Document:

Exhibit 10.1

                      STANDBY EQUITY DISTRIBUTION AGREEMENT
                      -------------------------------------

      THIS AGREEMENT  dated as of the 23rd day of June,  2005 (the  "Agreement")
between  CORNELL  CAPITAL  PARTNERS,  LP, a Delaware  limited  partnership  (the
"Investor"),  and SMARTIRE  SYSTEMS INC., a  corporation  organized and existing
under the laws of the Yukon Territory (the "Company").

      WHEREAS,  the  parties  desire  that,  upon the terms and  subject  to the
conditions  contained herein,  the Company shall issue and sell to the Investor,
from time to time as provided  herein,  and the Investor shall purchase from the
Company up to One Hundred  Sixty  Million  U.S.  Dollars  ($160,000,000)  of the
Company's common stock, no par value (the "Common Stock");

      WHEREAS, such investments will be made in reliance upon the provisions of:

      (i)   Regulation D  ("Regulation  D") of the  Securities  Act of 1933,  as
            amended, and the regulations promulgated thereunder (the "Securities
            Act"),  and or upon  such  other  exemption  from  the  registration
            requirements  of the Securities Act as may be available with respect
            to any or all of the investments to be made hereunder; and

      (ii)  Multilateral  Instrument  45-103  adopted  by the  British  Columbia
            Securities Commission (the "BCSC"); and

      WHEREAS,  the  Company  has  engaged  Newbridge   Securities,   Inc.  (the
"Placement  Agent"),  to act as  the  Company's  exclusive  placement  agent  in
connection with the sale of the Company's Common Stock to the Investor hereunder
pursuant to the Placement Agent Agreement dated the date hereof by and among the
Company, the Placement Agent and the Investor (the "Placement Agent Agreement").

      NOW, THEREFORE, the parties hereto agree as follows:

                                   ARTICLE I.
                               Certain Definitions

      Section 1.1.  "Advance"  shall mean the portion of the  Commitment  Amount
requested by the Company in the Advance Notice.

      Section  1.2.  "Advance  Date"  shall  mean the date  the  David  Gonzalez
Attorney  Trust  Account is in receipt of the funds from the  Investor and David
Gonzalez,  Esq., is in  possession  of free trading  shares from the Company and
therefore  an  Advance  by the  Investor  to the  Company  can be made and David
Gonzalez,  Esq. can release the free trading shares to the Investor. The Advance
Date shall be the first (1st)  Trading Day after  expiration  of the  applicable
Pricing Period for each Advance.

      Section 1.3.  "Advance Notice" shall mean a written notice to the Investor
setting forth the Advance amount that the Company requests from the Investor and
the Advance Date.

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      Section  1.4.  "Advance  Notice  Date"  shall  mean each date the  Company
delivers to the  Investor an Advance  Notice  requiring  the Investor to advance
funds to the Company,  subject to the terms of this Agreement. No Advance Notice
Date shall be less than five (5)  Trading  Days after the prior  Advance  Notice
Date.

      Section 1.5.  "Bid Price" shall mean,  on any date,  the closing bid price
(as reported by Bloomberg  L.P.) of the Common Stock on the Principal  Market or
if the Common Stock is not traded on a Principal  Market,  the highest  reported
bid price for the Common  Stock,  as furnished by the  National  Association  of
Securities Dealers, Inc.

      Section  1.6.  "Closing"  shall mean one of the closings of a purchase and
sale of Common Stock pursuant to Section 2.3.

      Section 1.7.  "Commitment Amount" shall mean the aggregate amount of up to
One Hundred Sixty  Million U.S.  Dollars  ($160,000,000)  which the Investor has
agreed to provide to the Company in order to purchase the Company's Common Stock
pursuant to the terms and conditions of this Agreement.

      Section 1.8.  "Commitment  Period" shall mean the period commencing on the
earlier to occur of (i) the  Effective  Date,  or (ii) such  earlier date as the
Company and the  Investor  may  mutually  agree in writing,  and expiring on the
earliest to occur of (x) the date on which the Investor  shall have made payment
of Advances  pursuant to this  Agreement in the aggregate  amount of One Hundred
Sixty  Million  U.S.  Dollars  ($160,000,000),  (y) the date this  Agreement  is
terminated  pursuant to Section 2.4, or (z) the date occurring  twenty four (24)
months after the Effective  Date or sixty (60) months after the  Effective  Date
provided  the  Company   files  either  an  amendment  to  the  then   effective
registration  statement or a new  registration  statement is declared  effective
after the twenty  fourth  (24th) and forty  eighty  (48th)  month after the date
hereof.

      Section 1.9.  "Common Stock" shall mean the Company's common stock, no par
value.

      Section  1.10.  "Condition  Satisfaction  Date" shall have the meaning set
forth in Section 7.2.

      Section 1.11.  "Damages" shall mean any loss,  claim,  damage,  liability,
costs and expenses (including,  without limitation,  reasonable  attorney's fees
and disbursements and costs and expenses of expert witnesses and investigation).

      Section 1.12.  "Effective Date" shall mean the date on which the SEC first
declares  effective  a  Registration  Statement  registering  the  resale of the
Registrable Securities as set forth in Section 7.2(a).

      Section 1.13. "Escrow Agreement" shall mean the escrow agreement among the
Company, the Investor, and David Gonzalez, Esq., dated the date hereof.

      Section 1.14.  "Exchange  Act" shall mean the  Securities  Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.

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      Section  1.15.   "Material  Adverse  Effect"  shall  mean  any  condition,
circumstance, or situation that would prohibit or otherwise materially interfere
with the ability of the Company to enter into and perform any of its obligations
under this  Agreement  or the  Registration  Rights  Agreement  in any  material
respect.

      Section 1.16.  "Market  Price" shall mean the lowest  closing Bid Price of
the Common Stock during the Pricing Period.

      Section 1.17. "Maximum Advance Amount" shall be Three Million U.S. Dollars
(US$3,000,000) per Advance Notice.

      Section  1.18.  "NASD" shall mean the National  Association  of Securities
Dealers, Inc.

      Section  1.19.  "Person"  shall  mean  an  individual,  a  corporation,  a
partnership, an association, a trust or other entity or organization,  including
a government or political subdivision or an agency or instrumentality thereof.

      Section 1.20.  "Placement  Agent" shall mean Newbridge  Securities Inc., a
registered broker-dealer.

      Section 1.21. "Pricing Period" shall mean the five (5) consecutive Trading
Days after the Advance Notice Date.

      Section 1.22.  "Principal  Market" shall mean the Nasdaq National  Market,
the Nasdaq SmallCap Market, the American Stock Exchange,  the OTC Bulletin Board
or the New York Stock Exchange,  whichever is at the time the principal  trading
exchange or market for the Common Stock.

      Section 1.23.  "Purchase Price" shall be set at ninety eight percent (98%)
of the Market Price during the Pricing Period.

      Section  1.24.  "Registrable  Securities"  shall mean the shares of Common
Stock to be issued hereunder (i) in respect of which the Registration  Statement
has not been declared  effective by the SEC, (ii) which have not been sold under
circumstances  meeting  all of the  applicable  conditions  of Rule  144 (or any
similar  provision then in force) under the Securities Act ("Rule 144") or (iii)
which have not been otherwise  transferred to a holder who may trade such shares
without  restriction  under the Securities  Act, and the Company has delivered a
new certificate or other evidence of ownership for such securities not bearing a
restrictive legend.

      Section 1.25.  "Registration Rights Agreement" shall mean the Registration
Rights Agreement dated the date hereof, regarding the filing of the Registration
Statement for the resale of the Registrable Securities, entered into between the
Company and the Investor.

      Section 1.26. "Registration Statement" shall mean a registration statement
on Form  S-1 or  SB-2  (if use of such  form is then  available  to the  Company
pursuant to the rules of the SEC and, if not, on such other form  promulgated by
the SEC for which the Company then  qualifies  and which counsel for the Company
shall deem appropriate,  and which form shall be available for the resale of the
Registrable  Securities  to be  registered  thereunder  in  accordance  with the
provisions  of this  Agreement and the  Registration  Rights  Agreement,  and in
accordance with the intended method of distribution of such securities), for the
registration of the resale by the Investor of the Registrable  Securities  under
the Securities Act.

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      Section  1.27.  "Regulation  D" shall  have the  meaning  set forth in the
recitals of this Agreement.

      Section 1.28. "SEC" shall mean the Securities and Exchange Commission

      Section  1.29.  "Securities  Act" shall have the  meaning set forth in the
recitals of this Agreement.

      Section 1.30.  "SEC  Documents"  shall mean Annual Reports on Form 10-KSB,
Quarterly  Reports  on  Form  10-QSB,  Current  Reports  on Form  8-K and  Proxy
Statements  of the  Company as  supplemented  to the date  hereof,  filed by the
Company for a period of at least twelve (12) months  immediately  preceding  the
date  hereof or the  Advance  Date,  as the case may be,  until such time as the
Company  no  longer  has  an  obligation  to  maintain  the  effectiveness  of a
Registration Statement as set forth in the Registration Rights Agreement.

      Section  1.31.  "Trading Day" shall mean any day during which the New York
Stock Exchange shall be open for business.

                                   ARTICLE II.
                                    Advances

      Section 2.1. Investments.

            (a)  Advances.  Upon the  terms  and  conditions  set  forth  herein
(including,  without  limitation,  the provisions of Article VII hereof), on any
Advance  Notice Date the  Company may request an Advance by the  Investor by the
delivery  of an Advance  Notice.  The number of shares of Common  Stock that the
Investor  shall  receive for each Advance  shall be  determined  by dividing the
amount of the Advance by the  Purchase  Price.  No  fractional  shares  shall be
issued.  Fractional  shares  shall be rounded to the next higher whole number of
shares.  The aggregate maximum amount of all Advances that the Investor shall be
obligated to make under this Agreement shall not exceed the Commitment Amount.

      Section 2.2. Mechanics.

            (a) Advance Notice.  At any time during the Commitment  Period,  the
Company may deliver an Advance Notice to the Investor, subject to the conditions
set forth in Section  7.2;  provided,  however,  the amount for each  Advance as
designated by the Company in the applicable  Advance  Notice,  shall not be more
than the Maximum Advance Amount.  The aggregate amount of the Advances  pursuant
to this Agreement shall not exceed the Commitment  Amount.  No fractional shares
shall be issued;  fractional  shares  shall be rounded to the next higher  whole
number of shares. The Company  acknowledges that the Investor may sell shares of
the Company's Common Stock corresponding with a particular Advance Notice on the
day the Advance Notice is received by the Investor.  There shall be a minimum of
five (5) Trading Days between each Advance Notice Date.

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            (b) Date of Delivery of Advance  Notice.  An Advance Notice shall be
deemed delivered on (i) the Trading Day it is received by facsimile or otherwise
by the Investor if such notice is received  prior to 12:00 noon Eastern Time, or
(ii) the  immediately  succeeding  Trading Day if it is received by facsimile or
otherwise after 12:00 noon Eastern Time on a Trading Day or at any time on a day
which is not a Trading Day. No Advance  Notice may be deemed  delivered on a day
that is not a Trading Day.

      Section  2.3.  Closings.  On each Advance  Date,  which shall be the first
(1st) Trading Day after  expiration of the  applicable  Pricing  Period for each
Advance,  (i) the Company  shall  deliver to David  Gonzalez,  Esq. (the "Escrow
Agent")  shares of the Company's  Common Stock,  representing  the amount of the
Advance by the Investor  pursuant to Section 2.1 herein,  registered in the name
of the  Investor  which shall be  delivered  to the  Investor,  or  otherwise in
accordance  with the Escrow  Agreement  and (ii) the Investor  shall  deliver to
Escrow Agent the amount of the Advance  specified in the Advance  Notice by wire
transfer of immediately available funds which shall be delivered to the Company,
or otherwise in accordance with the Escrow Agreement.  In addition,  on or prior
to the Advance Date,  each of the Company and the Investor  shall deliver to the
other through the Investor's  counsel,  all documents,  instruments and writings
required to be delivered by either of them  pursuant to this  Agreement in order
to implement and effect the transactions  contemplated herein.  Payment of funds
to the Company and delivery of the Company's  Common Stock to the Investor shall
occur in accordance  with the conditions set forth above and those  contained in
the Escrow Agreement;  provided, however, that to the extent the Company has not
paid the fees,  expenses,  and  disbursements of the Investor in accordance with
Section  12.4,  the  amount of such fees,  expenses,  and  disbursements  may be
deducted by the Investor from the amount of the Advance with no reduction in the
amount of shares of the  Company's  Common Stock to be delivered on such Advance
Date.

