Document:

Exhibit 10.3

                                                            Dated: June 23, 2005

      NEITHER THIS  DEBENTURE NOR THE  SECURITIES  INTO WHICH THIS  DEBENTURE IS
      CONVERTIBLE   HAVE  BEEN  REGISTERED  WITH  THE  SECURITIES  AND  EXCHANGE
      COMMISSION OR THE  SECURITIES  COMMISSION OF ANY STATE IN RELIANCE UPON AN
      EXEMPTION FROM  REGISTRATION  UNDER THE SECURITIES ACT OF 1933, AS AMENDED
      (THE  "SECURITIES  ACT"),  AND,  ACCORDINGLY,  MAY NOT BE  OFFERED OR SOLD
      EXCEPT  PURSUANT  TO  AN  EFFECTIVE   REGISTRATION   STATEMENT  UNDER  THE
      SECURITIES  ACT  OR  PURSUANT  TO AN  AVAILABLE  EXEMPTION  FROM,  OR IN A
      TRANSACTION  NOT  SUBJECT  TO,  THE   REGISTRATION   REQUIREMENTS  OF  THE
      SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.

No. 1                                                                $20,000,000

                              SMARTIRE SYSTEMS INC.

                              Convertible Debenture

                                Due June 23, 2008

      This  Convertible  Debenture  (this  "Debenture")  is issued  by  SMARTIRE
SYSTEMS INC, a corporation  organized  and existing  under the laws of the Yukon
Territory (the "Obligor"),  to Cornell Capital  Partners,  LP. (the "Holder") in
trust for LCC Global Limited, a corporation  organized under the laws of Cyprus,
pursuant to that certain Securities Purchase Agreement (the "Securities Purchase
Agreement") of even date herewith.

      FOR VALUE  RECEIVED,  the Obligor hereby  promises to pay to the Holder or
its  successors  and  assigns  the  principal  sum  of  Twenty  Million  Dollars
($20,000,000), together with accrued but unpaid interest on the following terms:

      Payments.  Interest on the  outstanding  principal  balance  hereof  shall
accrue  as of the  date  hereof  and be due  and  payable  monthly,  in  arrears
("Interest  Payment"),  commencing on November 1, 2005 and shall continue on the
first (1st) day of each calendar  month  thereafter  that any amounts under this
Debenture are due and payable (each, an "Interest Payment Date") as set forth on
the Payment Schedule  attached hereto.  In lieu of making an Interest Payment in
cash the Company at its option can elect to make such Interest Payment in shares
of the Company's Common Stock.  Principal shall be due and payable in thirty two
(32) equal  installments  as set forth in the Payment  Schedule  attached hereto
("Principal  Payment").  The  installments of principal shall be due and payable
commencing  on November  1, 2005 and  subsequent  installments  shall be due and
payable on the first (1st) day of each  calendar  month  thereafter  ("Principal
Payment  Date")  until the  outstanding  principal  balance is paid in full (the
"Maturity  Date") as outlined in the Payment  Schedule  attached  hereto or this
Debenture  is converted in full  pursuant to Section 3. Upon any  conversion  in
part by the Holder in  accordance  with  Section  3, the Holder and the  Obligor
shall in good  faith  recalculate  the  outstanding  principal  balance  and the
amounts of the  Principal  Payments.  Upon any full  conversion by the Holder in
accordance  with  Section 3 of all of the  Interest  and  Principal  amounts due
hereunder all of the Obligor's payment obligations shall terminate. All payments
in respect of the indebtedness  evidenced hereby shall be made in either cash or
common stock as outlined herein, and shall be applied in the following order: to
accrued  interest,  principal,  and  charges  and  expenses  owing  under  or in
connection with this Debenture.

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<PAGE>

      In the  event  the  Holder  has  elected  to  convert  a  portion  of this
Debenture, pursuant to Section 3, the Company, in lieu of making a Principal and
Interest  Payment as  outlined  above,  shall be  entitled  to an off-set of the
Principal  and  Interest  Payment due  pursuant to the Payment  Schedule and the
dollar amount of the Debenture which has been converted.

      Interest.  Interest  shall  accrue on the  outstanding  principal  balance
hereof at an annual rate equal to ten percent (10%) from the date  principal was
advanced in connection with this Debenture.  Interest shall be calculated on the
basis of a 360-day  year and the actual  number of days  elapsed,  to the extent
permitted by applicable  law.  Interest  hereunder will be paid to the Holder or
its assignee in whose name this  Debenture is  registered  on the records of the
Obligor  regarding  registration  and  transfers of Debentures  (the  "Debenture
Register")  as outlined  herein.  In the event the Holder has elected to convert
Interest due hereunder into shares of the Company's  Common Stock or the Company
has elected to make an Interest  Payment  hereunder  in shares of the  Company's
Common Stock the amount of stock to be issued will be calculated as follows: the
value of the  stock  shall be the  Closing  Bid  Price on the date the  interest
payment is due or the  conversion  is made.  A number of shares of Common  Stock
with a value equal to the amount of  interest  due shall be issued to the Holder
within five (5) days of the conversion date or on the Interest  Payment Date. No
fractional shares will be issued;  therefore, in the event that the value of the
Common Stock per share does not equal the total  interest due, the Company shall
round up the number of shares due.

      Consent  of  Holder to Sell  Capital  Stock or Grant  Security  Interests.
Except  for the  capital  stock to be  issued  pursuant  to the  Standby  Equity
Distribution  Agreement  dated June 23, 2005 between the  Obligator  and Cornell
Capital Partners,  LP,  ("Cornell") the convertible  debenture issued to Cornell
dated May 20, 2005 pursuant to the Securities  Purchase  Agreement dated May 20,
2005, the Series A Preferred  Shares issued and outstanding to Cornell  pursuant
to the  Investment  Agreement  dated March 22, 2005, or pursuant to a commitment
arising  prior to the date  hereof,  so long as any of the  principal  amount or
interest on this  Debenture  remains unpaid and  unconverted,  the Obligor shall
not, without the prior consent of the Holder, (i) issue or sell any common stock
or  preferred  stock  with or  without  consideration,  (ii)  issue  or sell any
preferred stock, warrant,  option, right,  contract,  call, or other security or
instrument granting the holder thereof the right to acquire common stock with or
without  consideration,  (iii) enter into any security  instrument  granting the
holder a security interest in any of the assets of the Obligor, or (iv) file any
registration  statements on Form S-8.  Provided the Obligor gives the Holder two
(2) days prior written notice, the foregoing  restriction shall exclude options,
warrants or other securities  convertible or exchangeable  into shares of common
stock of the Obligor that were outstanding prior to the date hereof.

                                       2
<PAGE>

      This Debenture is subject to the following additional provisions:

      Section 1. This Debenture is exchangeable for an equal aggregate principal
amount of Debentures of different authorized denominations,  as requested by the
Holder  surrendering  the  same.  No  service  charge  will  be  made  for  such
registration of transfer or exchange.

      Section 2. Events of Default.

      (a) An "Event of  Default",  wherever  used  herein,  means any one of the
following  events  (whatever  the reason and  whether it shall be  voluntary  or
involuntary or effected by operation of law or pursuant to any judgment,  decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):

            (i) Any default in the payment of the principal  of,  interest on or
other charges in respect of this Debenture,  free of any claim of subordination,
as and when the same shall become due and payable (whether on an installment,  a
Principal  Payment  Date,  an Interest  Payment  Date, a Conversion  Date or the
Maturity  Date or by  acceleration  or otherwise)  which  remains  uncured for a
period of ten (10) days after such default;

            (ii)  The  Obligor  shall  fail to  observe  or  perform  any  other
covenant,  agreement or warranty contained in, or otherwise commit any breach or
default of any provision of this Debenture  (except as may be covered by Section
2(a)(i)  hereof or any  Transaction  Document (as defined in Section 4) which is
not cured with in the time prescribed;

            (iii) The Obligor or any  subsidiary of the Obligor shall  commence,
or there shall be commenced against the Obligor or any subsidiary of the Obligor
under any applicable bankruptcy or insolvency laws as now or hereafter in effect
or any  successor  thereto,  or the  Obligor or any  subsidiary  of the  Obligor
commences any other proceeding under any reorganization, arrangement, adjustment
of debt,  relief of debtors,  dissolution,  insolvency or liquidation or similar
law of any  jurisdiction  whether  now or  hereafter  in effect  relating to the
Obligor or any  subsidiary  of the  Obligor or there is  commenced  against  the
Obligor or any  subsidiary  of the Obligor any such  bankruptcy,  insolvency  or
other proceeding which remains  undismissed for a period of ninety (90) days; or
the  Obligor or any  subsidiary  of the  Obligor  is  adjudicated  insolvent  or
bankrupt;  or any  order of  relief or other  order  approving  any such case or
proceeding is entered;  or the Obligor or any subsidiary of the Obligor  suffers
any  appointment of any custodian,  private or court  appointed  receiver or the
like for it or any substantial part of its property which continues undischarged
or unstayed for a period of ninety (90) days;  or the Obligor or any  subsidiary
of the Obligor makes a general  assignment for the benefit of creditors;  or the
Obligor or any  subsidiary  of the Obligor shall call a meeting of its creditors
with a view to  arranging a  composition,  adjustment  or  restructuring  of its
debts;  or any  corporate  or  other  action  is  taken  by the  Obligor  or any
subsidiary of the Obligor for the purpose of effecting any of the foregoing;

                                       3
<PAGE>

            (iv) The Obligor or any  subsidiary  of the Obligor shall default in
any of its  obligations  under  any  other  Debenture  or any  mortgage,  credit
agreement or other facility,  indenture agreement,  factoring agreement or other
instrument under which there may be issued,  or by which there may be secured or
evidenced any  indebtedness  for borrowed money or money due under any long term
leasing or factoring arrangement of the Obligor or any subsidiary of the Obligor
in an amount exceeding  $250,000,  whether such indebtedness now exists or shall
hereafter be created and such default shall result in such indebtedness becoming
or being declared due and payable prior to the date on which it would  otherwise
become due and payable;

            (v) The Common  Stock shall cease to be quoted for trading or listed
for trading on the Nasdaq OTC Bulletin Board ("OTC"),  Nasdaq  SmallCap  Market,
New York Stock  Exchange,  American Stock Exchange or the Nasdaq National Market
(each,  a  "Subsequent  Market")  and shall  not  again be quoted or listed  for
trading thereon within twenty (20) Trading Days of such delisting;

            (vi) The Obligor or any  subsidiary  of the Obligor shall be a party
to any Change of Control Transaction (as defined in Section 4);

            (vii)  The  Obligor  shall  fail  to  file  the  Underlying   Shares
Registration Statement (as defined in Section 4) with the Commission (as defined
in Section 4), or the Underlying  Shares  Registration  Statement shall not have
been declared effective by the Commission,  in each case within the time periods
set forth in the Investor  Registration  Rights  Agreement of even date herewith
between the Obligor and the Holder;

            (viii) If the  effectiveness of the Underlying  Shares  Registration
Statement  lapses for any reason or the Holder  shall not be permitted to resell
the shares of Common Stock underlying this Debenture under the Underlying Shares
Registration  Statement,  in either  case,  for more  than five (5)  consecutive
Trading  Days  or an  aggregate  of  eight  Trading  Days  (which  need  not  be
consecutive Trading Days);

            (ix) The Obligor  shall fail for any reason to deliver  Common Stock
certificates to a Holder prior to the fifth (5th) Trading Day after a Conversion
Date or the Obligor  shall  provide  notice to the Holder,  including  by way of
public  announcement,  at any time, of its intention not to comply with requests
for conversions of this Debenture in accordance with the terms hereof;

            (x) The Obligor  shall fail for any reason to deliver the payment in
cash pursuant to a Buy-In (as defined herein) within three (3) days after notice
is claimed delivered hereunder;

      (b) During the time that any portion of this Debenture is outstanding,  if
any Event of Default has occurred,  the full principal amount of this Debenture,
together with interest and other amounts owing in respect  thereof,  to the date
of  acceleration  shall become at the  Holder's  election,  immediately  due and
payable in cash,  provided  however,  the Holder may request  (but shall have no
obligation  to request)  payment of such amounts in Common Stock of the Obligor.
If an Event of Default occurs and remains uncured, the Conversion Price shall be
reduced to [TWENTY PERCENT (20% of the VWAP on the Closing Date] _____ ($_____).
In addition to any other remedies,  the Holder shall have the right (but not the
obligation)  to convert this Debenture at any time after (x) an Event of Default
or (y) the Maturity Date at the Conversion Price then in-effect. The Holder need
not provide and the Obligor hereby waives any  presentment,  demand,  protest or
other notice of any kind, and the Holder may immediately and without  expiration
of any grace period enforce any and all of its rights and remedies hereunder and
all other remedies available to it under applicable law. Such declaration may be
rescinded and annulled by Holder at any time prior to payment hereunder. No such
rescission or annulment  shall affect any subsequent  Event of Default or impair
any right  consequent  thereon.  Upon an Event of Default,  notwithstanding  any
other provision of this Debenture or any Transaction Document,  the Holder shall
have no obligation to comply with or adhere to any  limitations,  if any, on the
conversion of this Debenture or the sale of the Underlying Shares.

