----

----

**UNITED        STATES**

**SECURITIES        AND EXCHANGE COMMISSION**

**FORM        10-KSB**

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

**1934**

**FOR        THE FISCAL YEAR ENDED JULY 31, 2007**

**[_]        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.**

|                                             |                                 |
|--------------------------------------------------|--------------------------------------|
| British                  Columbia, Canada        | Not                  applicable      |
| (State                  or other jurisdiction of | (I.R.S.                  Employer    |
| incorporation                  or organization)  | Identification                  No.) |

**#150        - 13151 VANIER PLACE**

**RICHMOND,        BRITISH COLUMBIA, CANADA V6V 2J1**

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

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

**COMMON        STOCK**

*Note        - Checking the box above will not relieve any registrant required to file        reports pursuant to Section 13 or 15(d) of the Exchange Act from their        obligations under those Sections.*

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|                         |                     | INDEX                                                                                                              |                                           |
|------------------------------|--------------------------|--------------------------------------------------------------------------------------------------------------------|------------------------------------------------|
| Page                         |                     |                                                                                                               | Page                                           |
| Number                       |                     |                                                                                                               |                     Number |
| PART                I        |                     |                                                                                                               |                                           |
|                         | Item                  1. | Description                  of Business                                                                           |  1                                        |
|                         |                     |                                                                                                               |                                           |
|                         | Item                  1A | Risk                  Factors                                                                                      |  13                                       |
|                         |                     |                                                                                                               |                                           |
|                         | Item                2.   | Description                of Property                                                                             |  19                                       |
|                         |                     |                                                                                                               |                                           |
|                         | Item                3.   | Legal                Proceedings                                                                                   |  20                                       |
|                         |                     |                                                                                                               |                                           |
|                         | Item                4.   | Submission                of Matters to a Vote of Security Holders                                                 |  20                                       |
|                         |                     |                                                                                                               |                                           |
| PART                II       |                     |                                                                                                               |                                           |
|                         |                     |                                                                                                               |                                           |
|                         | Item                5.   | Market                for Common Equity, Related Stockholder Matters and                Small Business             |  20                                       |
|                         |                     |                                                                                                               |                                           |
|                         | Item                6.   | Management's                Discussion and Analysis or Plan of Operation                                           |  23                                       |
|                         |                     |                                                                                                               |                                           |
|                         | Item                7.   | Financial                Statements                                                                                |  30                                       |
|                         |                     |                                                                                                               |                                           |
|                         | Item                8.   | Changes                In and Disagreements With Accountants on Accounting                and Financial Disclosure |  30                                       |
|                         |                     |                                                                                                               |                                           |
|                         | Item                8A.  | Controls                and Procedures                                                                             |  30                                       |
|                         |                     |                                                                                                               |                                           |
|                         | Item                8B.  | Other                Information                                                                                   |  30                                       |
|                         |                     |                                                                                                               |                                           |
| PART                III      |                     |                                                                                                               |                                           |
|                         |                     |                                                                                                               |                                           |
|                         | Item                9.   | Directors,                Executive Officers and Control Persons; compliance                                       |                                           |
|                         |                     | with                Section 16(a) of the Exchange Act                                                              |  31                                  |
|                         |                     |                                                                                                               |                                           |
|                         | Item                10.  | Executive                Compensation                                                                              | 34                                             |
|                         |                     |                                                                                                               |                                           |
|                         | Item                11.  | Security                Ownership of Certain Beneficial Owners and Management                                      |                                           |
|                         |                     | and                Related Stockholder Matters                                                                     |  39                                       |
|                         |                     |                                                                                                               |                                           |
|                         | Item                12.  | Certain                Relationships and Related Transactions                                                      |  44                                       |
|                         |                     |                                                                                                               |                                           |
|  PART                IV | Item                13.  | Exhibits                                                                                                           |  45                                       |
|                         |                     |                                                                                                               |                                           |
|                         | Item                14.  | Principal                Accounting Fees and Services                                                              |  56                                       |

----

**CAUTIONARY      STATEMENT REGARDING FORWARD-LOOKING INFORMATION**

**PART      I**

**ITEM      1. DESCRIPTION OF BUSINESS**

**Overview**

----

| ·   | become                cash flow positive; |
|--------------------|-------------------------------------------|

| ·   | increase                the overall value of our technology and the competitiveness of our                products; |
|--------------------|---------------------------------------------------------------------------------------------------------------------|

| ·   | create                opportunities for revenue growth beyond TPM;                and |
|--------------------|---------------------------------------------------------------------------------------|

| ·   | increase                the barrier for other companies to enter the commercial or truck,                bus,                recreational and off-highway vehicle markets for                TPM. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Corporate      History**

----

----

----

**Corporate      Information**

**Government      Regulations**

----

**Strategic      Alliances**

***Dana      Corporation.***

***Vansco      electronics LP.***

***GE      Nova Sensor.***

***Alligator      Ventilfabrik GmbH.***

**Products**

----

***Sensor/transmitters***

***Receivers***

***Displays***

***Tools***

***Miscellaneous      equipment***

***Product      Development***

----

**Marketing**

Our      current marketing strategy focuses on sales of our      TPMSs for OEM and after market applications in the commercial or truck, bus,      recreational and off-road industrial vehicle markets. Our ultimate goal is      to      become a wireless gateway system provider of multiple applications beyond TPMS.      In order to realize this goal, we are marketing our basic wireless platform      (Smartwave) to vehicle OEMs. Once installed, this platform has the ability      to      receive data wirelessly from a variety of sensor types. Our selling proposition      to the OEM’s is currently focused on TPMSs as this is a mature application of      our technology.  Because the major financial benefit of properly maintained      tires is reduced fuel consumption and increased tire life we believe that the      high cost of fuel and rubber provides a strong value proposition to justify      the      purchase of our TPMS by our customers. The cost of fuel and rubber is forecasted      to continue to increase which will serve to increase the value of our products      to our customers and increase adoption rates. Our strategy is to provide high      quality TPM products to the OEM market which incorporates the highest level      of      technology possible, at a competitive price. After successful implementation      of      this strategy, we plan to develop and sell additional sensor applications      through utilization of the Smartwave wireless platform as we believe this will      provide additional revenue growth opportunities for us and our channel      partners.

***Buses***

***Recreational      Vehicles (RV)***

----

***Off-road      industrial vehicles (OTR)***

**Competition**

----

**Our      Competitive Strengths**

| ·   | we                can leverage several years of experience dedicated specifically to                tire                monitoring, which we believe is greater than any other company in                the                world; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | we                believe that our tire monitoring solutions are installed on a greater                variety of automobiles, trucks, industrial and agricultural equipment                and                other types of vehicles than any other company in the                world; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | our                experience in OEM and aftermarket give us unmatched knowledge and                expertise in end customer issues and reliability                concerns; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | we                believe we are the established leader in tire monitoring performance                technology; |
|--------------------|-------------------------------------------------------------------------------------------------------------------|

| ·   | we                have a strong patent portfolio complemented by access to all required                intellectual property; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------|

| ·   | Our                customers have advised that we have the best in Class transmitter                radio                frequency ("RF") performance; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | based                on our field data, we have the best in class transmitter power management                technology; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------|

| ·   | we                have the ability to measure tire temperature as well as                pressure; |
|--------------------|----------------------------------------------------------------------------------------------------|

| ·   | we                provide flexible sensor mounting                solutions; |
|--------------------|------------------------------------------------------------------------------|

| ·   | we                are able to optimize the RF output characteristics during rotation                of                wheel assembly which provides consistent radiation                patterns; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | we                have the ability to interface with existing commercial vehicle                communication networks which allows our system to easily integrate                with                OEM commercial vehicles; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | our                technology prevents RF collision at start-up and minimizes potential                interference from other transmitters;                and |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | we                provide consistent life performance even at low temperatures and                we can                reduce the risk of chemical volatility at higher                temperatures. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Indirect      Competition**

***Automatic      tire inflation systems***

***“Chip-in-tire”***

**Raw      Materials and Principal Suppliers**

**Dependence      on Certain Customers**

**Proprietary      Protection**

----

| ·   | United                States Patent 5,231,872 addresses the technology in our 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 our abnormal                tire                condition warning system. It was issued on February 8, 1994 and expires                February 8, 2011. We purchased this patent from EPIC Technologies,                Inc. in                December 1996. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| ·   | United                States Patent 5,559,484 addresses certain technology in our data                logging                tire monitor with condition predictive capabilities and integrity                checking. It was issued on September 24, 1996 and expires September                24,                2013. We purchased this patent from EPIC Technologies in December                1996. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | United                States Patent 5,945,908 addresses certain other technology in our                data                logging tire monitor with condition predictive capabilities and integrity                checking. It was issued on August 31, 1999 and expires on August                31, 2016.                We purchased this patent from EPIC Technologies in December                1996. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | United                States Patent 6,357,883 addresses the technology for a wheel component                with a cavity for mounting a housing for measurement apparatus. It                was                issued on March 19, 2002 and expires March 19,                2019. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | United                States Patent 6,805,000 addresses the technology for a wheel component                with a cavity for mounting a housing for measurement apparatus. It                was                issued on October 25, 2004 and expires October 25,                2021. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Research      and Development**

----

**Costs      of compliance with any environmental laws**

**Liability      Insurance**

**Number      of Total Employees and Number of Full-time Employees**

**ITEM      1A. RISK FACTORS**

**RISKS      RELATED TO OUR BUSINESS**

**WE      MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING THAT WE MAY REQUIRE TO FUND      OUR      OPERATIONS.**

----

**WE      HAVE A HISTORY OF OPERATING CASH LOSSES AND FLUCTUATING OPERATING RESULTS,      WHICH      RAISE SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING      CONCERN**

**OUR      5% AND 10% CONVERTIBLE DEBENTURES AND OUR PREFERRED SHARES PROVIDE FOR VARIOUS      EVENTS OF DEFAULT THAT WOULD ENTITLE THE HOLDERS TO REQUIRE US TO IMMEDIATELY      ACCELERATE FULL REPAYMENT OF ALL DEBENTURES AND PREFERRED SHARES OUTSTANDING      AND      ACCRUED INTEREST THEREON OR, NOTWITHSTANDING ANY LIMITATIONS CONTAINED IN THE      DEBENTURES AND PREFERRED SHARES AND/OR THE SECURITIES PURCHASE AGREEMENT, TO      CONVERT ALL DEBENTURES OUTSTANDING AND ACCRUED INTEREST THEREON INTO SHARES      OF      OUR COMMON STOCK. IF AN EVENT OF DEFAULT OCCURS, WE MAY BE UNABLE TO IMMEDIATELY      REPAY THE AMOUNT OWED AND ANY REPAYMENT MAY LEAVE US WITH LITTLE OR NO WORKING      CAPITAL IN OUR BUSINESS.**

----

**WE      MAY EXPERIENCE SIGNIFICANT AND RAPID GROWTH IF WE ARE ABLE TO CAPITALIZE ON      THE      EXPANSION OF THE TIRE MONITORING MARKET. IF WE ARE UNABLE TO HIRE AND TRAIN      STAFF TO HANDLE SALES AND MARKETING OF OUR PRODUCTS AND MANAGE OUR OPERATIONS,      SUCH GROWTH COULD MATERIALLY AND ADVERSELY AFFECT US.**

**TECHNOLOGICAL      CHANGES IN OUR INDUSTRY COULD RENDER OUR PRODUCTS NON-COMPETITIVE OR OBSOLETE      AND CONSEQUENTLY AFFECT OUR ABILITY TO GENERATE REVENUES.**

**WE      CARRY A REASONABLE AMOUNT OF PRODUCT LIABILITY INSURANCE. HOWEVER THERE CAN      BE      NO ASSURANCE THAT OUR EXISTING INSURANCE COVERAGE WOULD BE ADEQUATE IN TERM      AND      SCOPE TO PROTECT US AGAINST MATERIAL FINANCIAL EFFECTS IN THE EVENT OF A      SUCCESSFUL CLAIM.**

**SUBSTANTIALLY      ALL OF OUR ASSETS ARE OUTSIDE THE UNITED STATES, WITH THE RESULT THAT IT MAY      BE      DIFFICULT FOR INVESTORS TO ENFORCE WITHIN THE UNITED STATES ANY JUDGMENTS      OBTAINED AGAINST US OR ANY OF OUR OFFICERS.**

----

**THE      LOSS OF ANY ONE OF OUR TWO MAJOR CUSTOMERS MAY MATERIALLY AND ADVERSELY AFFECT      US.**

**WE      MAY EXPERIENCE DIFFICULTY IN OBTAINING COMPONENTS AND RAW MATERIALS, AND WE      COULD BE MATERIALLY AND ADVERSELY AFFECTED AS A RESULT.**

**THE      LOSS OF ANY OF OUR CONTRACT MANUFACTURERS MAY MATERIALLY AND ADVERSELY AFFECT      US.**

**WE      DEPEND TO A SIGNIFICANT EXTENT ON CERTAIN KEY PERSONNEL, THE LOSS OF ANY OF      WHOM      MAY MATERIALLY AND ADVERSELY AFFECT OUR COMPANY.**

**FUTURE      SALES BY OUR STOCKHOLDERS MAY CAUSE OUR STOCK PRICE TO DECLINE AND MAY GREATLY      REDUCE OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS.**

----

**THE      SALE OF OUR STOCK UNDER OUR FLOATING RATE CONVERTIBLE DEBENTURES COULD ENCOURAGE      SHORT SALES BY THIRD PARTIES, WHICH MAY CONTRIBUTE TO THE FUTURE DECLINE OF      OUR      STOCK PRICE.**

**OUR      COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY FLUCTUATE      SIGNIFICANTLY, WHICH MAY AFFECT OUR STOCKHOLDERS' ABILITY TO SELL SHARES OF      OUR      COMMON STOCK.**

**RISKS      RELATED TO OUR COMMON STOCK**

**WE      DO NOT EXPECT TO PAY DIVIDENDS.**

----

**OUR      COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE TRADING      MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR STOCK      CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR      STOCK.**

| ·   | that a                broker or dealer approve a person's account for transactions in penny                stocks; and |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------|

| ·   | the                broker or dealer receive from the investor a written agreement to                the                transaction, setting forth the identity and quantity of the penny                stock to                be purchased. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | In                order to approve a person's account for transaction, setting forth                the                identity and quantity of the penny stock to                be purchased. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Obtain financial                information and investment experience objectives of the person;                and |
|--------------------|------------------------------------------------------------------------------------------------------------------------------|

| ·   | make                a reasonable determination that the transactions in penny stocks                are                suitable for that person and the person has sufficient knowledge                and                experience in financial matters to be capable of evaluating the risks                of                transactions in penny stocks. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | sets                forth the basis on which the broker or dealer made the suitability                determination; and |
|--------------------|--------------------------------------------------------------------------------------------------------------------------|

| ·   | States                that the broker or dealer received a signed, written agreement from                the                investor prior to the transaction. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Brokers                may be less willing to execute transactions in securities subject                to the                "penny stock" rules. This may make it more difficult for investors                to                dispose of our common stock and cause a decline in the market value                of our                stock. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**THE      HOLDERS OF OUR CONVERTIBLE DEBENTURES AND PREFERRED SHARES HAVE THE OPTION      OF      CONVERTING THE CONVERTIBLE DEBENTURES AND PREFERRED SHARES INTO SHARES OF OUR      COMMON STOCK, AND WE MAY ELECT TO MAKE PRINCIPAL REPAYMENTS AND/OR INTEREST      PAYMENTS UNDER THE CONVERTIBLE DEBENTURES IN SHARES OF OUR COMMON STOCK. THE      HOLDERS OF THE CONVERTIBLE NOTES MAY ALSO EXERCISE THEIR COMMON STOCK PURCHASE      WARRANTS. IF THE CONVERTIBLE DEBENTURES ARE CONVERTED OR THE SHARE PURCHASE      WARRANTS ARE EXERCISED, THERE WILL BE DILUTION OF YOUR SHARES OF OUR COMMON      STOC**

**ITEM      2. DESCRIPTION OF PROPERTY**

**Facilities**

----

**ITEM      3. LEGAL PROCEEDINGS**

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

**PART      II**

**ITEM      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER      MATTERS**

**MARKET      FOR COMMON STOCK**

| QUARTER                ENDED    | HIGH   | LOW    |
|---------------------------------|--------|--------|
|                            |   |   |
| July                31, 2007    | $0.019 | $0.006 |
|                            |   |   |
| April                30, 2007   | $0.039 | $0.015 |
|                            |   |   |
| January                31, 2007 | $0.050 | $0.032 |
|                            |   |   |
| October                31, 2006 | $0.065 | $0.034 |
|                            |   |   |
| July                31, 2006    | $0.083 | $0.044 |
|                            |   |   |
| April                30, 2006   | $0.084 | $0.050 |
|                            |   |   |
| January                31, 2006 | $0.099 | $0.059 |
|                            |   |   |
| October                31, 2005 | $0.13  | $0.075 |

----

**DIVIDEND      POLICY**

**RECENT      SALES OF UNREGISTERED SECURITIES**

| ·   | By                amended conversion notice dated September 27, 2007, Staraim Enterprises                Limited elected to convert $130,000 of its 10% convertible debenture                into                common shares of the Company.  In response we issued 23,000,000                shares of our common stock pursuant to Rule 506 of Regulation D under                the                Securities Act. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | On                September 28, 2007, we issued 100,000 warrants exercisable at $0.03                per                share into shares of our common stock to SKS Consulting of South                Florida                Corp. pursuant to a consulting                agreement. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | By                conversion notice dated September 19, 2007, Starome Investments Limited                elected to convert $51,200 of its 10% convertible debenture into                common                shares of the Company.  In response we issued 10,000,000 shares                of our common stock pursuant to Rule 506 of Regulation D under the                Securities Act. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | By                amended conversion notice dated September 12, 2007, Staraim Enterprises                Limited elected to convert $130,000 of its 10% convertible debenture                into                common shares of the Company.  In response we issued 23,000,000                shares of our common stock pursuant to Rule 506 of Regulation D under                the                Securities Act. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | On                August 31, 2007, we issued 100,000 warrants exercisable at $0.03                per share                into shares of our common stock to SKS Consulting of South Florida                Corp.                pursuant to a consulting agreement. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | On                August 20, 2007, we issued, pursuant to Rule 506 of Regulation D                under the                Securities Act, for an aggregate purchase price of $350,000 a 10%                convertible debenture due on or before April 27, 2010. We have paid                Yorkville Advisors, LLC, a related party of Xentenial, a cash fee                of                $35,000 in connection with the securities purchase agreement out                of the                aggregate purchase price paid for this 10% convertible                debenture. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | On                July 31, 2007, we issued 100,000 warrants exercisable at $0.03 per                share                into shares of our common stock to SKS Consulting of South Florida                Corp.                pursuant to a consulting agreement. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | By                conversion notice dated July 17, 2007, Starome Investments Limited                elected                to convert $21,800 of its 10% convertible debenture into common shares                of                the Company.  In response we issued 2,500,000 shares of our                common stock pursuant to Rule 506 of Regulation D under the Securities                Act. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | By                conversion notice dated July 12, 2007, Cornell Capital Partners elected                to                convert 625 Class A preferred shares valued at $100,000 into common                shares                of the Company.  In response we issued 10,000,000 shares of our                common stock pursuant to Rule 506 of Regulation D under the Securities                Act. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | By                conversion notice dated July 11, 2007, Cornell Capital Partners elected                to                convert 625 Class A preferred shares valued at $100,000 into common                shares                of the Company.  In response we issued 10,000,000 shares of our                common stock pursuant to Rule 506 of Regulation D under the Securities                Act. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | On                July 10, 2007, we issued 100,000 shares of our common stock to SKS                Consulting of South Florida Corp. pursuant to a consulting                agreement. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | On                June 30, 2007, we issued 100,000 warrants exercisable at $0.03 per                share                into shares of our common stock to SKS Consulting of South Florida                Corp.                pursuant to a consulting agreement. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | By                conversion notice dated June 15, 2007, Cornell Capital Partners elected                to                convert 1,026 Class A preferred shares valued at $164,160 into common                shares of the Company.  In response we issued 16,416,000 shares                of our common stock pursuant to Rule 506 of Regulation D under the                Securities Act. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | On                June 12, 2007, we issued 100,000 shares of our common stock to SKS                Consulting of South Florida Corp. pursuant to a consulting                agreement. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | On                May 30, 2007, we issued 100,000 warrants exercisable at $0.03 per                share                into shares of our common stock to SKS Consulting of South Florida                Corp.                pursuant to a consulting agreement. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | By                conversion notice dated May 17, 2007, Cornell Capital Partners elected                to                convert 840 Class A preferred shares valued at $134,400 into common                shares                of the Company.  In response we issued 13,440,000 shares of our                common stock pursuant to Rule 506 of Regulation D under the Securities                Act. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | On                May 9, 2007, we issued 100,000 shares of our common stock to SKS                Consulting of South Florida Corp. pursuant to a consulting                agreement |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | By                conversion notice dated May 1, 2007, Cornell Capital Partners elected                to                convert 500 Class A preferred shares valued at $80,000 into common                shares                of the Company.  In response we issued 8,000,000 shares of our                common stock pursuant to Rule 506 of Regulation D under the Securities                Act. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | On                April 30, 2007, we issued 100,000 warrants exercisable at $0.03 per                share                into shares of our common stock to SKS Consulting of South Florida                Corp.                pursuant to a consulting agreement. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | On                March 31, 2007, we issued 100,000 warrants exercisable at $0.03 per                share                into shares of our common stock to SKS Consulting of South Florida                Corp.                pursuant to a consulting agreement. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | On                February 28, 2007, we issued 400,000 warrants, of which 200,000 are                exercisable at $0.03 per share and 200,000 are exercisable at $0.06                per                share, into shares of our common stock to SKS Consulting of South                Florida                Corp. pursuant to a consulting                agreement. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

