UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the quarterly period ended ~~January~~April 3130, 2009.

¨ 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.)

5781 Lee Blvd., Suite 208, Box 243

Lehigh Acres, FL 33971

(Address of principal executive offices)

239-691-1873

(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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer ¨ Smaller reporting company 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 ¨ 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 ~~May~~June 2819, 2009 was 19,342,461,198.

Index			Page
			Number
PART I. Financial Information			1
	ITEM 1.	Financial Statements	1
		Consolidated Balance Sheets at January 31, 2009 (unaudited) and July 31, 2008	2
		Consolidated Balance Sheets at April 30, 2009 (unaudited) and July 31, 2008	2
		Consolidated Statements of Operations (unaudited) for the three and six months ended January 31, 2009 and January 31, 2008	3
		Consolidated Statements of Operations (unaudited) for the three and nine months ended April 30, 2009 and April 30, 2008	3
		Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended January 31, 2009 and January 31, 2008	3
		Consolidated Statements of Comprehensive Loss (unaudited) for the three and nine months ended April 30, 2009 and April 30, 2008	3
		Consolidated Statements of Cash Flows (unaudited) for the six months ended January 31, 2009 and January 31, 2008	4
		Consolidated Statements of Cash Flows (unaudited) for the nine months ended April 30, 2009 and April 30, 2008	4
		Consolidated Statements of Capital Deficit (unaudited) for the six months ended January 31, 2009	5
		Consolidated Statement of Capital Deficit (unaudited) for the nine months ended April 30, 2009	5
		Notes to consolidated financial statements (unaudited) for the three and six months ended January 31, 2009	6
		Notes to consolidated financial statements (unaudited) for the three and nine months ended April 30, 2009	6
	ITEM 2.	Management's Discussion and Analysis or Plan or Operation	36
	ITEM 3.	Controls and Procedures	51
PART II. Other Information			51
	ITEM 1.	Legal Proceedings	51
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
	ITEM 3.	Defaults upon Senior Securities	52
	ITEM 4.	Submission of Matters to a Vote of Security Holders	52
	ITEM 5.	Other Information	52
	ITEM 6.	Exhibits	53
		Signatures	54

PART I - FINANCIAL INFORMATION

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

THIS QUARTERLY REPORT ON FORM 10-~~QSB~~Q, 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, 2008 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,” “SmarTire,” and the “Company”) as of ~~January~~April 3130, 2009 and for the three and ~~six~~nine months ended ~~January~~April 3130, 2009 and 2008 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~~nine months ended ~~January~~April 3130, 2009 and 2008 include all adjustments necessary in order to ensure that the financial statements are not misleading. ~~These~~ 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~~ accounting principles generally accepted in the United States of America. Except ~~where~~ where noted, these interim financial statements follow the same accounting ~~policies~~ policies and methods of their application as the Company’s July 31, 2008 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, 2008 annual consolidated financial statements.

Operating results for the three and ~~six~~nine months ended ~~January~~April 3130, 2009 are not necessarily indicative of the results that can be expected for the year ending July 31, 2009.

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,
	April 30			July 31,
	2009			2008
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	183,~~013~~199		$	27,057
Restricted cash (note 5)		2,~~639~~597,~~482~~227			-
Receivables, net of allowance for doubtful accounts of $nil (July 31, 2008 - $10,000)		-			418,995
Current portion of minimum earn-out payments receivable (note 4)		250,000			-
Minimum earn-out payments receivable (note 4)		500,000			-
Prepaid expenses		8929,~~910~~240			62,548
Assets held for sale (note 4)		-			2,179,710
		2,997,405			2,688,310
	$	3,129,666		$	2,688,310
Long-term portion of minimum earn-out payments receivable (note 4)		250,000			-
	$	3,247,405		$	2,688,310
LIABILITIES AND CAPITAL DEFICIT
Current liabilities:
Accounts payable and accrued liabilities (notes 6 and 12)	$	1,~~619~~661,~~615~~363		$	2,657,703
Current portion of convertible debentures (note 7)		33,421,398			35,068,398
Convertible debentures (note 7)		33,421,398			35,068,398
Current portion of preferred shares, subject to mandatory redemption (note 8)		3,682,240			3,604,470
Preferred shares, subject to mandatory redemption (note 8)		3,719,857			3,604,470
Current portion of accrued interest on convertible debentures, payable in shares (note 7(c) to (k))		9,951,069			8,347,538
Accrued interest on convertible debentures, payable in shares (note 7(c) to (k))		10,745,786			8,347,538
Notes payable (note 4)		762,532			-
Liabilities held for sale (note 4)		-			313,106
		49,436,854			49,991,215
		50,310,936			49,991,215
Capital deficit:
Share capital (note 9)
Common shares, without par value:
Unlimited shares authorized 19,342,461,198 shares issued and outstanding (July 31, 2008 - 5,907,011,198)		75,174,988			73,632,963
Additional paid-in capital		33,~~759~~721,~~193~~576			34,210,776
Accumulated deficit		(~~157~~158,~~503~~220,~~380~~409	)		(156,048,743	)
Accumulated other comprehensive income		2,~~379~~142,~~750~~575			902,099
		(46,189,449	)		(47,302,905	)
		(47,181,270	)		(47,302,905	)
	$	3,~~247~~129,~~405~~666		$	2,688,310
Going concern (note 2)
Contingency (note 13)

See accompanying notes to consolidated financial statements.

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~~nine months ended ~~January~~April 3130, 2009 and 2008

(Unaudited)

	Three Months Ended						Nine Months Ended
	April 30,			April 30,			April 30,			April 30,
	2009			2008			2009			2008

Earnings (expenses):
General and administrative	$	(97,154	)	$	(640,694	)	$	(317,323	)	$	(1,313,713	)
Other income - settlement from patent litigation (note 11)		-			1,500,000			1,800,000			1,500,000
Interest income		2			2,087			1,303			7,931
Interest and financing expense (note 10)		(838,331	)		(7,740,721	)		(2,659,838	)		(19,083,490	)
Foreign exchange gain (loss)		218,454			(72,367	)		(1,517,576	)		266,547
Loss from continuing operations		(717,029	)		(6,951,695	)		(2,693,434	)		(18,622,725	)

Discontinued operations:
Loss from operations of discontinued business (note 4)		-			(820,309	)		(653,518	)		(2,674,653	)
Gain on disposal of discontinued business (note 4)		-			-			1,175,286			-
Income (loss) from discontinued operations		-			(820,309	)		521,768			(2,674,653	)

Loss for the period		(717,029	)		(7,772,004	)		(2,171,666	)		(21,297,378	)

Accrued dividends and accretion on preferred shares (note 8)		(37,617	)		(38,039	)		(115,387	)		(115,809	)

Loss available to common stockholders	$	(754,646	)	$	(7,810,043	)	$	(2,287,053	)	$	(21,413,187	)

Basic and diluted loss per share from continuing operations	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.02	)
Basic and diluted income (loss) per share from discontinued operations	$	-		$	(0.00	)	$	0.00		$	(0.00	)
Basic and diluted loss per share	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.02	)

Weighted average number of common shares used in the computation of basic and diluted loss per share		19,342,461,198			2,203,451,500			12,441,074,934			1,172,436,500

	Three Months Ended						Six Months Ended
	January 31,			January 31,			January 31,			January 31,
	2009			2008			2009			2008
Earnings (expenses):
General and administrative	$	(112,633	)	$	(217,367	)	$	(220,169	)	$	(432,531	)
Other income - settlement from lawsuit (note 11)		-			-			1,800,000			-
Interest income		24			1,532			1,301			5,844
Interest and financing expense (note 10)		(823,960	)		(6,321,116	)		(1,821,507	)		(11,342,769	)
Foreign exchange gain (loss)		(81,394	)		(673,172	)		(1,736,030	)		338,914
Loss from continuing operations		(1,017,963	)		(7,210,123	)		(1,976,405	)		(11,430,542	)
Discontinued operations:
Loss from operations of discontinued business (note 4)		(71,969	)		(946,734	)		(653,518	)		(2,094,832	)
Gain on disposal of discontinued business (note 4)		1,175,286			-			1,175,286			-
Income (loss) from discontinued operations		1,103,317			(946,734	)		521,768			(2,094,832	)
Income (loss) for the period		85,354			(8,156,857	)		(1,454,637	)		(13,525,374	)
Accrued dividends and accretion on preferred shares (note 8)		(38,885	)		(38,885	)		(77,770	)		(77,770	)
Income (loss) available to common stockholders	$	46,469		$	(8,195,742	)	$	(1,532,407	)	$	(13,603,144	)
Basic and diluted loss per share from continuing operations	$	(0.00	)	$	(0.01	)	$	(0.00	)	$	(0.02	)
Basic and diluted loss per share from discontinued operations	$	0.00		$	(0.00	)	$	0.00		$	(0.00	)
Basic and diluted income (loss) per share	$	0.00		$	(0.01	)	$	(0.00	)	$	(0.02	)
Weighted average number of common shares used in the computation of basic and diluted loss per share		12,250,536,741			835,521,037			9,102,904,405			668,135,685

See accompanying notes to consolidated financial statements.

SMARTIRE SYSTEMS INC.

Consolidated Statements of Comprehensive ~~Income (~~Loss)

(Expressed in United States dollars)

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

Three and ~~six~~nine months ended ~~January~~April 3130, 2009 and 2008

(Unaudited)

	Three Months Ended						Nine Months Ended
	April 30,			April 30,			April 30,			April 30,
	2009			2008			2009			2008

Loss for the period	$	(717,029	)	$	(7,772,004	)	$	(2,171,666	)	$	(21,297,378	)
Translation adjustment		(237,175	)		33,893			1,240,476			(159,721	)

Comprehensive loss for the period	$	(954,204	)	$	(7,738,111	)	$	(931,190	)	$	(21,457,099	)

	Three Months Ended						Six Months Ended
	January 31,			January 31,			January 31,			January 31,
	2009			2008			2009			2008
Income (loss) for the period	$	85,354		$	(8,156,857	)	$	(1,454,637	)	$	(13,525,374	)
Translation adjustment		(27,657	)		245,128			1,477,651			(193,614	)
Comprehensive income (loss) for the period	$	57,697		$	(7,911,729	)	$	23,014		$	(13,718,988	)

See accompanying notes to consolidated financial statements.

SMARTIRE SYSTEMS INC.

Consolidated Statements of Cash Flows

(Expressed in United States dollars)

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

~~Six~~Nine months ended ~~January~~April 3130, 2009 and 2008

(Unaudited)

	January 31,			January 31,
	April 30,			April 30,
	2009			2008
Cash provided (used for):
Operating activities:
Net loss	$	(12,~~454~~171,~~637~~666	)	$	(1321,~~525~~297,~~374~~378	)
Adjust for (gain) loss from discontinued operations		(521,768	)		2,~~094~~674,~~832~~653
Items not affecting cash:
Non-cash interest and finance charges		12,~~749~~544,~~686~~404			1119,~~306~~062,~~334~~718
Unrealized foreign exchange (gain) loss on financing activities		1,~~736~~538,~~030~~066			(~~356~~313,~~293~~089	)
Changes in non-cash working capital:
Receivables		375,502			~~129~~25,~~942~~549
Prepaid expenses		~~(39~~21,~~188~~281	)		~~(147~~686	)
Accounts payable and accrued liabilities		(~~786~~777,~~666~~392	)		~~607~~671,~~001~~057
Net cash provided by operating activities of continuing operations		1,~~058~~008,~~959~~427			~~256~~824,~~295~~196
Net cash used in operating activities of discontinued operations		(948,020	)		(12,~~623~~229,~~958~~898	)
Net cash provided by (used in) operating activities		~~110~~60,~~939~~407			(1,~~367~~405,~~663~~702	)
Investing activities:
Net cash used in investing activities of discontinued operations		-			(47,209	)
Financing activities:
Restricted cash released to operational cash		~~623~~665,~~050~~305			-
Proceeds from convertible debentures (note 7)		252,500			1,~~260~~334,500
Financing costs (note 7)		(26,500	)		(~~160~~169,500	)
Repayment of convertible debentures in cash (note 7)		(900,000	)		-
Net cash provided by (used in) financing activities		(508,~~950~~695	)		1,~~100~~165,000
Effect of exchange rate difference on cash and cash equivalents		(6975,~~033~~570	)		~~109~~49,~~615~~591
Net decrease in cash and cash equivalents		(923,~~044~~858	)		(~~205~~238,~~257~~320	)
Cash and cash equivalents, beginning of year		27,057			350,018
Cash and cash equivalents, beginning of period		27,057			350,018
Cash and cash equivalents, end of year	$	18,013		$	144,761
Cash and cash equivalents, end of period	$	3,199		$	111,698
Supplementary information:
Interest and finance charges paid	$	3536,~~776~~807		$	2841,~~619~~888
Non-cash investing and financing activities:
Conversion of convertible debentures to common shares (note 7)		1,077,236			1,~~106~~502,~~228~~850
Issuance of common shares for services and partial consideration to settle debt		-			1714,~~430~~720
Warrants issued for services		-			14,~~907~~617
Proceeds of convertible debentures allocated to warrants (note 7)		-			~~200~~207,~~489~~189
Proceeds of convertible debentures allocated to beneficial conversion feature (note 7)		89,625			~~658~~692,~~485~~685
Proceeds from sale of discontinued business included in restricted cash (note 4)		2,500,000			-
Proceeds from Bridge Note included in restricted cash at period end (note 4)		~~139~~97,~~482~~227			-

See accompanying notes to consolidated financial statements.

SMARTIRE SYSTEMS INC.

Consolidated Statement of Capital Deficit

(Expressed in United States dollars)

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

~~Six~~Nine months ended ~~January~~April 3130, 2009 (Unaudited)

															Accumulated
	Common Shares					Additional			Accumulated				Accumulated
								Additional							other
	Shares		Amount			paid-in			deficit				other
	Common Shares							paid-in				Accumulated			comprehensive				Capital
						capital							comprehensive			Capital
	Shares			Amount				capital				deficit			income				deficit
													income			deficit
			$	$		$		$	$			$	$		$	$			$
Balance as at July 31, 2008		5,907,011,198		73,632,963	~~73,632,963~~		34,210,776		~~34,210,776~~	(156,048,743	)		~~(156,048,743~~	)902,099		~~902,099~~	(47,302,905	)		~~(47,302,905~~	)
Conversion of convertible debentures into common shares (note 7)		13,435,450,000		1,542,025	~~1,542,025~~		(464,789	)	~~(464,789~~	)-			-	-		-	1,077,236			~~1,077,236~~
Stock-based compensation (note 9(c))		-		-	-		1,351		~~1,351~~	-			-	-		-	1,351			~~1,351~~
Intrinsic value of beneficial conversion feature (note 7)		-		-	-		89,625		~~89,625~~	-			-	-		-	89,625			~~89,625~~
Accrued dividends and accretion on preferred shares (note 8)		-		-	-		(115,387	)	~~(77,770~~	)-			-	-		-	(115,387	)		~~(77,770~~	)
Loss for the period		-		-	-		-		-	(2,171,666	)		~~(1,454,637~~	)-		-	(2,171,666	)		~~(1,454,637~~	)
Translation adjustment		-		-	-		-		-	-			-	1,240,476		~~1,477,651~~	1,240,476			~~1,477,651~~
Balance as at January 31, 2009		19,342,461,198			75,174,988				33,759,193				(157,503,380	)		2,379,750				(46,189,449	)
Balance as at April 30, 2009		19,342,461,198		75,174,988			33,721,576			(158,220,409	)			2,142,575			(47,181,270	)

See accompanying notes to consolidated financial statements.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

1. Nature of Operations:

Prior to December 11, 2008, the Company and its subsidiaries developed and marketed products incorporating wireless data transmission and processing technologies, primarily for the automotive and transportation industries. The Company's primary product was a wireless tire monitoring system which it marketed for use on trucks, buses, off the road vehicles, recreational vehicles, buses and other pneumatic tire applications.

