**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        20-F**
 
 o
              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, 2006
 or
 o
              Transition
                  report pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934 for the transition period [    ] from to
                  [    ]
 or
 o
              Shell
                  Company report pursuant to Section 13 or 15(d) of the Securities
                  Exchange
                  Act of 1934
 
 Date
        of
        event requiring this shell company report [    ]
 
 **Commission
        file number**  **000-30948**
 QI
        Systems Inc.
 (Exact
        name of Registrant as specified in its charter)
 
 **Delaware**
 (Jurisdiction
        of incorporation)
 
 **609
        Cheek Sparger Road, Suite 300, Colleyville, TX 76034**
 **(** Address
        of principal executive offices)
 
 Securities
        registered pursuant to Section 12(b) of the Act: **None.**
 
 Securities
        registered pursuant to Section 12(g) of the Act:
 
 **Common
        stock, $.001 par value.**
 (Title
        of
        Class)
 
 Securities
        for which there is a reporting obligation pursuant to Section 15(d) of the
        Act: **None.**
 
 Indicate
        the number of outstanding shares of each of the registrant's classes of capital
        or common stock as of the close of the period covered by the annual
        report. ****
 
 **44,834,629**  **shares
        of common stock, $.001 par value.**
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act. Yes
o
        No  x
 
 If
        this
        report is an annual or transition report, indicate by check mark if the
        registrant is not required to file reports pursuant to Section 13 or 15(d)
        of the Securities Exchange Act of 1934.  Yes x No o
 
 Note
        -
        Checking the box above will not relieve any registrant required to file reports
        pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from
        their obligations under those Sections.
 
 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 o
  
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
 
 Large
                  accelerated filero
              
              Accelerated
                  filero
              
              Non-accelerated
                  filer****x****
 
 Indicate
        by check mark which financial statement item the registrant has elected to
        follow.     Item 17 ý Item 18 o
 
 If
        this
        is an annual report, indicate by check mark whether the registrant is a shell
        company (as defined in Rule 12b-2 of the Exchange Act).    
Yes o No ý
  (Applicable
        only to issuers involved in bankruptcy proceedings during the past five years)
 Indicate
        by check mark whether the registrant has filed all documents and reports
        required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange
        Act
        of 1934 subsequent to the distribution of securities under a plan confirmed
        by a
        court.
  x Not
          Applicable         Yes o 
Noo
 
  **EXPLANATORY
        NOTE**
   We
        are
        filing this annual report for the fiscal year ended June 30, 2006 on Form
        20-F
        pursuant to General Instruction A of Form 20-F. For the entire fiscal year
        ended
        June 30, 2006, we were a “foreign private issuer,” as that term is defined in
        Rule 3b-4, promulgated under the Securities Exchange Act of 1934, as amended.
        On
        July 1, 2006, the first day of our 2007 fiscal year, we changed our jurisdiction
        of incorporation, or domesticated, from the Province of British Columbia,
        Canada
        to the State of Delaware. Because we were a “foreign private issuer” for the
        entire period covered by this report, we are required to file our annual
        report
        for our fiscal year ended June 30, 2006 on Form 20-F, and not on Form 10-KSB.
        We
        plan to file future annual reports on Form 10-KSB, as long as we qualify to use
        such form.
  
  **NOTE
        REGARDING FORWARD LOOKING STATEMENTS** ****
  This
        annual report on Form 20-F contains forward looking statements. Except for
        statements of historical fact, specified information contained in this annual
        report may constitute “forward-looking statements,” including without
        limitation, statements based on the beliefs, opinions and expectations of
        our
        management; statements related to projections, estimates and future trends;
        and
        statements containing the words “believes,” “anticipates,” “intends,” “expects,”
“estimates”, “projected”, “may”, “should”, “could” and words of similar import,
        and all projections of future results. Such forward-looking statements involve
        known and unknown risks, uncertainties and other factors which may cause
        our
        actual results or achievements to be materially different from any of our
        future
        results or achievements 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;
  ·
              our
                  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 our technology obsolete;
                  competition with companies having greater financial and technological
                  resources;
  ·
              dependence
                  on strategic alliances to install our Cash Card technology in the
                  marketplace;
  ·
              dependence
                  on large contracts and concentration of customers;
  ·
              changes
                  in economic conditions; and
  ·
              other
                  risks and uncertainties described in “Key Information,” “Information on
                  the Company,” “Operating and Financial Review and Projects” and
                  “Quantitative and Qualitative Disclosures about Market Risk.”
  Our
        actual results, performance or achievement could differ significantly from
        those
        expressed in, or implied by, these forward-looking statements. Accordingly,
        we
        cannot assure that any of the events anticipated by our forward-looking
        statements will occur, or if they do, what impact they will have on our results
        of operations and financial condition.
  Forward-looking
        statements are based on the beliefs, opinions and expectations of our management
        at the time they are made, and we do not assume any obligation to update
        our
        forward-looking statements if those beliefs, opinions or expectations, or
        other
        circumstances, should change.
  