**RESULTS      OF OPERATIONS**

**Fiscal      Year Ended July 31, 2007 vs. Fiscal Year Ended July 31,      2006**

**Revenue**

| ·   | Sales                of TPMSs to OEMs for installation on new and existing buses increased                to                $1,062,174 in fiscal year 2007 from $952,824 in fiscal year 2006.                Although                we anticipate sales of this product to the OEM bus market to increase                significantly in the next fiscal year as our customer base has increased,                it is difficult for us to predict what the volume of sales will be                as this                is dependent on how quickly our new customers retrofit their fleets                and                integrate TPMSs into their production                lines. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Sales                of TPMSs to OEMs for new passenger cars increased to $1,502,597 in                fiscal                year 2007 from $1,143,554 in fiscal year 2006. The increase was primarily                due to an increase in sales to Aston Martin, formerly Ford's flagship                division until recently sold. As Aston Martin now supplies our TPMSs                on                all three of their platforms, we do not anticipate sales of this                product                to the OEMs to increase unless Aston Martin increases their production                of                vehicles as our sales and marketing efforts are focused on the commercial                or truck, bus, recreational and off-highway vehicle                markets. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Sales                of TPMSs to OEMs for new recreational vehicle TPMSs increased to                $274,191                in fiscal year 2007 from $254,095 in fiscal year 2006. Although we                anticipate sales of this product to the OEM recreational vehicle                (RV)                market to continue to increase, it is difficult for us to predict                what the                volume of sales of this product will be as this will depend primarily                on                market acceptance. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Sales                of TPMSs to the RV aftermarket decreased to $385,934 in fiscal year                2007                from $616,223 in fiscal year 2006. Sales of this product were                significantly higher during the fiscal year ended July 31, 2006 as                we                received initial stocking orders from our major distributor of this                product during this period. We anticipate sales of this product to                the RV                aftermarket to increase. However it is difficult for us to predict                what                the volume of sales will be as this will depend primarily on market                acceptance and our customers implementation                schedules. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Sales                of TPMSs to the truck market increased to $161,509 in fiscal year                2007                from $70,490 in fiscal year 2006. We anticipate that sales to this                market                will increase significantly in fiscal 2008 as we expect to ship product                to                new OEM customers that we have been working with for the last twelve                to                eighteen months. Although interest in this product is very high,                it is                difficult for us to predict what the volume of sales will be, as                this will                depend primarily on market                acceptance. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Sales                of TPMSs to the off-highway aftermarket decreased to $30,999 in fiscal                year 2007 from $56,189 for the year ended July 31, 2006. While we                anticipate sales to this market to increase significantly in fiscal                2008,                it is difficult for us to predict what the volume of sales will be,                as                this will depend primarily on market acceptance and our customers                implementation schedules. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | Sales                of TPMSs to the aftermarket passenger car market decreased to $83,570                in                fiscal year 2007 from $240,676 in fiscal year 2006. As our sales                and                marketing efforts are not focused on this market, we do not anticipate                future sales of this product to be                significant. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Sales                of aftermarket motorcycle TPMSs increased to $34,227 in fiscal year                2007                from $31,244 in fiscal year 2006. As discussed above, as our sales                and                marketing efforts are not focused on this market, we do not anticipate                future sales of this product to be                significant. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Service                revenue for assistance in installing TPMSs and training customers                and                making customer specific software changes increased to $87,114 in                fiscal                2007 from $0 in fiscal year 2006. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Sales                of miscellaneous products and services decreased to $39,506 in fiscal                year                2007 from $90,354 in fiscal year                2006. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Gross      Margin**

**Expenses**

----

**Depreciation      and amortization**

**Interest      and finance charges**

**Interest      Income**

**Loss      on settlement of debt**

----

**Unrealized      loss on derivative instruments**

**Foreign      exchange gain/loss**

**LIQUIDITY      AND CAPITAL RESOURCES**

***Net      cash used in operating activities***

| (i)   | the                closure of our European office; |
|-----------------|----------------------------------------------------|

| (ii)   | the                reduction in the number of our employees by approximately                45%; |
|------------------|--------------------------------------------------------------------------------------------------|

| (iii)   | the                issuance of shares to settle                debt; |
|-------------------|----------------------------------------------------------------------|

----

***Net      cash used in investing activities***

***Net      cash provided by financing      activities***

|   |                           | **Gross**                       | **Financing**                                    | **Net**                         |
|--------|--------------------------------|---------------------------------|--------------------------------------------------|---------------------------------|
|   | **Date**                       | **Proceeds**                    | **costs**                                        | **Proceeds**                    |
| (1)    | November                  2006 | $ 1,200,000                |     $  130,000     | $ 1,070,000                |
| (2)    | January                  2007  |     684,000 |        83,400 |     600,600 |
| (3)    | February                  2007 |     334,000 |        33,400 |     300,600 |
| (4)    | March                  2007    |     782,000 |        78,200 |     703,800 |
| (5)    | April                  2007    |  1,150,000                 |       135,000      |  1,015,000                 |
|   |                           |                            |                                             |                            |
|   |                           | $ 4,150,000                |     $  460,000     | $ 3,690,000                |

| ·   | On                October 20, 2005, a warrant holder exercised 1,100,000 warrants at                an                exercise price of $0.10 for gross proceeds of                $110,000. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | During                fiscal year 2006, 2,060,000 stock options were exercised for gross                proceeds of $61,800. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------|

----

**FUTURE      OPERATIONS**

|                                                   |                                  Estimated Range   |
|--------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|
| Marketing                                              |  $            1,200,000                                           |  $           1,400,000 |
| Engineering,                  research and development |                1,750,000                                |               2,000,000 |
| General                  and administrative            |                1,750,000                                |               2,000,000 |
| Capital                  Purchases                     |                     60,000     |                  300,000 |
| Debt                  repayment (1)                    | **-**                                                                                                                              | 42,200,000 |
| General                  Working Capital (2)           |              (2,360,000)                                          |              (2,700,000) |
|                                                   |                                                                                                                               |   |
| TOTAL                                                  |  $            2,400,000                                           |  $         45,200,000 |

| (1)   | Principal                payments on all of our outstanding debt and interest payable due                within                the next twelve months, excluding $500,000 of interest payable in                cash                under our June 2005 10% convertible debentures and interest payable                under                our May 2005 5% convertible debenture is convertible into shares                of our                common stock. Principal due under our June 2005 10% convertible debentures                must be converted into shares of the Company on June 23, 2008. However,                this conversion is limited to 4.9% of our outstanding shares for                each                debtholder and related group of                debtholders. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | Our                working capital requirements are impacted by our inventory requirements.                Therefore, any increase in sales of our products will be accompanied                not                only by an increase in revenues, but also by an increase in our working                capital requirements. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (1)   | issuance                of either convertible debt or                equity; |
|-----------------|------------------------------------------------------------------------------|

| (2)   | sale                of rights to market our product; |
|-----------------|------------------------------------------------------|

| (3)   | license                of our technology; |
|-----------------|-------------------------------------------|

| (4)   | settlement                of patent                infringement lawsuit-we launched a patent infringement lawsuit                against Siemens VDO Automotive Corp. and Schrader-Bridgeport                International, Inc. on  September 12,                2007 |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**APPLICATION      OF CRITICAL ACCOUNTING POLICIES**

**Revenue      Recognition**

**Inventory**

**Impairment      of Long Lived Assets**

**Convertible      Debentures**

----

**Stock-Based          Compensation**

.

**Income          Taxes**

**Off-Balance      Sheet Arrangements**

| ·   | an                obligation under a guarantee                contract; |
|--------------------|-------------------------------------------------------------------------|

| ·   | a                retained or contingent interest in assets transferred to the                unconsolidated entity or similar arrangement that serves as credit,                liquidity or market risk support to such entity for such                assets; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | an                obligation, including a contingent obligation, under a contract that                would                be accounted for as a derivative instrument; or an obligation, including                a                contingent obligation, arising out of a variable interest in an                unconsolidated entity that is held by, and material to, us where                such                entity provides financing, liquidity, market risk or credit risk                support                to, or engages in leasing, hedging, or research and development services                with us. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**ITEM      7. FINANCIAL STATEMENTS**

See      index to the Consolidated Financial Statements beginning on      page 58.

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

**ITEM      8A. CONTROLS AND PROCEDURES**

**ITEM      8B. OTHER INFORMATION**

----

**PART      III**

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

| Name                                      | Age    |   | Position                                                         |
|-------------------------------------------|--------|--------|------------------------------------------------------------------|
|                                      |   |   |                                                             |
| Dave                  Warkentin           | 49     |   | President                  and Chief Executive Officer, Director |
| Jeff                  Finkelstein         | 46     |   | Chief                  Financial Officer                         |
| Shawn                  Lammers            | 40     |   | Vice                  President, Engineering                     |
| Greg                  Tooke               | 39     |   | Vice                  President, Product and Supply Chain        |
| William                  Cronin(1)(2)(3)  | 60     |   | Director                                                         |
| Martin Gannon(1)(2)(3)               | 55     |   | Director                                                         |
| Geroge                  O'Leary (1)(2)(3) | 44     |   | Director                                                         |

**Business      Experience and Principal Occupation of Directors, Executive Officers and      Significant Employees**

----

----

**Family      Relationships**

**Involvement      In Certain Legal Proceedings**

| ·   | 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; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | any                conviction in a criminal proceeding or being subject to a pending                criminal                proceeding (excluding traffic violations and other minor                offences); |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | been                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 |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | been                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. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Audit      Committee Financial Expert**

**Section      16(a) Beneficial Ownership Reporting Compliance**

**Code      of Ethics**

**ITEM      10. EXECUTIVE COMPENSATION**

----

**Summary      Compensation Table**

| **Summary                  Compensation**                                   |             |                 |          |                           |                                                    |                                                         |
|-----------------------------------------------------------------------------|------------------|----------------------|---------------|--------------------------------|---------------------------------------------------------|--------------------------------------------------------------|
| Name                  and Principal Position                                | Year             | Salary               | Bonus(2)      | Option                  awards | Non-Equity                  Incentive Plan Compensation | Nonqualified                  Deferred Compensation Earnings | All                  OtherCompen-sation | Total                  ($) |
|                                                                        |             |                 |          |                           |                                                    |                                                         |   |   |
| Dave                  WarkentinPrincipal                  Executive Officer | 2007   | $176,117   | -   | $115,201                       | -                                             | -                                                  | $13,324(2)   | $304,642 |
| Jeff                  FinkelsteinChief                  Financial Officer   | 2007   | $156,435   | -   | $26,442                        | -                                             | -                                                  | -   | $182,877 |
| Shawn                  LammersVice-President,                  Engineering  | 2007   | $139,601   | -   | $21,815                        | -                                             | -                                                  | -   | $161,416 |

| *    | The                average of the closing foreign exchange rates for fiscal 2007 as                calculated by using the reported daily rates posted by the Federal                Reserve                Bank of New York, was CDN$1.1258 to every US$1.00. For the purposes                of                this table, executive compensation paid in Canadian currency to the                Named                Executive Officers has been converted into United States currency                at the                rate of CDN$1.1258 to every                US$1.00. |
|---------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (1)   | The                value of perquisites and other personal benefits, securities and                property                for the Named Executive Officers that do not exceed the lesser of                $10,000                or 10% of the total of the annual salary and bonus is not reported                herein. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | Represents                sales commissions of $ 20,125 and $13,424 earned by Mr. Warkentin                during                fiscal 2006 and 2007 respectively. The commissions were earned while                he                was in the position of Vice-President of Sales and                Marketing. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                     |                            |
|----------------------------------------------------------|---------------------------------|
| Expected                    dividend yield               | 0%                              |
| Expected                    stock price volatility       | 140                    - 145%   |
| Risk-free                    interest rate               | 3.54                    - 4.53% |
| Expected                    life of options and warrants | 5                    years      |

**Compensation      of Directors**

----

| Successful                organizational restructuring by 2/28/07         | 100,000                warrants |
|---------------------------------------------------------------------------|---------------------------------|
| Successful                additional short-term financing by 3/31/07      | 100,000                warrants |
| Company                at monthly breakeven by 12/31/07                   | 200,000                warrants |
| Stock                price at $0.12/share for a consecutive 30 day period | 100,000                warrants |
|                                                                      |                            |
| Total                                                                     | 500,000                warrants |

----

| Name                                 | Fees                  earned or Paid in Cash ($)                                                  | Stock                  awards ($)                             | Option                  Awards ($)                                        | Non-Equity                  Incentive Plan Compensation ($)                                       | Nonqualified                  Deferred Compensation Earnings ($)                                                    | All                  Other Compensation ($)                                                                                           | Total                  ($)                                                                  |                         |
|--------------------------------------|---------------------------------------------------------------------------------------------------|---------------------------------------------------------------|---------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|------------------------------|
|                                 |                                                                                              |                                                          |                                                                      |                                                                                              |                                                                                                                |                                                                                                                                  |                                                                                        |                         |
| Bill                  Cronin         |  $      49,186                                                 |           - |             - |                 - |                    - |                       - |  $    49,186                                                       | (1)                          |
| Martin                  Gannon       |          50,922                                      |           - |             - |                 - |                    - |                       - |        50,922                                            | (2)                          |
| George                  O'Leary      |          13,500                                      |      2,372                           |      18,853                                      |                 - |                    - |                 8,500                                 |        43,225                                            | (3)                  and (6) |
| Dave                  Warkentin      |                 - |           - |             - |                 - |                    - |                       - |                - |                         |
| Robert                  Rudman       |          62,525                                      |           - |  -                                                                   |  -                                                                                           |                    - |               70,000                                            |      132,525                                                       | (4)                          |
| Johnny                  Christiansen |          25,764                                      |           - |  -                                                                   |  -                                                                                           |                    - |  -                                                                                                                               |        25,764                                            | (5)                          |
|                                 |                                                                                              |                                                          |                                                                      |                                                                                              |                                                                                                                |                                                                                                                                  |                                                                                        |                         |
|                                 |  $    201,897                                                            |  $  2,372                                      |  $  18,853                                                 |  $             -            |  $                -            |  $           78,500                                                       |  $  301,622                                                                  |                         |

| (1)    | $28,900                  paid in fiscal 2007; $103,342 owed at July 31, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | $3,900                  paid in fiscal 2007; $74,633 owed at July 31, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (3)    | $Nil                  fees paid in cash for director fees; $8,500, net of $1,275 of withholding                  taxes paid in consulting                  fees; 600,000 common shares valued at $2,372 and 900,000                  warrants of                  which 700,000 are exercisable at $0.03 per share and 200,000 are                  exercisable at $0.06 per share were issued as consulting                  fees.                                                                                                                                                             |
| (4)    | $80,000                  paid in fiscal 2007 representing consulting fees earned of $10,000                  in                  fiscal 2006 and $70,000 in fiscal 2007.                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 3,679,604                  shares of common stock issued as settlement for $72,525 in directors                  fees                  representing                  $62,525 earned in fiscal 2007 and $10,000 in directors fees owed                  from                  fiscal 2006.                                                                                                                                                                                                                                                                                                            |
| (5)    | $4,500                  paid in fiscal 2007; 3,679,604                  shares of common stock issued as settlement for $40,208 in directors                  fees representing                  $25,764 earned in fiscal 2007 and $14,444 in directors fees owed                  from                  fiscal 2006.                                                                                                                                                                                                                                                                      |
| (6)    | Warrants                    are accounted for under the provisions of SFAS 123(R), which                    requires recognition                    of the fair value of equity-based compensation. The fair value                    of warrants                    was estimated using a Black-Scholes option valuation model. This                    methodology requires the use of subjective assumptions in implementing                    SFAS 123(R), including expected stock price volatility and the                    estimated life of each                    award. |

----

**Employment          Contracts and Termination of Employment and Change-in-Control          Arrangements**

**Outstanding          Equity Awards at Fiscal Year End**

| **Name**                                     | **Option                      Awards**                                                                        |                                                                                                            |                                                                                                                                     |                                           | **Stock                      Awards**       |                                                                                                    |                                                                                                    |
|----------------------------------------------|---------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------|---------------------------------------------|---------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                         | Number                      of Securities Underlying Unexercised Options (#)                      Exercisable | Number                      of Securities Underlying Unexercised Options (#)                      Unexercisable | Equity                      Incentive Plan Awards: Number of Securities Underlying Unexercised                      Unearned options (#) | Option                      Exercise Price ($) | Option                      Expiration Date | Number                      of Shares or Units of Stock that have not Vested (#)                        | Market                      Value of Shares or Units of Stock that have not Vested (#)                  | Equity                      Incentive Plan Awards: Number of Unearned Shares, Units or                      Other Rights                      that have not Vested (#) | Equity                      Incentive Plan Awards: Market or Payout Value of Unearned Shares,                      Units or                      Other Rights that have not Vested ($) |
| Dave                      Warkentin          | 2,000,000                                                                                                     |                                                                                                            |                                         -      | $0.035                                         | 8/10/2010                                   |                  - |                  - |                  - |                  - |
| Principal                                    | 550,000                                                                                                       | 250,000                                                                                                         |                                                                                                                                     | $0.035                                         | 12/29/2010                                  |                                                                                                    |                                                                                                    |   |   |
| Executive                      Officer       | 250,000                                                                                                       | 250,000                                                                                                         |                                                     | $0.035                                         | 5/29/2010                                   |                                                                                                    |                                                                                                    |   |   |
|                                         |                                                                                                          |                                                                                                            |                                                                                                                                     |                                           |                                        |                                                                                                    |                                                                                                    |   |   |
| Jeff                      Finkelstein        | 1,200                                                                                                         |                                                                                                            |                                        -            | $1.16                                          | 8/28/2007                                   |                  - |                  - |                  - |                  - |
| Chief                      Financial Officer | 1,200                                                                                                         |                                                                                                            |                                                                                                                                     | $1.39                                          | 8/28/2007                                   |                                                                                                    |                                                                                                    |   |   |
|                                         | 1,200                                                                                                         |                                                                                                            |                                                                                                                                     | $1.67                                          | 8/28/2007                                   |                                                                                                    |                                                                                                    |   |   |
|                                         | 600                                                                                                           |                                                                                                            |                                                                                                                                     | $2.00                                          | 8/28/2007                                   |                                                                                                    |                                                                                                    |   |   |
|                                         | 600                                                                                                           |                                                                                                            |                                                                                                                                     | $2.88                                          | 8/28/2007                                   |                                                                                                    |                                                                                                    |   |   |
|                                         | 600                                                                                                           |                                                                                                            |                                                                                                                                     | $1.00                                          | 10/23/2007                                  |                                                                                                    |                                                                                                    |   |   |
|                                         | 2,334                                                                                                         |                                                                                                            |                                                                                                                                     | $1.20                                          | 10/23/2007                                  |                                                                                                    |                                                                                                    |   |   |
|                                         | 23,333                                                                                                        |                                                                                                            |                                                                                                                                     | $1.44                                          | 10/23/2007                                  |                                                                                                    |                                                                                                    |   |   |
|                                         | 23,333                                                                                                        |                                                                                                            |                                                                                                                                     | $0.20                                          | 8/12/2008                                   |                                                                                                    |                                                                                                    |   |   |
|                                         | 329,600                                                                                                       |                                                                                                            |                                                                                                                                     | $0.03                                          | 12/19/2009                                  |                                                                                                    |                                                                                                    |   |   |
|                                         | 3,000,000                                                                                                     |                                                                                                            |                                                                                                                                     | $0.035                                         | 12/29/2010                                  |                                                                                                    |                                                                                                    |   |   |
|                                         | 600,000                                                                                                       |                                                                                                            |                                                                                                                                     |                                           |                                        |                                                                                                    |                                                                                                    |   |   |
|                                         |                                                                                                          | 600,000                                                                                                         |                                                     | $0.07                                          | 12/29/2010                                  |                                                                                                    |                                                                                                    |   |   |
|                                         |                                                                                                          |                                                                                                            |                                                                                                                                     |                                           |                                        |                                                                                                    |                                                                                                    |   |   |
| Shaw                      Lammers            | 3,334                                                                                                         |                                                                                                            |                                         -           | $1.16                                          | 8/28/2007                                   |                  - |                  - |                  - |                  - |
| Vice-President,                              | 3,333                                                                                                         |                                                                                                            |                                                                                                                                     | $1.39                                          | 8/28/2007                                   |                                                                                                    |                                                                                                    |   |   |
| Engineering                                  | 3,333                                                                                                         |                                                                                                            |                                                                                                                                     | $1.67                                          | 8/28/2007                                   |                                                                                                    |                                                                                                    |   |   |
|                                         | 1,700                                                                                                         |                                                                                                            |                                                                                                                                     | $2.00                                          | 8/28/2007                                   |                                                                                                    |                                                                                                    |   |   |
|                                         | 1,700                                                                                                         |                                                                                                            |                                                                                                                                     | $2.40                                          | 8/28/2007                                   |                                                                                                    |                                                                                                    |   |   |
|                                         | 1,700                                                                                                         |                                                                                                            |                                                                                                                                     | $2.88                                          | 8/28/2007                                   |                                                                                                    |                                                                                                    |   |   |
|                                         | 332,600                                                                                                       |                                                                                                            |                                                                                                                                     | $0.20                                          | 8/12/2008                                   |                                                                                                    |                                                                                                    |   |   |
|                                         | 3,000,000                                                                                                     |                                                                                                            |                                                                                                                                     | $0.03                                          | 12/19/2009                                  |                                                                                                    |                                                                                                    |   |   |
|                                         | 550,000                                                                                                       |                                                                                                            |                                                                                                                                     | $0.035                                         | 12/29/2010                                  |                                                                                                    |                                                                                                    |   |   |
|                                         |                                                                                                          | 550,000                                                                                                         |                                                     | $0.07                                          | 12/29/2010                                  |                                                                                                    |                                                                                                    |   |   |

