TTC Technology 10QSB 2008 Q2 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

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

ACT OF 1934

For the quarterly period ended January 31, 2008.

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

For the transition period from ___________ to ____________

Commission file number 0-24209

SMARTIRE SYSTEMS INC.

(Exact name of small business issuer as specified in its charter)


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

#150 - 13151 Vanier Place

Richmond, British Columbia, Canada V6V 2J1

(Address of principal executive offices)

604-276-9884

(Issuer's telephone number, including area code)

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [X ] No [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.

The number of shares of our common stock outstanding at March 11, 2008 was 2,405,269,235.

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

INDEX			PAGE
			NUMBER

PART I.	FINANCIAL INFORMATION		1

	ITEM 1.	FINANCIAL STATEMENTS	1

		CONSOLIDATED BALANCE SHEETS - JANUARY 31, 2008 (UNAUDITED)
		AND JULY 31, 2007	2

		CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED ) - FOR THE
		THREE AND SIX MONTHS ENDED JANUARY 31, 2008 AND JANUARY 31, 2007	3

		CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE THREE AND SIX
		MONTHS ENDED JANUARY 31, 2008 AND JANUARY 31, 2007	3

		CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED
		JANUARY 31, 2008 AND JANUARY 31, 2007	4

		CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT FOR THE SIX MONTHS
		ENDED JANUARY 31, 2008 (UNAUDITED)	5

		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE SIX MONTHS
		ENDED JANUARY 31, 2008 AND JANUARY 31, 2007	6

	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION	24

	ITEM 3AT.	CONTROLS AND PROCEDURES	30

PART II.	OTHER INFORMATION		31

	ITEM 1.	LEGAL PROCEEDINGS	31

	ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	31

	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	32

	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	32

	ITEM 5.	OTHER INFORMATION	32

	ITEM 6.	EXHIBITS	32

		SIGNATURES	33

PART I - FINANCIAL INFORMATION

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

THIS QUARTERLY REPORT ON FORM 10-QSB, INCLUDING THE EXHIBITS HERETO, CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENTS ARE TYPICALLY IDENTIFIED BY THE WORDS “ANTICIPATES,” “BELIEVES,” “EXPECTS,” “INTENDS,” “FORECASTS,” “PLANS,” “FUTURE,” “STRATEGY,” OR WORDS OF SIMILAR MEANING. VARIOUS FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS, INCLUDING THOSE DESCRIBED IN “RISK FACTORS” IN OUR JULY 31, 2007 FORM 10-KSB. WE ASSUME NO OBLIGATIONS TO UPDATE THESE FORWARD-LOOKING STATEMENTS TO REFLECT ACTUAL RESULTS, CHANGES IN ASSUMPTIONS, OR CHANGES IN OTHER FACTORS, EXCEPT AS REQUIRED BY LAW.

ITEM 1. FINANCIAL STATEMENTS

The unaudited consolidated financial statements of SmarTire Systems Inc. and its wholly owned subsidiaries, SmarTire USA Inc., SmarTire Europe Limited and SmarTire Technologies Inc. (“we,” “us,” “our,” and “SmarTire”) as of January 31, 2008 and for the three and six months ended January 31, 2008 and January 31, 2007 are attached hereto. Our consolidated financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.

It is the opinion of management that the interim financial statements for the three and six months ended January 31, 2008 and January 31, 2007 includes all adjustments necessary in order to ensure that the financial statements are not misleading. These statements reflect all adjustments, which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented in accordance with accounting principles generally accepted in the United States of America. Except where noted, these interim financial statements follow the same accounting policies and methods of their application as the Company’s July 31, 2007 annual consolidated financial statements. All adjustments are of a normal recurring nature. These interim financial statements should be read in conjunction with the Company’s July 31, 2007 annual consolidated financial statements.

Operating results for the three and six months ended January 31, 2008 are not necessarily indicative of the results that can be expected for the year ending July 31, 2008.

-1-

SMARTIRE SYSTEMS INC.
Consolidated Balance Sheets
(Expressed in United States dollars)
(Prepared in accordance with U.S. generally accepted accounting principles)



	January 31,			July 31,
	2008			2007
	(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	144,761		$	350,018
Receivables, net of allowance for doubtful accounts
of $10,000 (July 31, 2007 - $18,657)		401,029			505,581
Inventory		1,501,003			1,591,230
Prepaid expenses		146,440			138,890
		2,193,233			2,585,719

Property and equipment		767,342			799,540

Deferred financing costs (note 4)		445,551			947,945

	$	3,406,126		$	4,333,204

LIABILITIES AND CAPITAL DEFICIT

Current liabilities:
Accounts payable and accrued liabilities (note 5)	$	2,481,289		$	1,748,855
Current portion of convertible debentures (note 6)		19,220,640			11,134,533
Current portion of accrued interest on convertible debentures, payable in shares (note 6)		6,478,963			4,741,414
		28,180,892			17,624,802

Convertible debentures (note 6)		1,986,293			1,828,575
Unrecognized tax benefit (Note 3 (b))		756,698			-
Accrued interest on convertible debentures, payable in shares (note 6)		113,918			194,588

Preferred shares, subject to mandatory redemption net of
amounts to be accreted of $Nil (July 31, 2007 - $Nil) (note 7)		3,527,546			3,449,776

Capital deficit:
Share capital (note 8)
Common shares, without par value:
Unlimited shares authorized
1,245,510,602 shares issued and outstanding (July 31, 2007 - 463,336,271)		72,670,887			71,033,916
Additional paid-in capital		34,497,631			34,081,226
Accumulated deficit		(139,050,820	)		(124,796,374	)
Accumulated other comprehensive income		723,081			916,695
		(31,159,221	)		(18,764,537	)

	$	3,406,126		$	4,333,204
Going concern (note 2)
Contingency (note 11)
See accompanying notes to consolidated financial statements.

-2-

SMARTIRE SYSTEMS INC.
Consolidated Statements of Operations
(Expressed in United States dollars)
(Prepared in accordance with U.S. generally accepted accounting principles)
Three and six months ended January 31, 2008 and 2007
(Unaudited)

	Three Months Ended						Six Months Ended
	January 31,			January 31,			January 31,			January 31,
	2008			2007			2008			2007

Revenue (note 12)	$	740,848		$	946,665		$	1,663,874		$	1,798,444

Cost of goods sold		665,165			650,164			1,461,919			1,288,140

		75,683			296,501			201,955			510,304

Expenses:
Depreciation and amortization		65,902			142,908			130,187			283,609
Engineering, research and development		413,326			995,946			905,831			1,819,685
General and administrative		762,996			868,451			1,275,863			1,804,865
Marketing		187,167			371,930			441,792			1,038,459
		1,429,391			2,379,235			2,753,673			4,946,618

Loss from operations		(1,353,708	)		(2,082,734	)		(2,551,718	)		(4,436,314	)

Other earnings (expenses):
Interest income		1,532			5,710			5,844			15,292
Interest and financing expense (note 9)		(6,321,116	)		(3,030,874	)		(11,342,769	)		(4,963,808	)
Unrealized loss on derivative instruments		-			-			-			(1,030,415	)
Foreign exchange gain (loss)		(483,565	)		(216,327	)		363,269			(223,902	)
		(6,803,149	)		(3,241,491	)		(10,973,656	)		(6,202,833	)

Loss for the period		(8,156,857	)		(5,324,225	)		(13,525,374	)		(10,639,147	)

Accrued dividends and accretion on preferred shares (note 7)		(38,885	)		(2,009,216	)		(77,770	)		(3,726,269	)

Loss available to common stockholders	$	(8,195,742	)	$	(7,333,441	)	$	(13,603,144	)	$	(14,365,416	)

Basic and diluted loss per share	$	(0.01	)	$	(0.02	)	$	(0.02	)	$	(0.05	)

Weighted average number of common shares used in
the computation of basic and diluted loss per share		835,521,037			319,084,077			668,135,685			315,378,079

See accompanying notes to consolidated financial statements.

SMARTIRE SYSTEMS INC.
Consolidated Statements of Comprehensive Loss
(Expressed in United States dollars)
(Prepared in accordance with U.S. generally accepted accounting principles)
Three and six months ended January 31, 2008 and 2007
(Unaudited)

	Three Months Ended						Six Months Ended
	January 31,			January 31,			January 31,			January 31,
	2008			2007			2008			2007

Loss for the period	$	(8,156,857	)	$	(5,324,225	)	$	(13,525,374	)	$	(10,639,147	)
Translation adjustment		245,128			101,111			(193,614	)		139,515

Other comprehensive loss for the period	$	(7,911,729	)	$	(5,223,114	)	$	(13,718,988	)	$	(10,499,632	)

See accompanying notes to consolidated financial statements.

-3-

SMARTIRE SYSTEMS INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
(Prepared in accordance with U.S. generally accepted accounting principles)
Six months ended January 31, 2008 and 2007
(Unaudited)



	January 31,			January 31,
	2008			2007
Cash provided (used for):
Operating activities:
Loss for the period	$	(13,525,374	)	$	(10,639,147	)
Items not affecting cash:
Depreciation and amortization		130,187			283,609
Unrealized loss on derivative instruments		-			1,030,415
Non-cash interest and finance charges		11,306,334			4,920,899
Stock-compensation expense		146,607			353,160
Issuance of common shares and warrants for services received		4,617			(15,690	)
Unrealized foreign exchange gain on financing activities		(356,293	)		-
Changes in non-cash working capital:
Receivables		129,942			(49,012	)
Inventory		189,463			293,165
Prepaid expenses		(147	)		(71,221	)
Accounts payable and accrued liabilities		607,001			627,332

Net cash used in operating activities		(1,367,663	)		(3,266,490	)

Investing activities:
Purchase of property and equipment		(47,209	)		(287,191	)

Net cash used in investing activities		(47,209	)		(287,191	)

Financing activities:
Cash received on exercise of stock options		-			93,000
Proceeds from convertible debentures (note 6)		1,260,500			1,884,000
Financing costs (note 6)		(160,500	)		(213,400	)

Net cash provided by financing activities		1,100,000			1,763,600


Effect of exchange rate difference on cash and cash equivalents		109,615			127,771

Net decrease in cash and cash equivalents		(205,257	)		(1,662,310	)

Cash and cash equivalents, beginning of period		350,018			1,988,420

Cash and cash equivalents, end of period	$	144,761		$	326,110

Supplementary information:
Interest and finance charges paid	$	28,169		$	5,229
Non-cash investing and financing activities:
Conversion of preferred shares to common shares		-			74,720
Conversion of convertible debentures to common shares (note 6)		1,106,228			308,642
Shares issued for services and settlement of debt (notes 8 (f)-(g))		17,430			-
Warrants issued for services (note 8 (e))		1,907			-
Proceeds of convertible debentures allocated to warrants (note 6)		200,489			-
Proceeds of convertible debentures allocated to beneficial conversion feature (note 6)		658,485			-

See accompanying notes to consolidated financial statements.

