<PAGE>

                                                                    EXHIBIT 10.5

NONE OF THE SECURITIES REPRESENTED HEREBY HAVE BEEN REGISTERED UNDER THE 1933
ACT, OR ANY U.S. STATE SECURITIES LAWS, AND, UNLESS SO REGISTERED, MAY NOT BE
OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, IN THE UNITED STATES (AS DEFINED
HEREIN) OR TO U.S. PERSONS EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF
REGULATION S UNDER THE 1933 ACT, PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE 1933 ACT, OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE 1933 ACT AND IN
EACH CASE ONLY IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. IN ADDITION,
HEDGING TRANSACTIONS INVOLVING THE SECURITIES MAY NOT BE CONDUCTED UNLESS IN
COMPLIANCE WITH THE 1933 ACT. "UNITED STATES" AND "U.S. PERSON" ARE AS DEFINED
BY REGULATION S UNDER THE 1933 ACT.

                 ADVISORY FEE PAYMENT AND SUBSCRIPTION AGREEMENT

                  This ADVISORY FEE PAYMENT AND SUBSCRIPTION AGREEMENT (the
"Agreement") is made as of the 26th day of March, 2002, by and between SmarTire
Systems Inc. ("SmarTire"), a company formed under the laws of British Columbia,
and Seraph Capital AG ("Seraph Capital"), a corporation formed under the laws of
Switzerland.

                                    RECITALS

                  WHEREAS:

A. The parties have entered into an Advisory Agreement dated as of September 15,
2001 (the "Advisory Agreement"), pursuant to which Seraph Capital has agreed to
act as a non-exclusive advisor to SmarTire in raising new equity and/or debt
financing, and, in partial consideration for such services (the "Services"),
SmarTire has agreed to issue to Seraph Capital three year warrants (the
"Warrants") to purchase common shares in the capital of SmarTire (the "Warrant
Shares") equal in number to seven percent (7%) of the total number of common
shares in the capital of SmarTire purchased by investors (the "Investors")
introduced to SmarTire by Seraph Capital; and

B. Investors have agreed to subscribe for a total of 750,000 common shares in
the capital of SmarTire.

                  NOW, THEREFORE, the parties hereto agree as follows:

1.                ISSUANCE OF THE WARRANTS

1.1 In consideration for the Services provided to SmarTire under the Advisory
Agreement, SmarTire hereby grants to Seraph Capital 52,500 Warrants, each
entitling Seraph Capital to purchase one Warrant Share at an exercise price of
U.S. $1.75 per Warrant Share until 4:30 p.m. (Vancouver time) on that day that
is three years following the date hereof, at which time any unexercised Warrants
will expire.

1.2 SmarTire agrees to issue to Seraph Capital a certificate representing the
Warrants, in the form attached as Appendix I hereto, as soon as practicable
following delivery by Seraph Capital to SmarTire of two fully-executed copies of
this Agreement.

<PAGE>

                                     - 2 -


1.3 The Warrants and the Warrant Shares are sometimes collectively referred to
in this Agreement as the "Securities".

2.                ACKNOWLEDGEMENTS OF SERAPH CAPITAL

2.1 Seraph Capital acknowledges and agrees that:

      (a)   none of the Warrants or the Warrant Shares have been registered
            under the 1933 Act, or under any state securities or "blue sky" laws
            of any state of the United States, and, unless so registered, may
            not be offered or sold in the United States or, directly or
            indirectly, to U.S. Persons, as that term is defined in Regulation S
            under the 1933 Act ("Regulation S"), except in accordance with the
            provisions of Regulation S, pursuant to an effective registration
            statement under the 1933 Act, or pursuant to an exemption from, or
            in a transaction not subject to, the registration requirements of
            the 1933 Act;

      (b)   Seraph Capital acknowledges that SmarTire has not undertaken, and
            will have no obligation, to register any of the Securities under the
            1933 Act;

      (c)   the decision to execute this Agreement and acquire the Securities
            hereunder has not been based upon any oral or written representation
            as to fact or otherwise made by or on behalf of SmarTire, and such
            decision is based entirely upon a review of information (the receipt
            of which is hereby acknowledged) which has been filed by SmarTire
            with the United States Shares and Exchange Commission and in
            compliance, or intended compliance, with applicable securities
            legislation (collectively, the "Public Record");

      (d)   if SmarTire has presented a business plan to Seraph Capital, Seraph
            Capital acknowledges that the business plan may not be achieved or
            be achievable;

      (e)   no securities commission or similar regulatory authority has
            reviewed or passed on the merits of the Securities;

      (f)   there is no government or other insurance covering the Securities;

      (g)   there are risks associated with an investment in the Securities, as
            more fully described in certain information forming part of the
            Public Record;

      (h)   SmarTire has advised Seraph Capital that SmarTire is relying on an
            exemption from the requirements to provide Seraph Capital with a
            prospectus and to sell the Securities through a person registered to
            sell securities under the Securities Act (British Columbia) (the
            "B.C. Act") and, as a consequence of acquiring the Shares pursuant
            to this exemption, certain protections, rights and remedies provided
            by the B.C. Act, including statutory rights of rescission or
            damages, will not be available to Seraph Capital;