----

**ITEM      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED      STOCKHOLDER MATTERS**

|                                                                                                 | **Amount                  and Nature of** | **Percentage**                   |
|------------------------------------------------------------------------------------------------------|-------------------------------------------|----------------------------------|
| **Name                  and Address of Beneficial Owner**                                            | **Beneficial                  Ownership** | **of                  Class(1)** |
|                                                                                                 |                                      |                             |
| William                  Cronin                                                                      | 2,899,746                  (2)            | *                                |
| 180                  Concord Drive                                                                   |                                      |                             |
| Madison,                  Connecticut, USA 06443                                                     |                                      |                             |
|                                                                                                 |                                      |                             |
| Martin                  Gannon                                                                       | 2,685,000                  (3)            | *                                |
| 1275                  Post Road                                                                      |                                      |                             |
| Fairfield,                  Connecticut, USA 06824                                                   |                                      |                             |
|                                                                                                 |                                      |                             |
| George                  O'Leary                                                                      | 2,200,000                  (4)            | *                                |
| SKS                  Consulting                                                                      |                                      |                             |
| 950                  Peninsula Corporate Circle Suite 2018                                           |                                      |                             |
| Boca                  Raton, FL 33487                                                                |                                      |                             |
|                                                                                                 |                                      |                             |
| Greg                  Tooke                                                                          | 1,415,400                  (5)            | *                                |
| 12644                  27A Street                                                                    |                                      |                             |
| Surrey,                  BC V4A 2N3                                                                  |                                      |                             |
|                                                                                                 |                                      |                             |
| Jeff                  Finkelstein                                                                    | 5,022,010                  (6)            | *                                |
| 3460                  Regent Street                                                                  |                                      |                             |
| Richmond,                  BC V7E 2N1                                                                |                                      |                             |
|                                                                                                 |                                      |                             |
| Shawn                  Lammers                                                                       | 4,910,479                  (7)            | *                                |
| 10540                  Suncrest Drive                                                                |                                      |                             |
| Delta,                  BC V4C 2N5                                                                   |                                      |                             |
|                                                                                                 |                                      |                             |
| David                  Warkentin                                                                     | 2,800,000                  (8)            | *                                |
| 20580                  Powell Ave.                                                                   |                                      |                             |
| Maple                  Ridge, B.C. V2X 3G1                                                           |                                      |                             |
|                                                                                                 |                                      |                             |
|                                                                                                 |                                      |                             |
| Directors                  and Executive Officers as a Group                                         | 21,932,635                  (9)           | 3.92%                            |
|                                                                                                 |                                      |                             |
| YA                  Global Investments LP (formerly Cornell Capital Partners,                  L.P.) | 27,911,745                  (10)          | 4.90%                            |
| 101                  Hudson St., Suite 3606                                                          |                                      |                             |
| Jersey                  City, NJ 07302                                                               |                                      |                             |

----

|                                                  | Amount                  and Nature of | Percentage                   |
|-------------------------------------------------------|---------------------------------------|------------------------------|
| Name                  and Address of Beneficial Owner | Beneficial                  Ownership | of                  Class(1) |
|                                                  |                                  |                         |
| Staraim                  Enterprises Limited          | 27,911,745                  (11)      | 4.90%                        |
| Athalassas,                  47                       |                                  |                         |
| 2nd                  Floor, Flat/Office 202           |                                  |                         |
| Strovolos,                  P.C. 2012                 |                                  |                         |
| Nicosia,                  Cyprus                      |                                  |                         |
|                                                  |                                  |                         |
| Xentennial                  Holdings Limited          | 27,911,745                  (12)      | 4.90%                        |
| Athalassas,                  47                       |                                  |                         |
| 2nd                  Floor, Flat/Office 202           |                                  |                         |
| Strovolos,                  P.C. 2012                 |                                  |                         |
| Nicosia,                  Cyprus                      |                                  |                         |
|                                                  |                                  |                         |
| Starome                  Investments Limited          | 27,911,745                  (13)      | 4.90%                        |
| Athalassas,                  47                       |                                  |                         |
| 2nd                  Floor, Flat/Office 202           |                                  |                         |
| Strovolos,                  P.C. 2012                 |                                  |                         |
| Nicosia,                  Cyprus                      |                                  |                         |
|                                                  |                                  |                         |
| TAIB                  Bank B.S.C.                     | 28,451,335                  (14)      | 4.99%                        |
| 450                  Park Avenue - Suite 1902         |                                  |                         |
| New                  York, NY 10022                   |                                  |                         |
|                                                  |                                  |                         |
| Certain                  Wealth, Ltd.                 | 28,451,335                  (15)      | 4.99%                        |
| 450                  Park Avenue - Suite 1902         |                                  |                         |
| New                  York, NY 10022                   |                                  |                         |

| (1)   | Based                on 541,715,706 shares of our common stock issued and outstanding                as of                October 17, 2007. Beneficial ownership is determined in accordance                with                the rules of the Securities and Exchange Commission and generally                includes                voting or investment power with respect to securities. Except as                otherwise                indicated, we believe that the beneficial owners of shares of our                common                Stock listed above, based on information furnished by such owners,                have                sole investment and voting power with respect to such shares, subject                to                community property laws where                applicable. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | Includes                options to acquire up to 2,812,500 shares of our Common stock, exercisable                within sixty days. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------|

| (3)   | Includes                options to acquire up to 2,675,100 shares of our Common stock, exercisable                within sixty days. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------|

| (4)   | Includes                warrants to acquire up to 1,200,000 shares of our Common stock,                exercisable within sixty days. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------|

| (5)   | Includes                options to acquire up to 1,362,400 shares of our Common stock, exercisable                within sixty days. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------|

----

| (6)   | Includes                options to acquire up to 4,005,000 shares of our Common stock, exercisable                within sixty days. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------|

| (7)   | Includes                options to acquire up to 3,897,700 shares of our common stock, exercisable                within 60 days. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------|

| (8)   | Includes                of options to acquire up to 2,800,000 shares of our common stock,                exercisable within 60 days. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------|

| (9)   | Includes                options and warrants to acquire up to 19,152,700 shares of our common                stock, exercisable within 60 days. |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------|

| (10)   | Includes                only 27,911,745 shares of our common stock beneficially owned by YA                Global Investments LP (formerly Cornell Capital Partners, L.P.) The                total                number of shares of our common stock owned by YA Global Investments                LP                (formerly Cornell Capital Partners, L.P.) includes: (i) 308,544,000                shares of our common stock that could be issued upon the conversion                of                $3,085,440 5% series A convertible preferred shares, (ii) 2,483,625,731                shares of our common stock that could be issued upon the conversion                of a                10% convertible debenture issued by our company in the original principal                amount of $8,000,000 and interest of $1,437,778 owed as at October                17,                2007, (iii) 559,976,608 shares of our common stock that could be                issued                upon the conversion of a 10% convertible debenture issued by our                company                with a principal balance remaining of $1,770,000 and interest of                $357,911                as at October 17, 2007, (iv) 50,714,286 shares of our common stock                that                could be issued upon the conversion of a 5% convertible debenture                issued                by our company in the original principal amount of $1,500,000, at                a                conversion price of $0.028 per share, (v) 914,234,386 shares of our                common                stock that could be issued upon the conversion of 10% convertible                debentures issued by our company totaling principal of $3,300,000                and                interest of $174,091 as at October 17, 2007 (vi)16,668,750 shares                of our                common stock that could be issued upon the exercise of 16,668,750                common                share purchase warrants issued to Xentenial Holdings Limited expiring                June                23, 2010 at an exercise price of $0.0298 per share and (vii) 4,162,500                shares of our common stock that could be issued upon the exercise                of                4,162,500 common share purchase warrants issued to Staraim Enterprises                Limited expiring June 23, 2010 at an exercise price of $0.0298 per                share.                The 5% and 10% convertible debentures and the share purchase warrants                all                contain a contractual restriction on beneficial share ownership that                limits YA Global Investments LP to beneficial ownership, at any one                time,                of 4.9% of our outstanding shares. YA Global Investments LP and its                affiliates, in the aggregate, cannot own more than 4.9% of our outstanding                shares of common stock except upon providing us with not less than                65 days                prior notice. Because Staraim Enterprises Limited and Xentenial Holdings                Limited are wholly owned by YA Global Investments LP, YA Global                Investments LP is deemed to beneficially own all shares of our common                stock held by them. Also, because Staraim Enterprises Limited and                Xentenial Holdings Limited are affiliates of YA Global Investments                LP,                Staraim Enterprises Limited, Xentenial Holdings Limited and YA Global                Investments LP cannot, collectively, beneficially own in excess of                4.9% of                our outstanding shares of common stock. Yorkville Advisors, the general                partner of YA Global Investments LP, may also be deemed to beneficially                own the securities of our company that are owned by YA Global Investments                LP. Mark A. Angelo, the founder and President of YA Global Investments                LP,                has sole voting and dispositive power over the securities of our                company                that are beneficially owned by each of YA Global Investments LP,                Xentenial                Holdings Limited and Staraim Enterprises                Limited.                           |
|------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| (11)   | Includes                only 27,911,745 shares of our common stock beneficially owned by                Staraim                Enterprises Limited.  The total number of shares of our common                stock beneficially owned by Staraim Enterprises Limited includes                (i)                559,976,608 shares of our common stock that could be issued upon                the                conversion of the 10% convertible debenture issued by our company                with a                principal balance remaining of $1,770,000 and interest of $357,911                as of                October 17, 2007, which matures June 23, 2008, and (ii) 4,162,500                shares                of our common stock that could be issued upon the exercise of 4,162,500                common share purchase warrants. The 10% convertible debenture and                the                share purchase warrants all contain a contractual restriction on                beneficial share ownership that limits Staraim Enterprises Limited                to                beneficial ownership, at any one time, of 4.9% of our outstanding                shares.  Staraim Enterprises Limited and its affiliates, in the                aggregate, cannot own more than 4.9% of our outstanding shares of                common                stock except upon providing us with not less than 65 days prior                notice.  These shares of our common stock are held by either                Staraim Enterprises Limited, a Cyprus company, or its wholly-owned                subsidiary, Staraim Enterprises Limited, a New Brunswick                corporation.  Cornell Capital Partners L.P. owns all of the                issued and outstanding securities of Staraim Enterprises Limited,                and has                voting and dispositive authority over all of the shares of common                stock of                our company that are owned by Staraim Enterprises Limited. Mark A.                Angelo,                the founder and President of YA Global Investments LP, is deemed                to                control YA Global Investments LP and therefore is deemed to be the                beneficial owner of the securities of our company that are held by                Staraim                Enterprises Limited.  Mark Angelo disclaims beneficial ownership                of these shares.  YA Global Investments LP and its                affiliates, in the aggregate, cannot own more than 4.9% of our outstanding                shares of common stock. As Staraim Enterprises Limited and Xentenial                Holdings Limited are affiliates of YA Global Investments LP, Staraim                Enterprises Limited, Xentenial Holdings Limited and YA Global Investments                LP. cannot, collectively, own in excess of 4.9% of our outstanding                shares                of common stock. |
|------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (12)   | Includes                only 27,911,745 shares of our common stock beneficially owned by                Xentenial                Holdings Limited.  The total number of shares of our common                stock beneficially owned by Xentenial Holdings Limited includes:                (i)                2,483,625,731 shares of our common stock that could be issued upon                conversion of the 10% convertible debenture issued by our company                in the                original principal amount of $8,000,000 and interest of $1,437,778                as of                October 17, 2007 and (ii) 16,668,750 shares of our common stock that                could                be issued upon exercise of 16,668,750 share purchase warrants issued                by                our company to Xentenial Holdings Limited.  The 10% convertible                debenture and the stock purchase warrants contain contractual restrictions                on beneficial share ownership limiting Xentenial Holdings Limited's                beneficial ownership to 4.9% of our outstanding shares of common                stock                except upon providing us with not less than 65 days prior notice.                The                shares shown and the shares proposed to be sold are held directly                by                either Xentenial Holdings Limited, a Cyprus company, and/or its                wholly-owned subsidiary, Xentenial Holdings Limited, a New Brunswick                corporation.  All of the issued and outstanding securities of                Xentenial Holdings Limited are owned by YA Global Investments LP,                and YA                Global Investments LP is therefore deemed to have voting and                dispositive authority over the shares of our company owned by Xentenial                Holdings Limited.  Mark A. Angelo, the founder and President of                YA Global Investments LP, is deemed to control YA Global Investments                LP                and therefore is deemed to be the beneficial owner of the securities                of                our company that are held by Xentenial Holdings Limited.  Mark                Angelo disclaims beneficial ownership of these shares.  YA                Global Investments LP and its affiliates, in the aggregate, cannot                own                more than 4.9% of our outstanding shares of common stock.  As                Staraim Enterprises Limited and Xentenial Holdings Limited are affiliates                of YA Global Investments LP, Staraim Enterprises Limited, Xentenial                Holdings Limited and YA Global Investments LP cannot, collectively,                own in                excess of 4.9% of our outstanding shares of common                stock. |
|------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| (13)   | Includes                only 27,911,745 shares of our common stock beneficially owned by                Starome                Investments Limited. The total number of shares of our common stock                beneficially owned by Starome Investments Limited includes: (i)                6,154,133,521 shares of our common stock that could be issued upon                the                conversion of the 10% convertible debenture issued by our company                in the                original principal amount of $20,000,000 and balance remaining of                $19,854,558 and interest of $3,531,149 as of October 17, 2007, maturing                on                June 23, 2008, and (ii) 41,668,750 shares of our common stock that                could                be issued upon the exercise of 41,668,750 common share purchase warrants.                The 10% convertible debenture and the common share purchase warrants                contain contractual restrictions on beneficial share ownership limiting                Starome Investments Limited's beneficial ownership to 4.9% unless                Starome                Investments Limited waives such limitation by providing us with 65                day                notice.  The 10% convertible debenture and the share purchase                warrants are held directly by either Starome Investments Limited,                a Cyprus                company, and/or its wholly-owned subsidiary, Starome Investments                Limited,                a New Brunswick corporation.  Prentice Capital Management, L.P.                serves as investment manager to a number of investment funds (including                Prentice Capital Partners, LP, Prentice Capital Partners GP, LP and                Prentice Capital Offshore, Ltd.) and manages investments for certain                entities in managed accounts with respect to which it has voting                and                dispositive authority over 100% of the shares of Starome Investments                Limited. Michael Zimmerman is the Managing Member of (a) Prentice                Management GP, LLC, the general partner of Prentice Capital Management                and                (b) Prentice Capital GP, LLC, the general partner of certain investment                funds.  As such, he is deemed to control Prentice Capital                Management and certain of the investment funds and therefore may                be deemed                to be the beneficial owner of the securities of our company that                are held                by Starome Investments Limited. Each of Michael Zimmerman and Prentice                Capital Management disclaims beneficial ownership of these securities                of                our company. |
|------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (14)   | Includes                only 28,451,335 shares of our common stock beneficially owned by TAIB                Bank B.S.C. The total number of shares of our common stock beneficially                owned by TAIB Bank B.S.C. includes 208,419,720 shares of our common                stock                that could be issued upon the conversion of the remaining balance                of                $706,452 of the 10% convertible debenture issued by our Company and                interest of $85,543 owed at October 17, 2007 maturing on October                31, 2008.                This debenture contains contractual restrictions on beneficial share                ownership limiting TAIB Bank B.S.C.’s beneficial ownership to 4.99% unless                TAIB Bank B.S.C. waives such limitation. TAIB Bank, B.S.C. has authorized                Larry Chaleff to exercise dispositive powers with respect to the                shares                offered by TAIB Bank, B.S.C. Mr. Chaleff disclaims beneficial ownership                of                the shares offered by TAIB Bank,                B.S.C. |
|------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (15)   | Includes                only 28,451,335 shares of our common stock beneficially owned by                Certain Wealth, Ltd. The total number of shares of our common stock                beneficially owned by Certain Wealth, Ltd. includes 39,256,081 shares                of                our common stock that could be issued upon the conversion of the                remaining                balance of $131,568 of the 10% convertible debenture issued by our                Company                and interest of $17,605 owed at October 17, 2007 maturing on October                31,                2008. This debenture contains contractual restrictions on beneficial                share                ownership limiting Certain Wealth, Ltd.’s beneficial ownership to 4.99%                unless Certain Wealth, Ltd. waives such limitation. Certain Wealth,                Ltd.                has authorized Larry Chaleff to exercise dispositive powers with                respect                to the shares offered by Certain Wealth ,Ltd. Mr. Chaleff disclaims                beneficial ownership of the shares offered by Certain Wealth                ,Ltd. |
|------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**EQUITY      COMPENSATION PLAN INFORMATION**

|                                       |                                        |                                       | Number                  of Securities       |
|--------------------------------------------|---------------------------------------------|--------------------------------------------|---------------------------------------------|
|                                       | Number                  of Securities to be |                                       | be                  Remaining Available for |
|                                       | Issued                  Upon Exercise of    | Weighted-Average                  Exercise | Future                  Issuance Under      |
|                                       | Outstanding                  Options,       | Price                  of Outstanding      | Equity                  Compensation Plans  |
|                                       | Warrants                  and Rights        | Options,                  Warrants and     | (Excluding                  Securities      |
|                                       |                                        | Rights                                     | Reflected                  in Column (a))   |
|                                       |                                        |                                       |                                        |
| Plan                  Category             | (a)                                         | (b)                                        | (c)                                         |
| Equity                  compensation plans | 6,923,000                                   | $0.085                                     | 14,793,796                                  |
| approved                  by               |                                        |                                       |                                        |
| securityholders                            |                                        |                                       |                                        |
|                                       |                                        |                                       |                                        |
| Equity                  compensation plans | 107,678,143                                 | $0.043                                     | 11,526,025                                  |
| not                  approved by           |                                        |                                       |                                        |
| securityholders                            |                                        |                                       |                                        |
|                                       |                                        |                                       |                                        |
| Total                                      | 114,601,143                                 | $0.046                                     | 26,319,821                                  |

**ITEM      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

----

**PART      IV**

**ITEM      13. EXHIBITS**

| EXHIBIT |   |                                                                                                                                                     |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| NUMBER  |   | DESCRIPTION                                                                                                                                              |
|    |   |                                                                                                                                                     |
| 3.1     |   | Certificate                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                May 15, 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 SmarTire Systems Inc. dated                November                17, 1995 (1)              |
|    |   |                                                                                                                                                     |
| 3.9     |   | Special                Resolution and Altered Memorandum of UniComm Signal Inc. dated January                17,                1997 (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 (4)               |

----

| 3.12   |   | Substituted                  Articles of SmarTire Systems Inc. adopted December 5, 2000                  (4)                                                                                                                                                                                                                                                                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 3.13   |   | Articles                  of Continuance, dated January 29, 2003 and effective February 6,                  2003                  (7)                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 3.14   |   | Certificate                  of Amendment issued to SmarTire Systems Inc. by the Yukon Registrar                  of                  Corporations effective December 15, 2003 and attached Articles                  of                  Amendements of SmarTire Systems Inc. dated December 11, 2003                  (4)                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 3.15   |   | Certificate                  of Registration of Restated Articles issued to SmarTire Systems                  Inc. by                  the Yukon Registrar of Corporations effective December 15, 2003,                  and                  attached Restated Articles of Incorporation of SmarTire Systems                  Inc. dated                  December 11, 2003 (19) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 3.16   |   | By-Law                  No. 1, dated February 6, 2003 (7)                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 3.17   |   | Articles                  of Continuation to British Columbia (24)                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 3.18   |   | Articles                  of SmarTire Systems Inc. (24)                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1   |   | Forbearance                  and Escrow Agreement dated as of September 24, 2004.                  (5)                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2   |   | Promissory                  note dated as of November 16, 2004 with Cornell Capital Partners,                  L.P.                  (6)                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3   |   | Promissory                  note dated as of November 16, 2004 with Cornell Capital Partners,                  L.P.                  (6)                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4   |   | Form                  of Subscription Agreement and Prospective Purchaser Questionnaire                  of                  SmarTire Systems Inc. (7)                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.7   |   | Form                  of 5% Convertible Debenture SmarTire Systems Inc. (7)                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.8   |   | Form                  of Redemption Warrant of SmarTire Systems Inc. (7)                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.9   |   | Securities                  Purchase Agreement dated December 15, 2004 by and between SmarTire                  Systems                  Inc. and Cornell Capital Partners, L.P. (7)                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.10  |   | Registration                  Rights Agreement dated December 15, 2004 by and between SmarTire                  Systems                  Inc. and Cornell Capital Partners, L.P. (7)                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.11  |   | Securities                  Purchase Agreement dated December 15, 2004 by and between SmarTire                  Systems                  Inc. and Cornell Capital Partners, L.P. (7)                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.12  |   | Registration                  Rights Agreement dated December 15, 2004 by and between SmarTire                  Systems                  Inc. and Cornell Capital Partners, L.P. (7)                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.13  |   | Form                  of Common Stock Purchase Warrant of SmarTire Systems Inc.                  (7)                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.14  |   | 2004                  Non-US US Stock Incentive Plan of SmarTire Systems Inc.                  (7)                                                                                                                                                                                                                                                                                |

