# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

# FORM 20-F

|    | (Mark One)                                                                                      
|--- | ------------------------------------------------------------------------------------------------
||_| | REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

||X| | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ------------------------------------------------------------------------------------

For the fiscal year ended  June 30,
2002

OR

||_| | TRANSITION REPORT PURSUANT TO SECTION 13 TO 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

For the transition period from
to

Commission File Number:  
000-30948

QI SYSTEMS INC.
(formerly Q I Technologies Corp.)
(Exact Name of Registrant as Specified in its
Charter)

Province of British Columbia, Canada
(Jurisdiction of Incorporation or Organization)

Unit 101, 3820 Jacombs Road, Richmond, British Columbia, V6V 1Y6
(Address of Principal Executive Offices)

Securities registered or to be
registered pursuant to Section 12(b) of the Act:

|Title of each class
None | Name of each exchange on which registered
Not Applicable
|------------------------ | --------------------------------------------------------

Securities registered or to be
registered pursuant to Section 12(g) of the Act:

Common shares without par value
(Title of Class)

Securities for which there is a
reporting obligation pursuant to Section 15(d) of the Act:

None
(Title of Class)

Indicate the number of  outstanding
 shares of each of the issuer's  classes of capital stock as of the close of the period
 covered by the annual report:

June 30, 2002
12,280,168 Common Shares

---

Indicate by check mark whether the
Registrant  (1) has filed all reports  required to be filed by Section 13 or 15(d) of the
Securities Exchange  Act of 1934  during the  preceding  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 | X | No | 
| | --- | - | -- | 

Indicate by check mark which
financial statement item the Registrant has elected to follow.

| | Item 17 | X | Item 18 | 
| | ------- | - | ------- | 

---

# NOTE REGARDING
FORWARD LOOKING STATEMENTS

Except for statements of historical
fact, certain information contained herein constitute forward-looking
statements, including without limitation, statements containing the words
believes, anticipates, intends, expects
and words of similar import, as well as all projections of future results. Such
forward-looking statements involve known and unknown risks, uncertainties and other
factors which may cause the actual results or achievements of the Registrant to be
materially different from any future results or achievements of the Registrant expressed
or implied by such forward-looking statements. Such factors include, among others, the
following: our history of operating losses and uncertainty of future profitability; lack
of operating cash flow, uncertainty of access to additional capital; risks associated with
the acceptance of Cash Card systems; rapidly changing technology and the high costs
associated with research and development; the development of technologies that may render
the Registrants technology obsolete; competition with companies having greater
financial and technological resources; dependence on strategic alliances to install the
Registrants Cash Card technology in the marketplace; dependence on large contracts
and concentration of customers, and changes in economic conditions. See Description
of Business  Risk Factors.

The Companys actual results,
performance or achievement could differ significantly from those expressed in, or implied
by, the Companys forward-looking statements. Accordingly, the Company cannot assure
that any of the events anticipated by the Companys forward-looking statements will
occur, or if they do, what impact they will have on the Companys results of
operations and financial condition.

Forward-looking statements are based
on the beliefs, opinions and expectations of the Companys management at the time
they are made, and the Company does not assume any obligation to update its
forward-looking statements if those beliefs, opinions or expectations, or other
circumstances, should change.

---

# TABLE OF
CONTENTS

|Item    | Heading | Page No.                                                                    
|------- | ------- | ----------------------------------------------------------------------------
|
|Item 1  |         | Identity of Directors, Senior Management and Advisers                       
|Item 2  |         | Offer Statistics and Expected Timetable                                     
|Item 3  |         | Key Information                                                             
|Item 4  |         | Information on the Registrant                                               
|Item 5  |         | Operating and Financial Review and Prospects                                
|Item 6  |         | Directors, Senior Management and Employees                                  
|Item 7  |         | Major Shareholders and Related Party Transactions                           
|Item 8  |         | Financial Information                                                       
|Item 9  |         | The Offer and Listing                                                       
|Item 10 |         | Additional Information                                                      
|Item 11 |         | Quantitative and Qualitative Disclosures About Market Risk                  
|Item 12 |         | Description of Securities Other Than Equity Securities                      
|Item 13 |         | Defaults, Dividends Arrearages and Delinquencies                            
|Item 14 |         | Material Modifications to the Rights of Security Holders and Use of Proceeds
|Item 15 |         | [Reserved]                                                                  
|Item 16 |         | [Reserved]                                                                  
|Item 17 |         | Financial Statements                                                        
|Item 18 |         | Financial Statements                                                        
|Item 19 |         | Exhibits                                                                    

---

# PART I

Item 1    
  Identity of Directors, Senior Management and Advisers

| | A.   Directors and senior management
| | ------------------------------------

| | Not Applicable
| | --------------

| | B.   Advisers
| | -------------

Not
Applicable

C.    Auditors

Not
Applicable

Item 2
     Offer Statistics and Expected Timetable

Not
applicable.

Item 3
     Key Information

A.   Selected financial data

The
following table sets forth selected financial data regarding the Registrants
consolidated operating results and financial position. The data has been derived from the
Registrants consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in Canada (Canadian GAAP).
For a reconciliation to accounting principles generally accepted in the United States (US
GAAP), see Note 13 to the Consolidated Financial Statements dated June 30,
2002. The following selected financial data is qualified in their entirety by, and should
be read in conjunction with, the consolidated financial statements and notes thereto
included elsewhere in this Registration Statement. The selected financial data is
expressed in Canadian dollars (in accordance with Canadian GAAP).

---

2

|                        | Year Ended June 30
|----------------------- | ------------------
|
|
|
|Revenue                 |                   
|General &               |                   
|Administrative Expenses |                   
|Net (Loss) from         |                   
|Continuing Operations   |                   
|Canadian GAAP           |                   
|US GAAP                 |                   
|Net (Loss) per Share    |                   
|Canadian GAAP           |                   
|US GAAP                 |                   
|Working Capital         |                   
|(Deficiency)            |                   
|Total Assets            |                   
|Total Liabilities       |                   
|Shareholders' Equity    |                   
|(Deficiency)            |                   
|Canadian GAAP           |                   
|US GAAP                 |                   
|Long-term Obligations   |                   
|Outstanding             |                   
|Number of Shares        |                   
|Dividends Declared      |                   

The
Registrant has paid no dividends on its shares since incorporation and does not
anticipate doing so for the foreseeable future. The declaration of dividends on the
common shares of the Registrant is within the discretion of the Registrants board
of directors and will depend upon, among other factors, earnings, capital requirements,
and the operating and financial condition of the Registrant.

## CURRENCY AND
EXCHANGE RATES

The
following table sets out the exchange rates for one Canadian dollar (Cdn$)
expressed in terms of one United States dollar (US$) in effect at the end of
the following periods, and the average exchange rates (based on the average of the
exchange rates on the last day of each month in such periods) and the range of high and
low exchange rates for such periods.

---

3

|US Dollars Per Canadian Dollar
|------------------------------
|
|
|
|
|
|
|Average for the Period        

The
high and low exchange rates for each month during the previous six months are as follows:

|US Dollars Per Canadian Dollar
|------------------------------
|
|
|July 2002                     
|August 2002                   
|September 2002                
|October 2002                  
|November 2002                 
|December 2002                 
|                              

Exchange
rates are based upon the noon buying rate in New York City for cable transfers in foreign
currencies as certified for customs purposes by the Federal Reserve Bank of New York. As
of June 30, 2002, the noon rate of exchange, as reported by the Federal Reserve Bank of
New York for the conversion of United States dollars into Canadian dollars was US$0.6583
(US$1.00 = CDN$1.5190). As of December 31, 2002, the noon rate of exchange, as reported
by the Federal Reserve Bank of New York for the conversion of United States dollars into
Canadian dollars was US$0.6376 (US$1.00 = CDN$1.5683). Unless otherwise indicated, all
references herein are to U.S. Dollars.

| | B.   Capitalization
and indebtedness
| | ------------------------------------

| | Not applicable.
| | ---------------

| | C.   Reasons for the offer and use of proceeds
| | ----------------------------------------------

| | Not applicable.
| | ---------------

| | D.   Risk Factors
| | -----------------

| | We have a history of losses, expect future losses and may never achieve profitability.
| | --------------------------------------------------------------------------------------

| | We have not achieved profitability and expect to continue to incur operating losses
for the foreseeable future. We incurred net losses of $966,440 in fiscal 2002, $1,066,772
in
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

4

| | fiscal
2001 and $844,508 in fiscal 2000. We expect to incur losses for the year ending June 30,
2003.
| | -----------------------------------------------------------------------------------------------------

| | As
of June 30, 2002 and June 30, 2001, we had an accumulated deficit of $9,341,770 and
$8,375,330 , respectively. We may not become profitable or able to significantly increase
our revenue. We have recently increased our operating expenses and capital expenditures
and expect further increases in operating expenses to facilitate the commercialization of
our technology over the next twelve months. We plan to increase our operating expenses to
expand our sales and marketing operations, to broaden our customer support capabilities
and to increase our administration resources. A relatively high percentage of our
expenses is typically fixed in the short term as our expense levels are based, in part,
on our expectations of future revenue. To the extent that such expenses precede or are
not subsequently followed by increased revenue, our business, operating results and
financial condition would be materially adversely affected. We will need to significantly
increase revenues to achieve profitability. Even if we do achieve profitability, we may
be unable to sustain profitability on a quarterly or annual basis in the future. It is
possible that our revenues will grow more slowly than we anticipate or that operating
expenses will exceed our expectations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We have a limited operating history in the Cash Card industry, therefore evaluation of our
future prospects is difficult to assess.
| | -----------------------------------------------------------------------------------------------------------------------------------

| | We
commenced our current business of developing Cash Card technologies in December, 1995
and, therefore, have only a limited operating history upon which an evaluation of our
business and prospects can be based. Our revenue and income potential is unproven, and as
of yet, our business model has not been fully implemented. During the last three fiscal
years, our revenue has declined from $351,613 during our fiscal year ended June 30, 2000,
to $238,810 during our fiscal year ended June 30, 2001, to $152,985 during our fiscal
year ended June 30, 2002. There can be no assurance that, in the future, we will
experience revenue growth, reverse the trend of revenue decline or ever become profitable
on a quarterly or annual basis. In view of our results of operations to date, the rapidly
evolving nature of our business and markets and our limited operating history, we believe
that period-to-period comparisons of financial results are not necessarily meaningful and
should not be relied upon as an indication of future performance. See Managements
Discussion and Analysis of Financial Condition and Results of Operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our history of operating losses and our current working capital position
makes our ability to
continue as a going concern doubtful.
| | -----------------------------------------------------------------------------------------------------------------------------------

| | We
had working capital deficits of $78,130 at June 30, 2002 and $543,698 at June 30,
2001. Our a history of losses and our current working capital position when viewed with
our plan of operation makes our ability to continue as a going concern doubtful. See
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Plan of Operation. Our financial statements do not reflect
adjustments to
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

5

| | the
carrying value of assets and liabilities, the reported expenses and balance sheet
classifications used that would be necessary if the going concern assumption were not
appropriate. If we are unable to successfully increase our revenues from our operations
or to raise sufficient capital to fund our plan of operation, we may be unable to
continue as a going concern and the value of our common shares would be materially
adversely affected.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
operating results may fluctuate.
| | ------------------------------------

| | Our
results of operations have fluctuated in the past and are likely to continue to fluctuate
from period to period depending on a number of factors, including:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
timing and receipt of significant orders,
|- |  | ---------------------------------------------

| |  | the
timing of completion of contracts,
|- |  | --------------------------------------

| |  | increased
competition,
|- |  | ----------------------

| |  | changes
in the demand for our products and services,
|- |  | ----------------------------------------------------

| |  | the
cancellation of contracts,
|- |  | ------------------------------

| |  | the
timing of new product announcements and introductions,
|- |  | ----------------------------------------------------------

| |  | changes
in pricing policies by us and our competitors,
|- |  | ------------------------------------------------------

| |  | delays
in the introduction of products or enhancements by us,
|- |  | -------------------------------------------------------------

| |  | expenses
associated with the acquisition of products or technology from third parties,
|- |  | --------------------------------------------------------------------------------------

| |  | the
mix of sales of our products and services,  seasonality of customer purchases,
|- |  | -----------------------------------------------------------------------------------

| |  | personnel
changes,
|- |  | ------------------

| |  | market
acceptance of Cash Cards, including VisaCash and Mondex,
|- |  | ---------------------------------------------------------------

| |  | the
mix of international and North American revenue, and
|- |  | --------------------------------------------------------

| |  | changes
in tax policies, foreign currency exchange rates and general economic conditions.
|- |  | -----------------------------------------------------------------------------------------

| | Changes
in these factors are beyond our control and may affect the demand for our products
and services and our results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------

| | The market for Cash Cards is not well developed and may not grow.
| | -----------------------------------------------------------------

| | The
SmartKit® project is reliant on the commercial deployment of Cash Cards by the
world banking community. The entire global development of Cash Cards is a new application
of computer technology and, as such, is very dynamic. From the consumer point of view,
the greatest benefit from Cash Cards is achieved from self-serve applications.
Consequently, diverse opportunities for use of Cash Cards in unattended devices will be a
fundamental determinant of the global success or failure of the entire concept.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
SmartKit®project involves new technology and new development. The bank Cash
Cards are a new technology and no standard practice pre-existed for their use
in either
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

6

| | attended
or unattended point of sale (UPOS) applications. While card payment systems
for applications like parking and payphones have existed, their operation is
fundamentally different from the bank Cash Cards.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Both
Visa and Mondex are modifying their specifications to better accommodate UPOS
applications and to allow for the wide diversity of UPOS devices. In addition, the smart
card technology on which the Cash Cards are based is evolving very rapidly and the design
of our terminals must advance to keep pace with the market.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since
we are unable to forecast with certainty the receipt of orders for our products and
services and our expense levels are relatively fixed and are based, in part, upon our
expectation of future revenue, if revenue levels fall below expectations as a result of a
delay in completing a contract, the inability to obtain new contracts, the cancellation
of an existing contract or otherwise, operating results are likely to be adversely
affected. As a result, net income may be disproportionately affected because a relatively
small amount of our expenses vary with our revenue. In particular, we plan to increase
our operating expenses to expand our sales and marketing operations, expand our
distribution channels, fund greater levels of research and development, broaden our
customer support capabilities and increase our administrative resources. Based upon all
of the foregoing factors, we believe that our quarterly revenue, direct expenses and
operating results are likely to vary significantly in the future, that period-to-period
comparisons of the results of operations are not necessarily meaningful and that such
comparisons should not be relied upon as an indication of future performance.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
may also choose to reduce prices or increase spending in response to competition, or to
pursue new market opportunities. If new competitors, technological advances by existing
competitors or other competitive factors require us to reduce our prices or invest
significantly greater resources in research and development efforts, our operating
results in the future may be adversely affected. There can be no assurance that we will
be able to grow in future periods or that we will be able to sustain our level of total
revenue or our rate of revenue growth on a quarterly or annual basis. It is likely that
in some future quarter our operating results will be below the expectations of public
market analysts and investors. In such event, the price of our Common Shares would likely
be materially adversely affected. See Managements Discussion and Analysis of
Financial Condition and Result of Operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The markets acceptance of and demand for our products are uncertain.
| | ---------------------------------------------------------------------

| | Demand
for, and market acceptance of, our products is subject to a high level of uncertainty due
to rapidly changing technology, new product introductions and changes in customer
requirements and preferences. The success of our products also depends upon our ability
to enhance our existing products and to develop and introduce new products and
technologies to meet customer requirements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

7

| | We
face the risk that Cash Card technology generally, and our products specifically, will
not be chosen to replace existing technology or will not otherwise achieve market
acceptance. Our success will depend upon market acceptance of our products and our
ability to enhance these products and to introduce new products and features to meet
customer requirements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Existing
demand for Cash Card products in the North America is not large enough for all the
companies seeking to engage in the Cash Card business to succeed. Current participants in
the Cash Card business rely upon anticipated growth in demand, which may not occur. The
success of the Cash Card industry depends on the ability of market participants,
including our company, to convince governmental authorities, commercial enterprises and
other potential system sponsors to adopt a Cash Card system in lieu of existing or
alternative systems. Cash Card-based systems may not prove economically feasible for some
potential system sponsors. We cannot assure you that there will be significant market
opportunities for Cash Card systems. If the expected growth does not occur, our strategy
will not be successful.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We experience lengthy sales cycles for our products.
| | ----------------------------------------------------

| | The
purchase of Cash Card readers is often an enterprise-wide decision for prospective
customers and requires us to engage in sales efforts over an extended period of time and
to provide a significant level of education to prospective customers regarding the use
and benefits of such systems. Due in part to the impact that the application of Cash Card
readers has on the operations of a business and the commitment of capital required by
such a system, potential customers tend to be cautious in making acquisition decisions.
As a result, our products generally have a lengthy sales cycle ranging from several
months to several years. Consequently, if sales forecasted from a specific customer for a
particular quarter are not realized in that quarter, we may not be able to generate
revenue from alternative sources in time to compensate for the shortfall. The loss or
delay of a large contract could have a material adverse affect on our quarterly operating
results. Moreover, to the extent that significant contracts are entered into and required
to be performed earlier than expected, operating results for subsequent quarters may be
adversely affected. See Managements Discussion and Analysis of Financial
Condition and Results of Operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We depend on large contracts and a concentration of customers.
| | --------------------------------------------------------------

| | Our
revenue is dependent, in large part, on significant contracts from a limited number of
customers. During the fiscal year ended June 30, 2002, approximately 83% of our
consolidated revenue was attributable to three customers. During the fiscal year ended
June 30, 2001, approximately 56% of our consolidated revenue was attributable to 3
customers. During the fiscal year ended June 30, 2000, approximately 89% of our
consolidated revenue was attributable to 2 customers. We believe that revenue derived
from current and future large customers will continue to represent a significant portion
of our total revenue. Our inability to continue to secure and maintain a sufficient
number of
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

8

| | large
contracts would have a material adverse effect on our business, operating results and
financial condition. Moreover, our success will depend in part upon our ability to obtain
orders from new customers, as well as the financial condition and success of our
customers and general economic conditions.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our future profitability is expected to depend on enhancements to existing products and new
products that we develop.
| | ---------------------------------------------------------------------------------------------------------------------

| | We
expect that a significant portion of our future revenue will be derived from the sale of
newly introduced products and from enhancement of existing products. Our success will
depend in part upon our ability to enhance our current products on a timely and
cost-effective basis and to develop new products that meet changing market conditions,
including changing customer needs, new competitive product offerings, new Cash Card
Schemes, and enhanced technology. There can be no assurance that we will be successful in
developing and marketing, on a timely and cost-effective basis, new products and
enhancements that respond to such changing market conditions. If we are unable to
anticipate or adequately respond on a timely or cost-effective basis to changing market
conditions, to develop new software products and enhancements to existing products, to
correct errors on a timely basis or to complete products currently under development, or
if such new products or enhancements do not achieve market acceptance, our business,
operating results and financial condition could be materially adversely affected. In
light of the difficulties inherent in software and hardware development, we expect that
we may experience delays in the completion and introduction of new products. See Business of
the Company Products.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
Cash Card products are relatively new products and have not gained wide market acceptance
to date. We face the risk generally associated with introducing new products to markets,
including high marketing costs, possible lack of market acceptance and competition with
new and existing products and technologies. There can be no assurance that the market
will accept our products or that they will be commercially successful.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We may be unable to grow and increase our competitive position.
| | ---------------------------------------------------------------

| | Our
success is dependent on our ability to grow and increase the number and complexity of our
products, the number and geographic focus of our targeted vertical markets and product
distribution channels. The total number of our employees has grown from four employees in
Canada in December, 1995 to 16 employees located in Canada in December, 2002. Our
expected growth, coupled with the rapid evolution of our markets, is expected to place
significant strains on our management, administrative, operational and financial
resources, as well as increased demands on our internal systems, procedures and controls.
There can be no assurance that we will be able to manage our growth successfully. Failure
to do so could have a material adverse affect on our business, operating results and
financial condition.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

9

| | We depend on key personnel to implement our business strategies.
| | ----------------------------------------------------------------

| | Our
performance and future operating results are substantially dependent on the continued
service and performance of our senior management and key technical and sales personnel.
Our ability to execute our business plan depends upon the continued services of Mesbah
Taherzadeh, President, Chief Executive Officer, and Craig Jones, Vice-President, Sales
and Marketing. Our ability to execute our strategic plan could be materially adversely
affected should the services of any of these individuals cease to be available to us.
None of these employees is subject to an agreement not to compete with us in the event
such employees services are terminated. We cannot guarantee that we will be able to
attract and retain key personnel in the future. Failure to attract or retain key
personnel could have a material adverse effect on our operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
intend to hire additional sales personnel in the next year. Competition for such
personnel is intense, and there can be no assurance that we can retain our key technical,
sales and managerial employees or that it will be able to attract or retain
highly-qualified technical and managerial personnel in the future. The loss of the
services of any of our senior management or other key employees or the inability to
attract and retain the necessary technical, sales and managerial personnel could have a
material adverse affect upon our business, operating results and financial condition.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our success depends upon marketing relationships.
| | -------------------------------------------------

| | Our
products are marketed by our direct field sales force as well as by resellers. Our
existing agreement with GPT International gives them the non-exclusive world-wide license
to manufacture or have manufactured our products in accordance with appropriate ISO 9000
and/or BS5750 standards in vending and pay phone applications, and may be terminated by
either party in accordance with the provisions set out in the agreement. See Description
of Business Material Contracts. GPT International is not within our control and may
also represent and sell competing products. To date we have not received any material
revenues from our licence arrangement with GPT International. There can be no assurance
that our existing resellers, including GPT International, will continue to provide the
level of services and technical support necessary to provide a complete solution to our
customers or that they will not emphasize their own or third-party products to the
detriment of our products. We also depend on our strategic relationships with Visa and
Mondex. The loss of these marketing relationships, the failure of such parties to perform
under our agreements or our inability to attract and retain new resellers with the
technical, industry and application experience required to market our products
successfully could have a material adverse affect on our business, operating results and
financial condition. We expect that we may enter into certain joint ventures in order to
facilitate our expansion into other vertical markets and geographic areas. To the extent
that such joint ventures are not successful, there could be a material adverse affect on
our business, operating results and financial condition.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