                                       4
<PAGE>

      Section 3. Conversion.

         (a) (i) Conversion at Option of Holder.

            (A) This Debenture shall be convertible  into shares of Common Stock
at the  option of the  Holder,  in whole or in part at any time and from time to
time,  after the  Original  Issue Date (as defined in Section 4) (subject to the
limitations on conversion set forth in Section 3(a)(ii)  hereof).  The number of
shares of Common Stock  issuable upon a conversion  hereunder  equals the sum of
(i) the  quotient  obtained  by  dividing  (x) the  outstanding  amount  of this
Debenture  to be converted  by (y) the  Conversion  Price (as defined in Section
3(c)(i)).  The Obligor shall  deliver  Common Stock  certificates  to the Holder
prior to the Fifth (5th) Trading Day after a Conversion Date.

            (B) Notwithstanding anything to the contrary contained herein, if on
any  Conversion  Date:  (1) the  number of  shares  of Common  Stock at the time
authorized, unissued and unreserved for all purposes, or held as treasury stock,
is  insufficient  to pay  principal  and interest  hereunder in shares of Common
Stock; (2) the Common Stock is not listed or quoted for trading on the OTC or on
a  Subsequent  Market;  (3)  the  Obligor  has  failed  to  timely  satisfy  its
conversion; or (4) the issuance of such shares of Common Stock would result in a
violation of Section 3(a)(ii),  then, at the option of the Holder,  the Obligor,
in lieu of  delivering  shares of Common Stock  pursuant to Section  3(a)(i)(A),
shall deliver, within three (3) Trading Days of each applicable Conversion Date,
an amount in cash equal to the product of the outstanding principal amount to be
converted  plus any interest  due therein  divided by the  Conversion  Price and
multiplied by the highest closing price of the stock from date of the conversion
notice till the date that such cash payment is made.

      Further,  if the Obligor shall not have  delivered any cash due in respect
of conversion of this  Debenture or as payment of interest  thereon by the fifth
(5th) Trading Day after the  Conversion  Date,  the Holder may, by notice to the
Obligor, require the Obligor to issue shares of Common Stock pursuant to Section
3(c), except that for such purpose the Conversion Price applicable thereto shall
be the lesser of the Conversion  Price on the Conversion Date and the Conversion
Price on the date of such Holder demand.  Any such shares will be subject to the
provisions of this Section.

            (C) The Holder shall effect conversions by delivering to the Obligor
a  completed  notice in the form  attached  hereto as  Exhibit A (a  "Conversion
Notice").  The date on which a Conversion Notice is delivered is the "Conversion
Date." Unless the Holder is converting the entire principal  amount  outstanding
under this  Debenture,  the Holder is not required to physically  surrender this
Debenture to the Obligor in order to effect conversions.  Conversions  hereunder
shall have the  effect of  lowering  the  outstanding  principal  amount of this
Debenture plus all accrued and unpaid interest thereon in an amount equal to the
applicable conversion. The Holder and the Obligor shall maintain records showing
the principal amount converted and the date of such conversions. In the event of
any dispute or  discrepancy,  the records of the Holder shall be controlling and
determinative in the absence of manifest error.

                                       5
<PAGE>

      (ii) Certain Conversion Restrictions.

            (A) A Holder may not convert  this  Debenture  or receive  shares of
Common Stock as payment of interest  hereunder to the extent such  conversion or
receipt of such interest  payment would result in the Holder,  together with any
affiliate thereof, beneficially owning (as determined in accordance with Section
13(d) of the Exchange  Act and the rules  promulgated  thereunder)  in excess of
4.9% of the then issued and outstanding shares of Common Stock, including shares
of Common Stock  issuable upon  conversion  of, and payment of interest on, this
Debenture  or upon  exercise  of, or  conversion  of, any other  security of the
Obligor, held by such Holder after application of this Section. Since the Holder
will not be  obligated  to report to the  Obligor the number of shares of Common
Stock it may hold at the time of a conversion  hereunder,  unless the conversion
at issue would  result in the  issuance  of shares of Common  Stock in excess of
4.9% of the then outstanding  shares of Common Stock without regard to any other
shares which may be  beneficially  owned by the Holder or an affiliate  thereof,
the Holder shall have the  authority  and  obligation  to determine  whether the
restriction  contained  in this  Section  will limit any  particular  conversion
hereunder  and to the extent  that the  Holder  determines  that the  limitation
contained in this Section  applies,  the  determination  of which portion of the
principal  amount of this Debenture is convertible  shall be the  responsibility
and  obligation of the Holder.  If the Holder has delivered a Conversion  Notice
for a  principal  amount of this  Debenture  that,  without  regard to any other
shares that the Holder or its affiliates may  beneficially  own, would result in
the issuance in excess of the  permitted  amount  hereunder,  the Obligor  shall
notify the Holder of this fact and shall  honor the  conversion  for the maximum
principal amount permitted to be converted on such Conversion Date in accordance
with the  periods  described  in Section  3(a)(i)(A)  and,  at the option of the
Holder,  either retain any principal amount tendered for conversion in excess of
the  permitted  amount  hereunder for future  conversions  or return such excess
principal amount to the Holder.  The provisions of this Section may be waived by
a Holder (but only as to itself and not to any other  Holder) upon not less than
65 days prior notice to the Obligor.  Other  Holders  shall be unaffected by any
such waiver.

      (b) (i)  Nothing  herein  shall  limit a Holder's  right to pursue  actual
damages  or declare  an Event of  Default  pursuant  to Section 2 herein for the
Obligor 's failure to deliver  certificates  representing shares of Common Stock
upon conversion  within the period  specified  herein and such Holder shall have
the right to pursue all remedies  available to it at law or in equity including,
without limitation,  a decree of specific  performance and/or injunctive relief,
in each case  without  the need to post a bond or provide  other  security.  The
exercise  of any such  rights  shall not  prohibit  the Holder  from  seeking to
enforce damages pursuant to any other Section hereof or under applicable law.

                                       6
<PAGE>

            (ii) In addition to any other rights available to the Holder, if the
Obligor fails to deliver to the Holder such certificate or certificates pursuant
to Section 3(a)(i)(A) by the fifth Trading Day after the Conversion Date, and if
after such fifth  (5th)  Trading  Day the Holder  purchases  (in an open  market
transaction or otherwise)  Common Stock to deliver in  satisfaction of a sale by
such Holder of the Underlying Shares which the Holder anticipated receiving upon
such  conversion  (a  "Buy-In"),  then the Obligor  shall (A) pay in cash to the
Holder (in addition to any  remedies  available to or elected by the Holder) the
amount by which (x) the  Holder's  total  purchase  price  (including  brokerage
commissions,  if any) for the Common Stock so purchased  exceeds (y) the product
of (1) the  aggregate  number of shares of Common  Stock that such Holder  would
have received from the conversion at issue multiplied by (2) the market price of
the Common Stock at the time of the sale giving rise to such purchase obligation
and (B) at the option of the Holder, either reissue a Debenture in the principal
amount equal to the principal  amount of the attempted  conversion or deliver to
the Holder the number of shares of Common  Stock that would have been issued had
the  Obligor  timely  complied  with its  delivery  requirements  under  Section
3(a)(i)(A).  For example,  if the Holder  purchases  Common Stock having a total
purchase  price of Eleven  Thousand  Dollars  ($11,000)  to cover a Buy-In  with
respect to an  attempted  conversion  of  Debentures  with  respect to which the
market price of the  Underlying  Shares on the date of conversion was a total of
Ten Thousand  Dollars  ($10,000) under clause (A) of the  immediately  preceding
sentence,  the Obligor shall be required to pay the Holder One Thousand  Dollars
($1,000).  The Holder shall provide the Obligor  written  notice  indicating the
amounts payable to the Holder in respect of the Buy-In.

      (c) (i) The  conversion  price (the  "Conversion  Price") in effect on any
Conversion Date shall be equal to $0.1125, which may be adjusted pursuant to the
other terms of this Debenture.

            (ii)  If  the  Obligor,   at  any  time  while  this   Debenture  is
outstanding,  shall (a) pay a stock dividend or otherwise make a distribution or
distributions  on  shares  of its  Common  Stock or any  other  equity or equity
equivalent   securities  payable  in  shares  of  Common  Stock,  (b)  subdivide
outstanding  shares of Common Stock into a larger number of shares,  (c) combine
(including  by way of reverse  stock split)  outstanding  shares of Common Stock
into a smaller number of shares, or (d) issue by  reclassification  of shares of
the Common Stock any shares of capital stock of the Obligor, then the Conversion
Price  shall be  multiplied  by a fraction of which the  numerator  shall be the
number of shares of Common Stock (excluding treasury shares, if any) outstanding
before such event and of which the denominator  shall be the number of shares of
Common Stock  outstanding after such event. Any adjustment made pursuant to this
Section  shall  become  effective  immediately  after  the  record  date for the
determination of stockholders  entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision, combination or re-classification.

            (iii) Except for shares of capital stock or  securities  convertible
into or exercisable  for shares of capital stock issued pursuant to a commitment
dated prior to the date hereofif the Obligor,  at any time while this  Debenture
is outstanding, shall issue rights, options or warrants to all holders of Common
Stock (and not to the Holder) entitling them to subscribe for or purchase shares
of  Common  Stock at a price per share  less than the  Closing  Bid Price at the
record date mentioned below,  then the Conversion Price shall be multiplied by a
fraction,  of which the denominator  shall be the number of shares of the Common
Stock (excluding treasury shares, if any) outstanding on the date of issuance of
such rights or warrants  (plus the number of  additional  shares of Common Stock
offered for  subscription or purchase),  and of which the numerator shall be the
number  of  shares of the  Common  Stock  (excluding  treasury  shares,  if any)
outstanding on the date of issuance of such rights or warrants,  plus the number
of shares which the  aggregate  offering  price of the total number of shares so
offered would purchase at such Closing Bid Price.  Such adjustment shall be made
whenever  such  rights  or  warrants  are  issued,  and shall  become  effective
immediately after the record date for the determination of stockholders entitled
to receive such rights, options or warrants. However, upon the expiration of any
such  right,  option or  warrant  to  purchase  shares of the  Common  Stock the
issuance of which resulted in an adjustment in the Conversion  Price pursuant to
this  Section,  if any such right,  option or warrant shall expire and shall not
have been exercised, the Conversion Price shall immediately upon such expiration
be recomputed and effective immediately upon such expiration be increased to the
price  which it would have been (but  reflecting  any other  adjustments  in the
Conversion  Price made  pursuant to the  provisions  of this  Section  after the
issuance of such rights or warrants) had the adjustment of the Conversion  Price
made upon the  issuance of such  rights,  options or  warrants  been made on the
basis of offering for subscription or purchase only that number of shares of the
Common Stock  actually  purchased  upon the exercise of such rights,  options or
warrants actually exercised.

