ESCROW AGREEMENT

      THIS ESCROW  AGREEMENT  (this  "Agreement") is made and entered into as of
May 19 , 2004 by SMARTIRE  SYSTEMS,  INC, a British  Columbia  corporation  (the
"Company");  CORNELL CAPITAL PARTNERS,  LP, a Delaware limited  partnership (the
"Investor"); and BUTLER GONZALEZ LLP (the "Escrow Agent").

                                   BACKGROUND

      WHEREAS,  the Company and the Investor have entered into an Standby Equity
Distribution Agreement (the "Standby Equity Distribution Agreement") dated as of
the date hereof,  pursuant to which the  Investor  will  purchase the  Company's
Common Stock, no par per share (the "Common Stock"),  at a price per share equal
to  the  Purchase  Price,  as  that  term  is  defined  in  the  Standby  Equity
Distribution Agreement,  for an aggregate price of up to Fifteen Million Dollars
($15,000,000).  The Standby Equity Distribution  Agreement provides that on each
Advance  Date the  Investor,  as that  term is  defined  in the  Standby  Equity
Distribution Agreement, shall deposit the Advance pursuant to the Advance Notice
in a segregated  escrow account to be held by Escrow Agent and the Company shall
deposit  shares of the Company's  Common Stock,  which shall be purchased by the
Investor as set forth in the Standby  Equity  Distribution  Agreement,  with the
Escrow  Agent,  in order to  effectuate  a  disbursement  to the  Company of the
Advance by the Escrow Agent and a disbursement  to the Investor of the shares of
the Company's  Common Stock by Escrow Agent at a closing to be held as set forth
in the Standby Equity Distribution Agreement (the "Closing").

      WHEREAS,  Escrow Agent has agreed to accept,  hold, and disburse the funds
and the shares of the  Company's  Common Stock  deposited  with it in accordance
with the terms of this Agreement.

      WHEREAS,  in order to  establish  the escrow of funds and shares to effect
the provisions of the Standby Equity Distribution Agreement,  the parties hereto
have entered into this Agreement.

      NOW THEREFORE,  in consideration of the foregoing,  it is hereby agreed as
follows:

      1. Definitions. The following terms shall have the following meanings when
used herein:

            a. "Escrow  Funds" shall mean the Advance funds  deposited  with the
Escrow Agent pursuant to this Agreement.

            b. "Joint Written Direction" shall mean a written direction executed
by the  Investor  and the Company  directing  Escrow  Agent to disburse all or a
portion  of the  Escrow  Funds or to take or  refrain  from  taking  any  action
pursuant to this Agreement.

<PAGE>

            c.  "Common  Stock  Joint  Written  Direction"  shall mean a written
direction executed by the Investor and the Company directing  Investor's Counsel
to disburse all or a portion of the shares of the  Company's  Common Stock or to
refrain from taking any action pursuant to this Agreement.

      2. Appointment of and Acceptance by Escrow Agent.

            a. The Investor and the Company hereby appoint Escrow Agent to serve
as Escrow Agent  hereunder.  Escrow Agent hereby accepts such  appointment  and,
upon receipt by wire transfer of the Escrow Funds in  accordance  with Section 3
below,  agrees to hold,  invest and disburse the Escrow Funds in accordance with
this Agreement.

            b. The Investor and the Company  hereby  appoint the Escrow Agent to
serve as the holder of the shares of the  Company's  Common Stock which shall be
purchased by the Investor. The Escrow Agent hereby accepts such appointment and,
upon receipt of the certificates representing the shares of the Company's Common
Stock in accordance with Section 3 below, agrees to hold and disburse the shares
of the Company's Common Stock in accordance with this Agreement.

            c. The Company hereby  acknowledges that the Escrow Agent is counsel
to the Investor in connection with the transactions  contemplated and referenced
herein.  The  Company  agrees  that  in the  event  of any  dispute  arising  in
connection  with this Escrow  Agreement  or  otherwise  in  connection  with any
transaction or agreement  contemplated and referenced  herein,  the Escrow Agent
shall be permitted  to continue to  represent  the Investor and the Company will
not seek to disqualify such counsel.