      (i)   Seraph Capital has not acquired the Securities as a result of, and
            will not itself engage in, any "directed selling efforts" (as
            defined in Regulation S under the 1933 Act) in the United States in
            respect of any of the Securities which would include any activities
            undertaken for the purpose of, or that could reasonably be expected
            to have the effect of, conditioning the market in the United States
            for the resale of any of the Warrant Shares; provided, however, that
            Seraph Capital may sell or otherwise dispose of any of the Warrant
            Shares pursuant to registration of any of the Warrant Shares under
            the 1933 Act and any applicable state securities laws or under an
            exemption from such registration requirements;

<PAGE>

                                     - 3 -


      (j)   Seraph Capital and Seraph Capital's advisor(s) have had a reasonable
            opportunity to ask questions of and receive answers from SmarTire in
            connection with the distribution of the Securities hereunder, and to
            obtain additional information, to the extent possessed or obtainable
            without unreasonable effort or expense, necessary to verify the
            accuracy of the information about SmarTire;

      (k)   the books and records of SmarTire were available upon reasonable
            notice for inspection, subject to certain confidentiality
            restrictions, by Seraph Capital during reasonable business hours at
            its principal place of business, and all documents, records and
            books in connection with the distribution of the Securities
            hereunder have been made available for inspection by Seraph Capital,
            Seraph Capital's attorney and/or advisor(s);

      (l)   Seraph Capital will indemnify and hold harmless SmarTire and, where
            applicable, its directors, officers, employees, agents, advisors and
            shareholders, from and against any and all loss, liability, claim,
            damage and expense whatsoever (including, but not limited to, any
            and all fees, costs and expenses whatsoever reasonably incurred in
            investigating, preparing or defending against any claim, lawsuit,
            administrative proceeding or investigation whether commenced or
            threatened) arising out of or based upon any representation or
            warranty of Seraph Capital contained herein or in any document
            furnished by Seraph Capital to SmarTire in connection herewith being
            untrue in any material respect or any breach or failure by Seraph
            Capital to comply with any covenant or agreement made by Seraph
            Capital to SmarTire in connection therewith;

      (m)   none of the Securities are listed on any stock exchange or automated
            dealer quotation system and no representation has been made to
            Seraph Capital that any of the Securities will become listed on any
            stock exchange or automated dealer quotation system; except that
            currently the common shares of SmarTire are listed for trading on
            the Nasdaq SmallCap Market;

      (n)   none of the Securities may be offered or sold to a U.S. Person or
            for the account or benefit of a U.S. Person (other than a
            distributor) prior to the end of the Restricted Period (as defined
            herein);

      (o)   offers and sales of any of the Securities prior to the expiration of
            a period of forty days after the date of issuance of such Securities
            (the "Restricted Period") shall only be made in compliance with the
            safe harbor provisions set forth in Regulation S, pursuant to the
            registration provisions of the 1933 Act or an exemption therefrom,
            and that all offers and sales after the Restricted Period shall be
            made only in compliance with the registration provisions of the 1933
            Act or an exemption therefrom;

      (p)   there are additional restrictions on Seraph Capital's ability to
            resell the Securities under the B.C. Act and Multilateral Instrument
            45-102 adopted by the British Columbia Securities Commission;

      (q)   SmarTire will refuse to register any transfer of the Securities not
            made in accordance with the provisions of Regulation S, pursuant to
            an effective registration statement under the 1933 Act or pursuant
            to an available exemption from the registration requirements of the
            1933 Act;

      (r)   the statutory and regulatory basis for the exemption claimed for the
            offer Securities, although in technical compliance with Regulation
            S, would not be available if the offering is part of a plan or
            scheme to evade the registration provisions of the 1933 Act; and

<PAGE>

                                     - 4 -


      (s)   Seraph Capital has been advised to consult Seraph Capital's own
            legal, tax and other advisors with respect to the merits and risks
            of an investment in the Securities and with respect to applicable
            resale restrictions, and it is solely responsible (and SmarTire is
            not in any way responsible) for compliance with:

            (i)   any applicable laws of Switzerland in connection with the
                  distribution of the Securities hereunder, and

            (ii)  applicable resale restrictions.

3.                REPRESENTATIONS, WARRANTIES AND COVENANTS OF SERAPH CAPITAL

      (a)   Seraph Capital hereby represents and warrants to and covenants with
            SmarTire (which representations, warranties and covenants shall
            survive the Closing) that:

      (b)   Seraph Capital is resident in Switzerland, and is neither a U.S.
            Person nor a resident of British Columbia;

      (c)   Seraph Capital is or will be acquiring the Securities as principal
            for its own account, for investment only and not with a view to
            resale or distribution, and, in particular:

      (d)   no other person has a direct or indirect beneficial interest in such
            Securities;

      (e)   Seraph Capital is not and will not be acquiring the Securities for
            the account or benefit of, directly or indirectly, any U.S. Person
            or any resident of British Columbia; and

      (f)   it has no intention to distribute either directly or indirectly any
            of the Securities in the United States or to U.S. Persons;

      (g)   Seraph Capital is outside the United States when receiving and
            executing this Agreement;

