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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                 FORM 10-KSB/A

                                  AMENDMENT 2

(MARK ONE)

[X]     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
        OF 1934

        FOR THE FISCAL YEAR ENDED JULY 31, 2001

                                       OR

[ ]     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934

        FOR THE TRANSITION PERIOD FROM         TO

                         COMMISSION FILE NUMBER 0-29248

                                  ------------

                              SMARTIRE SYSTEMS INC.
                 (Name of small business issuer in its charter)

                                  ------------

              BRITISH COLUMBIA                                 N/A
      (State or other jurisdiction of                   (I.R.S. Employer
       incorporation or organization)                  Identification No.)

                            #150 - 13151 VANIER PLACE
                   RICHMOND, BRITISH COLUMBIA, CANADA V6V 2J1
               (Address of principal executive offices) (Zip Code)

                                  604-276-9884
                           (Issuer's telephone number)

       SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE

         SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:

                                  COMMON STOCK

                              (TITLE OF EACH CLASS)

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. [X] Yes
[ ] No

     Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

     State issuer's revenues for its most recent fiscal year: $779,611

     At July 31, 2002, the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the average bid
and asked price of such common equity, was $22,777,185.

     The number of shares outstanding of the Company's common stock at July 31,
2002 was 18,711,369.

     Transitional Small Business Disclosure Format (check one): [ ] Yes  [X] No


================================================================================

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INDEX

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                                                                                   Page
                                                                                 Number
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<S>      <C>                                                                     <C>
PART I

Item 1.  Description of Business .....................................................2

Item 2.  Description of Property.....................................................18

Item 3.  Legal Proceedings...........................................................18

Item 4.  Submission of Matters to a Vote of Security Holders.........................18

PART II

Item 5.  Market for Common Equity and Related Stockholder Matters....................18

Item 6.  Management's Discussion and Analysis or Plan of Operation...................19

Item 7.  Financial Statements........................................................23

Item 8.  Changes In and Disagreements With Accountants on Accounting
         and Financial Disclosure....................................................24

PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act...........................24

Item 10. Executive Compensation......................................................28

Item 11. Security Ownership of Certain Beneficial Owners
         and Management..............................................................32

Item 12. Certain Relationships and Related Transactions..............................34

Item 13. Exhibits and Reports on Form 8-K............................................34
</TABLE>

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                                       2


THIS ANNUAL REPORT ON FORM 10-KSB, INCLUDING EXHIBITS THERETO, CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. THESE FORWARD-LOOKING STATEMENTS ARE TYPICALLY IDENTIFIED BY THE
WORDS "ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FORECASTS", "PLANS",
"FUTURE", "STRATEGY", OR WORDS OF SIMILAR MEANING. VARIOUS FACTORS COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING
STATEMENTS, INCLUDING THOSE DESCRIBED IN "RISK FACTORS" IN THIS FORM 10-KSB. THE
COMPANY ASSUMES NO OBLIGATIONS TO UPDATE THESE FORWARD-LOOKING STATEMENTS TO
REFLECT ACTUAL RESULTS, CHANGES IN ASSUMPTIONS, OR CHANGES IN OTHER FACTORS,
EXCEPT AS REQUIRED BY LAW.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

SmarTire Systems Inc. (together with its subsidiaries, the "Company" or
"SmarTire") is engaged in developing and marketing technically advanced tire
monitoring systems designed for improved vehicle safety, performance,
reliability and fuel efficiency. During the fiscal year ended July 31, 2001, the
Company earned revenues primarily from the sale of tire monitoring systems for
passenger cars and motorsport applications.

The Company was incorporated under the laws of the Province of British Columbia
as TTC/Truck Tech Corp. on September 8, 1987. The Company (operating as
TTC/Truck Tech Corp.) completed its initial public offering on the Vancouver
Stock Exchange on September 11, 1989. On April 13, 1995, the Company changed its
name to UniComm Signal Inc. On December 24, 1997, the Company changed its name
to SmarTire Systems Inc. On December 16, 1998, trading of the Company's common
stock commenced on the Nasdaq Small Cap Market. On March 12, 1999, the Company
voluntarily delisted its shares from trading on the Vancouver Stock Exchange.
The Company's corporate offices are located at #150 - 13151 Vanier Place,
Richmond, British Columbia, Canada, V6V 2J1. The Company's telephone number is
(604) 276-9884.

The Company's consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, SmarTire USA Inc., SmarTire (Europe)
Limited and SmarTire Technologies Inc.

The Company's consolidated financial statements are stated in United States
Dollars and are prepared in accordance with United States Generally Accepted
Accounting Principles (GAAP).

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                                       3


BUSINESS OF THE COMPANY
OVERVIEW

The Company, in conjunction with its strategic partners, is focused on
developing and marketing technically advanced tire monitoring systems for the
transportation and automotive industries. SmarTire Systems Inc. was formed to
develop and market remote data sensing, transmission and processing products
incorporating patented technologies to satisfy emerging market requirements in
the transportation industry.

SmarTire has three wholly owned subsidiaries: SmarTire Technologies Inc.,
SmarTire USA Inc. and SmarTire (Europe) Limited. SmarTire Technologies Inc.,
formerly Delta Transportation Products Ltd., was the original developer of the
Company's patented technology. SmarTire USA Inc. was incorporated under the laws
of Delaware in May of 1997 as the exclusive marketing agency for SmarTire in
North America. SmarTire (Europe) Limited was incorporated in the United Kingdom
on February 25, 1998 as the Company's exclusive sales and distribution operation
for Europe. SmarTire (Europe)'s head office is located at Park 34, Southmead
Industrial Park, Didcot, Oxfordshire, England, OX11 7WB.

The Company's initial product was a revolutionary tire monitoring system. The
first version of this tire monitoring system was designed for large ore hauling
trucks and wheeled loaders that are utilized in the mining industry. Based on
the success of its experience in the industrial equipment market, the Company
shifted its focus during 1995 to the development of products for the mainstream
transportation markets. Passenger car and commercial vehicle markets represent
significant sales potential for the Company and therefore have received the
highest priority.

On December 6, 1996, SmarTire completed an Asset Purchase Agreement to acquire
the Low Tire Pressure Warning Division of EPIC Technologies, Inc. of Norwalk,
Ohio ("EPIC"). The Company acquired assets from EPIC, including specialized
testing equipment, patents and all contractual rights, including a production
program with Ford Motor Company. Run-flat tires were offered as an option on
Lincoln Continentals and the use of run-flat tires required a tire monitoring
system. EPIC's Low Pressure Tire Warning System was in use on Lincoln
Continentals through the 2000 model year and SmarTire received revenues
generated by those sales. Sales under the Lincoln Continental production program
were expected to discontinue at the end of the 2000 model year but have been
continued. The Company has no contract in place with Ford. Ford issues purchase
orders for the manufacture of tire monitoring systems for the Lincoln
Continental. The purchase orders do not commit Ford to any minimum purchase
requirement and there is no assurance that Ford will continue to offer the tire
monitoring system on the Lincoln Continental.

This acquisition accelerated SmarTire's entry into the passenger car market.
Recognizing the emerging demand for tire monitoring products in passenger cars
and light trucks, the Company modified the new car version of EPIC's technology
for use in existing vehicles. This product was launched into the automotive
aftermarket in June 1997 to support the market introduction of run-flat tires.

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                                       4


Goodyear, Michelin and Bridgestone/Firestone approved the Company's first
generation tire monitoring system for sale with run-flat or extended mobility
tires. Run-flat tires allow drivers to drive up to 50 miles on a tire that has
lost all of its air pressure. These tires perform so well without any air
pressure that an approved tire monitoring system is required with the purchase
of each set. Otherwise the operator may unknowingly drive on the tire until it
fails or is no longer repairable. Tire monitoring systems for both run-flat and
conventional tires are distributed primarily through independent tire dealers
and distributors and automobile service centers.

SmarTire established a strategic alliance with a leading automotive parts
supplier on April 20, 1998 when the Company entered into four agreements with
TRW Inc., a global company providing products and services with a high
technological or engineering content to automotive, space and defense markets.
These agreements were an Equity Agreement, a Cooperation Engineering Agreement,
an OEM License Agreement and a Manufacturing Agreement. TRW was to have
exclusive rights to jointly developed tire monitoring products in the original
equipment market, and SmarTire was to have the exclusive rights in the
aftermarket.

On December 15, 1999, SmarTire announced that it had completed a development/
supply agreement with SensoNor ASA in Horten, Norway, a leading producer of
sensors for automotive applications. In late 1998 SmarTire and TRW teamed with
SensoNor in the successful development of an Application Specific Integrated
Sensor (ASIS) for passenger car and light truck tire monitoring. SensoNor and
SmarTire have also agreed to develop an ASIS for commercial vehicle tire
monitoring applications.

On December 2, 1999, the Company announced it had finalized a licensing
agreement with Transense Technologies plc of Oxfordshire, England granting
SmarTire a non-exclusive, worldwide right to develop and market Transense's
Surface Acoustic Wave (SAW) technology for use in tire monitoring. Transense
researches, develops and markets the use of its patented SAW technology in the
automotive industry.

On December 10, 1999, the Company announced that it had completed an agreement
to develop valve stem designs and tire monitoring electronic packaging for new
market applications and new tire monitoring technologies with Alligator
Ventilfabrik GmbH in Giengen, Germany, the world's leading producer of valve
stems that allow the attachment of tire monitoring sensors inside the tire.

On September 5, 2001, SmarTire announced a restructuring of the alliance with
TRW. The two companies agreed to cancel most of the agreements that were entered
into in 1998, however, TRW retained its equity position in SmarTire.

SmarTire completed the development and launch of its second-generation tire
monitoring system for the passenger car and light truck market during the last
fiscal year. The Company is also continuing the development of systems for the
commercial, industrial and recreational vehicle markets.

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                                       5


In the year ended July 31, 2001, the United States government enacted the
Transportation Recall Enhancement Accountability and Documentation ("TREAD") Act
of 2000 which requires that tire monitoring technology be installed on all new
passenger cars and light trucks in the United States sold after November 2003.
SmarTire anticipates that, as this legislation is put into practice though the
administrative rule making process, the tire monitoring industry as a whole will
experience rapid expansion from an early stage niche market to a $1 billion a
year staple automotive component. The TREAD Act can be compared to the
legislation which introduced compulsory airbags in the US a few years ago.

GOVERNMENT REGULATIONS

The Company's products are subject to regulation by the government agencies
responsible for radio frequencies in each country that the Company's tire
monitoring systems will be sold. For example, in the United States approval must
be received from the Federal Communications Commission for each product. In
addition to radio approvals, some countries require additional governmental
approvals, or other approvals may be necessary for market acceptance of the
product. For example, TUV (a highly regarded independent testing company)
approval in Germany is considered necessary to market the Company's tire
monitoring system. In the United Kingdom, the Vehicle Installation Development
Group is a governmental body that approves all electronic equipment to be
installed in emergency and police vehicles.

The Company believes it has all of the necessary governmental approvals for its
current tire monitoring systems in its intended market countries. As each new
tire monitoring product is introduced to the market, the Company will apply for
necessary approvals for the new products.

In the year ended July 31, 2001, the United States government enacted the TREAD
Act of 2000. The TREAD Act was implemented to address perceived safety concerns
resulting from poor tire maintenance, tread separation and tire blow outs. The
Act, among other things, requires that the National Highway Transportation and
Safety Administration ("NHTSA") develop rules and regulations which require all
new vehicles sold after November 2003 to have tire monitoring systems that warn
drivers if a tire is significantly under-inflated, installed as a standard
feature.

In July 2001, NHTSA published and circulated a Notice of Proposed Rule Making
which included provisions related to the tire monitoring requirements of the
Act. The Notice of Rule Making outlines the parameters of systems that NHTSA
will consider compliant with the legislation and the proposed periods for
complying with the regulations. Two forms of tire monitoring technologies are
being considered: direct and indirect.

The direct tire monitoring technologies are based on dedicated sensor/
transmitters located within the cavity of the tire that are usually mounted on
the wheel. The transmitter monitors and measures contained air pressure and
temperature within each tire and transmits this information to a receiver and/or
display module located in the dash of the vehicle. The Company's products are an
example of a direct system.


<PAGE>
                                       6


Indirect tire monitoring technologies typically work with the vehicle's
anti-lock brake system (ABS). Most indirect tire pressure monitoring systems
compare each wheel's rotational speed with the rotational speed of other wheels.
If one tire becomes significantly under-inflated while the others remain at
proper pressure, the indirect system detects the problem because the wheel's
rotational speed is slightly higher than that of other wheels.

Based upon the advantages of the direct monitoring technology and the shortfalls
of the indirect monitoring technology, NHTSA concluded that none of the current
indirect systems satisfy the requirements of the proposed rules. In the Notice
of Proposed Rule Making, NHTSA concluded that direct measurement systems have
major advantages over indirect systems as they:

     -  actually measure the pressure in each tire and can detect when any tire
        or combination of tires is under-inflated, including when all tires are
        under-inflated,

     -  operate while the vehicle is stationary,

     -  are highly accurate and can detect small pressure losses, some even as
        low as 1psi,

     -  do not give false positives if the vehicle is driven on bumpy roads, has
        mismatched tires or has a tire out of balance or alignment,

     -  don't need substantial time to calibrate the system and reduce the very
        real possibility for human error,

     -  can tell the operator which tire is under-inflated.

Although the TREAD Act only applies to passenger automobiles, the Company
believes that other motor vehicles, including medium and heavy trucks, buses and
motorcycles will be impacted by this legislation in subsequent years. The
Company also believes that compliance with this legislation by European,
Japanese and other auto makers will accelerate the adoption of tire monitoring
systems globally.

STRATEGIC RELATIONSHIPS

The company's strategy includes the establishment of alliances to assist in the
development and marketing of its products and technologies. Key strategic
alliances include:

(a)  SensoNor ASA
        Supply agreements for Application Specific Integrated Sensor ("ASIS")
        used in tire monitoring applications.

(b)  Alligator Ventilfabrik GmbH
        A development agreement for valve stem designs and tire monitoring
        electronic packaging.

(c)  Transense Technologies plc
        A license agreement to develop and market Surface Acoustic Wave ("SAW")
        technology for use in future tire monitoring systems.

Subsequent to the end of the fiscal year, the Company announced a restructuring
of its strategic alliance with TRW Inc. ("TRW"). SmarTire established this
strategic alliance with TRW in April 1998. The strategic alliance included joint
engineering and development activities and granted TRW exclusive marketing and
distribution rights


<PAGE>
                                       7


for some of the Company's products. SmarTire and TRW worked closely on the
development of new tire monitoring systems, which have been incorporated in
SmarTire's current product line. During the alliance TRW was to have exclusive
rights to jointly developed products in the original equipment manufacturing
market, and SmarTire was to have the exclusive rights in the aftermarket.

Under the terms of the recent restructuring, SmarTire and TRW agreed to
substantially reduce the interrelationship of the two companies. Although each
party will continue to have a royalty free, perpetual right to use the products
jointly developed, there will be no further collaboration on product
development. Additionally, neither company will have exclusive rights to any of
the products and SmarTire will be free to explore alternative marketing and
distribution channels. The Company believes that this additional flexibility
will allow it to better exploit the expected increase in demand for tire
monitoring resulting from the TREAD Act and allow for the development of
complete global market access.

The Company expects to develop new strategic relationships in pursuing
opportunities with original equipment manufacturers ("OEM") of passenger cars
and light trucks. The Company also expects to develop new strategic alliances in
pursuing the medium and heavy truck and industrial vehicle markets for tire
monitoring.

PRODUCT DEVELOPMENT

The Company's technology provides drivers with real time information regarding
tire pressure and temperature changes while the vehicle is in motion. This
information provides the consumer and commercial markets with improved vehicle
safety, performance and fuel economy. The SmarTire products have been engineered
and designed for universal application. The sensor/transmitter can be
installed on virtually any tire and wheel combination. Each sensor/transmitter
contains a custom computer chip and the Company's core radio frequency ("RF")
technology.

SmarTire's technology features a custom developed ASIS that forms a single
micro-electronic package containing pressure and temperature sensing elements
and a digital logic state machine that functions as the brains of the sensor/
transmitter. This unique single chip is robust in design, optimizes battery life
and provides various modes of sensing and communicating which ensure faster
transmission of data when problems occur. Uniquely packaged on a miniaturized
circuit board with the ASIS are various components and SmarTire's RF technology.
The RF technology is based on years of experience and transmits the data through
the exterior of the tire and wheel.