      3. Creation of Escrow Account/Common Stock Account.

            a. On or prior to the date of this  Agreement the Escrow Agent shall
establish  an escrow  account  for the deposit of the Escrow  Funds  entitled as
follows:  Smartire Systems,  Inc/Cornell Capital Partners, LP. The Investor will
wire funds to the account of the Escrow Agent as follows:

BANK:                                      Wachovia, N.A. of New Jersey
ROUTING #:                                 031201467
ACCOUNT #:                                 2020000659170
NAME ON ACCOUNT:                           Butler Gonzalez LLP as Escrow Agent
NAME ON SUB-ACCOUNT:                       Smartire Systems, Inc/Cornell Capital
                                           Partners, LP Escrow account


      4. Deposits  into the Escrow  Account.  The Investor  agrees that it shall
promptly  deliver all monies for the  payment of the Common  Stock to the Escrow
Agent for deposit in the Escrow Account.

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<PAGE>

      5. Disbursements from the Escrow Account.

            a.  At  such  time as  Escrow  Agent  has  collected  and  deposited
instruments  of payment in the total amount of the Advance and has received such
Common Stock from the Company which are to be issued to the Investor pursuant to
the Standby  Equity  Distribution  Agreement,  the Escrow Agent shall notify the
Company  and the  Investor.  The Escrow  Agent will  continue to hold such funds
until the Investor  and Company  execute and deliver a Joint  Written  Direction
directing  the Escrow  Agent to  disburse  the Escrow  Funds  pursuant  to Joint
Written  Direction at which time the Escrow Agent shall wire the Escrow Funds to
the Company.  In disbursing such funds,  Escrow Agent is authorized to rely upon
such Joint Written  Direction from Company and may accept any signatory from the
Company  listed on the signature  page to this  Agreement and any signature from
the Investor that Escrow Agent already has on file.  Simultaneous  with delivery
of the  executed  Joint  Written  Direction to the Escrow Agent the Investor and
Company shall execute and deliver a Common Stock Joint Written  Direction to the
Escrow Agent directing the Escrow Agent to release to the Investor the shares of
the Company's  Common Stock. In releasing such shares of Common Stock the Escrow
Agent is authorized to rely upon such Common Stock Joint Written  Direction from
Company and may accept any  signatory  from the Company  listed on the signature
page to this Agreement and any signature from the Escrow Agent has on file.

      In the event the Escrow  Agent does not  receive the amount of the Advance
from the  Investor or the shares of Common Stock to be purchased by the Investor
from the Company, the Escrow Agent shall notify the Company and the Investor.

      In the event that the Escrow Agent has not received the Common Stock to be
purchased by the Investor from the Company, in no event will the Escrow Funds be
released to the Company until such shares are received by the Escrow  Agreement.
For purposes of this Agreement,  the term "Common Stock certificates" shall mean
Common Stock  certificates  to be purchased  pursuant to the respective  Advance
Notice pursuant to the Standby Equity Distribution Agreement.

      6. Deposit of Funds. The Escrow Agent is hereby  authorized to deposit the
wire transfer proceeds in the Escrow Account.

      7. Suspension of Performance: Disbursement Into Court.

            a.  Escrow  Agent.  If at any time,  there  shall  exist any dispute
between the Company and the Investor with respect to holding or  disposition  of
any portion of the Escrow Funds or the Common Stock or any other  obligations of
Escrow Agent  hereunder,  or if at any time Escrow Agent is unable to determine,
to Escrow Agent's sole  satisfaction,  the proper  disposition of any portion of
the  Escrow  Funds  or  Escrow  Agent's  proper  actions  with  respect  to  its
obligations hereunder, or if the parties have not within thirty (30) days of the
furnishing  by Escrow  Agent of a notice of  resignation  pursuant  to Section 9
hereof,  appointed a successor Escrow Agent to act hereunder,  then Escrow Agent
may, in its sole discretion, take either or both of the following actions:

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<PAGE>

                  i.  Suspend  the   performance  of  any  of  its   obligations
(including  without  limitation any disbursement  obligations) under this Escrow
Agreement  until  such  dispute or  uncertainty  shall be  resolved  to the sole
satisfaction  of  Escrow  Agent  or  until a  successor  Escrow  Agent  shall be
appointed (as the case may be); provided however, Escrow Agent shall continue to
invest the Escrow Funds in accordance with Section 8 hereof; and/or

                  ii. Petition (by means of an interpleader  action or any other
appropriate method) any court of competent  jurisdiction in any venue convenient
to Escrow Agent, for  instructions  with respect to such dispute or uncertainty,
and to the  extent  required  by law,  pay into  such  court,  for  holding  and
disposition in accordance with the instructions of such court, all funds held by
it in the Escrow Funds,  after deduction and payment to Escrow Agent of all fees
and expenses  (including  court costs and attorneys'  fees) payable to, incurred
by, or expected to be incurred by Escrow Agent in connection with performance of
its duties and the exercise of its rights hereunder.

                  iii. Escrow Agent shall have no liability to the Company,  the
Investor,  or any person with respect to any such  suspension of  performance or
disbursement  into  court,  specifically  including  any  liability  or  claimed
liability that may arise, or be alleged to have arisen, out of or as a result of
any delay in the  disbursement of funds held in the Escrow Funds or any delay in
with respect to any other action required or requested of Escrow Agent.

      8.  Investment of Escrow Funds.  The Escrow Agent shall deposit the Escrow
Funds in a non-interest bearing money market account.

      If Escrow  Agent has not  received a Joint  Written  Direction at any time
that an  investment  decision  must be made,  Escrow Agent may retain the Escrow
Fund, or such portion thereof,  as to which no Joint Written  Direction has been
received, in a non-interest bearing money market account.

      9.  Resignation and Removal of Escrow Agent.  Escrow Agent may resign from
the performance of its duties  hereunder at any time by giving thirty (30) days'
prior written notice to the parties or may be removed, with or without cause, by
the parties,  acting jointly,  by furnishing a Joint Written Direction to Escrow
Agent,  at any time by the  giving of ten (10)  days'  prior  written  notice to
Escrow Agent as provided  herein below.  Upon any such notice of  resignation or
removal,  the  representatives  of the  Investor and the Company  identified  in
Sections 13a.(iv) and 13b.(iv),  below, jointly shall appoint a successor Escrow
Agent  hereunder,  which  shall be a  commercial  bank,  trust  company or other
financial  institution  with  a  combined  capital  and  surplus  in  excess  of
$10,000,000.00.  Upon the  acceptance  in writing of any  appointment  of Escrow
Agent hereunder by a successor  Escrow Agent,  such successor Escrow Agent shall
thereupon succeed to and become vested with all the rights,  powers,  privileges
and duties of the retiring Escrow Agent,  and the retiring Escrow Agent shall be
discharged  from its duties and  obligations  under this Escrow  Agreement,  but
shall not be  discharged  from any  liability  for actions taken as Escrow Agent
hereunder  prior  to  such   succession.   After  any  retiring  Escrow  Agent's
resignation or removal,  the provisions of this Escrow  Agreement shall inure to

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<PAGE>

its  benefit as to any  actions  taken or omitted to be taken by it while it was
Escrow  Agent under this  Escrow  Agreement.  The  retiring  Escrow  Agent shall
transmit all records pertaining to the Escrow Funds and shall pay all funds held
by it in the Escrow Funds to the successor Escrow Agent,  after making copies of
such records as the retiring  Escrow Agent deems  advisable and after  deduction
and payment to the retiring  Escrow  Agent of all fees and  expenses  (including
court costs and  attorneys'  fees)  payable to,  incurred  by, or expected to be
incurred by the retiring  Escrow Agent in connection with the performance of its
duties and the exercise of its rights hereunder.