-4-


SMARTIRE SYSTEMS INC.
Consolidated Statement of Capital Deficit
(Expressed in United States dollars)
(Prepared in accordance with U.S. generally accepted accounting principles)
Six months ended January 31, 2008 (unaudited) and year ended July 31, 2007



	Common Shares				Additional			Accumulated			Accumulated
	Shares		Amount		paid-in			deficit			other
					capital						comprehensive			Capital
											income			deficit
Balance as at July 31, 2007		463,336,271	$	71,033,916	$	34,081,226		$	(124,796,374	)	$	916,695		$	(18,764,537	)

Conversion of convertible debentures into common shares (note 6)		779,469,519		1,619,541		(513,313	)		-			-			1,106,228
Stock-based compensation (notes 8(c))		-		-		146,607			-			-			146,607
Issuance of warrants for services (note 8(e))		-		-		1,907			-			-			1,907
Accrued dividends on preferred shares (note 7)		-		-		(77,770	)		-			-			(77,770	)
Incremental beneficial conversion feature adjustment (note 6)		-		-		658,485			-			-			658,485
Issuance of warrants in conjunction with convertible debentures (note 6)		-		-		200,489			-			-			200,489
Shares issued for services and settlement of debt (notes 8 (f)-(g))		2,704,812		17,430		-			-			-			17,430
Loss for the period		-		-		-			(13,525,374	)		-			(13,525,374	)
Translation adjustment		-		-		-			-			(193,614	)		(193,614	)
Cumulative-effect adjustment (note 3 (b))		-		-		-			(729,072	)		-			(729,072	)
Balance as at January 31, 2008 (unaudited)		1,245,510,602	$	72,670,887	$	34,497,631		$	(139,050,820	)	$	723,081		$	(31,159,221	)

See accompanying notes to consolidated financial statements.

-5-

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

(Prepared in accordance with U.S. generally accepted accounting principles)

Six months ended January 31, 2008 and 2007

1.	Nature of Operations:

The Company and its subsidiaries develop and market products incorporating wireless data transmission and processing technologies, primarily for the automotive and commercial transportation industries. The Company's primary product is a wireless tire monitoring system which it currently markets for use on trucks, buses, off highway vehicles and recreational vehicles. All sales of its product are made in this industry segment.

2.	Going Concern:

The Company has incurred recurring operating losses and has an accumulated deficit of $139,050,820 and a working capital deficiency of $25,987,659 of which $25,699,603 is potentially convertible into shares of common stock of the Company, subject to certain restrictions as described in note 6(i) as at January 31, 2008. During the six months ended January 31, 2008, the Company used cash of $1,414,872 (six months ended January 31, 2007 - $3,553,681) in operating and investing activities and realized net proceeds of $1,100,000 (six months ended January 31, 2007 - $1,763,600) from financing activities.

The ability of the Company to continue as a going concern is in substantial doubt and is dependent on achieving profitable operations and obtaining the necessary financing in order to achieve profitable operations. The outcome of these matters cannot be predicted at this time. The Company’s future operations are dependent on the market’s acceptance of its products in order to ultimately generate future profitable operations and the Company’s ability to secure sufficient financing to fund future operations. There can be no assurance that the Company’s products will be able to secure market acceptance. Management of the Company plans to obtain additional financing to enable the Company to achieve profitable operations. Despite the Company’s $100 million Standby Equity Distribution Agreement (“SEDA”) with YA Global Investments LP, formerly Cornell Capital Partners, it is uncertain when the Company will be permitted to draw down on the Standby Equity Distribution Agreement as drawdowns are subject to an effective registration statement covering the underlying shares. Based on the Company’s current market capitalization and outstanding debentures, management of the Company does not believe that its SEDA is currently a viable source of financing. There can be no assurance that sufficient financing will be secured by the Company. These consolidated financial statements have been prepared on the going concern basis which assumes that adequate sources of financing will be obtained as required and that the Company's assets will be realized and liabilities settled in the ordinary course of business. Accordingly, these consolidated financial statements do not include any adjustments related to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. These interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.

3.	Significant accounting policies:

(a) Basis of presentation:

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

-6-

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

(Prepared in accordance with U.S. generally accepted accounting principles)

Six months ended January 31, 2008 and 2007

Significant accounting policies (continued):

These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in conjunction with the audited financial statements of the Company for the year ended July 31, 2007. The interim results are not necessarily indicative of the operating results expected for the full fiscal year ending on July 31, 2008. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

(b) Recent accounting pronouncements:

In July 2006, the Financial Accounting Standards Board ("FASB") issued interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FAS No. 109)" ("FIN 48"). This interpretation prescribes a recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with this interpretation is a two-step process. In the first step, recognition, the Company determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step addresses measurement of a tax position that meets the more-likely-than-not criteria. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in a) an increase in a liability for income taxes payable or a reduction of an income tax refund receivable, b) a reduction in a deferred tax asset or an increase in a deferred tax liability or c) both a and b. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be de-recognized in the first subsequent financial reporting period in which that threshold is no longer met. Use of a valuation allowance as described in FAS No. 109 is not an appropriate substitute for the de-recognition of a tax position. The requirement to assess the need for a valuation allowance for deferred tax assets based on sufficiency of future taxable income is unchanged by this interpretation. This Interpretation is effective for fiscal years beginning after December 15, 2006.

On August 1, 2007, the Company adopted FIN 48, regarding accounting for uncertainty in tax positions. The Company remains subject to examination of income tax filings in the United States and various state jurisdictions for periods since its inception in 1998. The Company has also determined that it is subject to examination in Canada and the United Kingdom for all prior periods due to the Company's continued loss position in such jurisdictions. Material tax positions were examined under the more-likely-than-not guidance provided by FIN 48. If interest and penalties were to be assessed, the Company would charge interest to interest expense, and penalties to general and administrative expense.

The cumulative effect of adopting FIN 48 of $756,698 was recorded as a reduction of $729,072 to accumulated deficit and a change to operations of $27,626. The total amount of unrecognized tax benefits as of January 31, 2008 was $756,698. Of this amount, $756,698 represents the amount that would reduce the Company's effective income tax rate, if recognized in future periods.

-7-

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

(Prepared in accordance with U.S. generally accepted accounting principles)

Six months ended January 31, 2008 and 2007

4.	Deferred financing costs:


	January 31,	July 31,
	2008	2007

Balance, beginning of year	$ 947,945	$ 1,692,094
Additions during the period	-	227,910
Amortization of deferred financing costs	(502,394)	(972,059)

Balance, end of period	$ 445,551	$ 947,945

5.	Accounts payable and accrued liabilities:


	January 31,	July 31,
	2008	2007

Accounts payable	$ 731,222	$ 374,788
Accrued liabilities	805,621	534,071
Due to directors	260,175	191,475
Interest payable on convertible debentures	684,271	648,521

	$ 2,481,289	$ 1,748,855

-8-

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

(Prepared in accordance with U.S. generally accepted accounting principles)

Six months ended January 31, 2008 and 2007

6.	Convertible debentures:

The Company has entered into a number of convertible debt instruments. The following table denotes the face value of each of these convertible debentures and provides a summary of the balance of convertible debentures outstanding as at January 31, 2008. Each convertible debenture is also described in detail as specified in the table below.


	Note 6 (a)	Note 6 (b)	Note 6 (c)	Note 6 (d)	Note 6 (e)	Note 6 (f)	Note 6 (g)	Note 6 (h)
	5%	5%	10%	10%	10%	10%	10%	12%	Total
Original face value of convertible debenture	$ 195,000	$ 1,500,000	$30,000,000	$ 1,200,000	$1,800,000	$1,500,000	$ 96,500	$ 814,000	$ 37,105,500

Debt component, as at July 31, 2007:	10,000	1,420,000	9,704,533	415,620	896,112	516,843	-	-	12,963,108
Issued	-	-	-	-	-	350,000	96,500	814,000	1,260,500
Finance fees paid to debenture holder/related company of debenture holder	-	-	-	-	-	(35,000)	(11,500)	(114,000)	(160,500)
Intrinsic value of beneficial conversion feature of convertible debentures	-	-	-	-	-	(200,121)	(35,625)	(422,739)	(658,485)
Fair value of warrants issued	-	-	-	-	-	-	-	(200,489)	(200,489)
Interest accretion	-	-	8,544,214	232,501	227,697	102,738	1,873	4	9,109,027
Conversion of debt to common shares		-	(934,031)	(172,197)	-	-	-	-	(1,106,228)
Debt component, as at January 31, 2008	10,000	1,420,000	17,314,716	475,924	1,123,809	734,460	51,248	76,776	21,206,933
Less current portion, as at January 31, 2008	(10,000)	(1,420,000)	(17,314,716)	(475,924)	-	-	-	-	(19,220,640)
Long term portion of debt component, as at January 31, 2008	$ -	$ -	$ -	$ -	$ 1,123,809	$ 734,460	$ 51,248	$ 76,776	$ 1,986,293
Remaining face value of convertible debenture as at January 31, 2008	$ 10,000	$ 1,420,000	$ 28,920,527	$ 764,593	$1,800,000	$1,500,000	$ 96,500	$ 814,000	$35,325,620

(a)

$195,000 – 5% convertible debenture issued on December 15, 2004

On December 15, 2004, the Company closed a $195,000 private placement bearing interest at 5% per annum and maturing on December 15, 2006. As at July 31, 2005, as a result of a default, the Company had accreted the original assigned debt component to its full face value, and therefore, there is no accretion expense on this debenture for the years ending July 31, 2007 and 2006.

During the year ended July 31, 2007, $185,000 of principal was converted into common shares resulting in the issuance of 7,115,384 common shares. As at January 31, 2008, there remains outstanding $10,000 of principal and $1,521 of interest payable in cash (July 31, 2007 - $10,000 and $1,271). The holder of the debenture has not requested repayment or conversion and therefore the Company continues to disclose the amount as a current liability.

-9-

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

(Prepared in accordance with U.S. generally accepted accounting principles)

Six months ended January 31, 2008 and 2007

6.	Convertible debentures (continued):

Principal under the convertible debentures is convertible at the option of the holder in whole or in part and from time to time at a conversion price equal to the lesser of:

i)	$0.036 and;

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

(b)

$1,500,000 – 5% convertible debenture issued on May 20, 2005

On May 20, 2005, the Company entered into an agreement to issue a $1,500,000 5% debenture, convertible at the option of the holder at a fixed price of $0.028 per share maturing on September 1, 2006. Principal was to be due and payable in 12 equal installments of $125,000 commencing on October 1, 2005. Interest on the outstanding principal balance was due and payable monthly, in arrears, commencing on August 1, 2005.

For accounting purposes, the Company calculated the intrinsic value of the beneficial conversion feature to be $1,499,999 and recorded it as additional paid-in capital. During the year ended July 31, 2006, the loan became in default as a result of the Company not obtaining an extension from the holder, relating to the deferral of all principal and interest. As a result of the default, the Company accreted the original assigned debt component to its full face value during the year ended July 31, 2006. Consequently, the Company did not record any accretion expense on this debenture for the three and six months ended January 31, 2008 and January 31, 2007.