The Company's products feature transmitter options providing different
installation choices for various automotive applications. A strap-mounted
transmitter attached to the wheel offers the most universal installation for a
wide range of tire and wheel assemblies. A valve mounted transmitter attached to
the base of the valve offers an adjustable, secure in-tire installation for
specific wheel/rim profiles. Once installed, the sensor/transmitters do not
require ongoing maintenance. The sensor/transmitters are coupled with modular
options for in-vehicle display. The Company has developed three display options
for the aftermarket (basic, integrated full


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                                       8


function and remote full function) as well as telltale lights, switchblanks and
digital displays for original equipment and port of entry applications.

The Company is currently in the process of developing a Gen II commercial
vehicle tire monitoring system using a new high-pressure transmitter. The new
commercial vehicle product will handle tire pressure up to 150 pounds per square
inch ("psi") and is being designed for use on all trucks including Class 8
tractor-trailers. This high-pressure transmitter can also be used in
recreational vehicle and motorhome applications as well as in off-the-road heavy
industrial applications. The Company is targeting completion and introduction
into the market of the commercial vehicle system during the 2002 fiscal year.

In 1996, SmarTire acquired a tire monitoring system designed specifically for
use in motorsports that was developed in conjunction with Penske Racing. The
current motorsports tire monitoring system can only be fitted on wheels that
have been specially machined by the manufacturer. The wheel fixtures are similar
to enlarged valve stems with the antenna located inside the air space of the
tire. The three ounce transmitter is about three inches long and sends data only
when the wheel motion is detected in order to preserve the life of its lithium
batteries. In addition to providing warnings of a tire losing pressure, the
motorsports tire monitoring system is used to correctly set cold tire pressures
in order to avoid over-inflated tires. The motorsport tire monitoring system is
distributed by Pi Research, United Kingdom.

MARKETING

SmarTire USA and SmarTire (Europe) have been established to carry out the
marketing of the Company's products. The initial objective of SmarTire USA and
SmarTire (Europe) was to establish a distribution network for the automotive
aftermarket. A co-objective of establishing this network has been to train and
certify dealers and retailers to install the SmarTire(TM) system. We had
anticipated that the launch of the next generation of passenger car tire
monitoring systems would build upon this distribution network.

The Company has substantially changed its marketing strategy based upon the
enactment of the TREAD Act and the Company's restructuring of its strategic
alliance with TRW. The Company expects that, as tire monitoring becomes standard
equipment for new passenger vehicles in the United States over the next few
years, demand for tire monitoring systems as dealer installed options and
aftermarket products will eventually decline. The Company's current strategy
involves generating short-term revenue from products available to meet today's
demand combined with the pursuit of OEM business.

If the TREAD Act is implemented as expected, demand for tire monitoring
technology will be initiated by the big three U.S. automakers; General Motors,
DaimlerChrysler and Ford. Some European automotive groups have already used tire
monitoring as a means to add value and differentiate models. Due to the large
volume of import vehicles to the U.S., it is expected that the thirty different
automakers in Europe plus the twelve from Asia will meet the TREAD Act
requirements for North America. Adding tire monitoring to domestic European and


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                                       9


Asian vehicles would trigger a much larger demand for tire monitoring than was
anticipated prior to introduction of the TREAD Act.

SmarTire's marketing strategy will be to focus on sales for original equipment
applications. In approaching the OEM market, SmarTire expects to be a key
subcomponent supplier. The Company expects to pursue two levels of entry. The
first will be the OEMs themselves, while the second will be systems integrators
or Tier One suppliers. These Tier One suppliers produce systems and subsystems
for the OEMs. Given that there are already RF based systems either on or
available to most new car platforms, SmarTire does not expect to be competitive
in placing receivers within new vehicles. However, the Company expects to
capitalize on its sensor and RF expertise to supply transmitters to the OEM, the
Tier One supplier, or a Tier One supplier as directed by the OEM. On certain
platforms, SmarTire may be successful in providing fully-integrated tire
monitoring solutions.

While the Company expects that the greatest demand for tire monitoring in the
U.S. will be at the OEM level for passenger vehicles and light trucks, SmarTire
will continue to market its products through installation at either the new car
dealer or port of entry level. SmarTire refers to this opportunity as car
accessory programs ("CAPs"). CAPs programs may be used to provide an OEM quality
product that is not installed at the factory. CAPs opportunities also exist in
Europe due to the number and diversity of automakers. It is expected that CAPs
will provide a longer-term opportunity in Europe.

During the fiscal year ended July 31, 2001 the Company completed development of
its Gen II products and released its line of products for sale into the
aftermarket. The aftermarket consists of retailers, including tire retailers,
automotive electronic stores and accessory shops, that sell products directly to
consumers. The aftermarket opportunity currently consists of a niche market in
the enthusiast and performance vehicle segment. To access this niche, SmarTire
has worked to establish a wholesale distribution network in Europe, while in
North America the company has sought to work directly with major retail
distributors.

COMPETITION

As a whole, the tire monitoring industry is still in its early stages. There
have been very few products available in the market. Tire monitoring products
can generally be divided among two basic types, direct technology and indirect
monitoring technologies. As described in the NHTSA's report discussed in the
"Government Regulations" section, direct tire monitoring, such as the Company's
products, provide substantial advantages over indirect monitoring technology.
SmarTire's main competitors with respect to direct tire monitoring systems
include the following:

Schrader Bridgeport, claims to be the world's largest producer of tire valves
and tire-pressure measurement equipment with over $140 million in annual sales.
The tire monitoring system developed by Schrader has been used on Corvettes
since 1996. The Schrader tire monitoring system is also used on the Plymouth
Prowler. The product is being aggressively marketed at the OEM level. As a
transmitter supplier, Schrader has teamed with receiver suppliers to recently
win new tire monitoring

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                                       10


OEM contracts. In the aftermarket, Schrader has joined with Johnson Controls in
the launch of their PSI product.

German based BERU acquired Doduco and its tire monitoring technology. The
company is presently working with and approved by the consortium of five German
vehicle manufacturers. To SmarTire's knowledge, the system requires the use of
transmitters attached to the valve stem (inside the tire/wheel assembly),
receiving antennas at each of the wheel wells, wiring harness for conveying data
to the receiver and some form of in-dash display. This system has been developed
for the OEM market only.

Pacific Industrial Co. Ltd., a Japanese company, has developed a product that
measures the air pressure in each tire and sends the data to a receiver mounted
inside a vehicle. The products are available on a few Asian vehicles and, to
date, are not commercially available in North America. SmarTire believes that
the Pacific products resemble the BERU approach to tire monitoring with
additional antennas and wiring harnesses.

TRW is a producer of safety and security systems for the global automotive
market. It supplies advanced technology products and services to the aerospace,
information systems and automotive markets. From December 1998 to August
2001, SmarTire and TRW jointly developed advanced tire monitoring technology and
each has access to this technology, which encompasses SmarTire's current
products. During this period, the two companies developed a common ASIS chip for
existing products. SmarTire believes that TRW's tire monitoring product has not
been released into production.

Siemens Automotive merged with Atecs Mannesmann AG to create Siemens Automotive
AG, a large supplier of high-tech automotive electronic systems. The combined
company's product portfolio focuses on electronic modules and systems including
ABS and airbag electronics. With the advent of the TREAD Act, SmarTire expects
Siemens to enter the tire monitoring market and become a major supplier over
time.

In addition to the systems mentioned above, NHTSA also tested two other wireless
tire monitoring systems. One system was developed by Cycloid Co. and the other
was developed by Fleet Specialties Co. The information obtained from NHTSA
indicates that both of these systems are still in the prototype stage.

There are several indirect or ABS systems, either available on the market or in
prototype stages. Based on the substantial advantages of direct monitoring
technology and the fact the none of these systems currently meet the proposed
guidelines set out in NHTSA's Notice of Proposed Rule Making, unless
improvements can be made to these systems to allow them to meet the proposed
guidelines, the Company does not consider indirect monitoring technology will be
a significant competitor.

With respect to commercial vehicle tire monitoring systems, the major tire
companies have been developing medium truck tires incorporating electronic chips
in the sidewall to provide tire tracking information possibly including
pressure,

<PAGE>
                                       11


temperature and identification. Their disadvantage is their inability to provide
real-time, dynamic values to the driver, which eliminates any early warning
capability while operating the vehicle. Further, it seems that currently there
are no additional functions that can be programmed into these static systems,
limiting their integration into other fleet management programs.

There are a number of companies that are marketing tire inflation systems into
the commercial trailer market. While these systems do not provide tire
monitoring information to the driver, they utilize the air lines in the trailer
to supply air pressure to a tire that is experiencing an air loss. This allows
the driver to continue to operate the vehicle. This system is not available on
the tractor or truck unit itself.

One potential future development that could affect the market for both passenger
car and commercial vehicle tire monitoring is the development of a "smart chip".
This is a computer chip that could transmit data and would be manufactured into
tires. The Company believes that Goodyear and Bridgestone/Firestone have both
completed some development of such a computer chip.

RAW MATERIALS AND PRINCIPAL SUPPLIERS

The Company contracts the manufacture of its products to third parties. These
manufacturers normally provide turnkey operations whereby the manufacturer is
responsible for purchasing the component parts for the Company's tire monitoring
system. The Company also purchases component parts on its own account for
engineering and prototype development purposes. Certain of the components and
raw materials used in the Company's products are difficult to obtain and/or
require purchase commitments far in advance of the manufacturing date. At
present, the Company's relationships with its current suppliers are generally
good and the Company expects that the suppliers will be able to meet the
anticipated demands for the Company's products through fiscal year 2002.

DEPENDENCE ON CERTAIN CUSTOMERS

Due to the early stage development of the market for tire monitoring systems in
general and for the Company's tire monitoring products, the Company is still
dependent on major customers. During the year ended July 31, 2001 the Company
earned 66% of its revenue from three major customers. One of these customers
accounted for 75% of sales of the OEM passenger car tire monitoring systems and
two customers accounted for 100% of sales of the motorsports tire monitoring
systems during fiscal year 2001. It is expected that this dependence will be
reduced as the Company markets its GEN II products and pursues new programs in
the OEM market.

PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS,
LABOR CONTRACTS, INCLUDING DURATION.

Proprietary Protection

The Company's intellectual property is important to protecting its competitive
advantage and expanding its market share. The Company relies on a combination of

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                                       12


patents, trade secret laws, confidentiality procedures and contractual
provisions to protect its intellectual property.

The Company holds several patents for its current technologies, which are listed
below:

United States Patent 5,231,872 addresses the technology in the tire monitoring
product. It was issued on August 3, 1993 and expires August 3, 2010.

United States Patent 5,285,189 addresses the technology in the abnormal tire
condition warning system. It was issued on February 8, 1994 and expires February
8, 2011. This patent was purchased by the Company from Epic Technologies, Inc.
in December 1996.

United States Patent 5,335,540 addresses the technology in the tire monitoring
product. It was issued on August 9, 1994 and expires August 9, 2011.

United States Patent 5,559,484 addresses the technology in data logging tire
monitor with condition predictive capabilities and integrity checking. It was
issued on September 24, 1996 and expires September 24, 2013. This patent was
purchased by the Company from Epic Technologies, Inc. in December 1996.

United States Patent 5,945,908 addresses the technology in data logging tire
monitor with condition predictive capabilities and integrity checking. It was
issued on August 31, 1999 and expires on August 31, 2016. This patent was
purchased by the Company from Epic Technologies, Inc. in December 1996.

United States Patent 4,653,445 addresses the technology in an Engine Protection
System ("EPS") product. It was issued on March 31, 1987 and expires March 31,
2004.

As the Company develops additional products and technology, it intends to seek
patent protection where applicable.

In addition to the Company's patents, it also has access to a number of other
patents under its license agreements with Transense and TRW.

The Company entered into a license agreement on September 30, 1999 with
Transense based in Oxfordshire, United Kingdom. Transense researches, develops
and exploits the use of its patented SAW technology in the automotive industry.
The license agreement grants SmarTire a non-exclusive, worldwide right to
develop and market Transense's SAW technology for use in tire monitoring
systems.

Effective August 31, 2001 the Company restructured its strategic alliance with
TRW. As part of the restructuring, SmarTire received a royalty-free license from
TRW to utilize technology developed during the term of the Cooperative
Engineering Agreement that is patented, now or in the future, by TRW. SmarTire
has granted the same royalty-free license to TRW.

<PAGE>
                                       13


RESEARCH AND DEVELOPMENT

The following is the amount spent during each of the last three fiscal years on
research and development activities;

2001 - $1,485,874
2000 - $1,416,992
1999 - $1,292,011

These amounts have funded the development of the Company's second generation
products. The Company expects that the historical research and development
expenses are indicative of the anticipated future annual expenditures and are
expected to continue to increase in order to integrate current products into
systems satisfying the TREAD Act requirements and complete development of the
Company's other products currently in development.

COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS

The Company has no material expenses and anticipates no material impact on its
business from compliance with environmental laws.

NUMBER OF TOTAL EMPLOYEES AND NUMBER OF FULL-TIME EMPLOYEES

At July 31, 2001, the Company had 44 full-time employees, 9 of whom are in
marketing, 21 of whom are in engineering, research and development and 14 of
whom are administrative and executive personnel. There is no collective
bargaining agreement in place.

RISK FACTORS

The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements in this Form
10-KSB.

History of Operating Losses; Fluctuating Operating Results

Since inception through July 31, 2001, the Company has incurred aggregate losses
of $31,287,425. The Company's loss from operations for the fiscal year ended
July 31, 2001 was $5,507,019. There is no assurance that the Company will
operate profitably or will generate positive cash flow in the future. In
addition, the Company's operating results may be subject to significant
fluctuations due to many factors not within the Company's control, such as the
unpredictability of when a customer will order products, the size of a
customer's order, the demand for the Company's products, the level of
competition and general economic conditions. Management believes that the
Company will have sufficient cash to fund its current and planned operations
through November 2001. Thereafter, the Company will require additional funding.
There can be no assurance that such financing will be available on terms
acceptable to the Company or at all.

<PAGE>
                                       14


Significant Competition in the Industry

The markets in which the Company competes are rapidly changing due to
technological developments and increasing focus on automotive safety. Other
companies offer products similar to those offered by the Company, and target the
same customers as the Company. Many of these companies have substantially
greater financial, marketing and technical resources. The Company also
anticipates that the competition within these markets will increase as demand
for the products escalates. It is possible that new competitors or alliances
among existing competitors may emerge and such competitors may rapidly acquire
significant market share.

Uncertainty of Consumer Awareness of Tire Monitoring Systems

Tire monitoring systems are a new product and consumer awareness is in its early
stages. There can be no assurance that consumer awareness and demand for tire
monitoring systems will increase, or develop sufficiently so that the Company
will achieve or sustain significant sales growth in either its historical
markets or for its new products. To the extent demand for the Company's products
does not develop, the Company's operations will be materially adversely
affected.

Uncertainty Relating to the Effects of TREAD Act

The Company expects that the recent enactment of the TREAD Act will have a major
impact on the tire monitoring industry. However, the rules implementing the
TREAD Act have not been finalized and therefore, the Company does not know when
or how the TREAD Act will be implemented. If there are extended "phase-in" or
"legacy" provisions, the full impact of the TREAD Act may not occur for several
years. Additionally, there can be no assurance that SmarTire's current products
will satisfy all of the TREAD Act's requirements as a monitoring technology, or
that it will satisfy the requirements in a cost effective manner. Even after
implementation, the rules promulgated under the TREAD Act could be changed to
require features or functions not available on SmarTire's products. Any of these
factors could substantially decrease the Company's revenues, gross margins, or
the ability to achieve profitability.

The Company may not be able to capitalize on the expansion of the tire
monitoring market from the implementation of the TREAD Act.

Even if the general market for tire monitoring technology experiences rapid
growth, SmarTire may not be able to gain a significant share of that market.
Although the Company believes the TREAD Act will significantly expand the tire
monitoring market, the expansion will occur disproportionately at the OEM level.
Many other companies, including several of our competitors and potential
competitors, have long and established relationships with the vehicle
manufacturers and the OEM suppliers which may make it difficult for the Company
to compete. Additionally, the vehicle manufacturers may elect to develop their
own systems to comply with the TREAD Act. Any of these factors could
substantially decrease the Company's revenues, gross margins, or the ability to
achieve profitability.

<PAGE>
                                       15


Dependence on Major Customers

During the year ended July 31, 2001, the Company earned 66% of its revenue from
three of its major customers. Accordingly, the loss of one of these major
customers would materially and adversely affect the Company. The loss of any
major customer, or significant reductions by any of them in buying the Company's
products, or the inability to collect accounts receivable from them, would
materially and adversely affect the Company's business and results of
operations. One of these customers accounted for 75% of sales of the OEM
passenger car tire monitoring systems and two customers accounted for 100% of
sales of the motorsports tire monitoring systems during fiscal year 2001.