                                       7
<PAGE>

            (iv) Except for shares of capital  stock or  securities  convertible
into or exercisable  for shares of capital stock issued pursuant to a commitment
dated prior to the date hereof,  if the Obligor or any  subsidiary  thereof,  as
applicable,  with respect to Common Stock Equivalents (as defined below), at any
time while this Debenture is outstanding,  shall issue shares of Common Stock or
rights, warrants,  options or other securities or debt that are convertible into
or  exchangeable  for  shares  of  Common  Stock  ("Common  Stock  Equivalents")
entitling  any Person to acquire  shares of Common  Stock,  at a price per share
less than the  Conversion  Price (if the  holder of the  Common  Stock or Common
Stock  Equivalent so issued shall at any time,  whether by operation of purchase
price adjustments, reset provisions,  floating conversion,  exercise or exchange
prices or  otherwise,  or due to warrants,  options or rights per share which is
issued in connection with such issuance, be entitled to receive shares of Common
Stock at a price  per  share  which  is less  than the  Conversion  Price,  such
issuance shall be deemed to have occurred for less than the  Conversion  Price),
then, at the sole option of the Holder,  the Conversion  Price shall be adjusted
to mirror the  conversion,  exchange or purchase  price for such Common Stock or
Common Stock Equivalents (including any reset provisions thereof) at issue. Such
adjustment shall be made whenever such Common Stock or Common Stock  Equivalents
are issued.  The Obligor shall notify the Holder in writing,  no later than five
(5)  business  days  following  the issuance of any Common Stock or Common Stock
Equivalent subject to this Section,  indicating therein the applicable  issuance
price, or of applicable reset price, exchange price,  conversion price and other
pricing  terms.  No  adjustment  under this Section shall be made as a result of
issuances and exercises of options to purchase shares of Common Stock issued for
compensatory  purposes  pursuant to any of the  Obligor's  stock option or stock
purchase plans.

            (v) If the Obligor, at any time while this Debenture is outstanding,
shall  distribute  to all  holders  of  Common  Stock  (and  not to the  Holder)
evidences of its  indebtedness  or assets or rights or warrants to subscribe for
or purchase any security,  then in each such case the Conversion  Price at which
this  Debenture  shall   thereafter  be  convertible   shall  be  determined  by
multiplying the Conversion Price in effect  immediately prior to the record date
fixed for determination of stockholders entitled to receive such distribution by
a fraction of which the denominator shall be the Closing Bid Price determined as
of the record date  mentioned  above,  and of which the numerator  shall be such
Closing Bid Price on such  record  date less the then fair market  value at such
record  date of the  portion  of such  assets or  evidence  of  indebtedness  so
distributed  applicable  to  one  outstanding  share  of  the  Common  Stock  as
determined  by the  Board  of  Directors  in good  faith.  In  either  case  the
adjustments  shall be  described  in a  statement  provided to the Holder of the
portion  of  assets  or  evidences  of   indebtedness  so  distributed  or  such
subscription  rights  applicable to one share of Common Stock.  Such  adjustment
shall be made whenever any such  distribution is made and shall become effective
immediately after the record date mentioned above.

                                       8
<PAGE>

            (vi) In case of any  reclassification  of the  Common  Stock  or any
compulsory  share exchange  pursuant to which the Common Stock is converted into
other securities,  cash or property,  the Holder shall have the right thereafter
to, at its option, (A) convert the then outstanding  principal amount,  together
with all accrued but unpaid  interest and any other amounts then owing hereunder
in respect of this Debenture into the shares of stock and other securities, cash
and property receivable upon or deemed to be held by holders of the Common Stock
following  such  reclassification  or share  exchange,  and the  Holder  of this
Debenture  shall  be  entitled  upon  such  event  to  receive  such  amount  of
securities,  cash or property  as the shares of the Common  Stock of the Obligor
into which the then outstanding principal amount,  together with all accrued but
unpaid  interest and any other  amounts then owing  hereunder in respect of this
Debenture could have been converted  immediately prior to such  reclassification
or share exchange would have been entitled, or (B) require the Obligor to prepay
the outstanding principal amount of this Debenture,  plus all interest and other
amounts due and payable  thereon.  The entire  prepayment price shall be paid in
cash. This provision shall  similarly apply to successive  reclassifications  or
share exchanges.

            (vii) All  calculations  under this Section 3 shall be rounded up to
the nearest $0.001 of a share.

            (viii)  Whenever the  Conversion  is adjusted  pursuant to Section 3
hereof, the Obligor shall promptly mail to the Holder a notice setting forth the
Conversion  Price after such  adjustment and setting forth a brief  statement of
the facts requiring such adjustment.

            (ix) If (A) the  Obligor  shall  declare  a  dividend  (or any other
distribution)  on the Common  Stock;  (B) the  Obligor  shall  declare a special
nonrecurring  cash  dividend on or a  redemption  of the Common  Stock;  (C) the
Obligor  shall  authorize the granting to all holders of the Common Stock rights
or warrants to  subscribe  for or  purchase  any shares of capital  stock of any
class or of any  rights;  (D) the  approval of any  stockholders  of the Obligor
shall be required in connection with any  reclassification  of the Common Stock,
any  consolidation  or  merger  to which  the  Obligor  is a party,  any sale or
transfer  of all or  substantially  all of the  assets  of the  Obligor,  of any
compulsory  share  exchange  whereby the Common  Stock is  converted  into other
securities,  cash or property;  or (E) the Obligor shall authorize the voluntary
or  involuntary  dissolution,  liquidation  or winding up of the  affairs of the
Obligor;  then, in each case, the Obligor shall cause to be filed at each office
or agency maintained for the purpose of conversion of this Debenture,  and shall
cause to be mailed to the Holder at its last address as it shall appear upon the
stock  books of the  Obligor,  at  least  ten (10)  calendar  days  prior to the
applicable record or effective date hereinafter  specified, a notice stating (x)
the date on which a record  is to be taken  for the  purpose  of such  dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of the Common Stock of record to be entitled to
such  dividend,  distributions,   redemption,  rights  or  warrants  are  to  be
determined  or (y)  the  date on  which  such  reclassification,  consolidation,
merger,  sale,  transfer or share  exchange is expected to become  effective  or
close,  and the date as of which it is expected that holders of the Common Stock
of record  shall be entitled to exchange  their  shares of the Common  Stock for
securities,  cash or other  property  deliverable  upon  such  reclassification,
consolidation,  merger,  sale,  transfer or share exchange,  provided,  that the
failure to mail such  notice or any defect  therein  or in the  mailing  thereof
shall not affect the validity of the corporate  action  required to be specified
in such  notice.  The Holder is entitled to convert  this  Debenture  during the
10-day calendar period  commencing the date of such notice to the effective date
of the event triggering such notice.

                                       9
<PAGE>

            (x) In case of any (1) merger or consolidation of the Obligor or any
subsidiary  of the  Obligor  with or into  another  Person,  or (2)  sale by the
Obligor or any  subsidiary of the Obligor of more than one-half of the assets of
the Obligor in one or a series of related transactions,  a Holder shall have the
right to (A) exercise any rights under Section  2(b),  (B) convert the aggregate
amount of this  Debenture  then  outstanding  into the shares of stock and other
securities, cash and property receivable upon or deemed to be held by holders of
Common Stock following such merger, consolidation or sale, and such Holder shall
be entitled  upon such event or series of related  events to receive such amount
of  securities,  cash and property as the shares of Common Stock into which such
aggregate   principal  amount  of  this  Debenture  could  have  been  converted
immediately  prior to such  merger,  consolidation  or  sales  would  have  been
entitled, or (C) in the case of a merger or consolidation, require the surviving
entity to issue to the Holder a convertible  Debenture  with a principal  amount
equal to the  aggregate  principal  amount of this  Debenture  then held by such
Holder,  plus all accrued and unpaid  interest and other amounts owing  thereon,
which such  newly  issued  convertible  Debenture  shall  have  terms  identical
(including with respect to conversion) to the terms of this Debenture, and shall
be entitled to all of the rights and  privileges of the Holder of this Debenture
set forth  herein and the  agreements  pursuant  to which this  Debentures  were
issued. In the case of clause (C), the conversion price applicable for the newly
issued shares of convertible preferred stock or convertible  Debentures shall be
based upon the amount of securities, cash and property that each share of Common
Stock  would  receive in such  transaction  and the  Conversion  Price in effect
immediately prior to the effectiveness or closing date for such transaction. The
terms of any such merger,  sale or consolidation  shall include such terms so as
to  continue to give the Holder the right to receive  the  securities,  cash and
property set forth in this Section upon any  conversion or redemption  following
such event. This provision shall similarly apply to successive such events.

      (d) The  Obligor  covenants  that it will at all  times  reserve  and keep
available out of its authorized  and unissued  shares of Common Stock solely for
the  purpose of  issuance  upon  conversion  of this  Debenture  and  payment of
interest on this Debenture, each as herein provided, free from preemptive rights
or any other actual contingent purchase rights of persons other than the Holder,
not less than such number of shares of the Common Stock as shall (subject to any
additional  requirements  of the  Obligor as to  reservation  of such shares set
forth in this  Debenture) be issuable  (taking into account the  adjustments and
restrictions  of Sections 2(b) and 3(c)) upon the conversion of the  outstanding
principal  amount of this  Debenture  and  payment of  interest  hereunder.  The
Obligor  covenants  that all shares of Common  Stock  that shall be so  issuable
shall,  upon  issue,  be duly and  validly  authorized,  issued and fully  paid,
nonassessable  and, if the  Underlying  Shares  Registration  Statement has been
declared  effective  under the  Securities  Act,  registered  for public sale in
accordance with such Underlying Shares Registration Statement.

                                       10
<PAGE>

      (e) Upon a conversion hereunder the Obligor shall not be required to issue
stock certificates representing fractions of shares of the Common Stock, but may
if otherwise permitted,  make a cash payment in respect of any final fraction of
a share based on the Closing Bid Price at such time. If the Obligor  elects not,
or is unable,  to make such a cash  payment,  the Holder  shall be  entitled  to
receive,  in lieu of the final  fraction  of a share,  one whole share of Common
Stock.

      (f) The  issuance  of  certificates  for  shares  of the  Common  Stock on
conversion of this Debenture  shall be made without charge to the Holder thereof
for any documentary stamp or similar taxes that may be payable in respect of the
issue or delivery of such  certificate,  provided  that the Obligor shall not be
required to pay any tax that may be payable in respect of any transfer  involved
in the issuance and delivery of any such  certificate  upon conversion in a name
other than that of the Holder of such  Debenture  so  converted  and the Obligor
shall not be required to issue or deliver such certificates  unless or until the
person or persons requesting the issuance thereof shall have paid to the Obligor
the  amount of such tax or shall have  established  to the  satisfaction  of the
Obligor  that  such  tax  has  been  paid.  The  Holder  shall  pay  any and all
withholding  taxes assessed in connection with the transactions  contemplated by
this Debenture.

