the states of the United States, and shall provide
      evidence of any such action so taken to the Buyers on or prior to the Closing
      Date.

     

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

     

    (d)  Use
      of
      Proceeds.
      The
      Company will use the proceeds from the sale of the Convertible Debentures for
      general corporate and working capital purposes.

     

    (e)  Reservation
      of Shares.
      The
      Company shall take all action reasonably necessary to at all times have
      authorized, and reserved for the purpose of issuance, such number of shares
      of
      Common Stock as shall be necessary to effect the issuance of the Conversion
      Shares. If at any time the Company does not have available such shares of Common
      Stock as shall from time to time be sufficient to effect the conversion of
      all
      of the Conversion Shares, the Company shall call and hold a special meeting
      of
      the shareholders within thirty (30) days of such occurrence, for the sole
      purpose of increasing the number of shares authorized. The Company’s management
      shall recommend to the shareholders to vote in favor of increasing the number
      of
      shares of Common Stock authorized. Management shall also vote all of its shares
      in favor of increasing the number of authorized shares of Common
      Stock.

     

    (f)  Listings
      or Quotation.
      The
      Company shall promptly secure the listing or quotation of the Conversion Shares
      upon each national securities exchange, automated quotation system or The
      National Association of Securities Dealers Inc.’s Over-The-Counter Bulletin
      Board (“OTCBB”)
      or
      other market, if any, upon which shares of Common Stock are then listed or
      quoted (subject to official notice of issuance) and shall use its best efforts
      to maintain, so long as any other shares of Common Stock shall be so listed,
      such listing of all Conversion Shares from time to time issuable under the
      terms
      of this Agreement. The Company shall maintain the Common Stock’s authorization
      for quotation on the OTCBB.

     

    (g)  Fees
      and Expenses.
      

     

    (i)  Each
      of
      the Company and the Buyer(s) shall pay all costs and expenses incurred by such
      party in connection with the negotiation, investigation, preparation, execution
      and delivery of the Transaction Documents, provided however, the Company shall
      pay TAIB Bank B.S.C (c) a fee of One Hundred Twenty Thousand Dollars ($120,000)
      directly from the gross proceeds of the Closing. 

     

    (ii)  The
      Company shall pay to TAIB Bank B.S.C. (c) a non-refundable due diligence fee
      of
      Ten Thousand Dollars ($10,000) which shall be paid directly from the proceeds
      of
      the Closing.

     

    (h)  Corporate
      Existence.
      So long
      as any of the Convertible Debentures remain outstanding, the Company shall
      not
      directly or indirectly consummate any merger, reorganization, restructuring,
      reverse stock split consolidation, sale of all or substantially all of the
      Company’s assets or any similar transaction or related transactions (each such
      transaction, an “Organizational
      Change”)
      unless, prior to the consummation an Organizational Change, the Company obtains
      the written consent of each Buyer. In any such case, the Company will make
      appropriate provision with respect to such holders’ rights and interests to
      insure that the provisions of this Section 4(h) will thereafter be applicable
      to
      the Convertible Debentures.

     

    (i)  Transactions
      With Affiliates.
      So long
      as any Convertible Debentures are outstanding, the Company shall not, and shall
      cause each of its subsidiaries not to, enter into, amend, modify or supplement,
      or permit any subsidiary to enter into, amend, modify or supplement any
      agreement, transaction, commitment, or arrangement with any of its or any
      subsidiary’s officers, directors, person who were officers or directors at any
      time during the previous two (2) years, stockholders who beneficially own five
      percent (5%) or more of the Common Stock, or Affiliates (as defined below)
      or
      with any individual related by blood, marriage, or adoption to any such
      individual or with any entity in which any such entity or individual owns a
      five
      percent (5%) or more beneficial interest (each a “Related
      Party”),
      except for (a) customary employment arrangements and benefit programs on
      reasonable terms, (b) any investment in an Affiliate of the Company, (c) any
      agreement, transaction, commitment, or arrangement on an arms-length basis
      on
      terms no less favorable than terms which would have been obtainable from a
      person other than such Related Party, (d) any agreement, transaction,
      commitment, or arrangement which is approved by a majority of the disinterested
      directors of the Company; for purposes hereof, any director who is also an
      officer of the Company or any subsidiary of the Company shall not be a
      disinterested director with respect to any such agreement, transaction,
      commitment, or arrangement. “Affiliate”
for
      purposes hereof means, with respect to any person or entity, another person
      or
      entity that, directly or indirectly, (i) has a ten percent (10%) or more equity
      interest in that person or entity, (ii) has ten percent (10%) or more common
      ownership with that person or entity, (iii) controls that person or entity,
      or
      (iv) shares common control with that person or entity. “Control”
or
      “controls”
for
      purposes hereof means that a person or entity has the power, direct or indirect,
      to conduct or govern the policies of another person or entity.