      Section 2.4. Termination of Investment.  The obligation of the Investor to
make an  Advance to the  Company  pursuant  to this  Agreement  shall  terminate
permanently  (including  with  respect  to an  Advance  Date  that  has  not yet
occurred)  in the event that (i) there shall occur any stop order or  suspension
of the  effectiveness  of the  Registration  Statement for an aggregate of fifty
(50)  Trading  Days,  other  than due to the acts of the  Investor,  during  the
Commitment  Period,  and (ii) the Company  shall at any time fail  materially to
comply with the  requirements of Article VI and such failure is not cured within
thirty (30) days after receipt of written  notice from the  Investor,  provided,
however,  that  this  termination  provision  shall  not  apply  to  any  period
commencing upon the filing of a  post-effective  amendment to such  Registration
Statement  and ending upon the date on which such post  effective  amendment  is
declared effective by the SEC.

      Section 2.5.  Agreement to Advance Funds.  The Investor  agrees to advance
the amount  specified in the Advance  Notice to the Company after the completion
of each of the following  conditions and the other  conditions set forth in this
Agreement:

            (a) the execution and delivery by the Company, and the Investor,  of
this Agreement and the Exhibits hereto;

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            (b) the Escrow Agent shall have  received the shares of Common Stock
applicable to the Advance in  accordance  with Section 2.3. Such shares shall be
free of restrictive legends.

            (c) the Company's  Registration Statement with respect to the resale
of the Registrable  Securities in accordance with the terms of the  Registration
Rights Agreement shall have been declared effective by the SEC;

            (d) the  Company  shall  have  obtained  all  material  permits  and
qualifications  required by any applicable  U.S. state or Canadian  province for
the offer and sale of the Registrable Securities, or shall have the availability
of exemptions  therefrom.  The sale and issuance of the  Registrable  Securities
shall be legally  permitted by all laws and  regulations to which the Company is
subject;

            (e) the  Company  shall have filed with the  Commission  in a timely
manner  all  reports,  notices  and other  documents  required  of a  "reporting
company" under the Exchange Act and applicable Commission regulations;

            (f) the fees as set forth in Section 12.4 below shall have been paid
or can be withheld as provided in Section 2.3; and

            (g) the  conditions  set  forth  in  Section  7.2  shall  have  been
satisfied.

      Section 2.6. Lock Up Period.

                  (i) On the date  hereof,  the Company  shall  obtain from each
executive  officer and director a lock-up  agreement,  as defined below,  in the
form annexed hereto as Schedule 2.6 agreeing to only sell in compliance with the
volume limitation of Rule 144.

      Section  2.7.  Hardship.  In the event the  Investor  sells  shares of the
Company's  Common Stock after receipt of an Advance Notice and the Company fails
to perform its  obligations  as mandated in Section  2.3, and  specifically  the
Company  fails to deliver to the Escrow  Agent on the Advance Date the shares of
Common Stock corresponding to the applicable Advance,  the Company  acknowledges
that the Investor shall suffer financial  hardship and therefore shall be liable
for any and all losses,  commissions,  fees, or financial hardship caused to the
Investor.

                                  ARTICLE III.
                   Representations and Warranties of Investor

      Investor  hereby  represents and warrants to, and agrees with, the Company
that the  following  are true and as of the date  hereof and as of each  Advance
Date:

      Section  3.1.  Organization  and  Authorization.   The  Investor  is  duly
incorporated  or  organized  and  validly  existing in the  jurisdiction  of its
incorporation  or  organization  and has all  requisite  power and  authority to
purchase and hold the securities issuable hereunder.  The decision to invest and
the execution and delivery of this Agreement by such Investor,  the  performance
by such  Investor of its  obligations  hereunder  and the  consummation  by such

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Investor of the transactions  contemplated  hereby have been duly authorized and
requires no other  proceedings on the part of the Investor.  The undersigned has
the right,  power and  authority to execute and deliver this  Agreement  and all
other  instruments  (including,  without  limitations,  the Registration  Rights
Agreement), on behalf of the Investor. This Agreement has been duly executed and
delivered by the Investor and,  assuming the  execution and delivery  hereof and
acceptance thereof by the Company,  will constitute the legal, valid and binding
obligations of the Investor, enforceable against the Investor in accordance with
its terms.

      Section 3.2.  Evaluation  of Risks.  The Investor has such  knowledge  and
experience in financial tax and business  matters as to be capable of evaluating
the  merits  and risks of,  and  bearing  the  economic  risks  entailed  by, an
investment  in the Company and of protecting  its  interests in connection  with
this  transaction.  It recognizes that its investment in the Company  involves a
high degree of risk.  The  Investor  acknowledges  that it shall pay any and all
withholding  taxes assessed in connection with the transactions  contemplated by
this Agreement.

      Section 3.3. No Legal Advice From the Company.  The Investor  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.  The Investor 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.

      Section 3.4. Investment Purpose. The securities are being purchased by the
Investor  for its own  account,  for  investment  and  without  any  view to the
distribution, assignment or resale to others or fractionalization in whole or in
part.  The Investor  agrees not to assign or in any way transfer the  Investor's
rights to the  securities  or any  interest  therein and  acknowledges  that the
Company  will not  recognize  any  purported  assignment  or transfer  except in
accordance with applicable  Federal and state  securities  laws. No other person
has or will have a direct or indirect beneficial interest in the securities. The
Investor  agrees not to sell,  hypothecate or otherwise  transfer the Investor's
securities  unless the securities  are  registered  under Federal and applicable
state securities laws or unless,  in the opinion of counsel  satisfactory to the
Company, an exemption from such laws is available.

      Section 3.5. Accredited Investor. The Investor is an "Accredited Investor"
as that term is defined in Rule  501(a)(3) of Regulation D of the Securities Act
and, in Multilateral Instrument 45 103 adopted by the BCSC.

      Section 3.6.  Reliance on Exemptions.  The Investor  understands  that the
Common  Stock is being  offered  and sold to it pursuant  to this  Agreement  in
reliance on specific exemptions from registration  requirements of United States
and  federal,  state,  and  provincial  securities  laws and that the Company is
relying in part upon the truth and  accuracy of, and the  Investor's  compliance
with, the  representations,  warranties,  acknowledgements and understandings of
the Investor set forth  herein and in the  questionnaires  in order to determine

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the  availability  of such  exemptions  and the  eligibility  of the Investor to
acquire such  securities.  The Company has advised the Investor that the Company
is relying on an exemption from the  requirements to provide the Investor with a
prospectus  and that sales of the Common  Stock in Canada must be made through a
person registered to sell securities under the Securities Act (British Columbia)
(the "B.C. Act").

      Section 3.7. Information. The Investor and its advisors (and its counsel),
if any,  have  been  furnished  with all  materials  relating  to the  business,
finances and  operations of the Company and  information  it deemed  material to
making an informed investment decision.  The Investor 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 Investor or its advisors, if any, or its representatives shall
modify,  amend  or  affect  the  Investor's  right  to  rely  on  the  Company's
representations  and  warranties  contained  in  this  Agreement.  The  Investor
understands that its investment  involves a high degree of risk. The Investor is
in a position  regarding  the  Company,  which,  based upon  employment,  family
relationship or economic bargaining power,  enabled and enables such Investor to
obtain information from the Company in order to evaluate the merits and risks of
this investment. The Investor has sought such accounting,  legal and tax advice,
as it has  considered  necessary to make an informed  investment  decision  with
respect to this transaction.

      Section  3.8.  Receipt of  Documents.  The  Investor  and its counsel have
received and read in their entirety: (i) this Agreement and the Exhibits annexed
hereto;  (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 year ended July 31, 2004 and Form 10-QSB
for the periods ended January 31, 205 and October 31, 2004;  and (iv) answers to
all questions the Investor  submitted to the Company  regarding an investment in
the Company;  and the Investor has relied on the information  contained  therein
and has not been  furnished  any  other  documents,  literature,  memorandum  or
prospectus.

      Section 3.9.  Registration  Rights  Agreement  and Escrow  Agreement.  The
parties have  entered  into the  Registration  Rights  Agreement  and the Escrow
Agreement, each dated the date hereof.

      Section 3.10. 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 shares of Common Stock offered hereby.

      Section 3.11. Not an Affiliate.  The Investor is not an officer,  director
or a person that  directly,  or indirectly  through one or more  intermediaries,
controls or is controlled by, or is under common control with the Company or any
"Affiliate"  of the  Company  (as  that  term  is  defined  in  Rule  405 of the
Securities Act).

      Section 3.12. Trading  Activities.  The Investor's trading activities with
respect to the Company's Common Stock shall be in compliance with all applicable
federal  and state  securities  laws,  rules and  regulations  and the rules and
regulations  of the  Principal  Market on which the  Company's  Common  Stock is
listed or traded.  Neither the  Investor  nor its  affiliates  has an open short
position in the Common Stock of the Company,  the Investor  agrees that it shall

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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,  provided  that the
Company  acknowledges  and agrees  that upon  receipt  of an Advance  Notice the
Investor is permitted  to sell the shares to be issued to the Investor  pursuant
to the Advance Notice during the applicable Pricing Period.

      Section     3.13.      British      Columbia     Resale      Restrictions.

            a. The  Investor  acknowledges  that the Common  Stock is 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 there under.

            b. Pursuant to  Multilateral  Instrument  45-102,  as adopted by the
BCSC a subsequent  trade in Common Stock will be a  distribution  subject to the
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 four (4) months (the "Canadian Hold Period") shall
have elapsed from the date on which the Common Stock was issued to the Investor;

                  ii.  during the  currency of the  Canadian  Hold  Period,  any
certificate  representing  the  Common  Stock 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
Multilateral Instrument 45-102);

                  iv. No  unusual  effort is made to  prepare  the  market or to
create a demand for the Common Stock that is 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; and

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            c. By executing and  delivering  this  Agreement,  the Investor will
have directed the Company not to include the Canadian Legend on any certificates
representing the Common Stock to be issued to the Investor,

            d. As a  consequence,  the Investor  will not be able to rely on the
resale provisions of Multilateral 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 of Canadian  securities
legislation,  to the  extent  that the  trade is  subject  to any such  Canadian
securities legislation.

                                   ARTICLE IV.
                  Representations and Warranties of the Company

      Except as stated below, on the disclosure  schedules attached hereto or in
the SEC  Documents  (as defined  herein),  the  Company  hereby  represents  and
warrants to, and  covenants  with,  the Investor that the following are true and
correct as of the date hereof:

      Section  4.1.   Organization  and  Qualification.   The  Company  is  duly
incorporated  or  organized  and  validly  existing in the  jurisdiction  of its
incorporation  or  organization  and  has  all  requisite  power  and  authority
corporate  power to own its properties and to carry on its 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.

      Section   4.2.   Authorization,   Enforcement,   Compliance   with   Other
Instruments.  (i) The Company has the requisite corporate power and authority to
enter into and perform this Agreement,  the Registration  Rights Agreement,  the
Escrow Agreement,  the Placement Agent Agreement and any related agreements,  in
accordance with the terms hereof and thereof, (ii) the execution and delivery of
this Agreement,  the Registration  Rights Agreement,  the Escrow Agreement,  the
Placement  Agent  Agreement  and any related  agreements  by the Company and the
consummation by it of the  transactions  contemplated  hereby and thereby,  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) this Agreement,  the  Registration  Rights  Agreement,  the
Escrow Agreement,  the Placement Agent Agreement and any related agreements have
been duly  executed  and  delivered  by the Company,  (iv) this  Agreement,  the
Registration  Rights  Agreement,  the  Escrow  Agreement,  the  Placement  Agent
Agreement and assuming the execution and delivery  thereof and acceptance by the
Investor and any related agreements 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.

                                       10
<PAGE>

      Section 4.3.  Capitalization.  As of June 23, 2005, the authorized capital
stock of the Company  consists of an unlimited number of shares of Common Stock,
no par value and one hundred  thousand  (100,000)  shares of Preferred  Stock of
which two hundred  seventy four million  five hundred  ninety five  thousand one
hundred  seventy  three  (274,595,173)  shares of Common  Stock and  twenty-five
thousand shares (25,000) of Preferred Stock were issued and outstanding.  All of
such  outstanding  shares  have  been  validly  issued  and are  fully  paid and
nonassessable.  Except as  disclosed in the SEC  Documents,  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. Except as disclosed in the
SEC  Documents,  as of the date hereof,  (i) there are no  outstanding  options,
warrants,  scrip,  rights to subscribe to, calls or commitments of any character
whatsoever  relating to, or securities or rights convertible into, any shares of
capital  stock  of  the  Company  or  any of  its  subsidiaries,  or  contracts,
commitments,  understandings  or arrangements by which the Company or any of its
subsidiaries is or may become bound to issue additional  shares of capital stock
of the Company or any of its subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character  whatsoever  relating to, or
securities  or rights  convertible  into,  any  shares of  capital  stock of the
Company  or  any  of its  subsidiaries,  (ii)  there  are  no  outstanding  debt
securities (iii) there are no outstanding  registration statements other than on
Form S-8 and (iv)  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 Registration
Rights   Agreement).   There  are  no  securities  or   instruments   containing
anti-dilution or similar  provisions that will be triggered by this Agreement or
any related  agreement or the consummation of the transactions  described herein
or therein. The Company has furnished to the Investor true and correct copies of
the Company's Articles of Incorporation, as amended and as in effect on the date
hereof (the  "Articles of  Incorporation"),  and the  Company's  By-laws,  as in
effect on the date  hereof  (the  "By-laws"),  and the  terms of all  securities
convertible  into or exercisable for Common Stock and the material rights of the
holders thereof in respect thereto.