      (h)   Seraph Capital has the legal capacity and competence to enter into
            and execute this Agreement and to take all actions required pursuant
            hereto, it is duly incorporated and validly subsisting under the
            laws of its jurisdiction of incorporation, and all necessary
            approvals by its directors, shareholders and others have been
            obtained to authorize execution and performance of this Agreement on
            behalf of Seraph Capital;

      (i)   the entering into of this Agreement and the transactions
            contemplated hereby do not and will not result in the violation of
            any of the terms and provisions of any law applicable to, or the
            constating documents of, Seraph Capital or of any material
            agreement, written or oral, to which Seraph Capital may be a party
            or by which Seraph Capital is or may be bound;

      (j)   Seraph Capital has duly executed and delivered this Agreement and it
            constitutes a valid and binding agreement of Seraph Capital
            enforceable against Seraph Capital;

      (k)   Seraph Capital is not an underwriter of, or dealer in, the common
            shares of SmarTire, nor is Seraph Capital participating, pursuant to
            a contractual agreement or otherwise, in the distribution of the
            Securities;

<PAGE>

                                     - 5 -


      (l)   Seraph Capital (i) is able to fend for itself in the Subscription;
            (ii) has such knowledge and experience in business matters as to be
            capable of evaluating the merits and risks of its prospective
            investment in the Shares; and (iii) has the ability to bear the
            economic risks of its prospective investment and can afford the
            complete loss of such investment;

      (m)   Seraph Capital is not aware of any advertisement of any of the
            Securities; and

      (n)   no person has made to Seraph Capital any written or oral
            representations:

            (i)   that any person will resell or repurchase any of the
                  Securities;

            (ii)  that any person will refund the purchase price of any of the
                  Securities; or

            (iii) as to the future price or value of any of the Securities.

4.                ACKNOWLEDGEMENT AND WAIVER

4.1 Seraph Capital has acknowledged that the decision to purchase the Shares was
solely made on the basis of publicly available information contained in the
Public Record. Seraph Capital hereby waives, to the fullest extent permitted by
law, any rights of withdrawal, rescission or compensation for damages to which
Seraph Capital might be entitled in connection with the distribution of any of
the Securities.

5.                LEGENDING OF SUBJECT SECURITIES

5.1 Seraph Capital hereby acknowledges that that upon the issuance thereof, and
until such time as the same is no longer required under the applicable
securities laws and regulations, the certificates representing any of the
Securities will bear legends in substantially the following forms:

            "THE SECURITIES REPRESENTED HEREBY HAVE BEEN OFFERED IN AN OFFSHORE
            TRANSACTION TO A PERSON WHO IS NOT A U.S. PERSON (AS DEFINED HEREIN)
            PURSUANT TO REGULATION S UNDER THE UNITED STATES SECURITIES ACT OF
            1933, AS AMENDED (THE "1933 ACT").

            NONE OF THE SECURITIES REPRESENTED HEREBY HAVE BEEN REGISTERED UNDER
            THE 1933 ACT, OR ANY U.S. STATE SECURITIES LAWS, AND, UNLESS SO
            REGISTERED, MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, IN
            THE UNITED STATES (AS DEFINED HEREIN) OR TO U.S. PERSONS EXCEPT IN
            ACCORDANCE WITH THE PROVISIONS OF REGULATION S UNDER THE 1933 ACT,
            PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT,
            OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT
            SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE 1933 ACT AND IN
            EACH CASE ONLY IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
            IN ADDITION, HEDGING TRANSACTIONS INVOLVING THE SECURITIES MAY NOT
            BE CONDUCTED UNLESS IN COMPLIANCE WITH THE 1933 ACT. "UNITED STATES"
            AND "U.S. PERSON" ARE AS DEFINED BY REGULATION S UNDER THE 1933
            ACT."

5.2 Seraph Capital hereby acknowledges and agrees to SmarTire making a notation
on its records or giving instructions to the registrar and transfer agent of
SmarTire in order to implement the restrictions on transfer set forth and
described in this Agreement.

<PAGE>

                                     - 6 -


6.                COSTS

6.1 Seraph Capital acknowledges and agrees that all costs and expenses incurred
by Seraph Capital (including any fees and disbursements of any special counsel
retained by Seraph Capital) relating to the acquisition of the Securities shall
be borne by Seraph Capital.

7.                GOVERNING LAW

7.1 This Agreement is governed by the laws of the Province of British Columbia
and the federal laws of Canada applicable therein. Seraph Capital irrevocably
attorns to the jurisdiction of the courts of the Province of British Columbia.

8.                SURVIVAL

8.1 This Agreement, including without limitation the representations, warranties
and covenants contained herein, shall survive and continue in full force and
effect and be binding upon the parties hereto notwithstanding the completion of
the purchase of the Shares by Seraph Capital pursuant hereto.

9.                ASSIGNMENT

9.1 This Agreement is not transferable or assignable.

10.               COUNTERPARTS AND ELECTRONIC MEANS

10.1 This Agreement may be executed in several counterparts, each of which will
be deemed to be an original and all of which will together constitute one and
the same instrument. Delivery of an executed copy of this Agreement by
electronic facsimile transmission or other means of electronic communication
capable of producing a printed copy will be deemed to be execution and delivery
of this Agreement as of the date first above written.