     

    (j)  Transfer
      Agent.
      The
      Company covenants and agrees that, in the event that the Company’s agency
      relationship with the transfer agent should be terminated for any reason prior
      to a date which is two (2) years after the Closing Date, the Company shall
      immediately appoint a new transfer agent and shall require that the new transfer
      agent execute and agree to be bound by the terms of the Irrevocable Transfer
      Agent Instructions (as defined herein).

     

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

     

    (l)  Neither
      the Buyer(s) nor any of its affiliates have an open short position in the Common
      Stock of the Company, and the Buyer(s) agrees that it shall not, and that it
      will cause its affiliates not to, engage in any short sales of or hedging
      transactions with respect to the Common Stock as long as any Convertible
      Debentures shall remain outstanding. 

     

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

     

    (n)  Lock
      Up Agreements.
      On the
      date hereof, the Company shall obtain from each officer and director a lock
      up
      agreement in the form attached hereto as Exhibit
      A.

     

    (o)  Transfer
      Agent.Within
      forty five (45) days of the date hereof the Company shall retain a new transfer
      agent that is DWAC eligible and agrees to be bound by the terms and conditions
      of the Transfer Agent Instructions.

     

    6.  CONDITIONS
      TO THE COMPANY’S OBLIGATION TO SELL.

     

    The
      obligation of the Company hereunder to issue and sell the Convertible Debentures
      to the Buyer(s) at the Closings is subject to the satisfaction, at or before
      the
      Closing Date, of each of the following conditions, provided that these
      conditions are for the Company’s sole benefit and may be waived by the Company
      at any time in its sole discretion:

     

    (a)  Each
      Buyer shall have executed the Transaction Documents and delivered them to the
      Company.

     

    (b)  The
      Buyer(s) must have completed, executed and returned to the Company a Prospective
      Investor Suitability Questionnaire in the form attached as Exhibit E (the
US
      Questionnaire”);
      if
      the Buyer(s) is purchasing pursuant to National Instrument 45-106 adopted by
      the
      BCSC, a British Columbia Accredited Investor Questionnaire in the form attached
      as Exhibit F (together with the US Questionnaire, the “Questionnaires”);
      and
      if the Buyer(s) is purchasing pursuant to Section 74(2)(4) of the Securities
      Act
      (British Columbia) (the “B.C.
      Act”)
      a Form
      45-903F1 in the form attached as Exhibit “G”.

     

    The
      Buyer(s) shall complete, sign and return to the Company as soon as possible,
      on
      request by the Company, any documents, questionnaires, notices and undertakings
      as may be required by any regulatory authorities and applicable
      law.

     

    (c)  The
      Buyer(s) shall have delivered to the Company the Purchase Price for Convertible
      Debentures in respective amounts as set forth next to each Buyer as outlined
      on
      Schedule I attached hereto, minus any fees to be paid directly from the proceeds
      the Closings as set forth herein, by wire transfer of immediately available
      U.S.
      funds pursuant to the wire instructions provided by the Company.

     

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

     

    7.  CONDITIONS
      TO THE BUYER’S OBLIGATION TO PURCHASE.

     

    (a)  The
      obligation of the Buyer(s) hereunder to purchase the Convertible Debentures
      at
      the Closing is subject to the satisfaction, at or before the First Closing
      Date,
      of each of the following conditions:

     

    (i)  The
      Company shall have executed the Transaction Documents and delivered the same
      to
      the Buyer(s).

     

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

     

    (iii)  The
      representations and warranties of the Company shall be true and correct in
      all
      material respects (except to the extent that any of such representations and
      warranties is already qualified as to materiality in Section 2 above, in which
      case, such representations and warranties shall be true and correct without
      further qualification) as of the date when made and as of the Closing Date
      as
      though made at that time (except for representations and warranties that speak
      as of a specific date) and the Company shall have performed, satisfied and
      complied in all material respects with the covenants, agreements and conditions
      required by this Agreement to be performed, satisfied or complied with by the
      Company at or prior to the Closing Date

     

    (iv)  The
      Company shall have executed and delivered to the Buyer(s) the Convertible
      Debentures in the respective amounts set forth opposite each Buyer(s) name
      on
      Schedule I attached hereto.

     

    (v)  The
      Buyer(s) shall have received an opinion of counsel from Company’s Yukon counsel
      in a form satisfactory to the Buyer(s).

     

    (vi)  The
      Company shall have provided to the Buyer(s) a certificate of good standing
      from
      the secretary of state from the state in which the company is incorporated
      and/or the Canadian equivalent of a certificate of good standing.