      Section 4.4. No Conflict. The execution,  delivery and performance of this
Agreement 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 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
Principal Market on which the Common Stock is quoted)  applicable to the Company
or any of its  subsidiaries  or by which any  material  property or asset of the
Company or any of its  subsidiaries is bound or affected and which would cause a
Material Adverse Effect.  Except as disclosed in the SEC Documents,  neither the
Company  nor its  subsidiaries  is in  material  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 in material violation
of any material law, ordinance, regulation of any governmental entity. Except as

                                       11
<PAGE>

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  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 fact or circumstance which might
give rise to any of the foregoing.

      Section 4.5. SEC Documents;  Financial Statements.  Since January 1, 2003,
the  Company  has filed all  reports,  schedules,  forms,  statements  and other
documents required to be filed by it with the SEC under of the Exchange Act. The
Company has delivered to the Investor or its 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  Investor  which is not  included in the SEC  Documents  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.

      Section  4.6.  Rule  10b-5.  The SEC  Documents  do not include any untrue
statements  of  material  fact,  nor do they  omit to state  any  material  fact
required to be stated therein necessary to make the statements made, in light of
the circumstances under which they were made, not misleading.

      Section 4.7. No Default.  Except as disclosed  in the SEC  Documents,  the
Company is not in default  in the  performance  or  observance  of any  material
obligation,  agreement,  covenant  or  condition  contained  in  any  indenture,
mortgage, deed of trust or other material instrument or agreement to which it is
a party or by which it is or its  property is bound and  neither the  execution,
nor the  delivery  by the  Company,  nor the  performance  by the Company of its
obligations  under this Agreement or any of the exhibits or  attachments  hereto
will  conflict  with or result in the breach or violation of any of the terms or
provisions  of, or  constitute a default or result in the creation or imposition
of any lien or  charge on any  assets or  properties  of the  Company  under its
Articles of Incorporation,  By-Laws, any material indenture,  mortgage,  deed of
trust or other  material  agreement  applicable  to the Company or instrument to
which the  Company is a party or by which it is bound,  or any  statute,  or any
decree, judgment, order, rules or regulation of any court or governmental agency
or body having  jurisdiction  over the Company or its  properties,  in each case
which default, lien or charge would cause a Material Adverse Effect.

                                       12
<PAGE>

      Section 4.8. Absence of Events of Default. Except for matters described in
the SEC Documents and/or this Agreement,  no Event of Default, as defined in the
respective  agreement to which the Company is a party, and no event which,  with
the giving of notice or the  passage of time or both,  would  become an Event of
Default (as so  defined),  has occurred  and is  continuing,  which would have a
Material Adverse Effect.

      Section  4.9.   Intellectual   Property   Rights.   The  Company  and  its
subsidiaries  own or possess  adequate  rights or licenses  to use all  material
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.

      Section  4.10.  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.

      Section 4.11. Environmental Laws. The Company and its subsidiaries are (i)
in compliance with any and all applicable material 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.

      Section 4.12. Title. Except as set forth in the SEC Documents, the Company
has good and marketable title to its properties and material assets owned by it,
free and clear of any pledge,  lien,  security interest,  encumbrance,  claim or
equitable  interest  other than such as are not  material to the business of the
Company.  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.

                                       13
<PAGE>

      Section  4.13.  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.

      Section 4.14. 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.

      Section 4.15.  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,  (iii) access to assets is  permitted  only in  accordance  with
management's   general  or  specific   authorization   and  (iv)  the   recorded
accountability  for assets is compared  with the existing  assets at  reasonable
intervals and appropriate action is taken with respect to any differences.

      Section 4.16. No Material  Adverse  Breaches,  etc. Except as set forth in
the SEC Documents, 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.  Except as set forth in the SEC  Documents,
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.

                                       14
<PAGE>

      Section  4.17.  Absence  of  Litigation.  Except  as set  forth in the SEC
Documents and the litigation  initiated by Bristol  Investment Fund, Ltd., 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 (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) except as
expressly disclosed in the SEC Documents,  have a Material Adverse Effect on the
business, operations, properties, financial condition or results of operation of
the Company and its subsidiaries taken as a whole.

      Section 4.18. Subsidiaries.  Except as disclosed in the SEC Documents, the
Company does not presently own or control, directly or indirectly,  any interest
in any other corporation, partnership, association or other business entity.

      Section 4.19. Tax Status.  Except as disclosed in the SEC  Documents,  the
Company  and each of its  subsidiaries  has made or 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.

      Section  4.20.  Certain  Transactions.  Except  as set  forth  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.

      Section  4.21.  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.

      Section 4.22. Use of Proceeds. The Company shall use the net proceeds from
this offering for  retirement  of debt,  general  corporate and working  capital
purposes.  However, in no event shall the Company use the net proceeds from this
offering  for the payment (or loaned to any such person for the  payment) of any
judgment,  or other  liability,  incurred  by any  executive  officer,  officer,
director or  employee  of the  Company,  except for any  liability  owed to such
person for services rendered,  or if any judgment or other liability is incurred
by such person originating from services rendered to the Company, or the Company
has indemnified such person from liability.

                                       15
<PAGE>

      Section 4.23. Further Representation and Warranties of the Company. For so
long  as  any  securities   issuable  hereunder  held  by  the  Investor  remain
outstanding, the Company acknowledges,  represents,  warrants and agrees that it
will maintain the listing of its Common Stock on the Principal Market.

      Section 4.24. Opinion of Counsel. Investor shall receive an opinion letter
from counsel to the Company on the date hereof,  in  substantially  the form set
forth in Schedule 4.24.

      Section  4.25.  Opinion  of  Counsel.  The  Company  will  obtain  for the
Investor, at the Company's expense, any and all opinions of counsel which may be
reasonably  required  by the  Company's  transfer  agent  in  order  to sell the
securities issuable hereunder without restriction.

      Section  4.26.  Dilution.  The  Company  is aware  and  acknowledges  that
issuance  of shares of the  Company's  Common  Stock  could  cause  dilution  to
existing shareholders and could significantly increase the outstanding number of
shares of Common Stock.

                                   ARTICLE V.
                                 Indemnification

      The Investor and the Company  represent  to the other the  following  with
respect to itself:

      Section 5.1. Indemnification.

            (a) In  consideration  of the  Investor's  execution and delivery of
this Agreement,  and in addition to all of the Company's other obligations under
this Agreement,  the Company shall defend, protect,  indemnify and hold harmless
the Investor, and all of its officers, directors, partners, employees and agents
(including,   without   limitation,   those  retained  in  connection  with  the
transactions  contemplated  by  this  Agreement)  (collectively,  the  "Investor
Indemnitees")  from and against any and all  actions,  causes of action,  suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith  (irrespective of whether any such Investor Indemnitee is a
party  to the  action  for  which  indemnification  hereunder  is  sought),  and
including  reasonable   attorneys'  fees  and  disbursements  (the  "Indemnified
Liabilities"),  incurred by the Investor  Indemnitees or any of them as a result
of, or arising out of, or relating to (a) any misrepresentation or breach of any
representation  or  warranty  made  by the  Company  in  this  Agreement  or the
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 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  Investor  Indemnitee  not  arising  out of any  action or  inaction  of an
Investor  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  Investor
Indemnitees.  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.

                                       16
<PAGE>

            (b) In consideration of the Company's execution and delivery of this
Agreement, and in addition to all of the Investor's other obligations under this
Agreement,  the Investor shall defend, protect,  indemnify and hold harmless the
Company and all of its officers, directors,  shareholders,  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  Company  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  Investor  in this  Agreement,  the  Registration  Rights
Agreement, or any instrument or document contemplated hereby or thereby executed
by the Investor, (b) any breach of any covenant,  agreement or obligation of the
Investor(s)  contained in this Agreement,  the Registration  Rights Agreement or
any other  certificate,  instrument or document  contemplated  hereby or thereby
executed by the Investor,  or (c) any cause of action,  suit or claim brought or
made against such Company  Indemnitee  based on  misrepresentations  or due to a
breach by the  Investor  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  Company
Indemnitees. To the extent that the foregoing undertaking by the Investor may be
unenforceable for any reason,  the Investor shall make the maximum  contribution
to the payment and satisfaction of each of the Indemnified Liabilities, which is
permissible under applicable law.

            (c) The obligations of the parties to indemnify or make contribution
under this Section 5.1 shall survive termination.

                                   ARTICLE VI.
                            Covenants of the Company

      Section 6.1. Registration Rights. The Company shall cause the Registration
Rights Agreement to remain in full force and effect and the Company shall comply
in all material respects with the terms thereof.

      Section  6.2.  Listing of Common  Stock.  The Company  shall  maintain the
Common  Stock's  authorization  for  quotation  on the National  Association  of
Securities Dealers Inc.'s Over the Counter Bulletin Board.

      Section 6.3. Exchange Act Registration.  The Company will cause its Common
Stock to continue to be registered under Section 12(g) of the Exchange Act, will
file in a timely  manner all  reports  and other  documents  required of it as a
reporting  company  under the  Exchange Act and will not take any action or file
any document  (whether or not permitted by Exchange Act or the rules thereunder)
to  terminate  or suspend  such  registration  or to  terminate  or suspend  its
reporting and filing obligations under said Exchange Act.

      Section  6.4.  Transfer  Agent  Instructions.  Upon  effectiveness  of the
Registration  Statement the Company shall deliver  instructions  to its transfer
agent to issue  shares  of  Common  Stock to the  Investor  free of  restrictive
legends on or before each Advance Date

                                       17
<PAGE>

      Section  6.5.  Corporate  Existence.  The  Company  will  take  all  steps
necessary to preserve and continue the corporate existence of the Company.

      Section 6.6. Notice of Certain Events Affecting  Registration;  Suspension
of Right to Make an Advance.  The Company will  immediately  notify the Investor
upon its becoming  aware of the  occurrence  of any of the  following  events in
respect  of a  registration  statement  or  related  prospectus  relating  to an
offering of  Registrable  Securities:  (i) receipt of any request for additional
information  by the SEC or any other  Federal  or state  governmental  authority
during the period of effectiveness of the Registration  Statement for amendments
or supplements to the  registration  statement or related  prospectus;  (ii) the
issuance by the SEC or any other Federal or state governmental  authority of any
stop order suspending the  effectiveness  of the  Registration  Statement or the
initiation  of  any  proceedings   for  that  purpose;   (iii)  receipt  of  any
notification  with respect to the suspension of the  qualification  or exemption
from  qualification  of  any of  the  Registrable  Securities  for  sale  in any
jurisdiction  or the  initiation  or  threatening  of any  proceeding  for  such
purpose;  (iv) the happening of any event that makes any  statement  made in the
Registration  Statement or related  prospectus of any document  incorporated  or
deemed to be incorporated therein by reference untrue in any material respect or
that requires the making of any changes in the Registration  Statement,  related
prospectus or documents so that, in the case of the Registration  Statement,  it
will not contain any untrue  statement  of a material  fact or omit to state any
material fact required to be stated  therein or necessary to make the statements
therein not misleading,  and that in the case of the related prospectus, it will
not  contain  any  untrue  statement  of a  material  fact or omit to state  any
material fact required to be stated  therein or necessary to make the statements
therein,  in the light of the  circumstances  under  which they were  made,  not
misleading; and (v) the Company's reasonable determination that a post-effective
amendment to the  Registration  Statement would be appropriate;  and the Company
will promptly make available to the Investor any such supplement or amendment to
the related  prospectus.  The  Company  shall not  deliver to the  Investor  any
Advance Notice during the continuation of any of the foregoing events.