This debenture is also subject to a registration rights agreement and beneficial ownership limitations, as described in Note 6(i).

As at January 31, 2008, the Company was in arrears on payments of principal and interest in the amount of $1,420,000 and $182,750 respectively (July 31, 2007 - $1,420,000 and $147,250). However, the Company has obtained an extension from the holder to defer all principal and interest payments under this convertible debenture until March 31, 2008.

(c)

$30,000,000 - 10% convertible debentures issued on June 23, 2005

On June 30, 2005 (as amended on December 30, 2005), the Company closed a private placement of unsecured convertible debentures in the aggregate principal amount of $30 million. The Company also issued 62.5 million warrants exercisable at $0.16 per share with an expiry period of five years. The convertible debentures bear interest at 10% per annum and will mature on June 23, 2008.

-10-

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

(Prepared in accordance with U.S. generally accepted accounting principles)

Six months ended January 31, 2008 and 2007

6.	Convertible debentures (continued):

Under the terms of the debenture (as amended on December 30, 2005), the principal was convertible into shares of common stock at the option of the holder at the lesser of $0.1125 and a 4.5% discount to market. Market was based on the lowest closing bid price of the common stock for the 5 trading days immediately preceding the date the conversion notice is provided. Interest is convertible into shares of the Company’s common stock and is calculated as 95.5% of the 5 day average of the closing bid price of the common stock for the 5 trading days immediately preceding the date the interest conversion is made. All accrued but unpaid interest is due on June 23, 2008. The convertible debentures contain a contractual restriction on beneficial share ownership. They provide that the debenture holders may not convert the convertible debentures, or receive shares of the Company’s common stock as payment of interest, to the extent that the conversion or receipt of the interest payment would result in the debenture holders, together with their respective affiliates, beneficially owning in excess 4.9% of the Company’s then issued and outstanding shares of common stock, except upon providing the Company with not less that 65 days prior notice.

As a result of the issuance of the November 2006 10% convertible debenture (Note 6(d)) and the anti-dilution provisions, the conversion price for the outstanding principal for these convertible debentures was reduced to the lesser of:

i)	$0.573 and;

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

This debenture is also subject to a registration rights agreement, as described in Note 6(i).

As at January 31, 2008, the Company has accrued $6,682,776 (July 31, 2007 - $5,241,414) in interest based on the terms of the amended convertible debenture of which $500,000 (July 31, 2007 - $500,000) is included in accounts payable and accrued liabilities and the remainder of $6,182,776 (July 31, 2007 - $4,741,414) is included in accrued interest on convertible debentures. The amount included in accounts payable and accrued liabilities related to cash interest payable prior to the amendment of the convertible debentures on December 30, 2005.

During the six months ended January 31, 2008, holders of the 10% convertible debentures converted $934,031 of principal (six months ended January 31, 2007 - $123,642) into 682,512,607 (six months ended January 31, 2007 – 3,157,747) common shares of the Company. During the three and six months ended January 31, 2008, the Company recorded $4,910,324 and $8,544,214 (three and six months ended January 31, 2007 - $1,496,824 and $2,450,453) of interest expense relating to interest accretion and charged it to the statement of operations.

The agreement contains anti-dilution provisions, whereby in the event the Company issues shares of common stock or rights, options, warrants or securities convertible or exercisable into common stock at a price per share of less than the conversion price of the convertible debentures or exercise price of the warrants, the conversion price of such convertible debentures and warrants will be reduced to the lower purchase price. In addition, the conversion price of the convertible debentures and warrants will be subject to adjustment in connection with any subdivision, stock split, combination of shares or recapitalization.

-11-

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

(Prepared in accordance with U.S. generally accepted accounting principles)

Six months ended January 31, 2008 and 2007

6.	Convertible debentures (continued):

(d)

$1,200,000 - 10% convertible debentures issued on November 7, 2006

On November 7, 2006, the Company closed a private placement of unsecured convertible debentures in the aggregate principal amount of $1.2 million. The Company paid fees totaling $130,000 to one of the holders upon closing. The convertible debentures bear interest at 10% per annum, and will mature on October 31, 2008. Interest shall be paid on October 31, 2008 in cash or shares of the Company’s common stock, at the option of the Company. The outstanding principal amount of each debenture is convertible into shares of the Company's common stock, in whole or in part, at the option of the holder of the debenture at the lesser of:

i)	$0.573 and;

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

In addition, the agreement contains similar anti-dilution provisions as those described in Note 6(c). This debenture is also subject to a registration rights agreement and beneficial ownership limitations, as described in Note 6(i).

With the adoption of the FASB staff position on EITF 00-19-2 (“FSP No. EITF 00-19-2”), management has determined that the conversion feature of this instrument meets all the requirements of EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s own Stock” (EITF 00-19”), to be accounted for as an equity interest and not a derivative. As such, for accounting purposes, the intrinsic value of the beneficial conversion feature, being $663,871, was allocated to additional paid-in capital. The remaining amount of $406,129 (net of $130,000 in finance fees paid to the holder) has been allocated to the debt component and is being accreted over the life of the debenture to the original face value using the effective interest rate method. During the six months ended January 31, 2008, holders converted $172,197 of principal (six months ended January 31, 2007 - $Nil) into 96,956,912 (2006 – Nil) common shares of the Company. During the three and six months ended January 31, 2008, interest accretion of $98,462 and $232,501 (three and six months ended January 31, 2007 - $56,808 and $56,808) was charged to the statement of operations as interest expense. As at January 31, 2008, there remains outstanding $764,593 of principal and $128,577 of interest payable in cash or shares of the Company’s common stock at the option of the Company (July 31, 2007 - $936,790 and $87,789).

In connection with these debentures, the Company entered into a registration rights agreement, as described in Note 6(i). A registration statement for the securities underlying these debentures was declared effective on June 15, 2007 by the Securities Exchange Commission. However, the Company registered only 87,958,115 of the shares of the Company’s common stock, which is less than the 150,000,000 agreed to in the registration statement. As such, management may be required to register additional shares underlying the convertible debentures. While management will apply its best efforts to register additional shares if required, there can be no assurances that the Company will succeed in obtaining the required approvals. The result of not obtaining an effective registration statement could have a significant impact on the operations of the Company. However, as at January 31, 2008, it is management’s opinion that the Company will be able to register additional shares if required, or alternatively management believes the holders will provide a future waiver until such time as the debentures are settled or a new registration statement is declared effective by the SEC. These debentures contain contractual restrictions on beneficial share ownership limiting beneficial ownership to 4.99% unless the debenture holders waive such limitation.

-12-

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

(Prepared in accordance with U.S. generally accepted accounting principles)

Six months ended January 31, 2008 and 2007

6.	Convertible debentures (continued):

(e)

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

On January 23, 2007, the Company closed on a $1.8 million securities purchase agreement, which was funded in three separate installments on January 23, 2007, February 9, 2007, and March 2, 2007. The Company paid fees totaling $195,000 upon closing to the holders. The convertible debentures bear interest at 10% per annum, and will mature on January 23, 2009. Interest is payable at maturity in cash or shares of the Company’s common stock, at the option of the Company.

The convertible debentures are convertible into shares of the Company at the then effective conversion price. The conversion price in effect on any conversion date shall be equal to the lesser of:

i)	$0.573 and;

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

This debenture is also subject to a registration statement agreement and beneficial ownership limitations, as described in Note 6(i).

With the adoption of FSP No. EITF 00-19-2, management has determined that the conversion feature of this instrument meets all the requirements of EITF 00-19, to be accounted for as an equity interest and not a derivative. As such, for accounting purposes, the intrinsic value of the beneficial conversion feature, being $886,302 was allocated to additional paid-in capital. The remaining amount of $718,698 (net of $195,000 in finance fees paid to the holder) has been allocated to the debt component and is being accreted over the life of the debenture to the original face value using the effective interest rate method. The Company has recorded accretion of $121,028 and $227,697 for the three and six months ended January 31, 2008 (three and six months ended January 31, 2007 - $Nil and Nil). As at January 31, 2008, there remains outstanding $1,800,000 of principal and $167,610 of interest payable in cash or shares of the Company’s common stock at the option of the Company (July 31, 2007 - $1,800,000 and $76,868).

(f)

$1,500,000 – 10% convertible debentures issued April 27, 2007 and August 20, 2007

On April 27, 2007, the Company closed on a $1.5 million securities purchase agreement, which was funded in two separate installments on April 27, 2007 and August 20, 2007. The Company paid fees totaling $170,000 upon closing to the holders. The convertible debentures bear interest at 10% per annum, and will mature on April 24, 2010. Interest is payable at maturity in cash or shares of the Company’s common stock, at the option of the Company.

The convertible debentures are convertible into shares of the Company at the then effective conversion price. The conversion price in effect on any conversion date shall be equal to the lesser of:

i)	$0.573 and;

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

-13-

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

(Prepared in accordance with U.S. generally accepted accounting principles)

Six months ended January 31, 2008 and 2007

6.	Convertible debentures (continued):

This debenture is also subject to a registration rights agreement and beneficial ownership limitations, as described in Note 6(i).

The intrinsic value of the beneficial conversion feature related to the August 20, 2007 $350,000 convertible debenture, being $200,121 was allocated to additional paid-in capital. The remaining amount of $114,879 (net of $35,000 in finance fees paid to the holder) has been allocated to the debt component and is being accreted over the life of the debenture to the original face value using the effective interest rate method.

The Company recorded accretion of $55,476 and $102,738 for the three and six months ended January 31, 2008 (three and six months ended January 31, 2007 - $Nil and Nil). As at January 31, 2008, there remains outstanding $1,500,000 of principal and $101,711 of interest payable in cash or shares of the Company’s common stock at the option of the Company (July 31, 2007 - $1,150,000 and $29,931).

(g)

$96,500 – 10% convertible debenture issued November 19, 2007

On November 19, 2007, the Company closed on a $96,500 securities purchase agreement. The Company paid fees of $11,500 upon closing to the holders. The convertible debenture bears interest at 10% per annum, and will mature on November 19, 2010. Interest is payable at maturity in cash or shares of the Company’s common stock, at the option of the Company.

The convertible debentures are convertible into shares of the Company at the then effective conversion price. The conversion price in effect on any conversion date shall be equal to the lesser of:

i)	$0.573 and;

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

This debenture is also subject to a registration rights agreement and beneficial ownership limitations, as described in Note 6(i).

The Company recorded accretion of $1,873 for the three and six months ended January 31, 2008 (three and six months ended January 31, 2007 - $Nil). As at January 31, 2008, there remains outstanding $96,500 of principal and $1,930 of interest payable in cash or shares of the Company’s common stock at the option of the Company (July 31, 2007 - $Nil).