      10. Liability of Escrow Agent.

            a. Escrow Agent shall have no liability or  obligation  with respect
to the Escrow  Funds  except  for Escrow  Agent's  willful  misconduct  or gross
negligence.  Escrow Agent's sole  responsibility  shall be for the  safekeeping,
investment, and disbursement of the Escrow Funds in accordance with the terms of
this  Agreement.  Escrow Agent shall have no implied duties or  obligations  and
shall not be charged with  knowledge or notice or any fact or  circumstance  not
specifically  set forth herein.  Escrow Agent may rely upon any instrument,  not
only as to its due  execution,  validity and  effectiveness,  but also as to the
truth and  accuracy of any  information  contained  therein,  which Escrow Agent
shall in good faith  believe to be genuine,  to have been signed or presented by
the person or parties  purporting to sign the same and conform to the provisions
of this  Agreement.  In no event shall  Escrow  Agent be liable for  incidental,
indirect, special, and consequential or punitive damages. Escrow Agent shall not
be obligated to take any legal action or commence any  proceeding  in connection
with the Escrow  Funds,  any account in which Escrow Funds are  deposited,  this
Agreement  or the  Standby  Equity  Distribution  Agreement,  or to  appear  in,
prosecute  or defend  any such  legal  action or  proceeding.  Escrow  Agent may
consult legal counsel  selected by it in the event of any dispute or question as
to construction of any of the provisions hereof or of any other agreement or its
duties  hereunder,  or relating to any dispute  involving any party hereto,  and
shall  incur no  liability  and shall be fully  indemnified  from any  liability
whatsoever  in acting in  accordance  with the opinion or  instructions  of such
counsel.  The Company and the Investor jointly and severally shall promptly pay,
upon  demand,  the  reasonable  fees and expenses of any such counsel and Escrow
Agent is hereby  authorized  to pay such fees and  expenses  from  funds held in
escrow.

            b. The Escrow Agent is hereby authorized, in its sole discretion, to
comply with orders  issued or process  entered by any court with  respect to the
Escrow  Funds,  without  determination  by the  Escrow  Agent  of  such  court's
jurisdiction  in the matter.  If any portion of the Escrow  Funds is at any time
attached,  garnished  or  levied  upon  under any  court  order,  or in case the
payment, assignment, transfer, conveyance or delivery of any such property shall
be stayed or enjoined by any court order,  or in any case any order  judgment or
decree shall be made or entered by any court affecting such property or any part
thereof, then and in any such event, the Escrow Agent is authorized, in its sole
discretion, to rely upon and comply with any such order, writ judgment or decree
which it is advised by legal counsel  selected by it,  binding upon it,  without
the need for appeal or other action;  and if the Escrow Agent  complies with any
such  order,  writ,  judgment  or  decree,  it shall not be liable to any of the
parties  hereto  or to any other  person or entity by reason of such  compliance
even though such order,  writ judgment or decree may be  subsequently  reversed,
modified, annulled, set aside or vacated.

      11.  Indemnification of Escrow Agent. From and at all times after the date
of this  Agreement,  the parties  jointly and severally,  shall,  to the fullest
extent  permitted by law and to the extent provided  herein,  indemnify and hold
harmless Escrow Agent and each director, officer, employee,  attorney, agent and