10

| | We face intense competition.
| | ----------------------------

| | Numerous
factors affect our competitive position, including price, product features, product
performance and reliability, ease of use, product scalability, product availability,
meeting customer schedules, integration of products with other enterprise solutions,
availability of project consulting services and timely ongoing customer service and
support. See Competition. We cannot assure you that competitive pressures
will not have a material adverse effect on our business and operating results.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
experience competition from a number of companies across our range of businesses,
including original equipment manufacturers, peripheral equipment manufacturers and others
that have greater resources than we do. There can be no assurance that new competitors
will not enter our business segments. Increased competition would likely result in price
reductions, reduced margins and loss of market share, any of which would have a material
adverse effect on our business and operating results.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
SmartKit® Cash Card reader fully supports Mondex/MasterCard and VisaCash
interoperability. We also anticipate the other Cash Card schemes may be developed that
compete directly with Mondex/MasterCard and VisaCash. There can be no assurance that our
systems will be compatible with such systems or that such systems will not render our
SmartKit® obsolete.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our products may contain defects could result in liability to us and have a material adverse
affect on our business.
| | --------------------------------------------------------------------------------------------------------------------

| | Cash
card reader systems, including those offered by us, may from time-to-time contain
undetected defects or may contain software errors. There can be no assurance that,
despite testing by us and by current and potential customers, defects or errors will not
be found in our products. Such defects or errors could result in loss of or delay in
market acceptance of our products, which could have a material adverse effect on our
business, operating results and financial condition.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We may be unable to protect our proprietary technology.
| | -------------------------------------------------------

| | Our
success is dependent on our ability to protect our intellectual property rights. At
present, we have no registered copyright pertaining to our software, and has no patent
protection. The absence of any registered proprietary right may limit our ability to
maintain control of trade and technology secrets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
rely principally upon a combination of trade secret laws, non-disclosure agreements and
other contractual provisions to establish and maintain our rights. As part of our
confidentiality procedures, we generally enter into nondisclosure and confidentiality
agreements with each of our key employees, consultants, distributors, customers and
corporate partners, to limit access to and distribution of our software, documentation
and other proprietary information. There can be no assurance that our efforts to protect
our
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

11

| | intellectual
property rights will be successful. Despite our efforts to protect our intellectual
property rights, unauthorized third parties, including competitors, may be able to copy
or reverse engineer certain portions of our software products, and use such copies to
create competitive products.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, because third parties may attempt to develop similar technologies
independently, we expect that software product developers will be increasingly subject to
infringement claims as the number of products and competitors in our industry segments
grow and the functionality of products in different industry segments overlaps. Although
we believe that our products do not infringe on the intellectual property rights of third
parties, there can be no assurance that third parties will not bring infringement claims
(or claims for indemnification resulting from infringement claims) against us with
respect to copyrights, trademarks, patents and other proprietary rights. Any such claims,
whether with or without merit, could be time consuming, result in costly litigation and
diversion of resources, cause product shipment delays or require us to enter into royalty
or licensing agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us or at all. A claim of product infringement against us
and failure or our inability to license the infringed or similar technology, could have a
material adverse affect on our business, operating results and financial condition.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We depend upon third party suppliers.
| | -------------------------------------

| | Certain
contracts may require us to supply, coordinate and install third party products and
services. We believe that there are a number of acceptable vendors and subcontractors for
most of our required products, but in many cases, despite the availability of multiple
sources, we may select a single source in order to maintain quality control and to
develop a strategic relationship with the supplier or may be directed by a customer to
use a particular product. The failure of a third party supplier to provide a sufficient
supply of parts and components or products and services in a timely manner could have a
material adverse affect on our results of operations. In addition, any increase in the
price of one or more of these products, components or services could have a material
adverse affect on our business, operating results and financial condition.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The market for our common shares has been volatile in the past, and may be subject to
fluctuations in the future.
| | -----------------------------------------------------------------------------------------------------------------

| | The
trading prices of the Common Shares have been subject to wide fluctuations since trading
of our shares commenced in March, 1978. The market price of our shares has ranged between
US$0.85 and US$0.10 per share on the TSX Venture Exchange (the TSX) and
between US$1.30 and US$0.16 on the OTCBB (January 1, 2002 to December 31, 2002). See
Nature of Trading Market. There can be no assurance that the market price of
the Common Shares will not significantly fluctuate from our current level. The market
price of the Common Shares may be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or new
products by the Company or our competitors, changes in financial
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

12

| | estimates
by securities analysts, or other events or factors. In addition, the financial markets
have experienced significant price and volume fluctuations for a number of reasons,
including the failure of the operating results of certain companies to meet market
expectations that have particularly affected the market prices of equity securities of
many high-technology companies that have often been unrelated to the operating
performance of such companies. These broad market fluctuations, or any industry-specific
market fluctuations, may adversely affect the market price of our Common Shares. In the
past, following periods of volatility in the market price of a companys securities,
securities class action litigation have been instituted against such a company. Such
litigation, whether with or without merit, could result in substantial costs and a
diversion of managements attention and resources, which would have a material
adverse affect on our business, operating results and financial condition.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Broker-dealers
may be discouraged from effecting transactions in our shares because they are considered
a penny stock andare subject to the penny stock rules.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Rules
15g-1 through 15g-9 promulgated under the Exchange Act impose sales practice and
disclosure requirements on certain brokers-dealers who engage in certain transactions
involving a penny stock. Subject to certain exceptions, a penny stock
generally includes any non-NASDAQ equity security that has a market price of less than
$5.00 per share. The market price of our shares has ranged between US$0.85 and US$0.10
per share on the TSX and between US$1.30 and US$.16 on the OTCBB (January 1, 2002 to
December 31, 2002), and our shares are deemed penny stock for the purposes of the
Exchange Act. The additional sales practice and disclosure requirements imposed upon
brokers-dealers may discourage broker-dealers from effecting transactions in our shares,
which could severely limit the market liquidity of the shares and impede the sale of our
shares in the secondary market.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the penny stock regulations, a broker-dealer selling penny stock to anyone other than an
established customer or accredited investor, generally, an individual with
net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000
together with his or her spouse, must make a special suitability determination for the
purchaser and must receive the purchasers written consent to the transaction prior
to sale, unless the broker-dealer or the transaction is otherwise exempt. In addition,
the penny stock regulations require the broker-dealer to deliver, prior to any
transaction involving a penny stock, a disclosure schedule prepared by the United States
Securities and Exchange Commission relating to the penny stock market, unless the
broker-dealer or the transaction is otherwise exempt. A broker-dealer is also required to
disclose commissions payable to the broker-dealer and the registered representative and
current quotations for the securities. Finally, a broker-dealer is required to send
monthly statements disclosing recent price information with respect to the penny stock
held in a customers account and information with respect to the limited market in
penny stocks.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

13

# Item 4
    Information on the Registrant

A.    History
and development of the Registrant

The
name of the Registrant is QI Systems Inc.

The
Registrant was incorporated on July 4, 1978 under the name Jewel Resources Inc. by
registration of its Memorandum and Articles under the Company Act (British
Columbia). The Registrant was initially engaged in natural resource exploration. In the
late 1980's the Registrant changed its business strategy and began to pursue its
current mission of developing, marketing and selling technology related products. The
Registrant subsequently changed its name to Wkay Resources Inc. on December
2, 1987, and to Magnatron International Corp. on October 18, 1990. Effective
March 17, 1994, the Registrant changed its name to QI Technologies Corp. and
effective May 25, 2001, the Registrant changed its name to QI Systems Inc.

On
December 15, 1999, the Registrants shareholders approved a forward split or
subdivision of its common shares on a one (old) for two (new) common shares basis. All
references to the Registrants common shares in this Annual Report gives effect to
the forward split.

The
Registrant designs hardware and software for the expanding electronic cash industry. The
Registrants products include its SmartKit® reader, which the Registrant has
configured for a variety of applications, and Qlink®, a handheld computer data
retriever used with the SmartKit® readers. See Our Products.

The
Registrant is a reporting issuer in Canada under the Securities Act(British
Columbia) and the Securities Act(Alberta). The Registrants Common Shares
are publicly traded in Canada (since May 9, 1979) on the TSX Venture Exchange (the TSX)
under the symbol QII.U, in the United States (since May 23, 2001) on the
OTCBB under the symbol QIIIF and in Germany on the Berlin Stock Exchange
under WKN# 865679. On May 29, 2001 the Canadian Venture Exchange (the CDNX)
was acquired by the Toronto Stock Exchange and changed its name to TSX Venture Exchange
(the TSX). The CDNX and TSX are collectively referred to herein as the TSX)

The
Registrants principal business office is located at:

Unit 101, 3820 Jacombs Road
         Richmond, British Columbia
         V6V 1Y6
         Tel: (604) 248-2301

The
registered and records offices are located at:

1040-999 West Hastings Street
        Vancouver, British Columbia, V6C 2W2

---

14

Tel:
(604) 683-1102

We,us, our, the
Company and the  Registrant, as the context requires, refers to
QI Systems Inc.

B.   Business
overview

The
Registrant, QI Systems Inc., is a British Columbia corporation. The Registrant develops,
markets and sells hardware and software for electronic cash self-serve payment Cash
Cardsystems being developed and introduced by major financial institutions such as
Visa International and Mondex/Mastercard. See Our Products. Cash Cards have
data storage capabilities that allow consumers, who purchase the cards in advance, to
purchase goods and services from vending machines, copier machines, transit systems,
laundromat machines and other machines that have Cash Card readers.

The
Registrants primary product is its SmartKit®Cash Card reader, which
enables Cash Card payments to be accepted in a wide range of vending and self-serve
machines. The Registrants SmartKit®Cash Card reader is a fully
developed product that supports multiple Cash Card schemes, including Mondex/Mastercard
and VisaCash Cash Cards, the principal Cash Card schemes. See Our Products.

In
a Cash Card transaction, the Registrants SmartKit® Cash Card reader
validates the Cash Card, displays the balance, deducts the amount of the transaction from
the card, then displays the remaining balance. The Registrant offers its SmartKit® for
factory installation in new equipment or in kits that can be installed in existing
machines in the field. SmartKit®consists of a custom computer and a custom
smart card interface in a steel or plastic enclosure designed for quick installation in
the vending machine. The Registrant has developed several variations of our SmartKit® readers,
including:

SmartKit®II,
a card acceptor, a user keypad and a back-lit liquid crystal display; SmartKit® Laundry,
a system that allows Cash Card payment at individual machines in a laundry facility; and
SmartKit® for newspaper vending machines.

The
Registrant has also developed Qlink®, a hand-held computer data retriever that
allows data to be downloaded from SmartKit®readers. The Registrants
SmartKit® and Qlink® systems are currently being used in commercial
applications throughout the world. See Our Products.

In
1997, the Registrant began installing and testing its first SmartKit Cash Card
reader in commercial applications. Since that time, the Registrants SmartKit Cash
Card readers have been installed in over 2,250 machines that accept smart card payments.

---

15

The
Registrant is currently pursuing product roll out opportunities by participating in the
pilot programs of VisaCash and Mondex and by marketing its cash card readers for
proprietary applications. See Status of Our Product Rollout.

Set
forth below is a description of the general development of the Registrants business
for each of the past three fiscal years ended June 30, 2002.

Fiscal 2000

During
fiscal 2000, the Registrant focused its business efforts on marketing and commercializing
its SmartKit® Cash Card reader and QLink®technologies. The Registrant is
also continuing its development efforts.

During
fiscal 2000, the Registrant achieved the following milestones in the development and
commercialization of its SmartKit® Cash Card reader and QLink®technologies:

| |  | In
August 1999, Mondex Canada Association launched an electronic cash test program in
Sherbrooke, Quebec, in which more than 600 merchants in six municipalities participated.
Mondex Canada Association coordinated the installation of cash card readers designed to
accept Mondex electronic Cash Cards in automated teller machines (ATMs), electronic cash
machines and vending machines, photocopiers, printers and other self-serve devices. In
connection with the Sherbrooke Mondex test program, the Registrant installed 288 SmartKit®cash
card readers in vending and laundry machines; a majority of these installations involved
the installation of the Registrants SmartKit®reader in existing
machines. These SmartKit®cash card readers were purchased for approximately
$1,000 each, and are still in use. Although the Registrant continues to market its
SmartKit®cash card readers in the Sherbrooke region, there can be no
assurance that it will sell or install additional SmartKit®cash card readers
in that region.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
November 1999, the installations of the Registrants SmartKit®readers
surpassed 1,000 units. The Registrants SmartKit®readers are now in use
in Europe, the United Kingdom, the United States and Canada. The Registrant has installed
SmartKit®readers in approximately 175 Coca-Cola and 80 Pepsi vending
machines, 110 coffee machines, 150 snack and sandwich machines, 400 laundromat machines
and in 140 various other applications including copiers and newspaper vending boxes.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On
 December 15, 1999, the Registrants shareholders approved a forward split or
subdivision of its common shares on a one (old) for two (new) common shares basis. All
references to the Registrants common shares in this Annual Report gives effect to
the forward split.

| |  | In
February 2000, the Registrant was retained by Pepsi Cola Venezuela to incorporate the
necessary software changes to its SmartKit®cash card reader in order to
support the cards issued by the Venezuela National Telephone Company. In the fourth
calendar quarter 2000, the Registrant completed the software changes necessary to support
acceptance of
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

16

| |  | the Venezuela
National Telephone Company cash cards, and the Registrant delivered 26 SmartKit®cash
card readers to Pepsi Cola Venezuela for $14,300 in connection with this transaction. The
Registrant anticipates that it may install additional SmartKit®cash card
readers in Pepsi vending machines during its fiscal year ending June 30, 2002; however,
the Registrant has not received any additional orders for SmartKit®cash card
readers and it has no agreement with Pepsi Cola Venezuela to deliver additional SmartKit®cash
card readers.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Also
in February 2000, the Registrant was retained by Slim Line Design and Rothmans, Benson
Hedges Inc. to develop SmartKit®control systems that would limit the sale of
tobacco products to authorized individuals. In May 2000, the Registrant received an
initial purchase order from Slim Line Design and Rothmans, Benson Hedges Inc. to supply
250 SmartKit®control system readers at $310 each. The Registrant delivered 50
SmartKit®control systems in the fourth calendar quarter 2000, and delivered
the balance of the purchase order during 2001. The SmartKit®control system
will allow staff members with identity badges that incorporate smart card technology to
purchase tobacco products and will allow the user to monitor and maintain records of
sales facilitated using the SmartKit®control system.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
May, 2000, the Registrant announced that it became an official member of the MULTOS
Global Supplier Network and that its SmartKit®products received official
certification for use with the MULTOS Cash Card operating system, which allows its
SmartKit®products to accept MULTOS Cash Cards. MULTOS is a secure,
multi-application smart card platform that is an openly licensed specification, which
allows developers to write and develop a number of smart card applications for the
platform, including security, payment, control and access applications. Products that use
the MULTOS platform must be certified by the MULTOS consortium, which is a cross-industry
organization that includes among its members, Motorola, Siemens, Hitachi, Gemplus, Mondex
International and MasterCard International. There are several hundred members of the
MULTOS Global Supplier Network, including several manufacturers such as SCM Microsystems,
Gemplus, Utimaco, Towitoko Electronics, Philips Electronics, Activcard, Coincard and
PubliCARD. Some of the members of the MULTOS Global Supplier Network develop products
that compete directly with the Registrants SmartKit®products.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
June, 2000, the Registrant was retained by CALE Parking Equipment Inc. of Saint-Lambert,
Quebec, to design and develop a MULTOS Cash Card payment system for use with their CALE
MP-102 Pay and Display Ticketing Machine. The CALE ticketing machine, installed with the
SmartKit®Cash Card reader was successfully demonstrated at the IPI Exhibition
Show in Fort Lauderdale, Florida in May, 2000. The Registrant has since installed its
SmartKit®Cash Card reader in 8 CALE ticketing machines, which are in use.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Registrant financed its operations during fiscal 2000 through funds received from the
exercise of stock options for  aggregate proceeds of
$1,020,128. See Managements Discussion

---

17

and Analysis of Financial  Condition
 and Results of  Operations-Overview.  The  Registrant  incurred a loss of $844,508
 during fiscal 2000.

During
fiscal 2000, the Registrant implemented a strategy to shift its focus from research and
development to marketing and sales in an effort to increase revenues and brand
recognition. The Registrant anticipated it would continue to incur losses during its
fiscal year ended June 30, 2001. The Registrant continues to seek additional financing.

Fiscal 2001

During
fiscal 2001, we continued to focus our business efforts on marketing and
commercialization of our SmartVend suite of products. Bank Card programs such as VisaCash
and Mondex slowed their activity in North America but the Registrant continued to support
the two pilots still going strong in Barrie, Ontario and Sherbrooke, Quebec. The
Registrant shifted its efforts not only to continue working with bankcard schemes but
also to integrate with selected proprietary smart card schemes.

During
fiscal 2001, we achieved the following milestones in the development and
commercialization of our SmartVend suite of products:

| |  | September,
2000  The Registrants new Secure Delivery System (SDS) product was introduced
at the ACT CANADA tradeshow in Toronto, Canada. Using the Registrants SmartKit® hardware
and technology, the Registrant designed a secure environment for the tracking and
distribution of equipment and supplies. SDS can be used with any Smart Card System and
works with all modern vending machines. SDS allows for endless applications for product
disbursement control and tracking items such as industrial shop supplies, office supplies
and drug and pharmaceutical products. Attendees at the show while using the SDS smart
card to access specific items in the machine were also introduced to the Registrants
new Smart Card. The addition to the Registrants product line enables the Registrant
to be a Solutions to Smart Card vendingprovider. The Registrant has SDS
solution installed in tool cribs at Bromley Mechanical Services Ltd., Medicine Hat,
Alberta. Bromley uses the SDS technology to manage employee use of construction supplies
such as grinding tools, safety goggles and various other industrial parts and tools.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Dismach
Snacks and Drinks retained the Registrant as their preferred supplier of smart card
terminals for installation in their snack and beverage vending machines. Dismach, a
Venezuelan company with headquarters in Caracas, distributes snack and beverage machines
to university and corporate campuses. Dismach imports all machines from leading USA and
Italian suppliers. All vending units will be fitted with the registrants SmartKit® readers
that are designed to accept Mondex, VisaCash and the Registrants own proprietary
card schemes.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | October,
2000  The board of directors accepted the resignation of Mr. James D. Roberts as
President and CEO, for health reasons. At the same time, the board appointed Mr.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

18

| |  | Craig Jones
as acting  President  and CEO.  Mr.  Roberts  continued  to serve as  Chairman of the
Board and a director of the                   Registrant until March 31, 2001.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | November
2000  The Mondex Canada electronic cash implementation marked its first year of
operations in the Sherbrooke region. The developments and breakthroughs made locally over
the previous twelve month period set standards for future implementations of Mondex
e-cash and other smart card applications around the world. As part of the Mondex
Sherbrooke program, the Registrants products have been used successfully in the
Sherbrooke, Quebec region for over a year. The Registrants SmartKit® used in
this program is installed in vending machines, laundry machines, and pay-and-display
parking ticket dispensers.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | December
2000  The Registrant was retained by Morehouse Engineering Inc. of Hopewell, New
Jersey, USA to develop a rural water delivery system using the Registrants readers
and smart cards for use in rural communities in South East Asia. Field prototypes were
shipped later that month.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
Registrants readers and smart cards purchased by Aurora Bar Code are being used in
a rural bulk water delivery system in the city of Dawson Creek, British Columbia, Canada.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
Registrant announced the signing of a Letter of Intent with TELUS Communications Inc. (TELUS)
of Burnaby, British Columbia which documents the intention of both parties to work
towards the establishment of a more permanent binding agreement in the form of a
Strategic alliance to develop and implement smart card systems, programs and
applications. TELUS and the Registrant are working together to ensure that smart card
technology is successfully implemented throughout Canada. The companies are working
cooperatively to provide customers with the most comprehensive smart card system
solutions available.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | January
2001  The Registrant announced that a Norwegian soft drink bottler has retained the
Registrant to supply Mondex enabled QI payment terminals for their vending machines.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | March
2001  Mondex Venezuela commenced rolling out their cash cards. The rollout focused
on select corporate and university campuses. The Registrant is proud to have played an
active role in both of these developments. Initial purchase orders were received from
Pepsi Venezuela, and two of the Mondex member banks.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
Registrant also entered into discussions with a number of universities on how to expand
the Mondex Student Card to include not only soda, coffee and snack vending services, but
also such services as photocopiers, access control, laundry, parking and printer control.
Inquiries have also been received as to a smart card rollout in Chile using the QI
reader.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