-14-

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

(Prepared in accordance with U.S. generally accepted accounting principles)

Six months ended January 31, 2008 and 2007

Convertible debentures (continued):

(h)

$814,000 – 10% convertible debentures issued November 30, 2007 and January 18, 2008

On November 30, 2007, the Company closed on a $1,150,000 securities purchase agreement. To January 31, 2008, the Company was funded an aggregate of $814,000 in two separate installments on November 30, 2007 and January 18, 2008. The securities purchase agreement gives debtholder the ability, but not the obligation and subject to our agreement, to purchase one or more additional secured convertible debentures for the remaining balance of up to $336,000 within six months from November 30, 2007 (note 13). The Company paid fees totaling $114,000 and issued 450 million five-year warrants exercisable into shares of our Common Stock at $0.0298 per share upon closing to the holders. If the Company issues any more of these convertible debentures (up to an aggregate face amount of $336,000), the Company has agreed that it will also issue up to 195 million five-year share purchase warrants exercisable into shares of our Common Stock at $0.0298 per share. The convertible debentures bear interest at 12% per annum, and will mature on November 30, 2010 and January 31, 2011 respectively. Interest is payable at maturity in cash or shares of the Company’s common stock, at the option of the Company.

The convertible debentures are convertible into shares of the Company at the then effective conversion price. The conversion price in effect on any conversion date shall be equal to the lesser of:

i)	$0.573 and;

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

These debentures are also subject to a registration rights agreement and beneficial ownership limitations, as described in Note 6(i).

With the adoption of FSP No. EITF 00-19-2, management has determined that the conversion feature of this instrument meets all the requirements of EITF 00-19, to be accounted for as an equity interest and not a derivative. As such, for accounting purposes, the intrinsic value of the beneficial conversion feature, related to the November 30, 2007 and January 18, 2008 $422,000 and $392,000 convertible debentures, being $422,739 and the fair value of the warrants, being $200,489 was allocated to additional paid-in capital. The remaining amount of $76,772 (net of $114,000 in finance fees paid to the holder) has been allocated to the debt component and is being accreted over the life of the debentures to the original face values using the effective interest rate method.

The fair value of the warrants at the date of grant was estimated at $422,739 using the Black-Scholes option pricing model using the following weighted average assumptions: dividend yield of 0%, expected volatility ranging from 150.8% -151.3%, risk-free interest rate ranging from of 3.47% - 3.80%, and an expected life of 5 years.

The Company recorded accretion of $4 for the three and six months ended January 31, 2008 (three and six months ended January 31, 2007 - $Nil). As at January 31, 2008, there remains outstanding $814,000 of principal and $10,277 of interest payable in cash or shares of the Company’s common stock at the option of the Company (July 31, 2007 - $Nil and $Nil).

-15-

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

(Prepared in accordance with U.S. generally accepted accounting principles)

Six months ended January 31, 2008 and 2007

Convertible debentures (continued):

(i)

Registration rights agreements and beneficial ownership initiations

In connection with the execution of the convertible debenture agreements described in Notes 6(b), (c), (d), (e), (f) (g) and (h) and with the preferred shares issued (as described in Note 7), the Company entered into registration rights agreements with the holders. Under the terms of these agreements, the Company agreed to file and remain effective a registration statement underlying the securities to be sold under the various convertible instruments noted above, except for the convertible debenture agreements described in Notes 6 (e), (f), (g) and (h), whereby the Company is required to use its best efforts to file, within thirty (30) days of demand by the Investors and provided that at least 30 days have passed since any other registration statement filed by the Company has been declared effective by the SEC, with the SEC a registration statement on Form S-1 or SB-2 (or, if the Company is then eligible, on Form S-3) under the Securities Act. In addition, these debenture agreements limit beneficial ownership, at any one time, of 4.9%, except for the convertible debentures described in note 6(d) which is 4.99%, of our outstanding shares by each debenture holder and its affiliates except upon providing us with not less than 65 days prior notice.

In the event the registration statements are not filed by the scheduled filing deadline or is not declared effective by the SEC, than as partial relief for the damages to any holder, the Company will pay as a liquidated damage to the holder, at the holder’s option, either a cash amount or shares of the Company’s common stock within 3 business days, equal to 2% of the liquidated value of the convertible debentures or preferred shares outstanding for each 30 day period after the scheduled filing deadline or scheduled effective date. For the convertible debentures described in Notes 6(b) and (c) and the preferred shares described in Note 7, the Company obtained permanent waivers to liquidation damages under the registration rights agreements on November 7, 2007 which eliminated the need to recognize a provision in relation to these debentures. For the debentures described in Notes 6(d), (e), (f), (g) and (h), the registration right agreement limits the amount of damages to not exceed 20% of the aggregate purchase price for all investors, being $240,000, $360,000, $300,000, $19,300 and $162,800 respectively.

Except as described in Note 6(d), the Company has not filed or made effective any registration statement underlying the other securities. However, on November 7, 2007 management obtained permanent waivers from the various holders of the convertible debentures described in Notes 6(b) and (c) and the preferred shares described in Note 7, which indicates the Company is not considered in default of these agreements and the holders waive their rights under the default provisions affected by this non-compliance. While management will apply its best efforts to have the various registration statements filed and declared effective if demanded by the Investors, there can be no assurances that the Company will succeed in obtaining the required approvals.. The result of not obtaining these effective registration statements could have a significant impact on the operations of the Company. However, as at January 31, 2008, it is management’s opinion that the various holders of these instruments will not require the Company to make effective a registration statement as required under the terms of this agreement until such time as the convertible instruments are settled. As such, the Company has not accrued any liabilities related to these liquidated damages associated with this non-compliance for any of the periods presented.

(j)

Security granted

In connection with the execution of the January 23, 2007 securities purchase agreement described in Note 6(e), the Company entered into a security agreement with Xentenial Holdings Limited, Cornell Capital Partners, LP, Starome Investments Limited and Staraim Enterprises Limited, in which the Company granted to these parties a security interest over all of its assets to secure both the repayment to Xentenial Holdings of all debts of the company now or hereafter held by it and all of the previously existing debt evidenced by the previously unsecured convertible debentures that the Company had previously sold to Cornell Capital Partners, Staraim Enterprises and Starome Investments. The security granted applies to the convertible debenture agreements described in Notes 6(b), (c), (e), (f), (g) and (h) and with the preferred shares issued (as described in Note 7).

-16-

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

(Prepared in accordance with U.S. generally accepted accounting principles)

Six months ended January 31, 2008 and 2007

7.	Preferred shares subject to mandatory redemptions:

On March 22, 2005, the Company closed a private placement of 25,000 5% convertible Class A preferred shares for gross proceeds of $4,000,000. For accounting purposes, these preferred shares have both a conversion and redemption feature. The beneficial conversion feature was recorded at its intrinsic value of $3,999,999 as at the date of entering the agreement. The beneficial conversion feature was initially recorded as additional paid-in capital and the remaining value of $1 was recorded as a mezzanine item on the balance sheet. The carrying value of the preferred shares was accreted to its face value of $4,000,000 (less any amounts converted), over a period from the date of issuance to its maturity date of December 22, 2006. The accretion was charged to additional paid-in-capital.

The holders of the preferred shares are entitled to receive dividends or distributions on a pro rata basis according to their holdings of the preferred shares when and if declared by our board of directors, in the amount of 5% per year. Dividends will be paid in cash and are cumulative. As at January 31, 2008, no dividends have been declared by the Company’s board of directors. No declared and unpaid dividends will bear or accrue interest.

As at January 31, 2008, the aggregate liquidation value of the preferred shares amounted to $3,527,546 (July 31, 2007 – $3,449,776).

As at January 31, 2008, the balance of the preferred shares subject to mandatory redemption consisted of the initial allocation of $1 (July 31, 2006 - $1), cumulative, undeclared but accrued dividends of $442,106 (July 31, 2007 - $364,336), and accumulated accretion of $3,999,999 (July 31, 2007 - $3,999,999), less $914,560 (July 31, 2007 - $914,560) converted to common shares. The balance of the remaining face value of the convertible preferred stock, being $3,085,440 (July 31, 2007 - $3,085,440), was due and payable at maturity on December 22, 2006. On November 7, 2007, the holder of the preferred shares provided the Company with an extension to March 31, 2008 to pay the balance owed on the preferred shares.

The preferred shares are subject to a registration statement and beneficial ownership limitations as described in Note 6(i) and are secured by the Company’s assets as described in Note 6(j).

8.	Share capital:

(a)	Authorized:

Unlimited number of common shares with no par value

100,000 preferred shares, issuable in series, of which 25,000 have been issued (note 7)

(b)	Standby equity distribution agreement:

On June 23, 2005 (as amended on December 30, 2005), the Company entered into a $100 million Standby Equity Distribution Agreement (“SEDA”) with Cornell Capital. In connection with the agreement, the Company paid a cash fee of $16 million. The term of the agreement is five years from the date the SEC declares a registration statement covering the underlying shares of common stock effective.

Under the terms of the SEDA, once a registration statement is declared effective, the Company can request an advance of up to a maximum of $3 million every seven days until a total of $100 million is reached. Cornell Capital will receive shares equaling the advance at 98% of the lowest closing bid price on the principal market on which the Company’s common stock is traded for the five days immediately following the notice of advancement. In addition, the Company must pay a draw down fee of 2.5% on each advancement made.

-17-

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

(Prepared in accordance with U.S. generally accepted accounting principles)

Six months ended January 31, 2008 and 2007

8.	Share capital (continued):

During the term of the agreement, subject to certain exceptions, the Company cannot issue or sell any common stock, preferred stock, warrant, option, or other security or instrument granting the holder thereof the right to acquire common stock. In addition, the Company cannot enter into any security instrument granting the holder a security interest in any asset or file any registration statements on Form S-8.

Based on the Company’s current market capitalization, the existence of outstanding convertible debentures, management of the Company does not believe that its SEDA is currently a viable source of financing. In addition, based on discussions with the SEC, the Company has not registered the equity line of credit and as such the Company cannot request any advances under the $100 million equity line of credit until such time as a registration statement covering the underlying shares of common stock is declared effective by the SEC. It is uncertain as to whether management will register such underlying shares until its debentures have been settled. Due to the uncertainty as to when the Company will be able to access its equity line, it expensed all fees related to the SEDA agreement during the year ended July 31, 2006.

(c)	Stock-based compensation

During the three and six months ended January 31, 2008, the Company charged $17,891 and $146,607 (three and six months ended January 31, 2007 - $176,580 and $353,160) to the statement of operations which increased engineering, research and development expenses by $10,205 and $76,945 (2007 - $82,634 and $165,268), general and administrative expenses by $5,878 and $33,332 (2007 - $38,988 and $77,976) and marketing expenses by $1,808 and $36,330 (2007 - $54,958 and $109,916) relating to options respectively.

As at January 31, 2008, for options granted in the period or in a prior year, there was $26,318 of total unrecognized compensation cost related to unvested options. This unrecognized compensation cost is expected to be recognized over a weighted average period of six months.