     

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

     

    (viii)  The
      Company shall have reserved out of its authorized and unissued Common Stock,
      solely for the purpose of effecting the conversion of the Convertible
      Debentures, shares of Common Stock to effect the conversion of all of the
      Convertible Debentures . 

     

    (ix)  The
      Irrevocable Transfer Agent Instructions, in form and substance satisfactory
      to
      the Buyer, shall have been delivered to and acknowledged in writing by the
      Company’s transfer agent.

     

    8.  INDEMNIFICATION.

     

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

     

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

     

    9.  GOVERNING
      LAW: MISCELLANEOUS.

     

    (a)  Governing
      Law.
      This
      Agreement shall be governed by and interpreted in accordance with the laws
      of
      the State of New Jersey without regard to the principles of conflict of laws.
      The parties further agree that any action between them shall be heard in Hudson
      County, New Jersey, and expressly consent to the jurisdiction and venue of
      the
      Superior Court of New Jersey, sitting in Hudson County and the United States
      District Court for the District of New Jersey sitting in Newark, New Jersey
      for
      the adjudication of any civil action asserted pursuant to this
      Paragraph.

     

    (b)  Counterparts.
      This
      Agreement may be executed in two or more identical counterparts, all of which
      shall be considered one and the same agreement and shall become effective when
      counterparts have been signed by each party and delivered to the other party.
      In
      the event any signature page is delivered by facsimile transmission, the party
      using such means of delivery shall cause four (4) additional original executed
      signature pages to be physically delivered to the other party within five (5)
      days of the execution and delivery hereof.

     

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

     

    (d)  Severability.
      If any
      provision of this Agreement shall be invalid or unenforceable in any
      jurisdiction, such invalidity or unenforceability shall not affect the validity
      or enforceability of the remainder of this Agreement in that jurisdiction or
      the
      validity or enforceability of any provision of this Agreement in any other
      jurisdiction.

     

    (e)  Entire
      Agreement, Amendments.
      This
      Agreement supersedes all other prior oral or written agreements between the
      Buyer(s), the Company, their affiliates and persons acting on their behalf
      with
      respect to the matters discussed herein, and this Agreement and the instruments
      referenced herein contain the entire understanding of the parties with respect
      to the matters covered herein and therein and, except as specifically set forth
      herein or therein, neither the Company nor any Buyer makes any representation,
      warranty, covenant or undertaking with respect to such matters. No provision
      of
      this Agreement may be waived or amended other than by an instrument in writing
      signed by the party to be charged with enforcement.

     

    (f)  Notices.
      Any
      notices, consents, waivers, or other communications required or permitted to
      be
      given under the terms of this Agreement must be in writing and will be deemed
      to
      have been delivered (i) upon receipt, when delivered personally; (ii) upon
      confirmation of receipt, when sent by facsimile; (iii) three (3) days after
      being sent by U.S. certified mail, return receipt requested, or (iv) one (1)
      day
      after deposit with a nationally recognized overnight delivery service, in each
      case properly addressed to the party to receive the same. The addresses and
      facsimile numbers for such communications shall be:

     

    
      	
              If
                to the Company, 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
      Buyer(s), to its address and facsimile number on Schedule I, with copies to
      the
      Buyer’s counsel as set forth on Schedule I. Each party shall provide five (5)
      days’ prior written notice to the other party of any change in address or
      facsimile number.

     

    (g)  Successors
      and Assigns.
      This
      Agreement shall be binding upon and inure to the benefit of the parties and
      their respective successors and assigns. Neither the Company nor any Buyer
      shall
      assign this Agreement or any rights or obligations hereunder without the prior
      written consent of the other party hereto.

     

    (h)  No
      Third Party Beneficiaries.
      This
      Agreement is intended for the benefit of the parties hereto and their respective
      permitted successors and assigns, and is not for the benefit of, nor may any
      provision hereof be enforced by, any other person.

     

    (i)  Survival.
      Unless
      this Agreement is terminated under Section 9(l), the representations and
      warranties of the Company and the Buyer(s) contained in Sections 2 and 3, the
      agreements and covenants set forth in Sections 4, 5 and 9, and the
      indemnification provisions set forth in Section 8, shall survive the Closing
      for
      a period of two (2) years following the date on which the Convertible Debentures
      are converted in full. The Buyer(s) shall be responsible only for its own
      representations, warranties, agreements and covenants hereunder.