On December 11, 2008, the Company completed the sale of its tire pressure monitoring system business (the “TPMS Business”), along with substantially all of its assets and certain of its liabilities (the “Asset Sale”), to Bendix Commercial Vehicle Systems LLC (the “Buyer”). The Company retains the right to receive future earn-out payments due pursuant to the Asset Sale, as well as to litigate certain of SmarTire’s tire pressure monitoring related patents. The Company also retains certain operating liabilities and all of the convertible debt and convertible preferred stock that was outstanding prior to the Asset Sale (refer to note 4 for additional details).

2. Going Concern:

The Company has incurred recurring operating losses, and as of ~~January~~April 3130, 2009 has an accumulated deficit of $~~157~~158,~~503~~220,~~380~~409, and a working capital deficiency of $4647,~~439~~181,~~449~~270, of which $47,~~054~~887,~~707~~041 is potentially convertible into shares of common stock of the Company, subject to certain restrictions as described in note 7(l). After the Asset Sale, the Company’s business consists solely of attempting to license its patents, and collecting amounts due under the earn-out, and the Company ~~will~~has ~~have~~ no full-time employees and three part-time consultants. The Company retained approximately $1.2 million of operating liabilities that were not transferred in the Asset Sale. The Company also retained all of its outstanding ~~secured~~ secured convertible debentures and convertible preferred stock, all of which were in default as of ~~January~~April 3130, 2009, and which are more fully described in notes 7 and 8.

The ability of the Company to continue as a going concern is in substantial doubt, and subsequent to the Asset Sale is dependent on several factors, including (i) the amount of future sales achieved by the Buyer in the tire pressure monitoring business, which directly impacts amounts to be received by the Company pursuant to the terms of the Asset Sale, (ii) the amount of future revenues achieved by the Company from patent litigation, (iii) the ability of the Company to restructure its liabilities and debt obligations, and (iv) the ability of the Company to raise any additional funds required to remain as a going concern. The outcome of these matters cannot be predicted at this time. There can be no assurance that the Company will be successful in achieving any of these objectives.

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.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

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.

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, 2008. The interim results are not necessarily indicative of the operating results expected for the full fiscal year ending on July 31, 2009. 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 September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, Fair Value Measurements (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of FAS 157 are effective fiscal years beginning after November 15, 2007. The Company adopted this pronouncement for its fiscal year beginning August 1, 2008. Adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

In February 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company adopted this pronouncement for its fiscal year beginning August 1, 2008. Adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Non controlling Interests in Consolidated Financial Statements – an amendment to ARB No.51 (“FAS 160”). This statement Amends ARB 51 to establish accounting and reporting standards for a non-controlling interest in a subsidiary and for deconsolidation of a subsidiary. This standard applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This statement may not be applied before that date. The Company is currently evaluating the impact of this statement.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

3. Significant accounting policies:

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133 (“FAS 161”). FAS 161 modifies existing requirements to include qualitative disclosures regarding the objectives and strategies for using derivatives, fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The pronouncement also requires the cross-referencing of derivative disclosures within the financial statements and notes thereto. Based on current conditions, the Company does not expect the adoption of FAS 161 to have a significant impact on the Company’s consolidated financial statements.

In May 2008, FASB issued SFAS No.162, The Hierarchy of Generally Accepted Accounting Principles. This pronouncement mandates the GAAP hierarchy reside in the accounting literature as opposed to the audit literature. This has the practical impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP hierarchy. This pronouncement will become effective 60 days following SEC approval. The Company does not believe this pronouncement will impact the Company’s consolidated financial statements.

In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 provides guidance on how to determine if certain instruments or embedded features are considered indexed to our own stock, including instruments similar to our convertible notes and warrants to purchase our stock. EITF 07-5 requires companies to use a two-step approach to evaluate an instrument’s contingent exercise provisions and settlement provisions in determining whether the instrument is considered to be indexed to its own stock and exempt from the application of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. Although EITF 07-5 is effective for fiscal years beginning after December 15, 2008, any outstanding instrument at the date of adoption will require a retrospective application of the accounting through a cumulative effect adjustment to retained earnings upon adoption. The Company is currently evaluating the impact that adoption of EITF 07-5 will have on its consolidated financial statements.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

4. Asset Sale, Discontinued Operations, and Assets and Liabilities Held for Sale:

Until December 11, 2008, wethe Company developed, subcontracted our manufacturing, and ~~marketed~~ marketed technically advanced tire pressure monitoring systems that monitor tire ~~pressure~~ pressure and tire temperature in a wide range of vehicles. On December 11, 2008, we the Company completed the sale of substantially all of this business, comprising substantially all of ~~our~~its assets and certain of ~~our~~ its liabilities, to Bendix CVS Canada Inc. pursuant to an asset purchase agreement dated December 4, 2008 (the “Asset Purchase Agreement”).

The following are the material terms of the agreements relating to the Asset Sale:

The sale price was $2,500,000 cash at closing, plus an earn-out amount in each of the five years after closing based on a percentage of tire pressure monitoring system sales made or license fees received by the Buyer during that period, with a minimum earn-out of $500,000, of which $250,000 was due on March 1, 2009 (this payment has not been received as of the date of this filing but is expected to be received shortly thereafter), and $250,000 is payable by March 1, 2010. YA Global Investments LP, Xentenial Holdings Limited, Staraim Enterprises Limited, and Starome Investments Limited (collectively, the “Debtholders”) will receive all of these proceeds as a result of their position as secured creditors of the company.

The earn-out is based on future revenues generated by the Buyer from the TPMS Business, and any amounts earned by the Company above the minimum earn-out are payable to us from the Buyer on an annual basis for a period of five years. Amounts due from the Buyer to us pursuant to the earn-out provision shall be equal to (a) 10% of sales of tire pressure monitoring products generated by the Buyer (net of returns, allowances, freight, and duties) between $2,000,000 and $10,000,000 in any given earn-out year, plus (b) 15% sales of tire pressure monitoring products generated by the Buyer (net of returns, allowances, freight, and duties) that exceeds $10,000,000 in any given earn-out year. The first earn-out year begins on December 11, 2008 and ends on December 11, 2009. New earn-out years thereafter begin on December 11, 2009 and for each year after until five full earn-out years have been completed.

The initial cash payment of $2,500,000 is being held in escrow, pursuant to the terms of an escrow agreement amongst the Company and the Buyer, until the earlier of the following events: (i) the transaction is ratified by the Company’s shareholders, (ii) the British Columbia Supreme Court issues an order declaring that the disposition of the Company’s assets is for valuable consideration to the Buyer who are dealing with the Company in good faith, or (iii) the second anniversary of the transaction.

In connection with the Asset Purchase Agreement, the Debtholders each consented to and released their security interest in the assets contemplated by the Asset Purchase Agreement.

Pursuant to the terms of the Asset Purchase Agreement, the Company collaterally assigned, and granted a security interest in, the rights to all payments due to the Company under the Asset Purchase Agreement, including any amounts paid under the earn-out, to the Debtholders.

The assets sold consisted of lease agreements, inventory, property and equipment, accounts receivable, certain contracts, permits, intellectual property rights including technical drawings and specifications, goodwill, books and records, and prepaid assets.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

4. Asset Sale, Discontinued Operations, and Assets and Liabilities Held for Sale (continued):

The Company retains the right to receive future earn-out payments due, as well as the right to proceed with litigation in respect of prior infringements of our U.S. Patent Nos. 5,231,872 and 5,335,540.

The Company retains certain operating liabilities and all of the liabilities and obligations with respect to the convertible debt and the shares of its convertible preferred stock that were outstanding prior to the Asset Sale. Liabilities retained by the Company include (a) approximately $1.2 million of trade accounts payable and accrued liabilities related primarily to corporate costs, director fees, and discontinued vendors not related directly to the operation of the tire pressure monitoring business, (b) approximately $44.1 million of principal and accrued interest on secured convertible debentures on which the Company has defaulted, and (c) approximately $3.7 million of face value and accumulated dividends on convertible preferred stock on which the Company has defaulted. Secured convertible debentures and convertible preferred stock are carried at their full face value as a result of the default. Management believes the book value of these liabilities approximates fair value.

Because all of the Company’s assets were subject to a pre-existing grant of security in favor of the holders of outstanding debt in the aggregate amount of approximately $44,150,000 (as of December 11, 2008), the Company entered into a Liquidation Agreement (included as Exhibit 10.96 to our Form 10-KSB/A filed on March 3, 2009) with YA Global Investments, L.P., Xentenial Holdings Limited, Staraim Enterprises Limited and Starome Investments Limited pursuant to which the Company (a) acknowledged its debt to the lenders in the aggregate amount of approximately $44,150,000, (b) assured the lenders that it had no offsets, claims or counterclaims against any of them, (c) ratified all of the loan documents pursuant to which it had borrowed the money owed and acknowledged that they, and the documents granting security for repayment of the loans, were in full force and effect, and (d) agreed to adhere to a projected budget and wind-down plan during the period from closing through December 31, 2009.

The post-closing budget designated in the liquidation agreement calls for expenditures from closing through December 31, 2009 in the amount of $953,341 related to (a) severance costs incurred at closing, (b) preparation, printing and mailing of a proxy statement, (c) costs to complete the audit of the Company’s financial statements for the year ended July 31, 2008, (d) contractor costs to perform accounting, administrative and patent licensing functions, and (e) legal and administrative costs associated with the acquisition and post-sale operations.

The Wind-down Plan stipulates that (a) the Company will complete the audit and file a corresponding form 10-KSB for fiscal year ended July 31, 2008 no later than December 31, 2008, (b) the Company will file this proxy statement and information circular to attempt to secure shareholder approval of the Asset Sale, (c) The Company’s current board shall remain in place until such shareholder meeting is held, (d) David Warkentin shall resign as Chief Executive Officer at closing, but retain his position as director and assist on a contract basis with patent and administrative issues, (e) David Dodge shall continue as CFO until the special meeting of shareholders completed, (f) the Company will file its 2008 tax returns, and (g) the Company will pursue licensing and/or litigation relating to patent rights retained by SmarTire.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

4. Asset Sale, Discontinued Operations, and Assets and Liabilities Held for Sale (continued):

· At closing of the Asset Sale, YA Global Investments LP funded $762,532 in the form of the Bridge Note (included as Exhibit 10.98 to our Form 10-KSB/A filed on March 3, 2009) with an annual interest rate of 14%, to be used to pay specified post-closing administrative items. The Bridge Note is to be repaid from any future earnings or payments received from escrow by the Company, and is recorded as a current liability at ~~January~~April 3130, 2009.

· The Company agreed that it would change its name to TTC Technology Corp, which is subject to approval by the Company’s shareholders.

The Company has analyzed the pertinent facts of the transaction with respect to the criteria outlined in Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lives Assets” (“SFAS 144”), and has determined that all of the criteria for classification as “held for sale” were met as of October 15, 2008 and continue to be met. Accordingly, the Company is reporting the operating results of the TPMS Business as Discontinued Operations for all periods presented in this filing, and the assets and liabilities relating to the TPMS Business as Held for Sale as of July 31, 2008. Assets Held for Sale were not depreciated or amortized from the determination date of October 15, 2008 through the sale date of December 11, 2008. The disposal transaction is reflected in the Company’s financial statements during the three and ~~six~~nine months ended ~~January 31~~April 30, 2009.

Upon completion of the Asset Sale on December 11, 2008, the Company recorded a gain on the disposal of the assets and liabilities sold in the amount of $1,175,286 representing the difference between the fair value of the proceeds received in the transaction, and the carrying value of the disposed assets and liabilities at closing:

Fair value of proceeds received:
Cash paid into escrow	$	2,500,000
Minimum guaranteed earn-out payments due		500,000
Disposal costs		(572,811	)
		2,427,189

Carrying value of asset group at sale date:
Receivables		349,790
Inventory		970,692
Prepaid assets		54,649
Property and equipment		449,367
Accounts payable and accrued liabilities		(572,595	)
		1,251,903

Gain on disposal of discontinued business	$	1,175,286

The accompanying consolidated statement of operations for the three ~~and~~(nine) ~~six~~ months ended ~~January~~April 3130, 2009 reflects the results of operations for the discontinued business for the period from February 1, 2009 (August 1, 2008) through ~~January~~April 3130, 2009.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

4. Asset Sale, Discontinued Operations, and Assets and Liabilities Held for Sale (continued):

The operating results of the TPMS Business classified as discontinued operations are shown in the following table for the three and ~~six~~nine months ended ~~January~~April 3130, 2009 and 2008. There is no tax expense or benefit to report due to the Company’s net operating loss carry forward tax position.

	Three Months Ended						~~Six~~Nine Months Ended
	January 31,			January 31,			January 31,			January 31,
	April 30,			April 30,			April 30,			April 30,
	2009			2008			2009			2008
Revenue	$	~~277,466~~-		$	~~740~~794,~~848~~373		$	956,175		$	12,~~663~~458,~~874~~247
Cost of goods sold		~~154,439~~-			~~665~~679,~~165~~326			661,017			12,~~461~~141,~~919~~245
		123,027			75,683			295,158			201,955
		-			115,047			295,158			317,002
Expenses:
Depreciation and amortization		~~(575~~-	)		65,~~902~~189			9,650			~~130~~195,~~187~~376
Engineering, research and development		~~123,819~~-			~~413~~431,~~326~~095			503,390			~~905~~1,~~831~~336,926
General and administrative		~~117,248~~-			~~545~~290,~~629~~575			285,207			~~843~~893,~~332~~419
Marketing		~~43,563~~-			~~187~~156,~~167~~572			187,166			~~441~~598,~~792~~364
		284,055			1,212,024			985,413			2,321,142
		-			943,431			985,413			3,024,085
Loss from operations		~~(161,028~~-	)		(1828,~~136,341~~384	)		(690,255	)		(2,~~119~~707,~~187~~083	)
Other income:
Other earnings (expenses):
Foreign exchange gain		~~89,059~~-			~~189~~8,~~607~~075			36,737			2432,~~355~~430
		89,059			189,607			36,737			24,355
		-			8,075			36,737			32,430
Loss from operations of discontinued business	$	~~(71,969~~-	)	$	(~~946~~820,~~734~~309	)	$	(653,518	)	$	(2,~~094~~674,~~832~~653	)

Revenue from external customers by geography (based on customer location) for the three and ~~six~~nine months ended ~~January~~April 3130, 2009 and 2008 is outlined in the following table. The Company did not recognize any revenue after the completion of the Asset Sale on December 11, 2008 through ~~January~~April 3130, 2009.

Three months ended

~~Six~~Nine months ended

January 31,

April 30,

2009

2008

2009

2008

United Kingdom

~~52,257~~-

~~404~~253,~~196~~815

392,957

~~798~~1,~~535~~052,350

United States

~~220,286~~-

~~289~~516,~~591~~644

541,541

~~749~~1,~~160~~265,804

Other

~~4,923~~-

4723,~~061~~914

21,677

~~116~~140,~~179~~093

~~277,466~~-

~~740~~794,~~848~~373

956,175

12,~~663~~458,~~874~~247

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

4. Asset Sale, Discontinued Operations, and Assets and Liabilities Held for Sale (continued):

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

	Three months ended				~~Six~~Nine months ended
	January 31,		January 31,		January 31,		January 31,
	April 30,		April 30,		April 30,		April 30,
	2009		2008		2009		2008
Customer A	$	~~45,580~~-	$	~~381~~385,~~900~~263	$	322,408	$	~~760~~1,~~351~~145,614
Customer B		~~45,690~~-		~~166~~106,~~098~~744		124,267		~~343~~450,~~625~~370
Customer C		~~82,398~~-		-63,264		164,019		-172,560
	$	~~173,668~~-	$	~~547~~555,~~998~~271	$	610,694	$	1,~~103~~768,~~976~~544

All sales relate to the discontinued business, and as such are reflected under the caption “Loss from operations of discontinued business” in the accompanying consolidated statement of operations.