----

| 10.15  |   | Amendment                  Agreement dated February 3, 2005 by and between SmarTire Systems                  Inc. and                  Robert Rudman (8)                                                                |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                    |
| 10.16  |   | Amendment                  Agreement dated February 3, 2005 by and between SmarTire Systems                  Inc. and                  Allan Kozak (8)                                                                  |
|   |   |                                                                                                                                                                                                                    |
| 10.17  |   | Amendment                  Agreement dated February 3, 2005 by and between SmarTire Systems                  Inc. and                  Jeff Finkelstein (8)                                                             |
|   |   |                                                                                                                                                                                                                    |
| 10.18  |   | Amendment                  Agreement dated February 3, 2005 by and between SmarTire Systems                  Inc. and                  Erwin Bartz (8)                                                                  |
|   |   |                                                                                                                                                                                                                    |
| 10.19  |   | Amendment                  Agreement dated February 3, 2005 by and between SmarTire Systems                  Inc. and                  Shawn Lammers (8)                                                                |
|   |   |                                                                                                                                                                                                                    |
| 10.20  |   | Amendment                  Agreement dated February 3, 2005 by and between SmarTire Systems                  Inc. and                  William Cronin (8)                                                               |
|   |   |                                                                                                                                                                                                                    |
| 10.21  |   | Amendment                  Agreement dated February 3, 2005 by and between SmarTire Systems                  Inc. and                  Martin Gannon (8)                                                                |
|   |   |                                                                                                                                                                                                                    |
| 10.22  |   | Amendment                  Agreement dated February 3, 2005 by and between SmarTire Systems                  Inc. and                  Johnny Christiansen (8)                                                          |
|   |   |                                                                                                                                                                                                                    |
| 10.23  |   | Registration                  Rights Agreement dated as of March 22, 2005 by and between SmarTire                  Systems, Inc. and                                                                                    |
|   |   | Cornell                  Capital Partners, L.P. (9)                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                    |
| 10.24  |   | Investment                  Agreement dated as of March 22, 2005 by and between SmarTire Systems                  Inc.                  and Cornell Capital Partners, L.P. (9)(10)                                      |
|   |   |                                                                                                                                                                                                                    |
| 10.25  |   | Termination                  Agreement dated as of March 22, 2005 by and between SmarTire Systems                  Inc.                  and Cornell Capital Partners, L.P. (9)                                         |
|   |   |                                                                                                                                                                                                                    |
| 10.26  |   | Redemption,                  settlement and release agreement dated April 27, 2005 by and between                  SmarTire Systems Inc. and Palisades Master Fund, L.P. and PEF Advisors,                  Ltd.(11)    |
|   |   |                                                                                                                                                                                                                    |
| 10.27  |   | Redemption,                  settlement and release agreement dated May 2, 2005 by and between                  SmarTire                  Systems Inc. and Gamma Opportunity Partners. (11)                             |
|   |   |                                                                                                                                                                                                                    |
| 10.28  |   | Redemption,                  settlement and release agreement dated May 4, 2005 by and between                  SmarTire                  Systems Inc. and Alpha Capital Aktiengesellschaftt,                  L.P.(11) |
|   |   |                                                                                                                                                                                                                    |
| 10.29  |   | Redemption,                  settlement and release agreement dated May 13, 2005 by and between                  SmarTire Systems Inc. and Crescent International                  Ltd.(11)                             |
|   |   |                                                                                                                                                                                                                    |
| 10.30  |   | Redemption,                  settlement and release agreement dated May 23, 2005 by and between                  SmarTire Systems Inc. and Goldplate Investment                  Partners.(11)                          |
|   |   |                                                                                                                                                                                                                    |
| 10.31  |   | Registration                  Rights Agreement dated as of May 22, 2005 by and between SmarTire                  Systems                  Inc. and Cornell Capital Partners, L.P.                  (11)                 |

----

| 10.32  |   | Standby                  Equity Distribution Agreement dated as of May 22, 2005 by and between                  SmarTire Systems Inc. and Cornell Capital Partners, L.P.                  (11)                                                                                                                                                                                                        |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.33  |   | Investor                  Registration Rights Agreement dated as of May 22, 2005 by and between                  SmarTire Systems Inc. and Cornell Capital Partners, L.P.                  (11)                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.34  |   | Amended                  and Restated Convertible Debenture dated as of June 10, 2005 by                  and                  between SmarTire Systems Inc. and Cornell Capital Partners, L.P.                  (11)                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.35  |   | Securities                  Purchase Agreement dated as of May 22, 2005 by and between SmarTire                  Systems Inc. and Cornell Capital Partners, LP (11)                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.36  |   | Waiver                  Letter from Cornell Capital Partners to SmarTire Systems Inc. dated                  October 7, 2005 (15)                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.37  |   | Waiver                  Letter from Crescent International Ltd. to SmarTire Systems Inc.                  dated                  October 20, 2005 (15)                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.38  |   | Waiver                  Letter from Cornell Capital Partners to SmarTire Systems Inc. dated                  October 31, 2005 (15)                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.39  |   | Marketing                  and distribution agreement with DANA Corporation dated as of October                  12,                  2005 (13)                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.40  |   | Investor                  Relations Agreement between AGORA Investor Relations Corp and SmarTire                  Systems Inc. dated as of November 1, 2005 (14)                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.41  |   | Agreement                  for Electronic Manufacturing Services, dated November 16, 2005                  by and                   between Vansco Electronics L.P. and SmarTire Systems                  Inc.(13)                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.42  |   | Amendment                  No. 1 to Securities Purchase Agreement, dated as of December 30,                  2005,                  among SmarTire Systems Inc., Cornell Capital Partners, L.P., Highgate                  House Funds, Ltd., LCC Global Limited, Starome Investments Limited,                  Xentenial Holdings Limited and Staraim Investments Limited                  (14) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.43  |   | Amended                  and Restated Investor Registration Rights Agreement, dated as of                  December                  30, 2005 among SmarTire Systems, Starome Investment Limited,                  Xentenial Holdings Limited and Staraim Investments Limited                  (14)                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.44  |   | Amended                  and Restated Convertible Debenture, dated as of December 30, 2005,                  with a                  principal balance of $20 million, issued by SmarTire Systems Inc.                  to                  Starome Investments Limited (14)                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.45  |   | Amended                  and Restated Convertible Debenture, dated as of December 30, 2005,                  with a                  principal balance of $8 million, issued by SmarTire Systems Inc.                  to                  Xentenial Holdings Limited (14)                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.46  |   | Amended                  and Restated Convertible Debenture, dated as of December 30, 2005,                  with a                  principal balance of $2 million, issued by SmarTire Systems Inc.                  to                  Staraim Investments Limited (14)                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.47  |   | Amended                  and Restated Warrant to purchase 41,668,750 shares of common stock,                  dated                  as of December 30, 2005 issued by SmarTire Systems Inc. to Starome                  Investments Limited (14)                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.48  |   | Amended                  and Restated Warrant to purchase 16,668,750 shares of common stock,                  dated                  as of December 30, 2005 issued by SmarTire Systems Inc. to                  Xentenial Holdings Limited                  (14)                                                                                                                                |

----

| 10.49  |   | Amended                  and Restated Warrant to purchase 4,162,500 shares of common stock,                  dated                  as of December 30, 2005 issued by SmarTire Systems Inc. to Staraim                  Investments Limited (14)                                                      |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.50  |   | Standby                  Equity Distribution Agreement of December 30, 2005 between SmarTire                  Systems Inc. and Cornell Capital Partners, L.P. (14)                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.51  |   | Termination                  Agreement $160 million Standby Equity Distribution Agreement of                  December                  30, 2005 between SmarTire Systems Inc. and Cornell Capital Partners,                  L.P.                  (14)                                              |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.52  |   | Registration                  Rights Agreement of December 30, 2005 between SmarTire Systems                  Inc. and                  Cornell Capital Partners, L.P. (14)                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.53  |   | Agreement                  for Electronic Manufacturing Services dated November 16, 2005 between                  SmarTire Systems and Vansco Electronics L.P. (15)                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.54  |   | Placement                  Agent Agreement dated December 30, 2005 amongst SmarTire Systems                  Inc.,                  Newbridge Securities Corporation, SmarTire Systems Inc., Newbridge                  Securities Corporation and Cornell Capital Partners, LP                  (15) |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.55  |   | Amended                  and Restated Convertible Debenture, with a principal balance of                  $2                  million, issued by SmarTire Systems Inc. to Staraim Investments                  Limited                  dated April 4, 2006 (16)                                      |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.56  |   | Amended                  and Restated Convertible Debenture, with a principal balance of                  $8                  million, issued by SmarTire Systems Inc. to Xentenial Holdings                  Limited dated April 4, 2006 (16)                                                   |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.57  |   | Extension                  letter regarding Amended and Restated Convertible Debenture dated                  as of                  June 10, 2005 by and between SmarTire Systems Inc. and Cornell                  Capital                  Partners, L.P. (16)                                     |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.58  |   | Settlement                  Agreement and Mutual Release dated January 5, 2006 between SmarTire                  Systems Inc. and Bristol Investment Fund Ltd. (14)                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.59  |   | Waiver                  Letter from Starome Investments Limited to SmarTire Systems Inc.                  dated                  April 6, 2006 (16)                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.60  |   | Waiver                  Letter from Xentenial Holdings Limited to SmarTire Systems Inc. dated                  April 6, 2006 (16)                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.61  |   | Waiver                  Letter from Staraim Investments Limited to SmarTire Systems Inc.                  dated                  April 6, 2006 (16)                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.62  |   | Waiver                  Letter from Starome Investments Limited to SmarTire Systems Inc.                  dated                  April 6, 2006 (16)                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.63  |   | Waiver                  Letter from Xentenial Holdings Limited to SmarTire Systems Inc.                  dated                  April 6, 2006 (16)                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.64  |   | Waiver                  Letter from Staraim Investments Limited to SmarTire Systems Inc.                  dated                  April 6, 2006 (16)                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.65  |   | Extension                  letter regarding Amended and Restated Convertible Debenture dated                  as of                  July 31, 2005 by and between SmarTire Systems Inc. and Cornell                  Capital                  Partners, LP (17)                                       |

----

| 10.66  |   | Waiver                Letter from Cornell Capital Partners, Starome Investments Limited,                Xentenial Holdings Limited and Staraim Investments Limited to SmarTire                Systems Inc. dated July 31, 2006 (17)                                                                                                |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.67  |   | Consulting                Agreement by and between Robert Rudman and SmarTire Systems dated                June 30,                2005 (17)                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.68  |   | Renewal                and Amendment Agreement by and between Robert Rudman and SmarTire                Systems                dated August 9, 2006 (17)                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.69  |   | Management                Agreement by and between SmarTire Systems and David Warkentin dated                October 20, 2006 (18)                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.70  |   | Securities                Purchase Agreement dated as of October 31, 2006 by and between SmarTire                Systems Inc., TAIB Bank, B.S.C. and Certain Wealth, Ltd.                (20)                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.71  |   | Investor                Registration Rights Agreement dated as of October 31, 2006 by and                between                SmarTire Systems Inc., TAIB Bank, B.S.C. and Certain Wealth, Ltd.                (20)                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.72  |   | Convertible                debenture dated as of October 31, 2006 by and between SmarTire Systems                Inc. and TAIB Bank, B.S.C. (20)                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.73  |   | Convertible                debenture dated as of October 31, 2006 by and between SmarTire Systems                Inc. and Certain Wealth, Ltd. (20)                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.74  |   | Waiver                Letter (Event of default) from Cornell Capital, Starome Investments                Limited, Xentenial Holdings Limited and Staraim Investments Limited                to SmarTire Systems Inc. dated December 15, 2006 (21)                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.75  |   | Waiver                Letter (Anti-dilution) from Cornell Capital, Starome Investments                Limited, Xentenial Holdings Limited and Staraim Investments Limited                to SmarTire Systems Inc. dated December 15, 2006 (21)                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.76  |   | Securities                Purchase Agreement dated January 23, 2007 by and between SmarTire                Systems                Inc. and Xentenial Holdings Limited (22)                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.77  |   | Investor                Registration Rights Agreement dated January 23, 2007 by and between                SmarTire Systems Inc. and Xentenial Holdings Limited                (22)                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.78  |   | Security                Agreement dated as of January 23, 2007 by and between SmarTire Systems                Inc. and Xentenial Holdings Limited (22)                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.79  |   | Convertible                debenture dated as of January 23, 2007 issued by SmarTire Systems Inc. to                Xentenial Holdings Ltd. (22)                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.80  |   | Consent                letter from Cornell Capital Partners, L.P., Starome Investments Limited,                Xentenial Holdings Limited, Staraim Investments Limited, TAIB Bank,                B.S.C.                and Certain Wealth Ltd. to SmarTire Systems Inc. dated January 19,                2007                (26) |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.81  |   | Consulting                Agreement between SKS Consulting of South Florida Corp. and us                (23)                                                                                                                                                                                                                       |

----

| 10.82              |   | Amendment                  to Securities Purchase Agreement dated February 9, 2007 by and                  between                  SmarTire Systems Inc. and Xentenial Holdings Limited                  (25)                                                                                                              |
|--------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                                                        |
| 10.83              |   | Convertible                  debenture dated as of January 9, 2007 issued by SmarTire Systems                  Inc. to                  Xentenial Holdings Limited (25)                                                                                                                                                     |
|               |   |                                                                                                                                                                                                                                                                                                                        |
| 10.84              |   | Waiver                  Letter (Event of default) from TAIB Bank, B.S.C. and Certain Wealth                  Ltd.                  to SmarTire Systems Inc. dated February 13, 2007 (26)                                                                                                                                    |
|               |   |                                                                                                                                                                                                                                                                                                                        |
| 10.85              |   | Waiver                  Letter (Event of default) from Cornell Capital Partners, L.P.,                  dated                  February 15, 2007 (26)                                                                                                                                                                       |
|               |   |                                                                                                                                                                                                                                                                                                                        |
| 10.86              |   | Extension                  Letter from Cornell Capital Partners, L.P., dated March 31 , 2007                  (27)                                                                                                                                                                                                          |
|               |   |                                                                                                                                                                                                                                                                                                                        |
| 10.87              |   | Waiver                  Letter (Event of default) from Cornell Capital Partners, L.P.,                  Staraim                  Investments Limited, Xentenial Holdings Limited and Starome                  Investments Limited dated March 31, 2007 (27)                                                            |
|               |   |                                                                                                                                                                                                                                                                                                                        |
| 10.88              |   | Waiver                  Letter (Event of default) from Cornell Capital Partners, L.P.,                  dated March                  31, 2007 (27)                                                                                                                                                                          |
|               |   |                                                                                                                                                                                                                                                                                                                        |
| 10.89              |   | Waiver                  Letter (Event of default) from TAIB Bank, B.S.C. and Certain Wealth                  Ltd.                  Dated March 31, 2007 (27)                                                                                                                                                                |
|               |   |                                                                                                                                                                                                                                                                                                                        |
| 10.90              |   | Amendment                  No. 1 to Investor Registration Rights Agreement dated April 27,                  2007 by                  and between SmarTire Systems Inc., and Xentenial Holdings Limited                  (28)                                                                                                |
|               |   |                                                                                                                                                                                                                                                                                                                        |
| 10.91              |   | Amendment                  No. 1 to Security Agreement dated April 27, 2007 by and between                  SmarTire                  Systems Inc. Cornell Capital Partners, L.P., Staraim Investments                  Limited, Xentenial Holdings Limited and Starome Investments Limited                  (28) |
|               |   |                                                                                                                                                                                                                                                                                                                        |
| 10.92              |   | Convertible                  debenture dated as of April 27, 2007 issued by SmarTire Systems                  Inc. to                  Xentenial Holding Limited (28)                                                                                                                                                       |
|     |   |                                                                                                                                                                                                                                                                                                                        |
| 10.93              |   | Security                  Agreement (Patent) dated April 27, 2007 by and between SmarTire                  Systems                  Inc. Cornell Capital Partners, L.P., Staraim Investments Limited,                  Xentenial Holdings Limited and Starome Investments Limited                  (28)           |
|               |   |                                                                                                                                                                                                                                                                                                                        |
| 10.94              |   | Securities                  Purchase Agreement dated April 27, 2007 by and between SmarTire                  Systems                  Inc. and Xentenial Holdings Limited (28)                                                                                                                                              |
|               |   |                                                                                                                                                                                                                                                                                                                        |
| 10.95              |   | Lease                  between Alpha Equities LTD and SmarTire Systems Inc. dated April                  30, 2007                  (28)                                                                                                                                                                                     |
|               |   |                                                                                                                                                                                                                                                                                                                        |
| 10.96              |   | Resignation                  agreement and termination of consulting contract between Robert                  Rudman and                  SmarTire Systems Inc. dated May 7, 2007 (28)                                                                                                                                      |
|               |   |                                                                                                                                                                                                                                                                                                                        |
| 10.97              |   | Resignation                  agreement between Johnny Christiansen and SmarTire Systems Inc.                  dated May                  7, 2007 (28)                                                                                                                                                                       |
|               |   |                                                                                                                                                                                                                                                                                                                        |
| 10.98              |   | Settlement                  Letter issued by SmarTire Systems Inc. to Erwin Bartz dated February                  8,                  2007 (28)                                                                                                                                                                        |
|               |   |                                                                                                                                                                                                                                                                                                                        |
| 10.99              |   | Release                  by Erwin Bartz to SmarTire Systems Inc. dated February 7, 2008                  (28)                                                                                                                                                                                                               |

----

| 10.100          |   | Settlement                  letter issued by SmarTire Systems Inc. to Al Kozak dated February                  28, 2007                  (28)                                                                                                                                                                                                                                                         |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.101          |   | Release                  by Al Kozak to SmarTire Systems Inc. dated February 28, 2008                  (28)                                                                                                                                                                                                                                                                                 |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.102          |   | Extension                  Letter from Cornell Capital Partners, L.P., dated May 24 , 2007                  (28)                                                                                                                                                                                                                                                                            |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.103          |   | Waiver                  Letter (Event of default) from Cornell Capital Partners, L.P.,                  Staraim                  Investments Limited, Xentenial Holdings Limited and Starome                  Investments Limited dated May 24, 2007 (28)                                                                                                                                        |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.104          |   | Waiver                  Letter (Event of default) from Cornell Capital Partners, L.P.,                  dated May                  24, 2007 (28)                                                                                                                                                                                                                                                      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.105          |   | Waiver                  Letter (Event of default) from TAIB Bank, B.S.C. and Certain Wealth                  Ltd.                  dated May 25, 2007 (28)                                                                                                                                                                                                                                            |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.106          |   | Consent                  letter from Cornell Capital Partners, L.P., Starome Investments                  Limited,                  Xentenial Holdings Limited, Staraim Investments Limited, TAIB Bank,                  B.S.C.                  and Certain Wealth Ltd. to SmarTire Systems Inc. dated May 10,                  2007                  (28)                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.107     |   | Agreement                  between GE Sensing Inc. and SmarTire                  Systems Inc. dated August 3, 2007.  Portions                  of this document have been omitted and filed separately with the                  Securities and Exchange Commission pursuant to a Request for Confidential                  Treatment filed under 17                  C.F.R.ss.ss.200.80(b)4)*** |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.108          |   | Convertible                  debenture dated as of August 20, 2007                  issued by SmarTire Systems Inc. to Xentenial Holding Limited                  **                                                                                                                                                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.109          |   | Waiver                letter between us and YA Global                Investments, L.P. dated November 7, 2007**                                                                                                                                                                                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.110          |   | Waiver                letter from Starome Investements Limited                dated November 7, 2007**                                                                                                                                                                                                                                                                                                |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 14.1            |   | Code                  of Business Conduct and Ethics Compliance Program (17)                                                                                                                                                                                                                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 21.1            |   | Subsidiaries                  if Small Business                  Entity**                                                                                                                                                                                                                                                                                                                             |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 23.1            |   | Consent                  of BDO Dunwoody LLP**                                                                                                                                                                                                                                                                                                                                                        |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.1            |   | Certification                  pursuant to Section 302 of the                  Sarbanes Oxley-Act of 2002**                                                                                                                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.2            |   | Certification                  pursuant to Section 302 of the                  Sarbanes Oxley-Act of 2002**                                                                                                                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 32.1            |   | Certification                  pursuant to 18 U.S.C. section 1350 as                  adopted pursuant to section 906 of the Sarbanes Oxley-Act of                  2002**                                                                                                                                                                                                                            |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 32.2            |   | Certification                  pursuant to 18 U.S.C. section 1350 as                  adopted pursuant to section 906 of the Sarbanes Oxley-Act of                  2002**                                                                                                                                                                                                                            |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| (1)   |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form 10-KSB filed with                  the                  Securities and Exchange Commission on August 18, 1998                                                                                                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| (2)   |   | Incorporated                  by reference to SmarTire Systems Inc.'s definitive Proxy Statement                  and                  Information Circular on Schedule 14A filed                                                                                                                                                                                                                     |
|            |   | with                  the Securities and Exchange Commission on October 31,                  2000.                                                                                                                                                                                                                                                                                                    |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| (3)             |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form SB-2 filed with the                  Securities and Exchange Commission on January 23, 2003.                                                                                                                                                                                                                               |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| (4)             |   | Incorporated                  by reference to SmarTire Systems Inc.'s 8-K filed with the Securities                  Exchange Commission on December 23,                  2003.                                                                                                                                                                                                                       |