     

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

     

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

     

    (l)  Termination.
      In the
      event that the Closing shall not have occurred with respect to the Buyers on
      or
      before five (5) business days from the date hereof due to the Company’s or the
      Buyer’s failure to satisfy the conditions set forth in Sections 6 and 7 above
      (and the non-breaching party’s failure to waive such unsatisfied condition(s)),
      the non-breaching party shall have the option to terminate this Agreement with
      respect to such breaching party at the close of business on such date without
      liability of any party to any other party; provided, however, that if this
      Agreement is terminated by the Company pursuant to this Section 9(l), the
      Company shall remain obligated to pay the the fees and expenses described in
      Section 5(g) above.

     

    (m)  Brokerage.
      The
      Company represents that no broker, agent, finder or other party has been
      retained by it in connection with the transactions contemplated hereby and
      that
      no other fee or commission has been agreed by the Company to be paid for or
      on
      account of the transactions contemplated hereby.

     

    (n)  No
      Strict Construction.
      The
      language used in this Agreement will be deemed to be the language chosen by
      the
      parties to express their mutual intent, and no rules of strict construction
      will
      be applied against any party.

     

    

    [REMAINDER
      PAGE INTENTIONALLY LEFT BLANK]

    
      
        3

        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

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

     

    

    
      	 	
              COMPANY:

            
	 	
              SMARTIRE
                SYSTEMS INC. 

            
	 	 
	 	
              By:     
                /s/ Jeff Finkelstein      

            
	 	
              Name: 
                Jeff Finkelstein 

            
	 	
              Title: 
                Chief Financial Officer

            
	 	 

    

    

    

    

    
      
        
           

          

        

        
        

      

      
        
        

        
          

        

      

      
        
        

        
        

      

    

    

     

    SCHEDULE
      I

     

     

    SCHEDULE
      OF BUYERS 

     

    

      

      
        	
                Name

              	
                Signature

              	
                Address/Facsimile
                  

                Number
                  of Buyer

              	
                Amount
                  of Subscription

              
	 	 	 	 
	 	 	 	 
	
                TAIB
                  Bank, B.S.C. (c)

              	
                By: 
                  /s/ Larry Chaleff

              	
                450
                  Park Ave. - Suite 1902

              	
                $1,000,000

              
	
                c/o
                  TAIB Securities, Inc.

              	
                Name:
                  Larry Chaleff 

              	
                New
                  York, NY 10022

              	 
	 	 	
                Attention:
                  Larry Chaleff

              	 
	 	 	
                Facsimile: (212)
                  832-7122 

              	 
	 	 	 	 
	
                Certain
                  Wealth, Ltd.

              	
                By: 
                  /s/ Larry Chaleff

              	
                450
                  Park Ave. - Suite 1902

              	
                $200,000

              
	
                c/o
                  TAIB Securities, Inc.

              	
                Name:
                  Larry Chaleff

              	
                New
                  York, NY 10022

              	 
	 	 	
                Attention:
                  Larry Chaleff

              	 
	 	 	
                Facsimile:
                  (212) 832-7122

              	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 

      

       

    

    
      
        1

        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    DISCLOSURE
      SCHEDULE

    
      
        2

        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    EXHIBIT
      A

     

     

    LOCK
      UP AGREEMENT

     

    The
      undersigned hereby agrees that for a period commencing on October ___, 2006
      and
      expiring on the date thirty (30) days after the date that all amounts owed
      to
      TAIB Bank, B.S.C. (c) and Certain Wealth, Ltd. (the “Investor”),
      under
      the Convertible Debentures issued to the Investor pursuant to the Securities
      Purchase Agreement between Smartire Systems Inc. (the “Company”)
      and
      the Investor dated October ___, 2006 have been paid (the “Lock-up
      Period”),
      he,
      she or it will not, directly or indirectly, without the prior written consent
      of
      the Investor, issue, offer, agree or offer to sell, sell, grant an option for
      the purchase or sale of, transfer, pledge, assign, hypothecate, distribute
      or
      otherwise encumber or dispose of any securities of the Company, including common
      stock or options, rights, warrants or other securities underlying, convertible
      into, exchangeable or exercisable for or evidencing any right to purchase or
      subscribe for any common stock (whether or not beneficially owned by the
      undersigned), or any beneficial interest therein (collectively, the
“Securities”)
      except
      in accordance with the volume limitations set forth in Rule 144(e) of the
      General Rules and Regulations under the Securities Act of 1933, as
      amended.

     

    In
      order
      to enable the aforesaid covenants to be enforced, the undersigned hereby
      consents to the placing of legends and/or stop-transfer orders with the transfer
      agent of the Company’s securities with respect to any of the Securities
      registered in the name of the undersigned or beneficially owned by the
      undersigned, and the undersigned hereby confirms the undersigned’s investment in
      the Company.

     

    Dated:
      _______________, 2006

    

    Signature

    

    

     

    Name:
      ____________________________________

    Address:      

    City,
      State, Zip Code:

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