      (g) Any notices,  consents,  waivers or other  communications  required or
permitted  to be given  under the terms  hereof  must be in writing  and will be
deemed to have been delivered: (i) upon receipt, when delivered personally; (ii)
upon receipt,  when sent by facsimile (provided  confirmation of transmission is
mechanically or electronically generated and kept on file by the sending party);
or  (iii)  one (1)  trading  day  after  deposit  with a  nationally  recognized
overnight  delivery  service,  in each case  properly  addressed to the party to
receive the same.  The addresses and facsimile  numbers for such  communications
shall be:

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

                                       11
<PAGE>

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

If to the Holder:            Cornell Capital Partners, LP
                             101 Hudson Street - Suite 3700
                             Jersey City, NJ 07030
                             Attention:     Mark Angelo
                             Telephone:   (201) 985-8300
                             Facsimile:    (201) 985-8266

With a copy to:              David Gonzalez, Esq.
                             101 Hudson Street - Suite 3700
                             Jersey City, NJ 07030
                             Telephone:   (201) 985-8300
                             Facsimile:    (201) 985-8744

or at such other address and/or facsimile number and/or to the attention of such
other person as the  recipient  party has  specified by written  notice given to
each other  party three (3)  business  days prior to the  effectiveness  of such
change.  Written  confirmation  of receipt  (i) given by the  recipient  of such
notice,   consent,   waiver  or  other   communication,   (ii)  mechanically  or
electronically  generated by the sender's facsimile machine containing the time,
date,  recipient  facsimile  number  and an  image  of the  first  page  of such
transmission  or (iii) provided by a nationally  recognized  overnight  delivery
service, shall be rebuttable evidence of personal service,  receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.

      Section 4. Definitions. For the purposes hereof, the following terms shall
have the following meanings:

      "Business  Day"  means any day except  Saturday,  Sunday and any day which
shall be a federal  legal holiday in the United States or a day on which banking
institutions  are  authorized or required by law or other  government  action to
close.

      "Change of Control Transaction" means the occurrence of (a) an acquisition
after the date hereof by an  individual or legal entity or "group" (as described
in Rule  13d-5(b)(1)  promulgated  under the Exchange Act) of effective  control
(whether through legal or beneficial  ownership of capital stock of the Obligor,
by  contract or  otherwise)  of in excess of fifty  percent  (50%) of the voting
securities of the Obligor (except that the  acquisition of voting  securities by
the Holder  shall not  constitute a Change of Control  Transaction  for purposes
hereof), (b) a replacement at one time or over time of more than one-half of the
members of the board of  directors  of the  Obligor  which is not  approved by a
majority of those  individuals  who are members of the board of directors on the
date hereof (or by those  individuals who are serving as members of the board of
directors on any date whose nomination to the board of directors was approved by
a majority of the members of the board of directors  who are members on the date
hereof), (c) the merger, consolidation or sale of fifty percent (50%) or more of
the assets of the Obligor or any subsidiary of the Obligor in one or a series of
related  transactions  with or into another entity,  or (d) the execution by the
Obligor of an agreement to which the Obligor is a party or by which it is bound,
providing for any of the events set forth above in (a), (b) or (c).

                                       12
<PAGE>

      "Commission" means the Securities and Exchange Commission.

      "Common  Stock" means the common stock,  no par value,  of the Obligor and
stock of any other  class into which  shares of Common  Stock may  hereafter  be
changed or reclassified.

      "Exchange Act" means the Securities Exchange Act of 1934, as amended.

      "Original  Issue Date"  shall mean the date of the first  issuance of this
Debenture  regardless of the number of transfers and regardless of the number of
instruments, which may be issued to evidence such Debenture.

      "Closing Bid Price" means the price per share in the last  reported  trade
of the  Common  Stock on the OTC or on the  Subsequent  Market  which the Common
Stock is then listed as quoted by Bloomberg, LP.

      "Person" means a corporation, an association, a partnership, organization,
a business,  an individual,  a government or political  subdivision thereof or a
governmental agency.

      "Securities  Act" means the  Securities  Act of 1933, as amended,  and the
rules and regulations promulgated thereunder.

      "Trading  Day" means a day on which the shares of Common  Stock are quoted
on the OTC or quoted or traded on such Subsequent  Market on which the shares of
Common  Stock are then  quoted or listed;  provided,  that in the event that the
shares of Common  Stock are not listed or quoted,  then Trading Day shall mean a
Business Day.

      "Transaction  Documents"  means the Securities  Purchase  Agreement or any
other agreement  delivered in connection with the Securities Purchase Agreement,
including, without limitation the Investor Registration Rights Agreement.

      "Underlying  Shares"  means  the  shares  of Common  Stock  issuable  upon
conversion of this  Debenture or as payment of interest in  accordance  with the
terms hereof.

      "Underlying Shares Registration  Statement" means a registration statement
meeting  the  requirements  set  forth  in the  Registration  Rights  Agreement,
covering among other things the resale of the  Underlying  Shares and naming the
Holder as a "selling stockholder" thereunder.

                                       13
<PAGE>

      Section 5. Except as  expressly  provided  herein,  no  provision  of this
Debenture  shall  alter or impair  the  obligations  of the  Obligor,  which are
absolute and unconditional,  to pay the principal of, interest and other charges
(if any) on, this  Debenture at the time,  place,  and rate,  and in the coin or
currency,  herein  prescribed.  This  Debenture  is a direct  obligation  of the
Obligor.  This  Debenture  ranks  pari passu  with all other  Debentures  now or
hereafter issued under the terms set forth herein.  As long as this Debenture is
outstanding,  the Obligor shall not and shall cause their  subsidiaries  not to,
without the consent of the Holder,  (i) amend its certificate of  incorporation,
bylaws or other  charter  documents so as to adversely  affect any rights of the
Holder;  (ii)  repay,  repurchase  or offer to repay,  repurchase  or  otherwise
acquire shares of its Common Stock or other equity  securities  other than as to
the Underlying  Shares to the extent permitted or required under the Transaction
Documents;  or  (iii)  enter  into  any  agreement  with  respect  to any of the
foregoing.

      Section  6. This  Debenture  shall not  entitle  the  Holder to any of the
rights of a stockholder of the Obligor,  including without limitation, the right
to vote, to receive dividends and other distributions,  or to receive any notice
of, or to attend,  meetings  of  stockholders  or any other  proceedings  of the
Obligor,  unless  and to the extent  converted  into  shares of Common  Stock in
accordance with the terms hereof.

      Section 7. If this Debenture is mutilated,  lost, stolen or destroyed, the
Obligor shall  execute and deliver,  in exchange and  substitution  for and upon
cancellation of the mutilated Debenture,  or in lieu of or in substitution for a
lost, stolen or destroyed Debenture, a new Debenture for the principal amount of
this Debenture so mutilated,  lost, stolen or destroyed but only upon receipt of
evidence  of such  loss,  theft or  destruction  of such  Debenture,  and of the
ownership hereof, and indemnity,  if requested,  all reasonably  satisfactory to
the Obligor.

      Section 8. No  indebtedness  of the Obligor is senior to this Debenture in
right of payment, whether with respect to interest,  damages or upon liquidation
or dissolution or otherwise.  Without the Holder's consent, the Obligor will not
and will not permit any of their subsidiaries to, directly or indirectly,  enter
into, create,  incur, assume or suffer to exist any indebtedness of any kind, on
or with respect to any of its property or assets now owned or hereafter acquired
or any  interest  therein or any income or profits  there from that is senior in
any respect to the obligations of the Obligor under this Debenture.

      Section 9. This Debenture shall be governed by and construed in accordance
with the laws of the State of New Jersey,  without giving effect to conflicts of
laws thereof.  Each of the parties  consents to the jurisdiction of the Superior
Courts of the State of New Jersey sitting in Hudson  County,  New Jersey and the
U.S. District Court for the District of New Jersey sitting in Newark, New Jersey
in connection  with any dispute  arising under this Debenture and hereby waives,
to the maximum extent  permitted by law, any objection,  including any objection
based on forum non  conveniens  to the bringing of any such  proceeding  in such
jurisdictions.

      Section 10. If the Obligor fails to strictly comply with the terms of this
Debenture,  then the Obligor shall  reimburse the Holder  promptly for all fees,
costs and expenses, including, without limitation,  attorneys' fees and expenses
incurred  by the  Holder  in any  action  in  connection  with  this  Debenture,
including, without limitation, those incurred: (i) during any workout, attempted
workout,  and/or in  connection  with the  rendering  of legal  advice as to the
Holder's rights, remedies and obligations, (ii) collecting any sums which become
due  to the  Holder,  (iii)  defending  or  prosecuting  any  proceeding  or any
counterclaim to any proceeding or appeal;  or (iv) the protection,  preservation
or enforcement of any rights or remedies of the Holder.

                                       14
<PAGE>

      Section 11. Any waiver by the Holder of a breach of any  provision of this
Debenture  shall  not  operate  as or be  construed  to be a waiver of any other
breach  of such  provision  or of any  breach  of any  other  provision  of this
Debenture. The failure of the Holder to insist upon strict adherence to any term
of this Debenture on one or more  occasions  shall not be considered a waiver or
deprive that party of the right  thereafter  to insist upon strict  adherence to
that term or any other term of this Debenture. Any waiver must be in writing.

      Section 12. If any  provision  of this  Debenture  is invalid,  illegal or
unenforceable,  the balance of this Debenture shall remain in effect, and if any
provision is inapplicable to any person or circumstance,  it shall  nevertheless
remain applicable to all other persons and  circumstances.  If it shall be found
that any interest or other amount deemed  interest due  hereunder  shall violate
applicable laws governing  usury,  the applicable rate of interest due hereunder
shall  automatically be lowered to equal the maximum permitted rate of interest.
The Obligor  covenants  (to the extent that it may lawfully do so) that it shall
not at any time insist upon,  plead, or in any manner  whatsoever  claim or take
the benefit or advantage of, any stay, extension or usury law or other law which
would  prohibit  or forgive  the  Obligor  from paying all or any portion of the
principal of or interest on this  Debenture  as  contemplated  herein,  wherever
enacted,  now or at any time  hereafter  in  force,  or  which  may  affect  the
covenants or the performance of this  indenture,  and the Obligor (to the extent
it may lawfully do so) hereby  expressly waives all benefits or advantage of any
such law,  and  covenants  that it will not, by resort to any such law,  hinder,
delay or impeded the  execution of any power herein  granted to the Holder,  but
will  suffer and permit  the  execution  of every such as though no such law has
been enacted.

      Section 13.  Whenever any payment or other  obligation  hereunder shall be
due on a day other than a Business  Day,  such payment shall be made on the next
succeeding Business Day.

      Section 14. THE PARTIES HEREBY  KNOWINGLY,  VOLUNTARILY AND  INTENTIONALLY
WAIVE  THE  RIGHT  ANY OF THEM  MAY HAVE TO A TRIAL  BY JURY IN  RESPECT  OF ANY
LITIGATION  BASED  HEREON OR ARISING OUT OF,  UNDER OR IN  CONNECTION  WITH THIS
AGREEMENT  OR ANY  TRANSACTION  DOCUMENT  OR ANY  COURSE OF  CONDUCT,  COURSE OF
DEALING,  STATEMENTS  (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY.  THIS
PROVISION  IS  A  MATERIAL  INDUCEMENT  FOR  THE  PARTIES'  ACCEPTANCE  OF  THIS
AGREEMENT.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       15
<PAGE>

      IN WITNESS WHEREOF,  the Obligor has caused this Convertible  Debenture to
be duly executed by a duly authorized officer as of the date set forth above.

                                               SMARTIRE SYSTEMS INC.

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

                                       16
<PAGE>

                                   EXHIBIT "A"

                              NOTICE OF CONVERSION

        (To be executed by the Holder in order to Convert the Debenture)

TO:

      The undersigned hereby irrevocably elects to convert $_________________ of
the  principal  amount of the above  Debenture  into  Shares of Common  Stock of
SmarTire  Systems Inc.,  according to the conditions  stated therein,  as of the
Conversion Date written below.