(d)	Stock-options:

The following table represents the transactions and the number of stock options which are unvested, vested, and the total outstanding during the period ended January 31, 2008:


	Unvested options		Vested options		Total
		Weighted		Weighted		Weighted
	Unvested	average	Vested	average		average
	options	exercise	options	exercise	Options	exercise
	outstanding	price	outstanding	price	outstanding	price

Opening balance,
July 31, 2007	9,600,000	$ 0.06	39,243,002	$ 0.06	48,843,002	$ 0.06
Options vested	(5,437,500)	0.06	5,437,500	0.06	-	$ 0.06
Options forfeited	(2,387,500)	0.07	(8,695,050)	0.14	(11,082,550)	0.13

Ending balance,
January 31, 2008	1,775,000	$ 0.05	35,985,452	$ 0.05	37,760,452	$ 0.05

-18-

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

(Prepared in accordance with U.S. generally accepted accounting principles)

Six months ended January 31, 2008 and 2007

8.	Share capital (continued):

The following stock options were outstanding as at January 31, 2008:


	Options outstanding			Options exercisable

		Weighted
		average	Weighted		Weighted
		remaining	average		average
Range of	Number	contractual	exercise	Number	exercise
exercise prices	of options	life	price	exercisable	price

$0.03 - 0.07	31,945,002	2.35	$ 0.04	30,170,002	$ 0.04
$0.10 - 0.20	5,814,200	1.89	0.14	5,814,200	0.14
$0.53	1,250	0.01	0.53	1,250	0.53

$0.03 - 0.53	37,760,452	2.28	$ 0.05	35,985,452	$ 0.05

Stock option plans

The options currently outstanding under the “2005 US Stock Incentive Plan” and the “2005 Stock Incentive Plan” vest over two years, except options granted to directors, which vest immediately. The options outstanding under the "2003 and 2004 US Stock Incentive Plan" and the "2003 and 2004 Stock Incentive Plan" generally vest immediately. The options currently outstanding under the "2000 and 2002 Stock Incentive Plan" have vested as at January 31, 2008. The exercise price of each option is generally based on the fair value of the common stock at the date of grant. These options have a five year term.

As at January 31, 2008, 1,775,000 options were unvested, 14,362,946 options were available to be issued under the Company’s US Stock Option plans and 19,827,113 were available to be issued under the non-US Stock Options plans.

(e)

Warrants:

As at January 31, 2008, warrants outstanding were exercisable for 515,958,141 (July 31, 2007 – 65,758,141) common shares of the Company. The warrants entitle the holders to purchase common shares of the Company at prices ranging from $0.03 to $0.70 per share and expire on various dates until January 18, 2013.

The exercise price of warrants issued were not less than the market price of the Company's common shares at the date of issuance.

-19-

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

(Prepared in accordance with U.S. generally accepted accounting principles)

Six months ended January 31, 2008 and 2007

8.	Share capital (continued):



		Weighted-
		average
		exercise
	Warrants	price

Outstanding, beginning of year	65,758,141	$ 0.04
Issued	450,500,000	0.03
Expired	(300,000)	0.59

Oustanding, end of period	515,958,141	$ 0.03

The following warrants were outstanding at January 31, 2008:



		Weighted
		average	Weighted
		remaining	average
Range of	Number	contractual	exercise
exercise prices	of warrants	life	price

$0.03	513,700,000	4.60	$ 0.03
$0.06 - 0.22	2,132,673	1.04	0.15
$0.35 - 0.70	125,468	0.30	0.44

$0.03 - 0.70	515,958,141	4.58	$ 0.03

During the six months ended January 31, 2008, 500,000 share purchase warrants were issued for services rendered and 450 million share purchase warrants were issued in conjunction with the issuance of convertible debt as disclosed in Note 6 (h). The warrants are currently exercisable at $0.03 per warrant. The fair value of the warrants issued for services rendered at the date of grant was estimated at $1,907 using the Black-Scholes valuation model using the following weighted average assumptions: dividend yield of 0%, expected volatility ranging from 150.4% - 151.3%, risk-free interest rate ranging from of 3.80% - 4.38%, and an expected life of 5 years.

(f)

Settlement of liabilities:

During the six months ended January 31, 2008, the Company issued 2,104,812 shares of its common stock as consideration for $14,720 in severance owed to a former employee of the Company. The shares issued were valued using their quoted market value on the date the agreement was entered into.

-20-

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

(Prepared in accordance with U.S. generally accepted accounting principles)

Six months ended January 31, 2008 and 2007

8.	Share capital (continued):

(g)	Consulting agreement:

During the six months ended January 31, 2008, the Company issued 600,000 shares of its common stock and 500,000 warrants (notes 8(e) and 10(b)) as partial consideration under a consulting agreement. The fair value of the common stock of $2,710 and the fair value of the warrants in the amount of $1,907 was charged to administration expense.

9.	Interest and financing expenses:


		Three months ended				Six months ended
		January 31		January 31		January 31		January 31
		2008		2007		2008		2007

Interest accreted on convertible debentures (note 6)	$	5,187,167	$	1,553,632	$	9,109,027	$	2,507,261
Interest expense and finance charges on convertible debt and other		882,752		793,089		1,731,348		1,549,686
Amortization of deferred financing fees		251,197		234,153		502,394		456,861
Repricing of warrants		-		450,000		-		450,000

	$	6,321,116	$	3,030,874	$	11,342,769	$	4,963,808

10.	Related party transactions:

(a)

YA Global Investments LP, formerly Cornell Capital Partners is considered a related party from a financial perspective due to the number and size of the financial transactions that were entered into with the Company. YA Global Investments does not have influence over the Company's operating or investing activities. During the six months ended January 31, 2008, the Company paid $Nil in cash interest payments to YA Global Investments for interest and financing fees due on its $15,243,829 convertible debentures (six months ended January 31, 2007 - $Nil). The Company had the following financial instruments outstanding with YA Global Investments as at January 31, 2008:


Financial Instruments		Amount

Standby equity distribution agreement	$	100,000,000
Preferred shares		3,085,440
Convertible debentures		15,243,829

(b)	During the six months ended January 31, 2008, the Company issued 500,000 warrants and 600,000 common shares of the Company’s common stock to a Company related to a director of the Company pursuant to a consulting agreement entered into on January 23, 2007.

(c)

During the three and six months ended January 31, 2008, the Company was charged $36,339 and $73,239 (three and six months ended January 31, 2007 - $69,885 and $149,275) in directors fees. As at January 31, 2008, $260,175 (July 31, 2007 - $191,475) was included in accounts payable and accrued liabilities as owed to Directors of the Company. These amounts were incurred in the ordinary course of business are non-interest bearing, unsecured and due on demand.

-21-

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

(Prepared in accordance with U.S. generally accepted accounting principles)

Six months ended January 31, 2008 and 2007

11.	Contingency:

On January 30, 2006, the Company was served with a demand for arbitration by Travel Technology Innovations LLC (“TTI”). The demand for arbitration stemmed from the Company terminating on January 1, 2006, the Sales and Distribution agreement signed with TTI on March 12, 2005, and sought damages for potential lost profits of $5,000,000.

During November, 2006, the Company reached an agreement in principle regarding the settlement of TTI’s claims involving the payment of $63,068 by the Company to TTI. In addition, the Company will pay TTI 5% of its sales to Camping World from September 1, 2006 to January 31, 2008. The parties finalized a release and settlement agreement consistent therewith on February 12, 2007.

For the three and six months ended January 31, 2008, management has recorded $302 and $828 as a charge to cost of sales related to this settlement (three and six months ended January 31, 2007 - $2,217 and $4,217), which is based on 5% of actual sales to Camping World for the same period.

12.	Segmented information:

The Company operates in the wireless tire monitoring technology industry. Management of the Company makes decisions about allocating resources based on this one operating segment. Geographic information is as follows:

Revenue from external customers (based on customer location):


		Three months ended				Six months ended
		January 31,		January 31,		January 31,		January 31,
		2008		2007		2008		2007

United Kingdom	$	404,196	$	394,878	$	798,535	$	797,299
United States		289,591		510,812		749,160		934,565
Other		47,061		40,975		116,179		66,580

	$	740,848	$	946,665	$	1,663,874	$	1,798,444

As at January 31, 2008, 76% (July 31, 2007 - 79%) of the Company's property and equipment were in Canada and 24% (July 31, 2007 - 21%) were in the U.S.

-22-

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

(Prepared in accordance with U.S. generally accepted accounting principles)

Six months ended January 31, 2008 and 2007

12.	Segmented information (continued):

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


		Three months ended				Six months ended
		January 31,		January 31,		January 31,		January 31,
		2008		2007		2008		2007

Customer A	$	381,900	$	391,632	$	760,351	$	780,039
Customer B		166,098		148,561		343,625		299,142
Customer C		-		79,499		-		139,049

	$	547,998	$	619,692	$	1,103,976	$	1,218,230

13.	Subsequent events:

(a)	Subsequent to January 31, 2008, 1,159,758,633 shares of the Company’s common stock were issued pursuant to the conversion of convertible debentures with a principal balance of $275,739.

(b)

On February 20, 2008 the Company issued a $74,000 convertible debenture and issued 41,925,000 five-year share purchase warrants exercisable at $0.0298 into shares of the Company’s common stock under the $1,150,000 securities purchase agreement (note 6 (h)). The Company paid commitment fees of $9,000 for the convertible debentures in connection with the Securities Purchase Agreement. Terms of the debentures are identical to the $392,000 debenture issued on January 18, 2008 as described in note 6(h).

(c)

On February 20, 2008, the Company and Continental Automotive Systems US, Inc. (formerly Siemens VDO Automotive Corp.) entered into a Confidential Settlement and License Agreement, terminating the lawsuit between Siemens VDO Automotive and the Company. The Company received net proceeds of approximately $1.2 million after payment of withholding taxes and litigation-related expenses.

-23-

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

OVERVIEW

The following discussion of our financial condition, changes in financial condition and results of operations for the three and six months ended January 31, 2008 and 2007 should be read in conjunction with our most recent audited annual financial statements for the financial year ended July 31, 2007, the unaudited interim financial statements included herein, and, in each case, the related notes.

We have three wholly owned subsidiaries: SmarTire Technologies Inc., SmarTire USA Inc. and SmarTire Europe Limited. SmarTire Technologies Inc. was incorporated on June 3, 1988 under the laws of the Province of British Columbia, and was the original developer of our patented technology. SmarTire USA Inc., a Delaware corporation incorporated on May 16, 1997, is our exclusive marketing agency for SmarTire in North America. SmarTire Europe Limited, a United Kingdom corporation incorporated on February 25, 1998, was our exclusive sales and distribution operation for Europe until we began shipping products directly from SmarTire Systems Inc. in February 2007.

We are a ”foreign private issuer,” as such term is defined in Rule 3b-4 under the Securities Exchange Act of 1934, and a “small business issuer,” as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934. We voluntarily file annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB and Current Reports on Form 8-K with the SEC and are not subject to the proxy rules under Section 14 of the Exchange Act. Our insider reports are filed in Canada on its SEDI (system for electronic disclosure by insiders) at www.sedi.ca.