Difficulty in Obtaining Components and Raw Materials

The Company's current products, and the products that the Company may provide in
the future, embody new technologies. Certain of the components and raw materials
used in the Company's products are difficult to obtain and/or require purchase
commitments to be made by the Company far in advance of the manufacturing date.
The inability to obtain sufficient quantities of components or raw materials, or
the inability to forecast purchase requirements accurately, could adversely
affect the Company's business and results of operations. Similarly, commitments
to purchase components and raw materials in excess of customer demand for the
Company's products could adversely affect the Company's results of operations.

Reliance on Contract Manufacturers

The Company contracts the manufacture of its products to third parties. In
certain cases, the Company does not have an alternative source of manufacturing,
and a suitable replacement would be time-consuming and expensive to obtain. If,
for any reason, one of the Company's third party manufacturers is unable or does
not produce the Company's products, the Company's business, financial condition
and results of operations will be adversely affected.

Inability to Raise Additional Capital

The Company has been funding its capital requirements primarily through the
offer and sale of securities. These funds are used for ongoing operations as
well as to implement the Company's proposed expansion plans. In order to
implement the Company's business plan, the Company will need to raise additional
capital before the end of calendar 2001. Any additional equity financing may
involve substantial dilution to the Company's stockholders. There can be no
assurance that additional financing will be available to the Company when needed
or, if available, that it can be obtained on commercially reasonable terms.

Dependence on Key Personnel

The Company's success depends to a significant extent on the continued service
of certain key management personnel. The loss or interruption of services from
one or more of these personnel, for whatever reason, could have a material
adverse effect on the Company. In the event of the loss of services of such
personnel, no

<PAGE>
                                       16


assurances can be given that the Company will be able to obtain the services of
adequate replacement personnel.

Potential Inability to Manage Growth of the Company

If the Company is unable to manage its growth effectively, such inability would
have a material adverse effect on the Company's product development, its
business, financial condition and results of operations. The Company's ability
to manage and sustain growth effectively will depend, in part, on the ability of
its management to manage growth through the implementation of appropriate
management, operational and financial systems and controls, and the ability of
its management to successfully train, motivate and manage its employees. If the
Company's management is unable to manage its growth effectively, the Company's
results of operations could be materially adversely affected.

Reliance on Limited Number of Personnel

The Company relies on its existing staff for marketing and selling the Company's
products, and on a small development staff to develop new products and
applications for existing products. The Company's growth and expansion may be
inhibited unless it establishes a larger development staff to develop new
products and applications for existing products. The Company plans to increase
its development staff, although no assurances can be given that qualified
personnel can be hired. The inability of the Company to hire and keep qualified
personnel could materially adversely affect the Company's future plans. The
Company's success also depends in part on its ability to attract and retain
qualified professional, technical, managerial and marketing personnel.
Competition for such personnel in the markets in which the Company competes is
intense, and there can be no assurance the Company will be successful in
attracting and retaining the personnel it requires to conduct its operations
successfully.

Potential Inability to Keep up With Rapid Technological Change

The markets in which the Company competes are characterized by rapid
technological change, frequent new product and service introductions, evolving
industry standards and changes in customer demands. The introduction of products
embodying new technologies and the emergence of new industry standards can, in a
relatively short period of time, render existing products obsolete and
unmarketable. The Company believes that its success will depend upon its ability
to continuously develop new products and to enhance its current products and
introduce them promptly into the market. If the Company is not able to develop
and introduce new products, its business, financial condition and results of
operations could be adversely affected.

Dependence on Proprietary Technology; Risks of Third Party Infringement Claims

There can be no assurance that the Company's measures to protect its current
proprietary rights will be adequate to prevent misappropriation of such rights
or that the Company's competitors will not independently develop or patent
technologies that are substantially equivalent or superior to the Company's
technologies.

<PAGE>
                                       17


Additionally, although the Company believes that its products and technologies
do not infringe upon the proprietary rights of any third parties, there can be
no assurance that third parties will not assert infringement claims against the
Company. Similarly, infringement claims could be asserted against products and
technologies which the Company licenses, or has the rights to use, from third
parties. Any such claims, if proved, could materially and adversely affect the
Company's business and results of operations. In addition, although any such
claims may ultimately prove to be without merit, the necessary management
attention and cost required to defend such claims could adversely affect the
Company's business and results of operations.

Adequacy of Insurance and Lack of Comprehensive Product Liability Insurance

The Company could be subject to claims in connection with the products that it
sells. There can be no assurance that the Company would have sufficient
resources to satisfy any liability resulting from any such claim, or that it
would be able to have its customers indemnify or insure it against any such
liability. There can be no assurance that the Company's insurance coverage would
be adequate in term and scope to protect the Company against material financial
effects in the event of a successful claim. The Company currently does not carry
commercial general liability insurance providing comprehensive product liability
coverage in all insurances. The Company may obtain such insurance provided it
can be obtained at reasonable prices; however, there can be no assurance that
such coverage, if obtained, would be adequate in term and scope to protect the
Company.

Enforceability of Civil Liabilities Against the Company

Substantially all of the Company's assets are located outside the United States
and the Company does not currently maintain a permanent place of business within
the United States. In addition, a majority of the Company's directors and
officers are nationals and/or residents of countries other than the United
States, and all or a substantial portion of such persons' assets are located
outside the United States. As a result, it may be difficult for investors to
enforce within the United States any judgments obtained against the Company or
the Company's officers or directors, including judgments predicated upon the
civil liability provisions of the securities laws of the United States or any
state thereof.

Dilutive Effect of Options and Warrants

As at July 31, 2001, there were options and warrants outstanding to purchase an
aggregate of 1,768,467 shares of the Company's common stock at an average price
of $2.95 per share. To the extent that these and subsequent dilutive securities
are exercised and/or converted, dilution of the percentage ownership of the
Company's stockholders will occur, and any sales in the public market of the
common stock underlying the options, warrants and convertible debentures might
adversely affect prevailing market prices for the Company's common stock.

<PAGE>
                                       18


ITEM 2. DESCRIPTION OF PROPERTY

The Company leases a 15,364 square foot facility at #150-13151 Vanier Place,
Richmond, British Columbia, V6V 2J1 for a five year term ending August 31, 2005.
This facility consists of an office and administration area, an engineering
department, a prototype production facility and a warehouse.

SmarTire (Europe) Limited leases a 9,069 square foot facility at Park 34,
Didcot, Oxfordshire, United Kingdom OX11 7WB for a fifteen year term ending
February 20, 2016. This facility consists of an office and administration area
and a warehousing area.

We expect that our current facilities will be sufficient for the foreseeable
future. To the extent that the Company requires additional space in the near
future, the Company believes that it will be able to secure additional leased
facilities at commercially reasonable rates.

ITEM 3. LEGAL PROCEEDINGS

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There was no matter submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock is listed on the Nasdaq Small Cap Market under the
symbol "SMTR".

The table lists the high and low bid prices on the Nasdaq Small Cap Market for
the Company's common stock as compiled from NASDAQ - AMEX on-line.

<TABLE>
<CAPTION>
Period                                    High            Low
------                                    ----            ---
<S>                                      <C>             <C>
08/1/99 - 10/31/99                       $2.34           $1.53
11/1/99 - 01/31/00                        1.94            1.06
02/1/00 - 04/30/00                        3.25            1.13
05/1/00 - 07/31/00                        1.97            1.16
08/1/00 - 10/31/00                        5.56            1.25
11/1/00 - 01/31/01                        4.75            1.75
02/1/01 - 04/30/01                        2.88            1.91
05/1/01 - 07/31/01                        2.73            1.70
</TABLE>


<PAGE>
                                       19


The Company's common stock is issued in registered form. Pacific Corporate Trust
Company (located in Vancouver, British Columbia, Canada) is the registrar and
transfer agent for the Common Shares.

As of September 30, 2001 there were approximately 400 holders of record of the
Company's common stock.

The Company has never declared or paid dividends on its common stock and does
not anticipate that it will do so in the foreseeable future. The Company intends
to retain future earnings, if any, for use in its operations and the expansion
of its business.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion of the financial condition, changes in financial
condition and results of operations of the Company for the years ended July 31,
2001 and 2000 should be read in conjunction with the consolidated financial
statements of the Company and related notes included therein.

The Company's consolidated financial statements are in United States dollars and
are prepared in accordance with United States Generally Accepted Accounting
Principles (GAAP).

RESULTS OF OPERATIONS

Fiscal Year Ended July 31, 2001 vs. Fiscal Year Ended July 31, 2000

Gross revenue for the year ended July 31, 2001 was $779,611 compared to $747,738
for the fiscal year ended July 31, 2000. Sales of aftermarket passenger car
systems were $389,020 compared to $438,956 in the previous fiscal year. Sales of
the OEM passenger car system increased to $143,788 for the fiscal year ended
July 31, 2001 from $106,098 in the previous fiscal year. Sales of motorsport
tire monitoring systems increased to $246,803 for the year ended July 31, 2001
from $202,684 in the previous year.

Sales of aftermarket systems in fiscal 2001 were mostly due to the liquidation
of the Company's first generation products. Release of the Company's second
generation products was delayed until late fiscal 2001, which resulted in lower
revenues than anticipated. The Company expects increased revenues from
aftermarket systems in the next fiscal year as a result of the launch of its
second generation products and increased public awareness of tire pressure
monitoring. Sales of OEM passenger car systems are comprised of $35,320 on sales
of the Company's second generation products and $108,468 on the Lincoln
Continental program of first generation product. The Company expects increased
sales of its second generation products in the next fiscal year due to the
launch of the product in both the U.S. and Europe and availability for the full
twelve-month period. Sales of OEM passenger car systems on the Lincoln
Continental were expected to be discontinued at the end of the 2000 model year,
but Ford has not formally discontinued this program. Revenue

<PAGE>
                                       20


is dependent on sales by Ford and is difficult to predict. Motorsport tire
monitoring systems are sold through a distributor and are difficult to predict.

Gross margin decreased from 54.6% for the fiscal year ended July 31, 2000 to
50.5% for the fiscal year ended July 31, 2001. The gross margins were
significantly affected by the reduction in carrying value of first generation
product inventory in the 1999 fiscal year. Gross margins on sales of aftermarket
products would be substantially lower if the write down of inventory had not
occurred. The gross margin is expected to decrease significantly in the next
fiscal year.

Expenses and other decreased to $6,260,532 for the year ended July 31, 2001 from
$7,058,528 for the year ended July 31, 2000 as decreased marketing, general and
administrative expenses and a larger foreign exchange gain were partially offset
by higher engineering, research and development costs and depreciation and
amortization.

Included in expenses for fiscal 2000 is $294,000 of costs associated with the
closure of the Company's office in Bourne, Massachusetts effective March 31,
2000. Of this amount, approximately $245,000 related to payments on termination
of a management agreement. These costs have been allocated on a departmental
basis within the financial statements.

Marketing expenses decreased to $1,744,004 for the fiscal year ended July 31,
2001 from $2,057,937 for the fiscal year ended July 31, 2000. Lower expenditures
on wages and advertising and promotion were partially offset by increased
consulting costs. Marketing costs are expected to increase in fiscal 2002 due to
the launch of the Company's new products.

General and administrative expenses decreased from $3,421,844 for the fiscal
year ended July 31, 2000 to $2,701,621 for the fiscal year ended July 31, 2001.
Lower professional fees and investor relations costs were partially offset by
increased travel and computer expenditures. General and administrative expenses
are not expected to increase significantly in fiscal 2002.

Engineering, research and development expenses were $1,485,874 for the fiscal
year ended July 31, 2001 compared to $1,416,992 for the fiscal year ended July
31, 2000. Increased costs for product testing and approvals were partially
offset by a decrease in prototype development and consulting costs. Engineering,
research and development costs are expected to increase in fiscal 2002.

Depreciation and amortization expense increased to $446,096 for the fiscal year
ended July 31, 2001 from $177,690 for the fiscal year ended July 31, 2000. The
increase was due to amortization of the license acquired from TRW as described
under Liquidity and Capital Resources.

The Company earned interest income of $359,799 for the fiscal year ended July
31, 2001 as compared to $212,203 for the fiscal year ended July 31, 2000. This
increase was due to higher average cash balances during the current fiscal year.

<PAGE>
                                       21


Fiscal Year Ended July 31, 2000 vs. Fiscal Year Ended July 31, 1999

Gross revenue for the fiscal year ended July 31, 2000 was $747,738 compared to
$1,772,996 for the fiscal year ended July 31, 1999. Sales of aftermarket
passenger car systems were $438,956 for the fiscal year ended July 31, 2000
compared to $1,224,524 in the previous fiscal year. Sales of the OEM passenger
car system decreased to $106,098 for the fiscal year ended July 31, 2000
compared to $291,380 in the previous fiscal year. Sales of motorsport tire
monitoring systems decreased to $202,684 for the year ended July 31, 2000 from
$257,092 in the previous fiscal year.

Sales of aftermarket passenger car systems decreased in fiscal 2000 due to lower
selling prices and lower sales volumes resulting from the liquidation of the
Company's first generation products. The Company experienced delays in the
development of its second generation products and there were no sales of this
product in the fiscal year ended July 31, 2000. Sales of OEM passenger car
systems related to the Lincoln Continental were expected to be discontinued at
the end of the 2000 model year, but Ford has not formally discontinued this
program.

Gross margin increased from -231% for the fiscal year ended July 31, 1999 to
54.6% for the fiscal year ended July 31, 2000. Excluding the inventory write
down in fiscal 1999 of $4,429,713 included with the cost of goods sold, gross
margin was 18.4%. The Company's profit margin on passenger car systems increased
in 2000 due to the reduction in the carrying value of inventory in the 1999
fiscal year. Gross margins on sales of aftermarket products would be
substantially lower than if the write down of inventory had not occurred.

Expenses and other decreased to $7,058,528 for the fiscal year ended July 31,
2000 from $7,394,247 for the previous fiscal year. Included in expenses for
fiscal 2000 is $294,000 of costs associated with the closure of the Company's
office in Bourne, Massachusetts effective March 31, 2000. Of this amount,
approximately $245,000 relates to payments on termination of a management
agreement. These costs have been allocated on a departmental basis within the
financial statements.

During 1999, the Company assessed the future business prospects and sales for
its existing tire monitoring products, the forecasted sales levels and
introduction of the Company's next generation of tire pressure monitoring
products. The Company's assessment did not support the carrying value of certain
assets, including inventories (including purchase commitments), production
equipment and deferred development costs associated with the first generation of
the pressure monitoring systems, resulting in a write down of $4,429,713 to
inventory and a charge of $390,400 to engineering, research and development.

Marketing expenses decreased from $2,833,175 for the fiscal year ended July 31,
1999 to $2,057,937 for the fiscal year ended July 31, 2000. This reduction was
due to reduced advertising, promotion and market development costs. The 1999
expenses include advertising development, support materials and advertising
placement costs for the SmarTire(TM) direct campaign in North America. No such
program was undertaken in fiscal 2000.

<PAGE>
                                       22


General and administrative expenses were $3,421,844 for the fiscal year ended
July 31, 2000 as compared to $2,761,702 for the fiscal year ended July 31, 1999.
Higher investor relations costs and professional fees more than offset a
reduction in filing fees and travel costs. These increased costs were the result
of a comprehensive investor relations and public relations program to
significantly increase corporate awareness throughout the automotive industry
and investor community in North America and Europe.

Engineering, research and development expenses were $1,416,992 for the fiscal
year ended July 31, 2000 compared to $1,292,011 for the fiscal year ended July
31, 1999. The increase was due to increased expenditures for prototype
development and testing for the Company's next generation of tire pressure
monitoring systems and increases in the number of engineering staff and higher
wage levels. Included in fiscal 1999 expenses were $390,400 of costs for the
impairment of certain long-lived assets.

Depreciation and amortization expenses decreased to $177,690 for the fiscal year
ended July 31, 2000 from $402,250 for the fiscal year ended July 31, 1999. The
reduction reflects the write-down of certain assets in the 1999 fiscal year.

The Company earned interest income of $212,203 for the fiscal year ended July
31, 2000 as compared to $182,585 for the fiscal year ended July 31, 1999. This
increase was due to higher average cash balances during the current fiscal year.