----

| (5)    |   | Incorporated                  by reference to SmarTire Systems Inc.'s 8-K filed with the Securities                  Exchange Commission on October 1, 2004.                                                 |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                         |
| (6)    |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form 10-QSB filed with                  the                  Securities and Exchange Commission on December 14,                  2004. |
|   |   |                                                                                                                                                                                                         |
| (7)    |   | Incorporated                  by reference to SmarTire Systems Inc.'s 8-K filed with the Securities                  Exchange Commission on December 21, 2004.                                               |
|   |   |                                                                                                                                                                                                         |
| (8)    |   | Incorporated                  by reference to SmarTire Systems Inc.'s 8-K filed with the Securities                  Exchange Commission on February 9, 2005.                                                |
|   |   |                                                                                                                                                                                                         |
| (9)    |   | Incorporated                  by reference to SmarTire Systems Inc.'s 8-K filed with the Securities                  Exchange Commission on March 29, 2005.                                                  |
|   |   |                                                                                                                                                                                                         |
| (10)   |   | Incorporated                  by reference to SmarTire Systems Inc.'s 8-K filed with the Securities                  Exchange Commission on April 1, 2005, as amended.                                       |
|   |   |                                                                                                                                                                                                         |
| (11)   |   | Incorporated                  by reference to SmarTire Systems Inc.'s 8-K filed with the Securities                  and                  Exchange Commission on December 21, 2004.                          |
|   |   |                                                                                                                                                                                                         |
| (12)   |   | Incorporated                  by reference to SmarTire Systems Inc.'s 8-K filed with the Securities                  Exchange Commission on June 30, 2005.                                                   |
|   |   |                                                                                                                                                                                                         |
| (13)   |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form 10-QSB filed with                  the                  Securities Exchange Commission on December 15, 2005.                      |
|   |   |                                                                                                                                                                                                         |
| (14)   |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form SB-2 filed with the                  Securities Exchange Commission on January 11, 2006.                                          |
|   |   |                                                                                                                                                                                                         |
| (15)   |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form SB-2/A filed with                  the                  Securities Exchange Commission on February 27, 2006.                      |
|   |   |                                                                                                                                                                                                         |
| (16)   |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form SB-2/A filed with                  the                  Securities Exchange Commission on April 12, 2006.                         |
|   |   |                                                                                                                                                                                                         |
| (17)   |   | Incorporated                  by reference to SmarTire System Inc.’s Form 10-KSB filed with the                  Securities Exchange Commission on October 30, 2006.                                   |
|   |   |                                                                                                                                                                                                         |
| (18)   |   | Incorporated                  by reference to SmarTire System Inc.’s 8-K filed with the Securities                  Exchange Commission on October 26, 2006.                                           |
|   |   |                                                                                                                                                                                                         |
| (19)   |   | Incorporated                  by reference to SmarTire System Inc.’s 8-K filed with the Securities                  Exchange Commission on November 8, 2006.                                           |
|   |   |                                                                                                                                                                                                         |
| (20)   |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form 10-QSB filed with                  the                  Securities Exchange Commission on December 15, 2006.                      |
|   |   |                                                                                                                                                                                                         |
| (21)   |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form SB-2 filed with the                  Securities Exchange Commission on January 10,                  2007.                         |

----

| (22)                                                                                                                                    |   | Incorporated                  by reference to SmarTire System Inc.’s 8-K filed with the Securities                  Exchange Commission on January 26, 2007.                                                                                                                   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                    |   |                                                                                                                                                                                                                                                                                 |
| (23)                                                                                                                                    |   | Incorporated                  by reference to SmarTire System Inc.’s 8-K filed with the Securities                  Exchange Commission on January 29, 2007.                                                                                                                   |
|                                                                                                                                    |   |                                                                                                                                                                                                                                                                                 |
| (24)                                                                                                                                    |   | Incorporated                  by reference to SmarTire System Inc.’s 8-K filed with the Securities                  Exchange Commission on February 5, 2007.                                                                                                                   |
|                                                                                                                                    |   |                                                                                                                                                                                                                                                                                 |
| (25)                                                                                                                                    |   | Incorporated                  by reference to SmarTire System Inc.’s 8-K filed with the Securities                  Exchange Commission on February 15, 2007.                                                                                                                  |
|                                                                                                                                    |   |                                                                                                                                                                                                                                                                                 |
| (26)                                                                                                                                    |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form SB-2/A filed with                  the                  Securities Exchange Commission on February 20, 2007.                                                                                              |
|                                                                                                                                    |   |                                                                                                                                                                                                                                                                                 |
| (27)                                                                                                                                    |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form SB-2/A filed with                  the                  Securities Exchange Commission on April 24, 2007.                                                                                                 |
|                                                                                                                                    |   |                                                                                                                                                                                                                                                                                 |
| (28)                                                                                                                                    |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form SB-2/A filed with                  the                  Securities Exchange Commission on May 25, 2007                                                                                                    |
|                                                                                                                                    |   |                                                                                                                                                                                                                                                                                 |
| **                Filed herewith                                                                                                        |
| ***Filed                  herewith and confidential treatment has been requested for certain                  portions of this exhibit. |
|                                                                                                                                    |   |                                                                                                                                                                                                                                                                                 |
| (1)                                                                                                                           |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form 10-KSB filed with                  the                  Securities and Exchange Commission on August 18, 1998.                                                                                            |
|                                                                                                                                    |   |                                                                                                                                                                                                                                                                                 |
| (2)                                                                                                                           |   | Incorporated                  by reference to SmarTire Systems Inc.'s definitive Proxy Statement                  and                  Information Circular on Schedule 14A filed with the Securities                  and                  Exchange Commission on October 31, 2000. |
|                                                                                                                                    |   |                                                                                                                                                                                                                                                                                 |
| (3)                                                                                                                           |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form SB-2 filed with the                  Securities and Exchange Commission on January 23, 2003.                                                                                                              |
|                                                                                                                                    |   |                                                                                                                                                                                                                                                                                 |
| (4)                                                                                                                           |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form 8-K filed with the                  Securities                  and Exchange Commission on December 23, 2003.                                                                                             |
|                                                                                                                                    |   |                                                                                                                                                                                                                                                                                 |
| (5)                                                                                                                           |   | Incorporated                  by reference to SmarTire Systems Inc.'s 8-K filed with the Securities                  Exchange Commission on October 1, 2004.                                                                                                                         |
|                                                                                                                                    |   |                                                                                                                                                                                                                                                                                 |
| (6)                                                                                                                           |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form 10-QSB filed with                  the                  Securities and Exchange Commission on December 14,                  2004.                                                                         |
|                                                                                                                                    |   |                                                                                                                                                                                                                                                                                 |
| (7)                                                                                                                                     |   | Incorporated                  by reference to SmarTire Systems Inc.'s 8-K filed with the Securities                  Exchange Commission on December 21, 2004.                                                                                                                       |
|                                                                                                                                    |   |                                                                                                                                                                                                                                                                                 |
| (8)                                                                                                                           |   | Incorporated                  by reference to SmarTire Systems Inc.'s 8-K filed with the Securities                  Exchange Commission on February 9, 2005.                                                                                                                        |
|                                                                                                                                    |   |                                                                                                                                                                                                                                                                                 |
| (9)                                                                                                                           |   | Incorporated                  by reference to SmarTire Systems Inc.'s 8-K filed with the Securities                  Exchange Commission on March 29,                  2005.                                                                                                         |

----

| (10)   |   | Incorporated                  by reference to SmarTire Systems Inc.'s 8-K filed with the Securities                  Exchange Commission on April 1, 2005, as amended.                  |
|------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                    |
| (11)   |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form 10-QSB filed with                  the                  Securities and Exchange Commission on June 14, 2004. |
|             |   |                                                                                                                                                                                    |
| (12)   |   | Incorporated                  by reference to SmarTire Systems Inc.'s 8-K filed with the Securities                  Exchange Commission on June 30, 2005.                              |
|             |   |                                                                                                                                                                                    |
| (13)   |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form 10-QSB filed with                  the                  Securities Exchange Commission on December 15, 2005. |
|             |   |                                                                                                                                                                                    |
| (14)   |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form SB-2 filed with the                  Securities Exchange Commission on January 11, 2006.                     |
|             |   |                                                                                                                                                                                    |
| (15)   |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form SB-2/A filed with                  the                  Securities Exchange Commission on February 27, 2006. |
|             |   |                                                                                                                                                                                    |
| (16)   |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form SB-2/A filed with                  the                  Securities Exchange Commission on April 12, 2006.    |
|             |   |                                                                                                                                                                                    |
| (17)             |   | Incorporated                  by reference to SmarTire System Inc.’s Form 10-KSB filed with the                  Securities Exchange Commission on October 30, 2006.              |
|             |   |                                                                                                                                                                                    |
| (18)             |   | Incorporated                  by reference to SmarTire System Inc.’s 8-K filed with the Securities                  Exchange Commission on October 26, 2006.                      |
|             |   |                                                                                                                                                                                    |
| (19)             |   | Incorporated                  by reference to SmarTire System Inc.’s 8-K filed with the Securities                  Exchange Commission on November 8, 2006.                      |
|             |   |                                                                                                                                                                                    |
| (20)             |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form 10-QSB filed with                  the                  Securities Exchange Commission on December 15, 2006. |
|             |   |                                                                                                                                                                                    |
| (21)             |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form SB-2 filed with the                  Securities Exchange Commission on January 10, 2007.                     |
|             |   |                                                                                                                                                                                    |
| (22)             |   | Incorporated                  by reference to SmarTire System Inc.’s 8-K filed with the Securities                  Exchange Commission on January 26, 2007.                      |
|             |   |                                                                                                                                                                                    |
| (23)             |   | Incorporated                  by reference to SmarTire System Inc.’s 8-K filed with the Securities                  Exchange Commission on January 29, 2007.                      |
|             |   |                                                                                                                                                                                    |
| (24)             |   | Incorporated                  by reference to SmarTire System Inc.’s 8-K filed with the Securities                  Exchange Commission on February 5, 2007.                      |
|             |   |                                                                                                                                                                                    |
| (25)             |   | Incorporated                  by reference to SmarTire System Inc.’s 8-K filed with the Securities                  Exchange Commission on February 15, 2007.                     |
|             |   |                                                                                                                                                                                    |
| (26)             |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form SB-2 filed with the                  Securities Exchange Commission on February 20, 2007.                    |
|             |   |                                                                                                                                                                                    |
| (27)             |   | Incorporated                  by reference to SmarTire Systems Inc.'s Form SB-2 filed with the                  Securities Exchange Commission on April 24,                  2007.      |

----

**ITEM      14. PRINCIPAL ACCOUNTING FEES AND SERVICES.**

| Nature                of service  | Fiscal                year            | Fiscal                year      |
|-----------------------------------|---------------------------------------|---------------------------------|
|                         | 2007                                  | 2006                            |
|                         |                                  |                            |
| Audit                fees (1)     |      223,131 |     136,982 |
| Audit                related fees |       - |  -                         |
| Tax                fees      |  -                               |  -                         |
| All                other fees     |  -                               |  -                         |

| (1)   | These                  are fees for professional services performed by BDO Dunwoody LLP                  for their                  annual audit of our consolidated financial statements, reviewing                  our                  quarterly financial statements and for services that are normally                  provided                  in connection with statutory and regulatory filings or engagements,                  including  services performed in connection with the                  registration statements (Form SB-2) related to our secondary                  offering. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Pre-Approval      Policies**

| ·   | approved                by the Company's audit committee;                or |
|--------------------|-----------------------------------------------------------------------------|

| ·   | entered                into pursuant to pre-approval policies and procedures established                by the                audit committee, provided the policies and procedures are detailed                as to                the particular service, the audit committee is informed of each service,                and such policies and procedures do not include delegation of the audit                committee's responsibilities to                management. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (1)   | Annually                the auditor provides the audit committee with a list of the audit-related                and non-audit services that are anticipated to be provided during                the year                for pre-approval. The audit committee reviews the services with the                auditor and management considering whether the provision of the services                is compatible with maintaining the auditor's                independence. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | Upon                pre-approval of the services on the initial list, management may                engage                the auditor for specific engagements that are within the definition                of the                pre-approved services. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3)   | The                audit committee delegates approval authority to the Chair of the                audit                committee for requests for services not previously presented to the                audit                committee for pre-approval. Any services approved by the Chair are                reported to the full audit committee at the next                meeting. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4)   | A                final detailed review of all public accounting services and fee amounts                is                performed by the audit committee prior to the audit opinion being                issued                at year end. At that time, the auditor provides the audit committee                with                the annual independence letter and the form and content of fees disclosure                for the Company's annual report. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**SIGNATURES**

**SMARTIRE      SYSTEMS INC.**

*By:      /s/ Dave Warkentin*

*--------------------------------------*

*Dave      Warkentin, President and Chief Executive Officer*

*Date:      November 8, 2007*

**SIGNATURES**

*/s/      Bill Cronin*

*----------------------------------------------------*

*Bill      Cronin, Chairman*

*/s/      Jeff Finkelstein*

*----------------------------------------------------*

*Jeff      Finkelstein, Chief Financial Officer*

*(Principal      Financial and Accounting Officer)*

*/s/      Dave Warkentin*

*----------------------------------------------------*

*Dave      Warkentin, President and Chief Executive Officer*

*(Principal      Executive Officer)*

*/s/      Martin Gannon*

*----------------------------------------------------*

*Martin      Gannon, Director*

*/s/      George O’Leary*

*----------------------------------------------------*

*George      O’Leary, Director*

----

**Index      to Financial      Statements**

| Report                  of Independent Registered Public Accounting Firm;                                                         | F-1    |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                              |   |
| Consolidated                  Balance Sheets at July 31, 2007 and July 31,                  2006;                                 | F-2    |
|                                                                                                                              |   |
| Consolidated                  Statements of Operations for the Years Ended July                  31, 2007, July 31, 2006;         | F-3    |
|                                                                                                                              |   |
| Consolidated                  Statements of Comprehensive                  Loss                                                   | F-3    |
|                                                                                                                              |   |
| Consolidated                  Statements of Capital Deficit for the Years                  Ended July 31, 2007 and July 31, 2006; | F-4    |
|                                                                                                                              |   |
| Consolidated                  Statements of Cash Flows for the Years Ended                  July 31, 2007 and July 31, 2006;      | F-5    |
|                                                                                                                              |   |
| Notes                  to Consolidated Financial                  Statements                                                      | F-6    |

----

----

**Report      of Independent Registered Public Accounting Firm**

----

**To        the Directors and Stockholders of**

**SmarTire      Systems Inc.**

*/s/BDO      Dunwoody LLP *

----

| **SMARTIRE                SYSTEMS INC.**                                                                                                                                |   |                                 |         |   |   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------------|--------|--------|--------|
| **Consolidated                Balance Sheets**                                                                                                                          |   |                                 |         |   |   |   |
| (Expressed                in United States dollars)                                                                                                                     |   |                                 |         |   |   |   |
| (Prepared                in accordance with U.S. generally accepted accounting                principles)                                                               |   |                                 |         |   |   |   |
|                                                                                                                                                                    |   |                                 |         |   |   |   |
| July                31, 2007 and 2006                                                                                                                                   |   |                                 |         |   |   |   |
|                                                                                                                                                                    |   |                                 |         |   |   |   |
|                                                                                                                                                                    |   |                                 |         |   |   |   |
|                                                                                                                                                                    |   | 2007                                 |         |   | 2006   |   |
|                                                                                                                                                                    |   |                                 |         |   |   |   |
| ASSETS                                                                                                                                                                  |   |                                 |         |   |   |   |
|                                                                                                                                                                    |   |                                 |         |   |   |   |
| Current                assets:                                                                                                                                          |   |                                 |         |   |   |   |
|                     Cash and cash equivalents                                                                                                       |   | $                                    | 350,018      |   |   | $      | 1,988,420 |   |
|                     Receivables, net of allowance for doubtful accounts                                                                             |   |                                 |         |   |   |   |   |   |
|                          of $18,657 (2006 - $19,497)                                                                       |   |                                 | 505,581      |   |   |   | 609,250 |   |
|                     Inventory (note 5)                                                                                                              |   |                                 | 1,591,230    |   |   |   | 2,212,579 |   |
|                     Prepaid expenses                                                                                                                |   |                                 | 138,890      |   |   |   | 196,668 |   |
|                                                                                                                                                                    |   |                                 | 2,585,719    |   |   |   | 5,006,917 |   |
|                                                                                                                                                                    |   |                                 |         |   |   |   |   |   |
| Property                and equipment (note 6)                                                                                                                          |   |                                 | 799,540      |   |   |   | 780,039 |   |
|                                                                                                                                                                    |   |                                 |         |   |   |   |   |   |
| Deferred                financing costs (note 13)                                                                                                                       |   |                                 | 947,945      |   |   |   | 1,692,094 |   |
|                                                                                                                                                                    |   |                                 |         |   |   |   |   |   |
| Other                assets (note 7)                                                                                                                                    |   |                                 | -            |   |   |   | 75,275 |   |
|                                                                                                                                                                    |   |                                 |         |   |   |   |   |   |
|                                                                                                                                                                    |   | $                                    | 4,333,204    |   |   | $      | 7,554,325 |   |
|                                                                                                                                                                    |   |                                 |         |   |   |   |   |   |
| LIABILITIES                AND CAPITAL DEFICIT                                                                                                                          |   |                                 |         |   |   |   |   |   |
|                                                                                                                                                                    |   |                                 |         |   |   |   |   |   |
| Current                liabilities:                                                                                                                                     |   |                                 |         |   |   |   |   |   |
|                     Accounts payable and accrued liabilities (note 8)                                                                               |   | $                                    | 1,748,855    |   |   | $      | 2,257,049 |   |
|                     Current portion of convertible debentures (note 9)                                                                              |   |                                 | 11,134,533   |   |   |   | 1,615,000 |   |
|                     Current portion of accrued interest on convertible debentures, payable                in                shares (note 9)         |   |                                 | 4,741,414    |   |   |   | - |   |
|                                                                                                                                                                    |   |                                 | 17,624,802   |   |   |   | 3,872,049 |   |
|                                                                                                                                                                    |   |                                 |         |   |   |   |   |   |
| Convertible                debentures, net of amounts to be accreted of $22,208,240                                                                                     |   |                                 |         |   |   |   |   |   |
|                     (2006 - $8,567,424) (note 9)                                                                                                    |   |                                 | 1,828,575    |   |   |   | 21,432,576 |   |
|                                                                                                                                                                    |   |                                 |         |   |   |   |   |   |
| Accrued                interest on convertible debentures, payable in shares (note                9)                                                                    |   |                                 | 194,588      |   |   |   | 1,750,000 |   |
| Derivative                financial instrument (note 10)                                                                                                                |   |                                 | -            |   |   |   | 8,043,225 |   |
|                                                                                                                                                                    |   |                                 |         |   |   |   |   |   |
| Preferred                shares, subject to mandatory redemption net of                                                                                                 |   |                                 |         |   |   |   |   |   |
|                     amounts to be accreted of $nil (2006 - $3,665,485) (note                11)                                                     |   |                                 | 3,449,776    |   |   |   | 482,128 |   |
|                                                                                                                                                                    |   |                                 |         |   |   |   |   |   |
| Capital                deficit:                                                                                                                                         |   |                                 |         |   |   |   |   |   |
|                     Share capital (note 12)                                                                                                         |   |                                 |         |   |   |   |   |   |
|                         Common shares, without par value:                                                                       |   |                                 |         |   |   |   |   |   |
|                               Unlimited shares authorized                                         |   |                                 |         |   |   |   |   |   |
|                463,336,271                shares issued and outstanding (2006 - 311,610,656) |   |                                 | 71,033,916   |   |   |   | 68,049,577 |   |
|                     Additional paid-in capital                                                                                                      |   |                                 | 34,081,226   |   |   |   | 6,929,818 |   |
|                     Accumulated deficit                                                                                                             |   |                                 | (124,796,374 | )      |   |   | (103,967,579 | ) |
|                     Accumulated other comprehensive income                                                                                          |   |                                 | 916,695      |   |   |   | 962,531 |   |
|                                                                                                                                                                    |   |                                 | (18,764,537  | )      |   |   | (28,025,653 | ) |
|                                                                                                                                                                    |   |                                 |         |   |   |   |   |   |
|                                                                                                                                                                    |   | $                                    | 4,333,204    |   |   | $      | 7,554,325 |   |
| Going                concern (note 2)                                                                                                                                   |   |                                 |         |   |   |   |   |   |
| Commitments                and contingencies (note 19)                                                                                                                  |   |                                 |         |   |   |   |   |   |
| See                accompanying notes to consolidated financial statements.                                                                                             |   |                                 |         |   |   |   |   |   |
|                                                                                                                                                                    |   |                                 |         |   |   |   |   |   |
| Approved                on behalf of the Board                                                                                                                          |   |                                 |         |   |   |   |   |   |
|                                                                                                                                                                    |   |                                 |         |   |   |   |   |   |
| * /s/Martin                Gannon*                                                                                                                                 |   | */s/Bill                Cronin*      |         |
|  Martin                Gannon, Director                                                                                                                            |   | Bill                Cronin, Director |         |