Conversion Date:                          ______________________________________

Applicable Conversion Price:              ______________________________________

Signature:                                ______________________________________

Name:                                     ______________________________________

Address:                                  ______________________________________

Amount to be converted:                   $_____________________________________

Amount of Debenture unconverted:          $_____________________________________

Conversion Price per share:               $_____________________________________

Number of  shares of Common  Stock to be
issued:                                   ______________________________________

Amount of Interest Converted:             $_____________________________________

Conversion Price per share:               $_____________________________________

Number of  shares of Common  Stock to be
issued:                                   ______________________________________

Please  issue  the  shares  of
Common  Stock in the
following  name and to the
following address:                        ______________________________________

Issue to:                                 ______________________________________

Authorized Signature:                     ______________________________________

Name:                                     ______________________________________

Title:                                    ______________________________________

Phone Number:                             ______________________________________

Broker DTC Participant Code:              ______________________________________

Account Number:                           ______________________________________Exhibit 10.4

                                                            Dated: June 23, 2005

      NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
      CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
      COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
      EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
      (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
      EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
      SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
      TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
      SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.

No. 2                                                                 $8,000,000

                              SMARTIRE SYSTEMS INC.

                              Convertible Debenture

                                Due June 23, 2008

      This  Convertible  Debenture  (this  "Debenture")  is issued  by  SMARTIRE
SYSTEMS INC, a corporation  organized  and existing  under the laws of the Yukon
Territory (the  "Obligor"),  to Cornell  Capital  Partners,  LP. (the "Holder"),
pursuant to that certain Securities Purchase Agreement (the "Securities Purchase
Agreement") of even date herewith.

      FOR VALUE  RECEIVED,  the Obligor hereby  promises to pay to the Holder or
its  successors  and  assigns  the  principal  sum  of  Eight  Million   Dollars
($8,000,000), together with accrued but unpaid interest on the following terms:

      Payments.  Interest on the outstanding  principal  balance hereof shall be
due and payable monthly, in arrears ("Interest Payment"), commencing on July 23,
2005 and shall continue on the first day of each calendar month  thereafter that
any amounts under this Debenture are due and payable (each, an "Interest Payment
Date") as set forth on the Payment Schedule attached hereto.  Principal shall be
due and  payable  in five (5) equal  installments  as set  forth in the  Payment
Schedule attached hereto , ("Principal Payment").  The installments of principal
shall be due and payable commencing on June 23, 2006 and subsequent installments
shall be due and payable  every six (6) months  thereafter  on the twenty  third
(23rd)  day  of  the  calendar  month  ("Principal   Payment  Date")  until  the
outstanding  principal balance is paid in full (the "Maturity Date") as outlined
in the Payment  Schedule  attached hereto or this Debenture is converted in full
pursuant to Section 3. Upon any  conversion  in part by the Holder in accordance
with Section 3, the Holder and the Obligor shall in good faith  recalculate  the
outstanding  principal balance and the amounts of the Principal  Payments.  Upon
any full  conversion  by the Holder in  accordance  with Section 3 of all of the
Interest  and  Principal  amounts due  hereunder  all of the  Obligor's  payment
obligations  shall  terminate.  All  payments  in  respect  of the  indebtedness
evidenced  hereby  shall be made in  either  cash or  common  stock as  outlined
herein,  and shall be  applied in the  following  order:  to  accrued  interest,
principal,  and charges and  expenses  owing  under or in  connection  with this
Debenture.

                                       1
<PAGE>

      In the  event  the  Holder  has  elected  to  convert  a  portion  of this
Debenture, pursuant to Section 3, the Company, in lieu of making a Principal and
Interest  Payment as  outlined  above,  shall be  entitled  to an off-set of the
Principal  and  Interest  Payment due  pursuant to the Payment  Schedule and the
dollar amount of the Debenture which has been converted.

      Interest.  Interest  shall  accrue on the  outstanding  principal  balance
hereof at an annual rate equal to ten percent (10%) from the date  principal was
advanced in connection with this Debenture.  Interest shall be calculated on the
basis of a 360-day  year and the actual  number of days  elapsed,  to the extent
permitted by applicable  law.  Interest  hereunder will be paid to the Holder or
its assignee in whose name this  Debenture is  registered  on the records of the
Obligor  regarding  registration  and  transfers of Debentures  (the  "Debenture
Register")  as outlined  herein.  In the event the Holder has elected to convert
Interest due hereunder into shares of the Company's  Common Stock or the Company
has elected to make an Interest  Payment  hereunder  in shares of the  Company's
Common Stock the amount of stock to be issued will be calculated as follows: the
value of the  stock  shall be the  Closing  Bid  Price on the date the  interest
payment is due or the  conversion  is made.  A number of shares of Common  Stock
with a value equal to the amount of  interest  due shall be issued to the Holder
within five (5) days of the conversion date or on the Interest  Payment Date. No
fractional shares will be issued;  therefore, in the event that the value of the
Common Stock per share does not equal the total  interest due, the Company shall
round up the number of shares due. .

      Consent  of  Holder to Sell  Capital  Stock or Grant  Security  Interests.
Except  for the  capital  stock to be  issued  pursuant  to the  Standby  Equity
Distribution  Agreement  dated June 23, 2005 between the  Obligator  and Cornell
Capital Partners,  LP,  ("Cornell") the convertible  debenture issued to Cornell
dated May 20, 2005 pursuant to the Securities  Purchase  Agreement dated May 20,
2005, the Series A Preferred  Shares issued and outstanding to Cornell  pursuant
to the  Investment  Agreement  dated March 22, 2005, or pursuant to a commitment
arising  prior to the date  hereof,  so long as any of the  principal  amount or
interest on this  Debenture  remains unpaid and  unconverted,  the Obligor shall
not, without the prior consent of the Holder, (i) issue or sell any common stock
or  preferred  stock  with or  without  consideration,  (ii)  issue  or sell any
preferred stock, warrant,  option, right,  contract,  call, or other security or
instrument granting the holder thereof the right to acquire common stock with or
without  consideration,  (iii) enter into any security  instrument  granting the
holder a security interest in any of the assets of the Obligor, or (iv) file any
registration  statements on Form S-8.  Provided the Obligor gives the Holder two
(2) days prior written notice, the foregoing  restriction shall exclude options,
warrants or other securities  convertible or exchangeable  into shares of common
stock of the Obligor that were outstanding prior to the date hereof.

      This Debenture is subject to the following additional provisions:

                                       2
<PAGE>

      Section 1. This Debenture is exchangeable for an equal aggregate principal
amount of Debentures of different authorized denominations,  as requested by the
Holder  surrendering  the  same.  No  service  charge  will  be  made  for  such
registration of transfer or exchange.

      Section 2. Events of Default.

      (a) An "Event of  Default",  wherever  used  herein,  means any one of the
following  events  (whatever  the reason and  whether it shall be  voluntary  or
involuntary or effected by operation of law or pursuant to any judgment,  decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):

            (i) Any default in the payment of the principal  of,  interest on or
other charges in respect of this Debenture,  free of any claim of subordination,
as and when the same shall become due and payable (whether on an installment,  a
Principal  Payment  Date,  an Interest  Payment  Date, a Conversion  Date or the
Maturity  Date or by  acceleration  or otherwise)  which  remains  uncured for a
period of ten (10) days after such default;

            (ii)  The  Obligor  shall  fail to  observe  or  perform  any  other
covenant,  agreement or warranty contained in, or otherwise commit any breach or
default of any provision of this Debenture  (except as may be covered by Section
2(a)(i)  hereof or any  Transaction  Document (as defined in Section 4) which is
not cured with in the time prescribed;

            (iii) The Obligor or any  subsidiary of the Obligor shall  commence,
or there shall be commenced against the Obligor or any subsidiary of the Obligor
under any applicable bankruptcy or insolvency laws as now or hereafter in effect
or any  successor  thereto,  or the  Obligor or any  subsidiary  of the  Obligor
commences any other proceeding under any reorganization, arrangement, adjustment
of debt,  relief of debtors,  dissolution,  insolvency or liquidation or similar
law of any  jurisdiction  whether  now or  hereafter  in effect  relating to the
Obligor or any  subsidiary  of the  Obligor or there is  commenced  against  the
Obligor or any  subsidiary  of the Obligor any such  bankruptcy,  insolvency  or
other proceeding which remains  undismissed for a period of ninety (90) days; or
the  Obligor or any  subsidiary  of the  Obligor  is  adjudicated  insolvent  or
bankrupt;  or any  order of  relief or other  order  approving  any such case or
proceeding is entered;  or the Obligor or any subsidiary of the Obligor  suffers
any  appointment of any custodian,  private or court  appointed  receiver or the
like for it or any substantial part of its property which continues undischarged
or unstayed for a period of ninety (90) days;  or the Obligor or any  subsidiary
of the Obligor makes a general  assignment for the benefit of creditors;  or the
Obligor or any  subsidiary  of the Obligor shall call a meeting of its creditors
with a view to  arranging a  composition,  adjustment  or  restructuring  of its
debts;  or any  corporate  or  other  action  is  taken  by the  Obligor  or any
subsidiary of the Obligor for the purpose of effecting any of the foregoing;

            (iv) The Obligor or any  subsidiary  of the Obligor shall default in
any of its  obligations  under  any  other  Debenture  or any  mortgage,  credit
agreement or other facility,  indenture agreement,  factoring agreement or other
instrument under which there may be issued,  or by which there may be secured or
evidenced any  indebtedness  for borrowed money or money due under any long term
leasing or factoring arrangement of the Obligor or any subsidiary of the Obligor
in an amount exceeding  $250,000,  whether such indebtedness now exists or shall
hereafter be created and such default shall result in such indebtedness becoming
or being declared due and payable prior to the date on which it would  otherwise
become due and payable;

                                       3
<PAGE>

            (v) The Common  Stock shall cease to be quoted for trading or listed
for trading on the Nasdaq OTC Bulletin Board ("OTC"),  Nasdaq  SmallCap  Market,
New York Stock  Exchange,  American Stock Exchange or the Nasdaq National Market
(each,  a  "Subsequent  Market")  and shall  not  again be quoted or listed  for
trading thereon within twenty (20) Trading Days of such delisting;

            (vi) The Obligor or any  subsidiary  of the Obligor shall be a party
to any Change of Control Transaction (as defined in Section 4);

            (vii)  The  Obligor  shall  fail  to  file  the  Underlying   Shares
Registration Statement (as defined in Section 4) with the Commission (as defined
in Section 4), or the Underlying  Shares  Registration  Statement shall not have
been declared effective by the Commission,  in each case within the time periods
set forth in the Investor  Registration  Rights  Agreement of even date herewith
between the Obligor and the Holder;

            (viii) If the  effectiveness of the Underlying  Shares  Registration
Statement  lapses for any reason or the Holder  shall not be permitted to resell
the shares of Common Stock underlying this Debenture under the Underlying Shares
Registration  Statement,  in either  case,  for more  than five (5)  consecutive
Trading  Days  or an  aggregate  of  eight  Trading  Days  (which  need  not  be
consecutive Trading Days);

            (ix) The Obligor  shall fail for any reason to deliver  Common Stock
certificates to a Holder prior to the fifth (5th) Trading Day after a Conversion
Date or the Obligor  shall  provide  notice to the Holder,  including  by way of
public  announcement,  at any time, of its intention not to comply with requests
for conversions of this Debenture in accordance with the terms hereof;

            (x) The Obligor  shall fail for any reason to deliver the payment in
cash pursuant to a Buy-In (as defined herein) within three (3) days after notice
is claimed delivered hereunder;

      (b) During the time that any portion of this Debenture is outstanding,  if
any Event of Default has occurred,  the full principal amount of this Debenture,
together with interest and other amounts owing in respect  thereof,  to the date
of  acceleration  shall become at the  Holder's  election,  immediately  due and
payable in cash,  provided  however,  the Holder may request  (but shall have no
obligation  to request)  payment of such amounts in Common Stock of the Obligor.
If an Event of Default occurs and remains uncured, the Conversion Price shall be
reduced to [TWENTY PERCENT (20% of the VWAP on the Closing Date] _____ ($_____).
In addition to any other remedies,  the Holder shall have the right (but not the
obligation)  to convert this Debenture at any time after (x) an Event of Default
or (y) the Maturity Date at the Conversion Price then in-effect. The Holder need
not provide and the Obligor hereby waives any  presentment,  demand,  protest or
other notice of any kind, and the Holder may immediately and without  expiration
of any grace period enforce any and all of its rights and remedies hereunder and
all other remedies available to it under applicable law. Such declaration may be
rescinded and annulled by Holder at any time prior to payment hereunder. No such
rescission or annulment  shall affect any subsequent  Event of Default or impair
any right  consequent  thereon.  Upon an Event of Default,  notwithstanding  any
other provision of this Debenture or any Transaction Document,  the Holder shall
have no obligation to comply with or adhere to any  limitations,  if any, on the
conversion of this Debenture or the sale of the Underlying Shares.