The Company recorded a gain on sale of investment of $8,343,487 for the year
ended July 31, 2000. During fiscal 2000, the Company made an investment in
Transense Technologies plc ("Transense") through the issuance of 25,000 common
shares of the Company valued at $37,500 plus cash of $161,230 in exchange for
250,000 common shares and 250,000 share purchase warrants of Transense. The
Company exercised the warrants at a cost of $794,100 and disposed of all of the
Transense common shares for net cash proceeds of $9,336,317. The Company still
retains its rights under the September 30, 1999 license agreement with
Transense.

LIQUIDITY AND CAPITAL RESOURCES

To date the Company has financed its activities primarily through the issuance
and sale of securities. The Company has incurred net operating losses in each
year since inception and, as of July 31, 2001, had an accumulated deficit of
$31,287,425. Shareholders' equity was $6,115,149 and the Company's working
capital was $3,900,260 at July 31, 2001.

The Company's cash and short-term investments at July 31, 2001 were $2,930,257
as compared to $9,753,063 at July 31, 2000. This decrease was due to the net of
the Company's operating, financing and investing activities described below.

The Company used $6,108,545 for operating activities during the fiscal year
ended July 31, 2001. The Company received proceeds of $240,000 from the exercise
of 160,000 warrants and $23,000 from the exercise of 11,500 stock options. The
Company used $732,832 for investing activities during the year ended July 31,
2001. Of this amount $332,832 was for the purchase of capital assets and
$400,000 was

<PAGE>
                                       23


used to purchase the license from TRW as described below. The net loss of
$5,507,019 was reduced by non-cash charges of $446,096 for depreciation and
amortization, $61,247 for compensation expense and was increased by $1,108,869
due to changes in non-cash working capital.

SmarTire established a strategic alliance with TRW in April 1998. The strategic
alliance included joint engineering and development activities and granted TRW
exclusive marketing and distribution rights for some of the Company's products.
SmarTire and TRW worked closely on the development of new tire monitoring
systems, which have been incorporated in SmarTire's current product line. During
the alliance TRW was to have exclusive rights to the jointly developed products
in the original equipment manufacturing market, and SmarTire was to have the
exclusive rights in the aftermarket.

Effective December 13, 2000 SmarTire Systems Inc. entered into an Assignment and
Amendment Agreement (the "Assignment and Amendment Agreement") with TRW that
transferred to SmarTire Systems Inc. the license to manufacture and sell tire
monitoring systems to the original equipment vehicle manufacturers of most
medium and heavy duty trucks. Consideration paid to TRW consisted of 490,072
shares of common stock plus cash. On August 31, 2001 the Company and TRW Inc.
restructured certain agreements entered into in 1998 between both companies,
including the Assignment and Amendment Agreement. The Company is paying
consideration of $US3.3 Million in cash and debt for this transaction.

Under the terms of the August 31, 2001 restructuring, SmarTire and TRW agreed to
substantially reduce the interrelationship of the two companies. Although each
party will continue to have a royalty free, perpetual right to use the products
jointly developed, there will be no further collaboration on product
development. Additionally, neither TRW nor SmarTire will have exclusive rights
to any of the jointly developed products. SmarTire will be free to explore
alternative marketing and distribution channels. The Company believes that this
additional flexibility will allow it to better exploit the expected increase in
demand for tire monitoring resulting from the TREAD Act and allow for the
development of complete global market access.

As at July 31, 2001, the Company had commitments for payments under operating
leases, and service agreements for premises and certain equipment and consulting
of $1,282,963, as disclosed in note 12 to the Company's consolidated financial
statements contained elsewhere in this Form 10-KSB.

The Company believes that the cash and cash equivalents at July 31, 2001 will be
sufficient to fund operations and debt repayments through November 2001. The
Company will need to secure additional financing by that time. The Company
intends to fund its future operations through private placements or public
financings over the foreseeable future.

ITEM 7. FINANCIAL STATEMENTS

The consolidated financial statements of the Company are included beginning
immediately following the signature page to this report. See Item 13 for a list
of the financial statements and financial statement schedules included.

<PAGE>
                                       24


ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT

The following table sets forth the names, ages and positions held with respect
to each Director and Executive Officer of the Company.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
      Name               Age                       Position
--------------------------------------------------------------------------------
<S>                      <C>            <C>
                         Directors
--------------------------------------------------------------------------------
LAWRENCE BECERRA          49            Director
--------------------------------------------------------------------------------
JOHN BOLEGOH              57            Technical Support Manager and Director
--------------------------------------------------------------------------------
KEVIN CARLSON             40            Chief Financial Officer, Managing
                                        Director, Corporate Secretary and
                                        Director
--------------------------------------------------------------------------------
WILLIAM CRONIN            54            Director
--------------------------------------------------------------------------------
BERNARD PINSKY            47            Director
--------------------------------------------------------------------------------
ROBERT RUDMAN             54            President, Chairman and Chief Executive
                                        Officer and Director
--------------------------------------------------------------------------------

       Executive Officers and Significant Employees Who Are Not Directors

--------------------------------------------------------------------------------
ERWIN BARTZ               40            Director, Technical Operations
--------------------------------------------------------------------------------
IAN BATEMAN               56            Managing Director,
                                        SmarTire (Europe) Limited
--------------------------------------------------------------------------------
SHAWN LAMMERS             34            Vice President, Engineering
--------------------------------------------------------------------------------
</TABLE>

BUSINESS EXPERIENCE AND PRINCIPAL OCCUPATION OF DIRECTORS, EXECUTIVE OFFICERS
AND SIGNIFICANT EMPLOYEES

The present and principal occupations of the Company's directors and executive
officers during the last five years are set forth below:

LAWRENCE BECERRA:

        Mr. Becerra has been a Director since March 1998. He has an extensive
        background in international finance. Since 1996, he has been the
        principal and founder of West Sussex Trading, Inc. which is involved in
        corporate finance activities. Between 1992 and 1995 Mr. Becerra was the
        Senior Proprietary Trader promoted from the position of Manager of
        European Money Market Trading for Goldman Sachs International in London,
        England. Between 1987 and 1992 Mr. Becerra was the Managing Director for
        Czarnikow Financial Futures. Between 1984 and 1987, he held the position
        of Senior Trader with TransMarket Group, Inc. Between 1976 and 1984, Mr.
        Becerra worked for Continental Bank in London and ended his tenure as
        the Executive Director representing all trading activities for the
        company. He attended Middlebury College in Middlebury, Vermont between
        1970 and 1974 and Hackley School in Tarrytown, New York between 1968 and
        1970.

<PAGE>
                                       25


JOHN BOLEGOH:

        Mr. Bolegoh has held a number of positions with the Company and has been
        a Director since 1993. Mr. Bolegoh has an extensive background in tire
        product engineering, including twenty years with Michelin Technical
        Services Canada Limited in positions of increasing responsibility. Mr.
        Bolegoh joined the Company in 1991. His responsibilities include
        defining necessary product capabilities and designs for entering various
        markets; establishing contacts to promote awareness of the Company's
        technologies; locating and exploring business possibilities with
        potential distributors; and providing customer relations, problem
        solving, training and sales assistance. Mr. Bolegoh specialized in
        mechanical technology at the Hamilton Institute of Technology in
        Hamilton, Ontario.

KEVIN CARLSON:

        Mr. Carlson joined the Company as the Chief Financial Officer in
        November 1998 and has served as a Director since December 1998. Mr.
        Carlson is responsible for all of the Company's financial and related
        functions including Finance, Treasury, Accounting, Taxation, Legal,
        Management Information Systems and Administration. Effective April 1,
        2000 Mr. Carlson assumed the additional responsibilities of General
        Manager and is responsible for all operating activities of the Company's
        Richmond office. As of December 2000, Mr. Carlson became the Managing
        Director responsible for all North American operations. Prior to joining
        the Company, Mr. Carlson was Chief Financial Officer of ID Biomedical
        Corporation, a publicly traded biotechnology company. Previously, he was
        Chief Financial Officer for three other publicly traded companies. Mr.
        Carlson spent eight years with KPMG in Calgary, Alberta. In addition to
        his Chartered Accountancy designation, Mr. Carlson holds a Bachelor of
        Commerce degree from the University of Calgary.

WILLIAM CRONIN:

        Mr. Cronin has been a Director since June 2001 and previously served as
        a Director from November 17, 1995 to April 25, 1998. Mr. Cronin is owner
        of Madison Financial Services, a registered investment adviser firm
        located in Madison, CT, specializing in tax, pension investing planning
        strategies and portfolio management. Mr. Cronin has a degree in
        political science and has been in the financial services field for over
        20 years.

BERNARD PINSKY:

        Mr. Pinsky has been a Director since August 1998. He is a partner
        practicing corporate/securities law at Clark, Wilson, one of Vancouver's
        most established and respected law firms. Mr. Pinsky was called to the
        British Columbia Bar in 1980, and was admitted to practice law in
        California in 1999. He has advised a variety of public and private
        companies on legal matters related to acquisitions, mergers, takeovers,
        initial public offerings, secondary financings, public company
        disclosure requirements and stock exchange practice. Mr. Pinsky has been
        corporate and securities counsel for the Company since 1993.

<PAGE>
                                       26


ROBERT RUDMAN:

        Mr. Rudman has been a Director since September 1993. He is a Chartered
        Accountant with 15 years of experience assisting public companies,
        especially on the Vancouver Stock Exchange. Mr. Rudman joined the
        Company in March 1993 as the Chief Financial Officer after serving as an
        independent financial consultant for several months. He was appointed
        Chief Executive Officer of the Company on January 19, 1996, and served
        as President from January 19, 1996 to June 4, 1999, when he was
        appointed Chairman of the Board. Mr. Rudman was reappointed President of
        the Company effective April 1, 2000. Prior to joining the Company, Mr.
        Rudman was manager of a California-based sales contract financing firm.
        Previously, he was a partner in a consulting firm providing professional
        assistance to publicly traded companies. Mr. Rudman became a Chartered
        Accountant in 1974 and worked with Laventhol & Horwath and Price
        Waterhouse & Co. in Winnipeg, Manitoba. In addition to his Chartered
        Accountancy designation, Mr. Rudman holds a Bachelor of Arts degree and
        graduate business diploma from Lakehead University in Thunder Bay,
        Ontario.

ERWIN BARTZ

        Mr. Bartz is a Professional Engineer with 16 years of engineering
        experience. Mr. Bartz joined the Company as Director, Technical
        Operations in January 2001 and is responsible for the Company's overall
        technical operations including engineering and manufacturing. Prior to
        joining the Company, Mr. Bartz spent ten years as Manager of Engineering
        and Manufacturing at Finning (Canada), the Caterpillar dealer for
        British Columbia, Alberta, United Kingdom and Chile, with corporate
        responsibility for engineering, product review, heavy manufacturing and
        new equipment preparation. Previously, he held the Engineering Manager
        role at Weldco Beales, a custom attachment manufacturer for the mobile
        equipment market, and also worked as a design engineer for the Chapman
        Industries, a Hitachi distributor and general manufacturer of purpose
        built machinery and equipment. Mr. Bartz holds a Bachelor of Applied
        Science degree in Mechanical Engineering from the University of British
        Columbia.

IAN BATEMAN:

        Mr. Bateman is the Managing Director for SmarTire (Europe) Limited. He
        is a U.K. resident and has extensive sales, marketing and senior
        managerial experience in a variety of facets of European automotive
        industries. From 1966 to 1973 he was a manager with Mid Bucks Automotive
        Limited. During 1973 to 1979 Mr. Bateman was a manager with Renault U.K.
        Limited, and was instrumental in the formation of a direct sales company
        in the U.K. with a sales budget of pound sterling 100 million per year.
        Between 1979 and 1991 he operated his own marketing company which
        expanded to supply every European car manufacturer/importer, with the
        exception of just three, with an overall turnover of pound sterling 10
        million per year. From 1991 and prior to joining SmarTire (Europe)
        Limited, Mr. Bateman carried out independent consulting services, most
        importantly with Otter Controls Limited, which was implementing a
        marketing program for a tire-monitoring system.

<PAGE>
                                       27


SHAWN LAMMERS:

        Mr. Lammers is a professional engineer, with a Bachelor of Applied
        Science degree from the University of British Columbia, specializing in
        computer engineering. He has developed software for MS-DOS, Windows,
        UNIX Workstations and Amiga platforms. Mr. Lammers has been with the
        Company since its inception and is responsible for the development of
        the patented remote sensing technology utilized in SmarTire's products.
        He has been the chief engineer in respect to the design, development and
        production of the Company's passenger car tire monitoring system, the
        commercial vehicle tire monitoring system and the industrial equipment
        tire monitoring systems.

FAMILY RELATIONSHIPS

There are no family relationships between any of our directors or executive
officers.

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

None of our directors, executive officers, promoters or control persons have
been involved in any of the following events during the past five years:

        1.  any bankruptcy petition filed by or against any business of which
            such person was a general partner or executive officer either at the
            time of the bankruptcy or within two years prior to that time;

        2.  any conviction in a criminal proceeding or being subject to a
            pending criminal proceeding (excluding traffic violations and other
            minor offenses);

        3.  being subject to any order, judgment, or decree, not subsequently
            reversed, suspended or vacated, of any court of competent
            jurisdiction, permanently or temporarily enjoining, barring,
            suspending or otherwise limiting his involvement in any type of
            business, securities or banking activities; or

        4.  being found by a court of competent jurisdiction (in a civil
            action), the Commission or the Commodity Futures Trading Commission
            to have violated a federal or state securities or commodities law,
            and the judgment has not been reversed, suspended, or vacated.

SECTION 16(a) REPORTING

Since the Company is a "foreign private issuer", its insiders are exempt from
the reporting requirements of Section 16(a) of the United States Securities
Exchange Act of 1934, as amended (the "1934 Act"). Among other things, Section
16(a) of the 1934 Act requires certain "reporting persons" of any issuer with
any class of equity securities registered under Section 12 of the 1934 Act to
file with the United States Securities and Exchange Commission reports of
ownership and changes in ownership of securities of the registered class.
Reporting persons consist of directors, executive officers and beneficial owners
of more than 10% of the securities of the registered class. The Company is aware
that certain persons who would be subject to such reporting requirements, but
for the fact that the Company is a "foreign private issuer", have voluntarily
filed reports under Section 16(a) of the 1934 Act during the year ended July

<PAGE>
                                       28


31, 2001. However, the Company is not in a position to comment on the
completeness of such filings.

ITEM 10. EXECUTIVE COMPENSATION

SUMMARY OF EXECUTIVE COMPENSATION

Particulars of compensation awarded to, earned by or paid to:

        (a)  the Company's chief executive officer (the "CEO");

        (b)  each of the Company's four most highly compensated executive
             officers who were serving as executive officers at the end of the
             most recently completed financial year and whose total salary and
             bonus exceeds $100,000 per year; or

        (c)  any additional individuals for whom disclosure would have been
             provided under (b) but for the fact that the individual was not
             serving as an executive officer of the Company at the end of the
             most recently completed financial year;

(the "Named Executive Officers") are set out in the summary compensation table
below.

During 2001, five (5) individuals served as executive officers of the Company at
various times: Robert Rudman, Kevin Carlson, Erwin Bartz, Shawn Lammers and Ian
Bateman. All except Mr. Bartz qualify as "Named Executive Officers" as defined
above.

<TABLE>
<CAPTION>
==================================================================================================================
                                            SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------------------------------------------------
                                        ANNUAL COMPENSATION                  LONG TERM COMPENSATION(1)
------------------------------------------------------------------------------------------------------------------

                                                                              AWARDS          PAYOUTS
------------------------------------------------------------------------------------------------------------------

                                                            OTHER     SECURITIES  RESTRICTED
                                                            ANNUAL    UNDERLYING   SHARES OR
                                                            COMPEN-    OPTIONS/   RESTRICTED           ALL OTHER
     NAME AND                                               SATION       SARs       SHARE      LTIP      COMPEN-
PRINCIPAL POSITION      YEAR      SALARY        BONUS         (1)       GRANTED     UNITS     PAYOUTS    SATION
------------------------------------------------------------------------------------------------------------------
<S>                    <C>       <C>           <C>          <C>       <C>         <C>         <C>      <C>
Robert Rudman          2001      $191,058        Nil          Nil       150,000       Nil       Nil        Nil
President, Chairman    2000      $185,826        Nil          Nil        17,500       Nil       Nil     44,730(2)
and Chief Executive    1999      $163,732      $59,587        Nil         Nil         Nil       Nil        Nil
Officer
------------------------------------------------------------------------------------------------------------------

Ian Bateman(3)         2001      $102,810        Nil          Nil        35,000       Nil       Nil        Nil
Managing Director      2000      $107,517        Nil          Nil        57,500       Nil       Nil        Nil
SmarTire (Europe)      1999      $ 89,613      $24,518        Nil        10,000       Nil       Nil        Nil
Limited
------------------------------------------------------------------------------------------------------------------

Kevin Carlson(4)       2001      $131,764        Nil          Nil        50,000       Nil       Nil        Nil
Chief Financial        2000      $102,201        Nil          Nil        60,000       Nil       Nil    $15,406
Officer, Managing
Director, Corporate
Secretary and
Director
------------------------------------------------------------------------------------------------------------------

Shawn Lammers(5)       2001      $ 83,802        Nil          Nil        15,000       Nil       Nil    $17,017(6)
VIP Engineering
==================================================================================================================
</TABLE>

(1)     The value of perquisites and other personal benefits, securities and
        property for the Named Executive

<PAGE>
                                       29


        Officers that do not exceed the lesser of $50,000 or 10% of the total of
        the annual salary and bonus is not reported herein.