We develop, subcontract our manufacturing, and market technically advanced tire pressure monitoring systems (“TPMSs”), which monitor tire pressure and tire temperature in a wide range of vehicles. Our TPMSs are designed to improve vehicle safety, performance, reliability and fuel efficiency. Although we currently sell TPMSs for trucks, buses, recreational vehicles, off-highway vehicles, passenger cars and motorcycles, our primary sales and marketing efforts are focused on the commercial or truck, bus, recreational and off-highway vehicle markets.

Our mission is to become the global leader in providing wireless tire pressure monitoring (“TPM”) solutions for truck, bus, recreational and off-highway vehicles. We are selling our products under the brand “SmartWave” and “SmarTire.” We anticipate that the increasing penetration of wireless technology in the mobile environment and the ability of our products to provide applications in addition to TPMS will provide us with multiple benefits, including the following:

·	become cash flow positive;

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

·	create opportunities for revenue growth beyond TPM; and

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

On September 12, 2007 we filed a complaint against Siemens VDO Automotive Corp. and Schrader-Bridgeport International, Inc. in the United States District Court for the Eastern District of Virginia alleging infringement of our United States Patent No. 5,231,872, entitled “Tire Monitoring Apparatus and Method.”

The case is styled SmarTire Systems, Inc. v. Siemens VDO Automotive Corp., Schrader-Bridgeport International, Inc. and Schrader Electronics Ltd., Civil Action No. 1:07cv932 (E.D. Virginia).

On February 20, 2008, we and Continental Automotive Systems US, Inc. (formerly Siemens VDO Automotive Corp.) entered into a Confidential Settlement and License Agreement, terminating the lawsuit between Siemens VDO Automotive and us. We received net proceeds of approximately $1.2 million after payment of withholding taxes and litigation-related expenses. In a separate judgment that was entered by the district court on February 21, 2008, Continental Automotive Systems US, Inc. also acknowledged the validity and enforceability of our United States Patent No. 5,231,872.

Our remaining patent infringement claim against Schrader-Bridgeport International, Inc. and Schrader Electronics Ltd. in the same case will continue with a jury trial now set to begin on May 7, 2008, subject to the Court’s ruling on pre-trial motions.

Government Regulations

Our products are subject to regulation by the government agencies responsible for radio frequencies in each country that our TPMSs will be sold. For example, in the United States approval must be received from the Federal Communications Commission for each product. Some countries require additional governmental approvals in certain circumstances. For example, in the United Kingdom, all electronic equipment to be installed in emergency and police vehicles must be approved by the Vehicle Installation Development Group, a governmental body. Also, as a practical matter, certain nongovernmental approvals may be necessary for market acceptance of our products in certain countries. For example, the approval of TUV (an independent testing company) is considered necessary to market our TPMSs in Germany.

We believe that we have all of the necessary governmental approvals for our current TPMSs in our intended market countries. As each new TPMS is introduced to the market, we intend to apply for the necessary approvals.

Our sales and marketing efforts are not focused on the passenger car market, but with the implementation of the Transportation Recall Enhancement, Accountability, and Documentation Act of 2000 (“TREAD Act”) which only applies to passenger automobiles sold in the United States, we believe that other motor vehicles, including medium and heavy trucks, buses, off-highway and recreational vehicles will be impacted by this legislation in subsequent years. We also believe that the TREAD Act is positively influencing commercial vehicle manufacturers’ adoption of tire pressure monitoring.

It is difficult to predict the magnitude of the expected sales increase or the exact timing of the increase since our products will continue to face competition from other TPMSs manufactured by our competitors, and the timing of additional legislative initiatives on tire safety, if any, in the United States and abroad remains uncertain.

-24-

RESULTS OF OPERATIONS

Three months ended January 31, 2008 and January 31, 2007

Revenue

Gross revenue for the three months ended January 31, 2008 decreased to $740,848 from $946,665 for the three months ended January 31, 2007. The breakdown of the sources of our gross revenue is as follows:

Sales of TPMSs to OEMs for installation on new and existing buses decreased to $227,851 for the three months ended January 31, 2008 from $238,379 for the three months ended January 31, 2007. Although we anticipate sales of this product to the OEM bus market to increase, this is dependent on how quickly our new customers retrofit their fleets and integrate TPMSs into their production lines;

Sales of TPMSs to OEMs for new passenger cars increased to $397,492 for the three months ended January 31, 2008 from $392,425 for the three months ended January 31, 2007. We do not anticipate sales of this product to the OEMs to increase unless Aston Martin increases their production of vehicles as our sales and marketing efforts are focused on the commercial or truck, bus, recreational and off-road industrial vehicle markets;

Sales of TPMSs to OEMs for new recreational vehicles (“RVs”) decreased to $27,837 for the three months ended January 31, 2008 from $55,285 for the three months ended January 31, 2007. Although we anticipate sales of this product to the OEM RV market to increase, it is difficult for us to predict what the volume of sales of this product will be as this will depend primarily on market acceptance and our customers implementation schedules;

Sales of TPMSs to the RV aftermarket decreased to $28,179 for the three months ended January 31, 2008 from $136,677 for the three months ended January 31, 2007. We anticipate sales of this product to the RV market to increase. However it is difficult for us to predict what the volume of sales will be as this will depend primarily on market acceptance;

Sales of TPMSs to the truck market decreased to $14,299 for the three months ended January 31, 2008 from $50,761 for the three months ended January 31, 2007. We anticipate that sales to this market will increase significantly during the remainder of fiscal 2008 as we expect to ship product to new OEM customers. Although interest in this product is very high as demonstrated by several fleet trials, it is difficult for us to predict what the volume of sales will be, as this will depend primarily our customers’ implementation schedules and on market acceptance;

Sales of TPMSs to the off-highway market decreased to $9,832 for the three months ended January 31, 2008 from $15,455 for the three months ended January 31, 2007. While we anticipate sales to this market to increase significantly during the remainder of fiscal 2008, it is difficult for us to predict what the volume of sales will be, as this will depend primarily our customers’ implementation schedules and on market acceptance;

Sales of TPMSs to the aftermarket passenger car market decreased to $20,226 for the three months ended January 31, 2008 from $25,723 for the three months ended January 31, 2007. As our sales and marketing efforts are not focused on this market, we do not anticipate future sales of this product to be significant;

Sales of aftermarket motorcycle systems increased to $3,813 for the three months ended January 31, 2008 from negative ($2,112) for the three months ended January 31, 2007. The negative sales amount was due to product returns. As discussed above, as our sales and marketing efforts are not focused on this market, we do not anticipate future sales of this product to be significant;

·	Service revenue for assistance in installing TPMSs and training customers and making customer specific software changes decreased to $3,230 for the three months ended January 31, 2008 from $28,000 for the three months ended January 31, 2007; and

·	Sales of miscellaneous products were $8,089 for the three months ended January 31, 2008 compared to $6,072 for the three months ended January 31, 2007.

Gross Margin

Gross margin on product sales decreased to 10.2% for the three months ended January 31, 2008 from 31% for the three months ended January 31, 2007. The decrease in gross margin in the three months ended January 31, 2008 from the three months ended January 31, 2007 resulted as the margin on our sales of TPMSs to OEMs for new passenger cars decreased due to higher product costs and our product costs on all products increased due to the decrease in the value of the $US. We anticipate that our overall margin will increase during the remainder of fiscal 2008 as we anticipate sales of TPMSs to OEMs for new passenger cars as a percentage of overall sales to decrease and we plan to make some manufacturing process changes to reduce certain product costs.

Expenses

Expenses decreased to $1,429,391 for the three months ended January 31, 2008 from $2,379,235 for the three months ended January 31, 2007

Engineering, research and development expenses for the three months ended January 31, 2008 decreased to $413,326 from $995,946 for the three months ended January 31, 2007. The decrease was mainly due to lower wage expense and lower prototype development expenses. Lower wage expense was due to the decrease in the number of employees in this department by approximately 50%.

Marketing expenses for the three months ended January 31, 2008 decreased to $187,167 from $371,930 for the three months ended January 31, 2007. The decrease was mainly a result of lower wage expense, lower demo expense and lower advertising and promotion expense and lower trade show expenses. We anticipate marketing expenses to remain constant during the remainder of the year.

-25-

General and administrative expenses for the three months ended January 31, 2008 decreased to $762,996 from $868,451 for the three months ended January 31, 2007. The decrease was primarily attributed to a decrease in investor relation costs, director fees, rent and wages. The decrease in rent was a result of terminating our lease in our UK lease facility in fiscal 2007. The decrease in expenses was partially offset by an increase in legal fees which were incurred to defend our infringement claim against Siemens VDO Automotive Corp., Schrader-Bridgeport International, Inc. and Schrader Electronics Ltd. We anticipate general and administrative expenses to remain constant during the remainder of the year.

Depreciation and amortization expense decreased to $65,902 for the three months ended January 31, 2008 from $142,908 for the three months ended January 31, 2007.

Interest and finance charges increased to $6,321,116 for the three months ended January 31, 2008 from $3,030,874 for the three months ended January 31, 2007. Interest and finance charges for the three months ended January 31, 2008 includes non-cash interest of $6,287,579 compared to non-cash interest charges of $3,006,224 for the three months ended January 31, 2007. The increase occurred mainly due to an increase in the interest accreted on our convertible debentures as more fully explained in note 6 to the financial statements.

Interest Income

Interest income of $1,532 was earned for the three months ended January 31, 2008 as compared to $5,710 for the three months ended January 31, 2007 and was the result of lower average cash balances during the three months ended January 31, 2008.

Foreign exchange gain (loss)

A foreign exchange loss of $483,565 was incurred for the three months ended January 31, 2008 as compared to a foreign exchange loss of $216,327 for the three months ended January 31, 2007. Foreign exchange losses were mainly due to the decrease in the value of the Canadian dollar versus the US dollar from the end of our first quarter and were primarily due to the revaluation of our interest payable on our US denominated debentures at the end of the quarter. Foreign exchange gains and losses are due to fluctuations in currency exchange rates and are virtually impossible to predict.