The assets and liabilities of the TPMS Business classified as held for sale as of July 31, 2008 are shown in the following table. Because the disposal was finalized on December 11, 2008, there were no assets or liabilities held for sale as of ~~January~~April 3130, 2009.

	July 31,
	2008

ASSETS

Current assets:
Inventory	$	1,561,147
Prepaid expenses and other		27,338
		1,588,485

Property and equipment		591,225

Assets held for sale	$	2,179,710

LIABILITIES AND CAPITAL DEFICIT

Current liabilities:
Accounts payable and accrued liabilities	$	313,106

Liabilities held for sale	$	313,106

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

4. Asset Sale, Discontinued Operations, and Assets and Liabilities Held for Sale (continued):

Inventory included in assets held for sale as of July 31, 2008 was:

	July 31,
	2008

Raw materials	$	308,870
Work-in-process		265,847
Finished goods		986,430

	$	1,561,147

As at ~~January~~April 3130, 2009, the Company did not have any property and equipment, as all fixed assets were transferred tto the Buyer in the Asset Sale. At July 31, 2008, 70% of the Company's property and equipment were in Canada and 30% were in the U.S. All property and equipment is reflected under the caption “Assets held for sale” in the accompanying consolidated balance sheet.

During the ~~six~~nine months ended ~~January~~April 3130, 2009, the discontinued TPMS Business used $948,020 cash in operating activities (~~six~~nine months ended ~~January~~April 3130, 2008 - $12,~~623~~229,~~958~~898), and $Nil in investing activities (~~six~~nine months ended ~~January~~April 3130, 2008 - $47,209).

During the three and ~~six~~nine months ended ~~January~~April 3130, 2008, the Company incurred the following disposal-related costs:

	Three		~~Six~~Nine
	months ended		months ended
	January 31,		January 31,
	April 30,		April 30,
	2009		2009
Severance costs related to terminated employees	$	-	$	377,663
Legal fees		~~23,768~~-		116,351
Advisory fees		~~48,484~~-		78,797
	$	~~72,252~~-	$	572,811

Results of operations for the discontinued TPMS Business are included in the line item entitled “Loss from operations of discontinued business” on the accompanying consolidated statement of operations for the period from August 1, 2008 to December 11, 2008, and for the entire three and ~~six~~nine month periods ended ~~January~~April 3130, 2009 and 2008. Balance sheet items related to the discontinued TPMS Business are included in the line items entitled “Assets held for sale” and “Liabilities held for sale” on the accompanying consolidated balance sheet as of July 31, 2008. Because the disposal was finalized on December 11, 2008, there were no assets or liabilities held for sale as of ~~January~~April 3130, 2009.

Because the results of the discontinued TPMS Business have already been removed from the Company’s continuing operations and classified as discontinued operations for the three and ~~six~~nine months ended ~~January~~April 3130, 2009 and 2008, pro forma financial statements are not presented herein.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

5. Restricted Cash:

Certain cash proceeds received in connection with the Asset Sale are subject to restrictions and as a result are classified as “Restricted cash” on the consolidated balance sheet. Restricted cash was comprised of the following as of ~~January~~ 31April 30, 2009 and July 31, 2008:

	January 31,		July 31,
	April 30,		July 31,
	2009		2008
Gross proceeds from sale of TPMS business held in escrow	$	2,500,000	$	-
Balance of cash received from Bridge Note		~~139~~97,~~482~~227		-
	$	2,~~639~~597,~~482~~227	$	-

The initial cash payment of $2,500,000 relating to the sale of TPMS business is being held in escrow, pursuant to the terms of an escrow agreement between us and the Buyer, until the earlier of the following events: (i) the transaction is ratified by our shareholders, (ii) the British Columbia Supreme Court issues an order declaring that the disposition of our assets is for valuable consideration to the Buyer who are dealing with us in good faith, or (iii) the second anniversary of the transaction.

On December 11, 2008, YA Global Investments LP funded the Bridge Note in the ~~amount~~ amount of $762,532 to be used to pay specified post-closing administrative items. The Bridge Note bears interest at 14% per annum, and matures on is to be repaid from the proceeds of the Asset Sale or other future earnings of the Company. The balance of $~~139~~97,~~482~~227 represents the remainder of funds at ~~January 31~~April 30, 2009 that were advanced pursuant to the Bridge Note.

6. Accounts payable and accrued liabilities:

	January 31,		July 31,
	April 30,		July 31,
	2009		2008
Accounts payable	$	~~262~~263,~~806~~962	$	1,063,025
Accrued liabilities		~~117~~298,~~139~~965		569,282
Due to directors		~~483~~324,~~899~~790		305,375
Interest payable on convertible debentures		~~755~~773,~~771~~646		720,021
	$	1,~~619~~661,~~615~~363	$	2,657,703

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

7. 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~~April 3130, 2009 and July 31, 2008. Each convertible debenture is also described in detail as specified in ~~the~~ the table below.

	Note 7 (a)			Note 7 (b)			Note 7 (c)			Note 7 (d)			Note 7 (e)			Note 7 (f)
	5%			5%			10%			10%			10%			10%
Original face value of convertible debenture	$	195,000		$	1,500,000		$	30,000,000		$	1,200,000		$	1,800,000		$	1,500,000
Debt component, as at July 31, 2008		10,000			1,420,000			28,629,598			455,300			1,800,000			1,500,000
Issued		-			-			-			-			-			-
Finance fees paid to debenture holder/related company of debenture holder		-			-			-			-			-			-
Intrinsic value of beneficial conversion feature of convertible debentures		-			-			-			-			-			-
Interest accretion		-			-			-			-			-			-
Conversion of debt to common shares		-			-			(12,000	)		-			-			-
Repayment of debentures in cash		-			-			(900,000	)		-			-			-
Debt component, as at January 31, 2009		10,000			1,420,000			27,717,598			455,300			1,800,000			1,500,000
Debt component, as at April 30, 2009		10,000			1,420,000			27,717,598			455,300			1,800,000			1,500,000
Less current portion, as at January 31, 2009		(10,000	)		(1,420,000	)		(27,717,598	)		(455,300	)		(1,800,000	)		(1,500,000	)
Less current portion, as at April 30, 2009		(10,000	)		(1,420,000	)		(27,717,598	)		(455,300	)		(1,800,000	)		(1,500,000	)
Long term portion of debt component, as at January 31, 2009	$	-		$	-		$	-		$	-		$	-		$	-
Long term portion of debt component, as at April 30, 2009	$	-		$	-		$	-		$	-		$	-		$	-
Remaining face value of convertible debenture as at January 31, 2009	$	10,000		$	1,420,000		$	27,717,598		$	455,300		$	1,800,000		$	1,500,000
Remaining face value of convertible debenture as at April 30, 2009	$	10,000		$	1,420,000		$	27,717,598		$	455,300		$	1,800,000		$	1,500,000

	Note 7 (g)			Note 7 (h)			Note 7 (i)			Note 7 (j)			Note 7 (k)
	10%			12%			12%			12%			12%			Total
Original face value of convertible debenture	$	96,500		$	888,000		$	269,000		$	152,500		$	100,000		$	371,~~701~~506,000
Debt component, as at July 31, 2008		96,500			888,000			269,000			-			-			35,068,398
Issued		-			-			-			152,500			100,000			252,500
Finance fees paid to debenture holder/related company of debenture holder		-			-			-			(26,500	)		-			(26,500	)
Intrinsic value of beneficial conversion feature of convertible debentures		-			-			-			(64,625	)		(25,000	)		(89,625	)
Interest accretion		-			-			-			91,125			25,000			116,125
Conversion of debt to common shares		-			(466,000	)		(269,000	)		(152,500	)		(100,000	)		(999,500	)
Repayment of debentures in cash		-			-			-			-			-			(900,000	)
Debt component, as at January 31, 2009		96,500			422,000			-			-			-			33,421,398
Debt component, as at April 30, 2009		96,500			422,000			-			-			-			33,421,398
Less current portion, as at January 31, 2009		(96,500	)		(422,000	)		-			-			-			(33,421,398	)
Less current portion, as at April 30, 2009		(96,500	)		(422,000	)		-			-			-			(33,421,398	)
Long term portion of debt component, as at January 31, 2009	$	-		$	-		$	-		$	-		$	-		$	-
Long term portion of debt component, as at April 30, 2009	$	-		$	-		$	-		$	-		$	-		$	-
Remaining face value of convertible debenture as at January 31, 2009	$	96,500		$	422,000		$	-		$	-		$	-		$	33,421,398
Remaining face value of convertible debenture as at April 30, 2009	$	96,500		$	422,000		$	-		$	-		$	-		$	33,421,398

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

7. Convertible debentures (continued):

(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~~ assigned debt component to its full face value, and therefore, there is no ~~accretion~~ accretion expense on this debenture for the three or ~~six~~nine months ending ~~January 31~~April 30, 2009 and 2008.

No conversions or repayments were made against this debenture during the three or ~~six~~nine months ending ~~January~~April 3130, 2009 and 2008. As at ~~January~~April 3130, 2009, ~~there~~ there remains $10,000 of principal outstanding. The holder of the debenture has not requested repayment or conversion and therefore the Company continues to disclose the amount as a current liability.

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 $1,499,999 and recorded it as additional paid-in capital. During the year ended July 31, 2006, the loan became in 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~~ 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 or ~~six~~ nine months ending ~~January~~April 3130, 2009 and 2008.

This debenture is also subject to a registration rights agreement and beneficial ownership limitations, as described in note 7(l).

No conversions were made relating to this debenture during the ~~six~~nine months ending ~~January~~April 3130, 2009 and 2008. As at ~~January~~April 3130, 2009, the Company was in arrears on payments of principal and interest in the amount of $1,420,000 and $~~253~~271,~~750~~500 respectively.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

7. Convertible debentures (continued):

(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 62,500,000 warrants exercisable at $0.16 per share with an expiry period of five years. The convertible debentures bear interest at 10% per annum and matured on June 23, 2008.

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 was 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. 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.

This debenture is also subject to a registration rights agreement, as described in note 7(l).

As at ~~January~~April 3130, 2009, the Company has accrued $910,~~607~~292,~~272~~513 (July 31, 2008 - $8,190,438) in interest based on the terms of the amended convertible debenture of which $500,000 (July 31, 2008 - $500,000) is included in accounts payable and accrued liabilities and the remainder of $9,~~107~~792,~~272~~513 (July 31, 2008 - $7,690,438) is included in accrued interest on convertible debentures. The ~~amount~~ amount included in accounts payable and accrued liabilities related to cash ~~interest~~ interest payable prior to the amendment of the convertible debentures on December 30, 2005.

As a result of the issuance of the November 2006 10% convertible debenture (note 7 (d)) and the anti-dilution provisions, the conversion price for the outstanding principal for these convertible debentures was reduced to the lesser of:

(i)

$0.0573 and;

(ii)

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

In addition, on November 7, 2006, the Company repriced the 62,500,000 warrants originally issued in connection with this convertible debenture from $0.16 per share to $0.0298 per share (with all other terms remaining the same). The Company accounted for the repricing as a modification under SFAS No. 123R and recorded the net incremental fair value of $450,000 as interest and financing expense during the year ended July 31, 2007.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

7. Convertible debentures (continued):

During the ~~six~~nine months ended ~~January~~April 3130, 2009, holders of the 10% convertible debentures converted $12,000 of principal (~~six~~nine months ended ~~January~~April 3130, 2008- – $~~934~~1,~~031~~194,560) into 120,000,000 (~~six~~nine months ended ~~January~~April 3130, 2008 – ~~682~~1,~~512~~903,~~607~~488,493) common ~~shares~~ shares of the Company. Also during the ~~six~~nine months ended ~~January~~April 3130, 2009, ~~the~~ the Company made a cash repayment against the principal of this debenture in the amount of $900,000 (~~six~~nine months ended ~~January~~April 3130, 2008 – $nil).

This debenture matured unpaid on June 23, 2008, at which time the Company accreted the original assigned debt component to its full face value. Accordingly, there was no accretion of this debenture during the three or ~~six~~nine months ended ~~January~~ 31April 30, 2009 (three and ~~six~~nine months ended ~~January 31~~April 30, 2008 - $46,~~910~~286,~~324~~477 and $814,~~544~~830,~~214~~691). As at ~~January~~April 3130, 2009, the Company was in arrears on payments of principal and interest in the amount of $27,717,598 and $910,~~607~~292,~~272~~513, respectively. Because this debenture has matured, the holder has the right to call the unpaid balance, and may waive any ownership limitations prescribed by the debenture.

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.

(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 $1,200,000. The Company paid fees totaling $130,000 to one of the holders upon closing. The convertible debentures bear interest at 10% per annum, and matured unpaid on October 31, 2008. Interest was also due on October 31, 2008 in cash or shares of the Company’s common stock, at the option of the Company, but was not paid. 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:

$0.0573 and;

ii)

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

In addition, the agreement contains similar anti-dilution provisions as those described in note 7(c). This debenture is also subject to a registration rights agreement and beneficial ownership limitations, as described in note 7(l).

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) was allocated to the debt component to be accreted over the life of the debenture to the original face value using the effective interest rate method.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

7. Convertible debentures (continued):

During the ~~six~~nine months ended ~~January~~April 3130, 2009, holders did not convert any principal ~~into~~ into common shares of the Company. During the ~~six~~nine months ended ~~January~~April 3130, 2008, holders converted principal of $~~172~~308,~~197~~290 into 96856,~~956~~945,~~912~~909 common shares of ~~the~~ the Company.

This debenture was considered in default on June 23, 2008, by virtue of a provision that a default by the Company on any other debenture in excess of $100,000 qualifies as an event of default under this debenture. The Company defaulted on its $30,000,000 10% convertible debentures on June 23, 2008 for failure to repay that obligation by its maturity date (note 7 (c)). A holder of a portion of the $30,000,000 10% convertible debentures was also the holder of this debenture. Due to the default, the Company accreted the original assigned debt component to its full face value during the year ended July 31, 2008. Accordingly, there was no accretion of this debenture during ~~the~~ the three and ~~six~~nine months ended ~~January~~April 3130, 2009 (three and ~~six~~nine months ended ~~January~~ 31April 30, 2008 - $98128,~~462~~550 and $~~232~~361,~~501~~051). As at ~~January~~April 3130, 2009, the Company was in arrears on payments of principal and interest in the amount of $455,300 and $~~168~~179,~~526~~628, respectively. Due to the default, the holder has the right to call the unpaid balance, and may waive any ownership limitations prescribed by the debenture.

In connection with these debentures, the Company entered into a registration rights agreement, as described in note 7(l). 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. These debentures contain contractual restrictions on beneficial share ownership limiting beneficial ownership to 4.99% unless the debenture holders waive such limitation. These limitations may be waived by the holder due to the default status of the debenture.

(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 $1,800,000 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 have a contractual maturity date of 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:

$0.0573 and,

ii)

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

This debenture is also subject to a registration statement agreement and beneficial ownership limitations, as described in note 7(l).