19

| |  | TELUS
at Comdex Canada West 2001 in Vancouver, British Columbia, Canada displayed the Registrants
SmartVend payment devices from March 13  15, 2001.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | April,
 2001 - Mr. James D.  Roberts  resigned as Chairman and  director  due to health
 reasons.  Mr.  Douglas C. Brazier was          appointed as Chairman of the Board.  Mr.
Mesbah Taherzadeh was appointed as President and Chief Executive Officer.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | May,
2001  The common shares of the Company began quotation on the NASD OTCBB (Symbol
QONEF) on May 23, 2001. In order to better reflect the true nature of the Registrants
business as it is today, the Registrants name was changed to QI Systems Inc. and a
new TSX trading symbol of QII and a new OTCBB trading symbol of QIIIF was adopted to
reflect the name change.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Fiscal 2002 and six months ending
December 31, 2002

During
fiscal 2002, we continued to focus our business efforts on marketing and
commercialization of our SmartVend suite of products. Bank Card programs such as VisaCash
and Mondex slowed their activity in North America but the Registrant continued to support
the pilot in Barrie, Ontario. The Registrant shifted its efforts not only to continue
working with bankcard schemes but also to integrate with selected proprietary smart card
schemes. During fiscal 2002, we achieved the following milestones in the development and
commercialization of our SmartVend suite of products and the general development of the
Company:

| |  | In
July 2001 the Company was retained by one of British Columbias leading universities
to supply and install a major campus Smart Card Solution that incorporate QIs suite
of SmartVend devices. Also, in July 2001, the Company obtained the approval of the TSX
for trading its listed common shares in US $.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
September 2001, the Company negotiated a Private Placement for a total of 625,000 shares
in the capital stock of the Company at $0.40 per share to net the treasury an aggregate
of $250,000. Also, in September the Company announced that in a joint venture contract
with TELUS, it has developed Smart Card Payment Terminals that can meet The Corrections
Services market in Canada. The first installation were successfully installed at the
North Fraser Pre-Trial Centre in Port Coquitlam, B.C., Canada. The Company also announced
that in a joint venture contract with Cardlogix, of Irvine, California, they developed a
handheld value reload system which allows a merchant to load e-cash to a City of San
Diego issued parking meter smart card.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
November 2001, the Company announced the appointment of Mr. Billy Gene Parker Jr. to the
Board of Directors.
|- |  | ---------------------------------------------------------------------------------------------------------------

| |  | In
December 2001, the Company announced that it was been retained by a major San Francisco
based system integrator and consulting company to develop and incorporate their SmarTe
Campus Solution into QIs Unattended Point Of Sale(UPOS) payment terminals for two
large college campuses in Northern California with a total student body of
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

20

| |  | approximately 50,000.
The Company also announced that it has been retained by a major Canadian based food
service company, servicing hospitals in Ontario and Quebec to develop, design and install
its SmartVend solution system into its entire operation.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
January 2002, the Company was selected by a major American newspaper chain, to develop,
design and install two versions of a battery operated Unattended Point Of Sale (UPOS)
payment terminal for use in specially designed newspaper-vending boxes located at select
university campuses. Also in January the Company announced the completion of a
private placement for a total of 45,454 common shares in the capital stock of the Company
at $0.44 per share to net the treasury an aggregate of $20,000.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
February  2002 the Company  announced  that it had retained  Porter,  LeVay &
 Rose,  Inc.
 (PLR) as its investor  relations firm.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------

| |  | Also
in February 2002 the Company announced a partnership with JAYD LLC of Mason, Ohio to
develop and integrate its Setec chip-based e-purse application into QIs Suite of
Unattended Point Of Sales Payment Terminals and other ancillary equipment. The Setec
purse is recognized as one of the worlds leading proven e-purse applications.   As
a result of this QI was awarded a supply contract for providing its Smart Card Hybrid
Payment Terminals and other related equipment for use and installation by a large
metropolitan transit authority in the United States. This is an ongoing project with the
estimated value of up to $2 million for the implementation of its 2nd. and 3rd,
phase. The Registrant still hopes to complete the proposed 2nd and
third phase, however to date, no firm order has been received.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
March 2002 the Company announced that the University of Northern British Columbias
(UNBC) campus-wide smart card automation system, has been completed, making it British
Columbias first university to convert from a magnetic stripe-based card system to a
smart card system. This contract followed the Companys contract for installation of
its UPOS payment terminals at two large college campuses in Northern California in soda
and snack vending machines, copiers, network printing, pay and display parking and value
reload stations. The Registrant was optimistic that its terminals will be installed into
six additional colleges in California by the end of 2002, thus executing on its strategy
of aggressively pursuing the high-growth campus target market. However due to unforeseen
events in market conditions, the Registrant was unable to completely meet its goals of
installing on those campuses. But the Registrant is still optimistic that the project
will expand into the new campuses in the years 2003, 2004.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
May 2002 the Company announced that it has negotiated a private placement for a total of
4,000,000 units, each unit comprised of one common share and one non-transferable share
purchase warrant, in the capital stock of the Company at $0.30 per unit. One Warrant will
entitle the holder to purchase one additional common share of the Company for a period of
two years from the date of the initial purchase at $0.40 per share. This placement closed
in July, 2002 for 3,550,000 units and 200,000 common shares. Wolrige Mahon was first
appointed auditor of the Company on May 7, 2002.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

21

| |  | In
May 2002 the Company  announced  that Mr.  Richard  Murray,  P.Eng.  has  re-joined  the
 management  team of QI Systems Inc. as the          Director of Business Development and
Marketing.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
June 2002 the Company announced that it has received a firm purchase order from Mount
Royal College of Calgary, Alberta, for two Value Reload Stations, and eighteen UPOS
payment terminals for laundry machines. Also, the Equity Fund Management (EFM) group
advised QI Systems that the Northern California College has entered into the second phase
installation of the Value Reload Stations, and UPOS Payment Terminals for soda vending
machines, network printers, and pay and display parking machines. QI anticipates that
between 150 to 200 SmartVend devices would be installed in the second phase of the
project. The above orders were part of a $530,000 (Cdn$800,000) backlog of sales orders
still to be filled by the Company during 2002. However due to delays in implementation,
some of this backlog has is expected to be implemented in fiscal 2003.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
late July 2002 the Company announced that had received further orders for equipment from
several clients. As part of the 2nd phase installation, EFM ordered 6 more Value reload
stations, 6 UPOS Payment Terminals for photocopiers, and 20 UPOS Payment Terminals for
installation into the Coke Vending Machines at the California College Campuses. The City
of Dawson Creek, British Columbia, expanded its Smart Water Distribution Centers by
ordering 4 more Smart Water Distribution Systems and 500 more Smart Cards. USAToday News
Paper expanded its Smart Card vending boxes at three more Eastern US University Campuses
by ordering more than 40 UPOS Payment Terminals for installation in those campuses.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
late September 2002 the Company announced that the Company was receiving purchase orders
on a regular basis for equipment from several of its clients. It was also
announced that the Company had completed the development and integration of the Jayd/
Setec Card Scheme into its equipment.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
October 2002 the Company announced that the appointment of Mr. Matthew Yugovich to its
Board of Directors and that he brings over 30 years of valuable business management
experience to the Board. He is the president of Great Western Adventures Inc. in the
State of Texas. The Company also announced that it had negotiated a Private Placement for
a total 333,333 units, each unit comprised of one common share and one non-transferable
share purchase warrant in the capital stock of the Company at $0.30 per unit to net the
treasury an aggregate of $100,000. One Warrant will entitle the holder to purchase one
additional common share of the Company for a period of two years from the date of the
initial purchase at $0.40 per share. The placement closed in December 2002.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On
October 30, 2002 Mr.  Craig R. Jones joined the Board of  Directors.  Mr.  Jones was, at
the time of his  appointment,  the          Company's Vice-President, in charge of the
Sales and marketing Division.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
December 2002 the Company announced that it continued to improve its market position by
strengthening strategic relationships with firms who have international reach.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

22

| |  | The example
was an additional request from CALE Parking of Quebec, Canadian affiliate of CALE Sweden
a company with products in over 35 countries throughout the world.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
January 2003 the Company announced that it received an order from British Columbias
Slim Line Design LTD. for providing 140 SmartVend(TM) devices as part of an agreement to
supply one of Canadas largest cigarette manufacturers with a controlled
dispensing systems. This was further evidence of the Companys foothold in the niche
market for Controlled Dispensing Systems which are gaining acceptance by the tobacco
industry due to some government regulations that require cigarette manufacturers to
ensure minors are not able to purchase tobacco from food and beverage servers. Also in
January the Company announced that it received an order from a city in State of Colorado
to design, manufacture and deliver a Smart Water Dispensing Kiosk for the sale of bulk
water. This Smart Water Dispensing Kiosk is to replace their present self serve bulk
water coin operated system.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We have incurred
approximately $6 million over the past five years researching, developing, marketing and
selling its SmartKit® and Qlink® products.

We have not been
subject to any bankruptcy, receivership or similar proceedings.

Status of the Registrants
Product Rollout.

The
Registrants general product roll out strategy has been to participate in the pilot
programs of the two major cash card bank platforms, VisaCash and Mondex, and to market
its cash card readers for proprietary applications.

| | VisaCash
and Mondex Roll Out Strategy: The Registrants SmartKit Cash Card readers have
been installed in VisaCash and Mondex pilot programs in Canada, the United States,
Norway, England, Scotland and Venezuela. As a result of these pilot programs, it has had
discussions with banks in Mexico, Chile, Brazil, Costa Rica, Korea, Singapore,
Philippines and South Africa to participate in VisaCash and Mondex pilot programs in
those countries. The Registrants goal is to position itself as a preferred provider
of VisaCash and Mondex cash card readers in the countries in which VisaCash and Mondex
are introduced. The Registrant cannot assure you that VisaCash and Mondex will gain the
global acceptance or that it will successfully market its products to purchasers of cash
card readers. To date, the Registrant has installed approximately 1,250 SmartKit Cash
Card readers in VisaCash and Mondex pilot programs and anticipates that it will
participate in pilot programs in Chile, Korea, Taiwan, Venezuela, the Philippines and
South Africa during 2003 and 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Proprietary
System Platform Strategy: Proprietary systems are systems that accept payment only
from smart cards issued by a specific organization. Examples of proprietary systems
include laundry systems, newspaper vending systems, parking systems, university campus
systems (for copiers, vending machines, printers, libraries, etc.), telephone card
systems, tobacco dispensing systems, bulk water dispensing systems
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

23

| | and
other systems that accept smart card payments from cards issued by the organization. The
Registrant has installed or has arrangements to install its SmartKit Cash Card readers in
a variety of proprietary system applications, including the applications for the
following organizations:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|  | 
|- | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 

To
date the Registrant has installed approximately 3500 SmartKit Cash Card readers in
proprietary system applications in Canada, the United States, Venezuela, Norway and
England. . The Registrant is actively pursuing opportunities to install its SmartKit® Cash
Card readers in additional proprietary system applications, primarily to the types of
organizations in which it has completed successful installations. The Registrant cannot
assure you that the market for proprietary systems will develop into a commercially
viable opportunity for it or that it will successfully compete against competitors that
offer competing smart card reader systems.

---

24

# Our Products

We
design hardware and software for electronic cash applications, including the SmartKit® card
reader, a product for unattended point of sale transactions using the VisaCash and the
Mondex open system card payment schemes and proprietary Cash Card systems, and QLink®,
a handheld computer data retriever for use with the SmartKit® readers. Set forth
below is a description of our products.

SmartKit®

SmartKit® is
a payment control system that allows Cash Card payments to be accepted in a wide range of
vending machines. SmartKit®has been certified by VisaCash and Mondex, the
principal card schemes, and proprietary cash card systems, for use with their Cash Cards.
Both organizations have established stringent testing requirements, before a device is
certified for use with their Cash Cards.

Our
SmartKit®Cash Card reader system is designed to handle multiple Cash Card
schemes. The SmartKit®reader currently being tested in markets throughout
North America and Europe works with as many as four different Cash Card schemes.

Designed
for ease of use, Smart Kit®features a card acceptor, a user keypad and a
crisp back-lit Liquid Crystal display. SmartKit®will validate the Cash Card
and authorize the transaction in about two seconds, the message SELECT PRODUCT advises
the customer to make a selection. The card balance before and after the transaction may
be displayed, depending on the Cash Card scheme specifications.

SmartKit® is
offered in kit form for field installation in existing machines or for factory
installation in new equipment. SmartKit®consists of a custom computer and a
custom smart card interface in a steel enclosure designed for quick installation in the
vending machine. A moulded front panel with display and push buttons attaches to the
front and provides a standard user interface for all installations. SmartKit® installs
in a knock out panel provided for bill acceptors. A standard configuration for these
panels has been adopted by nearly all equipment manufacturers. SmartKit is designed to
support the three standards. The kit is shipped with different interface cables for the
different internal standards.

Installation
of SmartKit®is simple. The removable panel on the machine is typically held in place
by four nuts accessible from within the machine. When the panel is removed, SmartKit®is
installed in the opening using the same four nuts. SmartKit®interface cables are
provided with male and female plugs to fit the coin changer interface in the machines.
Using the appropriate interface harness, the installer unplugs the coin acceptor from the
machine and plugs SmartKit®in its place. The coin changer is then plugged into the
female connector on the SmartKit®harness.

---

25

We
are establishing relationships with major equipment manufacturers with the objective of
having the SmartKit®both installed on the factory floor and distributed
through factory sales channels.

SmartKit® II

SmartKit® II
was engineered specifically for vending machine applications and capitalizes on the
modular design of our latest generation of Cash Card payment systems. The modular
configuration of SmartKit®products enables us to offer cost effective,
flexible and scaleable Cash Card solutions for a greater number of markets. Features such
as loyalty program capability are tailored to meet the requirements of individual
clients, from Original Equipment Manufacturer (OEM) to Route Operator.

SmartKit® II
features a card acceptor, a user keypad and a back-lit liquid crystal display. Cash Card
transactions are quick and simple. Like SmartKit®, SmartKit®II
will validate the Cash Card and authorize the transaction in just a few seconds.
Depending on the card specification chosen, the card balance before and after the
transaction is easily displayed.

Integrating
Cash Card payment with existing payment options, SmartKit®II installs in almost all
vending machines. The use of multi-board architecture has enabled us to configure board
components compatible with current, custom and future requirements for power supply,
software, data-storage and communications needs.

SmartKit® wide
system compatibility and simple future upgrading or expansion should the support of
additional card schemes be required. SmartKit®II supports VisaCash, Mondex and
additional Cash Cards, including proprietary card systems.

Qlink®

Qlink®is
a palmtop computer linking VisaCash Card accepting devices with host
computers and or the VISA Concentration Point. Our SmartKit®and other card accepting
devices (CADs) without the need for telecommunications.

Until
recently, VisaCash installations have required phone or radio communications to each CAD.
For many applications the expense was prohibitive. Networks generally reduce costs when
similar CADs are clustered in close proximity. Where operators need to communicate with
various types of CADs, networking may not be successful. Also, applications like vending
frequently have scattered machine locations, making networking impractical.

Qlink® offers
a solution to these obstacles. It collects data from one or many CADs and stores the
files for later transmission to Visa. When connected to a modem, Qlink® dials
the VISA Concentration Point (CP) and transmits the data collected from each
CAD. The CP returns updated information for each CAD via Qlink®during the
next data collection session at the CAD.

---

26

Qlink®can
communicate with and handle data from various types of CADs. It can store data from over
100 CADs spread over any distance. When connected with the Visa CP it presents the CADs
as stations on a network.

Qlink®is
part of the QLink Management System (QMS). The system is designed to provide
enhanced control and reporting for VisaCash merchants. CADs in unattended devices, such
as vending machines, currently offer little direct reporting to the merchant. QMS
provides merchants with CAD supervision capabilities.

Qlink® allows
direct reporting of the value of each VisaCash upload from each CAD. It also reports the
value of any re-transmission of old data when CADs re-send files per the VisaCash
specification. Reports can be viewed on the Qlink®screen and can be printed.

Qlink®can
communicate with a CAD either through a standard serial port or through the CAD Smart
Card reader. For some applications, such as laundry machines, communication through the
Smart Card reader is more convenient than internal serial port access. Even in standard
point of sale applications, data access through the reader can be the most practical
approach. For these cases, Qlink®works with our Smartlink paddle, which is
inserted in the Smart Card reader and permits data access through the reader.

Qlink® consists
of our Qlink hand-held software running on a Hewlett Packard 200 LX palmtop computer
together with a modem, cables and connectors as necessary for communications with CADs
and with Visa CPs.

SmartKit® Laundry

The
SmartKit®Laundry (SKL) system allows Cash Card payment at
individual machines in a laundry facility. Approved for use with Mondex and VisaCash, SKL
can be integrated into most modern laundry machines. Support for custom or proprietary
card systems is also available.

Laundry
is one of the foremost unattended point-of-sale applications where Cash Card payment
offers major advantages over traditional payment methods. Laundry facilities,
particularly in apartment buildings, are vulnerable to damage by thieves attempting to
access cash. This creates revenue loss and repair costs for machine operators and causes
frustration for customers. Card payment can eliminate these problems.

Cash
Card transactions are quick and simple. They dispense with the need for exact change and
coin collection. Using on-line credit and ATM accounts, Smart Card re-valuation may be
done electronically making laundry facilities cashless and revenues secure. This makes
payments convenient, improves security and increases customer satisfaction.

SKL
is part of the SmartKit®modular system of electronic Cash Card payment
products. Other devices which share the payment module include vending machine kits and
OEM kits for applications such as payphones and newspaper vending. Using SmartKit®products,
coin-free

---

27

pay laundry facilities are now
possible.  We can quickly implement custom machine interface modules for new applications.

SKL
design offers cost-saving custom configuration. For example, it may be delivered with or
without its own display and configured for either networked or stand-alone operation.
Networked, the system allows automated data upload and exception log handling. For
stand-alone machines, a hand-held reporting device is available. We can custom craft a
card supply system to meet the needs of the vendor and the customer.

SKL
supports installation in existing and future OEM laundry devices, including the Maytag
G2, Maytag G1 and other coin-drop appliances. For modern machines such as the Maytag G2,
a full serial interface with the controller is supported. For older coin-drop type
machines the standard pulsed interface is used. SKL design is easily installed in the
field or on the factory floor.

SmartKit® for
Newspaper Vending

SmartKit® for
Newspaper Vending (SKNPV) is designed to increase access to newspapers, by
allowing consumers to buy newspapers using Cash Cards issued by VisaCash and Mondex,
eliminating the need to carry coins.

SKNPV
is part of our line of SmartKit®modular payment systems. SKNPV supports Cash
Cards by VisaCash and Mondex with custom support available for proprietary cards.

Newspaper
vending boxes of varied design use the SKNPV system, and are in use around the world. We
can develop a solution to the specific requirements of most publishers or equipment
manufacturers.

Cash
Card technology is evolving quickly, and we are committed to keeping our products current
through ongoing research and development, planning and product flexibility. In the
future, we intend to design our SmartKit®for other applications.

# Our Marketing Strategy

Our
marketing strategy for our products has consisted of two major initiatives:

| |  | to
develop close relationships with the card associations and with their member financial
institutions, and
|- |  | -----------------------------------------------------------------------------------------------------------

| |  | to
establish strategic partnerships with companies and organizations that can benefit from
our technology in proprietary applications or could use the same core technology in
parallel industry segments.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

28

Our
strategy was based on an assumption that open Cash Card schemes would be developed over a
few years and would then deploy rapidly in commercial applications. Our strategy is to
use the relationships with the card associations to achieve credibility and market share
and to use strategic partnerships to meet product demand and to achieve capacity to
respond to the demand when commercial deployment begins.

We
believe we have been successful in developing good working relationships with Mondex,
Visa and participating financial institutions that are deploying cash cards in North
American. To date we have participated in each North American test or pilot program of
the VisaCash and Mondex cash card systems by installing our SmartKit®cash
card system in vending machines for the program. In these programs, VisaCash, Mondex,
participating financial institutions and manufacturers of smart card systems, including
us, actively market and support the use of cash card systems.

We
have also found that financial institutions provide a co-marketing function when
promoting their cash card systems by finding and qualifying potential customers for our
products. We have received orders and inquiries to install our SmartKit®cash
card systems in vending machines from Visa and Mondex/Mastercard member financial
institutions, including the Visa Canada Head Office, Bank of Nova Scotia, Canadian
Imperial Bank of Commerce, Vancouver City Savings Credit Union (Canada), Bank of America,
Citibank, First Union National Bank, Nations Bank, Wachovia Bank and the Visa
International Head Office.

Our
SmartKit®cash card system has been featured in a number of pilot sites,
including a pilot program at the Vancouver, British Columbia, BC Transit Main
Street/Science World SkyTrain Station ticket vending machines. We developed this transit
fare collection system, which was one of the first systems in the world to offer payment
by VisaCash. Our SmartKit®cash card system has also been used in a variety of
proprietary system applications, including laundry systems, newspaper vending systems,
parking systems, university campus systems, telephone card systems, tobacco dispensing
systems and bulk water dispensing systems.