Six months ended January 31, 2008 and January 31, 2007

Revenue

Gross revenue for the six months ended January 31, 2008 decreased to $1,663,874 from $1,798,444 for the six months ended January 31, 2007. The breakdown of the sources of our gross revenue is as follows:

Sales of TPMSs to OEMs for installation on new and existing buses increased to $543,941 for the six months ended January 31, 2008 from $503,672 for the six months ended January 31, 2007. Although we anticipate sales of this product to the OEM bus market to increase, this is dependent on how quickly our new customers retrofit their fleets and integrate TPMSs into their production lines;

Sales of TPMSs to OEMs for new passenger cars decreased to $776,438 for the six months ended January 31, 2008 from $793,570 for the six months ended January 31, 2007. We do not anticipate sales of this product to the OEMs to increase unless Aston Martin increases their production of vehicles as our sales and marketing efforts are focused on the commercial or truck, bus, recreational and off-road industrial vehicle markets;

Sales of TPMSs to OEMs for new recreational vehicles (“RVs”) increased to $100,387 for the six months ended January 31, 2008 from $100,201 for the six months ended January 31, 2007. Although we anticipate sales of this product to the OEM RV market to increase, it is difficult for us to predict what the volume of sales of this product will be as this will depend primarily on market acceptance and our customers implementation schedules;

Sales of TPMSs to the RV aftermarket decreased to $105,832 for the six months ended January 31, 2008 from $203,841 for the six months ended January 31, 2007. We anticipate sales of this product to the RV market to increase. However it is difficult for us to predict what the volume of sales will be as this will depend primarily on market acceptance;

Sales of TPMSs to the truck market decreased to $19,164 for the six months ended January 31, 2008 from $70,601 for the six months ended January 31, 2007. We anticipate that sales to this market will increase significantly during the remainder of fiscal 2008 as we expect to ship product to new OEM customers. Although interest in this product is very high as demonstrated by several fleet trials, it is difficult for us to predict what the volume of sales will be, as this will depend primarily our customers’ implementation schedules and on market acceptance;

Sales of TPMSs to the off-highway market decreased to $11,589 for the six months ended January 31, 2008 from $15,555 for the six months ended January 31, 2007. While we anticipate sales to this market to increase significantly during the remainder of fiscal 2008, it is difficult for us to predict what the volume of sales will be, as this will depend primarily our customers’ implementation schedules and on market acceptance;

Sales of TPMSs to the aftermarket passenger car market decreased to $27,430 for the six months ended January 31, 2008 from $61,592 for the six months ended January 31, 2007. As our sales and marketing efforts are not focused on this market, we do not anticipate future sales of this product to be significant;

Sales of aftermarket motorcycle systems increased to $22,629 for the six months ended January 31, 2008 from $7,039 for the six months ended January 31, 2007. As discussed above, as our sales and marketing efforts are not focused on this market, we do not anticipate future sales of this product to be significant;

Service revenue for assistance in installing TPMSs and training customers and making customer specific software changes decreased to $24,112 for the six months ended January 31, 2008 from $28,000 for the six months ended January 31, 2007; and

Sales of miscellaneous products were $32,352 for the six months ended January 31, 2008 compared to $14,373 for the six months ended January 31, 2007.

-26-

Gross Margin

Gross margin on product sales decreased to 12.1% for the six months ended January 31, 2008 from 28% for the six months ended January 31, 2007. The decrease in gross margin in the six months ended January 31, 2008 from the six months ended January 31, 2007 resulted as the margin on our sales of TPMSs to OEMs for new passenger cars decreased due to higher product costs and our product costs on all products increased due to the decrease in the value of the $US. We anticipate that our overall margin will increase during the remainder of fiscal 2008 as we anticipate sales of TPMSs to OEMs for new passenger cars as a percentage of overall sales to decrease and we plan to make some manufacturing process changes to reduce certain product costs.

Expenses

Expenses decreased to $2,753,673 for the six months ended January 31, 2008 from $4,946,618 for the six months ended January 31, 2007 primarily due to the streamlining of operations.

Engineering, research and development expenses for the six months ended January 31, 2008 decreased to $905,831 from $1,819,685 for the six months ended January 31, 2007. The decrease was mainly due to lower wage expense, less product development and lower travel. Lower wage expense was due to the decrease in the number of employees in this department by approximately 50%.

Marketing expenses for the six months ended January 31, 2008 decreased to $441,792 from $1,038,459 for the six months ended January 31, 2007. The decrease was mainly a result of lower wage expense, lower demo expense, lower advertising and promotion expense and lower trade show expenses. Wage expense decreased as our former VP Sales and Marketing, Dave Warkentin was promoted to President and Chief Executive officer of our Company in October, 2007, which resulted in his wage expense subsequently charged to General and Administration. In addition, in October 2006 we terminated our SmarTire Europe Managing Director. We anticipate marketing expenses to remain constant during the remainder of the year.

General and administrative expenses for the six months ended January 31, 2008 decreased to $1,275,863 from $1,804,865 for the three months ended January 31, 2007. The decrease was primarily attributed to a decrease in investor relation costs, professional fees, insurance costs, rent and director fees. The decrease in rent was a result of terminating our lease in our UK lease facility in fiscal 2007. In addition, during the six months ended January 31, 2007, we were charged fees charged by our former President and Chief Executive Officer and we recorded a charge of $65,000 to settle a dispute with one of our former distributors. The decrease in expenses was partially offset by an increase in legal fees which were incurred to defend our infringement claim against Siemens VDO Automotive Corp., Schrader-Bridgeport International, Inc. and Schrader Electronics Ltd.

Depreciation and amortization expense decreased to $130,187 for the six months ended January 31, 2008 from $283,609 for the six months ended January 31, 2007.

Interest and finance charges increased to $11,342,769 for the six months ended January 31, 2008 from $4,963,808 for the six months ended January 31, 2007. Interest and finance charges for the six months ended January 31, 2008 includes non-cash interest of $11,278,708 compared to non-cash interest charges of $4,920,899 for the six months ended January 31, 2007. The increase occurred mainly due to an increase in the interest accreted on our convertible debentures as more fully explained in note 6 to the financial statements.

Interest Income

Interest income of $5,844 was earned for the six months ended January 31, 2008 as compared to $15,292 for the six months ended January 31, 2007 and was the result of lower average cash balances during the six months ended January 31, 2008.

Unrealized loss on derivative instruments

A derivative instrument loss of $nil was incurred for the six months ended January 31, 2008 as compared to a derivative instrument loss of $1,030,415 for the six months ended January 31, 2007. The derivative instrument loss for the six months ended January 31, 2007 represents the mark to market adjustment on derivative instruments to October 31, 2006. There was no derivative instrument unrealized gain or loss subsequent to October 31, 2006 as effective November 1, 2006, as a result of early adopting FSP EITF No. 00-19-2, management has determined that the outstanding warrants and embedded conversion feature in its convertible debentures met the requirements for classification as equity items and consequently the derivative financial instruments were reclassified to additional paid in capital and accumulated deficit.

Foreign exchange gain (loss)

A foreign exchange gain of $363,269 was incurred for the six months ended January 31, 2008 as compared to a foreign exchange loss of $223,902 for the six months ended January 31, 2007. Foreign exchange gains were mainly due to the increase in the value of the Canadian dollar versus the US dollar and were primarily due to the revaluation of our interest payable on our US denominated debentures at the end of the quarter as compared to July 31, 2007. Foreign exchange gains and losses are due to fluctuations in currency exchange rates and are virtually impossible to predict.

-27-

LIQUIDITY AND CAPITAL RESOURCES

CURRENT POSITION

Our cash position at January 31, 2008 was $144,761 as compared to $350,018 at July 31, 2007. This decrease was due to the net of our use of cash in operating and investing activities and cash provided by financing activities as described below.

Our net loss of $13,525,374 for the six months ended January 31, 2008 includes non-cash charges of $130,187 for depreciation and amortization, a stock based compensation expense of $146,607, an expense of $4,617 for the issuance of common shares and warrants for consulting services rendered, an unrealized foreign exchange gain on financing activities of $356,293 and $11,306,334 for interest and finance charges as disclosed above under interest and finance charges. Increases in non-cash working capital during the quarter amounted to $926,259. Non-cash working capital changes included decreases in receivables and inventory and increases in prepaid expenses and accounts payable and accrued liabilities.

Net cash used in operating activities

Net cash used in operating activities was $1,367,663 during the six months ended January 31, 2008, compared to net cash used in operations of $3,266,490 during the six months ended January 31, 2007. The reduction in cash used during the six months ended January 31, 2008 versus the six months ended January 31, 2007 was primarily due to the decrease in operating expenses.

Net cash used in investing activities

Net cash used in investing activities was $47,209 during the six months ended January 31, 2008 compared to $287,191 during the six months ended January 31, 2007. We used less cash was used in investing activities during the six months ended January 31, 2008 as our product offering was substantially completed in the prior fiscal year.

Net cash provided by financing activities

Net cash provided by financing activities was $1,100,000 during the six months ended January 31, 2008 compared to $1,763,600 during the six months ended January 31, 2007.

During the six months ended January 31, 2008, we received gross and net proceeds of $1,260,500 and $1,100,000 respectively through the sale of convertible debentures as explained in further detail in notes 6(f)-(h) to our financial statements.

During the six months ended January 31, 2007, we realized aggregate gross cash and net cash proceeds of $1,977,000 and $1,763,000 as follows:

·	Cash of $93,000 was received from the exercise of employee stock options

·	Sale of convertible debentures for gross and net proceeds of $1,884,000 and $1,670,600

FUTURE OPERATIONS

Presently, our cash flow generated from operations is not sufficient to meet operating and capital expenses. We have incurred operating losses since inception, and we project this to continue for the next nine to twelve months.

At January 31, 2008, we had cash of $144,761. In addition, on February 20, 2008 we received net proceeds of $65,000 from the issuance of a convertible debenture and on March 5, 2008, we received net proceeds of approximately $1.2 million from the settlement of our patent infringement lawsuit launched against Siemens VDO Automotive Corp. As our management projects that we will require a minimum of $2.76 million and a maximum of $44.0 million to fund our debt repayments, ongoing operating expenses and working capital requirements through January 31, 2009, as detailed below, we may require between $1.350 million and $42.590 million in financing through the next twelve months in order to continue in business as a going concern.

	Estimated Range
Marketing	$ 1,100,000	$ 1,400,000
Engineering, research and development	1,750,000	2,000,000
General and administrative	1,750,000	2,000,000
Capital Purchases	60,000	300,000
Debt repayment (1)	-	40,100,000
General Working Capital (2)	(1,900,000)	(2,700,000)

TOTAL	$ 2,760,000	$ 43,100,000

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(1)

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

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

The continuation of our business is dependent upon obtaining further financing, further market acceptance of our current products and any new products that we may introduce, the continuing successful development of our products and related technologies, and, finally, achieving a profitable level of operations.

We plan to raise additional capital required to meet the balance of our estimated funding requirements through February 28, 2009, through either:

(1)	issuance of either convertible debt or equity;
(2)	sale of rights to market our product;
(3)	license of our technology; and/or
(4)	settlement of patent infringement lawsuit launched against Schrader-Bridgeport International, Inc. on September 12, 2007.

The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.

In addition, despite our $100 million Standby Equity Distribution Agreement (“SEDA”) with YA Global Investments LP, formerly Cornell Capital Partners, it is uncertain when we will be permitted to draw down on it as drawdowns are subject to an effective registration statement covering the underlying shares. Based on our current market capitalization and outstanding debentures, we do not believe that our SEDA is currently a viable source of financing.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our consolidated financial statements is critical to an understanding of our financials.

Revenue Recognition

We recognize revenue when there is persuasive evidence of an arrangement, goods are shipped and title passes, collection is probable, and the fee is fixed or determinable. Provisions are established for estimated product returns and warranty costs at the time the revenue is recognized. We record deferred revenue when cash is received in advance of the revenue recognition criteria being met.