      Section 6.7.  Restriction on Sale of Capital Stock.  During the Commitment
Period,  except for the capital stock to be issued  hereunder or pursuant to the
commitment  disclosed in the SEC Documents as defined in the Securities Purchase
Agreement  dated May 20, 2005,  the  Convertible  Debenture  dated June 23, 2005
issued to Cornell pursuant to the Securities  Purchase  Agreement dated June 23,
2005 by and between the Company and Cornell, the Convertible Debenture dated May
20, 2005 issued to Cornell pursuant to the Securities  Purchase  Agreement dated
May 20,  2005 by and between  the  Company  and  Cornell  (the "May  Convertible
Debenture"), and the Series A Preferred Shares issued to Cornell pursuant to the
Investment  Agreement dated March 22, 2005 , the Company shall not,  without the
prior consent of the  Investor,  (i) issue or sell any common stock or preferred
stock with or without  consideration,  (ii) issue or sell any  preferred  stock,
warrant, option, right, contract, call, or other security or instrument granting
the  holder   thereof  the  right  to  acquire  common  stock  with  or  without
consideration,  (iii) enter into any security  instrument  granting the holder a
security  interest  in any of the  assets  of the  Company,  or  (iv)  file  any
registration statements on Form S-8. Provided the Company gives the Investor two
(2) days prior written notice, the foregoing  restriction shall exclude options,
warrants or other securities  convertible or exchangeable  into shares of common
stock of the Company that were outstanding prior to the date hereof.

                                       18
<PAGE>

      Section 6.8.  Consolidation;  Merger.  The Company  shall not, at any time
after the date hereof, effect any merger or consolidation of the Company with or
into,  or a transfer  of all or  substantially  all the assets of the Company to
another  entity (a  "Consolidation  Event")  unless the  resulting  successor or
acquiring  entity  (if  not the  Company)  assumes  by  written  instrument  the
obligation to deliver to the Investor such shares of stock and/or  securities as
the Investor is entitled to receive pursuant to this Agreement.

      Section  6.9.  Issuance of the  Company's  Common  Stock.  The sale of the
shares of Common  Stock  shall be made in  accordance  with the  provisions  and
requirements of Regulation D and any applicable state securities law.

                                  ARTICLE VII.
                Conditions for Advance and Conditions to Closing

      Section 7.1. Conditions  Precedent to the Obligations of the Company.  The
obligation hereunder of the Company to issue and sell the shares of Common Stock
to the  Investor  incident to each  Closing is subject to the  satisfaction,  or
waiver by the Company, at or before each such Closing, of each of the conditions
set forth below.

            (a) Accuracy of the Investor's  Representations and Warranties.  The
representations  and warranties of the Investor shall be true and correct in all
material respects.

            (b) Performance by the Investor.  The Investor shall have performed,
satisfied  and  complied in all  respects  with all  covenants,  agreements  and
conditions  required by this Agreement and the Registration  Rights Agreement to
be  performed,  satisfied  or complied  with by the Investor at or prior to such
Closing.

      Section 7.2.  Conditions  Precedent to the Right of the Company to Deliver
an Advance  Notice and the  Obligation  of the  Investor to  Purchase  Shares of
Common  Stock.  The right of the  Company to  deliver an Advance  Notice and the
obligation  of the  Investor  hereunder  to  acquire  and pay for  shares of the
Company's  Common Stock  incident to a Closing is subject to the  fulfillment by
the  Company,  on (i) the date of delivery of such  Advance  Notice and (ii) the
applicable Advance Date (each a "Condition  Satisfaction  Date"), of each of the
following conditions:

            (a) Registration of the Common Stock with the SEC. The Company shall
have filed with the SEC a  Registration  Statement with respect to the resale of
the  Registrable  Securities  in accordance  with the terms of the  Registration
Rights  Agreement.  As set  forth  in the  Registration  Rights  Agreement,  the
Registration  Statement shall have previously  become effective and shall remain
effective on each  Condition  Satisfaction  Date and (i) neither the Company nor
the Investor  shall have  received  notice that the SEC has issued or intends to
issue a stop order with  respect to the  Registration  Statement or that the SEC
otherwise  has  suspended or withdrawn  the  effectiveness  of the  Registration
Statement, either temporarily or permanently, or intends or has threatened to do
so (unless the SEC's concerns have been addressed and the Investor is reasonably
satisfied that the SEC no longer is considering or intends to take such action),
and (ii) no other  suspension of the use or withdrawal of the  effectiveness  of
the Registration  Statement or related  prospectus shall exist. The Registration
Statement  must  have  been  declared  effective  by the SEC  prior to the first
Advance Notice Date.

                                       19
<PAGE>

            (b)  Authority.  The  Company  shall have  obtained  all permits and
qualifications  required by any applicable  U.S.  state or Canadian  province in
accordance with the Registration  Rights Agreement for the offer and sale of the
shares of Common Stock, or shall have the availability of exemptions  therefrom.
The sale and issuance of the shares of Common  Stock shall be legally  permitted
by all laws and regulations to which the Company is subject.

            (c)  Fundamental  Changes.  There  shall not  exist any  fundamental
changes to the information set forth in the  Registration  Statement which would
require  the  Company to file a  post-effective  amendment  to the  Registration
Statement.

            (d)  Performance by the Company.  The Company shall have  performed,
satisfied and complied in all material  respects with all covenants,  agreements
and conditions required by this Agreement  (including,  without limitation,  the
conditions  specified  in  Section  2.5  hereof)  and  the  Registration  Rights
Agreement to be performed, satisfied or complied with by the Company at or prior
to each Condition Satisfaction Date.

            (e) No Injunction.  No statute, rule,  regulation,  executive order,
decree,  ruling or injunction shall have been enacted,  entered,  promulgated or
endorsed by any court or governmental  authority of competent  jurisdiction that
prohibits or directly and adversely affects any of the transactions contemplated
by this Agreement, and no proceeding shall have been commenced that may have the
effect  of   prohibiting  or  adversely   affecting  any  of  the   transactions
contemplated by this Agreement.

            (f) No Suspension  of Trading in or Delisting of Common  Stock.  The
trading of the Common Stock is not suspended by the SEC or the Principal  Market
(if the Common Stock is traded on a Principal Market). The issuance of shares of
Common Stock with respect to the applicable  Closing,  if any, shall not violate
the shareholder  approval  requirements  of the Principal  Market (if the Common
Stock is traded on a Principal Market).  The Company shall not have received any
notice  threatening  the continued  listing of the Common Stock on the Principal
Market (if the Common Stock is traded on a Principal Market).

            (g) Maximum  Advance Amount.  The amount of an Advance  requested by
the Company  shall not exceed the Maximum  Advance  Amount.  In addition,  in no
event shall the number of shares issuable to the Investor pursuant to an Advance
cause the aggregate number of shares of Common Stock  beneficially  owned by the
Investor and its  affiliates to exceed nine and 9/10 percent  (9.9%) of the then
outstanding  Common  Stock  of  the  Company.  For  purposes  of  this  section,
beneficial ownership shall be calculated in accordance with Section 13(d) of the
Exchange Act.

            (h) No  Knowledge.  The Company has no  knowledge of any event which
would be more  likely than not to have the effect of causing  such  Registration
Statement to be suspended or otherwise ineffective.

                                       20
<PAGE>

            (i) Other. On each Condition  Satisfaction  Date, the Investor shall
have received the certificate  executed by an officer of the Company in the form
of Exhibit A attached hereto.

                                  ARTICLE VIII.
         Due Diligence Review; Non-Disclosure of Non-Public Information

      Section 8.1. Due Diligence Review. Prior to the filing of the Registration
Statement the Company  shall make  available  for  inspection  and review by the
Investor, its advisors and representatives, and any underwriter participating in
any disposition of the Registrable Securities on behalf of the Investor pursuant
to the Registration  Statement,  any such registration statement or amendment or
supplement  thereto or any blue sky,  NASD or other  filing,  all  financial and
other  records,  all SEC Documents and other filings with the SEC, and all other
corporate documents and properties of the Company as may be reasonably necessary
for the purpose of such review, and cause the Company's officers,  directors and
employees to supply all such information reasonably requested by the Investor or
any  such  representative,  advisor  or  underwriter  in  connection  with  such
Registration  Statement  (including,  without  limitation,  in  response  to all
questions  and other  inquiries  reasonably  made or  submitted by any of them),
prior to and  from  time to time  after  the  filing  and  effectiveness  of the
Registration  Statement  for the sole  purpose of enabling the Investor and such
representatives,  advisors and underwriters and their respective accountants and
attorneys  to conduct  initial  and ongoing due  diligence  with  respect to the
Company and the accuracy of the Registration Statement.

      Section 8.2. Non-Disclosure of Non-Public Information.

            (a) The Company  shall not disclose  non-public  information  to the
Investor,  its advisors,  or its representatives,  unless prior to disclosure of
such  information the Company  identifies such  information as being  non-public
information and provides the Investor,  such advisors and  representatives  with
the  opportunity to accept or refuse to accept such  non-public  information for
review. The Company may, as a condition to disclosing any non-public information
hereunder,  require the Investor's  advisors and representatives to enter into a
confidentiality agreement in form reasonably satisfactory to the Company and the
Investor.

            (b) Nothing herein shall require the Company to disclose  non-public
information to the Investor or its advisors or representatives,  and the Company
represents that it does not disseminate  non-public information to any investors
who purchase stock in the Company in a public offering,  to money managers or to
securities analysts,  provided, however, that notwithstanding anything herein to
the contrary, the Company will, as hereinabove provided,  immediately notify the
advisors and representatives of the Investor and, if any,  underwriters,  of any
event or the existence of any  circumstance  (without any obligation to disclose
the specific  event or  circumstance)  of which it becomes  aware,  constituting
non-public  information (whether or not requested of the Company specifically or
generally  during  the course of due  diligence  by such  persons or  entities),
which, if not disclosed in the prospectus included in the Registration Statement
would  cause such  prospectus  to include a material  misstatement  or to omit a
material  fact  required to be stated  therein in order to make the  statements,
therein,  in light of the circumstances in which they were made, not misleading.
Nothing  contained  in this  Section  8.2 shall be  construed  to mean that such

                                       21
<PAGE>

persons or entities other than the Investor  (without the written consent of the
Investor  prior to disclosure  of such  information)  may not obtain  non-public
information  in the course of conducting  due  diligence in accordance  with the
terms of this  Agreement  and nothing  herein shall  prevent any such persons or
entities  from  notifying  the Company of their  opinion  that based on such due
diligence by such persons or entities,  that the Registration Statement contains
an untrue  statement of material  fact or omits a material  fact  required to be
stated  in the  Registration  Statement  or  necessary  to make  the  statements
contained  therein,  in light of the  circumstances in which they were made, not
misleading.

                                   ARTICLE IX.
                           Choice of Law/Jurisdiction

      Section  9.1.  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, New Jersey and the United States District Court of New
Jersey,  sitting in Newark, New Jersey, for the adjudication of any civil action
asserted pursuant to this paragraph.

                                   ARTICLE X.
                             Assignment; Termination

      Section  10.1.  Assignment.  Neither this  Agreement nor any rights of the
Company hereunder may be assigned to any other Person.

      Section  10.2.  Termination.  The  obligations  of the  Investor  to  make
Advances under Article II hereof shall  terminate  twenty four (24) months after
the Effective  Date or sixty (60) months after the  Effective  Date provided the
Company files either an amendment to the then effective  registration  statement
or a new  registration  statement is declared  effective after the twenty fourth
(24th) and forty eighty (48th) month after the date hereof.

                                   ARTICLE XI.
                                     Notices

      Section  11.1.  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 receipt, when sent by facsimile,
provided a copy is mailed by U.S.  certified  mail,  return  receipt  requested;
(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:

                                       22
<PAGE>

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

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

If to the Investor(s):      Cornell Capital Partners, LP
                            101 Hudson Street -Suite 3700
                            Jersey City, NJ 07302
                            Attention: Mark Angelo
                            Portfolio Manager
                            Telephone: (201) 985-8300
                            Facsimile: (201) 985-8266

With a Copy to:             David Gonzalez, Esq.
                            101 Hudson Street - Suite 3700
                            Jersey City, NJ 07302
                            Telephone: (201) 985-8300
                            Facsimile: (201) 985-8266

Each party shall provide five (5) days' prior written  notice to the other party
of any change in address or facsimile number.

                                  ARTICLE XII.
                                  Miscellaneous

      Section 12.1. 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,  though failure to deliver such copies shall not affect the
validity of this Agreement.

                                       23
<PAGE>

      Section 12.2. Entire Agreement;  Amendments. This Agreement supersedes all
other prior oral or written agreements between the Investor,  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  the  Investor  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.

      Section 12.3.  Reporting Entity for the Common Stock. The reporting entity
relied upon for the  determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this  Agreement  shall
be Bloomberg,  L.P. or any successor thereto.  The written mutual consent of the
Investor and the Company shall be required to employ any other reporting entity.