In
addition to our relationship with VisaCash and Mondex, we have developed the following
relationships:

| |  | We
granted GPT International Limited a non-exclusive, world-wide licence to manufacture,
market and sell our SmartKit®cash card reader to customers in vending and
payphone applications. GPT Internationals wholly-owned subsidiary, Marconi
Communications, has an agreement with Coca Cola to provide on-line support, including
electronic locking and cashless transactions, for cold can vending world-wide. We are
pursuing opportunities to supply our SmartKit®cash card readers to Marconi
Communications. We have no agreement with Marconi Communications or Coca Cola to install
our SmartKit®cash card readers in vending machines. As of December 31, 2002,
we have not sold any SmartKit®cash card readers to Marconi Communications and
there can be no assurance that our cash card readers will be installed in Coca Cola
vending machines.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

29

| |  | Diebold, Incorporated,
which could lead to our SmartKit®readers being incorporated into Diebold systems to
support open card payment schemes for Diebold customers.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Pepsi
Cola Venezuela to incorporate the necessary software changes to our SmartKit®Cash
reader to support Cash Cards issued by the Venezuela National Telephone Company.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Slim
Line  Design and  Rothmans,  Benson  Hedges  Inc.  to supply 250  SmartKit® readers
to control  the sale of tobacco                   products to authorized individuals.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Jayd
LLC , MBTA, and Central parking Corp., to provide SmartVend products with capability of
accepting Jayd/Setec Smart Card Scheme.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------

| |  | EFM(
Enterprise Fund management) to provide SmartVend products with capability of accepting
EFM Smart Card Scheme.
|- |  | ------------------------------------------------------------------------------------------------------------------

We
have experience in the vending field and have been assembling marketing information for
the past three years through attendance at trade shows and extensive discussions with
contacts in the industry, including the Mondex and Visa financial institutions. Our
SmartKit®Cash Card reader is capable of fully supporting multiple Cash Card
schemes, including Mondex/Mastercard and VisaCash. Our SmartKit®can be built
into new vending machines or retrofitted into existing equipment. We intend to use the
multi-card functionality and installation flexibility to market our SmartKit®Cash
Card reader systems.

# The Cash Card Industry

Cash
Card or smart cardtechnology was developed in 1974. In 1992 and 1993, France
became the first country to roll out a national banking system using smart cards. By the
beginning of 1993, all of the 21 million banking cards issued in France were smart cards.
In 1994, France Telecom reached an agreement allowing 22 million Carte Bancaires
cardholders access to the 120,000 French chip-reading public telephones. (Source: The
Smart Card 1998, Jones and Mearns). Following the successful introduction of smart cards
in France, other countries began deploying smart cards for a number of applications in
industries ranging from banking to telecommunications, from healthcare to pay television.
Frost & Sullivan estimates that approximately 592 million smart cards were shipped in
Europe in 1997. In recent years, Asia has begun to deploy smart card technology in
several industries.

Businesses
in the U.S. have been slower to adopt smart card technology because of the wide usage and
existing infrastructure of magnetic stripe technology, the cost of deploying new
technology and the lack of industry-wide standards for smart card operating systems.
However, smart card technology is likely to achieve greater adoption in the U.S. for
several reasons, including:

---

30

| |  | The
cost of producing smart card products, including microchips, cards, readers, writers and
terminals, has decreased.
|- |  | ----------------------------------------------------------------------------------------------------------------------

| |  | Smart
card technology may offer more functionality and flexibility than the credit/debit card
magnetic stripe technologies that are currently popular in North America. For example:
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | smart
cards can store thousands of times more information than magnetic stripe cards;
|- |  | -------------------------------------------------------------------------------------

| |  | smart
cards have been determined to be more reliable than magnetic stripe cards;      |X|
 smart cards can be used for a wide variety of applications (payment methods,
identification, security, authorized access, etc.), compared to magnetic stripe cards,
which are generally single application cards;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | smart
cards can contain advanced security devices such as encryption, which may not be possible
on magnetic stripe cards because of their limited memory storage capabilities and
functionality;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | smart
cards can be used to facilitate off-line transactions by permitting the cards to store
value, compared to magnetic stripe systems that generally require on-line verification
and authorization;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | smart
cards can store proprietary applications unique to an organizations or users
needs (such as record storing/keeping functions, access and control functions and user
identification) which are limited by magnetic stripe cards functionality; and
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | smart
cards themselves can be programmed to the unique needs of a smart card system, where as
magnetic stripe cards can generally only store information.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Technological
advancements, such as Java (a general purpose language that allows multiple applications
to share smart card resources), have improved the functionality and storage capacity of
smart cards.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | New
technology such as the Internet and electronic commerce have increased the need for the
added security and versatility smart cards provide.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

| |  | Several
industry standards have been recently developed by such organizations as Microsoft,
MasterCard, Visa and Sun Microsystems.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------

| |  | Banking
institutions are commercialising Cash Card applications.
| |  | ----------------------------------------------------------------

Mondex/MasterCard
and VisaCash systems have already been widely introduced, and other Cash Card
technologies are being developed, which should increase the use of Cash Cards in North
America.

---

31

Although
the smart card industry has advanced, the Registrant cannot assure you that its SmartKit
cash card systems will benefit from the growth and advancement of the smart card
industry.

Self-serve
Point of Sale Applications

The
Registrant believes that the world vending machine industry is a major market for Cash
Card technology. There are over seven million vending machines in the United States with
annual sales in excess of $11 billion. In Europe the market is even larger, with one
vending machine for every 120 people and in Japan, one vending machine for every 25
people. In the United States alone, there are over seven million vending machines,
including over 1.7 million can cold drink machines.

The
Registrants SmartKit®technology applications permit conditional access,
security, flexible multi-card payment and data storage to be performed in a low cost,
easy-to-use, secure manner. Conditional access and security applications include those
that restrict the use of products and services. Payment system applications include the
use of smart cards in connection with credit and debit card systems, as well as coin and
currency replacement, couponing and electronic commerce. Data storage applications can
use the data storage capacity of smart cards to provide the secure storage of data in a
durable, portable form.

SmartKit® can
be installed in most of the vending machines in use in the United States and around the
world, as well as in new models being manufactured. Once installed in vending machines,
the Registrant believes that SmartKit®offers significant advantages,
including reduced cash handling, reduced costs related to on-line verification, automated
credit to merchant accounts, increased data gathering and accounting flexibility, reduced
losses from theft and equipment damage from attempted theft. Cash Card payment also
allows for pricing flexibility and eliminates the need and expense for bill validators
and handling change.

The
Registrant believes that smart cards provide an easy, flexible and cost-effective way to
achieve the key benefits of highly secure, authenticated transactions. The Registrants
SmartKit®can be adopted for a variety of stored value applications for
payment systems, including:

| |  | Pay
Television. Cash Cards and SmartKit®can be used to enable subscribers to
perform transactions such as purchase merchandise and order video on demand services via
their smart card-operated set-top boxes.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Transportation.
Cash Cards and SmartKit®can be used to enable municipalities to replace
coin-operated parking meters with meters that read Cash Cards.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

The
Registrants SmartKit®Cash Card reader fully supports multiple Cash Card
schemes, including Mondex/Mastercard and VisaCash. The Registrants SmartKit®is
fully certified for use with Mondex/Mastercard and VisaCash cash card systems and is
ready for building into new

---

32

vending machines and retro-fitting to
existing equipment. Although the Registrant believes that the flexibility of its
SmartKit®systems will provide it with market opportunities as the popularity
of Cash Card systems grows, the Registrant cannot assure you that it will be able to
install a sufficient number of SmartKit®systems in a timely manner to be
commercially successful or that more economical and versatile smart card systems will not
be introduced by competitors to the market.

# Competition

Competition
in the technology markets in which the Registrant operate is intense and is characterized
by rapidly changing technologies, evolving industry standards, frequent new product
introductions and rapid changes in customer requirements. To be competitive, the
Registrant must continue to develop and introduce, on a timely and cost-effective basis,
new products and product features that keep pace with technological developments and
emerging industry standards and address the increasingly sophisticated needs of its
customers. See Research and Development. The principal competitive factors
affecting the market for its products are the products technical characteristics,
price, install ability, multi-card scheme flexibility, strategic relationships, customer
service, reputation in the industry, and brand loyalty. In order to compete, the
Registrant will be required to continue to respond promptly and effectively to the
challenges of technological changes and its competitors innovations.

Several
of the Registrants competitors have greater financial, technical and other
resources. SCM Microsystems, Gemplus, Utimaco, Towitoko Electronics, Philips Electronics,
Activcard, Coincard, Smartmove and PubliCARD Cash Card systems compete directly with the
Registrants SmartKit®card readers. The Registrants SmartKit®laundry
Cash Card products also compete with Danyl, ESD and Set-O-Matic commercial laundry Cash
Card products. Several of the Registrants competitors develop, market and sell
their own proprietary Cash Cards and Cash Card systems, which may have features that are
not offered by the Registrant. Smartmove has developed a cash card reader that, like the
Registrants, supports multiple cash card platforms. In the future, OEMs, peripheral
equipment manufacturers and software development companies may develop systems that
compete directly with its SmartKit®and Qlink®products.

Many
of the Registrants current and potential competitors have longer operating
histories and significantly greater financial, technical, sales, customer support,
marketing and other resources, as well as greater name recognition and a larger installed
base of products and technologies than the Registrant. In addition, as the Cash Card
market develops, a number of companies with significantly greater resources than the
Registrant could attempt to increase their presence in the market by acquiring or forming
strategic alliances with the Registrants competitors, resulting in increased
competition.

The
Registrant cannot assure you that it will successfully compete against established
competitors or that its SmartKit®will gain market acceptance.

---

33

# Research and Development

During
the last 3 fiscal years, the Registrant has spent approximately $1.754 million on
research and development efforts. The Registrant currently employs 13 employees that
develop its technology. The Registrants current research and develop efforts focus
on designing SmartKit®cash card systems that are compatible with multiple
cash card platforms.

The
Registrant is currently undertaking the following research and development projects:

|                                 
|---------------------------------
|
|                                 
|Pepsi Cola Venezuela Project     
|                                 
|Data Management                  
|                                 
|Functionality Improvement        
|                                 
|Implementation of new card scheme
|                                 

The
Registrant works closely with Mondex and VisaCash to monitor advancements in cash card
technologies and undertakes research and development efforts necessary to maintain the
multi-platform compatibility of its SmartKit® cash card systems.

C.   Organizational
structure

The
Registrant has a Nevada state incorporated subsidiary, Magnatron, Inc. The Registrant is
not a subsidiary of any entity.

D.   Property,
plants and equipment

The
Registrant has no material tangible fixed assets.

---

34

# Item 5   
Operating and Financial Review and Prospects

A.   Operating
Results

For The Year Ended June 30, 2002 Compared to The Year Ended June 30, 2001.

Revenue.                 The
Registrant generated $152,985 in revenue for the year ended June 30, 2002,
          compared with $234,810 for the year ended June 30, 2001, for a decrease of
          $81,825. The revenue consisted of product sales of $136,712 for the year ended
          June 30, 2002, compared to $196,685 for the year ended June 30, 2001. The
          Registrant also reported other income of $16,273 for the year ended June 30,
          2002, compared with $38,125 for the year ended June 30, 2001. The decrease in
          product sales was due to postponement and delay in implementation by certain
          customers. The Registrant anticipates that revenue will increase during fiscal
          2003 as the Company completes installations of its products and customers take
          deliveries under existing sales orders and arrangements.

General
and Administrative Expenses. General and administrative expenses consist of
management compensation, rent, professional fees, telephone, travel and other general
corporate expenses. General and administrative expenses were $248,521 for the year ended
June 30, 2002, compared with $199,046 for the year ended June 30, 2001, for an increase
of $49,475. The increase in general and administrative expenses was due to an increase in
management fees and consulting fees.

Professional
fees were $67,560 for the year ended June 30, 2002, compared with $109,471 for the year
ended June 30, 2001. The decrease was mainly due to lower costs for professional fees
related to the Registrants United States filings. During fiscal 2001, Registrant
incurred professional fees and costs related to the filing of its registration statement
on Form 20-F.

Payroll
expenses relating to general and administrative activities were $3,760 for the year ended
June 30, 2002, compared with $22,284 for the year ended June 30, 2001. Management fees
were $152,490 for the year ended June 30, 2002, compared with $103,991 for the year ended
June 30, 2001. Office and maintenance charges were $11,139 for the year ended June 30,
2002, compared with $9,350 for the year ended June 30, 2001.

Investor
relations expenses were $29,148 for the year ended June 30, 2002, compared with $35,950
for the year ended June 30, 2001. The decrease was due to a change in investor relation
firms.

The
Registrant anticipates that future general and administrative expenses will be
approximately $31,250 a month or $375,000 a year, based on current operations.

Marketing
and Business Development Expenses. Marketing and Business Development expenses
consisted of compensation to employees and consultants and travel expenditures for
demonstrations of the Registrants technology to potential strategic partners.
Marketing expenses were $150,104 for the year ended June 30, 2002, compared to $253,344
for

---

35

the year ended June 30, 2001. The
decrease in marketing and business development expenses was attributable to efforts to
reduce the Registrants overall costs and expenses.

For The Year Ended June
30, 2001 Compared to The Year Ended June 30, 2000.

Revenue.                 The
Registrant generated $234,810 in revenue for the year ended June 30, 2001,
          compared with $351,613 for the year ended June 30, 2000, for a decrease of
          $116,803. The revenue consisted of product sales of $196,685 for the year ended
          June 30, 2001, compared to $313,055 for the year ended June 30, 2000. The
          Registrant also reported other income of $38,125 for the year ended June 30,
          2001, compared with $38,558 for the year ended June 30, 2000. The decrease in
          product sales was due to a large order in the year ended June 30, 2000, which
          resulted in revenue of $211,156.

General
and Administrative Expenses. General and administrative expenses consist of
management compensation, rent, professional fees, telephone, travel and other general
corporate expenses. General and administrative expenses were $199,046 for the year ended
June 30, 2001, compared with $240,351 for the year ended June 30, 2000, for a decrease of
$41,305.

Professional
and consulting fees were $109,471 for the year ended June 30, 2001, compared with $62,763
for the year ended June 30, 2000. The increase was due to our initial filing with the
Securities & Exchange Commission of our Form 20-F Registration Statement during
fiscal 2001, compared to no such charge for the year ended June 30, 2000.

Payroll
expenses relating to general and administrative activities were $22,284 for the year
ended June 30, 2001, compared with $23,790 for the year ended June 30, 2000. Management
fees were $103,991 for the year ended June 30, 2001, compared with $102,258 for the year
ended June 30, 2000. Office and maintenance charges were $9,350 for the year ended June
30, 2001, compared with $7,159 for the year ended June 30, 2000.

Investor
relations expenses were $35,950 for the year ended June 30, 2001, compared with $29,958
for the year ended June 30, 2000. The increase was due to the hiring of an investor
relations firm during the year ended June 30, 2001.

The
Registrant anticipates that future general and administrative expenses will be
approximately $375,000 a month or $31,250 a year, based on current operations.

Marketing
and Business Development Expenses. Marketing and Business Development expenses
consisted of compensation to employees and consultants and travel expenditures for
demonstrations of the Registrants technology to potential strategic partners.
Marketing expenses were $124,924 for the year ended June 30, 2001, compared to $108,849
for the year ended June 30, 2000.

---

36

B.   Liquidity
and capital resources

As
of June 30, 2002, the Registrants cash position was $83,961 and its working capital
deficiency was $(78,130), compared to a cash position of $12,239 and a working capital
deficiency of $(624,542) as of June 30, 2001. The large reduction in the working capital
deficiency was mainly due to the Registrants ability to raise additional capital
through private placements.

Since
inception, the Registrant has financed its operations from capital contributions. During
the year ended June 30, 2002, the Registrant received net proceeds of $270,000 from the
sale of common stock and by issuing common shares upon the exercise of options and
warrants, compared with proceeds of $452,579 for the year ended June 30, 2001. The
Registrant currently has no long-term debt obligations or commitments.

Net
cash used in operating activities was $76,587 for the year ended June 30, 2002. This
compares with net cash used in operating activities of $(58,654) for the year ended June
30, 2001. This increase was mainly due to an increase in proceeds from share capital
subscription and foreign currency exchange. Subsequent to June 30, 2002, the Registrant
completed a Private Placement of a total 333,333 units, each unit comprised of one common
share and one non-transferable share purchase warrant in the capital stock of the Company
at $0.30 per unit to net the treasury an aggregate of $100,000. One Warrant will entitle
the holder to purchase one additional common share of the Company for a period of two
years from the date of the initial purchase at $0.40 per share. The placement closed in
December 2002.

The
Registrant does not generate sufficient revenue from its operations to meet its on-going
cash requirements and the Registrant has no other internal sources of liquidity. The
Registrant has no external sources of liquidity. The Registrant has financed its
operations and capital requirements through the sale of its common shares, primarily
through private placements. The Registrant anticipates its current operating expenditures
will be approximately $1,537,000 for the next twelve (12) months. The Registrant
currently does not have sufficient working capital and does not anticipate that revenues
from its operations will be sufficient to meet its current capital requirements. The
Registrant anticipates that it will be required to fund its capital requirements by
raising funds through private placements of its equity or debt; however, the Registrant
has currently has no commitments from potential investors.

To a large degree
therefore, the operations of the Registrant are largely dependent upon the general state
of the public equity capital markets, and specifically on the state of the public equity
markets for small capitalization technology companies. There can be no assurance that any
additional financings will be available to the Registrant on favourable terms or at all.
The Registrant is subject to various risks and uncertainties, which appear elsewhere in
this document.

C.   Research
and development, patents and licenses, etc.

As
disclosed elsewhere herein, the Registrant acquired its C21 Technology effective
September 21, 1995. Since that time, the Registrant has continued its research and
development efforts related to its SmartKit®Cash Card reader and related
technologies. In November, 1999, the

---

37

Registrant received Canadian
trade-mark approval for the QI logo and the following product names:  SMARTVEND, QLINK,
C21 and SMARTKIT.

During
fiscal 2000, the Registrant implemented a strategy to shift its focus from research and
development to marketing and sales in an effort to increase revenues and brand
recognition. During the fiscal year ended June 30, 2000, the Registrant financed its
operations through funds received from the exercise of stock options for aggregate
proceeds of $1,020,128. The Registrant incurred a loss of $844,508 during fiscal 2000.

During
fiscal 2001, the Registrant spent $287,274 on research and development but continued with
its strategy to shift its focus to marketing and sales in an effort to increase revenues.
During the fiscal year ended June 30, 2001, the Registrant financed its operations
through funds received by issuing common shares and from the exercise of stock options
for aggregate proceeds of $452,579 and through sales of $234,810. The Registrant incurred
a loss of $1,066,772 during fiscal 2001.

During
the fiscal year ended June 30, 2002, the Registrant spent $405,320 on research and
development and financed its operations through sales of $152,985 and by raising an
aggregate of $270,000 through private placements and by issuing common shares upon the
exercise of options and warrants. The Registrant incurred a loss of approximately
$966,440 in fiscal 2002.

The
differences that are shown are as a result of re-distribution and re-allocation of costs
for different activities.

D.   Trend
Information

The
Registrant has changed focus from an open smart card system (i.e. banks), to a closed
smart card system due to the lengthy delays of the banks commercialising their smart card
systems. The banks have terminated a large majority of their pilot sites. The Registrant
has moved a majority of its resources and labour to developing closed smart card systems
for individual companies. The closed system uses the individual proprietary cards and
these cards must be used in all applications (i.e. campuses). The Registrant believes
that its revised marketing strategy and the change in market conditions has resulted in
an increase in demand for the Registrants products and orders during the first 6
months of fiscal 2003, when compared to the previous six months in fiscal 2002.

# Item 6   Directors, Senior
Management and Employees

A.   Directors
and senior management

The
following table sets forth the name, position with the Registrant, age and municipality
of residence of directors and senior management:

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38

|Name and Municipality of Residence                  | Principal Occupation or Employment during the past five years | Position with Registrant                                                                                                                                                                                                                     | Age
|--------------------------------------------------- | ------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---
|                                                   
|Mesbah Taherzadeh,
West Vancouver, British Columbia |                                                               | Owner, President and
C.E.O., Pacific Pool Water Products Ltd. 1996-2001                                                                                                                                                                      |    
|                                                   
|Craig Jones,
Richmond, British Columbia             |                                                               | Director of export Sales and Business
Development with Dairyworld Foods from March, 1996-October, 1998; Management
Consultant, C. Jones Associates since October, 1998; Vice-President, Sales
and Marketing for QI Systems since May 1, 2000 |    
|                                                   
|Billy Gene Parker Jr.,(1)
The Woodlands, Texas      |                                                               | Owner and President, Mobill
Contractor Inc., 1985-Present                                                                                                                                                                                    |    
|                                                   
|Lillie Cocunato,(1)
Toronto, Ontario                |                                                               | Retired Businesswoman                                                                                                                                                                                                                        |    
|                                                   
|Matthew Yugovich
Lubbock, Texas                     |                                                               | Commercial Real Estate Developer                                                                                                                                                                                                             |    
|                                                   
|Alan D. Graves(1)
Surrey, British Columbia          |                                                               | President of Gemcore
Communications Inc. since 1999; Senior Technical Consultant to QI since 1995                                                                                                                                            |    
|                                                   
|(1) Member of the audit committee.                 