(2)     Amount relates to accumulated vacation pay paid to Mr. Rudman.

(3)     Mr. Bateman commenced employment with the Company on February 2, 1998.

(4)     Mr. Carlson commenced employment with the Company on November 16, 1998.
        Mr. Carlson was paid a signing bonus consisting of 10,000 shares of the
        Company's common stock valued at $15,406.

(5)     Mr. Lammers commenced employment with the Company in October 1988.

(6)     Amount relates to accumulated vacation pay paid to Mr. Lammers.

The following table sets out the details of all stock options granted to the
Named Executive Officers during the most recently completed fiscal year:

OPTION/SAR GRANTS IN THE LAST FISCAL YEAR

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                       NUMBER OF    % OF TOTAL
                      SECURITIES      OPTIONS/
                      UNDERLYING       SARs
                       OPTIONS/      GRANTED TO    EXERCISE
                         SARs       EMPLOYEES IN     PRICE
      NAME            GRANTED(#)    FISCAL YEAR    ($/SHARE)    EXPIRATION DATE
================================================================================
<S>                   <C>           <C>            <C>          <C>
Robert Rudman(1)       150,000        30.1%          $3.33      January 17, 2006
--------------------------------------------------------------------------------
Ian Bateman(2)          35,000         7.0%          $3.65      January 17, 2006
--------------------------------------------------------------------------------
Kevin Carlson(2)        50,000        10.1%          $3.65      January 17, 2006
--------------------------------------------------------------------------------
Shawn Lammers(2)        15,000         3.0%          $3.65      January 17, 2006
--------------------------------------------------------------------------------
</TABLE>

(1)     Average price of $3.33 over the term of options. 75,000 of the options
        granted to Mr. Rudman were in recognition of past service and were
        immediately exercisable

(2)     Average price of $3.65 over the term of options

The following table sets out the details of all stock options exercised during
the most recently completed fiscal year by the Named Executive Officers.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                NUMBER OF SECURITIES UNDERLYING    VALUE OF UNEXERCISED
                                                  UNEXERCISED OPTIONS/SARs AT    IN-THE-MONEY OPTIONS/SARs
                                                          FY-END(#)                   AT FY-END($)(1)

                      SHARES        AGGREGATE
                    ACQUIRED ON      VALUE               EXERCISABLE/
       NAME         EXERCISE(#)     REALIZED            UNEXERCISEABLE           EXERCISEABLE/UNEXERCISEABLE
--------------------------------------------------------------------------------------------------------------
                                                EXERCISEABLE   UNEXERCISEABLE   EXERCISEABLE   UNEXERCISEABLE
--------------------------------------------------------------------------------------------------------------
<S>                 <C>             <C>         <C>            <C>              <C>            <C>
Robert Rudman          Nil            Nil          264,500         60,500          14,460           Nil

Ian Bateman            Nil            Nil           64,667         57,833           4,140           Nil

Kevin Carlson          Nil            Nil           70,667         89,333           4,320           Nil

Shawn Lammers          Nil            Nil           52,000         50,500           4,860           Nil
--------------------------------------------------------------------------------------------------------------
</TABLE>

(1)     The closing price of the Company's common stock on July 31, 2001 was
        $2.36 per share.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS


<PAGE>
                                       30


Effective August 1, 1999, the Board of Directors of the Company approved a new
management agreement with Robert Rudman, regarding his position with the
Company. The management agreement calls for payment of a base salary of
CDN$273,000 per annum subject to increase as from time to time plus incentive
compensation as determined by the Company's incentive compensation plan.
Effective August 1, 2000 Mr. Rudman's salary was increased to CDN $290,000 per
annum.

The agreement with Mr. Rudman requires the Company to pay a termination
allowance in the event of the termination of Mr. Rudman's employment by the
Company except for just cause. The termination allowance is equal to the annual
salary.

Effective August 1, 1999, the Board of Directors of the Company approved a new
management agreement with Kevin Carlson, regarding his position with the
Company. The management agreement calls for payment of a base salary of
CDN$140,000 per annum subject to increase as from time to time plus incentive
compensation as determined by the Company's incentive compensation plan.
Effective April 1, 2000 Mr. Carlson's salary was increased to CDN $170,000 per
annum due to the assumption of General Manager responsibilities. Effective
August 1, 2000 Mr. Carlson's salary was increased to CDN $200,000 per annum due
to the assumption of additional responsibilities.

The agreement with Mr. Carlson requires the Company to pay a termination
allowance in the event of the termination of Mr. Carlson's employment by the
Company except for just cause. The termination allowance is equal to the annual
salary.

Effective August 1, 1999, the Board of Directors of the Company approved a new
management agreement with Ian Bateman, regarding his position with the Company.
The management agreement calls for payment of a base salary of pounds sterling
67,000 per annum subject to increase as from time to time plus incentive
compensation as determined by the Company's incentive compensation plan.
Effective August 1, 2000, Mr. Bateman's salary was increased to pounds sterling
71,000 per annum.

The agreement with Mr. Bateman requires the Company to pay a termination
allowance in the event of the termination of Mr. Bateman's employment by the
Company except for just cause. The termination allowance is equal to the annual
salary.

Effective August 1, 1999, the Board of Directors of the Company approved a new
management agreement with Shawn Lammers, regarding his position with the
Company. The management agreement calls for payment of a base salary of
CDN$120,000 per annum subject to increase as from time to time plus incentive
compensation as determined by the Company's incentive compensation plan.
Effective August 1, 2000, Mr. Lammers salary was increased to $127,200.

The agreement with Mr. Lammers requires the Company to pay a termination
allowance in the event of the termination of Mr. Lammers' employment by the
Company except for just cause. The termination allowance is equal to the annual
salary.

Effective January 3, 2001, the Board of Directors of the Company approved a new
management contract with Erwin Bartz regarding his position with the Company.
The management agreement calls for payment of a base salary of CDN$150,000 per
annum subject to increase from time to time plus incentive compensation as
determined by the Company's incentive compensation plan.

<PAGE>
                                       31


The agreement with Mr. Bartz requires the Company to pay a termination allowance
in the event of the termination of Mr. Bartz' employment by the Company except
for just cause. The termination allowance is equal to the annual salary.

Other than as discussed above, the Company has no plans or arrangements in
respect of remuneration received or that may be received by Named Executive
Officers of the Company in fiscal 2001 to compensate such officers in the event
of termination of employment (as a result of resignation, retirement, change of
control) or a change of responsibilities following a change of control, where
the value of such compensation exceeds $100,000 per Named Executive Officer.

COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

Directors and executive officers have received from time to time incentive stock
options to purchase Common Shares as awarded by the Board of Directors in
consultation with the Compensation Committee.

Directors are entitled to reimbursement for reasonable travel and other
out-of-pocket expenses incurred in connection with attendance at meetings of the
Board of Directors. The Board of Directors may award special remuneration to any
director undertaking any special services on behalf of the Company other than
services ordinarily required of a director. Other than indicated below, no
director received and/or accrued any compensation for his services as a
director, including committee participation and/or special assignments.

There are no arrangements or plans in which the Company provides pension,
retirement or similar benefits for directors or executive officers.

The Company has adopted four formal stock incentive plans (collectively, the
"Stock Incentive Plans"), two of which were approved by the Shareholders at the
1998 Annual General Meeting of the Company and two of which were approved at the
2000 Annual General Meeting of the Company. Two of the Stock Incentive Plans
(the "1998 US Stock Incentive Plan" and the "2000 US Stock Incentive Plan")
provide for Awards to Eligible Employees of the Company or of any Related Entity
who are resident in the United States and/or subject to taxation in the United
States; the other two (the "1998 Stock Incentive Plan" and the "2000 Stock
Incentive Plan") provide for Awards to all other Eligible Employees of the
Company of any Related Entity.

The Company has also adopted a formal incentive compensation plan (the "1999
Incentive Compensation Plan") which was approved by the Shareholders at the 2000
Annual and Extraordinary General Meeting of the Company. The 1999 Incentive
Compensation Plan is intended to complement the Company's existing Stock
Incentive Plans and any subsequent stock incentive plans that may be approved by
the Shareholders of the Company. Accordingly, the 1999 Incentive Compensation
Plan does not specify a maximum number of Common Shares of the Company that will
be issuable pursuant to all awards granted under the 1999 Incentive Compensation
Plan, and all options granted under the 1999 Incentive Compensation Plan shall
be subject to the provisions of the Company's existing Stock Incentive Plans and
any subsequent stock incentive plans that may be approved by the Shareholders of
the Company. In granting awards under the 1999 Incentive Compensation Plan, the
Board of Directors follow certain guidelines which take into account after-tax
operating profits after accounting for the cost of capital employed to create
such profits, as suggested by an

<PAGE>
                                       32


Economic Value Added ("EVA(TM)") model developed by Stern, Stewart & Co., a
global consulting firm. There are no incentive awards under the 1999 Incentive
Compensation Plan for fiscal 2001 based on the audited consolidated financial
statements of the Company for the financial year ended July 31, 2001.

To date, the Company has granted to directors, officers, employees and
consultants incentive stock options to purchase Common Shares subject to and in
accordance with the prevailing policies of the stock exchange on which the
Company's shares were then listed. Options are granted based on the assessment
by the Company's Board of Directors and/or Compensation Committee of the
optionee's past and present contribution to the success of the Company. The
Company's Common Shares are presently listed for trading on the Nasdaq Small Cap
Market. These options are not transferable and are exercisable from the date
granted until the earliest of (i) such number of years (up to ten years) from
the date of the grant, (ii) such number of days following the death of the
optionee as is specified in each optionee's option agreement.

One Director is paid his hourly rate as an attorney at law for his time expended
on his duties as a Director.

Other than the 1999 Incentive Compensation Plan, the management agreements, the
advisory agreements and the 1998 and 2000 Stock Incentive Plans discussed
herein, the Company presently has no material bonus or profit sharing plans
pursuant to which cash or non-cash compensation is or may be paid to the
Company's directors or executive officers.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF

The authorized capital of the Company consists of: 200,000,000 shares of common
stock without par value; and 20,000 shares of preferred stock with a par value
of CDN $1,000 per share. As of September 30, 2001, there were 15,159,369 issued
and outstanding shares of common stock and no issued or outstanding shares of
preferred stock.

To the knowledge of the Company, the following beneficially own, directly or
indirectly, shares carrying more than five percent (5%) of the voting rights
attached to all shares of the Company:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
                       NAME AND ADDRESS OF        AMOUNT AND NATURE OF
TITLE OF CLASS         BENEFICIAL OWNER           BENEFICIAL OWNERSHIP     PERCENT OF CLASS
--------------------------------------------------------------------------------------------
<S>                    <C>                        <C>                      <C>
Common Stock           Simon Archdale             1,500,000                9.9%
                       Chalet Trois Nicholas
                       Courtavey, Crans Montana
                       Valais Switzerland
--------------------------------------------------------------------------------------------
Common Stock           TRW Inc.                   1,390,042                9.2%
                       1900 Richmond Rd.
                       Cleveland, OH
                       44124
--------------------------------------------------------------------------------------------
Common Stock           Andersen Maria Burrows       840,000                5.5%
                       Le Corail, 17 Rue Sadi
                       Carrot
                       F-06600 Antibes
                       France
--------------------------------------------------------------------------------------------
</TABLE>


<PAGE>
                                       33

The following table sets forth specified information with respect to the
beneficial ownership of the Company's common stock as of September 30, 2001 by
shares and percentages beneficially owned. Under the rules of the United States
Securities and Exchange Commission, beneficial ownership includes shares over
which the named stockholder exercises voting control or investment power. Shares
of common stock subject to options or warrants that are currently exercisable or
will become exercisable within sixty days from September 30, 2001 are deemed
outstanding for purposes of the ownership of the person holding the option or
warrant, but are not deemed outstanding for purposes of computing the ownership
percentage of any other person. Unless indicated otherwise in the footnotes
below, each person's address is the Company's principal place of business.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                              Total Number of Shares
        Name                    Beneficially Owned          Percent of Class
--------------------------------------------------------------------------------
<S>                           <C>                           <C>
                                    Directors
--------------------------------------------------------------------------------
Lawrence Becerra(1)                 152,303                     1.00%
--------------------------------------------------------------------------------
John Bolegoh(2)                      50,238                         *
--------------------------------------------------------------------------------
Kevin Carlson(3)                     96,237                         *
--------------------------------------------------------------------------------
William Cronin(4)                   160,660                     1.06%
--------------------------------------------------------------------------------
Bernard Pinsky(5)                    46,500                         *
--------------------------------------------------------------------------------
Robert Rudman(6)                    322,837                     2.13%
--------------------------------------------------------------------------------

                 Named Executive Officers who are not Directors
--------------------------------------------------------------------------------
Ian Bateman(7)                       78,000                         *
--------------------------------------------------------------------------------
Shawn Lammers(8)                     56,852                         *
--------------------------------------------------------------------------------
Total Directors/Executive
Officers (9 persons)(9)           1,000,294                     6.60%
--------------------------------------------------------------------------------
</TABLE>

* Represents less than 1% of the Company's outstanding stock

(1)     Mr. Becerra has incentive stock options for the right to purchase up to
        an aggregate of 70,000 shares of common stock and warrants for the right
        to purchase up to an aggregate of 28,803 shares of common stock. The
        options and warrants are immediately exercisable. Mr. Becerra's address
        is 32 Meadow Bank, Primrose Hill, London, United Kingdom NW33AY.

(2)     Includes 12,990 Common Shares owned by Mr. Bolegoh's wife and children.
        Mrs. Bolegoh has sole voting and dispositive power with respect to her
        shares, and Mr. Bolegoh disclaims beneficial ownership of such shares.
        Mr. Bolegoh has incentive stock options for the right to purchase up to
        an aggregate of 15,900 shares of common stock. The options vest over
        time and currently 13,634 are immediately exercisable.

(3)     Mr. Carlson is also a Named Executive Officer. Mr. Carlson has incentive
        stock options for the right to purchase an aggregate of 205,000 shares
        of common stock. The options vest over time and currently 85,667 options
        are immediately exercisable.

(4)     Mr. Cronin has incentive stock options for the right to purchase an
        aggregate of 63,750 shares of common stock. The options are immediately
        exercisable. Mr. Cronin's address is 180 Concord Dr. Madison,
        Connecticut, United States 06443.

(5)     Mr. Pinsky has incentive stock options for the right to purchase an
        aggregate of 40,000 shares of common stock. The options are immediately
        exercisable. Mr. Pinsky's address is 800-885 W Georgia, Vancouver,
        British Columbia, Canada V6C3H1.

(6)     Mr. Rudman is also a Named Executive Officer. Mr. Rudman has incentive
        stock options for the right to purchase 415,000 shares of common stock.
        The options vest over time and currently 294,500 options are immediately
        exercisable.

(7)     Mr. Bateman has incentive stock options for the right to purchase
        162,500 shares of common stock. The options vest over time and currently
        78,000 options are immediately exercisable. Mr. Bateman's address is 56
        Upper End, Chaddleworth, NR Newbury, Berkshire, England RG20 7DY.

(8)     Mr. Lammers has incentive stock options for the right to purchase
        112,500 shares of common stock. The options vest over time and currently
        55,333 options are immediately exercisable.

(9)     Includes 36,667 immediately exercisable incentive stock options
        beneficially owned by Mr. Bartz, Director Technical Operations, who is
        not a named executive officer. Mr. Bartz holds an additional 73,333
        incentive stock options that vest over time.