11.               SEVERABILITY

11.1 The invalidity or unenforceability of any particular provision of this
Agreement shall not affect or limit the validity or enforceability of the
remaining provisions of this Agreement.

12.               ENTIRE AGREEMENT

12.1 Except as expressly provided in this Agreement and in the agreements,
instruments and other documents contemplated or provided for herein, this
Agreement contains the entire agreement between the parties with respect to the
subject matter hereof and there are no other terms, conditions, representations
or warranties, whether expressed, implied, oral or written, by statute or common
law, by SmarTire or by anyone else.

IN WITNESS WHEREOF the parties hereto have duly executed this Agreement as of
the date first above written.

SMARTIRE SYSTEMS INC.                              SERAPH CAPITAL AG

By: /s/ Kevin A. Carlson                           By: /s/ Michael Minder
   -------------------------------------------        --------------------------
   Kevin A. Carlson, Managing Director and CFO        Authorized Signatory

<PAGE>

                                     - 7 -


THIS IS PAGE 7 OF THE ADVISORY FEE PAYMENT AND SUBSCRIPTION AGREEMENT BETWEEN
SMARTIRE SYSTEMS INC. AND SERAPH CAPITAL AG

<PAGE>

                                   APPENDIX 1

                           FORM OF WARRANT CERTIFICATE

"THE SECURITIES REPRESENTED HEREBY HAVE BEEN OFFERED IN AN OFFSHORE TRANSACTION
TO A PERSON WHO IS NOT A U.S. PERSON (AS DEFINED HEREIN) PURSUANT TO REGULATION
S UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT").

NONE OF THE SECURITIES REPRESENTED HEREBY HAVE BEEN REGISTERED UNDER THE 1933
ACT, OR ANY U.S. STATE SECURITIES LAWS, AND, UNLESS SO REGISTERED, MAY NOT BE
OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, IN THE UNITED STATES (AS DEFINED
HEREIN) OR TO U.S. PERSONS EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF
REGULATION S UNDER THE 1933 ACT, PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE 1933 ACT, OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE 1933 ACT AND IN
EACH CASE ONLY IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. IN ADDITION,
HEDGING TRANSACTIONS INVOLVING THE SECURITIES MAY NOT BE CONDUCTED UNLESS IN
COMPLIANCE WITH THE 1933 ACT. "UNITED STATES" AND "U.S. PERSON" ARE AS DEFINED
BY REGULATION S UNDER THE 1933 ACT."

               THESE WARRANTS WILL EXPIRE AND BECOME NULL AND VOID
             AT 4:30 P.M. (VANCOUVER TIME) ON _______________, 2005.

                             SHARE PURCHASE WARRANTS
                          TO PURCHASE COMMON SHARES OF

                              SMARTIRE SYSTEMS INC.

                incorporated in the Province of British Columbia

                  THIS IS TO CERTIFY THAT SERAPH CAPITAL AG, (the "Holder") of
Gubelstrasse 15, CH-6300 Zug, Switzerland, (has the right to purchase, upon and
subject to the terms and conditions hereinafter referred to, up to
________________________________ fully paid and non-assessable common shares
(the "Shares") in the capital of SmarTire Systems Inc. (hereinafter called the
"Company") on or before 4:30 p.m. (Vancouver time) on ____________________, 2004
(the "Expiry Date") at a price of US$  o   per Share.

      1.    ONE (1) WARRANT AND U.S.$  o   ARE REQUIRED TO PURCHASE ONE SHARE.
            THIS CERTIFICATE REPRESENTS __________________________ WARRANTS.

      2.    These Warrants are issued subject to the Terms and Conditions
            attached to the Warrants issued by SmarTire (the "Terms and
            Conditions") attached hereto as Appendix "A" and the Warrant Holder
            may exercise the right to purchase Shares only in accordance with
            those Terms and Conditions.

      3.    Nothing contained herein or in the Terms and Conditions will confer
            any right upon the Holder hereof or any other person to subscribe
            for or purchase any Shares at any time subsequent to the Expiry
            Date, and from and after such time, this Warrant and all rights
            hereunder will be void and of no value.

<PAGE>

                                     - 2 -


            IN WITNESS WHEREOF SmarTire has executed this Warrant Certificate
this ______ day of ___________________, 2002.

SMARTIRE SYSTEMS INC.


Per:  ___________________________________________
      Kevin A. Carlson, Managing Director and CFO

PLEASE NOTE THAT ALL SHARE CERTIFICATES MUST BE LEGENDED AS FOLLOWS DURING THE
CURRENCY OF APPLICABLE HOLD PERIODS:

      "THE SECURITIES REPRESENTED HEREBY HAVE BEEN OFFERED IN AN OFFSHORE
TRANSACTION TO A PERSON WHO IS NOT A U.S. PERSON (AS DEFINED HEREIN) PURSUANT TO
REGULATION S UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
"1933 ACT").