----

| **SMARTIRE                  SYSTEMS INC.**                                                                  |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|
| **Consolidated                  Statements of Operations**                                                  |   |
| (Expressed                  in United States dollars)                                                       |   |
| (Prepared                  in accordance with U.S. generally accepted accounting                  principles)         |   |
|                                                                                                             |   |
| Years                  ended July 31, 2007 and 2006                                                         |   |
|                                                                                                             |   |
|                                                                                                                       |   | 2007 |   |   | 2006 |   |
|                                                                                                                       |   |   |   |   |   |   |
|                                                                                                                       |   |   |   |   |   |   |
| Revenue                  (note 20)                                                                                         |   | $ | 3,661,821 |   |   | $ | 3,455,649 |   |
|                                                                                                                       |   |   |   |   |   |   |   |   |
| Cost                  of goods sold (includes write-down of inventory at                                                   |   |   |   |   |   |   |   |   |
|                       July 31, 2007 of $nil (2006 - $700,000))                                         |   |   | 2,675,465 |   |   |   | 3,160,763 |   |
|                                                                                                                       |   |   | 986,356 |   |   |   | 294,886 |   |
|                                                                                                                       |   |   |   |   |   |   |   |   |
| Expenses:                                                                                                                  |   |   |   |   |   |   |   |   |
|                       Depreciation and amortization                                                    |   |   | 445,700 |   |   |   | 1,303,889 |   |
|                       Engineering, research and development                                            |   |   | 2,734,148 |   |   |   | 1,891,961 |   |
|                       General and administrative                                                       |   |   | 2,922,461 |   |   |   | 2,368,118 |   |
|                       Marketing                                                                        |   |   | 1,642,384 |   |   |   | 1,535,160 |   |
|                                                                                                                       |   |   | 7,744,693 |   |   |   | 7,099,128 |   |
|                                                                                                                       |   |   |   |   |   |   |   |   |
| Loss                  from operations                                                                                      |   |   | (6,758,337 | ) |   |   | (6,804,242 | ) |
|                                                                                                                       |   |   |   |   |   |   |   |   |
| Other                  earnings (expenses):                                                                                |   |   |   |   |   |   |   |   |
|                       Interest income                                                                  |   |   | 31,286 |   |   |   | 222,332 |   |
|                       Interest and financing expense (note 14)                                         |   |   | (12,115,066 | ) |   |   | (24,262,542 | ) |
|                       Gain/(loss) on settlement of convertible debenture (note 9                  (b)) |   |   | - |   |   |   | (214,274 | ) |
|                       Unrealized gain (loss) on derivative instruments (note                  10) |   |   | (1,030,415 | ) |   |   | 2,521,841 |   |
|                       Foreign exchange gain (loss)                                                     |   |   | 250,724 |   |   |   | (292,220 | ) |
|                                                                                                                       |   |   | (12,863,471 | ) |   |   | (22,024,863 | ) |
|                                                                                                                       |   |   |   |   |   |   |   |   |
| Loss                  for the year                                                                                         |   |   | (19,621,808 | ) |   |   | (28,829,105 | ) |
|                                                                                                                       |   |   |   |   |   |   |   |   |
| Accrued                  dividends and accretion on preferred shares (note 11)                                             |   |   | (3,737,888 | ) |   |   | (554,138 | ) |
|                                                                                                                       |   |   |   |   |   |   |   |   |
| Loss                  available to common stockholders                                                                     |   | $ | (23,359,696 | ) |   | $ | (29,383,243 | ) |
|                                                                                                                       |   |   |   |   |   |   |   |   |
| Basic                  and diluted loss per share                                                                          |   | $ | (0.07 | ) |   | $ | (0.10 | ) |
|                                                                                                                       |   |   |   |   |   |   |   |   |
| Weighted                  average number of common shares used in                                                          |   |   |   |   |   |   |   |   |
|                       the computation of basic and diluted loss per share (note                  18)   |   |   | 344,399,602 |   |   |   | 292,196,901 |   |
|                                                                                                                       |   |   |   |   |   |   |   |   |
| See                  accompanying notes to consolidated financial statements.                                              |   |   |   |   |   |   |   |   |
|                                                                                                                       |   |   |   |   |   |   |   |   |
| **SMARTIRE                  SYSTEMS INC.**                                                                  |   |
| **Consolidated                  Statements of Comprehensive Loss**                                          |   |
| (Expressed                  in United States dollars)                                                       |   |
| (Prepared                  in accordance with U.S. generally accepted accounting                  principles)         |   |
|                                                                                                             |   |
| Years                  ended July 31, 2007 and 2006                                                         |   |
|                                                                                                             |   |
|                                                                                                                       |   | 2007 |   |   | 2006 |   |
|                                                                                                                       |   |   |   |   |   |   |   |   |
|                                                                                                                       |   |   |   |   |   |   |   |   |
| Loss                  for the year                                                                                         |   | $ | (19,621,808 | ) |   | $ | (28,829,105 | ) |
| Translation                  adjustment                                                                                    |   |   | (45,836 | ) |   |   | 833,638 |   |
|                                                                                                                       |   |   |   |   |   |   |   |   |
| Other                  comprehensive loss for the year                                                                     |   | $ | (19,667,644 | ) |   | $ | (27,995,467 | ) |
|                                                                                                                       |   |   |   |   |   |   |   |   |
| See                  accompanying notes to consolidated financial statements.                                              |   |   |   |   |   |   |   |   |

----

| **SMARTIRE                  SYSTEMS INC.**                                                                                                                                                                                                                                                       |   |                           |             |   |       |   |          |        |   |   |        |   |   |          |         |   |    |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|------------------|--------|------------|--------|---------------|-------------|--------|--------|-------------|--------|--------|---------------|--------------|--------|---------|--------|
| Consolidated                  Statement of Capital Deficit                                                                                                                                                                                                                                       |   |                           |             |   |       |   |          |        |   |   |        |   |   |          |         |   |    |   |
| (Expressed                  in United States dollars)                                                                                                                                                                                                                                            |   |                           |             |   |       |   |          |        |   |   |        |   |   |          |         |   |    |   |
| (Prepared                  in accordance with U.S. generally accepted accounting                  principles)                                                                                                                                                                                    |   |                           |             |   |       |   |          |        |   |   |        |   |   |          |         |   |    |   |
|                                                                                                                                                                                                                                                                                             |   |                           |             |   |       |   |          |        |   |   |        |   |   |          |         |   |    |   |
| Years                  ended July 31, 2007 and 2006                                                                                                                                                                                                                                              |   |                           |             |   |       |   |          |        |   |   |        |   |   |          |         |   |    |   |
|                                                                                                                                                                                                                                                                                             |   |                           |             |   |       |   |          |        |   |   |        |   |   |          |         |   |    |   |
|                                                                                                                                                                                                                                                                                             |   |                           |             |   |       |   |          |        |   |   |        |   |   |          |         |   |    |   |
|                                                                                                                                                                                                                                                                                             |   | Common                  Shares |             |   | Additional |   |          | Accumulated |   |   | Accumulated |   |   |          |         |
|                                                                                                                                                                                                                                                                                             |   | Shares                         |             |   | Amount     |   |          | paid-in     |   |   | deficit     |   |   | other         |         |   |    |   |
|                                                                                                                                                                                                                                                                                             |   |                           |             |   |       |   |          | capital     |   |   |        |   |   | comprehensive |         |   | Capital |   |
|                                                                                                                                                                                                                                                                                             |   |                           |             |   |       |   |          |        |   |   |        |   |   | income        |         |   | deficit |   |
|                                                                                                                                                                                                                                                                                             |   |                           |             |   |       | $      |          |        |   | $      |        |   |   | $             |         |   |    | $      |   |   |   | $ |   |
|                                                                                                                                                                                                                                                                                             |   |                           |             |   |       |   |          |        |   |   |        |   |   |          |         |   |    |   |   |   |   |   |   |
| Balance                  as at July 31, 2005                                                                                                                                                                                                                                                     |   |                           | 278,562,884      |   |       |   | 66,695,717    |        |   |   | 18,697,821  |   |   |          | (75,138,474  | )      |    |   | 128,893 |   |   |   | 10,383,957 |   |
|                                                                                                                                                                                                                                                                                             |   |                           |             |   |       |   |          |        |   |   |        |   |   |          |         |   |    |   |   |   |   |   |   |   |
| Exercise                  of stock options for cash (note 12 (d))                                                                                                                                                                                                                                |   |                           | 2,060,000        |   |       |   | 267,800       |        |   |   | (206,000    | )      |   |          | -            |   |    |   | - |   |   |   | 61,800 |   |
| Exercise                  of warrants for cash (note 12 (e))                                                                                                                                                                                                                                     |   |                           | 1,100,000        |   |       |   | 110,000       |        |   |   | -           |   |   |          | -            |   |    |   | - |   |   |   | 110,000 |   |
| Conversion                  of convertible debentures and accrued interest to                      common shares                  allocated pro-rata between additional                      paid-in-capital and common shares                  (note 9) |   |                           |  13,455,772 |   |       |   |  607,871 |        |   |   | (216,509    | )      |   |          |  -      |   |    |   |  - |   |   |   |  391,362 |   |
| Settlement                  of convertible debt (note 9 (b))                                                                                                                                                                                                                                     |   |                           | 2,000,000        |   |       |   | 79,549        |        |   |   | (41,895     | )      |   |          | -            |   |    |   | - |   |   |   | 37,654 |   |
| Amendment                  and modification of convertible debentures notes 9 (e) and                  10)                                                                                                                                                                                       |   |                           | -                |   |       |   | -             |        |   |   | 3,000,000   |   |   |          | -            |   |    |   | - |   |   |   | 3,000,000 |   |
| Initial                  valuation of derivative financial instrument (note 10)                                                                                                                                                                                                                  |   |                           | -                |   |       |   | -             |        |   |   | (10,565,066 | )      |   |          | -            |   |    |   | - |   |   |   | (10,565,066 | ) |
| Conversion                  of preferred shares into common shares (note 11)                                                                                                                                                                                                                     |   |                           | 14,432,000       |   |       |   | 288,640       |        |   |   | (144,320    | )      |   |          | -            |   |    |   | - |   |   |   | 144,320 |   |
| Stock-based                  compensation recovery (note 4 (b))                                                                                                                                                                                                                                  |   |                           | -                |   |       |   | -             |        |   |   | (3,087,145  | )      |   |          | -            |   |    |   | - |   |   |   | (3,087,145 | ) |
| Issuance                  of warrants for services (note 12 (e))                                                                                                                                                                                                                                 |   |                           | -                |   |       |   | -             |        |   |   | 47,070      |   |   |          | -            |   |    |   | - |   |   |   | 47,070 |   |
| Accrued                  dividends and accretion on preferred shares (note 11)                                                                                                                                                                                                                   |   |                           | -                |   |       |   | -             |        |   |   | (554,138    | )      |   |          | -            |   |    |   | - |   |   |   | (554,138 | ) |
| Loss                  for the period                                                                                                                                                                                                                                                             |   |                           | -                |   |       |   | -             |        |   |   | -           |   |   |          | (28,829,105  | )      |    |   | - |   |   |   | (28,829,105 | ) |
| Translation                  adjustment                                                                                                                                                                                                                                                          |   |                           | -                |   |       |   | -             |        |   |   | -           |   |   |          | -            |   |    |   | 833,638 |   |   |   | 833,638 |   |
| Balance                  as at July 31, 2006                                                                                                                                                                                                                                                     |   |                           | 311,610,656      |   |       |   | 68,049,577    |        |   |   | 6,929,818   |   |   |          | (103,967,579 | )      |    |   | 962,531 |   |   |   | (28,025,653 | ) |
|                                                                                                                                                                                                                                                                                             |   |                           |             |   |       |   |          |        |   |   |        |   |   |          |         |   |    |   |   |   |   |   |   |   |
| Exercise                  of stock options for cash (note 12 (d))                                                                                                                                                                                                                                |   |                           | 4,050,000        |   |       |   | 182,250       |        |   |   | (60,750     | )      |   |          | -            |   |    |   | - |   |   |   | 121,500 |   |
|  Conversion                  of preferred shares into common shares (note 11)                                                                                                                                                                                                               |   |                           | 77,024,000       |   |       |   | 1,540,480     |        |   |   | (770,240    | )      |   |          | -            |   |    |   | - |   |   |   | 770,240 |   |
|  Conversion                  of convertible debentures into common shares (note 9)                                                                                                                                                                                                          |   |                           | 53,341,141       |   |       |   | 906,196       |        |   |   | (312,544    | )      |   |          | -            |   |    |   | - |   |   |   | 593,652 |   |
|  Stock-based                  compensation and warrant repricing (notes 9 (e), 12                  (c)-(e))                                                                                                                                                                                 |   |                           | -                |   |       |   | -             |        |   |   | 1,157,589   |   |   |          | -            |   |    |   | - |   |   |   | 1,157,589 |   |
|  Intrinsic                  value of beneficial conversion feature (note 9)                                                                                                                                                                                                                 |   |                           | -                |   |       |   | -             |        |   |   | 2,084,574   |   |   |          | -            |   |    |   | - |   |   |   | 2,084,574 |   |
|  Change                  in accounting policy (note 4)                                                                                                                                                                                                                                      |   |                           | -                |   |       |   | -             |        |   |   | 28,494,782  |   |   |          | (1,206,987   | )      |    |   | - |   |   |   | 27,287,795 |   |
|  Accrued                  dividends and accretion on preferred shares (note 11)                                                                                                                                                                                                             |   |                           | -                |   |       |   | -             |        |   |   | (3,737,888  | )      |   |          | -            |   |    |   | - |   |   |   | (3,737,888 | ) |
|  Incremental                  beneficial conversion feature adjustment (note 9)                                                                                                                                                                                                             |   |                           | -                |   |       |   | -             |        |   |   | 295,885     |   |   |          | -            |   |    |   | - |   |   |   | 295,885 |   |
|  Shares                  issued for services and settlement of debt (notes 12                  (f)-(g))                                                                                                                                                                                     |   |                           | 17,310,474       |   |       |   | 355,413       |        |   |   | -           |   |   |          | -            |   |    |   | - |   |   |   | 355,413 |   |
|  Loss                  for the period                                                                                                                                                                                                                                                       |   |                           | -                |   |       |   | -             |        |   |   | -           |   |   |          | (19,621,808  | )      |    |   | - |   |   |   | (19,621,808 | ) |
|  Translation                  adjustment                                                                                                                                                                                                                                                    |   |                           | -                |   |       |   | -             |        |   |   | -           |   |   |          | -            |   |    |   | (45,836 | ) |   |   | (45,836 | ) |
|  Balance                  as at July 31, 2007                                                                                                                                                                                                                                               |   |                           | 463,336,271      |   |       |   | 71,033,916    |        |   |   | 34,081,226  |   |   |          | (124,796,374 | )      |    |   | 916,695 |   |   |   | (18,764,537 | ) |
|                                                                                                                                                                                                                                                                                             |   |                           |             |   |       |   |          |        |   |   |        |   |   |          |         |   |    |   |   |   |   |   |   |   |
| See                  accompanying notes to consolidated financial statements.                                                                                                                                                                                                                    |   |                           |             |   |       |   |          |        |   |   |        |   |   |          |         |   |    |   |   |   |   |   |   |   |

----

| **SMARTIRE                    SYSTEMS INC.**                                                                                                         |   |   |        |   |   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-------------|--------|--------|--------|
| **Consolidated                    Statements of Cash                    Flows**                                                                      |   |   |        |   |   |   |
| (Expressed                    in United States dollars)                                                                                              |   |   |        |   |   |   |
| (Prepared                    in accordance with U.S. generally accepted accounting                    principles)                                    |   |   |        |   |   |   |
|                                                                                                                                                 |   |   |        |   |   |   |
| Years                    ended July 31, 2007 and 2006                                                                                                |   |   |        |   |   |   |
|                                                                                                                                                 |   |   |        |   |   |   |
|                                                                                                                                                 |   | 2007   |        |   | 2006   |   |
|                                                                                                                                                 |   |   |        |   |   |   |
| Cash                    provided (used for):                                                                                                         |   |   |        |   |   |   |
| Operating                    activities:                                                                                                             |   |   |        |   |   |   |
|                        Loss for the year                                                                                              |   | $      | (19,621,808 | )      |   | $      | (28,829,105 | ) |
|                        Items not affecting cash:                                                                                      |   |   |        |   |   |   |   |   |
|                              Depreciation and amortization                                                   |   |   | 445,700     |   |   |   | 1,303,889 |   |
|                              Unrealized loss (gain) on derivative instruments                                |   |   | 1,030,415   |   |   |   | (2,521,841 | ) |
|                              Non-cash interest and finance charges                                           |   |   | 12,028,029  |   |   |   | 23,207,528 |   |
|                              Stock-compensation expense (recovery)                                           |   |   | 681,879     |   |   |   | (3,087,145 | ) |
|                              Inventory write-down                                                            |   |   | -           |   |   |   | 700,000 |   |
|                              Reprice of stock options                                                        |   |   | 22,658      |   |   |   | - |   |
|                              Issuance of common shares and warrants for services                    received |   |   | 16,677      |   |   |   | 47,070 |   |
|                              Issuance of common shares as partial consideration of                    debt   |   |   | 341,788     |   |   |   | - |   |
|                              Loss on settlement of debt                                                 |   |   | -           |   |   |   | 214,274 |   |
|                        Changes in non-cash working capital:                                                                           |   |   |        |   |   |   |   |   |
|                              Receivables                                                                |   |   | 103,669     |   |   |   | (303,993 | ) |
|                              Inventory                                                                  |   |   | 621,349     |   |   |   | 101,924 |   |
|                              Prepaid expenses                                                           |   |   | 57,778      |   |   |   | (24,781 | ) |
|                              Accounts payable and accrued liabilities                                   |   |   | (508,194    | )      |   |   | 1,315,627 |   |
|                        Net cash used in operating activities                                                                          |   |   | (4,780,060  | )      |   |   | (7,876,553 | ) |
|                                                                                                                                                 |   |   |        |   |   |   |   |   |
| Investing                    activities:                                                                                                             |   |   |        |   |   |   |   |   |
|                        Purchase of property and equipment                                                                             |   |   | (346,579    | )      |   |   | (246,575 | ) |
|                                                                                                                                                 |   |   |        |   |   |   |   |   |
|                        Net cash used in investing activities                                                                          |   |   | (346,579    | )      |   |   | (246,575 | ) |
|                                                                                                                                                 |   |   |        |   |   |   |   |   |
| Financing                    activities:                                                                                                             |   |   |        |   |   |   |   |   |
|                        Cash received on exercise of stock options                                                                     |   |   | 121,500     |   |   |   | 61,800 |   |
|                        Cash received on exercise of warrants (note 12)                                                                |   |   | -           |   |   |   | 110,000 |   |
|                        Proceeds from convertible debentures (note 9)                                                                  |   |   | 4,150,000   |   |   |   | - |   |
|                        Settlement of convertible debentures (note 9 (b))                                                              |   |   | -           |   |   |   | (250,000 | ) |
|                        Financing costs                                                                                                |   |   | (681,398    | )      |   |   | - |   |
|                                                                                                                                                 |   |   |        |   |   |   |   |   |
|                        Net cash provided by (used in) financing activities                                                            |   |   | 3,590,102   |   |   |   | (78,200 | ) |
|                                                                                                                                                 |   |   |        |   |   |   |   |   |
| Effect                    of exchange rate difference on cash and cash equivalents                                                                   |   |   | (101,865    | )      |   |   | 129,985 |   |
|                                                                                                                                                 |   |   |        |   |   |   |   |   |
| Net                    decrease in cash and cash equivalents                                                                                         |   |   | (1,638,402  | )      |   |   | (8,071,343 | ) |
|                                                                                                                                                 |   |   |        |   |   |   |   |   |
| Cash                    and cash equivalents, beginning of year                                                                                      |   |   | 1,988,420   |   |   |   | 10,059,763 |   |
|                                                                                                                                                 |   |   |        |   |   |   |   |   |
| Cash                    and cash equivalents, end of year                                                                                            |   | $      | 350,018     |   |   | $      | 1,988,420 |   |
|                                                                                                                                                 |   |   |        |   |   |   |   |   |
| Supplementary                    information:                                                                                                        |   |   |        |   |   |   |   |   |
|                        Interest and finance charges paid                                                                              |   | $      | 43,497      |   |   | $      | 933,014 |   |
|                        Taxes paid                                                                                                     |   |   | -           |   |   |   | 122,000 |   |
| Non-cash                    investing and financing activities:                                                                                      |   |   |        |   |   |   |   |   |
|                        Conversion of convertible debentures to common shares                                                          |   |   | 593,652     |   |   |   | 391,362 |   |
|                        Conversion of preferred shares to common shares                                                                |   |   | 770,240     |   |   |   | 144,320 |   |
|                                                                                                                                                 |   |   |        |   |   |   |   |   |
| See                    accompanying notes to consolidated financial statements.                                                                      |   |   |        |   |   |   |   |   |