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<PAGE>

affiliate of Escrow Agent (collectively,  the "Indemnified Parties") against any
and all actions,  claims (whether or not valid), losses,  damages,  liabilities,
costs  and  expenses  of  any  kind  or  nature  whatsoever  (including  without
limitation  reasonable  attorney's  fees,  costs and  expenses)  incurred  by or
asserted against any of the Indemnified  Parties from and after the date hereof,
whether direct, indirect or consequential,  as a result of or arising from or in
any way relating to any claim,  demand,  suit, action, or proceeding  (including
any inquiry or  investigation) by any person,  including without  limitation the
parties to this Agreement,  whether  threatened or initiated,  asserting a claim
for any legal or  equitable  remedy  against  any  person  under any  statute or
regulation, including, but not limited to, any federal or state securities laws,
or under any common law or  equitable  cause or  otherwise,  arising  from or in
connection with the negotiation,  preparation, execution, performance or failure
of performance of this Agreement or any transaction contemplated herein, whether
or not any such  Indemnified  Party is a party to any such action or proceeding,
suit or the target of any such inquiry or investigation; provided, however, that
no  Indemnified  Party  shall  have the right to be  indemnified  hereunder  for
liability finally determined by a court of competent jurisdiction, subject to no
further  appeal,  to have resulted  solely from the gross  negligence or willful
misconduct  of such  Indemnified  Party.  If any such  action or claim  shall be
brought or asserted against any Indemnified  Party, such Indemnified Party shall
promptly notify the Company and the Investor  hereunder in writing,  and the and
the Company  shall  assume the defense  thereof,  including  the  employment  of
counsel and the payment of all expenses.  Such  Indemnified  Party shall, in its
sole discretion,  have the right to employ separate counsel (who may be selected
by such  Indemnified  Party in its sole  discretion)  in any such  action and to
participate and to participate in the defense thereof, and the fees and expenses
of such  counsel  shall  be paid by such  Indemnified  Party,  except  that  the
Investor  and/or the  Company  shall be required to pay such fees and expense if
(a) the Investor or the Company agree to pay such fees and expenses,  or (b) the
Investor  and/or the Company  shall fail to assume the defense of such action or
proceeding or shall fail, in the sole discretion of such  Indemnified  Party, to
employ counsel  reasonably  satisfactory  to the  Indemnified  Party in any such
action or proceeding,  (c) the Investor and the Company are the plaintiff in any
such  action or  proceeding  or (d) the named or  potential  parties to any such
action or proceeding  (including any potentially impleaded parties) include both
Indemnified  Party the Company and/or the Investor and  Indemnified  Party shall
have been  advised  by  counsel  that  there may be one or more  legal  defenses
available to it which are different from or additional to those available to the
Company or the  Investor.  The  Investor  and the  Company  shall be jointly and
severally  liable to pay fees and expenses of counsel  pursuant to the preceding
sentence, except that any obligation to pay under clause (a) shall apply only to
the party so agreeing.  All such fees and expenses payable by the Company and/or
the Investor pursuant to the foregoing  sentence shall be paid from time to time
as incurred,  both in advance of and after the final  disposition of such action
or claim.  The  obligations  of the parties under this section shall survive any
termination of this  Agreement,  and  resignation or removal of the Escrow Agent
shall be independent of any obligation of Escrow Agent.

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<PAGE>

      12.  Expenses  of Escrow  Agent.  Except as set  forth in  Section  11 the
Company shall  reimburse  Escrow Agent for all of its  reasonable  out-of-pocket
expenses,  including  attorneys' fees, travel expenses,  telephone and facsimile
transmission  costs,  postage  (including  express mail and  overnight  delivery
charges),  copying  charges  and the like as  outlined  in  Section  12.4 of the
Standby  Equity  Distribution  Agreement  dated  the  date  hereof.  All  of the
compensation  and  reimbursement  obligations set forth in this Section shall be
payable by the Company,  upon demand by Escrow  Agent.  The  obligations  of the
Company under this Section shall survive any  termination  of this Agreement and
the resignation or removal of Escrow Agent.