NONE OF THE SECURITIES REPRESENTED HEREBY HAVE BEEN REGISTERED UNDER THE 1933
ACT, OR ANY U.S. STATE SECURITIES LAWS, AND, UNLESS SO REGISTERED, MAY NOT BE
OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, IN THE UNITED STATES (AS DEFINED
HEREIN) OR TO U.S. PERSONS EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF
REGULATION S UNDER THE 1933 ACT, PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE 1933 ACT, OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE 1933 ACT AND IN
EACH CASE ONLY IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. IN ADDITION,
HEDGING TRANSACTIONS INVOLVING THE SECURITIES MAY NOT BE CONDUCTED UNLESS IN
COMPLIANCE WITH THE 1933 ACT. "UNITED STATES" AND "U.S. PERSON" ARE AS DEFINED
BY REGULATION S UNDER THE 1933 ACT."

<PAGE>

                                  APPENDIX "A"

TERMS AND CONDITIONS dated ___________________, 2002, attached to the Warrants
issued by SmarTire Systems Inc.

1.                INTERPRETATION

1.1 Definitions

In these Terms and Conditions, unless there is something in the subject matter
or context inconsistent therewith:

      (a)   "Company" means SmarTire Systems Inc. until a successor corporation
            will have become such as a result of consolidation, amalgamation or
            merger with or into any other corporation or corporations, or as a
            result of the conveyance or transfer of all or substantially all of
            the properties and estates of SmarTire as an entirety to any other
            corporation and thereafter "Company" will mean such successor
            corporation;

      (b)   "Company's Auditors" means an independent firm of accountants duly
            appointed as auditors of SmarTire;

      (c)   "Director" means a director of SmarTire for the time being, and
            reference, without more, to action by the directors means action by
            the directors of SmarTire as a Board, or whenever duly empowered,
            action by an executive committee of the Board;

      (d)   "herein", "hereby" and similar expressions refer to these Terms and
            Conditions as the same may be amended or modified from time to time;
            and the expression "Article" and "Section," followed by a number
            refer to the specified Article or Section of these Terms and
            Conditions;

      (e)   "person" means an individual, corporation, partnership, trustee or
            any unincorporated organization and words importing persons have a
            similar meaning;

      (f)   "shares" means the common shares in the capital of SmarTire as
            constituted at the date hereof and any shares resulting from any
            subdivision or consolidation of the shares;

      (g)   "Warrant Holders" or "Holders" means the holders of the Warrants;
            and

      (h)   "Warrants" means the warrants of SmarTire issued and presently
            authorized and for the time being outstanding.

1.2 Gender

Words importing the singular number include the plural and vice versa and words
importing the masculine gender include the feminine and neuter genders.

1.3 Interpretation not affected by Headings

The division of these Terms and Conditions into Articles and Sections, and the
insertion of headings are for convenience of reference only and will not affect
the construction or interpretation thereof.

1.4 Applicable Law

The Warrants will be construed in accordance with the laws of the Province of
British Columbia.

<PAGE>

2.                ISSUE OF WARRANTS

2.1 Additional Warrants

SmarTire may at any time and from time to time issue additional warrants or
grant options or similar rights to purchase shares of its capital stock.

2.2 Warrant to Rank Pari-Passu

All Warrants and additional warrants, options or similar rights to purchase
shares from time to time issued or granted by SmarTire, will rank pari-passu
whatever may be the actual dates of issue or grant thereof, or of the dates of
the certificates by which they are evidenced.

2.3 Issue in Substitution for Mutilated Lost, Destroyed or Stolen Warrant
Certificates

      (a)   In case a Warrant Certificate becomes mutilated, lost, destroyed or
            stolen, the Company, at its discretion, may issue and deliver a new
            Warrant Certificate of like date and tenor as the one mutilated,
            lost, destroyed or stolen, in exchange for and in place of and upon
            cancellation of such mutilated Warrant Certificate, or in lieu of,
            and in substitution for such lost, destroyed or stolen Warrant
            Certificate and the substituted Warrant Certificate will be entitled
            to the benefit hereof and rank equally in accordance with its terms
            with all other Warrants issued or to be issued by the Company.

      (b)   The applicant for the issue of a new Warrant Certificate pursuant
            hereto will bear the cost of the issue thereof and in case of loss,
            destruction or theft furnish to the Company such evidence of
            ownership and of loss, destruction, or theft of the Warrant
            Certificate so lost, destroyed or stolen as will be satisfactory to
            the Company in its discretion and such applicant may also be
            required to furnish indemnity in amount and form satisfactory to the
            Company in its discretion, and will pay the reasonable charges of
            the Company in connection therewith.

2.4 Warrant Holder Not a Shareholder

The holding of a Warrant will not constitute the Holder thereof a shareholder of
SmarTire, nor entitle him to any right or interest in respect thereof except as
in the Warrant expressly provided.

3.                NOTICE

3.1 Notice to Warrant Holders

Any notice required or permitted to be given to the Holders will be in writing
and may be given by prepaid registered post, electronic facsimile transmission
or other means of electronic communication capable of producing a printed copy
to the address of the Holder appearing on the Holder's Warrant or to such other
address as any Holder may specify by notice in writing to SmarTire, and any such
notice will be deemed to have been given and received by the Holder to whom it
was addressed if mailed, on the third day following the mailing thereof, if by
facsimile or other electronic communication, on successful transmission, or, if
delivered, on delivery; but if at the time or mailing or between the time of
mailing and the third business day thereafter there is a strike, lockout, or
other labour disturbance affecting postal service, then the notice will not be
effectively given until actually delivered.