----

**SMARTIRE      SYSTEMS      INC.**

**Notes      to Consolidated Financial      Statements         **             

----

| **1.  ** | **Operations:** |
|--------------------|-----------------|

| **2.  ** | **Going                Concern:** |
|--------------------|-----------------------------------|

| **3.  ** | **Significant                accounting policies:** |
|--------------------|-----------------------------------------------------|

| (a)   | Basis                of presentation: |
|-----------------|---------------------------------------|

| (b)   | Research                and development costs: |
|-----------------|------------------------------------------------|

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **3.  ** | **Significant                accounting policies                (continued):** |
|--------------------|--------------------------------------------------------------------------------|

| (c)   | Cash                and cash equivalents: |
|-----------------|-------------------------------------------|

| (d)   | Inventory: |
|-----------------|------------|

| (e)   | Property                and equipment: |
|-----------------|----------------------------------------|

| (f)   | Deferred                financing costs: |
|-----------------|------------------------------------------|

| (g)   | Other                assets: |
|-----------------|------------------------------|

| (h)   | Impairment                of long-lived assets: |
|-----------------|-------------------------------------------------|

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **3.** | **Significant                accounting policies                (continued):** |
|--------|--------------------------------------------------------------------------------|

| (i)   | Revenue                recognition: |
|-----------------|-------------------------------------|

| (j)   | Loss                per share: |
|-----------------|--------------------------------|

| (k)   | Income                taxes: |
|-----------------|------------------------------|

| (l)   | Warranty                costs: |
|-----------------|--------------------------------|

| (m)   | Foreign                currency translation: |
|-----------------|----------------------------------------------|

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **3.** | **Significant                accounting policies                (continued):** |
|--------|--------------------------------------------------------------------------------|

| (n)   | Use                of estimates: |
|-----------------|----------------------------------|

| (o)   | Advertising                  and Marketing costs: |
|-----------------|---------------------------------------------------|

| (p)   | Fair                value of financial assets and                liabilities: |
|-----------------|-------------------------------------------------------------------------------|

| (q)   | Comprehensive                income: |
|-----------------|--------------------------------------|

| (r)   | Recent                accounting pronouncements: |
|-----------------|--------------------------------------------------|

*Accounting Changes and Error Corrections, a replacement of APB Opinion      No.      20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes      in      Interim Financial Statements*

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **3.  ** | **Significant                accounting policies                (continued):** |
|--------------------|--------------------------------------------------------------------------------|

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **4.** | **Change                in Accounting Policy** |
|--------|------------------------------------------------|

| (a)   | Convertible                  debt: |
|-----------------|------------------------------------|

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **4.** | **Change                in Accounting Policy                (continued):** |
|--------|----------------------------------------------------------------------------|

| (b)   | Stock-based                compensation: |
|-----------------|------------------------------------------|

|                                                                                                                 |                                                                                              |
|----------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------|
|                                                                                                                 | Year                  ended                                                                       |
|                                                                                                                 | July                  31, 2006                                                                    |
|                                                                                                                 |                                                                                              |
|                       Net loss as reported                                                       |  $   (28,829,105)                                                             |
|                       Stock-based compensation expense (recovery) recognized                     |                                                                                              |
|         using                  intrinsic value method (variable award)       |         (3,087,145)                                       |
|                                                                              |                                                                                              |
|                       Stock-based compensation expense determined                                |                                                                                              |
|                            under fair value based method for all awards |            (651,079)                       |
|                                                                                                                 |                                                                                              |
|                       Pro forma                                                                  |  $   (32,567,329)                                                             |
|                                                                                                                 |                                                                                              |
| Basic                  and diluted loss per share:                                                                   |                                                                                              |
|                       As reported                                                                |  $              (0.10) |
|                       Pro forma                                                                  |  $              (0.11) |

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **4.** | **Change                in Accounting Policy                (continued):** |
|--------|----------------------------------------------------------------------------|

|                                                     |                             |
|----------------------------------------------------------|----------------------------------|
|                                                     | Year                    ended    |
|                                                     | July                    31, 2006 |
|                                                     |                             |
| Expected                    dividend yield               | 0%                               |
| Expected                    stock price volatility       | 140                    - 145%    |
| Risk-free                    interest rate               | 3.15                    - 4.53%  |
| Expected                    life of options and warrants | 5                    years       |

**Stock      option plans**

| **5.  ** | **Inventory:** |
|--------------------|----------------|

|                              |                                                                                                                      |                                                                                                                      |
|-----------------------------------|---------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|
|                              | 2007                                                                                                                      | 2006                                                                                                                      |
|                              |                                                                                                                      |                                                                                                                      |
| Raw                  materials    |  $                746,849            |  $                701,661            |
| Work                  in progress |                    247,971 |                    232,517 |
| Finished                  goods   |                    596,410 |                 1,278,401                 |
|                              |                                                                                                                      |                                                                                                                      |
|                              |  $             1,591,230                            |  $             2,212,579                            |
|                              |                                                                                                                      |                                                                                                                      |

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **6.  ** | **Property                and equipment:** |
|--------------------|--------------------------------------------|

|                                            |                                                                                                                                        |                                                                                                                                        |                                                                                                                                                                              |
|-------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                            |                                                                                                                                        | Accumulated                                                                                                                            | Net                  book                                                                                                                                                         |
| **2007**                                        | Cost                                                                                                                                        | depreciatiom                                                                                                                                | Value                                                                                                                                                                             |
|                                            |                                                                                                                                        |                                                                                                                                        |                                                                                                                                                                              |
| Computer                  hardware and software |  $                   815,431            |  $                   650,849            |  $                   164,582                                                  |
| Office                  and shop equipment      |                    2,152,657                 |                    1,518,303                 |                       634,354                                       |
| Leasehold                  improvements         |                       118,339 |                       117,735 |                              604 |
|                                            |                                                                                                                                        |                                                                                                                                        |                                                                                                                                                                              |
|                                            |  $                3,086,427                            |  $                2,286,887                            |  $                   799,540                                                  |
|                                            |                                                                                                                                        |                                                                                                                                        |                                                                                                                                                                              |
|                                            |                                                                                                                                        | Accumulated                                                                                                                            | Net                  book                                                                                                                                                         |
| **2006**                                        | Cost                                                                                                                                        | depreciation                                                                                                                                | Value                                                                                                                                                                             |
|                                            |                                                                                                                                        |                                                                                                                                        |                                                                                                                                                                              |
| Computer                  hardware and software |  $                   953,549            |  $                   746,800            |  $                   206,749                                                  |
| Office                  and shop equipment      |                    1,773,674                 |                    1,285,667                 |                       488,007                                       |
| Leasehold                  improvements         |                       243,754 |                       158,471 |                         85,283                            |
|                                            |                                                                                                                                        |                                                                                                                                        |                                                                                                                                                                              |
|                                            |  $                2,970,977                            |  $                2,190,938                            |  $                   780,039                                                  |

| **7.  ** | **Other                assets:** |
|--------------------|----------------------------------|

| **8.  ** | **Accounts                payable and accrued                liabilities:** |
|--------------------|-----------------------------------------------------------------------------|

|                                                        | 2007                                                                                  | 2006                                                                                  |
|-------------------------------------------------------------|---------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|
|                                                        |                                                                                  |                                                                                  |
| Accounts                  payable                           |  $          374,788            |  $          497,861            |
| Accrued                  liabilities                        |              534,071 |           1,057,117                 |
| Due                  to directors                           |              191,475 |              113,500 |
| Interest                  payable on convertible debentures |              648,521 |              588,571 |
|                                                        |                                                                                  |                                                                                  |
|                                                        |  $       1,748,855                            |  $       2,257,049                            |

| **9.  ** | **Convertible                debentures:** |
|--------------------|--------------------------------------------|

** **

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **9.  ** | **Convertible                debentures (continued):** |
|--------------------|--------------------------------------------------------|

|                                                                                                                                                                                                                                                                                                                  |                                                                                                          |                                                                                                                |                                                                                        |                                                                                                                            |                                                                                                                                  |                                                                                                                |                                                                                                                |                                                                                                    |                                                      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|-----------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                  | Note                  9 (a)                                                                                   | Note                  9 (b)                                                                                         | Note                  9 (c)                                                                 | Note                  9 (d)                                                                                                     | Note                  9 (e)                                                                                                           | Note                  9 (f)                                                                                         | Note                  9 (g)                                                                                         | Note                  9 (h)                                                                             |                                                      |
|                                                                                                                                                                                                                                                                                                                  | 8%                                                                                                            | Discounted                                                                                                          | 5%                                                                                          | 5%                                                                                                                              | 10%                                                                                                                                   | 10%                                                                                                                 | 10%                                                                                                                 | 10%                                                                                                     | Total                                                     |
| Original                  face value of convertible debenture                                                                                                                                                                                                                                                         |  $                  1,700,000                                                                            |  $                  3,493,590                                                                                  |  $                  195,000                                                            |  $                  1,500,000                                                                                              |  $                  30,000,000                                                                                                   |  $                  1,200,000                                                                                  |  $                  1,800,000                                                                                  |  $                  1,150,000                                                                      |  $  41,038,590                             |
|                                                                                                                                                                                                                                                                                                                  |                                                                                                          |                                                                                                                |                                                                                        |                                                                                                                            |                                                                                                                                  |                                                                                                                |                                                                                                                |                                                                                                    |                                                      |
| Debt                  component, as at July 31, 2005                                                                                                                                                                                                                                                                  |         115,000                                                       |        286,333                                                                   |     195,000                                                             |                      1 |       21,388,916                                                                                        |                    - |                    - |                  - |      21,985,250                  |
|                                                                                                                                                                                                                                                                                                                  |                                                                                                          |                                                                                                                |                                                                                        |                                                                                                                            |                                                                                                                                  |                                                                                                                |                                                                                                                |                                                                                                    |                                                      |
| Interest                  accretion                                                                                                                                                                                                                                                                                   |                   - |                    - |                - |     1,499,999                                                                                               |       3,043,660                                                                                         |                    - |                    - |                  - |        4,543,659       |
| Modification                  of terms of debenture                                                                                                                                                                                                                                                                   |                   - |                    - |                - |                    -             |     (3,000,000)                                                                                                   |                    - |                    - |                  - |     (3,000,000)                       |
| Conversions                  and settlements of debt                                                                                                                                                                                                                                                                  |                                                                                                          |                                                                                                                |                                                                                        |                                                                                                                            |                                                                                                                                  |                                                                                                                |                                                                                                                |                                                                                                    |                                                      |
|   to                  common shares                                                                                                                                                                                                                                                                         |       (115,000)                                                                 |      (286,333)                                                                             |                - |        (80,000)                                                                              |                                                                                                                                  |                    - |                    - |                  - |         (481,333) |
| Debt                  component, as at July 31, 2006                                                                                                                                                                                                                                                                  |                   - |                    - |     195,000                                                             |     1,420,000                                                                                               |       21,432,576                                                                                        |                    - |                    - |                  - |      23,047,576                  |
| Less                  current portion, as at July 31, 2006                                                                                                                                                                                                                                                            |                   - |                    - |   (195,000)                                                                       |   (1,420,000)                                                                                                         |                                                                                                                                  |                    - |                    - |                  - |       (1,615,000)           |
| Long                  term portion of debt component,                                                                                                                                                                                                                                                                 |                                                                                                          |                                                                                                                |                                                                                        |                                                                                                                            |                                                                                                                                  |                                                                                                                |                                                                                                                |                                                                                                    |
|  as                  at July 31, 2006                                                                                                                                                                                                                                                                            |  $               -            |  $                -            |  $            -            |  $                -                        |  $   21,432,576                                                                                                   |  $                -            |  $                -            |  $              -            |  $  21,432,576                             |
|                                                                                                                                                                                                                                                                                                                  |                                                                                                          |                                                                                                                |                                                                                        |                                                                                                                            |                                                                                                                                  |                                                                                                                |                                                                                                                |                                                                                                    |                                                      |
| Remaining                  face value of convertible                                                                                                                                                                                                                                                                  |                                                                                                          |                                                                                                                |                                                                                        |                                                                                                                            |                                                                                                                                  |                                                                                                                |                                                                                                                |                                                                                                    |
|  debenture                  as at July 31, 2006                                                                                                                                                                                                                                                                  |  $               -            |  $                -            |  $                  195,000                                                            |  $                  1,420,000                                                                                              |  $                  30,000,000                                                                                                   |  $                -            |  $                -            |  $              -            |  $   31,615,000                       |
|                                                                                                                                                                                                                                                                                                                  |                                                                                                          |                                                                                                                |                                                                                        |                                                                                                                            |                                                                                                                                  |                                                                                                                |                                                                                                                |                                                                                                    |                                                      |
| Debt                  component, as at July 31, 2006:                                                                                                                                                                                                                                                                 |                   - |                    - |     195,000                                                             |     1,420,000                                                                                               |       21,432,576                                                                                        |                    - |                                                                                                                |                                                                                                    |      23,047,576                  |
| Issued                                                                                                                                                                                                                                                                                                                |                   - |                    - |                - |                    -             |                       - |     1,200,000                                                                                   |     1,800,000                                                                                   |     1,150,000                                                                       |        4,150,000       |
| Finance                  fees paid to debenture holder/related company of debenture                  holder                                                                                                                                                                                                           |                   - |                    - |                - |                    -             |                       - |      (130,000)                                                                             |       (195,000)                                                                       |     (135,000)                                                                       |        (460,000)       |
| Intrinsic                  value of beneficial conversion feature of convertible                  debentures                                                                                                                                                                                                          |                   - |                    - |                - |                    -             |                       - |       (663,871)                                                                       |     (886,302)                                                                                   |     (534,401)                                                                       |      (2,084,574)                 |
| Interest                  accretion                                                                                                                                                                                                                                                                                   |                   - |                    - |                - |                    -             |        6,927,439                                                                                   |         272,701                                                             |          177,414                                                       |        36,244                                                        |         7,413,798 |
| Change                  in accounting policy (note 4 (a))                                                                                                                                                                                                                                                             |                   - |                    - |                - |                    -             |       (18,214,155)                                                                                      |                    - |                    - |                  - |      (18,214,155)                |
| Incremental                  beneficial conversion feature adjustment                                                                                                                                                                                                                                                 |                   - |                    - |                - |                    -             |          (295,885)                                                                       |                    - |                    - |                  - |         (295,885) |
| Conversion                  of debt to common shares                                                                                                                                                                                                                                                                  |                   - |                    - |   (185,000)                                                                       |                    -             |          (145,442)                                                                       |      (263,210)                                                                             |                    - |                  - |         (593,652) |
|                                                                                                                                                                                                                                                                                                                  |                                                                                                          |                                                                                                                |                                                                                        |                                                                                                                            |                                                                                                                                  |                                                                                                                |                                                                                                                |                                                                                                    |                                                      |
| Debt                  component, as at July 31, 2007                                                                                                                                                                                                                                                                  |                   - |                    - |       10,000                                                  |     1,420,000                                                                                               |        9,704,533                                                                                   |         415,620                                                             |         896,112                                                             |       516,843                                                             |      12,963,108                  |
| Less                  current portion, as at July 31, 2007                                                                                                                                                                                                                                                            |                   - |                    - |     (10,000)                                                            |   (1,420,000)                                                                                                         |      (9,704,533)                                                                                             |                    - |                    - |                  - |      (11,134,533)                |
|                                                                                                                                                                                                                                                                                                                  |                                                                                                          |                                                                                                                |                                                                                        |                                                                                                                            |                                                                                                                                  |                                                                                                                |                                                                                                                |                                                                                                    |                                                      |
| Long                  term portion of debt                  component,                                as                  at July 31,  2007 |  $               -            |  $                -            |  $            -            |  $                -                        |  $                   -            |  $     415,620                                                                        |  $     896,112                                                                        |  $   516,843                                                                        |  $     1,828,575            |
|                                                                                                                                                                                                                                                                                                                  |                                                                                                          |                                                                                                                |                                                                                        |                                                                                                                            |                                                                                                                                  |                                                                                                                |                                                                                                                |                                                                                                    |                                                      |
| Remaining                  face value of convertible debenture as at July                  31,  2007                                                                                                                                                                                                        |  $               -            |  $                -            |  $   10,000                                                             |  $                  1,420,000                                                                                              |  $  29,854,558                                                                                                         |  $    936,790                                                                              |  $                  1,800,000                                                                                  |  $                  1,150,000                                                                      |  $   35,171,348                       |
|                                                                                                                                                                                                                                                                                                                  |                                                                                                          |                                                                                                                |                                                                                        |                                                                                                                            |                                                                                                                                  |                                                                                                                |                                                                                                                |                                                                                                    |                                                      |

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

**9.      Convertible      debentures (continued):**

| (a)   | $1,700,000                – 8% debentures issued on July 17,                2003 |
|-----------------|----------------------------------------------------------------------------------------|

| (b)   | $3,493,590                – 11% discounted debentures issued on December 24,                2003 |
|-----------------|--------------------------------------------------------------------------------------------------------|

| (i)   | the                  set price of $0.22 per share (subject to anti-dilution provisions),                  and |
|-----------------|---------------------------------------------------------------------------------------------------------------|

| (ii)   | 85%                  of the average closing price of the Company’s common stock for twenty days                  immediately prior to the applicable monthly redemption                  date. |
|------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (i)   | On                  December 24, 2005, a holder of this debenture alleged the Company                  had                  refused to honor its request to convert the value of the debt of                  $91,726                  into 9,268,875 common shares of the Company.   In                  settlement, the Company paid the holder $250,000 and issued 2,000,000                  of                  its common shares.  For accounting purposes, the Company                  recorded a loss on settlement of debt of $214,274, representing                  the                  aggregate consideration provided less the face value of the                  debt. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (ii)   | The                  remaining balance of $176,735 was converted into 6,311,964 common                  shares. |
|------------------|-----------------------------------------------------------------------------------------------------------------|

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **9.** | **Convertible                debentures (continued):** |
|--------|--------------------------------------------------------|

| (c)   | $195,000 –                5% convertible debenture issued on December 15,                2004 |
|-----------------|----------------------------------------------------------------------------------------------------------|

| (i)   | $0.036                and; |
|-----------------|----------------------------|

| (ii)   | an                amount equal to 80% of the lowest closing bid price of our common                stock,                as quoted on Bloomberg, L.P., for the five trading days immediately                preceding the conversion date, subject to adjustment as provided                for in                the debentures. |
|------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (d)   | $1,500,000                – 5% convertible debenture issued on May 20,                2005 |
|-----------------|--------------------------------------------------------------------------------------------------|

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **9.  ** | **Convertible                debentures (continued):** |
|--------------------|--------------------------------------------------------|

| (e)   | $30,000,000                - 10% convertible debentures issued on June 23,                2005 |
|-----------------|------------------------------------------------------------------------------------------------|

| (i)   | $0.0573                and; |
|-----------------|-----------------------------|

| (ii)   | 80%                of the lowest volume weighted average price of the Company’s common stock                during the thirty trading days preceding the conversion date as quoted                by                Bloomberg, LP.   As a result of this reset, the Company has                recorded an incremental beneficial conversion feature of $295,885                against                the carrying value of the debentures at the time the reset occurred                on                November 7, 2006.  The additional discount will be amortized to                interest over the life of the                debentures. |
|------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **9.  ** | **Convertible                debentures (continued):** |
|--------------------|--------------------------------------------------------|

| (f)   | $1,200,000                - 10% convertible debentures issued on November 7,                2006 |
|-----------------|--------------------------------------------------------------------------------------------------|

| i)   | $0.0573                and; |
|----------------|-----------------------------|

| ii)   | 80%                of the lowest volume weighted average price of the Company’s common stock                during the thirty (30) trading days immediately preceding the                conversion date as quoted by Bloomberg,                LP |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **9.  ** | **Convertible                debentures (continued):** |
|--------------------|--------------------------------------------------------|

| (g)   | $1,800,000                - 10% convertible debentures issued January 23, 2007, February 9,                2007 and                March 2, 2007 |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------|

| i)   | $0.0573                and, |
|----------------|-----------------------------|

| ii)   | 80%                of the lowest volume weighted average price of our common stock                during the thirty (30) trading days immediately preceding the conversion                date as quoted by Bloomberg, LP. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **9.  ** | **Convertible                debentures (continued):** |
|--------------------|--------------------------------------------------------|

| (h)   | $1,150,000                – 10% convertible debenture agreement issued April 27,                2007 |
|-----------------|------------------------------------------------------------------------------------------------------------|

| i)   | $1,150,000                on or before April 30, 2007; |
|----------------|--------------------------------------------------------|

| ii)   | $350,000                to be funded by October 1, 2007 (note 21                (b)) |
|-----------------|--------------------------------------------------------------------------------------|

| i)   | $0.0573                and; |
|----------------|-----------------------------|

| ii)   | 80%                of the lowest volume weighted average price of our common stock                during the thirty (30) trading days immediately preceding the conversion                date as quoted by Bloomberg, LP. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (i)   | Registration                rights agreements and beneficial ownership                initiations |
|-----------------|---------------------------------------------------------------------------------------------------|