      Section  12.4.  Fees and  Expenses.  The Company  hereby agrees to pay the
following fees:

            (a) Structuring Fees. Each of the parties shall pay its own fees and
expenses (including the fees of any attorneys, accountants, appraisers or others
engaged by such party) in connection  with this  Agreement and the  transactions
contemplated  hereby.  Subsequently  on each advance date,  the Company will pay
Yorkville  Advisors  Management,  LLC a structuring  fee of Five Hundred Dollars
($500) directly out the proceeds of any Advances hereunder.

            (b)  Commitment  Fees. On each Advance Date the Company shall pay to
the Investor,  directly from the gross proceeds held in escrow,  an amount equal
to five percent (5%) of the amount of each  Advance.  The Company  hereby agrees
that if such payment,  as is described  above, is not made by the Company on the
Advance  Date,  such  payment  will be made at the  direction of the Investor as
outlined and mandated by Section 2.3 of this Agreement.

            Furthermore the Company shall pay to Yorkville Advisors  Management,
LLC a cash fee of Sixteen Million Dollars ($16,000,000)  directly from the gross
proceeds  held in escrow from the closing of the  Convertible  Debentures  dated
June 23, 2005.

      Section 12.5. Brokerage. Each of the parties hereto represents that it has
had no dealings in connection  with this  transaction  with any finder or broker
who will  demand  payment of any fee or  commission  from the other  party.  The
Company on the one hand, and the Investor, on the other hand, agree to indemnify
the other against and hold the other  harmless from any and all  liabilities  to
any  person  claiming  brokerage  commissions  or  finder's  fees on  account of
services  purported to have been rendered on behalf of the indemnifying party in
connection with this Agreement or the transactions contemplated hereby.

                                       24
<PAGE>

      Section  12.6.  Confidentiality.   If  for  any  reason  the  transactions
contemplated by this Agreement are not  consummated,  each of the parties hereto
shall keep  confidential  any information  obtained from any other party (except
information  publicly  available  or in such  party's  domain  prior to the date
hereof,  and except as required by court order) and shall promptly return to the
other  parties  all  schedules,  documents,  instruments,  work  papers or other
written information without retaining copies thereof, previously furnished by it
as a result of this Agreement or in connection herein.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       25

<PAGE>

      IN WITNESS  WHEREOF,  the parties  hereto have caused this Standby  Equity
Distribution  Agreement  to be  executed  by  the  undersigned,  thereunto  duly
authorized, as of the date first set forth above.

                         COMPANY:
                                                SMARTIRE SYSTEMS INC.

                                                By: /s/Robert Rudman
                                                    ------------------
                                                Name:  Robert Rudman
                                                Title: President

                         INVESTOR:
                                                CORNELL CAPITAL PARTNERS, LP

                                                By:  Yorkville Advisors, LLC
                                                Its: General Partner

                                                By:/s/Mark Angelo
                                                   -----------------------
                                                Name:  Mark Angelo
                                                Title: Portfolio Manager

                                       26
<PAGE>

                                    EXHIBIT A

                      ADVANCE NOTICE/COMPLIANCE CERTIFICATE

                              SMARTIRE SYSTEMS INC.

The undersigned,  _______________________  hereby certifies, with respect to the
sale of  shares of Common  Stock of  Smartire  Systems  Inc..  (the  "Company"),
issuable in connection with this Advance Notice and Compliance Certificate dated
___________________  (the  "Notice"),  delivered  pursuant to the Standby Equity
Distribution Agreement (the "Agreement"), as follows:

      1. The undersigned is the duly elected ______________ of the Company.

      2. There are no fundamental  changes to the  information  set forth in the
Registration  Statement which would require the Company to file a post effective
amendment to the Registration Statement.

      3. The Company has  performed in all material  respects all  covenants and
agreements  to be  performed  by the  Company  on or prior to the  Advance  Date
related  to the  Notice  and has  complied  in all  material  respects  with all
obligations and conditions contained in the Agreement.

      4. The undersigned hereby  represents,  warrants and covenants that it has
made  all  filings  ("SEC  Filings")  required  to be  made  by it  pursuant  to
applicable securities laws (including,  without limitation, all filings required
under the Securities  Exchange Act of 1934, which include Forms 10-QSB,  10-KSB,
8-K,  etc.  All SEC Filings and other  public  disclosures  made by the Company,
including,  without limitation, all press releases, analysts meetings and calls,
etc. (collectively,  the "Public Disclosures"),  have been reviewed and approved
for release by the Company's attorneys and, if containing financial information,
the Company's independent  certified public accountants.  As of their respective
dates of filing,  none of the Company's Public Disclosures  contained any untrue
statement of a material  fact or omitted to state any material  fact required to
be stated therein or necessary to make the statements  therein,  in the light of
the circumstances under which they were made, not misleading.

      5. The Advance requested is _____________________.

      The   undersigned  has  executed  this   Certificate   this  ____  day  of
_________________.

                                         SMARTIRE SYSTEMS INC.

                                         By:
                                            ------------------------------------
                                         Name:
                                         Title:

                                       27
<PAGE>

                                    EXHIBIT B

                        ACCREDITED INVESTOR QUESTIONNAIRE

      The purpose of this  Questionnaire is to assure SmarTire Systems Inc. (the
"Company")  that  the   undersigned   (the   "Subscriber")   will  meet  certain
requirements for the registration and prospectus  exemptions  provided for under
Multilateral Instrument 45-103 ("MI 45-103"), as adopted by the British Columbia
Securities  Commission  and the Alberta  Securities  Commission  (each, a "local
jurisdiction"),  in respect of a proposed private placement of securities by the
Company (the "Transaction").  The Company will rely on the information contained
in this Questionnaire for the purposes of such determination.

      The  undersigned  Subscriber  covenants,  represents  and  warrants to the
Company that:

      1. the  Subscriber  has such  knowledge  and  experience  in financial and
business  matters  as to be capable  of  evaluating  the merits and risks of the
Transaction and the Subscriber is able to bear the economic risk of loss arising
from such Transaction;

      2. the  Subscriber  satisfies one or more of the categories of "accredited
investor" (as that term is defined in MI 45-103)  indicated  below (please check
the appropriate box):

      (a)   |_|  a  Canadian  financial   institution  as  defined  in  National
            Instrument  14-101, or an authorized foreign bank listed in Schedule
            III of the Bank Act (Canada);

      (b)   |_| the Business  Development Bank of Canada  incorporated under the
            Business Development Bank of Canada Act (Canada);

      (c)   |_| an association  under the Cooperative  Credit  Associations  Act
            (Canada) located in Canada;

      (d)   |_| a subsidiary of any person or company  referred to in paragraphs
            2(a) to 2(c),  where the  person or  company  owns all of the voting
            securities of the subsidiary,  except the voting securities required
            by law to be owned by directors of that subsidiary;

      (e)   |_| a person or company registered under the Securities Act (British
            Columbia),  or under securities  legislation of another jurisdiction
            of Canada,  as an adviser  or  dealer,  other than a limited  market
            dealer registered under the Securities Act (Ontario);

                                       28
<PAGE>

      (f)   |_| an  individual  registered  or  formerly  registered  under  the
            Securities Act (British Columbia),  or under securities  legislation
            in another  jurisdiction of Canada,  as a representative of a person
            or company  registered under the Securities Act (British  Columbia),
            or under securities  legislation in another  jurisdiction of Canada,
            as an  adviser  or  dealer,  other  than  a  limited  market  dealer
            registered under the Securities Act (Ontario);

      (g)   |_| the government of Canada or a province, or any crown corporation
            or agency of the government of Canada or a province;

      (h)   |_| a municipality, public board or commission in Canada;

      (i)   |_| a national, federal, state, provincial, territorial or municipal
            government of or in any foreign jurisdiction,  or any agency of that
            government;

      (j)   |_| a pension  fund that is  regulated  by either  the Office of the
            Superintendent  of Financial  Institutions  (Canada) or a provincial
            pension commission or similar regulatory authority;

      (k)   |_| a registered charity under the Income Tax Act (Canada);

      (l)   |_| an  individual  who  beneficially  owns,  or who together with a
            spouse beneficially owns,  directly or indirectly,  financial assets
            (defined  in MI  45-103  to mean  cash  and  securities)  having  an
            aggregate realizable value that, before taxes but net of any related
            liabilities, exceeds CDN.$1,000,000;

      (m)   |_|  an   individual   whose  net  income   before  taxes   exceeded
            CDN.$200,000  in each of the two most  recent  years  or  whose  net
            income  before  taxes  combined  with  that  of  a  spouse  exceeded
            CDN.$300,000  in each of those years and who, in either case,  has a
            reasonable  expectation  of  exceeding  that net income level in the
            current year;

      (n)   |_|  a   corporation,   limited   partnership,   limited   liability
            partnership,   trust  or  estate,   other  than  a  mutual  fund  or
            non-redeemable  investment  fund,  that had net  assets  of at least
            CDN.$5,000,000 as reflected on its most recently prepared  financial
            statements;

      (o)   |_| a mutual fund or  non-redeemable  investment  fund that,  in the
            local  jurisdiction,  distributes  it securities  only to persons or
            companies that are accredited investors;

      (p)   |_| a mutual fund or  non-redeemable  investment  fund that,  in the
            local  jurisdiction,  distributes its securities  under a prospectus
            for which a receipt has been issued by the regulator;

                                       29
<PAGE>

      (q)   |_| an entity organized in a foreign  jurisdiction that is analogous
            to any of the entities  referred to in paragraphs  2(a) through 2(e)
            and paragraph 2(j) in form and function; or

      (r)   |_| a person or  company  in  respect  of which all of the owners of
            interests,  direct or indirect, legal or beneficial,  are persons or
            companies that are accredited investors.

      The Subscriber acknowledges and agrees that the Subscriber may be required
by the Company to provide such  additional  documentation  as may be  reasonably
required by the Company and its legal counsel in  determining  the  Subscriber's
eligibility to acquire the Shares under relevant Legislation.

      IN WITNESS WHEREOF,  the undersigned has executed this Questionnaire as of
the                day of          ,            .           .

If a Corporation, Partnership or Other Entity:       If an Individual:

---------------------------------------------        ------------------------
Print or Type Name of Entity                         Signature

---------------------------------------------        ------------------------
Signature of Authorized Signatory                    Print or Type Name

---------------------------------------------
Type of Entity

<PAGE>

                                  SCHEDULE 2.6
                                  ------------

                              SMARTIRE SYSTEMS INC.
                              ---------------------

      The  undersigned  hereby  agrees that for a period  commencing on the date
hereof and  expiring on the  termination  of the  Agreement  dated June 23, 2005
between Smartire Systems Inc., (the  "Company"),  and Cornell Capital  Partners,
LP, (the "Investor") (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 except  pursuant  to Rule 144 of the  General  Rules and  Regulations
under the  Securities  Act of 1933,  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").

      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: _______________, 2005

                              Signature

                              Name:   ________________________________________
                              Address:________________________________________
                              City state, Zip Code:___________________________

                              ________________________________________________
                              Print Social Security Number
                              or Taxpayer I.D. NumberExhibit 10.2

                          SECURITIES PURCHASE AGREEMENT
                          -----------------------------

      THIS SECURITIES  PURCHASE AGREEMENT (this  "Agreement"),  dated as of June
23, 2005, by and between  SMARTIRE  SYSTEMS  INC., a  corporation  organized and
existing  under  the  laws  of the  Yukon  Territory,  and the  CORNELL  CAPITAL
PARTNERS,  LP and  HIGHGATE  HOUSE  FUNDS,  LTD.  (individually  referred  to as
"Cornell"  and  "Highgate"  and/or a  "Buyer"  collectively  referred  to as the
"Buyers").