3.2 Notice to SmarTire

Any notice required or permitted to be given to SmarTire will be in writing and
may be given by prepaid registered post, electronic facsimile transmission or
other means of electronic communication capable of producing a printed copy to
the address of SmarTire set forth below or such other address as SmarTire may
specify by notice in writing to the Holder, and any such notice will be deemed
to have been given and received by SmarTire to whom it was addressed if mailed,
on the third day following the mailing thereof, if by facsimile or other
electronic

<PAGE>

communication, on successful transmission, or, if delivered, on delivery; but if
at the time of mailing or between the time of mailing and the third business day
thereafter there is a strike, lockout, or other labour disturbance affecting
postal service, then the notice will not be effectively given until actually
delivered:

                  SmarTire Systems Inc.
                  13151 Vanier Place
                  Suite 150
                  Richmond, British Columbia
                  Canada V6V 2J1

                  Attention: Chief Financial Officer

                  Fax No.: (604) 276-2350

4.                EXERCISE OF WARRANTS

4.1 Method of Exercise of Warrants

The right to purchase shares conferred by the Warrants may be exercised by the
Holder surrendering the Warrant Certificate representing same, with a duly
completed and executed subscription in the form attached hereto and a bank draft
or certified cheque payable to or to the order Company, at par, in Vancouver,
British Columbia, for the purchase price applicable at the time of surrender in
respect of the shares subscribed for in lawful money of the United States of
America, to SmarTire at the address set forth in, or from time to time specified
by SmarTire pursuant to, Section 3.2.

4.2 Effect of Exercise of Warrants

      (a)   Upon surrender and payment as aforesaid the shares so subscribed for
            will be deemed to have been issued and such person or persons will
            be deemed to have become the Holder or Holders of record of such
            shares on the date of such surrender and payment, and such shares
            will be issued at the subscription price in effect on the date of
            such surrender and payment.

      (b)   Within ten business days after surrender and payment as aforesaid,
            SmarTire will forthwith cause to be delivered to the person or
            persons in whose name or names the shares so subscribed for are to
            be issued as specified in such subscription or mailed to him or them
            at his or their respective addresses specified in such subscription,
            a certificate or certificates for the appropriate number of shares
            not exceeding those which the Warrant Holder is entitled to purchase
            pursuant to the Warrant surrendered.

4.3 Subscription for Less Than Entitlement

The Holder of any Warrant may subscribe for and purchase a number of shares less
than the number which he is entitled to purchase pursuant to the surrendered
Warrant. In the event of any purchase of a number of common shares less than the
number which can be purchased pursuant to a Warrant, the Holder thereof upon
exercise thereof will in addition be entitled to receive a new Warrant in
respect of the balance of the shares which he was entitled to purchase pursuant
to the surrendered Warrant and which were not then purchased.

4.4 Warrants for Fractions of Shares

To the extent that the Holder of any Warrant is entitled to receive on the
exercise or partial exercise thereof a fraction of a common share, such right
may be exercised in respect of such fraction only in combination with another
Warrant or other Warrants which in the aggregate entitle the Holder to receive a
whole number of such common shares.

<PAGE>

4.5 Expiration of Warrants

After the expiration of the period within which a Warrant is exercisable, all
rights thereunder will wholly cease and terminate and such Warrant will be void
and of no effect.

4.6 Time of Essence

Time will be of the essence hereof.

4.7 Subscription Price

One (1) Warrant and US$  o   are required to subscribe for each Share during the
term of the Warrants.

4.8 Adjustment of Exercise Price

      (a)   The exercise price and the number of common shares deliverable upon
            the exercise of the Warrants will be subject to adjustment in the
            event and in the manner following:

            (i)   If and whenever the shares at any time outstanding are
                  subdivided into a greater or consolidated into a lesser number
                  of shares the exercise price will be decreased or increased
                  proportionately as the case may be; upon any such subdivision
                  or consolidation the number of shares deliverable upon the
                  exercise of the Warrants will be increased or decreased
                  proportionately as the case may be.

            (ii)  In case of any capital reorganization or of any
                  reclassification of the capital of SmarTire or in the case of
                  the consolidation, merger or amalgamation of SmarTire with or
                  into any other Company (hereinafter collectively referred to
                  as a "Reorganization"), each Warrant will after such
                  Reorganization confer the right to purchase the number of
                  shares or other securities of SmarTire (or of SmarTire's
                  resulting from such Reorganization) which the Warrant Holder
                  would have been entitled to upon Reorganization if the Warrant
                  Holder had been a shareholder at the time of such
                  Reorganization.

                  In any such case, if necessary, appropriate adjustments will
                  be made in the application of the provisions of this Article
                  Four relating to the rights and interest thereafter of the
                  Holders of the Warrants so that the provisions of this Article
                  Four will be made applicable as nearly as reasonably possible
                  to any shares or other securities deliverable after the
                  Reorganization on the exercise of the Warrants.

                  The subdivision or consolidation of shares at any time
                  outstanding into a greater or lesser number of shares (whether
                  with or without par value) will not be deemed to be a
                  Reorganization for the purposes of this clause 4.8(a)(ii).