Members
of the Board of Directors are elected by the holders of the Registrants Shares to
represent the interests of all shareholders. The Board of Directors meets periodically to
review significant developments affecting the Registrant and to act on matters requiring
Board approval. Although the Board of Directors delegates many matters to others, it
reserves certain powers and functions to itself. The only standing committee of the Board
of Directors of the Registrant is an Audit Committee. The Audit Committee of the
Registrants Board of Directors currently consists of Billy Parker, Alan Graves and
Lillie Cocunato. This committee is directed to review the scope, cost and results of the
independent audit of the Registrants books and records, the results of the annual
audit with management and the internal auditors and the adequacy of the Registrants
accounting, financial and operating controls; to recommend annually to the Board of
Directors the selection of the independent auditors; to consider proposals made by the
Registrants independent auditors for consulting work; and to report to the Board of
Directors, when so requested, on any accounting or financial matters. None of the
Registrants directors or

---

39

executive officers are parties to any
arrangement or understanding with any other person pursuant to which said individual was
elected as a director or officer of the Registrant.

No
director or executive officer of the Registrant has any family relationship with any
other officer or director of the Registrant.

The
following sets out additional biographical information for each of the Issuers
directors and officers:

Mesbah
Taherzadeh, P.Eng. McMaster University; Pahlavi University. President, Chief
Executive Officer and Director.Mr. Taherzadeh, a professional engineer, brings to
the Registrant over 30 years of senior executive experience. He has an extensive
background in turnaround and reorganization of manufacturing businesses and has managed
multi-million dollar projects. He was Director of Engineering for a national oil company
and Commissioning Superintendent of a nuclear power plant in the Province of Ontario and
held the position of President and CEO of two corporations in British Columbia. Mr.
Taherzadeh has served as a director, President and Chief Executive Officer of the
Registrant since April 27, 2001.

Matthew
 Yugovich,  Director,  Mr.  Yugovich has over 30 years of business  management
 experience.  He is currently  the  president of Great Western Adventure Inc. in State of
Texas.

Alan
D. Graves, Director.  Mr. Graves graduated from the University of British Columbia in
1983 with a BASc in Electrical Engineering. He has gained extensive technical experience
working as a hardware and software design engineer for several companies over the last 20
years. His experience has covered a full range of product development in the areas of
industrial process control, digital audio electronics, 1.8Ghz wireless and cable
repeaters for CDMA cell phone communications, and of course vending and Smartcard payment
systems. Since 1997 he has worked as an independent engineering consultant and manager
for several companies including QI Systems Inc. For the last 4 years he has held the
position of President of Gemcore Communications Inc. a company that specializes in
providing technical direction to other companies involved in developing products using
the latest technologies.

Craig
Jones, Vice-President, Sales and Marketing, Corporate Secretary and Acting Interim Principal
Financial Officer. Mr. Jones has over 20 years of
International Business Development experience, including 10 years of direct experience in
information technology. Mr. Jones has spent most of his career in Canada and Australia
developing and refining the skills required to design and implement global business
strategies. Mr. Jones has worked in the areas of consumer package goods, environmental
engineering, and the automotive and information technology industries. Mr. Jones joined
the Company as Vice-President, Sales and Marketing on May 1, 2000 and served as the
Companys Acting President and Acting Chief Executive Officer from October 17, 2000
to April 30, 2001, and as the Companys Corporate Secretary since October 22, 2001.
From October, 1998 to date, Mr. Jones has headed the management consultant firm of C.
Jones and Associates, specializing in international and national business development.
The group has developed a working knowledge from a diverse range of industry categories
such as consumer-packaged goods, dairy industry,

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40

environmental engineering, leisure
goods, information technology and automotive aftermarket. From March, 1996 to October,
1998, Mr. Jones was employed as Director of Export Sales and Business Development with
Dairyworld Foods, responsible for the sales, marketing, leadership growth and development
of the companys international business initiatives. From December, 1990 to March,
1996, Mr. Jones was President of Bayshore Pacific Trade Ltd. and worked with North
American companies in developing a wide range of trans-pacific partnerships and trading
opportunities. Mr. Jones currently serves as the Registrants
acting interim principal financial
officer.

Billy
Gene Parker, Jr., Director.Mr. Parker has been in the general contract business for
25 years. For the past 16 years, he has been President of Mobill Contractor Inc., a
general contractor in the Houston, Texas area.

Lillie
Cocunato, Director.Ms. Cocunato is a Toronto businesswoman with over 18 years
managerial experience. She was senior sales representative for Ontario for Handleman
Company of Canada. For 16 years, she managed the day to day operations of a family food
manufacturing business. She was President and CEO of a European import company. Recently,
she has worked as a consultant to a new outdoor advertising company, setting up and
organizing their Art Department.

None
of our directors and/or executive officers has been the subject of any order, judgment,
or decree of any governmental agency or administrator or of any court of competent
jurisdiction, revoking or suspending for cause any license, permit or other authority of
such person or of any corporation of which he is a director and/or executive officer, to
engage in the securities business or in the sale of a particular security or temporarily
or permanently restraining or enjoining any such person or any corporation of which he is
an officer or director from engaging in or continuing any conduct, practice, or
employment in connection with the purchase or sale of securities, or convicting such
person of any felony or misdemeanor involving a security or any aspect of the securities
business or of theft or of any felony.

B.   
Compensation

The
Registrant does not compensate its directors for their services as directors. Directors
are entitled to reimbursement for reasonable travel and other out-of-pocket expenses
incurred in connection with attendance at meetings of the Board of Directors. The Board
of Directors makes separate remuneration to any director undertaking services on behalf
of the Registrant other than services ordinarily required of a director. Other than as
indicated below, no director received any compensation for his services as a director,
including any committee participation or special assignments.

The
Registrant grants stock options to directors, executive officers and employees, as more
fully set forth below.

Executive Compensation

During
the fiscal year ended June 30, 2002, the Company had two Named Executive Officers (for
the purposes of applicable securities legislation), namely Mesbah Taherzadeh, the

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41

Companys President and Chief
Executive Officer from May 1, 2001; Craig Jones, Vice-President of Marketing and Sales,
May 1, 2000 to October 17, 2000, Acting President and Chief Executive Officer from October
18, 2000 to April 30, 2001, and then Vice-President of Marketing and Sales from May 1,
2001 and Corporate Secretary from October 22, 2001; (herein collectively referred to as
the Named Executive Officers). The following table sets forth, for the
periods indicated, the compensation of the Named Executive Officers.

|                    |  | Annual Compensation | Long Term Compensation |        
|------------------- |  | ------------------- | ---------------------- | -------
|
|
|                   
|Mesbah Taherzadeh   |  | 2002                |                        | 183,333
|President and       |  | 2001                |                        | 33,334 
|Chief Executive     |  | 2000                |                        | Nil    
|Officer             | 
|                   
|Craig Jones         |  | 2002                |                        | 120,000
|Vice-President,     |  | 2001                |                        | 120,000
|Marketing and Sales |  | 2000                |                        | 20,000 
|                   

|Notes: | (1) | July
1 to June 30.
|------ | --- | ------------------

| | (2) | Bonus
amounts are paid in cash in the year following the fiscal year in which           they
were earned.
| | --- | ---------------------------------------------------------------------------------------------------------

| | (3) | Stock
appreciation rights.
| | --- | --------------------------

| | (4) | Long-term
incentive plan
| | --- | ------------------------

| | (5) | Reference
is made to the section captioned Options and Stock           Appreciation Rights.
| | --- | ---------------------------------------------------------------------------------------------

| | (6) | Pursuant
to the terms and conditions of an           Employment Agreement dated May 1, 2001.
| | --- | --------------------------------------------------------------------------------------------

| | (7) | Pursuant
to the terms and conditions           of an Employment Agreement dated April 20, 2000.
| | --- | -----------------------------------------------------------------------------------------------

Options and Stock
Appreciation Rights

No
incentive stock options were granted to the Named Executive Officer(s) during the most
recently completed financial year (July 1, 2001 to June 30, 2002) (the Financial
Period).

No
incentive stock options were exercised during the Financial Period by any of the Named
Executive Officers.

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42

Pension Plan

The
Company does not have any pension plan arrangements in place.

Termination of
Employment, Change in Responsibilities and Employment Contracts

There
are no employment contracts between the Company or its subsidiary and a Named Executive
Officer except for the following:

A.              The
Company entered into an Employment Agreement dated April 20, 2000 (the           Agreement)
with Craig Jones, the Companys Vice-President,           Marketing and Sales (the
Executive), whereby the Executive agreed to           manage, supervise and
direct all activities relating to the Companys           marketing and sales. The
Company has agreed to pay the Executive an annual           salary of $120,000 for the
period from May 1, 2001 to April 30 2002, together           with an incentive bonus
calculated at a rate of no less than 30% of the           Executives annual salary
for the period. The annual compensation is to be           reviewed annually, with the
stipulation that the compensation to be paid to the           Executive shall not be less
than the annual salary and bonus percentage rate           paid to the Executive for the
immediately preceding twelve month period.

The
Agreement also provided that the Executive would receive stock options totalling 200,000
shares (which options were granted to the Executive on April 20, 2000). The Agreement
commenced on May 1, 2000 and will continue for an indefinite period of time until
terminated in accordance with the provisions of the Agreement.

The
Agreement may be terminated by the Company at any time for any reason without legal
consequence upon 18 months written notice or payment to the Executive in lieu of notice
of a lump sum equal to one and one half times the annual compensation. Should the
Executives employment be terminated by the Executive for other than Good Reason (as
defined in the Agreement) then the Company shall pay to the Executive of the annual
compensation earned by or payable to the Executive during the then current fiscal year of
the Company for the period to and including the date of termination, and neither the
Company nor its subsidiary shall have any further obligations to the Executive under the
Agreement. If the Agreement is terminated by the Company for other than just cause or
terminated by the Executive for Good Reason, then the Company shall pay the Executive his
annual compensation for the then current fiscal year for the period to and including the
date of termination, and as partial compensation for the Executives loss of
employment, an amount equal to one and one half times the annual compensation. The
Company shall also provide the Executive with the job relocation counselling services of
a firm chosen from time to time by the Executive, together with all additional reasonable
expenses that the Executive may incur in connection with obtaining alternative full-time
employment, including any costs associated with the relocation by the Executive to obtain
such alternative employment, such total not to exceed $20,000.

B.              The
Company entered into an Employment Agreement with Mesbah Taherzadeh, the           Companys
President and Chief Executive Officer (the CEO),           dated May 1, 2001,
whereby the CEO agreed to manage, supervise and direct all           activities of the
Company. The Company agreed

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43

to pay the CEO an annual salary of
$200,000 for the period from May 1, 2001. The CEO is also entitled under the Employment
Agreement to a benefits plan as is available from time to time for those individuals who
are employed as senior executives of the Company. In addition, the Employment Agreement
provided that the CEO would be granted an incentive stock option to purchase 300,000
shares of the Company, which option was granted to the CEO on April 26, 2001, exercisable
at $1.20 per share on or before April 26, 2006. In addition an Executive Incentive Plan is
to be established, based on the objectives as set out in the Companys Strategic
Business Plan, which will be developed by the CEO and the board of directors of the
Company.

Upon
termination of the Employment Agreement, the average monthly compensation shall be
determined by reference to the annual compensation paid to the CEO, averaged for the
preceding 36 months. If there is Just Cause (as defined in the Employment Agreement) then
the agreement may be immediately terminated by the Company without further compensation.
If the CEO is disabled, the Company will pay the CEO for 6 months applicable salary
and benefits. The Employment Agreement may be terminated by the Company at any time for
any reason without legal consequences upon payment to the Executive of one years
annual compensation plus all incentive bonus the CEO is entitled to, plus the right to
exercise all vested stock options not exercised. Further, in the event that the Company
shall terminate the Employment Agreement by the payment of one years annual
compensation, then the Company shall continue the CEOs entitlement to all medical,
dental and disability insurance coverage for a period of one year or such shorter period
as the Executive may advise.

Should
the CEOs employment be terminated following a change in control of the Company, the
Company (or the purchasing company) shall have the following payment obligations:

|a) |  | if
not previously paid, the CEOs annual compensation for the then current
                    fiscal year for the period to and including the date of termination
plus any                     incentive bonuses earned; and
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) |  | as
compensation for the CEOs loss of employment, an amount equal to two
                    times the CEOs annual compensation;
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------

|c) |  | if
the CEO holds any options,                     rights, warrants or other entitlement
granted to him by the Company for the                     purchase or acquisition of
shares in the capital of the Company (collectively                     the Rights),
and the Rights are vested in the CEO, the CEO shall                     have 60 days to
exercise his Rights by forwarding payment for the exercise of                     his
Rights to the Company; and
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|d) |  | the
Company shall pay to the CEO all outstanding and accrued vacation pay to the
          date of termination.
|-- |  | ---------------------------------------------------------------------------------------------------------------

If
the CEOs employment is terminated for Just Cause, the Company shall pay to the CEO,
if not previously paid, the fraction of the annual compensation earned by or payable to
the CEO by the Company or its subsidiaries during the then current fiscal year of the
Company for the period to and including the date of termination and neither the Company
nor its subsidiaries shall have any further obligations to the Executive under the
Employment Agreement, save as provided for in the Employment Agreement in the event of
the CEOs death or should the CEO become disabled.

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44

Other
than as disclosed above, there is no compensatory plan or arrangement, including payments
to be received from the Company or its subsidiaries, with respect to the Named Executive
Officers.

The
aggregate amount of compensation paid by the Registrant and its subsidiaries during the
fiscal year ended June 30, 2002 to all officers and directors as a group, for services in
all capacities was $223,919.

No
amounts have been set aside or accrued by the Registrant during fiscal 2002 to provide
pension retirements or similar benefits for directors or executive officers of the
Registrant pursuant to any plan provided for or contributed to by the Registrant.

The
Registrant has no plans or arrangements in respect of remuneration received or that may
be received by executive officers of the Registrant in the current year to compensate
such officers in the event of termination of employment (as a result of resignation,
retirement, change of control) or a change of responsibilities following a change of
control, where the value of such compensation exceeds US$60,000 ($94,000 Cdn.) per
executive officer, except as set out above.

Except
as set out above and as discussed in Options and Warrants to Purchase Securities
from the Registrant or Subsidiary, the Registrant has no material bonus or profit
sharing plans pursuant to which cash or non-cash compensation is or may be paid to the
Registrants directors or executive officers.

Stock
Options

As
of June 30, 2002, the Registrant had 1,516,500 incentive stock options outstanding. The
names and titles of the Registrants directors, executive officers, administrators,
supervisors and management to whom outstanding stock options have been granted and the
number of Common Shares subject to such stock options, as at June 30, 2002, are set forth
below.

|Name              | Number of
Shares | Exercise Price
Per Share | Expiry
Date
|----------------- | ---------------- | ------------------------ | -----------
|                 
|Craig Jones       |                  | 200,000                  |            
|                 
|Mesbah Taherzadeh |                  | 300,000                  |            
|                 

The exercise price of the stock
options is stated in U.S. dollars.

No
funds have been set aside or accrued by the Registrant to provide pension, retirement or
similar benefits for directors or executive officers of the Registrant pursuant to any
plan provided for or contributed to by the Registrant.

---

45

C.   
Board practices

Set
forth below is the expiration of the current term of office and the period during which
such person has served in that office:

|Name                                                                                                                                                                                                                                                                                                                     | Position | Expiration of Term
of Office                                   | Period of
Service
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------- | -------------------------------------------------------------- | -----------------
|                                                                                                                                                                                                                                                                                                                        
|Mesbah Taherzadeh                                                                                                                                                                                                                                                                                                        |          | President,
CEO and Director(1)                                 |                  
|                                                                                                                                                                                                                                                                                                                        
|Billy Gene Parker Jr                                                                                                                                                                                                                                                                                                     |          | Director                                                       |                  
|                                                                                                                                                                                                                                                                                                                        
|Lillie Cocunato                                                                                                                                                                                                                                                                                                          |          | Director                                                       |                  
|                                                                                                                                                                                                                                                                                                                        
|Craig Jones(2)                                                                                                                                                                                                                                                                                                           |          | Vice-President,
Sales and Marketing and Corporate Secretary(1) |                  
|                                                                                                                                                                                                                                                                                                                         |          | Director                                                       |                  
|                                                                                                                                                                                                                                                                                                                        
|Matthew Yugovich                                                                                                                                                                                                                                                                                                         |          | Director                                                       |                  
|                                                                                                                                                                                                                                                                                                                        
|Alan Graves                                                                                                                                                                                                                                                                                                              |          | Director                                                       |                  
|                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                        
|(1)    Officers are appointed by the directors for a term
expiring at the following Annual General Meeting.
(2)    Craig Jones also served as Acting  President and Acting
Chief  Executive  Officer of the Registrant  from October 17,
2000 to April 27, 2001 and Corporate Secretary 
        since October 22, 2001.

There are no Directors service
contracts which provide benefits upon the termination of employment except for an
Employment Agreement dated April 20, 2000 with Craig Jones and an Employment Agreement
dated May 1, 2001 with Mesbah Taherzadeh, particulars of which have been set out above
under Item 6.B. Compensation.

Set
forth below are the names of the members of the Registrants audit committee:

Billy Parker
Lillie Cocunato
Alan D. Graves

The
Audit Committee is directed to review the scope, cost and results of the independent
audit of the Registrants books and records, the results of the annual audit with
management and the internal auditors and the adequacy of the Registrants
accounting, financing and operating controls; to recommend annually to the Board of
Directors the selection of the independent auditors; to consider proposals made by the
Registrants independent auditors for consulting work; and to report to the Board of
Directors, when so requested, on any accounting or financial matters.

---

46

D.   Employees

The
Registrant had the following number of employees at the end of each of the following
fiscal years:

|June 30, 2002 | June 30, 2001 | June 30, 2000
|------------- | ------------- | -------------
|16 employees  |               | 18 employees 

E.   Share ownership

Set
forth below are details of the share ownership of the Registrants directors,
executive officers, administrators, supervisors and management as of November 1, 2002
based on information provided by such persons:

|Name                                                                                                                                                   | Securities beneficially owned,
directly or indirectly or over
which direction or control is
exercised | Percent of Issued and Outstanding Share Capital(1)
|------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------- | --------------------------------------------------
|
|Mesbah Taherzadeh                                                                                                                                      |                                                                                                       | 19,000                                            
|Billy Gene Parker Jr                                                                                                                                   |                                                                                                       | 1,669,800                                         
|Lillie Cocunato                                                                                                                                        |                                                                                                       | 35,000                                            
|Craig Jones                                                                                                                                            |                                                                                                       | 10,000                                            
|Mathew Yugovich (2)                                                                                                                                    |                                                                                                       | 132,000                                           
|Alan Graves (2)                                                                                                                                        |                                                                                                       | 80,000                                            
|
|*     Less than 1%.
(1)    16,030,168  common shares were issued and
outstanding as of November 1, 2002.
(2)    Appointed to the Board December, 2002.

A
summary of outstanding options granted to the above individuals to purchase common shares
of the Registrant is set forth below:

|Name              | Number of Shares | Exercise Price
Per Share | Expiry Date
|----------------- | ---------------- | ------------------------ | -----------
|                 
|                 
|Craig Jones       |                  | 200,000                  |            
|Mesbah Taherzadeh |                  | 300,000                  |            
|Billy Gene Parker |                  | 50,000                   | (1)        
|Lillie Cocunato   |                  | 50,000                   | (1)        
|Mathew Yugovich   |                  | 50,000                   | (1)        
|Alan Graves       |                  | 96,000                   | (1)        
|                  |                  | 24,000                   | (1)        

---

47

|(1) | These options were granted by the Board on December 31, 2002. The
          exercise price of the stock options is stated in U.S. dollars.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

# Item 7    Major
Shareholders and Related Party Transactions

A.   Major shareholders

The
following shareholders beneficially own greater than 5% of the Registrants common
shares.

|Name                 | Number of Voting
Securities | Percentage of Issued
Voting Securities
|-------------------- | --------------------------- | --------------------------------------
|                    
|Billy Gene Parker Jr |                             | 1,669,800                             
|James D. Roberts     |                             | 2,405,000                             
|                    

(1)    
          The percent is an increase of 3.22 % from his share ownership as of November 14,
          2002 (833,762 shares).

(2)    
          Based on the Companys registered shareholder list. Mr. Roberts most recent
          insider report as shown on the website of the British Columbia Securities
          Commission indicates that his current shareholdings total 1,230,030 shares and
          the Registrant has been advised by Mr. Roberts that he is no longer an insider
          of the Company.

All
of the Registrants shareholders have the same voting rights.

As
of November 1, 2002, 4,555,570 common shares were held by 58 registered shareholders
resident in the United States.

The
Registrant is not directly or indirectly owned or controlled by another corporation, any
foreign government or by any other natural or legal person(s) severally or jointly.

There
are no arrangements, known to the Registrant, the operation of which may at a subsequent
date result in a change of control of the Registrant.

B.   Related party transactions

During
the period since the beginning of the Registrants preceding three financial years
up to the date hereof, the Registrant has entered into the following related party
transactions:

On
March 31, 1999, the Registrant entered into a Settlement Agreement to settle
disputes among James Roberts, the Registrants former President and Chief Executive
Officer, and Robert Angus and the Registrant and Equus Technologies, an entity controlled
by Robert Angus, related to the C21 Technologies. See Material Agreements  Agreements
Related to the C21 Technology.