                                   WITNESSETH:
                                   -----------

      WHEREAS,  the Company and the Buyers are  executing  and  delivering  this
Agreement in reliance upon an exemption from securities registration afforded by
the provisions of:

      (i)   Regulation D  ("Regulation  D") as  promulgated by the United States
            Securities and Exchange  Commission (the "SEC") under the Securities
            Act of 1933, as amended (the "1933 Act"); and

      (ii)  Multilateral  Instrument  45-103  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 Buyers, as
provided   herein,   and  the  Buyers  shall  purchase  Thirty  Million  Dollars
($30,000,000)  of  convertible   debentures   (individually  referred  to  as  a
"Convertible   Debenture"   collectively   referred   to  as  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"),  of which Thirty Million Dollars  ($30,000,000) shall be funded on the
second (2nd) business day following the date hereof (the  "Closing") for a total
purchase price of Thirty Million Dollars ($30,000,000) (the "Purchase Price") in
the  respective  amounts set forth  opposite the Buyers' name on Schedule I (the
"Subscription Amount");

      WHEREAS,  contemporaneously  with  the  execution  and  delivery  of  this
Agreement, the parties hereto are executing and delivering a Registration Rights
Agreement  substantially in the form attached hereto as Exhibit A (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, the aggregate proceeds of the sale of the Convertible  Debentures
contemplated  hereby shall be held in escrow  pursuant to the terms of an escrow
agreement  substantially in the form of the Escrow Agreement  attached hereto as
Exhibit B (the "Escrow Agreement");

      WHEREAS,  contemporaneously  with  the  execution  and  delivery  of  this
Agreement,  the parties hereto are executing and delivering Irrevocable Transfer
Agent  Instructions  substantially in the form attached hereto as Exhibit C (the
"Irrevocable Transfer Agent Instructions"); and

<PAGE>

      WHEREAS,  contemporaneously  with  the  execution  and  delivery  of  this
Agreement, the Company is issuing the Buyers warrants in such respective amounts
and  substantially  in the form  attached  hereto  as  Exhibit  D (the  "Buyers'
Warrants")

      NOW,  THEREFORE,  in  consideration  of the  mutual  covenants  and  other
agreements  contained in this  Agreement the Company and the Buyers 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,  the Buyers agrees to
purchase at Closing (as defined  herein  below),  and the Company agrees to sell
and  issue  to  the  Buyers  at  Closing,   Convertible   Debentures  in  amount
corresponding  with the Subscription  Amount set forth opposite the Buyer's name
on Schedule I hereto. Upon execution hereof by the Buyers, the Buyers shall wire
transfer the  Subscription  Amount set forth  opposite his name on Schedule I in
same-day funds or a check payable to "David Gonzalez,  Esq., as Escrow Agent for
SmarTire Systems  Inc/Cornell  Capital Partners,  LP", which Subscription Amount
shall be held in  escrow  pursuant  to the  terms of the  Escrow  Agreement  (as
hereinafter defined) and disbursed in accordance therewith.

            (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 on
the second (2nd) 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 Buyers (the  "Closing  Date").  The Closing  shall occur on the
respective Closing Dates at the offices of Yorkville Advisors,  LLC, 3700 Hudson
Street,  Suite 3700,  Jersey  City,  New Jersey 07302 (or such other place as is
mutually agreed to by the Company and the Buyers.

            (c) Escrow Arrangements;  Form of Payment.  Upon execution hereof by
the Buyers and pending the Closing,  the  aggregate  proceeds of the sale of the
Convertible  Debentures  to the Buyers  pursuant  hereto shall be deposited in a
non-interest  bearing escrow account with David Gonzalez,  Esq., as escrow agent
(the "Escrow Agent"),  pursuant to the terms of an escrow agreement  between the
Company,  the Buyers and the Escrow Agent in the form attached hereto as Exhibit
B (the  "Escrow  Agreement").  Subject  to the  satisfaction  of the  terms  and
conditions of this Agreement,  and in accordance with the Escrow  Agreement,  on
the  Closing  Date,  (i) the  Escrow  Agent  shall  deliver  to the  Company  in
accordance  with the terms of the Escrow  Agreement such aggregate  proceeds for
the Convertible Debentures to be issued and sold to the Buyers, minus the unpaid
structuring fees and expenses of Yorkville Advisors Management,  LLC outlined in
Sections 6 (g) and (h) which shall be paid directly from the gross proceeds held
in escrow of the  Closing,  and (ii) the  Company  shall  deliver to the Buyers,
Convertible  Debentures  which the Buyers are purchasing in the amount indicated
opposite the Buyers name on Schedule I, duly executed on behalf of the Company.

      2. DOCUMENTS REQUIRED FROM BUYERS.

      The Buyers must complete, sign and return to the Company:

<PAGE>

            (a) an executed copy of this Agreement;

            (b) a Prospective  Investor  Suitability  Questionnaire  in the form
attached as Exhibit C (the US Questionnaire");

            (c) if the Buyers are purchasing  pursuant to Part 5 of Multilateral
Instrument  45-103 adopted by the BCSC, or is purchasing as a foreign  portfolio
manager  pursuant to British Columbia  Instrument  45-504 adopted by the BCSC, a
British  Columbia  Accredited  Investor  Questionnaire  in the form  attached as
Exhibit E (together with the US Questionnaire, the "Questionnaires");

      The  Buyers  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.

            3. BUYERS' REPRESENTATIONS AND WARRANTIES.

      The Buyers represent and warrant, severally and jointly, that:

            (a)  Investment  Purpose.  The Buyers are acquiring the  Convertible
Debentures  and, upon  conversion  of  Convertible  Debentures,  the Buyers will
acquire  the  Conversion  Shares  then  issuable,  for  their  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  Buyers  reserve  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.   The  Buyers  are  "Accredited
Investors"  as that term is defined in Rule  501(a)(3)  of  Regulation D and, in
Multilateral Instrument 45-103 adopted by the BCSC.

            (c)  Reliance  on  Exemptions.   The  Buyers   understand  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 such Buyers compliance with, the  representations,  warranties,
agreements,  acknowledgments  and understandings of such Buyers set forth herein
in order to determine the availability of such exemptions and the eligibility of
such Buyers to acquire such securities.

            (d)  Information.  The  Buyers and their  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  Buyers.  The Buyers and their  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 Buyers or
their advisors, if any, or its representatives shall modify, amend or affect

<PAGE>

such  Buyers  right  to rely on the  Company's  representations  and  warranties
contained in Section 3 below. The Buyers understand that their investment in the
Convertible Debentures and the Conversion Shares involves a high degree of risk.
The  Buyers  are  in  a  position  regarding  the  Company,  which,  based  upon
employment,  family  relationship  or  economic  bargaining  power,  enabled and
enables such Buyers to obtain  information from the Company in order to evaluate
the merits and risks of this investment. The Buyers have 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.  The Buyers  understand 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.  The  Buyers  understand  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 Buyers
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. The Company reserves the right
to place stop transfer  instructions against the shares and certificates for the
Conversion Shares.

            (g) Legends.  The Buyers  understand 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.
<PAGE>

The legend set forth above shall be removed  and the  Company  within  three (3)
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 Buyers and is a
valid and binding  agreement of such Buyers  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.  The Buyers and their  counsel have
received and read in their entirety: (i) this Agreement and each representation,
warranty  and  covenant  set forth  herein,  the  Investor  Registration  Rights
Agreement,  the Escrow Agreement,  and the Irrevocable Transfer Agent Agreement;
(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, 2004 and Form 10-QSB
for the fiscal  quarters ended October 31, 2004,  January 31, 2005 and April 30,
2005;  and (v)  answers to all  questions  the Buyers  submitted  to the Company
regarding  an  investment  in the  Company;  and the Buyers  have  relied on the
information  contained  therein and has not been furnished any other  documents,
literature, memorandum or prospectus.

            (j) Due  Formation.  The Buyers have 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.  The Buyers acknowledge,  that
they  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. The Buyers have relied 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.
<PAGE>

            (l) B.C. Exemption - Accredited Investor as Principal. If the Buyers
are purchasing the  Convertible  Debentures  pursuant to Part 5 of  Multilateral
Instrument 45-103 adopted by the BCSC, then the Buyers  additionally  represent,
warrant  and  covenant  to the  Company  (which  representations,  warrants  and
covenants shall survive closing) that the Buyers are purchasing as principal for
their own account, and not for the benefit of any other person, or company.

                  (m) B.C.  Exemption - Minimum  Purchase as  Principal.  If the
Buyers are purchasing the Convertible Debentures pursuant to Section 74(2)(4) of
the B.C. Act, then each 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 Convertible Debenture
with an aggregate acquisition cost to the Buyer of 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 Debenture of not less than CDN $97,000;

                  (iii)  neither  the Buyer nor any party on whose  behalf  each
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  Debenture without a prospectus in reliance on an exemption from the
prospectus requirements of applicable securities legislation; and

                  (iv) if the Buyer is not purchasing for its own account;

                  A. the  Buyer  is a trust  company  or an  insurer  which  has
received a business  authorization under the Financial Institutions Act (British
Columbia; or

                  B. a portfolio  manager who manages the investment  portfolios
of clients through  discretionary  authority  granted by one or more clients and
the Buyer is  registered  under the B.C.  Act,  or the Buyer is exempt from such
registration,  and the Buyer is purchasing the Convertible Debenture as an agent
for accounts that are fully managed by the Buyer;

            (n)  B.C.  Exemption  -  Trust  Companies,  Insurers  and  Portfolio
Managers  Outside  British  Columbia.  If the  either  Buyer is  purchasing  the
Convertible  Debenture  pursuant to the exemption from  prospectus  requirements
available under British Columbia Instrument 45-504 and is not purchasing for its
own account, then each Buyer additionally represents,  warrants and covenants to
the  Company  (which  representations,  warrants  and  covenants  shall  survive
closing) that;

                  (i) the Buyer is  purchasing  a  Convertible  Debenture  at an
aggregate acquisition cost to the Buyer of not less than CDN$97,000;
<PAGE>

                  (ii) the Buyer is:

                  A. a trust company or an insurer  authorized under the laws of
another  province  in  Canada  to carry on such  business  in such  province  or
territory,  and the Buyer is purchasing the Convertible Debenture as an agent or
trustee for accounts that are fully managed by the Buyer; or

                  B. a portfolio  manager who manages the investment  portfolios
of clients through  discretionary  authority  granted by one or more clients and
the Buyer is registered  as a portfolio  manager under the laws of a province in
Canada  other  than  British  Columbia,   or  the  Buyer  is  exempt  from  such
registration  and the Buyer is purchasing the Convertible  Debenture as an agent
for accounts that are fully managed by the Buyer; or

                  C. a person that carries on business as a portfolio manager in
a  jurisdiction  outside  Canada,  and the Buyer is purchasing  the  Convertible
Debenture as an agent for accounts that are fully managed by the Buyer.

            4. BRITISH COLUMBIA RESALE RESTRICTIONS.

            (a) The Buyers  acknowledge that the Convertible  Debentures  and/or
Conversion Shares 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 Multilateral  Instrument  45-102,  as adopted by the
BCSC, a subsequent  trade in the  Convertible  Debentures 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  four (4) months  (the  "Canadian  Hold  Period")
shall have elapsed from the date on which the Convertible Debentures were issued
to the Buyers;

                  (ii) during the  currency of the  Canadian  Hold  Period,  any
certificate  representing  the Convertible  Debenture 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]."

<PAGE>

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

                  (iv) no  unusual  effort is made to  prepare  the market or to
create a demand for the Convertible Debenture that is 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; and

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

            (d) As a  consequence,  the  Buyers  will not be able to rely on the
resale provisions of Multilateral Instrument 45-102, and any subsequent trade in
the  Convertible  Debentures  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.

      5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

      The Company  represents  and  warrants to the Buyers  that,  except as set
forth in the SEC Documents (as defined herein):

            (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 it is  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 Investor  Registration  Rights  Agreement,  the
Irrevocable  Transfer Agent  Agreement,  the Escrow  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, (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.

<PAGE>

            (c)  Capitalization.  As of June 23, 2005,  the  authorized  capital
stock of the Company  consists of an unlimited number of shares of common stock,
no par value and one  hundred  thousand  (100,000)  shares of Series A Preferred
Stock,  no par value.  As of June 23, 2005, the Company had two hundred  seventy
four  million  five  hundred  ninety five  thousand  one hundred  seventy  three
(274,595,173) shares of common stock and twenty-five thousand (25,000) shares of
Series A Preferred Stock issued and outstanding.  All of such outstanding shares
have  been  validly  issued  and are  fully  paid and  nonassessable.  Except as
disclosed in the SEC Documents (as defined in Section 3(f)), 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. Except as disclosed in the
SEC Documents,  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 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.  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.  The Company has  furnished to the
Buyers true and correct copies of the Company's  Articles of  Incorporation,  as
amended and as in effect on the date hereof (the  "Articles of  Incorporation"),
and the Company's By-laws, as in effect on the date hereof (the "By-laws"),  and
the terms of all securities convertible into or exercisable for Common Stock and
the material  rights of the holders  thereof in respect thereto other than stock
options issued to employees and consultants.

            (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.

<PAGE>

            (e) No  Conflicts.  Except as  disclosed in the SEC  Documents,  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. Except as disclosed in the SEC Documents,  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  Registration  Rights  Agreement in  accordance  with the terms
hereof or thereof.  Except as  disclosed  in the SEC  Documents,  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 January 1, 2003, the
Company has filed all reports,  schedules, forms, statements and other documents
required to be filed by it with the SEC under of the Securities  Exchange Act of
1934, as amended (the "Exchange  Act") (all of the foregoing  filed prior to the
date hereof or amended after the date hereof and all exhibits  included  therein
and financial  statements and schedules  thereto and documents  incorporated  by
reference therein,  being hereinafter  referred to as the "SEC Documents").  The
Company has delivered to the 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

<PAGE>

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

            (h) Absence of Litigation.  Except as disclosed in the SEC Documents
and the  litigation  initiated by Bristol  Investment  Fund,  Ltd.,  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)  except  as  expressly  disclosed  in  the  SEC
Documents,  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  Buyers  Purchase of the  Convertible
Debentures.  The  Company  acknowledges  and  agrees  that the Buyers are 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 Buyers are 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 Buyers or any
of their respective  representatives or agents in connection with this Agreement
and the transactions  contemplated  hereby is merely  incidental to such Buyers'
purchase of the  Convertible  Debentures or the Conversion  Shares.  The Company
further  represents to the Buyers 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.