      (b)   The adjustments provided for in this Section 4.8 are cumulative and
            will become effective immediately after the record date or, if no
            record date is fixed, the effective date of the event which results
            in such adjustments.

4.9 Determination of Adjustments

If any questions will at any time arise with respect to the exercise price or
any adjustment provided for in Section 4.8, such questions will be conclusively
determined by SmarTire's Auditors, or, if they decline to so act any other firm
of chartered accountants, in Vancouver, British Columbia that SmarTire may
designate and who will have access to all appropriate records and such
determination will be binding upon SmarTire and the Holders of the Warrants.

<PAGE>

5.                COVENANTS BY SMARTIRE

5.1 Reservation of Shares

SmarTire will reserve and there will remain unissued out of its authorized
capital a sufficient number of shares to satisfy the rights of purchase provided
for herein and in the Warrants should the Holders of all the Warrants from time
to time outstanding determine to exercise such rights in respect of all shares
which they are or may be entitled to purchase pursuant thereto and hereto.

6.                WAIVER OF CERTAIN RIGHTS

6.1 Immunity of Shareholders, etc.

The Warrant Holder, as part of the consideration for the issue of the Warrants,
waives and will not have any right, cause of action or remedy now or hereafter
existing in any jurisdiction against any past, present or future incorporator,
shareholder, Director or Officer (as such) of SmarTire for the issue of shares
pursuant to any Warrant or on any covenant, agreement, representation or
warranty by SmarTire herein contained or in the Warrant.

7.                MODIFICATION OF TERMS, MERGER, SUCCESSORS

7.1 Modification of Terms and Conditions for Certain Purposes

From time to time SmarTire may, subject to the provisions of these presents,
modify the Terms and Conditions hereof, for the purpose of correction or
rectification of any ambiguities, defective provisions, errors or omissions
herein.

7.2 Warrants Transferable

The Warrants and all rights attached to them are transferable or assignable at
the sole discretion of the Warrant Holder, subject to applicable securities laws
and regulatory requirements. SmarTire will refuse to register and will not
otherwise recognize any transfer of the Warrants not made in accordance with the
provisions of Regulation S, pursuant to an effective registration statement
under the 1933 Act or pursuant to an available exemption from, or in a
transaction not subject to, the registration requirements of the 1933 Act.

DATED as of the date first above written in these Terms and Conditions.

                                  SMARTIRE SYSTEMS INC.

                                  By:
                                     -------------------------------------------
                                     Kevin A. Carlson, Managing Director and CFO

<PAGE>

                              FORM OF SUBSCRIPTION

TO:   SmarTire Systems Inc.
      13151 Vanier Place, Suite 150
      Richmond, British Columbia
      Canada V6V 2J1

The undersigned Holder of the within Warrants hereby subscribes for ____________
common shares (the "Shares") of SmarTire Systems Inc. (the "Company") pursuant
to the within Warrants at U.S.$1.75 per Share on the terms specified in the said
Warrants. This subscription is accompanied by a certified cheque or bank draft
payable to or to the order of SmarTire for the whole amount of the purchase
price of the Shares.

The undersigned hereby directs that the Shares be registered as follows:

NAME(S) IN FULL                    ADDRESS(ES)                  NUMBER OF SHARES
______________________________     ________________________     ________________

______________________________     ________________________     ________________

______________________________     ________________________     ________________

                                   TOTAL:                       ________________


(Please print full name in which share certificates are to be issued, stating
whether Mr., Mrs. or Miss is applicable).

DATED this _____ day of ____________________ , ______.

In the presence of:

__________________________________         _______________________________
Signature of Witness                       Signature of Warrant Holder

Please print below your name and address in full.

Name (Mr./Mrs./Miss) ___________________________________________________________

Address  _______________________________________________________________________

         _______________________________________________________________________


                         INSTRUCTIONS FOR SUBSCRIPTION

The signature to the subscription must correspond in every particular with the
name written upon the face of the Warrant without alteration or enlargement or
any change whatever. If there is more than one subscriber, all must sign.

In the case of persons signing by agent or attorney or by personal
representative(s), the authority of such agent, attorney or representative(s) to
sign must be proven to the satisfaction of SmarTire.

If the Warrant certificate and the form of subscription are being forwarded by
mail, registered mail must be employed.

<PAGE>

                                       2


                        AGREEMENTS OF THE WARRANT HOLDER

                                    ARTICLE 1
                    REPRESENTATIONS, WARRANTIES AND COVENANTS

1.1 By executing this Subscription, the Warrant Holder hereby covenants,
represents and warrants to and with SmarTire that:

      (a)   the Warrant Holder, is legally competent to execute this
            Subscription, to take all actions required pursuant hereto, and the
            execution and delivery of this Subscription by the Warrant Holder
            has been duly and validly authorized;

      (b)   the Warrant Holder is purchasing the Shares as a principal (and not
            as an agent) for investment purposes only with no intention or view
            to reselling or distributing any portion or beneficial interest in
            the Shares; provided, however, that the Warrant Holder may sell or
            otherwise dispose of any of the Shares pursuant to registration of
            any of the Shares pursuant to the United States Securities Act of
            1933 (the "1933 Act") and any applicable state securities laws or
            under an exemption from such registration requirements and as
            otherwise provided herein;

      (c)   the Warrant Holder is not an underwriter of, or dealer in, the
            common shares of SmarTire, nor is the Warrant Holder participating,
            pursuant to a contractual agreement or otherwise, in the
            distribution of the Shares; and

      (d)   the Warrant Holder is familiar with the aims and objectives of
            SmarTire and is aware of the risk and other characteristics of its
            investment in the Shares.