The
Registrant entered into an Employment Agreement with Craig Jones dated April 20, 2000,
pursuant to which the Mr. Jones agreed to be employed as the Registrants
Vice-President,

---

48

Marketing and Sales, and to be
responsible for the management, supervision and direction of all activities relating to
marketing and sales. The term of the Employment Agreement commenced May 1, 2000 and the
agreement provides for an annual salary of Cdn.$120,000. The Employment Agreement also
provides that during the period from May 1, 2000 to April 30, 2001, the Registrant will
pay Mr. Jones an incentive bonus (the Executive Incentive Plan) calculated at
a rate no less than 30% of his annual salary based on performance criteria approved by the
Registrants Board of Directors. The Registrants Board of Directors and Craig
Jones are in the process of developing the performance criteria in which the incentive
bonus will be determined. The Employment Agreement also provides that the Registrant shall
grant to the Executive an incentive stock option to purchase up to 200,000 of common
shares, exercisable for a period of five years, at a price of Cdn.$5.50 per common share.
As set out above, the exercise price of the option was amended on December 22, 2000 to
Cdn.$2.00 per common share, subject to the receipt of TSX approval.

During
the period January, 2001 to August, 2001, the Registrant received funding by way of loans
in the amounts of US$297,315 (Cdn$450,000) and US$30,000 (together the Loan)
from James Roberts, past President of the Registrant, and his wife, Ursula Roberts,
respectively, (the Lenders) to provide the Registrant with general ongoing
working capital. Mr. Roberts is currently a significant shareholder and insider in the
Registrant owning or controlling, to the best of the Companys knowledge, 1,420,000
shares in the Registrant. He is currently not a member of senior management or the Board
of Directors. The Loan plus interest was repaid in July, 2002 with interest totalling
$34,617.

The
Registrant entered into an Employment Agreement with Mesbah Taherzadeh, the Registrants
President and Chief Executive Officer (the CEO), dated May 1, 2001, whereby
the CEO agreed to manage, supervise and direct all activities of the Registrant. The
Registrant agreed to pay the CEO an annual salary of $200,000 for the period from May 1,
2001. The CEO is also entitled under the Employment Agreement to a benefits plan as is
available from time to time for those individuals who are employed as senior executives
of the Registrant. In addition, the Employment Agreement provided that the CEO would be
granted an incentive stock option to purchase 300,000 shares of the Registrant, which
option was granted to the CEO on April 26, 2001, exercisable at $1.20 per share on or
before April 26, 2006. In addition an Executive Incentive Plan is to be established,
based on the objectives as set out in the Companys Strategic Business Plan, which
will be developed by the CEO and the board of directors of the Company.

On
September 10, 2001, the Registrant entered into a private placement subscription
agreement with Billy Gene Parker Jr. whereby Mr. Parker purchased from the Registrant
625,000 shares at $0.40 per share. Subsequent to the private placement, namely on
November 13, 2001, Mr. Parker joined the board of directors of the Registrant.

For
the period from July 1, 2000 to June 30, 2001, the Registrant paid $87,155 in consulting
fees to directors and officers. As at June 30, 2001 and 2000, amounts of $79,063 and
$69,515, respectively, were due to these directors and officers in respect of these fees,
and included in accounts payable. For the period ending June 30, 2002 consulting fees of
$154,435 were paid with a balance of $68,253 included in accounts payable.

---

49

Interest
of $7,467 was incurred during the year ended June 30, 2000 on loans from two shareholders
and directors amounting to $422,500. The loans were unsecured, bore interest at 10% per
annum and were fully repaid prior to June 30, 2000.

In
May, 2002, James Roberts purchased 1,170,000 units of the company, Mesbah Taherzadeh
purchased 10,000 units of the Company , Lillie Cocunato, purchased 24,000 units of the
Company, Douglas Brazier purchased 160,000 units, Craig Jones purchased 10,000 units of
the Company and Billy G. Parker purchased 750,000 units of the Company, all at the price
of US$0.30/Cdn$0.50 per unit from a private placement which with a total issuance of
200,000 common shares at US$0.30/Cdn.$0.50 per common share and 3,550,000 units of the
Company at a price of US$0.30/Cdn.$0.50 per unit. Total proceeds raised were US$1,125,000
(Cdn.$1,875,000) by way of private placement. Each unit comprised one share and one
non-transferable share purchase warrant entitling the holder to purchase one further
share of the Company for a period of two years at an exercise price of US$0.40/Cdn.$0.67
per share. An aggregate of 2,124,000 units for a purchase price of
US$637,200/Cdn.$1,062,000 were purchased by insiders of the Company.

C.   Interests of experts and counsel

Not
applicable.

# Item 8    Financial
Information

A.   Consolidated statements and other financial information

|1. |  | financial statements audited by an independent auditor and           accompanied by an
audit report comprised of:
|-- |  | -----------------------------------------------------------------------------------------------------------------

|(a) |  | Consolidated
Balance Sheets as of June 30, 2002 and 2001;
|--- |  | ---------------------------------------------------------

|(b) |  | Consolidated
          Statements of Operations and Deficit for the three years ended June 30, 2002,
          2001 and 2000;
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|(c) |  | Consolidated
statements of cash flows for the three years           ended June 30, 2002, 2001 and
2000;
|--- |  | -------------------------------------------------------------------------------------------------------

|(d) |  | Notes
to the consolidated financial statements.
|--- |  | -----------------------------------------------

are attached hereto
and form a part hereof.

| |  | The Registrant
is not involved and has not been involved in any legal or arbitration proceedings which
may have, or have had in the recent past, significant effects on the Registrants
financial position or profitability, including governmental proceedings pending or known
to be contemplated.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

50

| |  | The Registrant
has not, during its last five completed financial years, declared or paid any dividends
on its common shares and does not currently intend to pay dividends. Earnings, if any,
will be retained to finance further growth and development of the business of the Issuer.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B.   Significant changes

Subsequent
to June 30, 2002, the Registrant completed a Private Placement of a total 333,333 units,
each unit comprised of one common share and one non-transferable share purchase warrant
in the capital stock of the Company at $0.30 per unit to net the treasury an aggregate of
$100,000. One Warrant will entitle the holder to purchase one additional common share of
the Company for a period of two years from the date of the initial purchase at $0.40 per
share. The placement closed in December 2002.

# Item 9    The Offer and
Listing

Markets

The
Common Shares of the Registrant trade on the TSX Venture Exchange (the TSX)
under the symbol QIIU.V The TSX was previously known as the Canadian Venture Exchange
(the CDNX) prior to its acquisition by the Toronto Stock Exchange on May 29,
2001. The CDNX was the result of the merger of the Vancouver Stock Exchange and the
Alberta Stock Exchange on November 29, 2001. Prior to the establishment of the CDNX, the
Registrants common shares traded on the Vancouver Stock Exchange (the VSE).
The VSE, CDNX and TSX are collectively referred to herein as the TSX. The
following table sets out the price history of the Registrants Common Shares on TSX
and its relevant predecessors for the periods indicated:

|TSX Yearly Price History - Five most recent fiscal years
|--------------------------------------------------------
|
|                                                        
|Fiscal 1998                                             
|Fiscal 1999                                             
|Fiscal 2000                                             
|Fiscal 2001                                             
|                                                        

|Period      | High (Cdn$) | Low (Cdn$)                         
|----------- | ----------- | -----------------------------------
|           
|Fiscal 2002 |             | 12 Month Period ended June 30, 2002

|TSX Quarterly Price History - Two most recent fiscal years
|----------------------------------------------------------
|
|                                                          
|Fiscal 2001                                               
|                                                          
|                                                          
|                                                          
|                                                          

---

51

|            | High (Cdn$) | Low (Cdn$)                                   
|----------- | ----------- | ---------------------------------------------
|           
|Fiscal 2002 |             | First Fiscal Quarter ended September 30, 2001
|            |             | Second Fiscal Quarter ended December 31, 2001
|            |             | Third Fiscal Quarter ended March 31, 2002    
|            |             | Fourth Fiscal Quarter ended June 30, 2002    
|           

|TSX Monthly Price History - Six most recent months             |  | 
|-------------------------------------------------------------- |  | 
|
|July                                                           |  | 
|August                                                         |  | 
|September                                                      |  | 
|October                                                        |  | 
|November                                                       |  | 
|December                                                       |  | 
|                                                              
|The Registrant began trading in U.S. dollars on July 30, 2001.
|                                                              

The following  table sets out the
price history of the  Registrant's  Common Shares on the OTCBB from May 23, 2002,  being
the date the Registrant's Common Shares commenced trading, and for the following periods
indicated (in US dollars):

|OTCBB Yearly Price History - Five most recent fiscal years
|----------------------------------------------------------
|
|                                                          
|Fiscal 1998                                               
|Fiscal 1999                                               
|Fiscal 2000                                               
|Fiscal 2001                                               
|Fiscal 2002                                               
|                                                          

|OTCBB Quarterly Price History - Two most recent fiscal years
|------------------------------------------------------------
|
|                                                            
|Fiscal 2001                                                 
|xx                                                          
|xx                                                          
|xx                                                          
|Fiscal 2002                                                 
|xx                                                          
|xx                                                          
|xx                                                          
|                                                            

---

52

|OTCBB Monthly Price History - Six most recent months           |  |  
|-------------------------------------------------------------- |  | -
|
|July                                                           |  | 0
|August                                                         |  | 0
|September                                                      |  | 0
|October                                                        |  | 0
|November                                                       |  | 0
|December                                                       |  | 0
|The Registrant began trading in U.S. dollars on July 30, 2001.
|                                                              

The
Registrants common shares began trading on the Berlin Stock Exchange on March 23,
2000. The WKN number is 865-679. Trading figures are not shown as the majority of the
trading of the Registrant takes place on the TSX and the OTCBB.

# Item 10    Additional
Information

A.   
Share capital

Not
applicable.

B.    Memorandum
and articles of association

1.              The
Memorandum and Articles of the Registrant and the related disclosure called           for
by this item are contained in, and incorporated by reference, in Item 10B of
          the Registrants previously filed Form 20-F as filed in January 2002

C.    Material
Contracts

Following
are summaries of material contracts, other than those entered into in the ordinary course
of business, entered into by the Company for a period of no less than the two (2) years
preceding the date of this document:

|1. |  | Employment
Agreement dated May 1, 2001
|-- |  | --------------------------------------

| | See
the disclosure under the heading Compensation in Section 6.B. herein.
| | ---------------------------------------------------------------------------

|2. |  | Private
Placement Subscription Agreement dated September 10, 2001
|-- |  | -----------------------------------------------------------------

| | On
September 10, 2001, the Registrant entered into a private placement Subscription
Agreement with Billy Gene Parker Jr. whereby Mr. Parker purchased from the Registrant
625,000 shares at $0.40 per share. Subsequent to the private placement, namely on
November 13, 2001, Mr. Parker joined the board of directors of the Registrant.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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53

|3. |  | Termination
Agreement dated April 28, 2000
|-- |  | ------------------------------------------

| | The
Registrant entered into a Termination Agreement dated April 28, 2000 with Richard H.
Murray whereby the Registrant would pay Mr. Murray a onetime fee of $125,000 if he
resigned within 90 days of May 15, 2000. Mr. Murray resigned on August 11, 2000.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. |  | Private
Placement Subscription Agreements dated May, 2002
|-- |  | ---------------------------------------------------------

| | In
May, 2002, the Registrant entered into private placement Subscription Agreements with
Billy Gene Parker Jr. Mesbah Taherzadeh, Craig Jones, Lillie Cocunato, Douglas Brazier
and James Roberts. whereby they purchased an aggregate of 2,124,000 units for a purchase
price of US$637,200/Cdn.$1,062,000 from the Registrant. Each unit comprised one share and
one non-transferable share purchase warrant entitling the holder to purchase one further
share of the Company for a period of two years at an exercise price of US$0.40/Cdn.$0.67
per share. were purchased by insiders of the Company
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

D.   Exchange controls

Canada
has no system of exchange controls. There are no exchange restrictions on borrowing from
foreign countries nor on the remittance of dividends, interest, royalties and similar
payments, management fees, loan repayments, settlement of trade debts, or the
repatriation of capital. However, any dividends remitted to U.S. Holders, as defined
below, will be subject to withholding tax. See Item 10(E)  Taxation.

Except
as provided in the Investment Canada Act (the Act), there are no limitations
specific to the rights of non-Canadians to hold or vote the common stock of the Company
under the laws of Canada or in the charter documents of the Company.

Management
of the Company considers that the following general summary fairly describes those
provisions of the Act pertinent to an investment by an American investor in the Company.

The
Act requires a non-Canadian making an investment which would result in the acquisition of
control of a Canadian business, the gross value of the assets of which exceeds certain
threshold levels or the business activity of which is related to Canadas cultural
heritage or national identity, to either notify, or file an application for review with,
Investment Canada, the federal agency created by the Investment Canada Act. The
notification procedure involves a brief statement of information about the investment of
a prescribed form which is required to be filed with Investment Canada by the investor at
any time up to 30 days following implementation of the investment. It is intended that
investments requiring only notification will proceed without government intervention
unless the investment is in a specific type of business activity related to Canadas
cultural heritage and national identity.

---

54

If
an investment is reviewable under the Act, an application for review in the form
prescribed is normally required to be filed with Investment Canada prior to the
investment taking place and the investment may not be implemented until the review has
been completed and the Minister responsible for Investment Canada is satisfied that the
investment is likely to be of net benefit to Canada. If the Minister is not satisfied
that the investment is likely to be of net benefit to Canada, the non-Canadian must not
implement the investment or, if the investment has been implemented, may be required to
divest himself of control of the business that is the subject of the investment.

The
following investments by non-Canadians are subject to notification under the Act: (1) an
investment to establish a new Canadian business; and (2) an investment to acquire control
of a Canadian business that is not reviewable pursuant to the Act.

The following
investments by a non-Canadian are subject to review under the Act:

|(1) |  | direct
acquisitions of control of Canadian businesses with assets of CDN$5           million or
more unless the acquisition is being made by an American investor;           (2) direct
acquisitions of control of Canadian businesses with assets of CDN$152           million
or more by an American investor; (3) indirect acquisitions of control of
          Canadian businesses with assets of CDN$5 million or more if such assets
          represent more than 50% of the total value of the assets of the entities, the
          control of which is being acquired, unless the acquisition is being made by an
          American investor; (4) indirect acquisitions of control of Canadian businesses
          with assets of CDN$152 million or more by an American investor if such assets
          represent more than 50% of the total value of the assets of the entities, the
          control of which is being acquired; (5) indirect acquisitions of control of
          Canadian businesses with assets of CDN$50 million or more even if such assets
          represent less than 50% of the total value of the assets of the entities, the
          control of which is being acquired, unless the acquisition is being made by an
          American investor in which case there is no review; and (6) an investment
          subject to notification that would not otherwise be reviewable if the Canadian
          business engages in the activity of publication, distribution or sale of books,
          magazines, periodicals, newspapers, audio or video music recordings, or music
in           print or machine-readable form.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Generally
speaking, an acquisition is direct if it involves the acquisition of control of the
Canadian business or of its Canadian parent or grandparent and an acquisition is indirect
if it involves the acquisition of control of a non-Canadian parent or grandparent of an
entity carrying on the Canadian business. Control may be acquired through the acquisition
of actual or de jure voting control of a Canadian corporation or through the acquisition
of substantially all of the assets of the Canadian business. No change of voting control
will be deemed to have occurred if less than one-third of the voting control of a
Canadian corporation is acquired by an investor.

An
American, as defined in the Act includes an individual who is an American national or a
lawful, permanent resident of the United States, a government or government agency of the

---

55

United States, an American-controlled
corporation, limited partnership, trust or joint venture and a corporation, limited
partnership, trust or joint venture that is neither American-controlled or
Canadian-controlled of which two-thirds of its board of directors, general partners or
trustees, as the case may be, are any combination of Canadians and Americans. The higher
thresholds for Americans do not apply if the Canadian business engages in activities in
certain sectors such as oil, natural gas, uranium, financial services (except insurance),
transportation services or media activities.

The
Act specifically exempts certain transactions from either notification or review.
Included among the category of transactions is the acquisition of voting shares or other
voting interests by any person in the ordinary course of that persons business as a
trader or dealer in securities. Given the nature of the Companys business and the
size of its operations, management does not believe the Act would apply to an investment
in the Companys shares by a U.S. investor. The Act provides for civil penalties for
non-compliance with any provision except breach of confidentiality or provision of false
information, for which there are criminal penalties.

E.   Taxation

# United States Federal
Income Tax Consequences

The
following is a discussion of material United States federal income tax consequences,
under current law, applicable to a US Holder (as hereinafter defined) of common shares of
the Registrant. This discussion does not address consequences peculiar to persons subject
to special provisions of federal income tax law, such as those described below as
excluded from the definition of a US Holder. In addition, this discussion does not cover
any state, local or foreign tax consequences. (See Canadian Federal Income Tax
Considerations for material Canadian federal income tax consequences).

The
following discussion is based upon the sections of the Internal Revenue Code of 1986, as
amended (the Code), Treasury Regulations, published Internal Revenue Service (IRS)
rulings, published administrative positions of the IRS and court decisions that are
currently applicable, any or all of which could be materially and adversely changed,
possibly on a retroactive basis, at any time and which are subject to differing
interpretations. This discussion does not consider the potential effects, both adverse
and beneficial, of any proposed legislation which, if enacted, could be applied, possibly
on a retroactive basis, at any time. This discussion is for general information only and
it is not intended to be, nor should it be construed to be, legal or tax advice to any
holder or prospective holder of common shares of the Company and no opinion or
representation with respect to the United States federal income tax consequences to any
such holder or prospective holder is made. Accordingly, holders and prospective holders
of common shares of the Company should consult their own tax advisors about the federal,
state, local, and foreign tax consequences of purchasing, owning and disposing of common
shares of the Company.

---

56

# U.S. Holders

As
used herein, a U.S. Holder means a holder of common shares of the Company who
is (i) a citizen or individual resident of the United States, (ii) a corporation or
partnership created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) an estate whose income is taxable in the United
States irrespective of source or (iv) a trust subject to the primary supervision of a
court within the United States and control of a United States fiduciary as described
Section 7701(a)(30) of the Code. This summary does not address the tax consequences to,
and U.S. Holder does not include, persons subject to specific provisions of federal
income tax law, such as tax-exempt organizations, qualified retirement plans, individual
retirement accounts and other tax-deferred accounts, financial institutions, insurance
companies, real estate investment trusts, regulated investment companies, broker-dealers,
persons or entities that have a functional currency other than the U.S.
dollar, shareholders subject to the alternative minimum tax, shareholders who hold common
shares as part of a straddle, hedging, conversion transaction, constructive sale or other
arrangement involving more than one position, and shareholders who acquired their common
shares through the exercise of employee stock options or otherwise as compensation for
services. This summary is limited to U.S. Holders who own common shares as capital assets
within the meaning of Section 1221 of the Code. This summary does not address the
consequences to a person or entity holding an interest in a shareholder or the
consequences to a person of the ownership, exercise or disposition of any options,
warrants or other rights to acquire common shares.

# Distribution on Common
Shares of the Company

U.S.Holders receiving dividend distributions (including constructive dividends) with
          respect to common shares of the Company are required to include in gross income
          for United States federal income tax purposes the gross amount of such
          distributions, equal to the U.S. dollar value of such distributions on the date
          of receipt (based on the exchange rate on such date), to the extent that the
          Company has current or accumulated earnings and profits, without reduction for
          any Canadian income tax withheld from such distributions. Such Canadian tax
          withheld may be credited, subject to certain limitations, against the U.S.
          Holders federal income tax liability or, alternatively, may be deducted
in           computing the U.S. Holders federal taxable income by those who itemize
          deductions. (See more detailed discussion at Foreign Tax Credit          below).
To the extent that distributions exceed current or accumulated earnings           and
profits of the Company, they will be treated first as a return of capital up           to
the U.S. Holders adjusted basis in the common shares and thereafter as
          gain from the sale or exchange of the common shares. Preferential tax rates for
          long-term capital gains are applicable to a U.S. Holder which is an individual,
          estate or trust. There are currently no preferential tax rates for long-term
          capital gains for a U.S. Holder which is a corporation.

In
the case of foreign currency received as a dividend that is not converted by the
recipient into U.S. dollars on the date of receipt, a U.S. Holder will have a tax basis
in the foreign currency equal to its U.S. dollar value on the date of receipt. Generally
any gain or loss recognized upon a subsequent sale or other disposition of the foreign
currency, including the exchange for U.S. dollars, will be ordinary income or loss.
However, an individual whose realized gain does not exceed $200 will not recognize that
gain, to the extent that there are no

---

57

expenses associated with the
transaction that meet the requirements for deductibility as a trade or business expense
(other than travel expenses in connection with a business trip) or as an expense for the
production of income.

Dividends
paid on the common shares of the Company generally will not be eligible for the dividends
received deduction provided to corporations receiving dividends from certain United
States corporations. A U.S. Holder which is a corporation and which owns shares
representing at least 10% of the voting power and value of the Company may, under certain
circumstances, be entitled to a 70% (or 80% if the U.S. Holder owns shares representing
at least 20% of the voting power and value of the Company) deduction of the United States
source portion of dividends received from the Company (unless the Company qualifies as a
foreign personal holding company or a passive foreign investment
company, as defined below). The availability of this deduction is subject to
several complex limitations which are beyond the scope of this discussion.