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

7. Convertible debentures (continued):

The intrinsic value of the beneficial conversion feature, being $886,302 was allocated to additional paid-in capital at inception. The remaining amount of $718,698 (net of $195,000 in finance fees paid to the holder) was 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.

This debenture was considered in default on June 23, 2008, by virtue of a provision that a default by the Company on any other debenture held by the holder qualifies as an event of default under this debenture. The Company defaulted on its $30,000,000 10% convertible debentures on June 23, 2008 for failure to repay that obligation by its maturity date (note 7 (c)). The holder of the $30,000,000 10% convertible debentures was also the holder of this debenture. Due to the default, the Company accreted the original assigned debt component to its full face value during the year ended July 31, 2008. Accordingly, there was no accretion of this debenture during the three and ~~six~~nine months ended ~~January~~April 3130, 2009 (three and ~~six~~ nine months ended ~~January 31~~April 30, 2008 - $~~120~~137,~~028~~534 and $~~227~~365,~~697~~231). As at ~~January~~April 3130, 2009, the Company was in arrears on payments of principal and interest in the amount of $1,800,000 and $~~349~~394,~~094~~465, respectively. Due to the default, the holder has the right to call the unpaid balance, and may waive any ownership limitations prescribed by the debenture.

(f)

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

On April 27, 2007, the Company closed on a $1,500,000 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 have a contractual maturity date of 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:

$0.0573 and;

ii)

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

This debenture is also subject to a registration rights agreement and beneficial ownership limitations, as described in note 7(l).

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

7. Convertible debentures (continued):

The intrinsic value of the beneficial conversion feature related to the April 27, 2007 $1,150,000 convertible debenture, being $534,401, was allocated to additional paid-in capital. The remaining amount of $480,599 (net of $135,000 in finance fees paid to the holder) was allocated to the debt component to be accreted over the life of the debenture to the original face value using the effective interest rate method. 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) was allocated to the debt component to be accreted over the life of the debenture to the original face value using the effective interest rate method

This debenture was considered in default on June 23, 2008, by virtue of a provision that a default by the Company on any other debenture held by the holder qualifies as an event of default under this debenture. The Company defaulted on its $30,000,000 10% convertible debentures on June 23, 2008 for failure to repay that obligation by its maturity date (note 7 (c)). The holder of the $30,000,000 10% convertible debentures was also the holder of this debenture. Due to the default, the Company accreted the original assigned debt component to its full face value during the year ended July 31, 2008 and reclassified long term amounts to current liabilities as of July 31, 2008. Accordingly, there was no accretion of this debenture during the three and ~~six~~nine months ended ~~January~~April 3130, 2009 (three and ~~six~~nine months ended ~~January 31~~April 30, 2008 - $5560,~~476~~131 and $~~102~~162,~~738~~869). As at ~~January~~April 3130, 2009, the Company was in arrears on payments of principal and interest in the amount of $1,500,000 and $~~254~~292,~~861~~669, respectively. Due to the default, the holder has the right to call the unpaid balance, and may waive any ownership limitations prescribed by the debenture.

(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 has a contractual maturity date of 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:

$0.0573 and;

ii)

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

This debenture is also subject to a registration rights agreement and beneficial ownership limitations, as described in note 7(l).

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

7. Convertible debentures (continued):

The intrinsic value of the beneficial conversion feature, being $35,625 was allocated to additional paid-in capital. The remaining amount of $49,375 (net of $11,500 in finance fees paid to the holder) was allocated to the debt component to be accreted over the life of the debenture to the original face value using the effective interest rate method.

This debenture was considered in default on June 23, 2008, by virtue of a provision that a default by the Company on any other debenture held by the holder qualifies as an event of default under this debenture. The Company defaulted on its $30,000,000 10% convertible debentures on June 23, 2008 for failure to repay that obligation by its maturity date (note 9 7 (c)). The holder of the $30,000,000 10% convertible debentures was also the holder of this debenture. Due to the default, the Company accreted the original assigned debt component to its full face value during the year ended July 31, 2008 and reclassified long term amounts to current liabilities as of July 31, 2008. Accordingly, there was no accretion of this debenture during the three and ~~six~~nine months ended ~~January~~April 3130, 2009 (three and ~~six~~nine months ended ~~January 31~~April 30, 2008 - $12,~~873~~943 and $14,~~873~~816). As at ~~January~~April 3130, 2009, the Company was in arrears on payments of principal and interest in the amount of $96,500 and $1114,~~658~~090, respectively. Due to the default, the holder has the right to call the unpaid balance, and may waive any ownership limitations prescribed by the debenture.

(h)

$888,000 – 12% convertible debentures issued November 30, 2007, January 18, 2008, and February 20, 2008

On November 30, 2007, the Company closed on a securities purchase agreement for funding up to an aggregate of $1,150,000. The Company was funded an aggregate of $888,000 in three separate installments on November 30, 2007, January 18, 2008, and February 20, 2008 under this arrangement. The Company paid fees totaling $123,000 and issued 491,925,000 five-year warrants exercisable into shares of our Common Stock at $0.0298 per share upon closing to the holders. The convertible debentures bear interest at 12% per annum, and have a contractual maturity date of November 30, 2010, January 31, 2011, and February 20, 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:

$0.0573 and;

ii)

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

These debentures are also subject to a registration rights agreement and beneficial ownership limitations, as described in note 7(l).

The gross fair value of the warrants at the date of grant was estimated at $419,888 using the Black-Scholes option pricing model using the following weighted average assumptions: dividend yield of 0%, expected volatility ranging from 150.8% -152.1%, risk-free interest rate ranging from of 3.47% - 3.80%, and an expected life of 5 - 5.5 years.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

7. Convertible debentures (continued):

The intrinsic value of the beneficial conversion feature in the amount of $456,939, and the relative fair value of the warrants in the amount of $207,189 related to the November 30, 2007, January 18, 2008, and February 20, 2008 debentures were allocated to additional paid-in capital. The remaining amount of $100,872 (net of $123,000 in finance fees paid to the holder) was allocated to the debt component to be accreted over the life of the debentures to the original face values using the effective interest rate method.

This debenture was considered in default on June 23, 2008, by virtue of a provision that a default by the Company on any other debenture held by the holder qualifies as an event of default under this debenture. The Company defaulted on its $30,000,000 10% convertible debentures on June 23, 2008 for failure to repay that obligation by its maturity date (note 7 (c)). The holder of the $30,000,000 10% convertible debentures was also the holder of this debenture. Due to the default, the Company accreted the original assigned debt component to its full face value during the year ended July 31, 2008 and reclassified long term amounts to current liabilities as of July 31, 2008. Accordingly, there was no accretion of this debenture during the three and ~~six~~nine months ended ~~January~~April 3130, 2009 (three and ~~six~~nine months ended ~~January 31~~April 30, 2008 - $412,749 and $412,753).

On December 19, 2008, the holder of this debenture converted $466,000 of principal and $50,650 of accrued interest into 6,458,125,000 shares of the Company’s common stock. The conversion, together with conversions of other instruments disclosed in this note 7, resulted in a change in control of our company. Please see note 7(n) for further additional information. As at ~~January~~April 3130, 2009, the Company was in arrears on payments of remaining principal and interest in the amount of $422,000 and $5972,~~658~~422, respectively. Due to the default, the holder has the right to call the unpaid balance, and may waive any ownership limitations prescribed by the debenture.

(i)

$269,000 – 12% convertible debenture issued June 20, 2008

On June 20, 2008, the Company issued a secured convertible debenture with a face value of $269,000. The Company paid fees of $31,000 upon closing to the holders. The convertible debenture bears interest at 12% per annum, and has a contractual maturity date of June 20, 2011. 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:

iii)

$0.0573 and;

iv)

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 7(l).

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

7. Convertible debentures (continued):

The intrinsic value of the beneficial conversion feature, being $98,250 was allocated to additional paid-in capital. The remaining amount of $139,750 (net of $31,000 in finance fees paid to the holder) was allocated to the debt component to be accreted over the life of the debenture to the original face value using the effective interest rate method.

This debenture was considered in default on June 23, 2008, by virtue of a provision that a default by the Company on any other debenture held by the holder qualifies as an event of default under this debenture. The Company defaulted on its $30,000,000 10% convertible debentures on June 23, 2008 for failure to repay that obligation by its maturity date (note 7 (c)). The holder of the $30,000,000 10% convertible debentures was also the holder of this debenture. Due to the default, the Company fully accreted the remaining debt discount on this debenture during the year ended July 31, 2008 and reclassified long term amounts to current liabilities as of July 31, 2008. Accordingly, there was no accretion of this debenture during the three and ~~six~~nine months ended ~~January~~April 3130, 2009 (three and ~~six~~ nine months ended ~~January 31~~April 30, 2008 - $nil).

On December 19, 2008, the holder of this debenture converted the entire face value of $269,000 and accrued interest of $16,007 into 3,562,587,500 shares of the Company’s common stock, retiring the debenture. The conversion, together with conversions of other instruments disclosed in this note 7, resulted in a change in control of our company. Please see note 7(n) for further additional information.

(j)

$152,500 – 12% convertible debenture issued August 1, 2008

On August 1, 2008, the Company issued a secured convertible debenture with a face value of $152,500. The Company paid fees of $26,500 upon closing to the holders. The convertible debenture bears interest at 12% per annum, and has a contractual maturity date of August 1, 2011. 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:

$0.0573 and;

vi)

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 7(l).

The intrinsic value of the beneficial conversion feature, being $64,625 was allocated to additional paid-in capital. The remaining amount of $61,375 (net of $26,500 in finance fees paid to the holder) was allocated to the debt component to be accreted over the life of the debenture to the original face value using the effective interest rate method.

This debenture was considered in default at its issuance, by virtue of a provision that a default by the Company on any other debenture held by the holder qualifies as an event of default under this debenture. The Company defaulted on its $30,000,000 10% convertible debentures on June 23, 2008 for failure to repay that obligation by its maturity date (note 7 (c)). The holder of the $30,000,000 10% convertible debentures was also the holder of this debenture. Due to the default, the Company immediately accreted the full debt discount in the amount of $91,125 to reflect the debt at full face value.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

7.	Convertible debentures (continued):

On December 19, 2008, the holder of this debenture converted the entire face value of $152,500 and accrued interest of $6,969 into 1,993,362,500 shares of the Company’s common stock, retiring the debenture. The conversion, together with conversions of other instruments disclosed in this note 7, resulted in a change in control of our company. Please see note 7(n) for further additional information.

(k)

$100,000 – 12% convertible debenture issued August 15, 2008

On August 15, 2008, the Company issued a secured convertible debenture with a face value of $100,000. The Company did not pay any fees upon closing. The convertible debenture bears interest at 12% per annum, and has a contractual maturity date of August 15, 2011. 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:

vii)

$0.0573 and;

viii)

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 7(l).

The intrinsic value of the beneficial conversion feature, being $25,000 was allocated to additional paid-in capital. The remaining amount of $75,000 was allocated to the debt component to be accreted over the life of the debenture to the original face value using the effective interest rate method.

On December 19, 2008, the holder of this debenture converted the entire face value of $100,000 and accrued interest of $4,110 into 1,301,375,000 shares of the Company’s common stock, retiring the debenture. The conversion, together with conversions of other instruments disclosed in this note 7, resulted in a change in control of our company. Please see note 7(n) for further additional information.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

7.	Convertible debentures (continued):

(l)

Registration rights agreements and beneficial ownership limitations

In connection with the execution of the convertible debenture agreements described in notes 7(b) through (k), and with the preferred shares issued (as described in note 8), 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 7(e) through (k), 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, 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 7(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. Due to default of the debentures described in notes 7(b) through (k), the ownership limitations may be waived without notice by the holders.

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, 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 7(b) and (c) and the convertible preferred stock described in note 8, 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 7(d) through (k), the registration rights 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, $177,600, $53,800, $30,500, and $20,000, respectively.

Except as described in note 7(d), the Company has not filed or made effective any registration statement underlying the other securities. On November 7, 2007 management obtained permanent waivers from the various holders of the convertible debentures described in notes 7(b) and (c) and for the convertible preferred stock described in note 8, which indicate that the Company was not considered in default of these agreements and the holders waive their rights under the default provisions affected by this non-compliance. The remaining debentures are subject to demand registration rights. The Company had not received any demand for registration from any debenture holder as of the date of this filing. While management will apply its best efforts to have the various registration statements filed and declared effective if demanded by any holder, there can be no assurances that the Company will succeed in obtaining the required approvals. Failure by the Company to obtain effective registration statements could have a significant impact on the operations of the Company. However, as at ~~January~~April 3130, 2009, 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.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

7.	Convertible debentures (continued):

(m)

Security granted

In connection with the execution of the January 23, 2007 securities purchase agreement described in note 7(g), 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 7(b) through (k) and with the preferred shares issued (as described in note 8).

In connection with the sale of the TPMS Business and related assets and liabilities on December 11, 2008, the secured parties described above released their security interest in the assets sold.

(n)

Change of Control

On December 19, 2008, Xentenial Holdings Limited, a wholly owned subsidiary of YA Global Investments, L.P., converted in aggregate; various secured convertible debentures issued by the Company with a face value of $1,065,236, into a total of 13,315,450,000 of the Company’s common shares as follows:

			Face		Accrued		Total		Shares
			Value		Interest		Amount		Issued Upon
Debenture Issuance Date	Note		Converted		Converted		Converted		Conversion
January 17, 2008		7(h)	$	392,000	$	43,303	$	435,303		5,441,287,500
February 20, 2008		7(h)		74,000		7,347		81,347		1,016,837,500
June 20, 2008		7(i)		269,000		16,007		285,007		3,562,587,500
August 1, 2008		7(j)		152,500		6,969		159,469		1,993,362,500
August 15, 2008		7(k)		100,000		4,110		104,110		1,301,375,000
			$	987,500	$	77,736	$	1,065,236		13,315,450,000

After the conversion, the Company had 19,342,461,198 common shares outstanding, of which Xentenial Holdings Limited was the holder of 13,315,450,000, or 68.8%, of the Company’s total outstanding common shares. Upon completion of the conversion, a change in control of the Company occurred. The conversion was executed pursuant to the terms of a Voting Arrangement Agreement dated December 4, 2008 completed in connection with the sale of the Company’s tire pressure monitoring system business and related assets to Bendix, under which YA Global Investments, L.P. or its affiliated companies were required to convert into a number of shares sufficient to guarantee approval of the Asset Sale by the Company’s shareholders.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

8.	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 original maturity date of December 22, 2006. The accretion was charged to additional paid-in-capital. The holders subsequently extended the maturity date to June 30, 2008.

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~~April 30, 2009, 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~~ 31April 30, 2009, the aggregate liquidation value of the preferred shares amounted to $3,~~682~~719,~~240~~ 857 (July 31, 2008 –$3,604,470).

As at ~~January~~ 31April 30, 2009, the balance of the preferred shares subject to mandatory redemption consisted of the initial allocation of $1 (July 31, 2008 - $1), cumulative, undeclared but accrued dividends of $~~596~~634,~~800~~417 (July 31, 2008 – $519,030), and accumulated accretion of $3,999,999 (July 31, 2008 - $3,999,999), less $914,560 (July 31, 2008 - $914,560) converted to common shares. The Company did not record any accretion on the preferred shares during the three and ~~six~~nine months ended ~~January~~April 3130, 2009 or 2008. The balance of the remaining face value of the convertible preferred stock, being $3,085,440 (July 31, 2008 – $3,085,440), matured unpaid on June 30, 2008. Accordingly, the Company has classified the convertible preferred stock as a current liability as of ~~January 31~~April 30, 2009 and July 31, 2008.