                                    ARTICLE 2
                     ACKNOWLEDGEMENTS OF THE WARRANT HOLDER

2.1 The Warrant Holder acknowledges and agrees that:

      (a)   none of the Shares have been registered under the 1933 Act, or under
            any state securities or "blue sky" laws of any state of the United
            States, and, unless so registered, may not be offered or sold in the
            United States or, directly or indirectly, to U.S. Persons except in
            accordance with the provisions of Regulation S, pursuant to an
            effective registration statement under the 1933 Act, or pursuant to
            an exemption from, or in a transaction not subject to, the
            registration requirements of the 1933 Act;

      (b)   none of the Shares are listed on any stock exchange or automated
            dealer quotation system and no representation has been made to the
            Warrant Holder that any of the Shares will become listed on any
            stock exchange or automated dealer quotation system, except that
            currently the common shares of SmarTire are listed for trading on
            the Nasdaq SmallCap Market;

      (c)   the decision to execute this Subscription and purchase the Shares
            agreed to be purchased hereunder has not been based upon any oral or
            written representation as to fact or otherwise made by or on behalf
            of SmarTire, and such decision is based entirely upon a review of
            information (the receipt of which is hereby acknowledged) which has
            been filed by SmarTire with the United States Securities and
            Exchange Commission (the "SEC") and in compliance, or intended
            compliance, with applicable securities legislation. If SmarTire has
            presented a business plan to the Warrant Holder, the Warrant Holder
            acknowledges that the business plan may not be achieved or be
            achievable;

      (d)   the Warrant Holder has been advised by SmarTire that the Warrant
            Holder should consult its own legal adviser before disposing of all
            or any part of any Shares that may be issued to the Warrant Holder
            pursuant to this Subscription to avoid breach of applicable
            Legislation;

<PAGE>

                                       3


      (e)   no person has made to the Warrant Holder any written or oral
            representations:

            (i)   that any person will resell or repurchase the Shares;

            (ii)  that any person will refund the exercise price for the Shares;
                  or

            (iii) as to the future price or value of the Shares;

      (f)   neither the SEC nor any other securities commission or similar
            regulatory authority has reviewed or passed on the merits of the
            Shares;

      (g)   the Warrant Holder understands and agrees that offers and sales of
            any of the Shares prior to the expiration of the applicable hold
            period (the "Restricted Period") shall only be made in compliance
            with the safe harbor provisions set forth in Regulation S, pursuant
            to the registration provisions of the 1933 Act or an exemption
            therefrom, and that all offers and sales after the Restricted Period
            shall be made only in compliance with the registration provisions of
            the 1933 Act or an exemption therefrom;

      (h)   the Warrant Holder understands and agrees not to engage in any
            hedging transactions involving any of the Shares unless such
            transactions are in compliance with the provisions of the 1933 Act;
            and

      (i)   the Warrant Holder acknowledges that it will not be acquiring the
            Shares as a result of, and will not itself engage in, any "directed
            selling efforts" (as defined in Regulation S under the 1933 Act) in
            the United States in respect of any of the Shares which would
            include any activities undertaken for the purpose of, or that could
            reasonably be expected to have the effect of, conditioning the
            market in the United States for the resale of any of the Shares;
            provided, however, that the Warrant Holder may sell or otherwise
            dispose of any of the Shares pursuant to registration of any of the
            Shares pursuant to the 1933 Act and any applicable state securities
            laws or under an exemption from such registration requirements; and

      (j)   the Warrant Holder is acquiring the Shares pursuant to an exemption
            from the registration and prospectus requirements of the securities
            legislation (the "Legislation") in all jurisdictions relevant to
            this Subscription. As a consequence, the Warrant Holder acknowledges
            and agrees that:

            (i)   the Warrant Holder will not be entitled to use most of the
                  civil remedies available under the Legislation;

            (ii)  the Warrant Holder will not receive information that would
                  otherwise be required to be provided to him or her pursuant to
                  the Legislation;

            (iii) prior to issuing any Shares to the Warrant Holder, SmarTire
                  may require the Warrant Holder to complete, sign and return to
                  SmarTire as soon as possible, on request by SmarTire, any such
                  documents, questionnaires, notices and undertakings as
                  SmarTire may in its sole discretion deem appropriate to ensure
                  compliance with applicable law, and with the rules and
                  policies of the relevant regulatory authorities and stock
                  exchanges; and

            (iv)  the issuance and sale of the Shares to the Warrant Holder will
                  not be completed if it would be unlawful.

<PAGE>

                                       4


                                    ARTICLE 3
                         LEGENDING OF SUBJECT SECURITIES

3.1 The Warrant Holder hereby acknowledges that that upon the issuance thereof,
and until such time as the same is no longer required, the certificates
representing any of the Shares will bear such legend(s) as shall be required
under applicable securities laws and regulations.