Certain
information reporting and backup withholding rules may apply with respect to the Companys
common shares. In particular, a payor or middleman within the U.S., or in certain cases
outside the U.S., will be required to withhold 31% of any payments to a holder of the
Companys common shares of dividends on, or proceeds from the sale of, such common
shares within the U.S., unless the holder is an exempt recipient, if the holder fails to
furnish its correct taxpayer identification number or otherwise fails to comply with, or
establish an exemption from, the backup withholding tax requirements. Any amounts
withheld under the U.S. backup withholding tax rules will be allowed as a refund or a
credit against the U.S. Holders U.S. federal income tax liability, provided the
required information is furnished to the IRS. U.S. Holders are urged to consult their own
tax counsel regarding the information reporting and backup withholding rules applicable
to the Companys common shares.

# Foreign Tax Credit

A
U.S. Holder who pays (or has withheld from distributions) Canadian income tax with
respect to the ownership of common shares of the Company may be entitled, at the option
of the U.S. Holder, to either receive a deduction or a tax credit for such foreign tax
paid or withheld. Generally, it will be more advantageous to claim a credit because a
credit reduces United States federal income taxes on a dollar-for-dollar basis, while a
deduction merely reduces the taxpayers income subject to tax. This election is made
on a year-by-year basis and applies to all foreign taxes paid by (or withheld from) the
U.S. Holder during that year. There are significant and complex limitations which apply
to the credit, among which is the general limitation that the credit cannot exceed the
proportionate share of the U.S. Holders United States income tax liability that the
U.S. Holders foreign source income bears to his or its worldwide taxable income. In
the determination of the application of this limitation, the various items of income and
deduction must be classified into foreign and domestic sources. Complex rules govern this
classification process. In addition, this limitation is calculated separately with
respect to specific classes of income such as passive income,  high
withholding tax interest, financial services income, shipping
income, and certain other classifications of income. Dividends distributed by the
Company will generally constitute passive income or, in the case of certain
U.S. Holders, financial services income for these purposes. In addition, U.S.
Holders which are

---

58

corporations that own 10% or more of
the voting stock of the Company may be entitled to an indirect foreign tax
credit under Section 902 with respect to the payment of dividends by the Company under
certain circumstances and subject to complex rules and limitations. The availability of
the foreign tax credit and the application of the limitations on the credit are fact
specific, and U.S. Holders of common shares of the Company should consult their own tax
advisors regarding their particular circumstances.

# Disposition of Common
Shares of the Company

A
U.S. Holder will recognize gain or loss upon the sale of common shares of the Company
equal to the difference, if any, between (i) the amount of cash plus the fair market
value of any property received, and (ii) the shareholders tax basis in the
common shares of the Company. Preferential tax rates apply to long-term capital gains of
U.S. Holders which are individuals, estates or trusts. This gain or loss will be capital
gain or loss if the common shares are a capital asset in the hands of the U.S. Holder,
which will be long-term capital gain or loss if the common shares of the Company are held
for more than one year. Deductions for net capital losses are subject to significant
limitations. For U.S. Holders which are not corporations, any unused portion of such net
capital loss may be carried over to be used in later tax years until such net capital
loss is thereby exhausted. For U.S. Holders that are corporations (other than
corporations subject to Subchapter S of the Code), an unused net capital loss may be
carried back three years and carried forward five years from the loss year to be offset
against capital gains until such net capital loss is thereby exhausted.

# Other Considerations

In
the following circumstances, the above sections of this discussion may not describe the
United States federal income tax consequences resulting from the holding and disposition
of common shares:

Foreign Personal Holding
Company

If
at any time during a taxable year (i) more than 50% of the total combined voting power or
the total value of the Companys outstanding shares is owned, directly or
indirectly, by five or fewer individuals who are citizens or residents of the United
States and (ii) 60% (50% in some circumstances) or more of the Companys gross
income for such year was foreign personal holding company income (e.g.
dividends, interest and similar income), the Company may be treated as a foreign
personal holding company. In that event, U.S. Holders that hold common shares would
be required to include in gross income for such year their allocable portions of such
foreign personal holding company incometo the extent the Company does not
actually distribute such income. The Company does not believe that it currently qualifies
as a foreign personal holding company. However, there can be no assurance that the
Company will not be considered a foreign personal holding company for the current or any
future taxable year.

Foreign Investment Company

If
50% or more of the combined voting power or total value of the Companys outstanding
shares is held, directly or indirectly, by citizens or residents of the United States,
United States domestic partnerships or corporations, or estates or trusts other than
foreign estates

---

59

or trusts (as defined by the Code
Section 7701(a)(31)), and the Company is found to be engaged primarily in the business of
investing, reinvesting, or trading in securities, commodities, or any interest therein, it
is possible that the Company may be treated as a foreign investment company as
defined in Section 1246 of the Code, causing all or part of any gain realized by a U.S.
Holder selling or exchanging common shares to be treated as ordinary income rather than
capital gain. The Company does not believe that it currently qualifies as a foreign
investment company. However, there can be no assurance that the Company will not be
considered a foreign investment company for the current or any future taxable year.

Passive Foreign
Investment Company

As
a foreign corporation with U.S. Holders, the Company could potentially be treated as a
passive foreign investment company (PFIC), as defined in Section 1297 of the
Code, depending upon the percentage of the Companys income which is passive, or the
percentage of the Companys assets which produce or are held for the production of
passive income. U.S. Holders owning common shares of a PFIC are subject to the highest
rate of tax on ordinary income in effect for the applicable taxable year and to an
interest charge based on the value of deferral of tax for the period during which the
common shares of the PFIC are owned with respect to certain excess distributions on
and dispositions of PFIC stock. However, if the U.S. Holder makes a timely election to
treat a PFIC as a qualified electing fund (QEF) with respect to such
shareholders interest therein, the above-described rules generally will not apply.
Instead, the electing U.S. Holder would include annually in his gross income his pro rata
share of the PFICs ordinary earnings and net capital gain regardless of whether
such income or gain was actually distributed. A U.S. Holder of a QEF can, however, elect
to defer the payment of United States federal income tax on such income inclusions.
Special rules apply to U.S. Holders who own their interests in a PFIC through
intermediate entities or persons. In addition, subject to certain limitations, U.S.
Holders owning, actually or constructively, marketable (as specifically defined) stock in
a PFIC will be permitted to elect to mark that stock to market annually, rather than be
subject to the excess distribution regime of section 1291 described above. Amounts
included in or deducted from income under this alternative (and actual gains and losses
realized upon disposition, subject to certain limitations) will be treated as ordinary
gains or losses. This alternative will apply to taxable years of U.S. Holders beginning
after 1997 and taxable years of foreign corporations ending with or within such taxable
years of U.S. Holders.

The
Company believes that it was not a PFIC for its fiscal year ended June 30, 2002 and does
not believe that it will be a PFIC for the fiscal year ending June 30, 2003. However,
because the PFIC determination is made annually on the basis of income and assets, there
can be no assurance that the Company will not be a PFIC in the current or in a subsequent
year. In addition, there can be no assurance that the Companys determination
concerning its PFIC status will not be challenged by the IRS, or that it will be able to
satisfy record keeping requirements which will be imposed on QEFs in the event that it
qualifies as a PFIC.

Controlled Foreign
Corporation

If
more than 50% of the total combined voting power of all classes of shares entitled to
vote or the total value of the shares of the Company is owned, actually or
constructively, by

---

60

citizens or residents of the United
States, United States domestic partnerships or corporations, or estates or trusts other
than foreign estates or trusts (as defined by the Code Section 7701(a)(31)), each of which
own, actually or constructively, 10% or more of the total combined voting power of all
classes of shares entitled to vote of the Company (United States Shareholder),
the Company could be treated as a controlled foreign corporation (CFC) under
Subpart F of the Code. This classification would effect many complex results, one of which
is the inclusion of certain income of a CFC which is subject to current U.S. tax. The
United States generally taxes United States Shareholders of a CFC currently on their pro
rata shares of the Subpart F income of the CFC. Such United States Shareholders are
generally treated as having received a current distribution out of the CFCs
Subpart F income and are also subject to current U.S. tax on their pro rata shares of
the CFCs earnings invested in U.S. property. The foreign tax credit described above
may reduce the U.S. tax on these amounts. In addition, under Section 1248 of the Code,
gain from the sale or exchange of shares by a U.S. Holder of common shares of the Company
which is or was a United States Shareholder at any time during the five-year period ending
with the sale or exchange is treated as ordinary income to the extent of earnings and
profits of the Company attributable to the shares sold or exchanged. If a foreign
corporation is both a PFIC and a CFC, the foreign corporation generally will not be
treated as a PFIC with respect to United States Shareholders of the CFC. This rule
generally will be effective for taxable years of United States Shareholders beginning
after 1997 and for taxable years of foreign corporations ending with or within such
taxable years of United States Shareholders. Special rules apply to United States
Shareholders who are subject to the special taxation rules under Section 1291
discussed above with respect to a PFIC. Because of the complexity of Subpart F, a more
detailed review of these rules is outside of the scope of this discussion. The Company
does not believe that it currently qualifies as a CFC. However, there can be no assurance
that the Company will not be considered a CFC for the current or any future taxable year.

# Canadian Federal Income
Tax Considerations

The
summary below is restricted to the case of a holder (a Holder) of one or more
common shares who for the purposes of the Income Tax Act (Canada) (the Act)
is a non-resident of Canada, holds his common shares as capital property and deals at arms
length with the Registrant.

Dividends

A
Holder will be subject to Canadian withholding tax equal to 25% , or such lower rate as
may be available under an applicable tax treaty, of the gross amount of any dividend paid
or deemed to be paid on this common shares. Under the Canada-US Income Tax Convention
(the Treaty) the rate of withholding tax applicable to a dividend on common
shares paid to a Holder who is a resident of the United States is reduced to 15%. The
Registrant will be required to withhold the applicable amount of withholding tax from
each dividend so paid and remit the withheld amount directly to the Receiver General for
Canada for the account of the Holder is reduced to 15% (5% if the shareholder is a
corporation owning at least 10% of the outstanding voting common shares of the
Registrant.)

---

61

Disposition
of Common Shares

A
Holder who disposes of a common share, including by deemed disposition on death, will not
be subject to Canadian tax on any capital gain (or capital loss) thereby realized unless
the common share constituted taxable Canadian property as defined by the Act.
A capital gain occurs when proceeds from the disposition of a share of other capital
property exceeds the original cost. A capital loss occurs when the proceeds from the
disposition of a share are less than the original cost. Under the Act, capital gain is
effectively taxed at a lower rate as only 50% of the gain is effectively included in the
Holders taxable income.

Generally,
a common share will not constitute taxable Canadian property of a Holder unless not
listed on a stock exchange, he held the common shares as capital property used by him
carrying on a business (other than an insurance business) in Canada, or he or persons
with whom he did not deal at arms length alone or together held or held options to
acquire, at any time within the five years preceding the disposition, 25% or more of the
shares of any class of the capital stock of the Registrant.

A
Holder who is a resident of the United States and realizes a capital gain on disposition
of a common share that was taxable Canadian property will nevertheless, by virtue of the
Treaty, generally be exempt from Canadian tax thereon unless (a) more than 50% of the
value of the common share is derived from, or forms an interest in, Canadian real estate,
including Canadian mineral properties, (b) the common share formed part of the business
property of a permanent establishment that the Holder has or had in Canada within the 12
months preceding disposition, or (c) the Holder (i) was a resident of Canada at any time
within the ten years immediately, and for a total of 120 months during the 20 years,
preceding the disposition, and (ii) owned the common share when he ceased to be resident
in Canada.

A
Holder who is subject to Canadian tax in respect of a capital gain realized on
disposition of a common share must include 50% of the capital gain (taxable capital gain)
in computing his taxable income earned in Canada. This Holder may, subject to certain
limitations, deduct 50% of any capital loss (allowable capital loss) arising on
disposition of taxable Canadian property from taxable capital gains realized in the year
of disposition in respect to taxable Canadian property and, to the extent not so
deductible, from such taxable capital gains of any of the three preceding years or any
subsequent year.

F.   Dividends and paying agents

Not
applicable.

G.   Statement by experts

Not
applicable.

---

62

H.   Documents on display

Copies
of material contracts herein described may be examined at the head office of the
Registrant at Unit 101, 3820 Jacombs Road, Richmond, British Columbia, V6V 1Y6. or at the
registered office of the Registrant, 1040-999 West Hastings Street, Vancouver, B.C. V6C
2W2, during normal business hours.

I.   Subsidiary information

Not
applicable.

# Item 11    Quantitative and
Qualitative Disclosures About Market Risk

The
Company believes that it does not have any material exposure to interest or commodity
risks. The Company does not own any derivative instruments, does not engage in any
hedging transactions and does not have any outstanding long-term debt.

# Item 12    Description of
Securities Other Than Equity Securities

A.   Debt
Securities.

Not
applicable.

B.   Warrants and rights

Not applicable.

C.   Other securities

Not applicable.

D.   American Depositary Shares

Not
applicable

# Item 13    Defaults,
Dividends Arrearages and Delinquencies.

Not
Applicable

# Item 14    
          Material Modifications to the Rights of Security Holders and Use of Proceeds

Not
Applicable

---

63

# Item 15    Controls and
Procedures

We
maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports 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 our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.

There
were no significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation, including
any significant deficiencies or material weaknesses of internal controls that would
require corrective action.

# Item 16    [Reserved]

Not
Applicable

# PART III

# Item 17    Financial
Statements

The
Report and Consolidated Financial Statements for the years ended June 30, 2002 are
reported by Wolrige Mahon, Chartered Accountants and the 2001 (the Annual Statements)
are reported on by PricewaterhouseCoopers LLP, Chartered Accountants. These Annual
Statements were prepared in accordance with generally accepted accounting principles in
Canada, which differ from general accepted accounting principles in the United States.
See Note 13 to the Annual Statements.

The
following financial statements and related schedules are included in this Item:

Auditors
Report.

Consolidated Balance
Sheets as at June 30, 2002 and 2001.

| | Consolidated
Statements of Operations and Deficit for the three years ended June 30, 2002, 2001 and
2000. Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 and
2000. Notes to Consolidated Financial Statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

64

QI SYSTEMS INC.
Richmond, B.C.

FINANCIAL STATEMENTS
June 30, 2002

---

65

AUDITORSREPORT

To the Shareholders of QI Systems
Inc.:

We have audited the balance sheet of
QI Systems Inc. as at June 30, 2002 and the statements of operations and deficit and cash
flows for the year then ended. These financial statements are the responsibility of the
companys management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance
with Canadian generally accepted auditing standards. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.

In our opinion, these financial
statements present fairly, in all material respects, the financial position of the company
as at June 30, 2002 and the results of its operations and its cash flows for the year then
ended in accordance with Canadian generally accepted accounting principles. As required by
the British Columbia company act, we report that, in our opinion, these principles have
been applied on a basis consistent with that of the preceding year.

The audited financial statements as
at June 30, 2001 and 2000 and for the years then ended were examined by other auditors who
expressed an opinion without reservation on those statements in their reports dated
October 18, 2001and August 25, 2000 respectively.

Wolrige Mahon

CHARTERED ACCOUNTANTS 
Vancouver, Canada
October 8, 2002, except Note 8 which is as of November 1, 2002

Comments by Auditor for U.S. Readers on Canada-U.S.
Reporting Differences

In the United States, reporting
standards for auditors require the addition of an explanatory paragraph (following the
opinion paragraph) when the financial statements are affected by conditions and events
that cast substantial doubt on the companys ability to continue as a going concern,
such as those described in Note 1 to the financial statements. Our report to the
shareholders dated October 8, 2002 is expressed in accordance with Canadian reporting
standards which do not permit a reference to such events and conditions in the
auditors report when these are adequately disclosed in the financial statements.

Wolrige Mahon

CHARTERED ACCOUNTANTS 
Vancouver, Canada
October 8, 2002

---

66

## QI SYSTEMS INC.

STATEMENT OF OPERATIONS AND DEFICIT

For the years ended June 30, 2002, 2001 and 2000
(Expressed in U.S. dollars)

|                                           
|-------------------------------------------
|
|                                           
|Revenue                                    
|Product sales                              
|Service and contract work                  
|                                           
|                                           
|Cost of goods sold                         
|                                           
|                                           
|                                           
|Expenses                                   
|Development costs                          
|Marketing                                  
|Administration                             
|Professional fees                          
|Amortization                               
|Bad debt                                   
|Financing costs and interest               
|                                           
|                                           
|                                           
|Operating loss                             
|Interest income                            
|                                           
|Net loss                                   
|                                           
|Deficit, beginning of year                 
|                                           
|Deficit, end of year                       
|                                           
|                                           
|Loss per share - basic and diluted(Note 11)
|                                           

---

67

QI SYSTEMS INC.

BALANCE SHEET
As at June 30, 2002 and 2001
(Expressed in U.S. dollars)

|                                        | 
|--------------------------------------- | 
|
|                                        | 
|Assets                                  | 
|                                        | 
|Current                                 | 
|Cash                                    | 
|Receivables                             | 
|Share subscriptions receivable (Note 8) | 
|Prepaid expenses                        | 
|Inventory (Note 4)                      | 
|                                        | 
|                                        | 
|Capital assets (Note 5)                 | 
|                                        | 
|                                        | 
|                                        | 
|Liabilities                             | 
|                                        | 
|Current                                 | 
|Payables and accruals (Note 7)          | 
|Shareholder loan (Note 6)               | 
|Deferred revenue                        | 
|                                        | 
|                                        | 
|                                        | 
|Share Capital and Deficit               | 
|                                        | 
|Share capital (Note 8)                  | 
|Share capital subscribed (Note 8)       | 
|Warrants                                | 
|Deficit                                 | 
|Cumulative translation adjustment       | 
|                                        | 
|                                        | 
|Going concern(Note 1)                   | 
|                                        | 
|Commitments and contingencies(Note 12)  | 
|                                        | 
|                                        | 
|                                        | 

---

68

## QI SYSTEMS INC.

STATEMENT OF CASH FLOWS
For the years ended June 30, 2002, 2001 and 2000
(Expressed in U.S. dollars)

|                                           | 
|------------------------------------------ | 
|
|                                           | 
|Cash flows related to operating activities | 
|Loss for the year                          | 
|Amortization                               | 
|Writedown of inventory                     | 
|                                           | 
|                                           | 
|Changes in non-cash working capital        | 
|Receivables                                | 
|Prepaid expenses                           | 
|Inventory                                  | 
|Payables and accruals                      | 
|Deferred revenue                           | 
|                                           | 
|                                           | 
|                                           | 
|Cash flows related to investing activities | 
|Investment in capital assets               | 
|                                           | 
|Cash flows related to financing activities | 
|Proceeds from shareholder loans            | 
|Proceeds from private placements           | 
|Proceeds from share capital subscribed     | 
|                                           | 
|                                           | 
|                                           | 
|Foreign exchange effect                    | 
|                                           | 
|Net increase (decrease) in cash            | 
|Cash, beginning                            | 
|                                           | 
|Cash, ending                               | 
|                                           | 
|Supplementary information                  | 
|Interest received                          | 
|Interest paid                              | 
|Income taxes paid                          | 
|                                           | 
|Non-cash transactions (Note 8)             | 

---

69

## QI SYSTEMS INC.

NOTES 
For the years ended June 30, 2002 and 2001
(Expressed in U.S. dollars)

---

# Note 1   Going Concern

---

| | The
company was incorporated in 1978 under the British Columbia Company Act. The company
manufactures, designs and sells readers that allow the use of cash payment systems for
self-serve applications such as vending, laundromat machines, transit fare collection
systems and newspaper vending machines.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
financial statements have been prepared using Canadian generally accepted accounting
principles applicable to a going concern. The use of such principles may not be
appropriate because as at June 30, 2002, there was substantial doubt that the company
would be able to continue as a going concern.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
company has significant losses, a working capital deficiency and an accumulated deficit.
The company requires additional capital and revenue sources.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
continues to seek additional financing and revenue sources. Although there is no assurance
that the company will be successful in these actions, management is confident that it will
be able to secure the necessary financing and improve operating cash flow to enable it to
continue as a going concern. These financial statements do not reflect adjustments to the
carrying value of assets and liabilities, the reported expenses and balance sheet
classifications used that would be necessary if the going concern assumption were not
appropriate.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# Note 2   
Significant Accounting Policies

---

| | Amortization of Capital Assets
| | ------------------------------

| | Capital
assets are carried at cost less accumulated amortization. Amortization is calculated
annually as follows:
| | -----------------------------------------------------------------------------------------------------------------

|Furniture and fixtures           |  | - |  | 20 | %  | declining balance | 
|-------------------------------- |  | - |  | -- | -- | ----------------- | 
|Computer equipment               |  | - |  | 30 | %  | declining balance | 
|Moulds, tools and test equipment |  | - |  | 10 | 0% | declining balance | 

| | except
in the year of acquisition, at which time amortization is provided for at one-half the
annual rate.
| | ----------------------------------------------------------------------------------------------------------

| | Inventories
and Cost of Goods Sold
| | ----------------------------------

| | The
company records inventories at the lower of cost, calculated on a weighted average basis,
and estimated net realizable value.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | Cost
of goods sold comprises materials, direct labour and direct overhead expenditures incurred
in the production process.
| | --------------------------------------------------------------------------------------------------------------------------

| | Revenue Recognition
| | -------------------

| | Revenues
are derived primarily from equipment sales and non-recurring engineering fees. Revenue is
recognized upon delivery of equipment and completion of non-recurring engineering work.
Service, installation and contract revenue is recognized upon completion and acceptance.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