The preferred shares are subject to a registration statement and beneficial ownership limitations as described in note 7(l) and are secured by the Company’s assets as described in note 7(m).

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

9.	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 8)

(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.

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 and 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~~nine months ended April ~~January 31~~30, 2009, the Company charged $~~676~~nil and $1,351 (three and ~~six~~nine months ended April ~~January 31~~30, 2008 - $179,~~891~~660 and $~~146~~156,~~607~~267) to Loss from Operations of Discontinued Business on the statement of operations for options granted in prior years that vested during the ~~quarter~~period.

As at ~~January~~ 31April 30, 2009, for options granted in the period or in a prior year, there was ~~$675~~no ~~of total~~ unrecognized compensation cost related to unvested options. ~~This unrecognized compensation cost is expected to be recognized over a weighted average period of four months.~~

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

9.	Share capital (continued):

(d)

Stock-options:

The following tables reflect the transactions and the number of stock options which are unvested, vested, and the total outstanding during the ~~six~~nine months ended ~~January~~ 31April 30, 2009.

	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, 2008		500,000		$	0.06		23,549,602		$	0.06		24,049,602		$	0.06
Options vested		(300,000	)		0.07		300,000			-		-			-
Options forfeited		(200,000	)		0.04		(19,299,602	)		0.06		(19,499,602	)		0.06
Ending balance,
January 31, 2009		-		$	-		4,550,000		$	0.07		4,550,000		$	0.07
April 30, 2009		-		$	-		4,550,000		$	0.07		4,550,000		$	0.07

The total intrinsic value of options outstanding at ~~January~~April 3130, 2009 and exercised during the ~~six~~nine months ended ~~January 31~~April 30, 2009 was $nil and $nil, respectively. During the ~~six~~nine months ended ~~January~~April 3130, 2009, no options were granted or exercised from any of the Company’s stock option plans. On December 11, 2008, 17,380,002 options were forfeited when employees were terminated in connection with the Asset Sale.

The following stock options were outstanding and exercisable as at ~~January~~April 3130, 2009:

	Options outstanding						Options exercisable
			Weighted
			average		Weighted				Weighted
			remaining		average				average
Range of	Number		contractual		exercise		Number		exercise
exercise prices	of shares		life		price		exercisable		price
$0.03 - 0.035		2,250,000		10.1364	$	0.03		2,250,000	$	0.03
$0.07 - 0.10		2,300,000		21.1667		0.10		2,300,000		0.10
$0.03 - 0.20		4,550,000		1.6516	$	0.07		4,550,000	$	0.07

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

9.	Share capital (continued):

(e)

Warrants:

As at ~~January~~ 31April 30, 2009, warrants outstanding were exercisable for 556,075,000 (July 31, 2008 - 557,375,000) common shares of the Company. The warrants entitle the holders to purchase common shares of the Company at prices ranging from $0.03 to $0.20 per share and expire on various dates until August 20, 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.

				Weighted-
				average
				exercise
	Warrants			price

Outstanding, beginning of period		557,375,000		$	0.04
Expired		(1,300,000	)		0.16

Outstanding, end of period		556,075,000		$	0.03

The following warrants were outstanding at ~~January~~April 3130, 2009:

			Weighted
			average		Weighted
			remaining		average
Range of	Number		contractual		exercise
exercise prices	of warrants		life		price
$0.03		555,625,000		3.6742	$	0.03
$0.06 - 0.20		450,000		1.6035		0.14
$0.03 - 0.20		556,075,000		3.6642	$	0.03

No warrants were exercised during the nine ~~six~~ months ended ~~January~~April 3130, 2009 or 2008, and as such the Company did not receive any cash proceeds from exercise.

During the ~~six~~nine months ended ~~January~~April 3130, 2008, 500,000 share purchase warrants were issued for services rendered and 491,925,000 ~~450 million~~ share purchase warrants were issued in in conjunction with the issuance of convertible debt as disclosed in Note 7 (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.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

9.	Share capital (continued):

(f)

Settlement of liabilities:

During the ~~six~~nine months ended ~~January~~April 3130, 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.

(g)

Consulting agreement:

During the ~~six~~nine months ended ~~January~~April 3130, 2008, the Company issued 600,000 shares of its common stock and 500,000 warrants to SKS Consulting of South Florida, Inc. 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. George O’Leary, a member of our board of directors, is the president of SKS Consulting of South Florida, Inc. No warrants or shares were issued to SKS Consulting of South Florida, Inc. during the ~~six~~nine months ended ~~January~~April 3130, 2009.

10.	Net interest and financing expenses:

	Three months ended				~~Six~~Nine months ended
	January 31,		January 31,		January 31,		January 31,
	April 30,		April 30,		April 30,		April 30,
	2009		2008		2009		2008
Interest accreted on convertible debentures (note 7)	$	-	$	56,~~187~~628,~~167~~384	$	116,125	$	915,~~109~~737,~~027~~411
Interest expense and finance charges on convertible debt and other		~~823~~838,~~960~~331		~~882~~861,~~752~~140		12,~~705~~543,~~382~~713		12,~~731~~592,~~348~~488
Amortization of deferred financing fees		-		251,197		-		~~502~~753,~~394~~591
	$	~~823~~838,~~960~~331	$	67,~~321~~740,~~116~~721	$	12,~~821~~659,~~507~~838	$	1119,~~342~~083,~~769~~490

11.	Other income – settlement from patent litigation:

On September 12, 2007, the Company filed a complaint against Siemens VDO Automotive Corp. and Schrader-Bridgeport International, Inc. (“Schrader”) 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 was 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 ~~August~~ 21February 20, 2008, the Company and ~~Schrader~~Continental Automotive Systems US, Inc. (formerly Siemens VDO Automotive Corp.) entered into a Confidential Settlement and License Agreement, terminating the lawsuit between ~~Schrader~~Siemens ~~and~~VDO usAutomotive Corp. Weand ~~received~~the Company. The Company received net proceeds of $1,~~800~~500,000 after legal contingency fees, from which the Company paid approximately $~~310~~277,000 in litigation-related expenses. These litigation related expenses were incurred and charged to the statement of operations during the year ended July 31, 2008. The We Company recorded other income from ~~the~~ this settlement in the amount of $~~nil and $~~1,~~800~~500,000 during the three and ~~six~~ nine months ended ~~January~~April 3130, ~~2009~~2008. No (income was recorded related to this settlement during the three and ~~six~~nine months ended ~~January 31~~April 30, ~~2008 - $nil)~~2009.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

11.	Other income – settlement from patent litigation (continued):

On August 21, 2008, the Company and Schrader entered into a Confidential Settlement and License Agreement, terminating the lawsuit between Schrader and the Company. The Company received net proceeds of $1,800,000 after legal contingency fees, from which the Company paid approximately $310,000 in litigation-related expenses. These litigation related expenses were incurred and charged to the statement of operations during the year ended July 31, 2008. The Company recorded other income from this settlement in the amount of $nil and $1,800,000 during the three and nine months ended April 30, 2009 (three and nine months ended April 30, 2008 - $nil).

12.	Related party transactions:

(a)

On December 19, 2008, Xentenial Holdings Limited, a wholly owned subsidiary of YA Global Investments, L.P., converted face value in the aggregate amount of $1,065,236 of various secured convertible debentures issued by the Company into a total of 13,315,450,000 of the Company’s common shares. After the conversion, the Company had 19,342,461,198 common shares outstanding, of which Xentenial Holdings Limited was the holder of 13,315,450,000, or 68.8%, of the Company’s total outstanding common shares. Upon completion of the conversion, a change in control of the Company occurred. The conversion was executed pursuant to the terms of a Voting Arrangement Agreement dated December 4, 2008 completed in connection with the sale of the Company’s tire pressure monitoring system business and related assets to Bendix, under which YA Global Investments, L.P. or its affiliated companies were required to convert into a number of shares sufficient to guarantee approval of the Asset Sale by the Company’s shareholders.

By virtue of their ownership, YA Global Investments LP (formerly known as Cornell Capital Partners) and its affiliates are considered related parties. During the three and ~~six~~nine months ended ~~January~~April 3130, 2009, the Company paid $nil (three and ~~six~~ nine months ended ~~January 31~~April 30, 2008 - $nil) in cash interest payments to YA Global Investments and its affiliates, ~~for interest~~ and ~~financing fees of~~ $26,500 (~~six~~ nine months ended ~~January~~April 3130, 2008 - $~~160~~169,500) financing fees on convertible debentures issued to YA Global Investments and its affiliates. During the ~~six~~nine months ended ~~January~~April ~~31, 2009, the Company made a cash repayment of $900,000 against a portion of the principal held by Xentenial Holdings Ltd. on its $~~30,~~000,000~~ ~~10% convertible debentures issued on June 23, 2005. During the six months ended January 31,~~ 2009, the Company made a cash repayment of $900,000 against a portion of the principal held by Xentenial Holdings Ltd. on its $30,000,000 10% convertible debentures issued on June 23, 2005.

The Company had the following financial instruments outstanding with YA Global Investments and its affiliates as at April ~~January 31~~30, 2009:

Financial Instruments	Amount

Standby equity distribution agreement	$	100,000,000
Preferred shares		3,085,440
Convertible debentures		32,956,098

It is unlikely that the Company will be permitted to draw on the $100 million SEDA 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 the SEDA is a viable source of financing.

(b) During the six months ended January 31, 2008, the Company issued 600,000 shares of its common stock and 500,000 warrants to SKS Consulting of South Florida, Inc. 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. George O’Leary, a member of our board of directors, is the president of SKS Consulting of South Florida, Inc. No warrants or shares were issued to SKS Consulting of South Florida, Inc. during the six months ended January 31, 2009.

(c) During the three and six months ended January 31, 2009, the Company was charged $nil and $49,561 (three and six months ended January 31, 2008 - $36,339 and $73,239) in directors fees. As at January 31, 2009, $483,899 (July 31, 2008 - $305,375) 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.

SMARTIRE SYSTEMS INC.

Notes to Consolidated Financial Statements

(Expressed in United States dollars)

(Unaudited)

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

Three and nine months ended April 30, 2009 and 2008

(Unaudited)

12.	Related party transactions (continued):

(b)

During the nine months ended April 30, 2008, the Company issued 600,000 shares of its common stock and 500,000 warrants to SKS Consulting of South Florida, Inc. 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. George O’Leary, a member of our board of directors, is the president of SKS Consulting of South Florida, Inc. No warrants or shares were issued to SKS Consulting of South Florida, Inc. during the nine months ended April 30, 2009.

(c)

During the three and nine months ended April 30, 2009, the Company was charged $nil and $49,561 (three and nine months ended April 30, 2008 - $36,906 and $110,145) in directors fees. As at April 30, 2009, $324,790 (July 31, 2008 - $305,375) 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.

(d)

On May 15, 2009, the Company entered into an independent contractor agreement with David Warkentin, a member of the Company’s board of directors and its former President and Chief Executive Officer, pursuant to which Mr. Warkentin will manage the licensing of patent rights retained by the Company after the Asset Sale. Mr. Warkentin’s compensation pursuant to the agreement is $3,000 per month plus 5% of any proceeds realized by the Company from any patent litigation efforts that have been initiated prior to the termination of the agreement. The agreement may be terminated at any time by either party with 30 days’ written notice.

13.	Contingency:

On February 4, 2009, the Company was served with a Writ of Summons in the Supreme Court of British Columbia by Federal Express Canada Ltd. claiming unpaid invoices in the amount of approximately $~~132~~131,000 (using the ~~January~~April 3130, 2009 exchange rate of 1.~~2308~~2105 Canadian Dollars per US Dollar) for shipping services incurred during 2008. On February 11, 2009, the Company filed an Appearance with ~~the~~ the Supreme Court of British Columbia with respect to this matter. As of ~~January~~ 31April 30, 2009, the Company had accrued approximately $~~132~~131,000 in “Accounts ~~payable~~ payable and accrued liabilities” on its consolidated balance sheet related to ~~this~~ this matter.

14.	Comparative figures:

Certain figures have been reclassified to conform to the financial statement presentation adopted for the current year.

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~~nine months ended ~~January~~April 3130, 2009 ~~and~~ and 2008 should be read in conjunction with our most recent audited annual ~~financial~~ financial statements for the financial year ended July 31, 2008, the unaudited ~~interim~~ 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~~K, Quarterly Reports on Form 10-~~QSB~~Q 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.

Asset Sale

Until December 11, 2008, we developed, subcontracted our manufacturing, and marketed technically advanced tire pressure monitoring systems that monitor tire pressure and tire temperature in a wide range of vehicles (the “TPMS Business”). On December 11, 2008, we completed the sale of substantially all of this business (the “Asset Sale”), comprising substantially all of our assets and certain of our liabilities, to Bendix CVS Canada Inc. (the “Buyer”) pursuant to an asset purchase agreement dated December 4, 2008 (the “Asset Purchase Agreement”).

The followings are the material terms of the agreements relating to the Asset Sale:

· The sale price was $2,500,000 cash at closing, plus an earn-out amount in each of the five years after closing based on a percentage of tire pressure monitoring system sales made or license fees received by the Buyer during that period, with a minimum earn-out of $500,000, of which $250,000 iswas payable by March 1, 2009 (this payment has not been received as of the date of this filing but is expected to be received shortly thereafter), and US$250,000 is payable by March 1, 2010. YA Global Investments LP, Xentenial Holdings Limited, Staraim Enterprises Limited, and Starome Investments Limited (collectively, the “Debtholders”) will receive all of these proceeds as a result of their position as secured creditors of the company.

The earn-out is based on future revenues generated by the Buyer from the TPMS Business, and any amounts earned by our company above the minimum earn-out are payable to us from the Buyer on an annual basis for a period of five years. Amounts due from the Buyer to us pursuant to the earn-out provision shall be equal to (a) 10% of sales of tire pressure monitoring products generated by the Buyer (net of returns, allowances, freight, and duties) between $2,000,000 and $10,000,000 in any given earn-out year, plus (b) 15% sales of tire pressure monitoring products generated by the Buyer (net of returns, allowances, freight, and duties) that exceeds $10,000,000 in any given earn-out year. The first earn-out year begins on December 11, 2008 and ends on December 11, 2009. New earn-out years thereafter begin on December 11, 2009 and for each year after until five full earn-out years have been completed.

The initial cash payment of $2,500,000 is being held in escrow, pursuant to the terms of an escrow agreement amongst us and the Buyer, until the earlier of the following events: (i) the transaction is ratified by our shareholders, (ii) the British Columbia Supreme Court issues an order declaring that the disposition of our assets is for valuable consideration to the Buyer who are dealing with us in good faith, or (iii) the second anniversary of the transaction.

· In connection with the Asset Purchase Agreement, the Debtholders each consented to and released their security interest in the assets contemplated by the Asset Purchase Agreement.

In connection with the Asset Purchase Agreement, the Debtholders each consented to and released their security interest in the assets contemplated by the Asset Purchase Agreement.

Pursuant to the terms of the Asset Purchase Agreement, we collaterally assigned, and granted a security interest in, the rights to all payments due to us under the Asset Purchase Agreement, including any amounts paid under the earn-out, to the Debtholders.

We retain the right to receive future earn-out payments due, as well as the right to proceed with litigation in respect of prior infringements of our U.S. Patent Nos. 5,231,872 and 5,335,540.

Our assets immediately after the transaction consist of cash and prepaid assets relating to insurance policies still in effect to our benefit. As of the transaction date, the book value of cash was approximately $174,000, consisting of unspent funds advanced under a bridge note from YA Global Investments LP at closing, which funds are to be applied toward the post-closing operating budget; and the book value of prepaid insurance assets was approximately $118,000. We believe book value of these assets approximates fair value.