      13. Warranties.

            a. The Investor makes the following  representations  and warranties
to the Escrow Agent and Investor's Counsel:

                  i. The  Investor  has full power and  authority to execute and
deliver this Agreement and to perform its obligations hereunder.

                  ii. This  Agreement  has been duly  approved by all  necessary
action of the Investor,  including any necessary approval of the limited partner
of the Investor, has been executed by duly authorized officers of the Investor's
general partner, enforceable in accordance with its terms.

                  iii. The execution,  delivery, and performance of the Investor
of this Agreement will not violate,  conflict with, or cause a default under the
agreement  of  limited  partnership  of  the  Investor,  any  applicable  law or
regulation,  any  court  order or  administrative  ruling or degree to which the
Investor  is a  party  or any of its  property  is  subject,  or any  agreement,
contract, indenture, or other binding arrangement.

                  iv.  Mark A.  Angelo  has been  duly  appointed  to act as the
representative  of  Investor  hereunder  and has full  power  and  authority  to
execute,  deliver, and perform this Agreement,  to execute and deliver any Joint
Written Direction,  to amend,  modify, or waive any provision of this Agreement,
and to take any and all other  actions as the  Investor's  representative  under
this Agreement, all without further consent or direction form, or notice to, the
Investor or any other party.

                  v. No party other than the parties hereto have, or shall have,
any lien, claim or security interest in the Escrow Funds or any part thereof. No
financing  statement  under  the  Uniform  Commercial  Code  is on  file  in any
jurisdiction claiming a security interest in or describing (whether specifically
or generally) the Escrow Funds or any part thereof.

                  vi. All of the  representations and warranties of the Investor
contained  herein are true and  complete  as of the date hereof and will be true
and complete at the time of any disbursement from the Escrow Funds.

            b. The Company makes the following representations and warranties to
Escrow Agent and, the Investor:

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<PAGE>

                  i.  The  Company  is a  corporation  duly  organized,  validly
existing, and in good standing under the laws of Bristish Columbia, and has full
power and  authority  to execute and deliver this  Agreement  and to perform its
obligations hereunder.

                  ii. This  Agreement  has been duly  approved by all  necessary
corporate action of the Company,  including any necessary  shareholder approval,
has been executed by duly  authorized  officers of the Company,  enforceable  in
accordance with its terms.

                  iii. The execution,  delivery,  and performance by the Company
of this Escrow  Agreement is in accordance with the Standby Equity  Distribution
Agreement  and will not violate,  conflict  with,  or cause a default  under the
certificate  of  incorporation  or bylaws of the Company,  any applicable law or
regulation,  any  court  order or  administrative  ruling or decree to which the
Company  is a  party  or any of  its  property  is  subject,  or any  agreement,
contract, indenture, or other binding arrangement.

                  iv.  Robert V.  Rudman has been duly  appointed  to act as the
representative  of the Company  hereunder  and has full power and  authority  to
execute,  deliver, and perform this Agreement,  to execute and deliver any Joint
Written Direction, to amend, modify or waive any provision of this Agreement and
to take all other actions as the Company's  Representative under this Agreement,
all without  further consent or direction from, or notice to, the Company or any
other party.

                  v. No party other than the  parties  hereto  shall  have,  any
lien,  claim or security  interest in the Escrow Funds or any part  thereof.  No
financing  statement  under  the  Uniform  Commercial  Code  is on  file  in any
jurisdiction claiming a security interest in or describing (whether specifically
or generally) the Escrow Funds or any part thereof.

                  vi. All of the  representations  and warranties of the Company
contained  herein are true and  complete  as of the date hereof and will be true
and complete at the time of any disbursement from the Escrow Funds.

      14. Consent to Jurisdiction  and Venue. In the event that any party hereto
commences  a  lawsuit  or other  proceeding  relating  to or  arising  from this
Agreement,  the parties  hereto agree that the United States  District Court for
the District of New Jersey shall have the sole and exclusive  jurisdiction  over
any  such   proceeding.   If  all  such  courts  lack  federal   subject  matter
jurisdiction,  the parties agree that the Superior Court Division of New Jersey,
Chancery  Division of Hudson County shall have sole and exclusive  jurisdiction.
Any of these  courts  shall be proper  venue for any such  lawsuit  or  judicial
proceeding and the parties hereto waive any objection to such venue. The parties
hereto consent to and agree to submit to the  jurisdiction  of any of the courts
specified  herein  and agree to accept the  service of process to vest  personal
jurisdiction over them in any of these courts.