                                       4
<PAGE>

      Section 3. Conversion.

      (a) (i) Conversion at Option of Holder.

            (A) This Debenture shall be convertible  into shares of Common Stock
at the  option of the  Holder,  in whole or in part at any time and from time to
time,  after the  Original  Issue Date (as defined in Section 4) (subject to the
limitations on conversion set forth in Section 3(a)(ii)  hereof).  The number of
shares of Common Stock  issuable upon a conversion  hereunder  equals the sum of
(i) the  quotient  obtained  by  dividing  (x) the  outstanding  amount  of this
Debenture  to be converted  by (y) the  Conversion  Price (as defined in Section
3(c)(i)).  The Obligor shall  deliver  Common Stock  certificates  to the Holder
prior to the Fifth (5th) Trading Day after a Conversion Date.

            (B) Notwithstanding anything to the contrary contained herein, if on
any  Conversion  Date:  (1) the  number of  shares  of Common  Stock at the time
authorized, unissued and unreserved for all purposes, or held as treasury stock,
is  insufficient  to pay  principal  and interest  hereunder in shares of Common
Stock; (2) the Common Stock is not listed or quoted for trading on the OTC or on
a  Subsequent  Market;  (3)  the  Obligor  has  failed  to  timely  satisfy  its
conversion; or (4) the issuance of such shares of Common Stock would result in a
violation of Section 3(a)(ii),  then, at the option of the Holder,  the Obligor,
in lieu of  delivering  shares of Common Stock  pursuant to Section  3(a)(i)(A),
shall deliver, within three (3) Trading Days of each applicable Conversion Date,
an amount in cash equal to the product of the outstanding principal amount to be
converted  plus any interest  due therein  divided by the  Conversion  Price and
multiplied by the highest closing price of the stock from date of the conversion
notice till the date that such cash payment is made.

      Further,  if the Obligor shall not have  delivered any cash due in respect
of conversion of this  Debenture or as payment of interest  thereon by the fifth
(5th) Trading Day after the  Conversion  Date,  the Holder may, by notice to the
Obligor, require the Obligor to issue shares of Common Stock pursuant to Section
3(c), except that for such purpose the Conversion Price applicable thereto shall
be the lesser of the Conversion  Price on the Conversion Date and the Conversion
Price on the date of such Holder demand.  Any such shares will be subject to the
provisions of this Section.

            (C) The Holder shall effect conversions by delivering to the Obligor
a  completed  notice in the form  attached  hereto as  Exhibit A (a  "Conversion
Notice").  The date on which a Conversion Notice is delivered is the "Conversion
Date." Unless the Holder is converting the entire principal  amount  outstanding
under this  Debenture,  the Holder is not required to physically  surrender this
Debenture to the Obligor in order to effect conversions.  Conversions  hereunder
shall have the  effect of  lowering  the  outstanding  principal  amount of this
Debenture plus all accrued and unpaid interest thereon in an amount equal to the
applicable conversion. The Holder and the Obligor shall maintain records showing
the principal amount converted and the date of such conversions. In the event of
any dispute or  discrepancy,  the records of the Holder shall be controlling and
determinative in the absence of manifest error.

                                       5
<PAGE>

      (ii) Certain Conversion Restrictions.

            (A) A Holder may not convert  this  Debenture  or receive  shares of
Common Stock as payment of interest  hereunder to the extent such  conversion or
receipt of such interest  payment would result in the Holder,  together with any
affiliate thereof, beneficially owning (as determined in accordance with Section
13(d) of the Exchange  Act and the rules  promulgated  thereunder)  in excess of
4.9% of the then issued and outstanding shares of Common Stock, including shares
of Common Stock  issuable upon  conversion  of, and payment of interest on, this
Debenture  or upon  exercise  of, or  conversion  of, any other  security of the
Obligor, held by such Holder after application of this Section. Since the Holder
will not be  obligated  to report to the  Obligor the number of shares of Common
Stock it may hold at the time of a conversion  hereunder,  unless the conversion
at issue would  result in the  issuance  of shares of Common  Stock in excess of
4.9% of the then outstanding  shares of Common Stock without regard to any other
shares which may be  beneficially  owned by the Holder or an affiliate  thereof,
the Holder shall have the  authority  and  obligation  to determine  whether the
restriction  contained  in this  Section  will limit any  particular  conversion
hereunder  and to the extent  that the  Holder  determines  that the  limitation
contained in this Section  applies,  the  determination  of which portion of the
principal  amount of this Debenture is convertible  shall be the  responsibility
and  obligation of the Holder.  If the Holder has delivered a Conversion  Notice
for a  principal  amount of this  Debenture  that,  without  regard to any other
shares that the Holder or its affiliates may  beneficially  own, would result in
the issuance in excess of the  permitted  amount  hereunder,  the Obligor  shall
notify the Holder of this fact and shall  honor the  conversion  for the maximum
principal amount permitted to be converted on such Conversion Date in accordance
with the  periods  described  in Section  3(a)(i)(A)  and,  at the option of the
Holder,  either retain any principal amount tendered for conversion in excess of
the  permitted  amount  hereunder for future  conversions  or return such excess
principal amount to the Holder.  The provisions of this Section may be waived by
a Holder (but only as to itself and not to any other  Holder) upon not less than
65 days prior notice to the Obligor.  Other  Holders  shall be unaffected by any
such waiver.

      (b) (i)  Nothing  herein  shall  limit a Holder's  right to pursue  actual
damages  or declare  an Event of  Default  pursuant  to Section 2 herein for the
Obligor 's failure to deliver  certificates  representing shares of Common Stock
upon conversion  within the period  specified  herein and such Holder shall have
the right to pursue all remedies  available to it at law or in equity including,
without limitation,  a decree of specific  performance and/or injunctive relief,
in each case  without  the need to post a bond or provide  other  security.  The
exercise  of any such  rights  shall not  prohibit  the Holder  from  seeking to
enforce damages pursuant to any other Section hereof or under applicable law.

            (ii) In addition to any other rights available to the Holder, if the
Obligor fails to deliver to the Holder such certificate or certificates pursuant
to Section 3(a)(i)(A) by the fifth Trading Day after the Conversion Date, and if
after such fifth  (5th)  Trading  Day the Holder  purchases  (in an open  market
transaction or otherwise)  Common Stock to deliver in  satisfaction of a sale by
such Holder of the Underlying Shares which the Holder anticipated receiving upon
such  conversion  (a  "Buy-In"),  then the Obligor  shall (A) pay in cash to the
Holder (in addition to any  remedies  available to or elected by the Holder) the
amount by which (x) the  Holder's  total  purchase  price  (including  brokerage
commissions,  if any) for the Common Stock so purchased  exceeds (y) the product
of (1) the  aggregate  number of shares of Common  Stock that such Holder  would
have received from the conversion at issue multiplied by (2) the market price of
the Common Stock at the time of the sale giving rise to such purchase obligation
and (B) at the option of the Holder, either reissue a Debenture in the principal
amount equal to the principal  amount of the attempted  conversion or deliver to
the Holder the number of shares of Common  Stock that would have been issued had
the  Obligor  timely  complied  with its  delivery  requirements  under  Section
3(a)(i)(A).  For example,  if the Holder  purchases  Common Stock having a total
purchase  price of Eleven  Thousand  Dollars  ($11,000)  to cover a Buy-In  with
respect to an  attempted  conversion  of  Debentures  with  respect to which the
market price of the  Underlying  Shares on the date of conversion was a total of
Ten Thousand  Dollars  ($10,000) under clause (A) of the  immediately  preceding
sentence,  the Obligor shall be required to pay the Holder One Thousand  Dollars
($1,000).  The Holder shall provide the Obligor  written  notice  indicating the
amounts payable to the Holder in respect of the Buy-In.

                                       6
<PAGE>

      (c) (i) The  conversion  price (the  "Conversion  Price") in effect on any
Conversion Date shall be equal to $0.1125, which may be adjusted pursuant to the
other terms of this Debenture.

            (ii)  If  the  Obligor,   at  any  time  while  this   Debenture  is
outstanding,  shall (a) pay a stock dividend or otherwise make a distribution or
distributions  on  shares  of its  Common  Stock or any  other  equity or equity
equivalent   securities  payable  in  shares  of  Common  Stock,  (b)  subdivide
outstanding  shares of Common Stock into a larger number of shares,  (c) combine
(including  by way of reverse  stock split)  outstanding  shares of Common Stock
into a smaller number of shares, or (d) issue by  reclassification  of shares of
the Common Stock any shares of capital stock of the Obligor, then the Conversion
Price  shall be  multiplied  by a fraction of which the  numerator  shall be the
number of shares of Common Stock (excluding treasury shares, if any) outstanding
before such event and of which the denominator  shall be the number of shares of
Common Stock  outstanding after such event. Any adjustment made pursuant to this
Section  shall  become  effective  immediately  after  the  record  date for the
determination of stockholders  entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision, combination or re-classification.

            (iii) Except for shares of capital stock or  securities  convertible
into or exercisable  for shares of capital stock issued pursuant to a commitment
dated prior to the date hereof, if the Obligor, at any time while this Debenture
is outstanding, shall issue rights, options or warrants to all holders of Common
Stock (and not to the Holder) entitling them to subscribe for or purchase shares
of  Common  Stock at a price per share  less than the  Closing  Bid Price at the
record date mentioned below,  then the Conversion Price shall be multiplied by a
fraction,  of which the denominator  shall be the number of shares of the Common
Stock (excluding treasury shares, if any) outstanding on the date of issuance of
such rights or warrants  (plus the number of  additional  shares of Common Stock
offered for  subscription or purchase),  and of which the numerator shall be the
number  of  shares of the  Common  Stock  (excluding  treasury  shares,  if any)
outstanding on the date of issuance of such rights or warrants,  plus the number
of shares which the  aggregate  offering  price of the total number of shares so
offered would purchase at such Closing Bid Price.  Such adjustment shall be made
whenever  such  rights  or  warrants  are  issued,  and shall  become  effective
immediately after the record date for the determination of stockholders entitled
to receive such rights, options or warrants. However, upon the expiration of any
such  right,  option or  warrant  to  purchase  shares of the  Common  Stock the
issuance of which resulted in an adjustment in the Conversion  Price pursuant to
this  Section,  if any such right,  option or warrant shall expire and shall not
have been exercised, the Conversion Price shall immediately upon such expiration
be recomputed and effective immediately upon such expiration be increased to the
price  which it would have been (but  reflecting  any other  adjustments  in the
Conversion  Price made  pursuant to the  provisions  of this  Section  after the
issuance of such rights or warrants) had the adjustment of the Conversion  Price
made upon the  issuance of such  rights,  options or  warrants  been made on the
basis of offering for subscription or purchase only that number of shares of the
Common Stock  actually  purchased  upon the exercise of such rights,  options or
warrants actually exercised.