We retain certain operating liabilities and all of the liabilities and obligations with respect to the convertible debt and the shares of our convertible preferred stock that were outstanding prior to the Asset Sale. Liabilities retained by us include (a) approximately $1.2 million of trade accounts payable and accrued liabilities related primarily to corporate costs, director fees, and discontinued vendors not related directly to the operation of the tire pressure monitoring business, (b) approximately $44.1 million of principal and accrued interest on secured convertible debentures on which the company has defaulted, and (c) approximately $3.7 million of face value and accumulated dividends on convertible preferred stock on which the company has defaulted. Secured convertible debentures and convertible preferred stock are carried at their full face value as a result of the default. We believe book value of these liabilities approximates fair value.

Because all of our assets were subject to a pre-existing grant of security in favor of the holders of outstanding debt in the aggregate amount of approximately $44,150,000 (as of December 11, 2008), we entered into a Liquidation Agreement (included as Exhibit 10.96 to our Form 10-KSB/A filed on March 3, 2009) with the Debtholders pursuant to which we (a) acknowledged our debt to the Debtholders in the aggregate amount of approximately $44,150,000, (b) assured the Debtholders that we had no offsets, claims or counterclaims against any of them, (c) ratified all of the loan documents pursuant to which we had borrowed the money owed and acknowledged that they, and the documents granting security for repayment of the loans, were in full force and effect, and (d) agreed to adhere to a projected budget and wind-down plan during the period from closing through December 31, 2009.

The post-closing budget designated in the liquidation agreement calls for expenditures from closing through December 31, 2009 in the amount of $953,341 related to (a) severance costs incurred at closing, (b) preparation, printing and mailing of this proxy statement, (c) costs to complete the audit of our financial statements for the year ended July 31, 2008, (d) contractor costs to perform accounting, administrative and patent licensing functions, and (e) legal and administrative costs associated with the acquisition and post-sale operations.

The wind-down plan stipulates that (a) we will complete the audit and file a corresponding form 10-KSB for fiscal year ended July 31, 2008 no later than December 31, 2008, (b) we will file a proxy statement and information circular to attempt to secure shareholder approval of the Asset Sale, (c) our current board shall remain in place until such shareholder meeting is held, (d) David Warkentin shall resign as Chief Executive Officer at closing, but retain his position as director and assist on a contract basis with patent and administrative issues, (e) David Dodge shall continue as CFO until the special meeting of shareholders completed, (f) we will file our 2008 tax returns, and (g) we will pursue licensing and/or litigation relating to patent rights retained by SmarTire.

At closing of the Asset Sale, YA Global Investments LP funded $762,532 in the form of a bridge note (the “Bridge Note”) (included as Exhibit 10.98 to our Form 10-KSB/A filed on March 3, 2009) with an annual interest rate of 14%, to be used to pay specified post-closing administrative items. The Bridge Note is to be repaid from any future earnings of the Company.

· We agreed that we would change our name to TTC Technology Corp, which is subject to approval by our shareholders.

Reasons for the Asset Sale

At a meeting of our Board of Directors on August 8, 2008, management presented to our Board of Directors an analysis of our business and financial conditions. After considering management’s presentation, our Board of Directors considered the following factors, among others, in arriving at its decision to approve the sale of the assets of our company:

Lack of prospects for revenue growth – A number of initiatives had been taken in an effort to increase revenues, particularly with respect to Dana Corporation (our then marketing partner for the commercial vehicle market in North America, Australia and New Zealand). There were also a number of new potential OEM (original equipment manufacturer) customers, however, it would have taken at least 12 months to generate revenues from those customers and some of the OEM customers indicated that they would not be willing to undertake supply agreements because of our financial condition. Other sales and marketing initiatives have not been possible due to lack of funding;

Lack of funding from our lenders – Our lenders were unwilling to continue to fund our business operations. Furthermore, management believed that even if our lenders had been willing to provide further funding, we could not continue to survive with the level of funding experienced during the 2008 calendar year as sales and marketing and R&D efforts needed to be increased in order to grow and be competitive;

Lack of other funding – Management advised that the debt load and stock price of our company made it extremely unlikely that additional sources of funding could be found;

Timing of the sale – Management advised that we were in a unique situation in that there were at least three parties interested in purchasing our assets. One party was a competitor that was looking to upgrade its product portfolio as it had fallen behind, while another had decided to enter the market and was looking to buy rather than develop its own products due to the long marketing cycle. Management had extensive discussions with the two potential buyers other than Bendix CVS, including (i) providing in depth due diligence materials on our business and financial position, and (ii) discussions of potential purchase price range. Management advised our Board of Directors that if these potential buyers did not acquire our assets at the time, they would become our competitors in the future. A decision not to sell would create a significantly more competitive landscape for our company; and

· Value received – Our Board of Directors considered whether the process would ensure that we were receiving the greatest value for our assets. Management stated that we employed two outside consultants, to assist with the process of seeking out multiple potential buyers and creating an auction situation. No reports, opinions, or appraisals were provided by these consultants. Management stated that the process was undertaken and continued over a five month period with significant due diligence efforts by all potential buyers. Management also stated that, based on discussions with potential buyers, it was highly likely that any sale consideration would be paid in cash and that buyers would not assume any of the Company’s debt obligations.38

Value received – Our Board of Directors considered whether the process would ensure that we were receiving the greatest value for our assets. Management stated that we employed two outside consultants, to assist with the process of seeking out multiple potential buyers and creating an auction situation. No reports, opinions, or appraisals were provided by these consultants. Management stated that the process was undertaken and continued over a five month period with significant due diligence efforts by all potential buyers. Management also stated that, based on discussions with potential buyers, it was highly likely that any sale consideration would be paid in cash and that buyers would not assume any of the Company’s debt obligations. The consideration being discussed and negotiated with the potential buyers ranged from a minimum of $3,000,000 guaranteed cash consideration to unlimited consideration based on future performance of the business under the ownership of the buyer pursuant to an earn-out mechanism. Potential amounts projected to be received pursuant to any earn-out mechanism were based on internal projections and ranged from $500,000 minimum guaranteed payments to approximately $23,000,000 over a five-year period. The top end of the projected potential range of receipts was based on projected annual sales of the TPMS products by the buyer of approximately $80,000,000 by 2013. Our sales of $3,140,413 for our last fiscal year ended July 31, 2008 would have equated to an earn-out of approximately $114,000 under this formula. In order to reach the sales targets required to achieve the top end of the projected potential range of earn-out receipts, the buyer would have to increase annual sales to nearly 25 times the rate which we were able to achieve. To do so, the buyer would have to penetrate the international commercial vehicle market, which we were unable to achieve. When evaluating potential buyers, we considered the potential ability of each buyer to penetrate this market. While the actual amounts earned pursuant to the earn-out will not be known until earn-out years are completed, the likelihood that actual earn-out receipts will approach the top end of the range is fairly low, especially considering the global recession and its negative impact on sales of new automobiles. The critical elements of each consideration package considered by the Board of Directors, and negotiated by management with the potential buyers, were (i) amount of guaranteed cash to be received, (ii) amount of potential future consideration under any earn-out mechanism, (iii) each buyer’s ability to deliver future revenue and earnings from the business, and (iv) whether we would retain the rights to generate revenue from patent licensing.

After discussion of the various issues, our Board of Directors agreed that:

If we decided to seek additional funding sufficient to operate and grow the business we would probably not be successful;

Prospects for our revenue growth in time to permit our company to become self sufficient were poor, especially with the levels of funding at the time;

The timing was correct for the sale based upon the economic and competitive climate;

The process undertaken for the sale was exhaustive and would ensure best value received for the sale;

Potential buyers were legitimate companies with the ability to make the purchase and understood the value of our intellectual property and other assets, and such potential buyers would not require outside financing to complete the transaction; and

If our company were not sold, it was likely that our only course of action was bankruptcy.

Therefore, our Board of Directors determined that the proposed sale would be fair to and in the best interest of our shareholders, and the directors unanimously approved the sale of the assets of our company.

At a meeting of our Board of Directors on October 12, 2008, management presented an update on events regarding the sale process that led to the negotiation of the final term sheet from Bendix CVS Canada Inc. Management reported that, after going through the due diligence process with all three potential buyers, the deal team decided that Bendix CVS Canada Inc. had the only firm offer and that we should negotiate the best possible terms and accept. This conclusion was based primarily on management’s analysis and comparison of the estimated value expected to be received from each of the potential buyers, including upfront payments and payments potentially due pursuant to any earn-out mechanisms. In doing so, management and the board considered each party’s ability to take the TPMS products to market and thus deliver under an earn-out mechanism.

Management then entered into final negotiations of the deal terms with Bendix CVS Canada Inc., including (a) the amount of the purchase price, including cash due at closing and amounts payable under the earn-out, (b) transfer of employees from SmarTire to Bendix CVS Canada Inc., (c) transfer of assets and liabilities and net book value adjustment, and (d) exclusivity and timing of the transaction. The final term sheet was agreed upon on October 10, 2008. Then management presented its comments on the term sheet to our Board of Directors. Our Board of Directors discussed management’s comments and agreed that:

After an exhaustive due diligence negotiation period that the offer from Bendix CVS Canada Inc. was the only option left for us to consider;

The sale process was handled in a manner that generated the best possible offer for our company; and

The timing was critical as the economic climate was deteriorating and any delays would jeopardize a sale.

Therefore, our Board of Directors unanimously voted to accept the Bendix CVS Canada Inc. offer and move to complete the asset purchase with Bendix CVS Canada Inc. as soon as possible. In reaching its conclusion to recommend that investors vote for this proposal, the Board of Directors used a range of potential purchase price consideration to be received under terms of the Asset Purchase Agreement, with the minimum purchase price being $3,000,000 (upfront cash plus minimum earn-out). A range of additional expected purchase prices payable pursuant to the earn-out mechanism were projected using internally generated forecast models for a fully-funded debt-free operation.

The foregoing summary of the information and factors considered by our Board of Directors is not intended to be exhaustive of the factors considered by our Board of Directors in reaching its conclusion and making its recommendation, but does include the material information, factors and analysis considered by our Board of Directors in reaching its conclusion and recommendation. Our Board of Directors evaluated the various factors summarized above in light of its own knowledge of the business and the industry, financial condition and prospects of our company. The conclusion and unanimous recommendation of our Board of Directors was made after considering all of the information and factors involved.

3940

Change in Control

	Face		Accrued		Total		Shares
	Value		Interest		Amount		Issued Upon
Debenture Issuance Date	Converted		Converted		Converted		Conversion
January 18, 2008	$	392,000	$	43,303	$	435,303		5,441,287,500
February 20, 2008		74,000		7,347		81,347		1,016,837,500
June 20, 2008		269,000		16,007		285,007		3,562,587,500
August 1, 2008		152,500		6,969		159,469		1,993,362,500
August 15, 2008		100,000		4,110		104,110		1,301,375,000
	$	987,500	$	77,736	$	1,065,236		13,315,450,000

Shareholder Rights after the Asset Sale

Holders of shares of our common stock prior to completion of the Asset Sale still hold the same number of shares after the Asset Sale. Holders of shares of our common stock will not receive any cash distribution or common shares or other securities of the Buyer as a result of the transaction. All of the proceeds from the transaction have been collaterally assigned to the Debtholders, to the extent that those proceeds satisfy our obligations to the Debtholders, which as of December 11, 2008 were approximately $44.1 million (~~January~~April 3130, 2009 - $4748.86 million). There were no changes to the ~~voting~~ voting or other rights of our common shares as a result of the Asset Sale, with ~~the~~ the exception of the change in control described herein. On December 17, 2008, our common stock was delisted from the OTCBB and began trading on the ~~Pink~~ Pink Sheets due to delinquent SEC filings. We do not expect to become current with our SEC filings at any point in the foreseeable future, as we were unable to secure funds in our post-closing operational budget for such items.

Our Business After the Asset Sale

Following the sale of our tire pressure monitoring system business, we terminated nine employees and paid severance related to such terminations totaling approximately $378,000. The remaining former employees of our Company were hired by Bendix CVS Canada Inc. After the completion of the Asset Sale and the termination of all of our employees and consultants effective December 11, 2008, we engaged three people to provide our company with administrative and executive services on a part-time basis. All three of these people were previously consultants to/employed by our company in similar capacities prior to the sale of the TPMS Business.

4041

Subsequent to the Asset Sale, our sole business has been to pursue litigation in respect of prior infringements of our U.S. Patent Nos. 5,231,872 and 5,335,540. These patents relate to a proprietary method and apparatus for measuring and transmitting tire pressure and temperature data that was used in our tire pressure monitoring products before the Asset Sale. We have licensed these patents on two separate occasions: (a) on February 20, 2008, we entered into a Confidential Settlement and License Agreement with Continental Automotive Systems US, Inc. (formerly Siemens VDO Automotive Corp.) pursuant to which we received net proceeds of $1,500,000 after ~~payment~~legal ofcontingency ~~litigation related~~ fees ~~and withholding taxes~~, from which wethe Company paid approximately $~~300~~277,000 in litigation-related expenses, and (b) on August 21, 2008, we entered into a Confidential Settlement and License Agreement with Schrader-Bridgeport International, Inc., pursuant to which we received net proceeds of ~~approximately~~ $1.5,800,000 ~~million~~ after ~~payment~~legal ofcontingency fees, from which the Company paid approximately $310,000 in litigation-related ~~fees and~~ expenses. We anticipate that this will continue to be our sole business for the foreseeable future. We do not expect that cash flow generated from patent licensing will be sufficient to satisfy our outstanding liabilities and fund our ongoing operating expenses.

In connection with the Asset Sale, we agreed to adhere to a projected budget and wind down plan during the period from closing through December 31, 2009. The post-closing budget calls for expenditures from closing through December 31, 2009 in the amount of $953,341 related to (a) severance costs incurred at closing, (b) preparation, printing and mailing of this proxy statement, (c) costs to complete the audit of our financial statements for the year ended July 31, 2008, (d) contractor costs to perform accounting, administrative and patent licensing functions, and (e) legal and administrative costs associated with the acquisition and post-sale operations.

Government Regulations

Prior to the Asset Sale, our products were 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 the market in which we operated prior to the Asset Sale.

4142

RESULTS OF OPERATIONS

Three months ended ~~January~~April 3130, 2009 and ~~January~~April 3130, 2008

General and Administrative Expenses

General and administrative expenses for the three months ended ~~January~~April 3130, 2009 ~~decreased~~ decreased to $~~112~~97,~~633~~154 from $~~217~~640,~~367~~694 for the three months ended ~~January~~April 3130, 2008. ~~The~~Upon completion ~~decrease~~of ~~was~~the ~~primarily~~Asset ~~attributed~~Sale toon ~~lower~~December ~~audit~~11, ~~and~~2008, ~~tax~~all ~~fees,~~general and ~~lower~~administrative ~~director~~employees ~~fees,~~were ~~lower~~transferred ~~insurance~~to ~~premiums,~~the ~~and~~Buyers ~~reduced~~or terminated. General ~~public~~an ~~relations expenses~~administrative inexpense for the three months ended ~~January~~April 3130, ~~2009~~2008 reflects a full quarter of expenses with complete staff.

Other income – settlement from lawsuit

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 Corp. and the Company. The Company received net proceeds of $1,500,000 after legal contingency fees, from which the Company paid approximately $277,000 in litigation-related expenses. These litigation related expenses were incurred and charged to the statement of operations during the year ended July 31, 2008. The Company recorded other income from this settlement in the amount of $1,500,000 during the three months ended April 30, 2008. No income was recorded related to this settlement during the three months ended April 30, 2009.