70

## QI SYSTEMS INC.

NOTES 
For the years ended June 30, 2002 and 2001
(Expressed in U.S. dollars)

---

# Note 2   
Significant Accounting Policies (continued)

---

| | Development Costs
| | -----------------

| | Development
costs include on-going research and development of the modular payment system 
SmartKit III. Development costs are expensed as incurred unless they meet the criteria for
deferral under the Canadian generally accepted accounting principles.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Use of Estimates
| | ----------------

| | The
preparation of financial statements in conformity with Canadian generally accepted
accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Foreign Currency Translation
| | ----------------------------

| | Current
exchange rates are used to translate monetary assets and liabilities, and historical
exchange rates are used for non-monetary assets and liabilities. Revenues and expenses are
translated at average monthly exchange rates. The company has adopted the United States
dollar as its reporting currency, although the Canadian dollar is its functional currency.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
reporting purposes, assets and liabilities are translated at the current exchange rate,
revenues and expenses are translated at average exchange rates, and equity and share
capital are translated at historical exchange rates.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock-based Compensation Plans
| | ------------------------------

| | The
company has an Employee Incentive Stock Option Plan which is described in Note 7. No
compensation expense is recognized for this plan when stock or stock options are issued to
employees or consultants as options are normally issued at a price equivalent to the
market price on date of issue. Any consideration paid on exercise of stock options or
purchase of stock is credited to share capital.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Warrants
| | --------

| | Consideration
received on the exercise of warrants or purchase of stock is credited to share capital.
| | -----------------------------------------------------------------------------------------------------

| | Detachable
warrants are allocated a portion of the proceeds from debt or share issues based on fair
values and included in additional paid-in capital warrants until the warrants are
exercised or expired.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# Note 3
   Financial Instruments

---

| | The
fair value of the Companys cash, receivables, share subscriptions receivable and
payables accruals approximates their carrying amount due to the relatively short periods
to maturity of the instruments. The maximum credit risk exposure for all financial assets
is the carrying amount of that asset.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

71

## QI SYSTEMS INC.

NOTES 
For the years ended June 30, 2002 and 2001
(Expressed in U.S. dollars)

---

# Note 4   
Inventory

---

|                          | 2002
$ | 2001
          $
|------------------------- | ------ | ----------------
|Raw materials             |        | 170,563         
|Work-in-process           |        | 11,660          
|Finished goods            |        | 10,947          
|                          |        |                 
|                          |        | 193,170         
|Less: Inventory writedown |        | (50,000         
|                          |        |                 
|                          |        | 143,170         
|                          |        |                 

---

# Note 5   Capital Assets

---

|                       | Cost
$ | 2002
Accumulated
Amortization
$ | Net
$ | Cost
$  | 2001
Accumulated
Amortization
$ | Net
$ 
|---------------------- | ------ | ------------------------------- | ----- | ------- | ------------------------------- | ------
|Furniture and fixtures |        | 22,268                          |       | 16,502  |                                 | 5,766 
|Computer equipment     |        | 72,739                          |       | 56,670  |                                 | 16,069
|Moulds, tools and      |       
|test equipment         |        | 100,705                         |       | 100,705 |                                 | --    
|                       |       
|                       |        | 195,712                         |       | 173,877 |                                 | 21,835
|                       |       

---

# Note 6   Shareholder loan

---

| | Interest
of $34,617 was incurred during the year ended June 30, 2002 (2001  $6,186) on loans
from two shareholders amounting to $326,415 (2001  $297,315). The loans bore
interest at 12% per annum. Subscribed shares were issued in settlement of the loans
subsequent to year end.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# Note 7   Related Party
Transactions and Balances

---

| | During
the year, the company paid $154,435 (2001: $87,155) in consulting fees to directors and
officers and former directors and officers of the company. These transactions are in the
normal course of operations and are measured at the exchange amount, which is the amount
of consideration established and agreed to by the related parties. As at June 30, 2002 and
2001, amounts of $68,253 and $79,063, respectively, were due to these directors and
officers relating to these fees, and included in accounts payable.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

72

## QI SYSTEMS INC.

NOTES 
For the years ended June 30, 2002 and 2001
(Expressed in U.S. dollars)

---

# Note 8   
Share Capital

---

| | Authorized:
| | -----------

| | 200,000,000
 common shares with no par value
| | --------------------------------------------

| | Issued and outstanding:
| | -----------------------

|                        | Number of 
Shares | Amount
          $
|----------------------- | ----------------- | ------------------
|Issued for cash         |                   |                   
|Balance - June 30, 2000 |                   | 11,355,714        
|Private placement       |                   | 250,000           
|Warrants                |                   | --                
|Options exercised       |                   | 4,000             
|                        |                   |                   
|Balance - June 30, 2001 |                   | 11,609,714        
|Issued for cash         |                  
|Private placements      |                   | 670,454           
|                        |                   |                   
|Balance - June 30, 2002 |                   | 12,280,168        
|                        |                   |                   

| | Share Capital Subscribed
| | ------------------------

| | On
May 3, 2002 the Company adopted a share capital subscription plan to issue 3,750,000 units
at a price of $0.30 ($0.50 Canadian) per unit by way of private placement. Each unit is
comprised of one common share and one share purchase warrant of the company, exercisable
for a period of 24 months from May 3, 2002 at a price of $0.40 per share. The shares were
issued as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                             | Number of 
Shares | Amount
$ 
|---------------------------- | ----------------- | ---------
|Subscribed shares issued for |                   |          
|cash                         |                   | 1,980,000
|Subscribed shares issued in  |                  
|settlement of debt:          |                  
|Shareholder loan             |                   | 1,000,000
|Trade accounts payable       |                   | 770,000  
|                             |                   |          
|                             |                   | 3,750,000
|                             |                   |          

| | Subsequent
to year end all 3,750,000 subscribed shares were issued.
| | -------------------------------------------------------------------

---

73

## QI SYSTEMS INC.

NOTES 
For the years ended June 30, 2002 and 2001
(Expressed in U.S. dollars)

---

# Note 8   
Share Capital (continued)

---

| | Warrants
| | --------

| | On
August 23, 2000, the company completed a private placement for net proceeds of $446,231.
The placement comprised of 250,000 units; each unit comprised of one common share and one
non-transferable share purchase warrant. Each warrant entitles the holder to purchase one
common share at a price of $1.85 (Cdn $2.80) for a period of two years from August 23,
2000. $164,000 of the proceeds of the private placement has been allocated to warrants. As
at June 30, 2002, all 250,000 warrants were outstanding. These warrants expired August 23,
2002.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Escrow
Shares
| | -------------

| | Issued
share capital includes 750,000 shares held in escrow subject to release at the direction
of the Superintendent of Brokers of British Columbia.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock Options
| | -------------

| | The
company issues stock options as approved by the board of directors to employees,
consultants and directors. Options are issued at the average trading price of the 10 days
preceding the grant date and may be granted for periods of up to five days. The vesting
schedule for each grant is determined by the board of directors. As at June 30, 2002 the
total number of options approved for issue is 2,175,000, of which no more than 1,085,000
options may be granted to insiders.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of the status of the companys stock option plan as of June 30, 2002 and
2001, and changes during the years ending on those dates, is presented below:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  | Number of
Shares | 2002
Weighted AverageExercise Price | Number of 
Shares | 2001
Weighted AverageExercise Price |    
|----------------- | ---------------- | ----------------------------------- | ----------------- | ----------------------------------- | ---
|
|Outstanding -     |                  |                                     |                   |                                     |    
|Beginning of year |                  | 1,809,900                           |                   | 1                                   | .14
|Granted           |                  | --                                  |                   | -                                   | -  
|Exercised         |                  | --                                  |                   | -                                   | -  
|Forfeited         |                  | (293,400                            | )                 | 1                                   | .32
|                  |                  |                                     |                   |                                     |    
|Outstanding -     |                 
|End of year       |                  | 1,516,500                           |                   | 1                                   | .09
|                  |                  |                                     |                   |                                     |    

---

74

## QI SYSTEMS INC.

NOTES 
For the years ended June 30, 2002 and 2001
(Expressed in U.S. dollars)

---

# Note 8   
Share Capital (continued)

|Exercise Price | Options Outstanding |      | Options
Exercisable
|-------------- | ------------------- | ---- | -------------------
|
|
|0.79           |                     | 1.20 |                    
|1.32           |                     | 2.00 |                    
|               |                     |      |                    

---

75

# Note 9   
Segmented Information

---

| | The
company operates in one business  segment:  the  development,  manufacture and
installation of     unattended point of sale smartcard applications.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
by country are as follows:
| | -----------------------------------

|              | 2002
$ | 2001
        $
|------------- | ------ | --------------
|Canada        |        | 115,700       
|United States |        | 37,285        
|Venezuela     |        | --            
|Norway        |        | --            
|              |        |               
|              |        | 152,985       

| | All
 capital assets are located in Canada.
| | ------------------------------------------

| | During
the year ended June 30, 2002, one customer accounted for 70% of product sales.
| | -------------------------------------------------------------------------------------

| | During
the year ended June 30, 2001, three customers accounted for 27%, 18% and 11% of product
sales respectively.
| | ------------------------------------------------------------------------------------------------------------------

---

76

## QI SYSTEMS INC.

NOTES 
For the years ended June 30, 2002 and 2001
(Expressed in U.S. dollars)

---

# Note 10   
Income Taxes

---

| | The
company has accumulated losses of $4,816,407 for income tax purposes which may be deducted
in the calculation of taxable income in future years. The losses expire as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|     | $ |          
|---- | - | ---------
|2003 |   | 230,884  
|2004 |   | 411,855  
|2005 |   | 601,070  
|2006 |   | 827,742  
|2007 |   | 800,865  
|2008 |   | 1,008,024
|2009 |   | 935,967  
|     |   |          
|     |   | 4,816,407
|     |   |          

| | In
addition, the company has incurred scientific research and experimental development
expenditures (SR&ED) of approximately $1,806,227 to date for income tax purposes which
may be carried forward indefinitely and deducted in the calculation of taxable income in
future years.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
company has also accumulated non-refundable investment tax credits of $414,662 which may
be applied against taxes payable in future years, and which expire at various dates
commencing 2006.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
amounts are subject to review and revision by Canada Customers and Revenue Agency and the
potential tax benefit which may result from future application of the losses, SR&ED
expenditures, non-refundable investment tax credits, and capital cost allowance is not
reflected in these financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
income tax provision for the year ended June 30, 2002 and 2001 differs from the amount
obtained by applying the applicable statutory income tax rates to loss before future
income tax recovery as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                              | 2002 | 2001    
|--------------------------------------------- | ---- | --------
|Canadian federal and provincial tax rates     |      | 39.62   
|                                              | $    | $       
|Income tax recovery based on statutory rates  |      | 382,904 
|Loss carryforward and scientific research and |     
|experimental development expenditures         |      | (277,332
|Tax effect on timing difference               |      | (105,572
|                                              |      |         
|Tax effect on timing difference               |      | --      
|                                              |      |         

---

# Note 11   
Loss per share

---

| | Loss
per share is calculated using the weighted average number of common shares outstanding
during the year of 12,034,278 shares (2001: 11,571,835 shares; 2000: 11,085,907 shares).
Fully diluted per share amounts are not presented as the effect of outstanding options and
warrants is anti-dilutive.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

77

## QI SYSTEMS INC.

NOTES 
For the years ended June 30, 2002 and 2001
(Expressed in U.S. dollars)

---

# Note 12   Commitments and
Contingencies

---

| | Obligations
under the operating lease on the office premises are:
| | -----------------------------------------------------------------

|     | 
|---- | 
|2003 | 
|2004 | 
|2005 | 
|2006 | 
|2007 | 
|     | 
|     | 
|     | 

| | The
company is party to a settlement agreement, dated March 31, 1999, between various
shareholders and directors. As a condition of this settlement, and in exchange for certain
rights relating to the intangible assets of the company, the company has agreed to
indemnify certain shareholders against potential tax liabilities and related incidental
costs that may result on the transfer of Earn-Out Shares (escrow shares) as determined in
the settlement agreement. The amount of the potential liability is not determinable, and
accordingly, no provision has been made in these financial statements. To date, no claims
have been made.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# Note 13   
Differences Between Generally Accepted Accounting Principles in Canada and
the United States

---

| | These
financial statements have been prepared in accordance with generally accepted accounting
principles in Canada (Canadian GAAP) which differ in certain measurement respects with
accounting principles generally accepted in the United States (U.S. GAAP).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Had
the company followed U.S. GAAP, the statement of shareholders equity (deficiency)
under U.S. GAAP would have been reported as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------

|                                  | 2002
$ | 2001
$    
|--------------------------------- | ------ | ----------
|Share capital                     |        |           
|Common shares                     |        | 7,957,877 
|Additional paid-in capital        |        | 679,000   
|Deferred compensation expense     |        | (56,667   
|Share capital subscribed          |        | 1,187,809 
|                                  |        |           
|                                  |        | 9,768,019 
|                                  |        |           
|Cumulative translation adjustment |        | (34,211   
|                                  |        |           
|Accumulated deficit               |       
|Balance - beginning of year       |        | (8,823,663
|Loss for the year                 |        | (966,440  
|                                  |        |           
|Balance - end of year             |        | (9,790,103
|                                  |        |           
|                                  |        | (56,295   
|                                  |        |           

---

78

## QI SYSTEMS INC.

NOTES 
For the years ended June 30, 2002 and 2001
(Expressed in U.S. dollars)

---

# Note 13   
Differences Between Generally Accepted Accounting Principles in Canada and
the United States

---

| | Had
the company followed U.S. GAAP, the statements of operations contained within the
financial statements would have been reported as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------

|                                          | 2002
$ | 2001
$  | 2000
$
|----------------------------------------- | ------ | ------- | ------
|Loss for the year under Canadian GAAP     |        | 966,440 |       
|Effect of stock-based compensation        |        | --      |       
|                                          |        |         |       
|Loss for the year under U.S. GAAP         |        | 966,440 |       
|                                          |        |         |       
|Loss per common share - basic and diluted |       
|Canadian GAAP                             |        | (0.08   | )     
|U.S. GAAP                                 |        | (0.09   | )     

| | Had
the company followed U.S. GAAP, it would have reported statements of comprehensive income
within the financial statements as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------

|                                        | 2002
$ | 2001
$   | 2000
$
|--------------------------------------- | ------ | -------- | ------
|Loss under U.S. GAAP                    |        | (966,440 | )     
|Foreign currency translation adjustment |        | --       |       
|                                        |        |          |       
|Comprehensive loss under U.S. GAAP      |        | (966,440 | )     
|                                        |        |          |       

| | Had
the company followed U.S. GAAP, cash provided from (used for) operating activities
contained within the statements of cash flows would have been reported as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     | 2002
$ | 2001
$   | 2000
$
|------------------------------------ | ------ | -------- | ------
|Cash flows from operating activities |        |          |       
|Loss for the year under U.S. GAAP    |        | (966,440 | )     
|Items not affecting cash             |       
|Amortization                         |        | 59,667   |       
|Inventory writedown                  |        | --       |       
|Stock-based compensation             |        | --       |       
|                                     |        |          |       
|                                     |        | (906,773 | )     
|Changes in non-cash working capital  |       
|Receivables                          |        | (8,909   | )     
|Prepaid expenses                     |        | (4,143   | )     
|Inventory                            |        | 26,261   |       
|Payables and accruals                |        | 273,995  |       
|Deferred revenue                     |        | 25,000   |       
|                                     |        |          |       
|Operating activities under U.S. GAAP |        | (594,569 | )     
|                                     |        |          |       
|                                     |       

---

79

## QI SYSTEMS INC.

NOTES 
For the years ended June 30, 2002 and 2001
(Expressed in U.S. dollars)

---

# Note 13   
Differences Between Generally Accepted Accounting Principles in Canada and
the United States

---

| | Stock-based Compensation
| | ------------------------

| | Under
U.S. GAAP, the company uses the intrinsic value method as described in APB 25,
Accounting for Stock Issued to Employees, to recognize compensation cost on
options granted to directors and employees. Under this method, the difference between the
market price of the stock on the date of the grant and the exercise price of the stock
options is expensed as compensation cost over the period from the date of the grant to the
date the option is first exercisable. For options issued to consultants, the company
adopted the fair value method of accounting for stock-based compensation. This requires
the options to be valued on the date of grant using the Black-Scholes option pricing
method as prescribed by FAS 123.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
for fiscal years beginning on or after January 1, 2002, all public companies are required
to adopt the new recommendations of the Canadian Institute of Chartered Accountants
regarding accounting for Canadian stock-based compensation. These new requirements require
that all stockbased payments to non-employees and direct awards of stock to employees be
accounted for using a fair value based method of accounting. However, the new standard
permits the company to continue its existing policy of not recording compensation cost on
the grant of stock options to employees with the addition of pro forma information. The
company has elected to apply the proforma disclosure provisions of the new standard to
awards granted on or after July 1, 2002.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Comprehensive Income
| | --------------------

| | U.S. GAAP requires disclosure of comprehensive income which, for the company, is net
income (loss) under U.S. GAAP plus the change in cumulative translation
adjustment under U.S. GAAP.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
concept of comprehensive income does not exist under Canadian GAAP.
| | -----------------------------------------------------------------------

| | Recent Accounting Pronouncements
| | --------------------------------

| | In
October 2001, the Financial Accounting Standards Board (FASB) issued FAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. FAS No. 144
requires that long-lived assets be classified as assets either to be held and used, to be
disposed of other than by sale, or to be disposed by sale. It also prescribes various
approaches to valuing these types of long-lived assets. FAS No. 144 is effective for
fiscal years beginning after December 15, 2001. The provisions of FAS No. 144 are to be
applied prospectively. The company does not expect that the implementation of these
guidelines will have a material impact on its financial position or results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
FASB issued FAS No. 143, which addresses financial accounting and reporting obligations
associated with the retirement of long-lived assets and the associated asset retirement
costs. The statement applies to all entities and to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. It is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The company does not expect that this statement will have a
material impact on the companys financial position, results of operations or cash
flows.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

80

# Item 18    Financial
Statements

Not
Applicable

# Item 19    Exhibits

|Exhibit 
    No. | Description
|---------------- | -----------
|
|1                | .1(i)      
|
|1                | .2(i)      
|
|1                | .3(i)      
|
|1                | .4(i)      
|
|1                | .5(i)      
|
|1                | .6(i)      
|
|1                | .7(i)      
|
|1                | .8(i)      
|
|1                | .9(i)      
|
|4                | .1(i)      
|
|4                | .2(i)      
|
|4                | .4(i)      
|
|4                | .5(i)      
|
|4                | .6(i)      
|
|4                | .7(i)      
|
|4                | .8(i)      
|
|4                | .9(i)      
|
|4                | .10(i)     
|
|4                | .11(i)     
|
|4                | .12(i)     
|
|4                | .13(i)     
|

---

81

|Exhibit 
    No. | Description
|---------------- | -----------
|
|4                | .14(ii)    
|
|4                | .15(ii)    
|
|4                | .16(ii)    
|
|4                | .17(ii)    
|
|4                | .18(ii)    
|
|4                | .19(ii)    
|
|4                | .20(ii)    
|
|4                | .21(iii)   
|
|4                | .22(iii)   
|
|4                | .23(iii)   
|
|99               | .1         
|
|99               | .2         
|
|(i)              |            
|(ii)             |            
|(iii)            |            

---

82

# SIGNATURES

The registrant hereby
certifies that it meets all of the requirements for filing on Form 20-F and that it has
duly caused and authorized the undersigned to sign this annual report on its behalf.

| | QI SYSTEMS INC.
Registrant         "Mesbah Taherzadeh"
| | ------------------------------------------------------

|Date:  February 3, 2003
Executed at Vancouver,
British Columbia, Canada | By:    Mesbah Taherzadeh, President
|----------------------------------------------------------------------- | -----------------------------------

---

83

# CERTIFICATIONS
Certification of Principal Executive Officer

I, Mesbah Taherzadeh,
certify that:

1.    
          I have reviewed this annual report on Form 20-F of QI SYSTEMS INC.;

2.    
          Based on my knowledge, this annual report does not contain any untrue statement
          of a material fact or omit to state a material fact necessary to make the
          statements made, in light of the circumstances under which such statements were
          made, not misleading with respect to the period covered by this annual report;
          and

3.    
          Based on my knowledge, the financial statements, and other financial information
          included in this annual report, fairly present in all material respects the
          financial condition, results of operations and cash flows of the registrant as
          of, and for, the periods presented in this annual report.

Date: February 3, 2003

/s/ Mesbah Taherzadeh

Mesbah Taherzadeh,
President and acting Principal Executive Officer

---

# Certification of Chief Financial Officer

I, Craig Jones, certify
that:

1.    
          I have reviewed this annual report on Form 20-F of QI SYSTEMS INC.;

2.    
          Based on my knowledge, this annual report does not contain any untrue statement
          of a material fact or omit to state a material fact necessary to make the
          statements made, in light of the circumstances under which such statements were
          made, not misleading with respect to the period covered by this annual report;
          and

3.    
          Based on my knowledge, the financial statements, and other financial information
          included in this annual report, fairly present in all material respects the
          financial condition, results of operations and cash flows of the registrant as
          of, and for, the periods presented in this annual report.

Date: February 3, 2003

/s/ Craig Jones

Craig Jones, Acting
Interim Principal Financial Officer

---