Inventory

Inventory of raw materials is recorded at the lower of cost, determined on a first-in, first-out basis, and net realizable value. Inventory of finished goods and work-in progress are recorded at the lower of average cost and net realizable value. Average cost is determined using the weighted-average method and includes invoice cost, duties and freight where applicable plus direct labour applied to the product and an applicable share of manufacturing overhead. A provision for obsolescence for slow moving inventory items is estimated by management based on historical and expected future sales and is included in cost of goods sold.

Impairment of Long Lived Assets

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

Convertible Debentures

We have previously entered into convertible debt agreements under which we are obliged to register the underlying common shares with the Securities and Exchange Commission and to maintain such registration over a period specified in the respective agreements so that the convertible debenture holders could sell their shares if the debt was converted. In the event the registration statements are not filed by the scheduled filing deadline or is not declared effective by the SEC, then as partial relief for the damages to any holder, we are obliged to pay as a liquidated damage to the holder, at the holder’s option, either a cash amount or shares of our common stock within 3 business days, equal to 2% of the liquidated value of the convertible debentures or preferred shares outstanding for each 30 day period after the scheduled filing deadline or scheduled effective date. For certain of the debentures and our preferred shares, there are no alternative settlement methods in the agreement and there is no limit on the maximum potential amount of consideration payable as damages. For certain other debentures, the registration right agreement limits the amount of damages to not exceed 20% of the aggregate purchase price for all investors, aggregating to approximately $1,000,000.

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We have not filed or made effective registration statements underlying the majority of our debenture and preferred share obligations. However, management has obtained permanent waivers from the various holders of these convertible debentures and preferred shares, which indicates that we are not considered in default of these agreements. In addition, for our other debentures, management is required to make effective registration statements if demanded by the Investors. While management will apply its best efforts to have the various registration statements filed and declared effective if demanded by the Investors, there can be no assurances that we will succeed in obtaining the required approvals. As such, we have not accrued any liabilities related to these liquidated damages associated with this non-compliance for any of the periods presented.

Stock-Based Compensation

Stock options granted are accounted for under SFAS No. 123R “Share-Based Payment” and are recognized at the fair value of the options as determined by an option pricing model as the related services are provided and the options earned. SFAS No.123R replaces existing requirements under FAS 123 and APB 25, and requires public companies to recognize the cost of employee services received in exchange for equity instruments, based on the fair value of those instruments on the measurement date which generally is the grant date, with limited exceptions. We have adopted SFAS No. 123R as of August 1, 2006 using the modified prospective method of adoption. The adoption of SFAS No. 123R did not have a material effect on our financial position or cash flow for any period.

Stock-based compensation represents the cost related to stock-based awards granted to employees and non-employee consultants. We measure stock-based compensation cost at measurement date, based on the estimated fair value of the award, and generally recognize the cost as expense on a straight-line basis (net of estimated forfeitures) over the employee requisite service period or the period during which the related services are provided by the non-employee consultants and the options are earned. We estimate the fair value of stock options using the Black-Scholes option pricing model.

Operating expenses include stock-based compensation expense. For the three and six months ended January 31, 2008, we recorded an expense of $17,891 and $146,607 in connection with stock option grants. A future expense of non-vested options of $26,318 is expected to be recognized over a weighted-average period of one year.

Off-Balance Sheet Arrangements

We have not entered into any transaction, agreement or other contractual arrangement with an entity unconsolidated with us under which we have:

·	an obligation under a guarantee contract;

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

·	an obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument; or

an obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by, and material to, us where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging, or research and development services with us.

However, we currently have a verbal agreement to sublease our facilities in the United Kingdom. We are currently working on finalizing the agreement.

New Accounting Pronouncements

In July 2006, FASB issued interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109 (FAS No. 109)” (“FIN 48”). This interpretation prescribes a recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with this interpretation is a two-step process. In the first step, recognition, our company determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step addresses measurement of a tax position that meets the more-likely-than-not criteria. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in a) an increase in a liability for income taxes payable or a reduction of an income tax refund receivable, b) a reduction in a deferred tax asset or an increase in a deferred tax liability or c) both a and b. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be de-recognized in the first subsequent financial reporting period in which that threshold is no longer met. Use of a valuation allowance as described in FAS No. 109 is not an appropriate substitute for the de-recognition of a tax position. The requirement to assess the need for a valuation allowance for deferred tax assets based on sufficiency of future taxable income is unchanged by this interpretation. This interpretation is effective for fiscal years beginning after December 15, 2006. The cumulative effect of adopting FIN 48 of $756,698 was recorded as a reduction of $729,072 to accumulated deficit and a change to operations of $27,626. The total amount of unrecognized tax benefits as of January 31, 2008 was $756,698. Of this amount, $756,698 represents the amount that would reduce the Company’s effective income tax rate, if recognized in future periods. We recognize interest and penalties accrued on unrecognized tax benefits within income tax expense. As of the date of adoption, we had $244,000 of interest and penalties accrued associated with unrecognized tax benefits. An additional $27,626 of interest and penalties was accrued during the three months ended January 31, 2008. We are subject to taxation in the U.S., Canada and the United Kingdom. We are subject to tax examinations by tax authorities for all taxation years commencing in or after 2000. As of January 31, 2008, the amount of unrecognized tax benefits has increased to $756,698.

ITEM 3AT. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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As required by Rule 13a-15(b) under the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report (being January 31, 2008). Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that as of the end of the quarter covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that information relating to us and our subsidiaries that we are required to disclose in the reports that we file or submit to the SEC is recorded, processed, summarized and reported with the time periods specified in the SEC’s rules and forms. There has not been any change in our internal control over financial reporting identified in connection with the foregoing evaluation that occurred during our quarter ended January 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The case is styled SmarTire Systems, Inc. v. Siemens VDO Automotive Corp., Schrader-Bridgeport International, Inc. and Schrader Electronics Ltd., Civil Action No. 1:07cv932 (E.D. Virginia).

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following changes in our securities occurred during the three months ended January 31, 2008 and from February 1, 2008 to March 7, 2008:

By conversion notice dated March 11, 2008, Xentenial Holdings Limited elected to convert $12,200 of its 10% convertible debenture into common shares of the Company. In response we issued 76,250,000 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act.

By conversion notice dated March 7, 2008, TAIB Securities, Inc. elected to convert $2,500 of its 10% convertible debenture into common shares of the Company. In response we issued 15,625,000 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act.

By conversion notice dated March 7, 2008, Certain Wealth, Ltd. elected to convert $1,000 of its 10% convertible debenture into common shares of the Company. In response we issued 6,250,000 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act.

By conversion notices dated March 7, 2008, Starome Investments Limited elected to convert $12,000 of its 10% convertible debenture into common shares of the Company. In response we issued 60,000,000 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act.

By conversion notice dated March 5, 2008, TAIB Securities, Inc. elected to convert $7,000 of its 10% convertible debenture into common shares of the Company. In response we issued 35,000,000 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act.

By conversion notice dated March 5, 2008, Certain Wealth, Ltd. elected to convert $7,000 of its 10% convertible debenture into common shares of the Company. In response we issued 35,000,000 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act.

By conversion notices dated March 4, 2008, Xentenial Holdings Limited elected to convert $22,700 of its 10% convertible debenture into common shares of the Company. In response we issued 141,875,000 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act.

By conversion notice dated January 24, 2008, Xentenial Holdings Limited elected to convert $16,771 of its 10% convertible debenture into common shares of the Company. In response we issued 33,541,367 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act.

By conversion notices dated January 22, 2008, Starome Investments Limited elected to convert $30,000 of its 10% convertible debenture into common shares of the Company. In response we issued 60,000,000 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act.

On January 17, 2008, pursuant to a securities purchase agreement with Xentenial Holdings Limited dated November 30, 2007 we sold a second convertible debenture and issued 225 million five year warrants exercisable into shares of our Common Stock at $0.0298 per share under the $1.15 million securities purchase agreement entered into with Xentenial Holdings Limited on November 30, 2007 for gross proceeds of $392,000 and net proceeds of $350,000. Terms of the debenture are as per the debenture issued on November 30, 2007 as disclosed in note 6(h) to our financial statements. The securities were issued pursuant to Rule 506 of Regulation D under the Securities Act.

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By conversion notices dated January 17, 2008, Starome Investments Limited elected to convert $42,000 of its 10% convertible debenture into common shares of the Company. In response we issued 60,000,000 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act.

By conversion notice dated January 10, 2008, Xentenial Holdings Limited elected to convert $22,500 of its 10% convertible debenture into common shares of the Company. In response we issued 32,142,657 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act.

On January 9, 2008, we issued 200,000 shares of our common stock to SKS Consulting of South Florida Corp. in consideration of consulting services provided pursuant to a consulting agreement.

By conversion notices dated January 7, 2008, Starome Investments Limited elected to convert $42,000 of its 10% convertible debenture into common shares of the Company. In response we issued 60,000,000 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act.

By conversion notice dated January 4, 2008, Xentenial Holdings Limited elected to convert $21,400 of its 10% convertible debenture into common shares of the Company. In response we issued 30,571,529 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act.

By conversion notice dated January 3, 2008, Starome Investments Limited elected to convert $21,000 of its 10% convertible debenture into common shares of the Company. In response we issued 30,000,000 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act.

By conversion notices dated December 31, 2007, Starome Investments Limited elected to convert $42,000 of its 10% convertible debenture into common shares of the Company. In response we issued 60,000,000 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act.

On December 31, 2007, we issued 100,000 warrants exercisable at $0.03 per share into shares of our common stock to SKS Consulting of South Florida Corp. in consideration of consulting services provided pursuant to a consulting agreement.

By conversion notice dated December 18, 2007, Xentenial Holdings Limited elected to convert $20,000 of its 10% convertible debenture into common shares of the Company. In response we issued 28,571,429 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act.

By conversion notice dated December 17, 2007, TAIB Securities, Inc. elected to convert $3,200 of its 10% convertible debenture into common shares of the Company. In response we issued 4,571,429 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act.

By conversion notice dated December 13, 2007, Xentenial Holdings Limited elected to convert $20,000 of its 10% convertible debenture into common shares of the Company. In response we issued 27,777,778 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit

Number	Description

10.1	Waiver letter between us and YA Global Investments, L.P. dated March 11, 2008**
31.1	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002**

31.2	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002**

32.1	Certification pursuant to18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002** +

32.2	Certification pursuant to18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002** +

** Filed	herewith

+	The certifications attached as Exhibits 32.1 and 32.2 accompany this Quarterly Report on Form 10-QSB pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed "filed" by SmarTire Systems Inc. for purposes of Section 18 of the Exchange Act.

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SIGNATURES

In accordance with the requirements for the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SMARTIRE SYSTEMS INC.

/s/ Dave Warkentin

Dave Warkentin

President and Chief Executive Officer

(On behalf of the Registrant and as Principal Executive Officer)

Date: March 17, 2008

/s/ Jeff Finkelstein

Jeff Finkelstein

Chief Financial Officer

(On behalf of the Registrant and as Principal Financial Officer)

Date: March 17, 2008

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TTC Technology (SMTR) Inactive 10QSB2008 Q2 Quarterly report (small business)