Interest Income

Interest income of $242 was earned for the three months ended ~~January~~April 3130, 2009 as compared to to $12,~~532~~087 for the three months ended ~~January~~April 3130, 2008 and was the result of ~~lower~~ lower average cash balances during the three months ended ~~January~~April 3130, 2009.

Interest and finance charges

Interest and finance charges decreased to $~~823~~838,~~960~~331 for the three months ended ~~January~~April 3130, 2009 from $67,~~321~~740,~~116~~721 for the three months ended ~~January~~April 3130, 2008. Interest and finance charges for the three months ended ~~January~~April 3130, 2009 includes non-cash interest of $~~785~~794,~~839~~718 compared to non-cash interest charges of $67,~~287~~709,~~579~~109 for the three months ended ~~January~~April 3130, 2008. The decrease occurred due to the Company defaulting on its outstanding convertible debt instruments as of July 31, 2008, resulting in the debentures being written up from their carrying value to full face value as of July 31, 2008. As a result, all debentures issued prior to July 31, 2008 were fully accreted as of that date and the Company did not recognize any interest expense to accrete these instruments during the three ~~or six~~ months ended ~~January~~April 3130, 2009.

Foreign exchange gain (loss)

A foreign exchange ~~loss~~gain of $81218,~~394~~454 was ~~incurred~~recognized for the three months ended ~~January~~April 3130, 2009 as compared to a loss of ($~~673~~72,~~172~~367) for the three months ended ~~January~~April 3130, 2008. Foreign exchange gains and losses are due to fluctuations in currency ~~exchange~~ exchange rates.

Loss from operations of discontinued business

As a result of the sale of the TPMS Business on December 11, 2008, results of operations from this business have been classified as discontinued operations for the three months ended January 31, 2009 and 2008 in the accompanying statement of operations. The operating results of the TPMS Business classified as discontinued operations are shown in the following table for the three months ended January 31, 2009 and 2008.

	Three Months Ended
	January 31,			January 31,
	2009			2008
Revenue	$	277,466		$	740,848
Cost of goods sold		154,439			665,165
		123,027			75,683
Expenses:
Depreciation and amortization		(575	)		65,902
Engineering, research and development		123,819			413,326
General and administrative		117,248			545,629
Marketing		43,563			187,167
		284,055			1,212,024
Loss from operations		(161,028	)		(1,136,341	)
Other income:
Foreign exchange gain		89,059			189,607
		89,059			189,607
Loss from operations of discontinued business	$	(71,969	)	$	(946,734	)

Revenue decreased from $740,048 during the three months ended January 31, 2008 to $277,466 in the three months ended January 31, 2009. The decrease is primarily due to lower sales to our two primary customers during the three months ended January 31, 2009, as well as the fact the results for the three months ended January 31, 2009 only reflect operations of our business from November 1, 2008 to the sale date of December 11, 2008.

Cost of sales decreased from $665,165 during the three months ended January 31, 2008 to $154,439 in the three months ended January 31, 2009. The decrease corresponds with the decrease in sales to our two primary customers. Gross margin increased to 44% in the three months ended January 31, 2009 from 10% in the three months ended January 31, 2008 due to a lower concentration of our sales to original equipment manufacturers of new passenger cars.

Depreciation expense decreased from $65,902 during the three months ended January 31, 2008 to ($575) in the three months ended January 31, 2009. The decrease was due to suspended depreciation on assets held for sale during the three months ended January 31, 2009, as well as a higher value US Dollar relative to the Canadian dollar in 2008 resulting in lower US Dollar balances on depreciation of fixed assets denominated in Canadian dollars.

Engineering, research and development expense decreased from $413,326 during the three months ended January 31, 2008 to $123,819 in the three months ended January 31, 2009. The decrease was primarily due to lower stock based compensation expense, lower product testing expenses, and a higher value US Dollar relative to the Canadian dollar in 2008 resulting in lower US Dollar balances on expenses denominated in Canadian dollars. Additionally, results for the three months ended January 31, 2009 only reflect operations of our business from November 1, 2008 to the sale date of December 11, 2008.

~~General and~~Loss ~~administrative expense decreased~~ from $545,629 during the three months ended January 31, 2008 to $117,248 in the three months ended January 31, 2009. The decrease was primarily due to a reduction in staff from 2008 to 2009, reduced legal fees, lower stock based compensation expense, and a higher value US Dollar relative to the Canadian dollar in 2008 resulting in lower US Dollar balances on expenses denominated in Canadian dollars. Additionally, results for the three months ended January 31, 2009 only reflect operations of ~~our business from November 1, 2008 to the sale~~ ~~date~~discontinued ~~of December 11, 2008.~~business

~~Marketing~~The sale ~~expense~~of ~~decreased from $187,167 during~~ the ~~three~~TPMS ~~months~~Business ~~ended~~was ~~January~~completed ~~31,~~on ~~2008 to~~December ~~$43~~11,~~563~~ ~~in the three months ended January 31, 2009~~2008. ~~The decrease~~Accordingly, ~~was~~there ~~primarily~~were ~~due~~no toresults afrom ~~reduction~~the inoperations ~~staff~~of ~~from~~this ~~2008~~discontinued tobusiness ~~2009,~~for ~~lower stock based~~the ~~compensation~~three ~~expense,~~months ~~and~~ended aApril ~~higher~~30, ~~value~~2009. The USoperating ~~Dollar~~results ~~relative~~of to the ~~Canadian~~TPMS ~~dollar~~Business inclassified ~~2008~~as ~~resulting~~discontinued inoperations ~~lower US Dollar balances on expenses denominated in Canadian dollars. Additionally, results~~ for the three months ended ~~January~~ 31April 30, ~~2009~~2008 ~~only~~are ~~reflect~~shown ~~operations~~in ~~of our business from November 1, 2008 to~~ the ~~sale~~following ~~date of December 11, 2008~~table.

A foreign exchange gain of $89,059 was recognized for the three months ended January 31, 2009 as compared to $189,607 for the three months ended January 31, 2008. Foreign exchange gains and losses are due to fluctuations in currency exchange rates.

	Three months
	ended
	April 30,
	2008

Revenue	$	794,373
Cost of goods sold		679,326
		115,047

Expenses:
Depreciation and amortization		65,189
Engineering, research and development		431,095
General and administrative		290,575
Marketing		156,572
		943,431

Loss from operations		(828,384	)

Other earnings (expenses):
Foreign exchange gain (loss)		8,075
		8,075

Loss from operations of discontinued business	$	(820,309	)

~~Six~~Nine months ended ~~January~~April 3130, 2009 and ~~January~~April 3130, 2008

General and Administrative Expenses

General and administrative expenses for the ~~six~~nine months ended ~~January~~April 3130, 2009 decreased to $~~220~~317,~~169~~323 from $~~432~~1,~~531~~313,713 for the ~~six~~nine months ended ~~January~~April 3130, 2008. The decrease was primarily attributed to termination of all general and administrative employees as of December 11, 2008 in connection with the Asset Sale, lower legal fees related to patent litigation, lower audit and tax fees, lower director fees, lower insurance premiums, and reduced public relations expenses in the ~~six~~ nine months ended ~~January~~April 3130, 2009.

Other income – settlement from lawsuit

~~On August~~Other ~~21,~~income ~~2008,~~from wesettlement ~~and~~of ~~Schrader-Bridgeport~~lawsuits ~~International,~~was ~~Inc. entered into a Confidential Settlement and License Agreement~~$1,800,000 ~~terminating~~for the ~~lawsuit~~nine ~~between~~months ended ~~Schrader-Bridgeport~~April ~~International~~30, ~~Inc. and~~2009, ~~us. We~~as ~~received~~compared ~~net proceeds~~to of $1,~~800~~500,000 ~~after~~ ~~legal~~the ~~contingency~~nine ~~fees,~~months ~~from~~ended ~~which~~April ~~the Company~~30, ~~paid~~2008. Income ~~approximately $310,000~~ in ~~litigation-related~~2009 ~~expenses. These litigation~~ related ~~expenses were incurred and charged~~ to ~~the~~our ~~statement~~settlement ofwith ~~operations~~Schrader-Bridgeport ~~during the year ended July 31~~International, ~~2008~~Inc. We, ~~recorded~~and ~~other income~~2008 ~~from~~amounts ~~the~~related to our settlement inwith ~~the~~Continental ~~amount~~Automotive ofSystems $1US,~~800,000~~ ~~during~~Inc. ~~the~~(formerly ~~six~~Siemens ~~months~~VDO ~~ended~~Automotive ~~January 31, 2009 (six months ended January 31, 2008 - $nil~~Corp.).

Interest Income

Interest income of $1,~~301~~303 was earned for the ~~six~~nine months ended ~~January~~April 3130, 2009 as ~~compared~~ compared to $57,~~844~~931 for the ~~six~~nine months ended ~~January~~April 3130, 2008 and was the result of lower average cash balances during the ~~six~~nine months ended ~~January~~April 3130, 2009.

Interest and finance charges

Interest and finance charges decreased to $1,821,507 for the six months ended January 31, 2009 from $11,342,769 for the six months ended January 31, 2008. Interest and finance charges for the six months ended January 31, 2009 includes non-cash interest of $1,749,686 compared to non-cash interest charges of $11,278,708 for the six months ended January 31, 2008. The decrease occurred due to the Company defaulting on its outstanding convertible debt instruments as of July 31, 2008, resulting in the debentures being written up from their carrying value to full face value as of July 31, 2008. As a result, all debentures issued prior to July 31, 2008 were fully accreted as of that date and the Company did not recognize any interest expense to accrete these instruments during the three or six months ended January 31, 2009.

Interest and finance charges

Interest and finance charges decreased to $2,659,838 for the nine months ended April 30, 2009 from $19,083,490 for the nine months ended April 30, 2008. Interest and finance charges for the nine months ended April 30, 2009 includes non-cash interest of $2,544,404 compared to non-cash interest charges of $19,062,718 for the nine months ended April 30, 2008. The decrease occurred due to the Company defaulting on its outstanding convertible debt instruments as of July 31, 2008, resulting in the debentures being written up from their carrying value to full face value as of July 31, 2008. As a result, all debentures issued prior to July 31, 2008 were fully accreted as of that date and the Company did not recognize any interest expense to accrete these instruments during the nine months ended April 30, 2009.

Foreign exchange gain (loss)

A foreign exchange loss of ($1,~~736~~517,~~030)~~576 was incurred for the ~~six~~nine months ended ~~January~~April 3130, 2009 as compared to a gain of $~~338~~266,~~914~~547 for the ~~six~~nine months ended ~~January~~April 3130, 2008. Foreign exchange gains and losses are due to fluctuations in currency ~~exchange~~ exchange rates.

Loss from operations of discontinued business

As a result of the sale of the TPMS Business on December 11, 2008, results of operations from this business have been classified as discontinued operations for the ~~six~~nine months ended ~~January~~April 3130, 2009 and 2008 in the accompanying statement of operations. The operating results of the TPMS Business classified as discontinued operations are shown in the following table for the ~~six~~nine months ended ~~January~~April 3130, 2009 and 2008.

	Six Months Ended
	Nine Months Ended
	January 31,			January 31,
	April 30,			April 30,
	2009			2008
Revenue	$	956,175		$	12,~~663~~458,~~874~~247
Cost of goods sold		661,017			12,~~461~~141,~~919~~245
		295,158			~~201~~317,~~955~~002
Expenses:
Depreciation and amortization		9,650			~~130~~195,~~187~~376
Engineering, research and development		503,390			~~905~~1,~~831~~336,926
General and administrative		285,207			~~843~~893,~~332~~419
Marketing		187,166			~~441~~598,~~792~~364
		985,413			23,~~321~~024,~~142~~085
Loss from operations		(690,255	)		(2,~~119~~707,~~187~~083	)
Other income:
Other earnings (expenses):
Foreign exchange gain		36,737			24,355
Foreign exchange gain (loss)		36,737			32,430
		36,737			2432,~~355~~430
Loss from operations of discontinued business	$	(653,518	)	$	(2,~~094~~674,~~832~~653	)

Revenue decreased from $12,~~663~~458,~~874~~247 during the ~~six~~nine months ended ~~January~~April 3130, 2008 to $956,175 in the ~~six~~nine months ended ~~January~~April 3130, 2009. The decrease is primarily due to lower sales to our two primary customers during the ~~six~~nine months ended ~~January~~April 3130, 2009, as well as the fact the results for the ~~six~~nine months ended ~~January~~April 3130, 2009 only reflect operations of our business from August 1, 2008 to the sale date of December 11, 2008.

Cost of sales decreased from $1,461,919 during the six months ended January 31, 2008 to $661,017 in the six months ended January 31, 2009. The decrease corresponds with the decrease in sales to our two primary customers. Gross margin increased to 31% in the six months ended January 31, 2009 from 12% in the six months ended January 31, 2008 due to a lower concentration of our sales to original equipment manufacturers of new passenger cars.

Depreciation expense decreased from $130,187 during the six months ended January 31, 2008 to $9,650 in the six months ended January 31, 2009. The decrease was due to suspended depreciation on assets held for sale during the six months ended January 31, 2009, as well as a higher value US Dollar relative to the Canadian dollar in 2008 resulting in lower US Dollar balances on depreciation of fixed assets denominated in Canadian dollars.

~~Engineering,~~Cost of ~~research~~sales ~~and development expense~~ decreased from $~~905~~2,~~831~~141,245 during the ~~six~~nine months ended ~~January~~April 3130, 2008 to $~~503~~661,~~390~~017 in the ~~six~~nine months ended ~~January~~April 3130, 2009. The decrease ~~was primarily due to lower stock based~~ ~~compensation~~corresponds ~~expense,~~with ~~lower~~the ~~product~~decrease ~~testing~~in ~~expenses,~~sales ~~and~~to aour ~~higher~~two ~~value US~~primary ~~Dollar~~customers. Gross ~~relative~~margin increased to ~~the~~31% ~~Canadian dollar~~ in ~~2008~~the ~~resulting~~nine inmonths ~~lower US Dollar~~ended ~~balances~~April on30, ~~expenses~~2009 ~~denominated~~from 12% in ~~Canadian dollars. Additionally, results for~~ the ~~six~~nine months ended ~~January~~April 3130, ~~2009~~2008 ~~only~~due ~~reflect~~to ~~operations~~a lower concentration of our ~~business~~ ~~from~~sales ~~August 1, 2008~~ to ~~the~~original ~~sale~~equipment manufacturers ~~date~~ of ~~December~~new ~~11,~~passenger ~~2008~~cars.

~~General~~Depreciation ~~and administrative~~ expense decreased from $~~843~~195,~~332~~376 during the ~~six~~nine months ended ~~January~~ 31April 30, 2008 to $~~285~~9,~~207~~650 in the ~~six~~nine months ended ~~January~~April 3130, 2009. The decrease was ~~primarily~~ due to asuspended ~~reduction~~depreciation inon ~~staff~~assets ~~from 2008~~held tofor ~~2009,~~sale ~~reduced~~during ~~legal~~the ~~fees,~~nine ~~lower~~months ~~stock~~ended April ~~based~~30, ~~compensation expense~~2009, ~~and~~as well as a higher value US Dollar relative to the Canadian dollar in 2008 resulting in lower US Dollar balances on ~~expenses~~depreciation ~~denominated in Canadian dollars. Additionally, results for the six months ended January 31, 2009 only reflect operations~~ of ~~our business from August 1, 2008 to the sale~~fixed ~~date~~assets ofdenominated ~~December~~in ~~11,~~Canadian ~~2008~~dollars.