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **9.  ** | **Convertible                debentures (continued):** |
|--------------------|--------------------------------------------------------|

| (j)   | Security                granted |
|-----------------|---------------------------------|

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **10.  ** | **Derivative                financial instrument:** |
|---------------------|-----------------------------------------------------|

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **10.  ** | **Derivative                financial instrument                (continued):** |
|---------------------|--------------------------------------------------------------------------------|

| **11.  ** | **Preferred                shares subject to mandatory                redemptions:** |
|---------------------|--------------------------------------------------------------------------------------|

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **11.  ** | **Preferred                shares subject to mandatory redemptions                (continued):** |
|---------------------|--------------------------------------------------------------------------------------------------|

| **12.  ** | **Share                capital:** |
|---------------------|-----------------------------------|

| (a)   | Authorized: |
|-----------------|-------------|

| (b)   | Standby                equity distribution agreement: |
|-----------------|-------------------------------------------------------|

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **12.  ** | **Share                capital (continued):** |
|---------------------|-----------------------------------------------|

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

| **12.  ** | **Share                capital (continued):** |
|---------------------|-----------------------------------------------|

| (d) | **      **Stock-options: |
|-----|--------------------------------------------------------|

**July      31, 2007:**

|                                                        |                                                                                                                                  |                                                                                   |                                                                                                                                        |                                                             |                                                                                                          |                                                                   |
|-------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------|
|                                                        |                               Unvested options                       |                            Vested options |                               Total                                        |
|                                                        |                                                                                                                                  |                     Weighted                                                 |                                                                                                                                        | Weighted                                                         |                                                                                                          | Weighted                                                               |
|                                                        | Unvested                                                                                                                         | average                                                                                | Vested                                                                                                                                      | average                                                          |                                                                                                          | average                                                                |
|                                                        | options                                                                                                                          | exercise                                                                               | options                                                                                                                                     | exercise                                                         | Options                                                                                                       | exercise                                                               |
|                                                        | outstanding                                                                                                                           | price                                                                                  | outstanding                                                                                                                                 | price                                                            | outstanding                                                                                                   | price                                                                  |
|                                                        |                                                                                                                                  |                                                                                   |                                                                                                                                        |                                                             |                                                                                                          |                                                                   |
| Opening                  balance,                           |                                                                                                                                  |                                                                                   |                                                                                                                                        |                                                             |                                                                                                          |                                                                   |
|                       July 31, 2006     |         21,950,000                                                                            |  $         0.10                      |       44,073,402                                                                                              |  $       0.10            |     66,023,402                                                                            |  $        0.10            |
|                       Options granted   |           2,500,000                                                                 |             0.05           |                        - |  -                                                          |       2,500,000                                                                 |            0.05 |
|                       Options vested    |       (12,625,000)                                                                                      |           0.10                       |       12,625,000                                                                                              |           0.10 |                   - |  -                                                                |
|                       Options exercised |                       - |  -                                                                                |        (4,050,000)                                                                                       |         0.03             |     (4,050,000)                                                                           |           0.03       |
|                       Options forfeited |         (2,225,000)                                                                           |           0.08                       |      (13,405,400)                                                                                                  |         0.23             |   (15,630,400)                                                                                      |         0.21                   |
|                                                        |                                                                                                                                  |                                                                                   |                                                                                                                                        |                                                             |                                                                                                          |                                                                   |
| Ending                  balance,                            |                                                                                                                                  |                                                                                   |                                                                                                                                        |                                                             |                                                                                                          |                                                                   |
|     July                  31, 2007      |           9,600,000                                                                 |  $         0.05                      |       39,243,002                                                                                              |  $       0.09            |     48,843,002                                                                            |  $        0.06            |

**Suly      31, 2006:**

|                                                        |                                                                                                                                  |                                                                                   |                                                                                                                                        |                                                             |                                |                                                                   |
|-------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------|-------------------------------------|------------------------------------------------------------------------|
|                                                        |                              Unvested options                             |                            Vested options |                              Total                                         |
|                                                        |                                                                                                                                  | Weighted                                                                               |                                                                                                                                        | Weighted                                                         |                                | Weighted                                                               |
|                                                        | Unvested                                                                                                                         | average                                                                                | Vested                                                                                                                                      | average                                                          |                                | average                                                                |
|                                                        | options                                                                                                                          | exercise                                                                               | options                                                                                                                                     | exercise                                                         | Options                             | exercise                                                               |
|                                                        | outstanding                                                                                                                           | price                                                                                  | outstanding                                                                                                                                 | price                                                            | outstanding                         | price                                                                  |
|                                                        |                                                                                                                                  |                                                                                   |                                                                                                                                        |                                                             |                                |                                                                   |
| Opening                  balance,                           |                                                                                                                                  |                                                                                   |                                                                                                                                        |                                                             |                                |                                                                   |
|                       July 31, 2005     |              400,000                                                 |  $         0.10                      |       41,572,802                                                                                              |  $       0.13            |     41,972,802  |  $        0.13            |
|                       Options granted   |         28,500,000                                                                            |             0.10           |                        - |  -                                                          |     28,500,000  |            0.10 |
|                       Options vested    |         (6,050,600)                                                                           |             0.10           |         6,050,600                                                                                   |           0.10 |  -                             |            0.10 |
|                       Options exercised |                       - |  -                                                                                |        (2,060,000)                                                                                       |         0.03             |     (2,060,000) |           0.03       |
|                       Options forfeited |            (899,400)                                                           |           1.54                       |        (1,490,000)                                                                                       |         0.10             |     (2,389,400) |           0.64       |
|                                                        |                                                                                                                                  |                                                                                   |                                                                                                                                        |                                                             |                                |                                                                   |
| Ending                  balance,                            |                                                                                                                                  |                                                                                   |                                                                                                                                        |                                                             |                                |                                                                   |
|     July                  31, 2006      |         21,950,000                                                                            |  $         0.10                      |       44,073,402                                                                                              |  $       0.10            |     66,023,402  |  $        0.10            |

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **12.  ** | **Share                capital (continued):** |
|---------------------|-----------------------------------------------|

|                                               |                            |
|----------------------------------------------------|---------------------------------|
| Expected                    dividend yield         | 0%                              |
| Expected                    stock price volatility | 140                    - 144%   |
| Risk-free                    interest rate         | 3.87                    - 4.08% |
| Expected                    life of options        | 5                    years      |

|                               |   |                                                                               |                                                                                                             |                                                                                                             |   |        |                                                                                                             |
|------------------------------------|--------|------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------|--------|-------------|------------------------------------------------------------------------------------------------------------------|
|                               |   |                            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                                                                                                            |
|                               |   |                                                                               |                                                                                                             |                                                                                                             |   |        |                                                                                                             |
| $0.03                    - 0.07    |   | 40,710,002                                                                         | 2.84                                                                                                             |  $               0.04            |   | 32,410,002  |  $               0.03            |
| $0.085                    - 0.20   |   | 7,923,800                                                                          |                   2.52 | 0.14                                                                                                             |   | 6,623,800   | 0.15                                                                                                             |
| $0.52                    - 1.00    |   | 87,134                                                                             | 0.43                                                                                                             | 0.65                                                                                                             |   | 87,134      | 0.65                                                                                                             |
| $1.16                    - 2.88    |   | 122,066                                                                            |                   0.14 |                   1.60 |   | 122,066     |                   1.60 |
|                               |   |                                                                               |                                                                                                             |                                                                                                             |   |        |                                                                                                             |
| $0.03                    - 3.83    |   | 48,843,002                                                                         | 2.78                                                                                                             |  $               0.06            |   | 39,243,002  |  $               0.06            |

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **12.  ** | **Share                capital (continued):** |
|---------------------|-----------------------------------------------|

| (e) | Warrants: |
|-----|-----------|

|                                            |   |                                                                                                                      |                                                                      |                                                             |                                                                                                          |                                                                      |
|-------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------|------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------|
|                                            |   |                          2007                                                     |                                                                      |                         2006  |
|                                            |   |                                                                                                                      | Weighted-                                                                 |                                                             |                                                                                                          | Weighted-                                                                 |
|                                            |   |                                                                                                                      | average                                                              |                                                             |                                                                                                          | average                                                              |
|                                            |   |                                                                                                                      | exercise                                                             |                                                             |                                                                                                          | exercise                                                             |
|                                            |   | Warrants                                                                                                                  | price                                                                     |                                                             | Warrants                                                                                                      | price                                                                     |
|                                            |   |                                                                                                                      |                                                                      |                                                             |                                                                                                          |                                                                      |
| Outstanding,                  beginning of year |   |    64,858,141                                                                                              |  $      0.16                           |                                                             |  64,988,141                                                                                              |  $      0.16                           |
| Issued                                          |   |         900,000                                                                   |          0.04                |                                                             |    1,000,000                                                                                   |          0.16                |
| Reprice                  of warrants            |   |  (62,500,000)                                                                                                        |        0.16                            |                                                             |                   - |             - |
| Reprice                  of warrants            |   |    62,500,000                                                                                              |          0.03                |                                                             |                   - |             - |
| Exercised                                       |   |                     - |             - |                                                             |   (1,100,000)                                                                                       |          0.10                |
| Expired                                         |   |                     - |             - |                                                             |        (30,000)                                                            |          2.80                |
|                                            |   |                                                                                                                      |                                                                      |                                                             |                                                                                                          |                                                                      |
| Oustanding,                  end of year        |   |    65,758,141                                                                                              |  $      0.04                           |                                                             |  64,858,141                                                                                              |  $      0.16                           |

|                             |   |                         Warrants outstanding |                                                                                                             |
|----------------------------------|--------|----------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------|
|                             |   |                                                                       |                                                                                                             |   |
|                             |   |                                                                       | Weighted                                                                                                    |   |
|                             |   |                                                                       | average                                                                                                          | Weighted |
|                             |   |                                                                       | remaining                                                                                                        | average |
| Range                  of        |   | Number                                                                     | contractual                                                                                                      | exercise |
| exercise                  prices |   | of                  warrants                                               | life                                                                                                             | price |
|                             |   |                                                                       |                                                                                                             |   |
| $0.03                            |   | 63,200,000                                                                 | 2.90                                                                                                             |  $               0.03 |
| $0.06                  - 0.22    |   | 2,132,673                                                                  |                   1.55 | 0.15 |
| $0.35                  - 0.70    |   | 425,468                                                                    | 0.46                                                                                                             | 0.54 |
|                             |   |                                                                       |                                                                                                             |   |
| $0.03                  - 0.70    |   | 65,758,141                                                                 | 0.04                                                                                                             |  $               0.04 |

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **12.  ** | **Share                capital (continued):** |
|---------------------|-----------------------------------------------|

| (f) | Settlement                of liabilities: |
|-----|-------------------------------------------|

| (g) | Consulting                agreement: |
|-----|--------------------------------------|

| **13.  ** | **Deferred                financing costs:** |
|---------------------|----------------------------------------------|

|                                                            |   |                                                                                        |                                                                                                                                              |
|-----------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                            |   | 2007                                                                                        | 2006                                                                                                                                              |
|                                                            |   |                                                                                        |                                                                                                                                              |
| Balance,                  beginning of year                     |   |  $        1,692,094                            |  $      18,209,280                                                                                             |
|  Additions                  during the year                |   |               227,910 |                         - |
|  Amortization                  of deferred financing costs |   |              (972,059)     |         (16,517,186)                                                                                      |
|                                                            |   |                                                                                        |                                                                                                                                              |
| Balance,                  end of year                           |   |  $           947,945            |  $        1,692,094                                                                                  |

| **14.  ** | **Net                interest and financing                expenses:** |
|---------------------|------------------------------------------------------------------------|

|                                                                                |   |                                                                            |                                                            |
|-------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|-----------------------------------------------------------------|
|                                                                                |   | 2007                                                                            | 2006                                                            |
|                                                                                |   |                                                                            |                                                            |
| Interest                  accreted on convertible debentures                        |   |  $      7,413,798                            |  $      4,543,659            |
| Interest                  expense and finance charges on convertible debt and other |   |          3,279,209                 |          3,201,697 |
|  Amortization                  of deferred financing costs                     |   |             972,059 |        16,517,186            |
| Repricing                  of warrants (note 9 (e) and 12 (e))                      |   |             450,000 |  -                                                         |
|                                                                                |   |                                                                            |                                                            |
|                                                                                |   |  $    12,115,066                                       |  $    24,262,542                       |

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **15.  ** | **Financial                instruments:** |
|---------------------|-------------------------------------------|

| (a)   | Interest                rate Risk: |
|-----------------|-----------------------------------------|

| (b)   | Credit                Risk: |
|-----------------|-----------------------------|

| (c)   | Foreign                Currency Risk: |
|-----------------|---------------------------------------|

| **16.  ** | **Related                party transactions:** |
|---------------------|------------------------------------------------|

| (a)   | YA                Global Investments LP, formerly Cornell Capital Partners is considered                a                related party from a financial perspective due to the number and                size of                the financial transactions that were entered into with the Company.                YA                Global Investments does not have influence over the Company's operating                or                investing activities. During the year ended July 31, 2007, the Company                paid $nil in cash interest payments to YA Global Investments for                interest                and financing fees due on its $14,370,000 convertible debentures                (2006 - $900,000, net of $100,000 of withholding taxes). The                Company had the following financial instruments outstanding with                YA Global                Investments as at July 31, 2007: |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Financial                  Instruments                 |    | Amount                                                                            |
|--------------------------------------------------------|---------|-----------------------------------------------------------------------------------|
|                                                   |    |                                                                              |
| Standby                  equity distribution agreement |  $ |         100,000,000                       |
| Preferred                  shares                      |    |             3,085,440 |
| Convertible                  debentures                |    |           14,370,000            |

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **16.  ** | **Related                party transactions                (continued):** |
|---------------------|---------------------------------------------------------------------------|

| (b)   | During                the year ended July 31, 2007, the Company paid $80,000                (2006 – $230,000) in consulting fees to the Company’s former                Chairman pursuant to a consulting agreement entered into on June                30, 2005                and renewed and modified on August 9, 2006. The consulting agreement                was                terminated effective February 28, 2007 and 3,679,604 shares of the                Company’s common stock were issued as consideration for $72,525 owed to                the former Chairman. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (c)   | During                the year ended July 31, 2007, the Company paid $8,500 (2006 - $nil)                net of                withholding taxes of $1,275 in consulting fees and issued 900,000                warrants                and 600,000 common shares of the Company’s common stock to a Company                related to a director of the Company pursuant to a consulting agreement                entered into on January 23, 2007. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (d)   | During                the year ended July 31, 2007, the Company was charged $229,268 (2006                -                $392,183) in directors fees. As at July 31, 2007 $191,475 (2006 -                $113,500) was included in accounts payable and accrued liabilities                as owed                to Directors of the Company.  These amounts were incurred in the                ordinary course of business are non- interest bearing, unsecured                and due                on demand. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **17.  ** | **Income                taxes:** |
|---------------------|----------------------------------|

|                                                        |   |   |       |   |   |   |
|-------------------------------------------------------------|--------|--------|------------|--------|--------|--------|
|                                                        |   | 2007   |       |   | 2006   |   |
|                                                        |   |   |       |   |   |   |
| Statutory                  rate                             |   |   | 34.1       | %      |   |   | 34.1 | % |
| Computed                  statutory tax expense             |   |   | (6,694,960 | )      |   |   | (9,830,725 | ) |
| Foreign                  losses tax affected at lower rates |   |   | 32,088     |   |   |   | 30,007 |   |
| Reduction                  of effective tax rates           |   |   | 13,636     |   |   |   | 987,644 |   |
| Permanent                  and other differences            |   |   | 1,244,068  |   |   |   | 1,588,656 |   |
| Change                  in valuation allowance              |   |   | 5,405,168  |   |   |   | 7,224,418 |   |
|                                                        |   |   | -          |   |   |   | - |   |

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**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **17.  ** | **Income                taxes (continued):** |
|---------------------|----------------------------------------------|

|                                                                    |   |   |        |   |   |   |
|-------------------------------------------------------------------------|--------|--------|-------------|--------|--------|--------|
|                                                                    |   | 2007   |        |   | 2006   |   |
|                                                                    |   |   |        |   |   |   |
| Deferred                  tax assets:                                   |   |   |        |   |   |   |
| Property                  and equipment and other assets, accounting    |   |   |        |   |   |   |
|                       depreciation in excess of tax |   | $      | 5,587,309   |   |   | $      | 5,587,832 |   |
| Loss                  carryforwards                                     |   |   | 26,368,383  |   |   |   | 21,073,311 |   |
| Scientific                  research and development expenses           |   |   | 455,368     |   |   |   | 428,823 |   |
| Share                  issue costs                                      |   |   | 551,672     |   |   |   | 492,993 |   |
| Others                                                                  |   |   | 434,595     |   |   |   | 409,200 |   |
|                                                                    |   |   |        |   |   |   |   |   |
| Total                  gross deferred tax assets                        |   |   | 33,397,327  |   |   |   | 27,992,159 |   |
| Valuation                  allowance                                    |   | $      | (33,397,327 | )      |   | $      | (27,992,159 | ) |
|                                                                    |   |   |        |   |   |   |   |   |
| Net                  deferred tax assets                                |   |   | -           |   |   |   | - |   |

| **18.  ** | **Earnings                (loss) per share:** |
|---------------------|-----------------------------------------------|

|                                                            |          |          |
|-----------------------------------------------------------------|---------------|---------------|
|                                                            | 2007          | 2006          |
|                                                            |          |          |
| Weighted-average                  shares used in computation of | 344,399,602   | 292,196,901   |
| basic                  earnings (loss) per share                |          |          |
|                                                            |          |          |
| Potentially                  dilutive securities excluded in    |          |          |
| calculation                  of loss per share                  | 7,845,651,174 | 1,622,563,244 |

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **19.  ** | **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: |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |                             |
|--------|----------------------------------|
|   |                             |
| 2008   |  $                  448,000 |
| 2009   |     492,000  |
| 2010   |     499,000  |
| 2011   |     507,000  |
| 2012   |     510,000  |
| 2013   |     375,000  |
| 2014   |     188,000  |
| 2015   |     188,000  |
| 2016   |     141,000  |

| (b)   | Product                warranties: |
|-----------------|------------------------------------|

|                                     |                                             |
|------------------------------------------|--------------------------------------------------|
| Balance,                  August 1, 2005 |  $    50,440            |
|                                     |                                             |
| Provision                  increase      |        37,284 |
| Expenditures                             |       (12,494)     |
|                                     |                                             |
| Balance,                  July 31, 2006  |        75,230 |
|                                     |                                             |
| Provision                  decrease      |       (60,005)     |
| Expenditures                             |        14,775 |
|                                     |                                             |
| Balance,                  July 31, 2007  |  $    30,000            |

| (c)   | Contingencies: |
|-----------------|----------------|

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **19.  ** | **Commitments                and contingencies                (continued):** |
|---------------------|------------------------------------------------------------------------------|

| **20.  ** | **Segmented                information:** |
|---------------------|-------------------------------------------|

|                            |                                                                                                                                                                                                    |                                                                                                                                                                                                    |
|---------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                            | 2007                                                                                                                                                                                                    | 2006                                                                                                                                                                                                    |
|                            |                                                                                                                                                                                                    |                                                                                                                                                                                                    |
| United                  Kingdom |  $                          1,550,352                            |  $                          1,149,149                            |
| United                  States  |                              1,929,474                 |                              2,120,325                 |
| Other                           |                                 181,995 |                                 186,175 |
|                            |                                                                                                                                                                                                    |                                                                                                                                                                                                    |
|                            |  $                          3,661,821                            |  $                          3,455,649                            |
|                            |                                                                                                                                                                                                    |                                                                                                                                                                                                    |

|                        |                                                                                                                                                                                                    |                                                                                                                                                                                                    |
|-----------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                        | 2007                                                                                                                                                                                                    | 2006                                                                                                                                                                                                    |
|                        |                                                                                                                                                                                                    |                                                                                                                                                                                                    |
| Customer                  A |  $                          1,492,557                            |  $                          1,079,074                            |
| Customer                  B |                                 628,512 |                                 696,388 |
| Customer                  C | <10%                                                                                                                                                                                                 |                                 393,878 |

----

**SMARTIRE      SYSTEMS INC.   **

**Notes      to Consolidated Financial      Statements         **

----

| **21.  ** | **Subsequent                events:** |
|---------------------|---------------------------------------|

| (a)   | Subsequent                to July 31, 2007, 76,074,623 shares of the Company’s common stock were                issued pursuant to the conversion of convertible debentures with a                principal balance of $382,970, 2,104,812 shares of the Company’s common                stock were issued pursuant to an employee settlement agreement, and                200,000 shares of the Company’s common stock were issued pursuant to a                consulting agreement.  In addition, the Company issued 200,000                warrants, exercisable at $0.03 of which 100,000 warrants expires                on August                31, 2012 and 100,000 warrants expires on September 30,                2007. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (b)   | On                August 20, 2007 the Company issued a $350,000 convertible debenture                under                the $1.5 million securities purchase agreement as described in note                9 (h).                The Company paid commitment fees of $35,000 for the convertible debentures                in connection with the Securities Purchase Agreement. Terms of the                debentures are identical to the $1,150,000 debenture issued on                April 27, 2007 as described in note                9(h). |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **22.  ** | **Comparative                figures:** |
|---------------------|-----------------------------------------|

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