<PAGE>
                                       34


(10)    Based on beneficial shares owned, directly or indirectly, or over which
        control or direction is exercised at September 30, 2001. The issued and
        outstanding Common Shares of the Company at September 30, 2001 were
        15,159,369.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Becerra is a principal of West Sussex Trading Inc. During the year ended
July 31, 2001 the Company paid West Sussex Trading Inc. $78,510 for consulting
services. During the year ended July 31, 2000, the Company paid West Sussex
Trading Inc. $319,380 for consulting services and financing fees on the private
sale of the Company's common stock and issued it 86,409 share purchase warrants
at an exercise price of $2.00, expiring at dates ranging from October 15, 2002
to March 31, 2003 for financing services.

Mr. Pinsky is a partner of Clark, Wilson. During the years ended July 31, 2001
and 2000 the Company paid to Clark, Wilson $79,858 and $101,539, respectively,
for legal services.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)  The following documents are filed as part of this report:

        Consolidated Financial Statements. See "Index" on Page F-1

        Auditor's Report, dated September 14, 2001;

        Consolidated Balance Sheets at July 31, 2001 and July 31, 2000;

        Consolidated Statements of Operations and Deficit for the Years Ended
        July 31, 2001, July 31, 2000 and July 31, 1999;

        Consolidated Statements of Stockholders' Equity and Comprehensive Income
        (loss) for the Years Ended July 31, 2001, July 31, 2000 and July 31,
        1999;

        Consolidated Statements of Cash Flows for the Years Ended July 31, 2001,
        July 31, 2000 and July 31, 1999;

        Notes to Consolidated Financial Statements.

        Financial Statements schedules (All schedules have been omitted because
        they are not applicable, not required, were filed subsequent to the
        filing of the Form 10-KSB or because the information required to be set
        forth therein included in the Consolidated Financial Statements or in
        notes thereto)

        Exhibits. See "Exhibit Index"

(b)  Reports on form 8-K. None


<PAGE>
                                       35


                                   SIGNATURES

     PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.

                                  SMARTIRE SYSTEMS INC.

                       By:        /s/ ROBERT V. RUDMAN
                           ----------------------------------
                                  Robert V. Rudman, CA
                                President, Chairman and
                                Chief Executive Officer

                                Date: December 21, 2001


     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON DECEMBER 21, 2001:

<TABLE>
<CAPTION>
NAME                                     TITLES
----                                     ------
<S>                                      <C>
/s/ ROBERT V. RUDMAN                     Director, President, Chairman and
--------------------------------         Chief Executive Officer
Robert V. Rudman                         (Principal Executive Officer)


/s/ JOHN I. BOLEGOH                      Director, and Technical Support
--------------------------------         Manager
John I. Bolegoh


/s/ KEVIN A. CARLSON                     Director, Chief Financial Officer,
--------------------------------         Managing Director and Corporate
Kevin A. Carlson                         Secretary (Principal Financial Officer
                                         and Principal Accounting Officer)

/s/ BERNARD PINSKY                       Director
--------------------------------
Bernard Pinsky
</TABLE>


<PAGE>















                  Consolidated Financial Statements
                  (Expressed in United States dollars)



                  SMARTIRE  SYSTEMS  INC.



                  Years ended July 31, 2001, 2000 and 1999


<PAGE>



STATEMENT OF MANAGEMENT RESPONSIBILITY


The management of SmarTire Systems Inc. is responsible for the preparation of
the accompanying consolidated financial statements and the preparation and
presentation of all information in the Annual Report. The consolidated financial
statements have been prepared in accordance with the accounting principles
generally accepted in the United States and are considered by management to
present fairly the financial position and operating results of the Company.

The Company maintains various systems of internal control to provide reasonable
assurance that transactions are appropriately authorized and recorded, that
assets are safeguarded, and that financial records are properly maintained to
provide accurate and reliable financial statements.

The Company's Audit Committee is composed of two non-management directors and
the Chief Executive Officer of the Company and is appointed by the Board of
Directors annually. The committee meets periodically with the Company's
management and independent auditors to review financial reporting matters and
internal controls and to review the consolidated financial statements and the
independent auditors' report. The Audit Committee reported its findings to the
Board of Directors who have approved the consolidated financial statements.

The Company's independent auditors, KPMG LLP, have examined the consolidated
financial statements and their report follows.



Robert V. Rudman                            Kevin A. Carlson
CHIEF EXECUTIVE OFFICER                     CHIEF FINANCIAL OFFICER

<PAGE>

AUDITORS' REPORT

To the Board of Directors of SmarTire Systems Inc.

We have audited the consolidated balance sheets of SmarTire Systems Inc. as at
July 31, 2001 and 2000 and the consolidated statements of operations and
deficit, stockholders' equity and comprehensive income (loss) and cash flows for
each of the years in the three year period ended July 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

With respect to the consolidated financial statements for the year ended July
31, 2001, we conducted our audits in accordance with auditing standards
generally accepted in the United States of America and Canada. With respect to
the consolidated financial statements for each of the years in the two year
period ended July 31, 2000, we conducted our audits in accordance with Canadian
generally accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at July 31, 2001 and
2000 and the results of its operations and its cash flows for each of the years
in the three year period ended July 31, 2001 in accordance with accounting
principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 1 of the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

On September 14, 2001, we reported separately to the shareholders of the Company
on United States dollar consolidated financial statements for the same periods,
prepared in accordance with Canadian generally accepted accounting principles.


/s/ KPMG LLP
Chartered Accountants


Vancouver, Canada

September 14, 2001


<PAGE>


SMARTIRE SYSTEMS INC.
Consolidated Balance Sheets
(Expressed in United States dollars)

July 31, 2001 and 2000

<TABLE>
<CAPTION>
=========================================================================================
                                                                 2001            2000
-----------------------------------------------------------------------------------------
<S>                                                          <C>             <C>
ASSETS

Current assets:
       Cash and cash equivalents                             $  2,930,257    $  9,753,063
       Receivables, net of allowance for doubtful accounts
         of $46,232 (2000 - nil)                                  189,472          76,800
       Inventory (note 3)                                       1,477,751         178,219
       Prepaid expenses                                            85,470         104,286
-----------------------------------------------------------------------------------------
                                                                4,682,950      10,112,368

Fixed assets (note 4)                                             706,149         617,721

Other asset (note 5)                                            1,508,740               -
-----------------------------------------------------------------------------------------

                                                             $  6,897,839    $ 10,730,089
=========================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
       Accounts payable and accrued liabilities              $    782,690    $    496,744

Stockholders' equity:
       Share capital (note 8):
         Preferred shares, par value $1,000 Cdn per share
            20,000 shares authorized
              Issued and outstanding; none
         Common shares, without par value
            200,000,000 shares authorized
         15,159,369 shares issued and outstanding at
            July 31, 2001 (2000 - 14,497,797)                  37,566,083      35,965,583
       Additional paid-in capital                                 683,462         581,442
       Deferred stock compensation                                (40,773)              -
       Deficit                                                (31,287,425)    (25,780,406)
       Accumulated other comprehensive loss                      (806,198)       (533,274)
-----------------------------------------------------------------------------------------
                                                                6,115,149      10,233,345
-----------------------------------------------------------------------------------------
                                                             $  6,897,839    $ 10,730,089
=========================================================================================
</TABLE>

Commitments and contingencies (note 13)
Subsequent event (note 15)

See accompanying notes to consolidated financial statements.

<PAGE>


SMARTIRE SYSTEMS INC.
Consolidated Statements of Operations and Deficit
(Expressed in United States dollars)

Years ended July 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>
=========================================================================================
                                                 2001            2000            1999
-----------------------------------------------------------------------------------------
<S>                                          <C>             <C>             <C>
Revenue                                      $    779,611    $    747,738    $  1,772,996

Cost of goods sold (note 6) (excluding
depreciation attributable to production
equipment of $nil, $nil and $37,773,
respectively)                                     385,897         339,722       5,875,720
-----------------------------------------------------------------------------------------
                                                  393,714         408,016      (4,102,724)

Expenses and other:
       Depreciation and amortization              446,096         177,690         402,250
       Engineering, research and
       development                              1,485,874       1,416,992       1,292,011
       Foreign exchange loss (gain)              (117,063)        (15,935)        105,109
       General and administrative               2,701,621       3,421,844       2,761,702
       Marketing                                1,744,004       2,057,937       2,833,175
-----------------------------------------------------------------------------------------
                                                6,260,532       7,058,528       7,394,247
-----------------------------------------------------------------------------------------

Loss for the year                              (5,866,818)     (6,650,512)    (11,496,971)

Other income:
       Gain on sale of investment (note 7)              -       8,343,487               -
       Interest income                            359,799         212,203         182,585
-----------------------------------------------------------------------------------------
                                                  359,799       8,555,690         182,585
-----------------------------------------------------------------------------------------

Net income (loss)                            $ (5,507,019)   $  1,905,178    $(11,314,386)
=========================================================================================

Weighted average number of common shares:
       Basic                                   14,296,240      13,159,385      10,192,024
       Diluted                                 14,296,240      13,296,988      10,192,024
=========================================================================================

Income (loss) per share:
     Basic                                   $      (0.39)   $       0.14    $      (1.11)
     Diluted                                        (0.39)           0.14           (1.11)
=========================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>


SMARTIRE SYSTEMS INC.
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
(Expressed in United States dollars)

Years ended July 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                          Accumulated
                             Common shares       Additional      Deferred                       other
                         ----------------------     paid-in         Stock               comprehensive  Stockholders'  Comprehensive
                             Shares      Amount     capital  compensation      Deficit           loss         equity  income (loss)
-----------------------------------------------------------------------------------------------------------------------------------
                                         $            $           $             $             $              $              $
<S>                      <C>         <C>         <C>         <C>           <C>          <C>            <C>            <C>
Balance, August 1,
  1998                    9,406,782  25,570,607          -              -  (16,371,198)      (406,876)     8,792,533

Exercise of stock
  options for cash           18,500      37,492          -                           -              -         37,492
Exercise of warrants
  for cash                1,688,416   3,943,307          -              -            -              -      3,943,307
Remuneration paid in
  shares, at their
  market value              110,000     211,704          -              -            -              -        211,704
Common shares held in
  escrow cancelled         (181,251)          -          -              -            -              -              -
Loss for the year                 -           -          -              -  (11,314,386)             -    (11,314,386)  (11,314,386)
Translation adjustment            -           -          -              -            -         37,997         37,997        37,997
-----------------------------------------------------------------------------------------------------------------------------------

Balance, July 31,
  1999                   11,042,447  29,763,110          -              -  (27,685,584)      (368,879)     1,708,647   (11,276,389)
-----------------------------------------------------------------------------------------------------------------------------------

Issuance of common
  shares for cash upon
  private placements,
  net of issuance costs
  of $507,824             3,415,250   6,139,773          -              -            -              -      6,139,773
Fair value of warrants
  issued on private
  placement
 (note 8(b)(i))                   -           -    182,903              -            -              -        182,903
Compensation expense
  on options granted
  to contractors                  -           -    398,539              -            -              -        398,539
Exercise of stock
  options for cash            1,600       3,200          -              -            -              -          3,200
Issuance of common
  shares on purchase
  of shares of Transense
  Technologies plc
  (note 7)                   25,000      37,500          -              -            -              -         37,500
Remuneration paid in
  shares, at their
  market value               13,500      22,000          -              -            -              -         22,000
Net income                        -           -          -              -    1,905,178              -      1,905,178     1,905,178
Translation adjustment            -           -          -              -            -       (164,395)      (164,395)     (164,395)
-----------------------------------------------------------------------------------------------------------------------------------

Balance at July 31,
  2000                   14,497,797  35,965,583    581,442              -  (25,780,406)      (533,274)    10,233,345     1,740,783
-----------------------------------------------------------------------------------------------------------------------------------

Exercise of stock
  options for cash           11,500      23,000          -              -            -              -         23,000
Exercise of warrants
  for cash                  160,000     240,000          -              -            -              -        240,000
Issuance of common
  shares on purchase of
  license from TRW Inc.
  (note 5)                  490,072   1,337,500          -              -            -              -      1,337,500
Deferred compensation
  expense related to
  stock option plans
  (note 8(c))                     -           -    102,020       (102,020)           -              -              -
Compensation expense              -           -          -         61,247            -              -         61,247
Loss for the period               -           -          -              -   (5,507,019)             -     (5,507,019)   (5,507,019)
Translation adjustment            -           -          -              -            -       (272,924)      (272,924)     (272,924)
-----------------------------------------------------------------------------------------------------------------------------------

Balance at July 31,
  2001                   15,159,369  37,566,083    683,462        (40,773) (31,287,425)      (806,198)     6,115,149    (5,779,943)
===================================================================================================================================
</TABLE>

See accompanying notes to interim consolidated financial statements.

<PAGE>


SMARTIRE SYSTEMS INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)

Years ended July 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
                                                   2001           2000            1999
-------------------------------------------------------------------------------------------
<S>                                             <C>            <C>            <C>
Cash provided by (used for):

Operating activities:
  Net income (loss)                             $(5,507,019)   $ 1,905,178    $(11,314,386)
  Items not affecting cash:
    Depreciation and amortization                   446,096        177,690         402,250
    Remuneration in shares                                -         22,000         211,704
    Special charges in write-down of
      inventory and impairment of
      long-lived assets (note 6)                          -              -       4,820,113
    Gain on sale of investment (note 7)                   -     (8,343,487)              -
    Compensation expense                             61,247        398,539               -
  Change in non-cash working capital:
    Receivables                                    (115,379)       672,584        (249,777)
    Inventory                                    (1,310,788)       (26,950)     (3,413,974)
    Prepaid expenses                                 15,963        (17,790)        (14,586)
    Supplier prepayments                                  -              -         971,128
    Accounts payable and accrued
      liabilities                                   301,335       (783,418)        722,107
-------------------------------------------------------------------------------------------

  Net cash used in operating activities          (6,108,545)    (5,995,654)     (7,865,421)

Investing activities:
  Purchase of capital assets                       (332,832)      (446,701)       (209,335)
  Purchase of investment (note 7)                         -       (955,330)              -
  Purchase of other asset (note 5)                 (400,000)             -          (5,143)
  Redemption of short-term investments                    -      1,381,448      (1,381,448)
  Net proceeds on sale of investment
    (note 7)                                              -      9,336,317               -
-------------------------------------------------------------------------------------------

  Net cash provided by (used in)
    investing activities                           (732,832)     9,315,734      (1,595,926)

Financing activities:
  Issuance of common shares                         263,000      6,325,876       3,980,799
-------------------------------------------------------------------------------------------

  Net cash provided by financing
    activities                                      263,000      6,325,876       3,980,799

Effect of exchange rate differences on cash
  and cash equivalents                             (244,429)      (173,571)         (7,870)
-------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash
  equivalents                                    (6,822,806)     9,472,385      (5,488,418)

Cash and cash equivalents, beginning of year      9,753,063        280,678       5,769,096
-------------------------------------------------------------------------------------------

Cash and cash equivalents, end of year          $ 2,930,257    $ 9,753,063    $    280,678
===========================================================================================

Supplementary information:
  Interest paid                                 $    12,408    $    15,903    $      7,350
Non-cash investing and financing activities:
  Purchase of investment through issuance of
    common shares                                         -         37,500               -
  Write-down of other assets                              -              -         253,934
  Write-down of capital assets                            -              -         136,466
  Purchase of other asset through issuance of
    common shares                                 1,337,500              -               -
  Warrants issued for financing services on
    private placement                                     -        182,903               -
===========================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.


<PAGE>


SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended July 31, 2001, 2000 and 1999

--------------------------------------------------------------------------------


1.      OPERATIONS:

        The Company and its subsidiaries develop and market products
        incorporating wireless data transmission and processing technologies,
        primarily for the automotive markets. The Company's primary product is a
        wireless tire monitoring system which it currently markets for use on
        passenger vehicles and other pneumatic tire applications. All sales of
        its product are made in this industry segment.

        The Company is continuing to develop its products and markets.
        Accordingly, during the year ended July 31, 2001, it incurred a loss of
        $5,507,019 and used cash in operating activities of $6,108,545. Since
        1998, the Company has raised approximately $22,000,000 through seven
        private placements to fund its operations. The Company intends to fund
        its further operations through additional private placements or public
        financings over the foreseeable future. These consolidated financial
        statements have been prepared on the going concern basis which assumes
        that adequate sources of financing will be obtained as required and that
        the Company's assets will be realized and liabilities settled in the
        ordinary course of business. Accordingly, these consolidated financial
        statements do not include any adjustments related to the recoverability
        of assets and classification of assets and liabilities that might be
        necessary should the Company be unable to continue as a going concern.