                                       7
<PAGE>

            (iv) Except for shares of capital  stock or  securities  convertible
into or exercisable  for shares of capital stock issued pursuant to a commitment
dated prior to the date hereof,  if the Obligor or any  subsidiary  thereof,  as
applicable,  with respect to Common Stock Equivalents (as defined below), at any
time while this Debenture is outstanding,  shall issue shares of Common Stock or
rights, warrants,  options or other securities or debt that are convertible into
or  exchangeable  for  shares  of  Common  Stock  ("Common  Stock  Equivalents")
entitling  any Person to acquire  shares of Common  Stock,  at a price per share
less than the  Conversion  Price (if the  holder of the  Common  Stock or Common
Stock  Equivalent so issued shall at any time,  whether by operation of purchase
price adjustments, reset provisions,  floating conversion,  exercise or exchange
prices or  otherwise,  or due to warrants,  options or rights per share which is
issued in connection with such issuance, be entitled to receive shares of Common
Stock at a price  per  share  which  is less  than the  Conversion  Price,  such
issuance shall be deemed to have occurred for less than the  Conversion  Price),
then, at the sole option of the Holder,  the Conversion  Price shall be adjusted
to mirror the  conversion,  exchange or purchase  price for such Common Stock or
Common Stock Equivalents (including any reset provisions thereof) at issue. Such
adjustment shall be made whenever such Common Stock or Common Stock  Equivalents
are issued.  The Obligor shall notify the Holder in writing,  no later than five
(5)  business  days  following  the issuance of any Common Stock or Common Stock
Equivalent subject to this Section,  indicating therein the applicable  issuance
price, or of applicable reset price, exchange price,  conversion price and other
pricing  terms.  No  adjustment  under this Section shall be made as a result of
issuances and exercises of options to purchase shares of Common Stock issued for
compensatory  purposes  pursuant to any of the  Obligor's  stock option or stock
purchase plans.

            (v) If the Obligor, at any time while this Debenture is outstanding,
shall  distribute  to all  holders  of  Common  Stock  (and  not to the  Holder)
evidences of its  indebtedness  or assets or rights or warrants to subscribe for
or purchase any security,  then in each such case the Conversion  Price at which
this  Debenture  shall   thereafter  be  convertible   shall  be  determined  by
multiplying the Conversion Price in effect  immediately prior to the record date
fixed for determination of stockholders entitled to receive such distribution by
a fraction of which the denominator shall be the Closing Bid Price determined as
of the record date  mentioned  above,  and of which the numerator  shall be such
Closing Bid Price on such  record  date less the then fair market  value at such
record  date of the  portion  of such  assets or  evidence  of  indebtedness  so
distributed  applicable  to  one  outstanding  share  of  the  Common  Stock  as
determined  by the  Board  of  Directors  in good  faith.  In  either  case  the
adjustments  shall be  described  in a  statement  provided to the Holder of the
portion  of  assets  or  evidences  of   indebtedness  so  distributed  or  such
subscription  rights  applicable to one share of Common Stock.  Such  adjustment
shall be made whenever any such  distribution is made and shall become effective
immediately after the record date mentioned above.

                                       8
<PAGE>

            (vi) In case of any  reclassification  of the  Common  Stock  or any
compulsory  share exchange  pursuant to which the Common Stock is converted into
other securities,  cash or property,  the Holder shall have the right thereafter
to, at its option, (A) convert the then outstanding  principal amount,  together
with all accrued but unpaid  interest and any other amounts then owing hereunder
in respect of this Debenture into the shares of stock and other securities, cash
and property receivable upon or deemed to be held by holders of the Common Stock
following  such  reclassification  or share  exchange,  and the  Holder  of this
Debenture  shall  be  entitled  upon  such  event  to  receive  such  amount  of
securities,  cash or property  as the shares of the Common  Stock of the Obligor
into which the then outstanding principal amount,  together with all accrued but
unpaid  interest and any other  amounts then owing  hereunder in respect of this
Debenture could have been converted  immediately prior to such  reclassification
or share exchange would have been entitled, or (B) require the Obligor to prepay
the outstanding principal amount of this Debenture,  plus all interest and other
amounts due and payable  thereon.  The entire  prepayment price shall be paid in
cash. This provision shall  similarly apply to successive  reclassifications  or
share exchanges.

            (vii) All  calculations  under this Section 3 shall be rounded up to
the nearest $0.001 of a share.

            (viii)  Whenever the  Conversion  is adjusted  pursuant to Section 3
hereof, the Obligor shall promptly mail to the Holder a notice setting forth the
Conversion  Price after such  adjustment and setting forth a brief  statement of
the facts requiring such adjustment.

            (ix) If (A) the  Obligor  shall  declare  a  dividend  (or any other
distribution)  on the Common  Stock;  (B) the  Obligor  shall  declare a special
nonrecurring  cash  dividend on or a  redemption  of the Common  Stock;  (C) the
Obligor  shall  authorize the granting to all holders of the Common Stock rights
or warrants to  subscribe  for or  purchase  any shares of capital  stock of any
class or of any  rights;  (D) the  approval of any  stockholders  of the Obligor
shall be required in connection with any  reclassification  of the Common Stock,
any  consolidation  or  merger  to which  the  Obligor  is a party,  any sale or
transfer  of all or  substantially  all of the  assets  of the  Obligor,  of any
compulsory  share  exchange  whereby the Common  Stock is  converted  into other
securities,  cash or property;  or (E) the Obligor shall authorize the voluntary
or  involuntary  dissolution,  liquidation  or winding up of the  affairs of the
Obligor;  then, in each case, the Obligor shall cause to be filed at each office
or agency maintained for the purpose of conversion of this Debenture,  and shall
cause to be mailed to the Holder at its last address as it shall appear upon the
stock  books of the  Obligor,  at  least  ten (10)  calendar  days  prior to the
applicable record or effective date hereinafter  specified, a notice stating (x)
the date on which a record  is to be taken  for the  purpose  of such  dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of the Common Stock of record to be entitled to
such  dividend,  distributions,   redemption,  rights  or  warrants  are  to  be
determined  or (y)  the  date on  which  such  reclassification,  consolidation,
merger,  sale,  transfer or share  exchange is expected to become  effective  or
close,  and the date as of which it is expected that holders of the Common Stock
of record  shall be entitled to exchange  their  shares of the Common  Stock for
securities,  cash or other  property  deliverable  upon  such  reclassification,
consolidation,  merger,  sale,  transfer or share exchange,  provided,  that the
failure to mail such  notice or any defect  therein  or in the  mailing  thereof
shall not affect the validity of the corporate  action  required to be specified
in such  notice.  The Holder is entitled to convert  this  Debenture  during the
10-day calendar period  commencing the date of such notice to the effective date
of the event triggering such notice.

                                       9
<PAGE>

            (x) In case of any (1) merger or consolidation of the Obligor or any
subsidiary  of the  Obligor  with or into  another  Person,  or (2)  sale by the
Obligor or any  subsidiary of the Obligor of more than one-half of the assets of
the Obligor in one or a series of related transactions,  a Holder shall have the
right to (A) exercise any rights under Section  2(b),  (B) convert the aggregate
amount of this  Debenture  then  outstanding  into the shares of stock and other
securities, cash and property receivable upon or deemed to be held by holders of
Common Stock following such merger, consolidation or sale, and such Holder shall
be entitled  upon such event or series of related  events to receive such amount
of  securities,  cash and property as the shares of Common Stock into which such
aggregate   principal  amount  of  this  Debenture  could  have  been  converted
immediately  prior to such  merger,  consolidation  or  sales  would  have  been
entitled, or (C) in the case of a merger or consolidation, require the surviving
entity to issue to the Holder a convertible  Debenture  with a principal  amount
equal to the  aggregate  principal  amount of this  Debenture  then held by such
Holder,  plus all accrued and unpaid  interest and other amounts owing  thereon,
which such  newly  issued  convertible  Debenture  shall  have  terms  identical
(including with respect to conversion) to the terms of this Debenture, and shall
be entitled to all of the rights and  privileges of the Holder of this Debenture
set forth  herein and the  agreements  pursuant  to which this  Debentures  were
issued. In the case of clause (C), the conversion price applicable for the newly
issued shares of convertible preferred stock or convertible  Debentures shall be
based upon the amount of securities, cash and property that each share of Common
Stock  would  receive in such  transaction  and the  Conversion  Price in effect
immediately prior to the effectiveness or closing date for such transaction. The
terms of any such merger,  sale or consolidation  shall include such terms so as
to  continue to give the Holder the right to receive  the  securities,  cash and
property set forth in this Section upon any  conversion or redemption  following
such event. This provision shall similarly apply to successive such events.

      (d) The  Obligor  covenants  that it will at all  times  reserve  and keep
available out of its authorized  and unissued  shares of Common Stock solely for
the  purpose of  issuance  upon  conversion  of this  Debenture  and  payment of
interest on this Debenture, each as herein provided, free from preemptive rights
or any other actual contingent purchase rights of persons other than the Holder,
not less than such number of shares of the Common Stock as shall (subject to any
additional  requirements  of the  Obligor as to  reservation  of such shares set
forth in this  Debenture) be issuable  (taking into account the  adjustments and
restrictions  of Sections 2(b) and 3(c)) upon the conversion of the  outstanding
principal  amount of this  Debenture  and  payment of  interest  hereunder.  The
Obligor  covenants  that all shares of Common  Stock  that shall be so  issuable
shall,  upon  issue,  be duly and  validly  authorized,  issued and fully  paid,
nonassessable  and, if the  Underlying  Shares  Registration  Statement has been
declared  effective  under the  Securities  Act,  registered  for public sale in
accordance with such Underlying Shares Registration Statement.

                                       10
<PAGE>

      (e) Upon a conversion hereunder the Obligor shall not be required to issue
stock certificates representing fractions of shares of the Common Stock, but may
if otherwise permitted,  make a cash payment in respect of any final fraction of
a share based on the Closing Bid Price at such time. If the Obligor  elects not,
or is unable,  to make such a cash  payment,  the Holder  shall be  entitled  to
receive,  in lieu of the final  fraction  of a share,  one whole share of Common
Stock.

      (f) The  issuance  of  certificates  for  shares  of the  Common  Stock on
conversion of this Debenture  shall be made without charge to the Holder thereof
for any documentary stamp or similar taxes that may be payable in respect of the
issue or delivery of such  certificate,  provided  that the Obligor shall not be
required to pay any tax that may be payable in respect of any transfer  involved
in the issuance and delivery of any such  certificate  upon conversion in a name
other than that of the Holder of such  Debenture  so  converted  and the Obligor
shall not be required to issue or deliver such certificates  unless or until the
person or persons requesting the issuance thereof shall have paid to the Obligor
the  amount of such tax or shall have  established  to the  satisfaction  of the
Obligor  that  such  tax  has  been  paid.  The  Holder  shall  pay  any and all
withholding  taxes assessed in connection with the transactions  contemplated by
this debenture.

      (g) Any notices,  consents,  waivers or other  communications  required or
permitted  to be given  under the terms  hereof  must be in writing  and will be
deemed to have been delivered: (i) upon receipt, when delivered personally; (ii)
upon receipt,  when sent by facsimile (provided  confirmation of transmission is
mechanically or electronically generated and kept on file by the sending party);
or  (iii)  one (1)  trading  day  after  deposit  with a  nationally  recognized
overnight  delivery  service,  in each case  properly  addressed to the party to
receive the same.  The addresses and facsimile  numbers for such  communications
shall be:

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

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

                                       11
<PAGE>

If to the Holder:         Cornell Capital Partners, LP
                          101 Hudson Street - Suite 3700
                          Jersey City, NJ 07030
                          Attention:    Mark Angelo
                          Telephone:  (212) 985-8300
                          Facsimile:   (212) 985-8266

With a copy to:           David Gonzalez, Esq.
                          101 Hudson Street - Suite 3700
                          Jersey City, NJ 07030
                          Telephone:   (201) 985-8300
                          Facsimile:    (201) 985-8744

or at such other address and/or facsimile number and/or to the attention of such
other person as the  recipient  party has  specified by written  notice given to
each other  party three (3)  business  days prior to the  effectiveness  of such
change.  Written  confirmation  of receipt  (i) given by the  recipient  of such
notice,   consent,   waiver  or  other   communication,   (ii)  mechanically  or
electronically  generated by the sender's facsimile machine containing the time,
date,  recipient  facsimile  number  and an  image  of the  first  page  of such
transmission  or (iii) provided by a nationally  recognized  overnight  delivery
service, shall be rebuttable evidence of personal service,  receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.