      15. Notice.  All notices and other  communications  hereunder  shall be in
writing and shall be deemed to have been validly served, given or delivered five
(5) days after deposit in the United States mail, by certified  mail with return
receipt requested and postage prepaid,  when delivered  personally,  one (1) day
delivery to any overnight courier, or when transmitted by facsimile transmission
and addressed to the party to be notified as follows:

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<PAGE>

If to Investor, to:               Cornell Capital Partners, LP
                                  101 Hudson Street - Suite 3606
                                  Jersey City, New Jersey 07302
                                  Attention: Mark Angelo
                                  Facsimile: (201) 985-8266

If to Escrow Agent, to:           Butler Gonzalez LLP
                                  1416 Morris Avenue - Suite 207
                                  Union, New Jersey 07083
                                  Attention: David Gonzalez, Esq.
                                  Facsimile: (908) 810-0973

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

With a copy to:                   Sichenzia Ross Friedman Ference LLP
                                  1065 Avenue of the Americas
                                  New York, NY 10018
                                  Attention: Gregory Sichenzia, Esq.
                                             Darrin M. Ocasio, Esq.
                                  Telephone: (212) 981-6768
                                  Facsimile: (212) 930-9725

      Or to such other  address as each party may  designate  for itself by like
notice.

      16.  Amendments  or  Waiver.  This  Agreement  may  be  changed,   waived,
discharged or terminated  only by a writing  signed by the parties of the Escrow
Agent.  No delay or omission by any party in  exercising  any right with respect
hereto  shall  operate  as  waiver.  A waiver on any one  occasion  shall not be
construed as a bar to, or waiver of, any right or remedy on any future occasion.

      17.  Severability.  To the  extent  any  provision  of this  Agreement  is
prohibited  by  or  invalid  under  applicable  law,  such  provision  shall  be
ineffective  to  the  extent  of  such  prohibition,   or  invalidity,   without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.

      18.  Governing Law. This Agreement  shall be construed and  interpreted in
accordance with the internal laws of the State of Delaware without giving effect
to the conflict of laws principles thereof.

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<PAGE>

      19. Entire  Agreement.  This Agreement  constitutes  the entire  Agreement
between the parties relating to the holding, investment, and disbursement of the
Escrow Funds and sets forth in their entirety the  obligations and duties of the
Escrow Agent with respect to the Escrow Funds.

      20. Binding Effect.  All of the terms of this  Agreement,  as amended from
time to time,  shall be binding upon, inure to the benefit of and be enforceable
by the respective heirs, successors and assigns of the Investor, the Company, or
the Escrow Agent.

      21.  Execution  of  Counterparts.  This  Agreement  and any Joint  Written
Direction  may be  executed  in  counter  parts,  which when so  executed  shall
constitute one and same agreement or direction.

      22. Termination. Upon the first to occur of the termination of the Standby
Equity  Distribution  Agreement dated the date hereof or the disbursement of all
amounts in the Escrow  Funds and Common  Stock into court  pursuant to Section 7
hereof,  this Agreement  shall  terminate and Escrow Agent shall have no further
obligation or liability  whatsoever with respect to this Agreement or the Escrow
Funds or Common Stock.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       10
<PAGE>

      IN WITNESS WHEREOF the parties have hereunto set their hands and seals the
day and year above set forth.

                                         SMARTIRE SYSTEMS, INC.

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


                                         CORNELL CAPITAL PARTNERS, LP

                                         BY:   YORKVILLE ADVISORS, LLC
                                         ITS:  GENERAL PARTNER

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


                                         BUTLER GONZALEZ LLP

                                         By: /s/ David Gonzalez, Esq.
                                             -----------------------------------
                                         Name:  David Gonzalez, Esq.
                                         Title: Partner

                                       11