2.     SIGNIFICANT ACCOUNTING POLICIES:

       (a)   Basis of presentation:

             These consolidated financial statements include the accounts of the
             Company and its wholly-owned subsidiaries, SmarTire USA Inc.,
             SmarTire (Europe) Ltd., and SmarTire Technologies Inc. All
             intercompany balances and transactions have been eliminated.

       (b)   Research and development costs:

             Research and development costs are expensed as incurred. Equipment
             used in research and development is capitalized only if it has an
             alternative future use.

       (c)   Cash and cash equivalents:

             Cash and cash equivalents includes investments in short-term
             investments with a term to maturity when acquired of 90 days or
             less.

       (d)   Inventory:

             Inventory is valued at the lower of cost and net realizable value.
             Cost is determined using the weighted average method and includes
             invoice cost, duties and freight. Provision for obsolescence is
             estimated by management based on historical and expected future
             sales.

<PAGE>


SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended July 31, 2001, 2000 and 1999

--------------------------------------------------------------------------------

2.     SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

       (e)   Fixed assets:

             Fixed assets are recorded at cost. Depreciation of computer
             hardware and software and office and shop equipment is provided for
             on the declining balance basis at 30% per annum. Leasehold
             improvements are depreciated over the lesser of their useful lives
             or the term of the lease.

       (f)   Other asset:

             Other asset includes the license to manufacture and sell tire
             monitoring systems to the original equipment vehicle manufacturers
             of most medium and heavy duty trucks (note 5). Other asset is
             recorded at cost and is being amortized over five years on a
             straight-line basis.

       (g)   Impairment of long-lived assets:

             The Company monitors the recoverability of long-lived assets, based
             on estimates using factors such as expected future asset
             utilization, business climate and future undiscounted cash flows
             expected to result from the use of the related assets or be
             realized on sale. The Company recognizes an impairment loss if the
             projected undiscounted future cash flows is less than the carrying
             amount. The amount of the impairment charge, if any, is measured
             equal to the excess of the carrying value over the expected future
             cash flows discounted using the Company's average cost of funds.

       (h)   Revenue recognition:

             The Company recognizes revenue when goods are shipped and title
             passes, there is persuasive evidence of an arrangement, collection
             is probable, and the fee is fixed or determinable. Customer
             acceptance is used as the criterion for revenue recognition when
             the product sold does not have an established sales history to
             allow management to reasonably estimate returns and future
             provisions. Provisions are established for estimated product
             returns and warranty costs at the time the revenue is recognized.
             The Company records deferred revenue when cash is received in
             advance of the revenue recognition criteria being met.

       (i)   Income (loss) per share:

             Basic income (loss) per share computations are based on the
             weighted average number of shares outstanding during the year. If
             in a period the Company had outstanding dilutive stock options and
             warrants, diluted earnings (loss) per share is calculated using the
             treasury stock method.

<PAGE>

SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended July 31, 2001, 2000 and 1999

--------------------------------------------------------------------------------

2.     SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

       (j)   Income taxes:

             The Company accounts for income taxes in accordance with FAS No.
             109, "Accounting for Income Taxes", which requires the use of the
             asset and liability method. Under this method, deferred income
             taxes are recognized for the future income tax consequences
             attributable to differences between the financial statement
             carrying amounts and their respective income tax basis and for loss
             and tax credit carryforwards. Deferred tax assets and liabilities
             are measured using enacted tax rates expected to apply to taxable
             income in the years in which temporary differences are expected to
             be recovered or settled. The effect on deferred income tax assets
             and liabilities of a change in tax rates is recognized in income in
             the period of enactment. Deferred income tax assets are evaluated
             and if their realization is not considered to be "more likely than
             not", a valuation allowance is provided.

       (k)   Foreign currency translation:

             A majority of the Company's shareholders, customers, and industry
             analysts are located in Europe and the United States. Accordingly,
             the Company adopted the U.S. dollar as its reporting currency
             effective July 31, 2001.

             The Company's functional or primary operating currency is the
             Canadian dollar. The Company's financial statements are prepared in
             Canadian dollars before translation to the U.S. dollar reporting
             currency. The Company translates transactions in currencies other
             than the Canadian dollar at the exchange rate in effect on the
             transaction date. Monetary assets and liabilities denominated in a
             currency other than the Canadian dollar are translated at the
             exchange rates in effect at the balance sheet date. The resulting
             exchange gains and losses are recognized in earnings.
             Amounts reported in Canadian dollars have been translated into U.S.
             dollars as follows: assets and liabilities are translated into U.S.
             dollars at the rate of exchange in effect at the balance sheet date
             and revenue and expense items are translated at the average rates
             for the period. Unrealized gains and losses resulting from the
             translation to the reporting currency are accumulated in
             accumulated other comprehensive loss, a separate component of
             shareholders' equity.

       (l)   Use of estimates:

             The preparation of financial statements in conformity with
             accounting principles generally accepted in the United States of
             America requires management at the date of the financial statements
             make estimates and assumptions that affect the reported amounts of
             assets and liabilities and disclosure of contingent assets and
             liabilities at the date of the financial statements and the
             reported amounts to revenues and expenses during the reporting
             period. Significant areas requiring the use of estimates include
             estimating the net realizable value of inventory and the net
             recoverable amount of long-lived assets. Actual results may differ
             from those estimates.

<PAGE>

SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended July 31, 2001, 2000 and 1999

--------------------------------------------------------------------------------

2.     SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

       (m)   Stock-based compensation plans:

             The Company has elected under FAS 123, "Accounting for Stock-Based
             Compensation" to account for employee stock options using the
             intrinsic value method pursuant to Accounting Principles Board
             ("APB") Opinion No. 25, or "Accounting for Stock Issued to
             Employees" and related interpretations. As such, compensation
             expense under the Company's fixed option plans is recorded on the
             date of grant if the market price of the underlying stock at the
             date of grant exceeds the exercise price. The pro forma stock
             compensation information required by FAS 123 is presented in note
             8(d).

             The Company recognizes compensation expense for stock options,
             common stock and other instruments issued to non-employees for
             services received based upon the fair value of the equity
             instruments issued as the services are performed and the instrument
             earned.

       (n)   Comprehensive income:

             Under SFAS 130, "Reporting Comprehensive Income", the Company is
             required to report comprehensive income, which includes net
             earnings as well as changes in equity from non-owner sources. The
             other changes in equity included in comprehensive income for the
             periods presented comprise the foreign currency cumulative
             translation adjustments. Accumulated other comprehensive income
             (loss) is presented in the consolidated financial statements of
             shareholders' equity and comprehensive income (loss).

       (o)   Comparative figures:

             Certain comparative figures have been reclassified to conform with
             the financial statement presentation adopted in the current year.


3.     INVENTORY:

<TABLE>
<CAPTION>
       =======================================================================
                                                               2001      2000
       -----------------------------------------------------------------------
<S>                                                      <C>         <C>
       Raw materials                                     $  823,366  $161,191
       Work in progress                                     351,516         -
       Finished goods                                       302,869    17,028
       -----------------------------------------------------------------------
                                                         $1,477,751  $178,219
       =======================================================================
</TABLE>

<PAGE>

SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended July 31, 2001, 2000 and 1999

--------------------------------------------------------------------------------

4.     FIXED ASSETS:

<TABLE>
<CAPTION>
       =======================================================================================
                                                                   Accumulated       Net book
       2001                                             Cost      amortization          value
       ---------------------------------------------------------------------------------------
<S>                                               <C>             <C>               <C>
       Computer hardware and software             $  429,985          $247,955       $182,030
       Office and shop equipment                     715,567           325,278        390,289
       Leasehold improvements                        176,973            43,143        133,830
       ---------------------------------------------------------------------------------------
                                                  $1,322,525          $616,376  $     706,149
       =======================================================================================
</TABLE>

<TABLE>
<CAPTION>
       =======================================================================================
                                                                   Accumulated       Net book
       2000                                             Cost      amortization          value
       ---------------------------------------------------------------------------------------
<S>                                               <C>             <C>                <C>
       Computer hardware and software             $  342,105          $198,260       $143,845
       Office and shop equipment                     632,681           209,815        422,866
       Leasehold improvements                         86,695            35,685         51,010
       ---------------------------------------------------------------------------------------
                                                  $1,061,481          $443,760       $617,721
       =======================================================================================
</TABLE>

5.     OTHER ASSET:

       On December 13, 2000, the Company entered into an Assignment and
       Amendment Agreement with TRW Inc. that transfers to the Company the
       license to manufacture and sell tire monitoring systems to the original
       equipment vehicle manufacturers of most medium and heavy duty trucks.
       Consideration consisted of 490,072 shares of common stock valued at
       $1,337,500, based on the market value of the Company's stock at the date
       of purchase, plus cash of $400,000.

<TABLE>
<CAPTION>
       =======================================================================================
                                                               July 31, 2001
                                                  --------------------------------------------
                                                                   Accumulated       Net book
                                                        Cost      amortization          value
       ---------------------------------------------------------------------------------------
<S>                                               <C>                 <C>          <C>
       License                                    $1,737,500          $228,760     $1,508,740
       =======================================================================================
</TABLE>

6.     SPECIAL CHARGES - WRITE-DOWN OF INVENTORY AND IMPAIRMENT OF LONG-LIVED
       ASSETS:

       During the third quarter of 1999, the Company assessed the future
       business prospects and sales for its existing tire pressure monitoring
       products, the forecasted sales levels and the introduction of the
       Company's next generation of tire pressure monitoring products. The
       Company's assessment did not support the carrying value of certain
       assets, including inventories (including purchase commitments),
       production equipment and deferred development costs associated with the
       current generation of tire pressure monitoring systems. The Company
       recorded special charges of $4,820,113 during the third quarter of 1999,
       primarily to reduce the recorded value of inventory assets to their
       estimated net realizable values. Inventory write-down of $4,429,713 is
       included with cost of goods sold and impairment of long-lived assets of
       $390,400 is included with engineering, research and development expenses.

<PAGE>

SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended July 31, 2001, 2000 and 1999

--------------------------------------------------------------------------------

6.     SPECIAL CHARGES - WRITE-DOWN OF INVENTORY OF
       LONG LIVED ASSETS (continued):

       The Company plans to sell products that have been completely written off
       as long as demand for them exists. When they can no longer be sold, they
       will be disposed of. Disposal costs are anticipated to be negligible.

7.     GAIN ON SALE OF INVESTMENT:

       During 2000, the Company made an investment in Transense Technologies plc
       ("Transense") through the issuance of 25,000 common shares of the Company
       valued at $37,500, based on the market value of the Company's stock at
       the date of investment, plus cash of $161,230 in exchange for 250,000
       common shares and 250,000 share purchase warrants of Transense. The
       Company exercised the Transense warrants at a cost of $794,100 and sold
       all its Transense common shares for net cash proceeds of $9,336,317. The
       Company still retains its rights under the license agreement with
       Transense. Under the terms of the agreement, the Company has a worldwide
       non-exclusive license to Transense's surface acoustic wave technology for
       certain tire pressure monitoring applications.

8.     SHARE CAPITAL:

       (a)  Authorized capital was increased by 181,251 common shares in 2001,
            increasing the authorized capital to 200,000,000 common shares
            without par value.

       (b)  The subscribed and issued share capital of the Company is as
            follows:

           (i)  During the year ended July 31, 2000, the Company agreed to issue
                warrants to purchase 119,717 common shares at $2.00 per share
                for consulting and advisory services rendered in connection with
                private placements. The warrants were all exercisable on July
                31, 2001 and will expire between February 21, 2002 and March 31,
                2003. The estimated fair value of these warrants is recorded as
                a capital transaction as the services relate to an equity
                transaction by a charge against share capital and a
                corresponding credit to additional paid-in capital. The fair
                value of these warrants at the date of grant was $182,903.

                The fair value of the warrants was estimated on the date of
                issuance using the Black-Scholes option valuation model with the
                following assumptions:

<TABLE>
                ===============================================================
<S>                                                                 <C>
                Expected dividend yield                                     0%
                Expected stock price volatility                           196%
                Risk-free interest rate                                  6.03%
                Expected life of warrants                           2.65 years
                ===============================================================
</TABLE>

           (ii) The Company completed various private placement transactions
                involving the sale of its common stock during the year ended
                July 31, 2000 for net proceeds of $6,322,676 from the issuance
                of 3,415,250 common shares at a price of $2.00 per share. Of the
                total shares sold, 1,505,000 were issued in October 1999 and
                additional 1,910,250 were issued in March 2000.

<PAGE>

SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended July 31, 2001, 2000 and 1999

--------------------------------------------------------------------------------

8.     SHARE CAPITAL (CONTINUED):

       (c)  Stock-based compensation plans:

            At July 31, 2001, the Company has five stock-based compensation
            plans that are described below.

            The Company has the following fixed stock option plans:

           (i)   Prior to 1998, the Company had an initial plan whereby the
                 Company could grant employees options to purchase common stock.
                 These options vested immediately on the date of grant and
                 expire five years after grant date. The exercise price of cash
                 option equals the fair value of the common stock on the date of
                 grant.

           (ii)  Under the "1998 US Stock Incentive Plan" the Company may grant
                 options to its employees for up to 300,000 common shares.

                 Under the "1998 Stock Incentive Plan" the Company may grant
                 options to its employees for up to 600,000 common shares.

           (iii) Under the "2000 US Stock Incentive Plan" the Company may grant
                 options to its employees for up to 200,000 common shares.

                 Under the "2000 Stock Incentive Plan" the Company may grant
                 options to its employees for up to 800,000 common shares.

                 The options currently outstanding under these plans generally
                 vest from two to four years, with the first 20% to 33% vesting
                 at the date of grant and the balance vesting annually at each
                 anniversary date of the grant thereafter. The exercise price of
                 each option is based on the fair value of the common stock at
                 the date of grant. These options have a five year term.

       A summary of fixed stock option transactions and balances during the
       three years ended July 31, 2001 is as follows:

<TABLE>
<CAPTION>
       ===============================================================================================
                                           2001                   2000                     1999
                                    --------------------  ---------------------    -------------------
                                                Weighted               Weighted               Weighted
                                                 average                average                average
                                                exercise               exercise               exercise
                                       Shares      price      Shares      price      Shares      price
       -----------------------------------------------------------------------------------------------
<S>                                 <C>         <C>       <C>         <C>          <C>       <C>
       Outstanding, beginning
         of year                      997,625     $ 3.09     670,425     $ 3.47      555,175    $ 2.99
           Options granted            498,600       3.44     674,500       2.78      297,500      4.22
           Options exercised          (11,500)     (2.00)     (1,600)     (2.00)     (18,500)    (2.02)
           Options forfeited          (25,975)     (2.99)   (345,700)     (3.35)    (163,750)    (2.84)
       -----------------------------------------------------------------------------------------------
        Outstanding, end of year    1,458,750     $ 3.20     997,625     $ 3.09      670,425    $ 3.47
       ===============================================================================================
</TABLE>

<PAGE>


SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended July 31, 2001, 2000 and 1999

--------------------------------------------------------------------------------


8.     SHARE CAPITAL (CONTINUED):

<TABLE>
<CAPTION>
       =================================================================================
                                  Options outstanding              Options exercisable
                            ----------------------------------   -----------------------
                                           Weighted
                                            average   Weighted                 Weighted
                                          remaining    average                  average
       Range of                Number   contractual   exercise        Number   exercise
       exercise prices      of shares          life      price   exercisable      price
       ---------------------------------------------------------------------------------
<S>                         <C>         <C>           <C>        <C>           <C>
       $1.70 - 2.88           391,335          3.51      $2.38       288,968      $2.22
       $2.89 - 4.44         1,067,415          3.24       3.50       606,253       3.20
       ---------------------------------------------------------------------------------
       $1.75 - 4.44         1,458,750          3.32      $3.20       895,221      $2.88
       =================================================================================
</TABLE>

       The Company normally issues options to directors at fixed exercise
       prices. 90,000 options issued to directors were vested immediately, but
       if not exercised each year, there is an annual 20% increase in the
       exercise price until the options expire. For accounting purposes these
       options are considered to be variable in nature and compensation expense
       is recorded to the extent of increases in the market value of the
       underlying common shares as compared to the exercise price. The variable
       plan accounting has been applied prospectively for market value changes
       subsequent to the date of grant. The compensation expense for variable
       options for the year ended July 31, 2001 is $3,190 (2000 - nil). In
       addition, compensation expense is recognized to the extent that options
       are granted having an exercise price less than the market price of the
       underlying common stock on the date of grant.