      Section 4. Definitions. For the purposes hereof, the following terms shall
have the following meanings:

      "Business  Day"  means any day except  Saturday,  Sunday and any day which
shall be a federal  legal holiday in the United States or a day on which banking
institutions  are  authorized or required by law or other  government  action to
close.

      "Change of Control Transaction" means the occurrence of (a) an acquisition
after the date hereof by an  individual or legal entity or "group" (as described
in Rule  13d-5(b)(1)  promulgated  under the Exchange Act) of effective  control
(whether through legal or beneficial  ownership of capital stock of the Obligor,
by  contract or  otherwise)  of in excess of fifty  percent  (50%) of the voting
securities of the Obligor (except that the  acquisition of voting  securities by
the Holder  shall not  constitute a Change of Control  Transaction  for purposes
hereof), (b) a replacement at one time or over time of more than one-half of the
members of the board of  directors  of the  Obligor  which is not  approved by a
majority of those  individuals  who are members of the board of directors on the
date hereof (or by those  individuals who are serving as members of the board of
directors on any date whose nomination to the board of directors was approved by
a majority of the members of the board of directors  who are members on the date
hereof), (c) the merger, consolidation or sale of fifty percent (50%) or more of
the assets of the Obligor or any subsidiary of the Obligor in one or a series of
related  transactions  with or into another entity,  or (d) the execution by the
Obligor of an agreement to which the Obligor is a party or by which it is bound,
providing for any of the events set forth above in (a), (b) or (c).

      "Commission" means the Securities and Exchange Commission.

                                       12
<PAGE>

      "Common  Stock" means the common stock,  no par value,  of the Obligor and
stock of any other  class into which  shares of Common  Stock may  hereafter  be
changed or reclassified.

      "Exchange Act" means the Securities Exchange Act of 1934, as amended.

      "Original  Issue Date"  shall mean the date of the first  issuance of this
Debenture  regardless of the number of transfers and regardless of the number of
instruments, which may be issued to evidence such Debenture.

      "Closing Bid Price" means the price per share in the last  reported  trade
of the  Common  Stock on the OTC or on the  Subsequent  Market  which the Common
Stock is then listed as quoted by Bloomberg, LP.

      "Person" means a corporation, an association, a partnership, organization,
a business,  an individual,  a government or political  subdivision thereof or a
governmental agency.

      "Securities  Act" means the  Securities  Act of 1933, as amended,  and the
rules and regulations promulgated thereunder.

      "Trading  Day" means a day on which the shares of Common  Stock are quoted
on the OTC or quoted or traded on such Subsequent  Market on which the shares of
Common  Stock are then  quoted or listed;  provided,  that in the event that the
shares of Common  Stock are not listed or quoted,  then Trading Day shall mean a
Business Day.

      "Transaction  Documents"  means the Securities  Purchase  Agreement or any
other agreement  delivered in connection with the Securities Purchase Agreement,
including, without limitation the Investor Registration Rights Agreement.

      "Underlying  Shares"  means  the  shares  of Common  Stock  issuable  upon
conversion of this  Debenture or as payment of interest in  accordance  with the
terms hereof.

      "Underlying Shares Registration  Statement" means a registration statement
meeting  the  requirements  set  forth  in the  Registration  Rights  Agreement,
covering among other things the resale of the  Underlying  Shares and naming the
Holder as a "selling stockholder" thereunder.

      Section 5. Except as  expressly  provided  herein,  no  provision  of this
Debenture  shall  alter or impair  the  obligations  of the  Obligor,  which are
absolute and unconditional,  to pay the principal of, interest and other charges
(if any) on, this  Debenture at the time,  place,  and rate,  and in the coin or
currency,  herein  prescribed.  This  Debenture  is a direct  obligation  of the
Obligor.  This  Debenture  ranks  pari passu  with all other  Debentures  now or
hereafter issued under the terms set forth herein.  As long as this Debenture is
outstanding,  the Obligor shall not and shall cause their  subsidiaries  not to,
without the consent of the Holder,  (i) amend its certificate of  incorporation,
bylaws or other  charter  documents so as to adversely  affect any rights of the
Holder;  (ii)  repay,  repurchase  or offer to repay,  repurchase  or  otherwise
acquire shares of its Common Stock or other equity  securities  other than as to
the Underlying  Shares to the extent permitted or required under the Transaction
Documents;  or  (iii)  enter  into  any  agreement  with  respect  to any of the
foregoing.

                                       13
<PAGE>

      Section  6. This  Debenture  shall not  entitle  the  Holder to any of the
rights of a stockholder of the Obligor,  including without limitation, the right
to vote, to receive dividends and other distributions,  or to receive any notice
of, or to attend,  meetings  of  stockholders  or any other  proceedings  of the
Obligor,  unless  and to the extent  converted  into  shares of Common  Stock in
accordance with the terms hereof.

      Section 7. If this Debenture is mutilated,  lost, stolen or destroyed, the
Obligor shall  execute and deliver,  in exchange and  substitution  for and upon
cancellation of the mutilated Debenture,  or in lieu of or in substitution for a
lost, stolen or destroyed Debenture, a new Debenture for the principal amount of
this Debenture so mutilated,  lost, stolen or destroyed but only upon receipt of
evidence  of such  loss,  theft or  destruction  of such  Debenture,  and of the
ownership hereof, and indemnity,  if requested,  all reasonably  satisfactory to
the Obligor.

      Section 8. No  indebtedness  of the Obligor is senior to this Debenture in
right of payment, whether with respect to interest,  damages or upon liquidation
or dissolution or otherwise.  Without the Holder's consent, the Obligor will not
and will not permit any of their subsidiaries to, directly or indirectly,  enter
into, create,  incur, assume or suffer to exist any indebtedness of any kind, on
or with respect to any of its property or assets now owned or hereafter acquired
or any  interest  therein or any income or profits  there from that is senior in
any respect to the obligations of the Obligor under this Debenture.

      Section 9. This Debenture shall be governed by and construed in accordance
with the laws of the State of New Jersey,  without giving effect to conflicts of
laws thereof.  Each of the parties  consents to the jurisdiction of the Superior
Courts of the State of New Jersey sitting in Hudson  County,  New Jersey and the
U.S. District Court for the District of New Jersey sitting in Newark, New Jersey
in connection  with any dispute  arising under this Debenture and hereby waives,
to the maximum extent  permitted by law, any objection,  including any objection
based on forum non  conveniens  to the bringing of any such  proceeding  in such
jurisdictions.

      Section 10. If the Obligor fails to strictly comply with the terms of this
Debenture,  then the Obligor shall  reimburse the Holder  promptly for all fees,
costs and expenses, including, without limitation,  attorneys' fees and expenses
incurred  by the  Holder  in any  action  in  connection  with  this  Debenture,
including, without limitation, those incurred: (i) during any workout, attempted
workout,  and/or in  connection  with the  rendering  of legal  advice as to the
Holder's rights, remedies and obligations, (ii) collecting any sums which become
due  to the  Holder,  (iii)  defending  or  prosecuting  any  proceeding  or any
counterclaim to any proceeding or appeal;  or (iv) the protection,  preservation
or enforcement of any rights or remedies of the Holder.

      Section 11. Any waiver by the Holder of a breach of any  provision of this
Debenture  shall  not  operate  as or be  construed  to be a waiver of any other
breach  of such  provision  or of any  breach  of any  other  provision  of this
Debenture. The failure of the Holder to insist upon strict adherence to any term
of this Debenture on one or more  occasions  shall not be considered a waiver or
deprive that party of the right  thereafter  to insist upon strict  adherence to
that term or any other term of this Debenture. Any waiver must be in writing.

                                       14
<PAGE>

      Section 12. If any  provision  of this  Debenture  is invalid,  illegal or
unenforceable,  the balance of this Debenture shall remain in effect, and if any
provision is inapplicable to any person or circumstance,  it shall  nevertheless
remain applicable to all other persons and  circumstances.  If it shall be found
that any interest or other amount deemed  interest due  hereunder  shall violate
applicable laws governing  usury,  the applicable rate of interest due hereunder
shall  automatically be lowered to equal the maximum permitted rate of interest.
The Obligor  covenants  (to the extent that it may lawfully do so) that it shall
not at any time insist upon,  plead, or in any manner  whatsoever  claim or take
the benefit or advantage of, any stay, extension or usury law or other law which
would  prohibit  or forgive  the  Obligor  from paying all or any portion of the
principal of or interest on this  Debenture  as  contemplated  herein,  wherever
enacted,  now or at any time  hereafter  in  force,  or  which  may  affect  the
covenants or the performance of this  indenture,  and the Obligor (to the extent
it may lawfully do so) hereby  expressly waives all benefits or advantage of any
such law,  and  covenants  that it will not, by resort to any such law,  hinder,
delay or impeded the  execution of any power herein  granted to the Holder,  but
will  suffer and permit  the  execution  of every such as though no such law has
been enacted.

      Section 13.  Whenever any payment or other  obligation  hereunder shall be
due on a day other than a Business  Day,  such payment shall be made on the next
succeeding Business Day.

      Section 14. THE PARTIES HEREBY  KNOWINGLY,  VOLUNTARILY AND  INTENTIONALLY
WAIVE  THE  RIGHT  ANY OF THEM  MAY HAVE TO A TRIAL  BY JURY IN  RESPECT  OF ANY
LITIGATION  BASED  HEREON OR ARISING OUT OF,  UNDER OR IN  CONNECTION  WITH THIS
AGREEMENT  OR ANY  TRANSACTION  DOCUMENT  OR ANY  COURSE OF  CONDUCT,  COURSE OF
DEALING,  STATEMENTS  (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY.  THIS
PROVISION  IS  A  MATERIAL  INDUCEMENT  FOR  THE  PARTIES'  ACCEPTANCE  OF  THIS
AGREEMENT.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       15
<PAGE>

      IN WITNESS WHEREOF,  the Obligor has caused this Convertible  Debenture to
be duly executed by a duly authorized officer as of the date set forth above.

                                                  SMARTIRE SYSTEMS INC.

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

                                       16
<PAGE>

<PAGE>

                                   EXHIBIT "A"

                              NOTICE OF CONVERSION

        (To be executed by the Holder in order to Convert the Debenture)

TO:

      The undersigned hereby irrevocably elects to convert $_________________ of
the  principal  amount of the above  Debenture  into  Shares of Common  Stock of
SmarTire  Systems Inc.,  according to the conditions  stated therein,  as of the
Conversion Date written below.

Conversion Date:                          ______________________________________

Applicable Conversion Price:              ______________________________________

Signature:                                ______________________________________

Name:                                     ______________________________________

Address:                                  ______________________________________

Amount to be converted:                   $_____________________________________

Amount of Debenture unconverted:          $_____________________________________

Conversion Price per share:               $_____________________________________

Number of  shares of Common  Stock to be
issued:                                   ______________________________________

Amount of Interest Converted:             $_____________________________________

Conversion Price per share:               $_____________________________________

Number of  shares of Common  Stock to be
issued:                                   ______________________________________

Please  issue  the  shares  of
Common  Stock in the
following  name and to the
following address:                        ______________________________________

Issue to:                                 ______________________________________

Authorized Signature:                     ______________________________________

Name:                                     ______________________________________

Title:                                    ______________________________________

Phone Number:                             ______________________________________

Broker DTC Participant Code:              ______________________________________

Account Number:                           ______________________________________

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