<PAGE>

            (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.

<PAGE>

            (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. Except as set forth in the
SEC Documents, 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,  or results of operations of the
Company or its subsidiaries.  Except as set forth in the SEC Documents,  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, or results of operations of the Company or its
subsidiaries.

            (t) Tax  Status.  Except  as set  forth  in the SEC  Documents,  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 as set forth in the SEC Documents,
and 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.

<PAGE>

            (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.

      6. COVENANTS.

            (a)  Reasonable  Best Efforts.  Each party shall use its  reasonable
best efforts  timely to 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 Buyers  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 or Canada,  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 Buyers 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 Buyers 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 retirement of debt,  general  corporate and
working capital purposes.

<PAGE>

            (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 of 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.  Each of the Company and the Buyers shall pay
all  costs  and  expenses   incurred  by  such  party  in  connection  with  the
negotiation,   investigation,   preparation,   execution  and  delivery  of  the
Transaction Documents. The Company shall pay Yorkville Advisors Management LLC a
fee equal to Three Million Dollars ($3,000,000) directly from the gross proceeds
of the  Closing.  Furthermore  the  Company  shall  issue to the Buyers or their
designees  warrants to purchase in the aggregate  sixty two million five hundred
thousand  (62,500,000) shares in such amounts and as more fully set forth in the
form of the Buyers' Warrants attached hereto as Exhibit "D".

            (h) The Company  shall pay a structuring  fee to Yorkville  Advisors
Management, LLC of Fifty Thousand Dollars ($50,000),  directly from the proceeds
of the  Closing.  (i)  Corporate  Existence.  So long as any of the  Convertible
Debentures  remains  outstanding,  the Company  shall not directly or indirectly
consummate  any  merger,  reorganization,  restructuring,  reverse  stock  split
consolidation,  sale of all or substantially  all of the Company's assets or any
similar  transaction  or  related   transactions  (each  such  transaction,   an
"Organizational  Change") unless,  prior to the  consummation an  Organizational
Change,  the Company  obtains the written  consent of the Buyers  which  consent
shall not be  unreasonably  withheld.  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.

            (j)  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

<PAGE>

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  and  (e)  any
agreement, transaction, commitment, or arrangement that is amended, modified, or
supplemented in the ordinary  course of business  consistent with past practice.
"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.

            (k) 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).

            (l)  Restriction  on  Issuance  of the  Capital  Stock.  The Company
covenants  and agrees  that,  with the  exception  of Common  Stock to be issued
pursuant  to the  Standby  Equity  Distribution  Agreement  dated June 23,  2005
herewith between the Company and Cornell,  the Convertible  Debenture dated June
23, 2005 issued to Cornell pursuant to this Agreement, the Convertible Debenture
dated May 20,  2005  issued  to  Cornell  pursuant  to the  Securities  Purchase
Agreement  dated May 20, 2005 by and  between the Company and Cornell  (the "May
Convertible  Debenture"),  and the Series A Preferred  Shares  issued to Cornell
pursuant  to the  Investment  Agreement  dated  March 22,  2005 or pursuant to a
commitment  disclosed  in the SEC  Documents,  so  long as any of the  principal
amount or interest on the Convertible  Debentures remain unpaid and unconverted,
the Company  shall not,  without the prior  consent of the Buyers,  (i) issue or
sell any common stock or  preferred  stock with or without  consideration,  (ii)
issue or sell any preferred stock, warrant,  option, right,  contract,  call, or
other  security or instrument  granting the holder  thereof the right to acquire
common  stock  with or without  consideration,  (iii)  enter  into any  security
instrument  granting the holder a security  interest in any of the assets of the
Company,  or (iv) file any  registration  statements  on Form S-8.  Provided the
Company  gives the Buyers  two (2) days  prior  written  notice,  the  foregoing
restriction shall exclude options,  warrants or other securities  convertible or
exchangeable  into shares of common stock of the Company  that were  outstanding
prior to the date hereof.

      7. TRANSFER AGENT INSTRUCTIONS.

      The Company shall issue the Irrevocable Transfer Agent Instructions to its
transfer agent  irrevocably  appointing  David  Gonzalez,  Esq. as its agent for
purpose of having certificates  issued,  registered in the name of the Buyers or
their respective nominee(s), for the Conversion Shares representing such amounts
of  Convertible  Debentures as specified  from time to time by the Buyers to the
Company  upon  conversion  of the  Convertible  Debentures,  for  interest  owed
pursuant to the Convertible  Debentures,  and for any and all Liquidated Damages
(as this term is defined in the Investor  Registration Rights Agreement).  David
Gonzalez,  Esq.  shall be paid a cash  fee of  Fifty  Dollars  ($50)  for  every
occasion they act pursuant to the Irrevocable  Transfer Agent Instructions.  The
Company shall not change its transfer agent without the express  written consent
of the Buyers, which may be withheld by the Buyers in its sole discretion. Prior
to  registration  of the Conversion  Shares under the  Securities  Act, all such

<PAGE>

certificates shall bear the restrictive legend specified in Section 2(g) of this
Agreement.  The Company warrants that no instruction  other than the Irrevocable
Transfer  Agent  Instructions  referred to in this Section 5, and stop  transfer
instructions  to  give  effect  to  Section  2(g)  hereof  (in  the  case of the
Conversion Shares prior to registration of such shares under the Securities Act)
will be given by the  Company  to its  transfer  agent  and that the  Conversion
Shares shall  otherwise be freely  transferable  on the books and records of the
Company  as and to the  extent  provided  in this  Agreement  and  the  Investor
Registration Rights Agreement. Nothing in this Section 5 shall affect in any way
the Buyers  obligations  and agreement to comply with all applicable  securities
laws upon resale of Conversion Shares. If the Buyers provide the Company with an
opinion of counsel,  in form,  scope and  substance  customary  for  opinions of
counsel in comparable  transactions to the effect that  registration of a resale
by the  Buyers  of any  of the  Conversion  Shares  is not  required  under  the
Securities  Act, the Company  shall within two (2)  business  days  instruct its
transfer  agent  to  issue  one or more  certificates  in such  name and in such
denominations as specified by the Buyers. The Company acknowledges that a breach
by it of its obligations  hereunder will cause irreparable harm to the Buyers by
vitiating  the  intent  and  purpose  of the  transaction  contemplated  hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of its
obligations  under this Section 5 will be inadequate and agrees, in the event of
a breach or threatened  breach by the Company of the  provisions of this Section
5, that the  Buyers  shall be  entitled,  in  addition  to all  other  available
remedies,  to an  injunction  restraining  any  breach and  requiring  immediate
issuance  and  transfer,  without the  necessity  of showing  economic  loss and
without any bond or other security being required.

      8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.

      The obligation of the Company  hereunder to issue and sell the Convertible
Debentures  to the Buyers at the Closing is subject to the  satisfaction,  at or
before the Closing  Dates,  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) The Buyers shall have  executed the  Transaction  Documents  and
delivered them to the Company.

            (b) The Buyers shall have delivered to the Escrow Agent the Purchase
Price for Convertible  Debentures in respective amounts as set forth on Schedule
I attached  hereto and the Escrow Agent shall have delivered the net proceeds to
the Company by wire transfer of immediately available U.S. funds pursuant to the
wire instructions provided by the Company.

            (c) The  representations  and warranties of the Buyers shall be true
and  correct  in all  material  respects  as of the date when made and as of the
Closing  Date as  though  made at that  time  (except  for  representations  and
warranties  that  speak  as of a  specific  date),  and the  Buyers  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 Buyers at or prior to the Closing Date.

<PAGE>

      9. CONDITIONS TO THE BUYERS' OBLIGATION TO PURCHASE.

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

                  (i) The Company shall have executed the Transaction  Documents
and delivered them to the Buyers.

                  (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.

                  (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 3 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. If requested by
the  Buyers,  the Buyers  shall have  received a  certificate,  executed  by the
President of the Company,  dated as of the Closing Date, to the foregoing effect
and as to such  other  matters  as may be  reasonably  requested  by the  Buyers
including,  without  limitation  an update as of the Closing Date  regarding the
representation contained in Section 3(c) above.

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

                  (v) The Buyers shall have  received an opinion of counsel from
Greenberg Traurig, LLP in a form satisfactory to the Buyers.

                  (vi)  The  Company   shall  have  provided  to  the  Buyers  a
certificate of good standing from the secretary of state from the state in which
the Company is incorporated.

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

<PAGE>

                  (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  Debenture,  shares of Common Stock to effect the conversion of
all of the Conversion Shares then outstanding.

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

      10. INDEMNIFICATION.

            (a) In consideration  of the Buyers'  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
Buyers 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 "Buyers  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 Buyers 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 Buyers
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
Indemnities,  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 Buyers or holder of the  Convertible  Debentures
the Conversion Shares, as a Buyers 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 Buyers' other  obligations  under this
Agreement,  the Buyers 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 Buyers
in this  Agreement,  instrument  or  document  contemplated  hereby  or  thereby

<PAGE>

executed by the Buyers, (b) any breach of any covenant,  agreement or obligation
of the Buyers  contained in this  Agreement,  the Investor  Registration  Rights
Agreement or any other certificate,  instrument or document  contemplated hereby
or thereby  executed  by the Buyers,  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 Company  Indemnities.  To the
extent that the foregoing undertaking by The Buyers may be unenforceable for any
reason,  The Buyers  shall make the  maximum  contribution  to the  payment  and
satisfaction of each of the Indemnified Liabilities,  which is permissible under
applicable law.

      11. 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 Buyers(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.
<PAGE>

            (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:        Robert Rudman - President
                               Telephone:        (604) 276-9884
                               Facsimile:        (604) 276-2353

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

      If to the Buyers,  to their  address and  facsimile  number on Schedule I,
with copies to each Buyers' 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 11
the  representations  and warranties of the Company and the Buyers  contained in
Sections 3, 4 and 5, the  agreements  and  covenants set forth in Section 6, and
the  indemnification  provisions  set forth in Section  10,  shall  survive  the
Closing  for a  period  of two  (2)  years  following  the  date  on  which  the
Convertible Debentures are converted in full. The Buyers(s) shall be responsible
only  for  its  own  representations,   warranties,   agreements  and  covenants
hereunder.

            (j)  Publicity.  The Company and the Buyers  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
Buyers,  to issue any press release or other public  disclosure  with respect to
such  transactions  required  under  applicable  securities  or  other  laws  or
regulations  (the  Company  shall use its best  efforts to consult the Buyers in
connection with any such press release or other public  disclosure  prior to its
release and Buyers shall be provided with a copy thereof upon release thereof).

<PAGE>

            (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 Buyers failure to satisfy the conditions
set forth in Section 9 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  11(l),  the Company  shall remain  obligated to reimburse  the
Buyers for the fees and expenses of Yorkville Advisors Management, LLC described
in Section 6(g) and (h) above.

            (m) 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 OF PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

         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/Robert Rudman
                                        -------------------------
                                        Name:  Robert Rudman
                                        Title: President

                                        BUYERS:

                                        CORNELL CAPITAL PARTNERS, LP
                                        By:    Yorkville Advisors, LLC
                                        Its:   General Partner

                                        By:  /s/Mark Angelo
                                        -------------------
                                        Name:  Mark A. Angelo
                                        Its:   President and Portfolio Manager

                                        HIGHGATE HOUSE FUNDS, LTD.

                                        By:    Yorkville Advisors, LLC
                                        Its:   General Partner

                                        By:  /s/Adam Gottbetter
                                        -----------------------
                                        Name:  Adam Gottbetter
                                        Its:   Portfolio Manager

<PAGE>
                                    EXHIBIT A

                 FORM OF INVESTOR REGISTRATION RIGHTS AGREEMENT

<PAGE>

                                    EXHIBIT B

                            FORM OF ESCROW AGREEMENT

<PAGE>

                                    EXHIBIT C

                     IRREVOCABLE TRANSFER AGENT INSTRUCTIONS

<PAGE>

                                    EXHIBIT D

                                 FORM OF WARRANT

<PAGE>

                                    EXHIBIT E

                                US Questionnaire

                        ACCREDITED INVESTOR QUESTIONNAIRE

      All capitalized terms herein,  unless otherwise defined, have the meanings
ascribed thereto in the Securities Purchase Agreement.