       (d)  Stock-based compensation:

            As explained in note 2(m), the company has adopted only the
            disclosure provisions of FAS 123, to account for grants under the
            Company's existing employee stock based compensation plans. The
            exercise price of each option is based on the fair value of the
            common stock at the date of the grant Accordingly, no compensation
            cost has been recognized for the stock option plan. Had compensation
            cost for the Company's stock option plan been determined based on
            the fair value at the grant date for awards under those plans
            consistent with the measurement provisions of FAS 123, the Company's
            net income (loss) and income (loss) per share would have been
            adjusted as follows:

<TABLE>
<CAPTION>
           =======================================================================================
                                                          2001           2000            1999
           ---------------------------------------------------------------------------------------
<S>                                                    <C>             <C>           <C>
           Net income (loss):
              As reported                              $(5,507,019)    $1,905,178    $(11,314,386)
              Pro forma                                 (6,762,702)     1,375,301     (11,849,589)
           Basic and diluted income (loss) per share:
              As reported                                    (0.39)          0.14           (1.11)
              Pro forma                                      (0.47)          0.10           (1.16)
           =======================================================================================
</TABLE>

            The Company recognizes the compensation expense at the date of
            granting the stock options on a straight-line basis over the vesting
            period.

<PAGE>

SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended July 31, 2001, 2000 and 1999

--------------------------------------------------------------------------------

8.     SHARE CAPITAL (CONTINUED):

       (d)  Stock-based compensation (continued):

            The fair value of each option grant is estimated on the date of the
            grant using the Black-Scholes option valuation model with the
            following weighted average assumptions:

<TABLE>
<CAPTION>
            ==================================================================================
                                                         2001            2000            1999
            ----------------------------------------------------------------------------------
<S>                                                <C>             <C>             <C>
            Expected dividend yield                        0%              0%              0%
            Expected stock price volatility              220%            195%            120%
            Risk-free interest rate                     5.60%           5.89%           4.96%
            Expected life of options               2.00 years      3.80 years      5.00 years
            ==================================================================================
</TABLE>

            Weighted-average fair values of options granted during the year are
            as follows:

<TABLE>
<CAPTION>
            ==================================================================================
                                                         2001            2000            1999
            ----------------------------------------------------------------------------------
<S>                                                     <C>              <C>            <C>
            Options whose exercise price at
              date of grant:
                Equals the market price of stock        $3.88            $   -          $3.75
                Exceeds the market price of stock        3.04             1.64              -
                Is less than the market price of stock   3.25                -              -
            ==================================================================================
</TABLE>

       (e)  Warrants:

            As at July 31, 2001, warrants outstanding were exercisable for
            309,717 (2000 - 469,717) common shares of the Company. The warrants
            entitle the holders to purchase common shares of the Company at
            prices ranging from $1.50 to $2.00 per share that expire on various
            dates until March 31, 2003.

9.     FINANCIAL INSTRUMENTS:

        (a) Fair value of financial instruments:

            The carrying values of cash and cash equivalents, receivables and
            accounts payable and accrued liabilities approximate their fair
            values due to being in a ready cash form or the short-term maturity
            of these instruments.

       (b)  Credit risk:

            The majority of the Company's activities are concentrated in the
            automotive industry and sales are primarily to a few major customers
            (note 14). To reduce credit risk, management performs ongoing credit
            evaluations of its customers' financial condition. The Company
            maintains reserves for potential credit losses.

       (c)  Foreign currency risk:

            The Company operates internationally which gives rise to the risk
            that cash flows may be adversely impacted by exchange rate
            fluctuations. To July 31, 2001, the Company has not entered into
            derivatives or other hedging instruments to mitigate its foreign
            exchange risk.

<PAGE>

SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended July 31, 2001, 2000 and 1999

--------------------------------------------------------------------------------

10.    RELATED PARTY TRANSACTIONS:

       During the year ended July 31, 2001, the Company:

       (a)  Paid $78,510 (2000 - $319,380) for consulting services and financing
            fees on the private sales of its common stock and issued nil (2000 -
            86,409) share purchase warrants at an exercise price of $2.00,
            expiring at dates ranging from October 15, 2002 to March 31, 2003,
            for financing services to a company in which a director of the
            Company has significant influence. The director also received 15,000
            (2000 - 30,000 options) from the Company during the year.

       (b)  Paid $79,858 (2000 - $101,539) for legal fees to a legal firm in
            which a director of the Company is a partner.

11.    INCOME TAXES:

        (a) Effective tax rate:

            The effective income tax rates differ from the Canadian statutory
            rates for the following reasons:

<TABLE>
<CAPTION>
           ===================================================================================
                                                         2001            2000            1999
           -----------------------------------------------------------------------------------
<S>                                               <C>             <C>             <C>
           Canadian federal taxes at expected
             rate of 29.1%                        $(1,602,542)    $   647,779     $(3,312,473)
           Provincial taxes at expected rate
             of 16.5%                                (908,658)        367,298      (1,878,206)
           Foreign losses tax affected at
             lower rates                              260,118         312,515         488,398
           Reduction in effective tax rates         1,600,378               -               -
           Permanent and other differences            115,318      (1,450,946)        (18,292)
           Change in valuation allowance              535,386         123,354       4,720,573
           -----------------------------------------------------------------------------------
                                                  $         -     $         -     $         -
           ===================================================================================
</TABLE>

        (b) Deferred tax assets and liabilities:

<TABLE>
<CAPTION>
           ===================================================================================
                                                         2001            2000            1999
           -----------------------------------------------------------------------------------
<S>                                              <C>             <C>             <C>
           Deferred tax assets:
             Fixed assets, accounting
               depreciation in excess of cost    $    328,787    $    560,308    $    486,474
             Loss carryforwards                    10,137,211       9,084,020       9,146,901
             Scientific research and development
               expenses                               352,985         435,823         430,328
             Share issue costs                        218,050         415,712         328,768
             Others                                   208,053         213,837         193,875
           -----------------------------------------------------------------------------------
           Total gross deferred tax assets         11,245,086      10,709,700      10,586,346
           Valuation allowance                    (11,245,086)    (10,709,700)    (10,586,346)
           -----------------------------------------------------------------------------------
           Net deferred tax assets               $          -    $          -    $          -
           ===================================================================================
</TABLE>

<PAGE>

SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended July 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------

11.    INCOME TAXES (CONTINUED):

        In assessing the realizability of deferred tax assets, management
        considers whether it is more likely than not that some portion or all of
        the deferred tax assets will be realized. The ultimate realization of
        the deferred tax assets is dependent upon the generation of future
        taxable income during the periods in which those temporary differences
        become deductible.

        For Canadian tax purposes, the Company has approximately $18,600,000 of
        non-capital losses for income tax purposes available at July 31, 2001 to
        reduce taxable income of future years. These losses will expire as
        follows:

<TABLE>
        =======================================================================
<S>                                                                <C>
        2002                                                       $ 1,100,000
        2003                                                         1,800,000
        2004                                                         2,400,000
        2005                                                         2,800,000
        2006                                                         6,600,000
        2007                                                           200,000
        2008                                                         3,700,000
        -----------------------------------------------------------------------
                                                                   $18,600,000
        =======================================================================
</TABLE>

        Additionally, for Canadian tax purposes, the Company has scientific
        research and development expenditures of $940,000 available to reduce
        future taxable income indefinitely.

        For United States tax purposes, the Company has approximately $4,600,000
        of non-capital losses for income tax purposes available at July 31, 2001
        to reduce taxable income of future years. These losses will expire as
        follows:

<TABLE>
<CAPTION>
        =====================================================================
<S>                                                               <C>
        2012                                                      $  100,000
        2013                                                       1,000,000
        2019                                                       1,800,000
        2020                                                       1,300,000
        2021                                                         400,000
        ---------------------------------------------------------------------
                                                                  $4,600,000
        =====================================================================
</TABLE>

        For United Kingdom tax purposes, the Company has approximately
        $4,500,000 of non-capital losses for income tax purposes available at
        July 31, 2001 to reduce taxable income of future years. These losses may
        be carried forward indefinitely.

<PAGE>

SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended July 31, 2001, 2000 and 1999

--------------------------------------------------------------------------------
12.    EARNINGS (LOSS) PER SHARE:

       The weighted average number of shares outstanding used in the
       computation of earnings (loss) per share were as follows:

<Table>
<Caption>
           ===================================================================
                                                  2001        2000        1999
           -------------------------------------------------------------------
<S>                                         <C>         <C>         <C>
           Weighted-average shares
             used in computation of
             basic earnings (loss)
             per share                      14,296,240  13,159,385  10,192,024

           Weighted-average shares
             from assumed conversion
             of dilutive warrants                    -     137,603           -
           -------------------------------------------------------------------
           Fully diluted weighted
             average number of common
             shares                         14,296,240  13,296,988  10,192,024
           ===================================================================
</Table>

13.    COMMITMENTS AND CONTINGENCIES:

       (a) The Company is committed to the following payments under operating
           leases, and service agreements for premises and certain equipment and
           consultants:

<TABLE>
           ===================================================================
<S>                                                                  <C>
           2002                                                      $336,195
           2003                                                       282,142
           2004                                                       279,495
           2005                                                       279,495
           2006                                                       105,636
           ===================================================================
</TABLE>

       (b) Cash and short-term investments are used to secure credit card
           advances in the amount of $41,340 (2000 - $41,667).

14.    SEGMENTED INFORMATION:

        The Company operates in the wireless tire monitoring technology
        industry. Management of the Company makes decisions about allocating
        resources based on the one operating segment.

        Substantially all revenue is derived from sales to United States and
        European customers. Geographic information is as follows:

<TABLE>
<CAPTION>
       ========================================================================
                                                     Revenue from
                                                  external customers
                                       ----------------------------------------
                                            2001          2000            1999
       ------------------------------------------------------------------------
<S>                                     <C>           <C>           <C>
       United States                    $581,514      $558,560      $  985,506
       Europe                            198,097       189,178         787,490
       ------------------------------------------------------------------------

                                        $779,611      $747,738      $1,772,996
       ========================================================================
</TABLE>

       72% of the Company's fixed assets are in Canada and 28% are in Europe.

       Major customers, representing 10% or more of total sales, include:

<TABLE>
<CAPTION>
       ======================================================================
                                                  2001       2000       1999
       ----------------------------------------------------------------------
<S>                                           <C>        <C>        <C>
       Customer A                             $143,788   $106,098   $291,314
       Customer B                              246,803    202,684    256,886
       Customer C                              126,742          -          -
       Customer D                                    -          -     97,982
       Customer E                                    -          -    695,100
       ======================================================================
</TABLE>

<PAGE>

SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

Years ended July 31, 2001, 2000 and 1999

--------------------------------------------------------------------------------

15.    SUBSEQUENT EVENT:

       On August 31, 2001, the Company and TRW Inc. entered into an agreement to
       restructure their strategic alliance. Under the terms of restructuring,
       SmarTire and TRW agreed to terminate a number of agreements. The Company
       now has the right to manufacture and sell tire monitoring systems to the
       original equipment vehicle manufacturers market. Consideration consisted
       of a promissory note of $2.8 million, carrying an interest of 6% plus
       cash of $500,000. The promissory note is secured by personal property and
       assets of the Company, including equipment, inventory, accounts
       receivable, intangibles and other personal property.

       The promissory note is payable as follows:

<TABLE>
        =======================================================================
<S>     <C>                                                         <C>
        2002                                                        $1,900,000
        2003                                                           900,000
        =======================================================================
</TABLE>


<PAGE>


Index to Exhibits


<TABLE>
<S>        <C>
     3.1   Certified of Incorporation of TTC/Truck Tech Corp. dated September 8,
           1987(1)

     3.2   Memorandum and Articles of TTC/Truck Tech Corp.(1)

     3.3   Memorandum of TTC/Truck Tech Corp. dated September 2, 1987(1)

     3.4   Altered Memorandum of TTC/Truck Tech Corp. dated October 25, 1991(1)

     3.5   Certificate of Change of Name from TTC/Truck Tech Corp. to UniComm
           Signal Inc. dated April 13, 1994(1)

     3.6   Certificate of Change of Name from UniComm Signal Inc. to SmarTire
           Systems Inc. dated December 24, 1997(1)

     3.7   Special Resolution and Altered Memorandum of UniComm Signal Inc.
           dated October 28, 1994(1)

     3.8   Special Resolution and Altered Memorandum of UniComm Signal Inc.
           dated January 17, 1997(1)

     3.9   Special Resolution and Altered Memorandum of SmarTire Systems Inc.
           dated November 17, 1995(1)

    3.10   Special Resolution and Altered Memorandum of SmarTire Systems Inc.
           dated January 16, 1998(1)

    3.11   Special Resolution and Altered Memorandum of SmarTire Systems Inc.
           dated December 5, 2000(8)

    3.12   Substituted articles of SmarTire Systems Inc. adopted December 5,
           2000.(8)

    10.1   Supply Agreement dated April 20, 1998 between the Company and TRW
           Inc.(1)(2)

    10.2   Technical Cooperation Agreement dated as of April 20, 1998 between
           the Company and TRW Inc.(1)(2)

    10.3   License Agreement dated as April 20, 1998 between the Company and TRW
           Inc.(1)(2)

    10.4   Product Licensing Agreement dated May 5, 1998 between the Company and
           Advantage Enterprises Inc.(2)(3)
</TABLE>

<PAGE>

<TABLE>
<S>        <C>
    10.5   Distribution Agreement dated March 28, 1995 between the Company and
           the Haulpak Division of Komatsu Dresser Company.(1)

    10.6   Letter Agreement dated December 4, 1996 between the Company and Pi
           Research Limited.(1)

    10.7   ASIS Development 1 Purchase Contract between SensoNor asa, TRW Inc.
           and SmarTire Systems Inc. dated as of September 1, 1998.(4)

    10.8   Release and Settlement Agreement between SmarTire Systems Inc and
           Joseph Merback dated as of June 4, 1999.(4)

    10.9   Management agreement between the Company and Kevin Carlson dated as
           of August 1, 1999.(5)

    10.10  Management agreement between SmarTire USA Inc. and Mark Desmarais and
           SmarTire Systems Inc. dated as of June 1, 1999.(6)

    10.11  Management Agreement between the Company and Shawn Lammers dated as
           of August 1, 1999.(6)

    10.12  Management Agreement between the Company and Robert Rudman dated as
           of August 1, 1999.(6)

    10.13  Management Agreement between SmarTire Europe Limited and Ian Bateman
           dated as of December 9, 1999.(6)

    10.14  ASIS Development/Purchase Agreement dated as of December 13, 1999
           between the Company and Sensonor ASA.(6)(2)

    10.15  License Agreement dated September 20, 1999 between the Company and
           Transense Technologies plc.(6)(2)

    10.16  Management agreement between the Company and Erwin Bartz dated as of
           January 3, 2001**

    10.17  Assignment and Amendment agreement with TRW Inc. dated December 13,
           2000(7)(2)

    10.18  General Security agreement dated August 31, 2001 between the Company
           and TRW Inc.**

    10.19  License agreement dated August 31, 2001 between the Company and TRW
           Inc.**

    10.20  License agreement dated August 31, 2001 between TRW Inc. and the
           Company**

    10.21  Secured Promising note dated August 31, 2001 between the Company and
           TRW Inc.**

    10.22  Settlement and Release agreement dated August 31, 2001 between the
           Company and TRW Inc.**

    10.23  Termination agreement dated August 31, 2001 between the Company and
           TRW Inc.*

    11.1   Computation of Earnings Per Share**
</TABLE>

<PAGE>
 *   Portions of the agreement have been redacted pursuant to a confidential
     treatment request under the Freedom of Information Act.

**   Previously filed with the Company's Form 10-KSB for the year ended July 31,
     2001 as filed October 26, 2001.

(1)  Incorporated by reference to Form 10-KSB filed with the Securities and
     Exchange Commission on August 18, 1998.

(2)  Portions of the Exhibit have been omitted pursuant to an order granting
     confidential treatment under the Securities Exchange Act of 1934.

(3)  Incorporated by reference to the Company's Form 10-QSB for the quarter
     ended April 30, 1998.

(4)  Incorporated by reference to the Company's Form 10-KSB filed with the
     Securities and Exchange Commission on October 29, 1999.

(5)  Incorporated by reference to the Company's Form S-8 filed with the
     Securities and Exchange Commission on December 17, 1999.

(6)  Incorporated by reference to the Company's Form 10-QSB filed with the
     Securities and Exchange Commission on March 16, 2000.

(7)  Incorporated by references to the Company's Form 10-QSB filed with the
     Securities and Exchange Commission on March 15, 2001.

(8)  Incorporated by reference to the Company's definitive Proxy Statement and
     Information Circular on Schedule 14A filed with the Securities and Exchange
     Commission on October 31, 2000.