~~Marketing~~Engineering, research and development expense decreased from $~~441~~1,~~792~~336,926 during the ~~six~~ nine months ended ~~January~~April 3130, 2008 to $~~187~~503,~~166~~390 in the ~~six~~nine months ended ~~January~~April 3130, 2009. The decrease was primarily due to ~~a reduction in staff from 2008 to 2009,~~ lower stock based compensation expense, lower product testing expenses, and a higher value US Dollar relative to the Canadian dollar in 2008 resulting in lower US Dollar balances on expenses denominated in Canadian dollars. Additionally, results for the ~~six~~nine months ended ~~January~~ 31April 30, 2009 only reflect operations of our business from August 1, 2008 to the sale date of December 11, 2008.

~~A foreign~~General ~~exchange~~and ~~gain~~administrative ofexpense decreased from $36893,~~737~~419 ~~was~~during ~~recognized~~the ~~for~~nine months ended April 30, 2008 to $285,207 in the ~~six~~nine months ended ~~January~~April 3130, 2009. The asdecrease ~~compared~~was primarily due to ~~$24~~a reduction in staff from 2008 to 2009,~~355~~ reduced legal fees, lower stock based compensation expense, and a higher value US Dollar relative to the Canadian dollar in 2008 resulting in lower US Dollar balances on expenses denominated in Canadian dollars. Additionally, results for the ~~six~~nine months ended ~~January~~April 3130, 2009 ~~2008.~~only ~~Foreign exchange~~reflect ~~gains~~operations ~~and~~of ~~losses~~our ~~are~~business ~~due~~from toAugust ~~fluctuations~~1, in2008 ~~currency~~to ~~exchange~~the sale ~~rates~~date of December 11, 2008.

Marketing expense decreased from $598,364 during the nine months ended April 30, 2008 to $187,166 in the nine months ended April 30, 2009. The decrease was primarily due to a reduction in staff from 2008 to 2009, lower stock based compensation expense, and a higher value US Dollar relative to the Canadian dollar in 2008 resulting in lower US Dollar balances on expenses denominated in Canadian dollars. Additionally, results for the nine months ended April 30, 2009 only reflect operations of our business from August 1, 2008 to the sale date of December 11, 2008.

A foreign exchange gain of $36,737 was recognized for the nine months ended April 30, 2009 as compared to $32,430 for the nine months ended April 30, 2008. Foreign exchange gains and losses are due to fluctuations in currency exchange rates.

LIQUIDITY AND CAPITAL RESOURCES

On December 11, 2008, we completed the Asset Sale. Since December 11, 2008, our business has consisted primarily of our plan to pursue claims against certain parties that we believe have infringed our U.S. Patent Nos. 5,231,872 and 5,335,540.

Subsequent to the Asset Sale, management does not expect that cash flow generated from Earn-Out payments and patent licensing will be sufficient to satisfy the Company’s liabilities and fund its ongoing operating expenses. At closing of the Asset Sale, YA Global Investments LP funded $762,532 in the form of the Bridge Note with an annual interest rate of 14%, to be used to pay specified post-closing administrative items. The Bridge Note is to be repaid from any future earnings of the Company.

At ~~January~~ 31April 30, 2009, we had unrestricted cash balances of $183,~~013~~199 (July 31, 2008 - $27,057), and restricted cash balances of $2,~~639~~597,~~482~~227, comprised of $2,500,000 ~~proceeds~~ proceeds from the sale of our assets that is held in escrow and $~~139~~97,~~482~~227 unspent ~~funds~~ funds advanced to us pursuant to the Bridge Note. Management projects ~~that~~ that we will require a minimum of $10.35 million and a maximum of $5455.71 million additional cash to fund our debt repayments, ongoing operating expenses and working capital requirements through ~~May~~June 3130, 2010, as detailed below.

	Estimated Range
Debt repayment (1)	$	-	$	53,~~100~~300,000
General Working Capital (2)		~~283~~465,000		1,~~575~~776,000
TOTAL	$	~~283~~465,000	$	5455,~~675~~076,000

(1)

Due to the Company’s default status, principal payments on all of our outstanding convertible debentures and preferred stock, and interest payable due within the next twelve months on these instruments, is callable in cash, or in shares at the option of the holders. Any repayment of debt is limited by the amount of cash generated by the Company after the Asset Sale.

(2) Represents (i) amounts budgeted for operations of the Company ~~after~~to ~~closing~~June ~~and May 31~~30, 2010, and (ii) estimate of required payments for operating liabilities retained by the Company after the Asset Sale, exclusive of debt.

The Company is currently in default of its outstanding convertible debentures and convertible preferred stock as outlined in the table above. Due to default, the limitations provided in the convertible debentures and convertible preferred stock that the holders may not own more than 4.9% of the Company’s outstanding shares may be waived without notice by the holders. The convertible debentures and convertible preferred stock are also callable at any time by the holders. If the holders call any amounts due, the Company does not expect to be able to pay the amounts payable under these convertible securities in cash, including any interest on such amounts and any applicable late fees under the convertible debentures. These convertible debentures are secured by all of the assets of the Company remaining after the Asset Sale.

Cash Flows for ~~Six~~Nine Months Ended ~~January~~April 3130, 2009 and 2008

Our net loss of $12,~~454~~171,~~637~~666 for the ~~six~~nine months ended ~~January~~April 3130, 2009 includes non-cash charges of $12,~~749~~544,~~686~~404 for interest and finance charges, and unrealized foreign exchange loss on financing activities of $1,~~736~~538,~~030~~066. Increases in non-cash working capital during the ~~six~~nine months ended ~~January~~April 3130, 2009 amounted to to $~~450~~380,~~352~~609. Non-cash working capital changes resulted primarily from decreases in in accounts payable and accrued liabilities ~~and prepaid expenses~~, offset by a decrease in receivables and prepaid expenses.

Net cash provided by (used in) operating activities

Net cash generated by operating activities of continuing operations was $1,~~058~~008,~~959~~427 during the ~~six~~nine months ended ~~January~~April 3130, 2009, compared to $~~256~~824,~~295~~196 during the ~~six~~nine months ended ~~January~~April 3130, 2008. The increase in cash generated in the ~~six~~nine months ended ~~January~~April 3130, 2009 was primarily due to ~~the~~higher ~~receipt~~income offrom ~~$1,490,540~~patent ~~(net of~~settlements ~~$309~~in 2009,~~460~~ ~~litigation~~and ~~expenses)~~decreased ~~received~~general ~~from~~and ~~settlement~~administrative ofexpenses ~~our~~after ~~patent~~the ~~litigation~~completion ~~case~~of ~~with~~the ~~Schrader-Bridgeport~~Asset ~~International,~~Sale ~~Inc~~in 2009.

Net cash used in operating activities of discontinued operations was $948,020 during the ~~six~~nine months ended ~~January~~April 3130, 2009, as compared to $12,~~623~~229,~~958~~898 used during the ~~six~~nine months ended ~~January~~April 3130, 2008. The decrease in cash used was caused by by lower loss from operations of the discontinued business. During the nine months ended April 30, as2009, ~~well~~the asoperations aof the discontinued business ~~decrease~~are toonly ~~inventory~~included ~~and~~in ~~increase~~the toCompany’s ~~accounts~~consolidated ~~payable~~operations ~~balances~~from ~~during~~August ~~the~~1, ~~six~~2008 ~~months~~to ~~ended~~December ~~January 31~~11, ~~2009~~2008, aswhile the ~~company~~nine ~~conserved~~months ~~cash~~ended toApril ~~reach~~30, ~~completion~~2008 reflect the operations of the ~~Asset~~discontinued ~~Sale~~business for the entire period.

Net cash used in investing activities

Net cash used in investing activities was $Nil during the ~~six~~nine months ended ~~January~~April 3130, 2009, compared to $47,209 during the ~~six~~nine months ended ~~January~~April 3130, 2008, all of which was used in the Company’s discontinued operations for acquisition of property and equipment.

Net cash provided by (used in) financing activities

Net cash provided by (used in) financing activities was ($508,~~590~~695) during the ~~six~~nine months ended ~~January~~April 3130, 2009, compared to $1,~~100~~165,000 provided during the ~~six~~nine months ~~ended~~ ~~January~~ended 31April 30, 2008. All financing activities relate to continuing operations.

During the ~~six~~nine months ended ~~January~~April 3130, 2009, we received gross and net proceeds ~~through~~ through the sale of convertible debentures as follows:

	Gross		Financing		Net
Date	Proceeds		Costs		Proceeds
August 1, 2008	$	152,500	$	26,500	$	126,000
August 15, 2008		100,000		-		100,000
	$	252,500	$	26,500	$	226,000

During the ~~six~~nine months ended ~~January~~April 3130, 2008, we received gross and net proceeds ~~through~~ through the sale of convertible debentures totaling $1,~~260~~334,500 and $1,~~100~~165,000, respectively.

During the ~~six~~nine months ended ~~January~~April 3130, 2009, the Company made cash repayment in the amount of $900,000 against outstanding principal on its $30,000,000 10% convertible debentures issued on June 23, 2005.

On December 11, 2008, YA Global Investments LP funded $762,532 through the Bridge Note with an annual interest rate of 14%, to be used to pay specified post-closing administrative items. The Bridge Note is to be repaid from any future earnings of the Company. Amounts outstanding under the Bridge Note are classified as Restricted Cash on the consolidated balance sheet. During the ~~six~~nine months ended ~~January~~April 3130, 2009, we released $~~623~~665,~~050~~305 from Restricted Cash balances to operational cash to pay specified post-closing administrative items.

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.

Financial Instruments and Concentrations of Credit Risk

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued expenses, convertible debentures, and convertible preferred stock. Management believes the carrying values of cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued expenses approximate their fair values due to their short-term nature. The fair value of convertible debentures is equal to the face value of each instrument, as a result of a default by the Company on all instruments during the year ended July 31, 2008. As a result of the default, the holders have the right to call the unpaid balance, and may waive any ownership limitations prescribed by the debenture. The fair value of the convertible preferred stock is recorded as the remaining face value of the instrument, plus cumulative, undeclared but accrued dividends.

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.

New Accounting Pronouncements

In February 2007 the FASB issued SFAS No.159, The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company adopted this pronouncement for its fiscal year beginning August 1, 2008. Adoption of this statement did not have a material impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Non controlling Interests in Consolidated Financial Statements – an amendment to ARB No.51 (“FAS 160”). This statement Amends ARB 51 to establish accounting and reporting standards for a non-controlling interest in a subsidiary and for deconsolidation of a subsidiary. This standard applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This statement may not be applied before that date. We are currently evaluating the impact of this statement.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133 (“FAS 161”). FAS 161 modifies existing requirements to include qualitative disclosures regarding the objectives and strategies for using derivatives, fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The pronouncement also requires the cross-referencing of derivative disclosures within the financial statements and notes thereto. Based on current conditions, we do not expect the adoption of FAS 161 to have a significant impact on our consolidated financial statements.

In May 2008, FASB issued SFASB No.162, “The Hierarchy of Generally Accepted Accounting Principles.” The pronouncement mandates the GAAP hierarchy reside in the accounting literature as opposed to the audit literature. This has the practical impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP hierarchy. This pronouncement will become effective 60 days following SEC approval. We do not believe this pronouncement will impact our consolidated financial statements.

In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 provides guidance on how to determine if certain instruments or embedded features are considered indexed to our own stock, including instruments similar to our convertible notes and warrants to purchase our stock. EITF 07-5 requires companies to use a two-step approach to evaluate an instrument’s contingent exercise provisions and settlement provisions in determining whether the instrument is considered to be indexed to its own stock and exempt from the application of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. Although EITF 07-5 is effective for fiscal years beginning after December 15, 2008, any outstanding instrument at the date of adoption will require a retrospective application of the accounting through a cumulative effect adjustment to retained earnings upon adoption. Management is currently evaluating the impact that adoption of EITF 07-5 will have on our consolidated financial statements.

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.

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~~April 3130, 2009). Based upon that evaluation, our Principal Executive Officer and Principal 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~~April 3130, 2009 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

On December 16, 2008, the British Columbia Securities Commission of Canada issued a cease trade order against our company for failure to file our annual financial statements and related management’s discussion and analysis as required under National Instrument 51-102.

On February 4, 2009, we were served with a Writ of Summons in the Supreme Court of British Columbia by Federal Express Canada Ltd. claiming unpaid invoices in the amount of CAD $132,443 and USD $24,337 for shipping services incurred during 2008. On February 11, 2009, we filed an Appearance with the Supreme Court of British Columbia with respect to this matter.

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

The following changes in our securities occurred during the ~~six~~nine months ended ~~January~~April 3130, 2009 and from ~~February~~May 1, 2009 to ~~May~~June 2819, 2009. Upon conversion by by the holders of various outstanding convertible debentures, we issued shares of of our common stock pursuant to Rule 506 of Regulation D under the Securities ~~Act~~ Act in satisfaction of such conversions. The shares were issued ~~pursuant~~ pursuant to Rule 506 of Regulation D under the Securities Act.

On August 1, 2008, we issued to Xentenial Holdings Limited, pursuant to Rule 506 of Regulation D under the Securities Act, for an aggregate purchase price of $152,500, a 12% convertible debenture due on or before August 1, 2011. The debenture is convertible at the lesser of $0.0573 or 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. We have paid Yorkville Advisors, LLC, a related party of Xentenial, a cash fee of $26,500 in connection with the convertible debenture out of the aggregate purchase price.

On August 15, 2008, we issued to Xentenial Holdings Limited, pursuant to Rule 506 of Regulation D under the Securities Act, for an aggregate purchase price of $100,000 a 12% convertible debenture due on or before August 15, 2011. The debenture is convertible at the lesser of $0.0573 or 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. We did not pay any fees associated with this debenture.

·	By conversion notice dated September 22, 2008, Starome Investments Limited elected to convert $6,000 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 September 26, 2008, Starome Investments Limited elected to convert $6,000 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 December 19, 2008, Xentenial Holdings Limited elected to convert $987,500 face value and $77,736 accrued interest, relating to five separate convertible debentures held by Xentenial Holdings Limited, into common shares of the Company. In response we issued 13,315,450,000 shares of our common stock pursuant to Rule 506 of Regulation D under the Securities Act. After the conversion, the Company had 19,342,461,198 common shares outstanding, of which Xentenial was the holder of 13,315,450,000, or 68.8%, of the Company’s total outstanding common shares. Upon completion of the conversion, a change in control of the Company occurred. The conversion was executed pursuant to the terms of a Voting Arrangement Agreement dated December 4, 2008 completed in connection with the sale of the Company’s tire pressure monitoring system business and related assets to Bendix CVS Canada, Inc., under which YA Global Investments LP or its affiliated companies were required to convert into a number of shares sufficient to guarantee approval by the Company’s shareholders of the sale of the Company’s tire pressure monitoring system business and related assets. Xentenial Holdings Limited is a wholly owned subsidiary of YA Global Investments LP.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

The Company is currently in default of all of its outstanding secured convertible debentures and convertible preferred stock. By virtue of the default, the holders of the secured convertible debentures and convertible preferred stock may call any unpaid balances, and may waive any ownership limitations prescribed by the debentures or convertible preferred stock.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit
Number		Description
31.1		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** +
**		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.

**		Filed herewith

+		The certification attached as Exhibit 32.1 accompanies this Quarterly Report on Form 10-Q 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.

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/ David A. Dodge David A. Dodge Interim Chief Financial Officer (On behalf of the Registrant and as Principal Financial Officer and Principal Executive Officer)

~~David A.~~Date: ~~Dodge~~June 19, 2009

Interim Chief Financial Officer

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

Date: May 28, 2009

Filing Compare · TTC Technology Corp