      This  Questionnaire is for completion by the Investor,  who is a US person
(as that term is defined  Regulation S of the United  States  Securities  Act of
1933 (the  "1933  Act")).  The  purpose of this  Questionnaire  is to assure the
Company that the Investor  will meet the  standards  imposed by the 1933 Act and
the  appropriate  exemptions of applicable  state  securities laws in connection
with the transactions  contemplated by the Securities  Purchase  Agreement.  The
Company will rely on the  information  contained in this  Questionnaire  for the
purposes  of such  determination.  This  Questionnaire  is not an  offer  of any
securities of the Company in any state other than those specifically  authorized
by the Company.

      All  information  contained  in  this  Questionnaire  will be  treated  as
confidential.  However,  by  signing  and  returning  this  Questionnaire,  each
Investor agrees that, if necessary,  this Questionnaire may be presented to such
parties as the Company deems  appropriate to establish the  availability,  under
the 1933 Act or applicable state securities law, of exemption from  registration
in connection  with the  transactions  contemplated  by the Securities  Purchase
Agreement.

      12. The Investor covenants, represents and warrants to the Company that it
satisfies one or more of the categories of "Accredited Investors", as defined by
Regulation D promulgated under the 1933 Act, as indicated below: (Please initial
in the space provide those categories, if any, of an "Accredited Investor" which
the Investor satisfies)

     Category  1  An organization  described in Section  501(c)(3) of the United
                  States Internal  Revenue Code, a corporation,  a Massachusetts
                  or similar  business trust or partnership,  not formed for the
                  specific  purpose  of  acquiring  the  securities,  with total
                  assets in excess of US $5,000,000;

     Category 2   A natural  person  whose  individual  net worth,  or joint net
                  worth  with  that  person's  spouse,  on the date of  purchase
                  exceeds US $1,000,000;

     Category 3   A natural person who had an individual  income in excess of US
                  $200,000 in each of the two most recent  years or joint income
                  with that person's  spouse in excess of US $300,000 in each of
                  those years and has a reasonable  expectation  of reaching the
                  same income level in the current year;

<PAGE>

     Category 4   A "bank" as defined under Section (3)(a)(2) of the 1933 Act or
                  savings and loan  association or other  institution as defined
                  in Section 3(a)(5)(A) of the 1933 Act acting in its individual
                  or fiduciary capacity;  a broker dealer registered pursuant to
                  Section  15 of the  Securities  Exchange  Act of 1934  (United
                  States);  an insurance  company as defined in Section 2(13) of
                  the 1933  Act;  an  investment  company  registered  under the
                  Investment  Company Act of 1940 (United  States) or a business
                  development  company as defined  in Section  2(a)(48)  of such
                  Act; a Small Business  Investment Company licensed by the U.S.
                  Small Business  Administration  under Section 301(c) or (d) of
                  the Small Business  Investment Act of 1958 (United States);  a
                  plan with total assets in excess of $5,000,000 established and
                  maintained by a state, a political  subdivision thereof, or an
                  agency  or   instrumentality   of  a  state  or  a   political
                  subdivision  thereof,  for the  benefit of its  employees;  an
                  employee  benefit  plan  within the  meaning  of the  Employee
                  Retirement  Income  Security Act of 1974 (United States) whose
                  investment decisions are made by a plan fiduciary,  as defined
                  in Section 3(21) of such Act, which is either a bank,  savings
                  and  loan   association,   insurance   company  or  registered
                  investment  adviser, or if the employee benefit plan has total
                  assets in excess of $5,000,000,  or, if a self-directed  plan,
                  whose investment decisions are made solely by persons that are
                  accredited investors;

     Category 5   A private business  development  company as defined in Section
                  202(a)(22)  of the  Investment  Advisers  Act of 1940  (United
                  States);

     Category 6   A director or executive officer of the Company;

     Category 7   A trust with total assets in excess of $5,000,000,  not formed
                  for the specific  purpose of acquiring the  securities,  whose
                  purchase is directed by a sophisticated person as described in
                  Rule 506(b)(2)(ii) under the 1933 Act;

     Category 8   An  entity  in which  all of the  equity  owners  satisfy  the
                  requirements of one or more of the foregoing categories;

            Note that prospective Investors claiming to satisfy one of the above
      categories  of  Accredited  Investor may be required to supply the Company
      with a balance  sheet,  prior years'  federal  income tax returns or other
      appropriate documentation to verify and substantiate the Investor's status
      as an Accredited Investor.
<PAGE>

      13. If the  Investor is an entity which  initialed  Category 8 in reliance
upon the Accredited Investor  categories above, state the name,  address,  total
personal  income from all sources for the previous  calendar  year,  and the net
worth  (exclusive of home, home  furnishings and personal  automobiles) for each
equity owner of the said entity:

      14. _______________________________________________________________

      15. _______________________________________________________________

      The  Investor  hereby  certifies  that the  information  contained in this
Questionnaire  is complete and accurate and the Investor will notify the Company
promptly of any change in any such information.  If this  Questionnaire is being
completed on behalf of a corporation,  partnership,  trust or estate, the person
executing  on behalf of the  Investor  represents  that it has the  authority to
execute and deliver this Questionnaire on behalf of such entity.

      IN WITNESS WHEREOF,  the undersigned has executed this Questionnaire as of
the ______ day of __________________, 2005.

If a Corporation, Partnership or            If an Individual:
Other Entity:

Print or Type Name of Entity                Signature

Signature of Authorized Signatory           Print or Type Name

Type of Entity                              Social Security/Tax I.D. No.

<PAGE>

                                    EXHIBIT F

                        ACCREDITED INVESTOR QUESTIONNAIRE

      The purpose of this  Questionnaire is to assure SmarTire Systems Inc. (the
"Company")  that  the   undersigned   (the   "Subscriber")   will  meet  certain
requirements for the registration and prospectus  exemptions  provided for under
Multilateral Instrument 45-103 ("MI 45-103"), as adopted by the British Columbia
Securities  Commission  and the Alberta  Securities  Commission  (each, a "local
jurisdiction"),  in respect of a proposed private placement of securities by the
Company (the "Transaction").  The Company will rely on the information contained
in this Questionnaire for the purposes of such determination.

      The  undersigned  Subscriber  covenants,  represents  and  warrants to the
Company that:

      1.    the  Subscriber  has such  knowledge and experience in financial and
            business matters as to be capable of evaluating the merits and risks
            of the  Transaction  and the Subscriber is able to bear the economic
            risk of loss arising from such Transaction;

      2.    the   Subscriber   satisfies  one  or  more  of  the  categories  of
            "accredited  investor"  (as  that  term  is  defined  in MI  45-103)
            indicated below (please check the appropriate box):

            (a)   |_| a Canadian  financial  institution  as defined in National
                  Instrument  14-101,  or an  authorized  foreign bank listed in
                  Schedule III of the Bank Act (Canada);

            (b)   |_| the Business Development Bank of Canada incorporated under
                  the Business Development Bank of Canada Act (Canada);

            (c)|_| an association under the Cooperative Credit  Associations Act
                  (Canada) located in Canada;

            (d)   |_| a  subsidiary  of any  person or  company  referred  to in
                  paragraphs 2(a) to 2(c),  where the person or company owns all
                  of the voting securities of the subsidiary,  except the voting
                  securities  required by law to be owned by  directors  of that
                  subsidiary;

            (e)   |_| a person or company  registered  under the  Securities Act
                  (British Columbia), or under securities legislation of another
                  jurisdiction of Canada, as an adviser or dealer,  other than a
                  limited  market dealer  registered  under the  Securities  Act
                  (Ontario);

            (f)|_| an  individual  registered or formerly  registered  under the
                  Securities  Act  (British   Columbia),   or  under  securities
                  legislation   in  another   jurisdiction   of  Canada,   as  a
                  representative  of a person or  company  registered  under the
                  Securities  Act  (British   Columbia),   or  under  securities
                  legislation in another  jurisdiction of Canada,  as an adviser
                  or dealer, other than a limited market dealer registered under
                  the Securities Act (Ontario);

<PAGE>

            (g)   |_| the  government  of  Canada  or a  province,  or any crown
                  corporation  or  agency  of  the  government  of  Canada  or a
                  province;

            (h)   |_| a municipality, public board or commission in Canada;

            (i)   |_| a national,  federal,  state,  provincial,  territorial or
                  municipal government of or in any foreign jurisdiction, or any
                  agency of that government;

            (j)   |_| a pension  fund that is  regulated by either the Office of
                  the  Superintendent  of Financial  Institutions  (Canada) or a
                  provincial pension commission or similar regulatory authority;

            (k)   |_| a registered charity under the Income Tax Act (Canada);

            (l)   |_| an individual who beneficially  owns, or who together with
                  a spouse beneficially owns, directly or indirectly,  financial
                  assets  (defined  in MI 45-103  to mean  cash and  securities)
                  having an aggregate  realizable  value that,  before taxes but
                  net of any related liabilities, exceeds CDN.$1,000,000;

            (m)    an individual  whose net income before taxes  exceeded
                  CDN.$200,000 in each of the two most recent years or whose net
                  income before taxes  combined  with that of a spouse  exceeded
                  CDN.$300,000  in each of those years and who, in either  case,
                  has a  reasonable  expectation  of  exceeding  that net income
                  level in the current year;

            (n)   a  corporation,   limited   partnership,   limited   liability
                  partnership,  trust or  estate,  other  than a mutual  fund or
                  non-redeemable  investment  fund,  that had net  assets  of at
                  least   CDN.$5,000,000  as  reflected  on  its  most  recently
                  prepared financial statements;

            (o)   a mutual fund or  non-redeemable  investment fund that, in the
                  local jurisdiction,  distributes it securities only to persons
                  or companies that are accredited investors;

            (p)   a mutual fund or  non-redeemable  investment fund that, in the
                  local   jurisdiction,   distributes  its  securities  under  a
                  prospectus  for  which  a  receipt  has  been  issued  by  the
                  regulator;

<PAGE>

            (q)   an  entity  organized  in  a  foreign   jurisdiction  that  is
                  analogous  to any of the  entities  referred to in  paragraphs
                  2(a) through 2(e) and paragraph 2(j) in form and function; or

            (r)   a person or  company  in respect of which all of the owners of
                  interests,  direct  or  indirect,  legal  or  beneficial,  are
                  persons or companies that are accredited investors.

      The Subscriber acknowledges and agrees that the Subscriber may be required
by the Company to provide such  additional  documentation  as may be  reasonably
required by the Company and its legal counsel in  determining  the  Subscriber's
eligibility to acquire the Shares under relevant Legislation.

      IN WITNESS WHEREOF,  the undersigned has executed this Questionnaire as of
the             day of                   ,.             .

If a Corporation, Partnership or Other Entity:If an Individual:

----------------------------                    -------------------------------
Print or Type Name of Entity                    Signature

----------------------------                    -------------------------------
Signature of Authorized Signatory               Print or Type Name

----------------------------
Type of Entity

<PAGE>

                                    EXHIBIT G

                                  Form 45-903F1

<PAGE>

                                   SCHEDULE I

                               SCHEDULE OF BUYERS

<TABLE>
<CAPTION>
===================================================================================================================================
                                                                                    Address/Facsimile                 Amount of
                Name                                Signature                        Number of Buyers               Subscription
===================================================================================================================================
<S>                                    <C>                                   <C>                                      <C>
Cornell Capital Partners, LP           By:      Yorkville Advisors, LLC      101 Hudson Street - Suite 3700           $28,000,000
                                       Its:     General Partner              Jersey City, NJ  07303
                                                                             Attention:          Mark Angelo
                                       By: ________________________          Facsimile:         (201)
                                                                             985-8266
                                       Name:    Mark Angelo
                                       Its:     Portfolio Manager
                                       and
                                       President

With a copy to:                        David Gonzalez, Esq.                  101 Hudson Street - Suite 3700
                                                                             Jersey City, NJ 07302
                                                                             Facsimile:         (201)
                                                                             985-8266

Highgate House Funds, Ltd.             By:      Yorkville Advisors, LLC      488 Madison Ave. - 12th Floor            $ 2,000,000
                                       Its:     General Partner              New York, NY 10022
                                                                             Attention:    Adam Gottbetter
                                       By: : ________________________        Facsimile:   (212) 400-6901

                                       Name:    Adam Gottbetter
                                       Its:     Portfolio Manager

With a copy to:                        David Gonzalez, Esq.                  101 Hudson Street - Suite 3700
                                                                             Jersey City, NJ 07302
                                                                             Facsimile:         (201)
                                                                             985-8266

</TABLE>

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