  **QI
        SYSTEMS INC.**
 **FORM
        20-F**
 
 **TABLE
        OF CONTENTS**
 
 **Page
                  No.****PART
                  I**ITEM
                  1.
              
              IDENTITY
                  OF DIRECTORS, SENIOR MANAGEMENT AND
                  ADVISERS
              11.A
              Directors
                  and Senior Management
              11.B
              Advisors
              11.C
              Auditors
              1ITEM
                  2
              
              OFFER
                  STATISTICS AND EXPECTED TIMETABLE
              1ITEM
                  3
              
              KEY
                  INFORMATION
              13.A
              Selected
                  financial data
              13.B
              Capitalization
                  and indebtedness
              23.C
              Reasons
                  for the offer and use of proceeds
              33.D
              Risk
                  factors
              3ITEM
                  4
              
              INFORMATION
                  ON THE COMPANY
              94.A
              History
                  and development of the company
              94.B
              Business
                  overview
              94.C
              Organizational
                  structure
              174.D
              Property,
                  plants and equipment
              17ITEM
                  5
              
              OPERATING
                  AND FINANCIAL REVIEW AND
                  PROSPECTS
              175.A
              Operating
                  results
              195.B
              Liquidity
                  and capital resources
              205.C
              Research
                  and development, patents and licenses,
                  etc.
              205.D
              Trend
                  information
              215.E
              Off-balance
                  arrangements
              225.F
              Tabular
                  disclosure of contractual
                  obligations
              225.G
              Safe
                  Harbor
              22ITEM
                  6
              
              DIRECTORS,
                  SENIOR MANAGEMENT AND EMPLOYEES
              226.A
              Directors
                  and senior management
              226.B
              Compensation
              256.C
              Board
                  practices
              296.D
              Employees
              306.E
              Share
                  ownership
              30ITEM
                  7
              
              MAJOR
                  SHAREHOLDERS AND RELATED PARTY
                  TRANSACTIONS
              327.A
              Major
                  shareholders
              327.B
              Related
                  party transactions
              337.C
              Interests
                  of experts and counsel
              35ITEM
                  8
              
              FINANCIAL
                  INFORMATION
              358.A
              Consolidated
                  statements and other financial
                  information
              358.B
              Significant
                  changes
              35ITEM
                  9
              
              THE
                  OFFER AND LISTING
              359.A
              Offer
                  and listing details
              359.B
              Plan
                  of distribution
              359.C
              Markets
              369.D
              Selling
                  shareholders
              379.E
              Dilution
              389.F
              Expenses
                  of the issue
              38ITEM
                  10
              
              ADDITIONAL
                  INFORMATION
              3810.A
              Share
                  capital
              3810.B
              Memorandum
                  and articles of association
              3810.C
              Material
                  contracts
              3810.D
              Exchange
                  controls
              3810.E
              Taxation
              38
  
  10.F
              Dividends
                  and paying agents
              3910.G
              Statement
                  by experts
              3910.H
              Documents
                  on display
              3910.I
              Subsidiary
                  information
              40ITEM
                  11
              
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK
              40ITEM
                  12
              
              DESCRIPTION
                  OF SECURITIES OTHER THAN EQUITY
                  SECURITIES
              4012.A
              Debt
                  securities
              4012.B
              Warrants
                  and rights
              4012.C
              Other
                  securities
              4012.D
              American
                  depository shares
              40**PART
                  II**ITEM
                  13
              
              DEFAULTS,
                  DIVIDEND ARREARAGES AND
                  DELINQUENCIES
              40ITEM
                  14
              
              MATERIAL
                  MODIFICATIONS TO THE RIGHTS OF
                  SECURITY
              40HOLDERS
                  AND USE OF PROCEEDS
              40ITEM
                  15
              
              CONTROLS
                  AND PROCEDURES
              40ITEM
                  1616.A
              Audit
                Committee financial expert
              4116.B
              Code
                  of Ethics
              4116.C
              Principal
                  accountant fees and services
              4116.D
              Exemptions
                  from the listing standards for audit
                  committees
              4216.E
              Purchases
                  of equity securities by the issuer and affiliated
                  purchasers
              42**PART
                  III**ITEM
                  17
              
              FINANCIAL
                  STATEMENTS
              43ITEM
                  18
              
              FINANCIAL
                  STATEMENTS
              43ITEM
                  19
              
              EXHIBITS
              43
  *Table
            of Contents*


**PART
      I**





**Item
                1**
            **Identity
                of Directors, Senior Management and Advisers******




**1.A**
            ***Directors
                and senior management*******




Not
      Applicable.




**1.B**
            ***Advisers*******




Not
      Applicable.




**1.C**
            ***Auditors***




Not
      Applicable.




**Item
                2**
            **Offer
                Statistics and Expected Timetable******




Not
      applicable.




**Item3**
            **Key
                Information******




**3.A**
            ***Selected
                financial data***




The
      following table sets forth selected financial data regarding our consolidated
      operating results and financial position. The data has been derived from our
      consolidated financial statements, which have been prepared in accordance with
      accounting principles generally accepted in Canada, referred to below as
“Canadian GAAP.” For reconciliation to accounting principles generally accepted
      in the United States, referred to below as “US GAAP,” see Note 14 to our
      Consolidated Financial statements dated June 30, 2006. 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 annual report. The selected financial data is
      expressed in United States dollars, in accordance with Canadian GAAP.




**Year
                Ended June 30****2006**
              **(US$)**
            
            **2005**
              **(US$)**
            
            **2004**
              **(US$)**
            
            **2003**
              **(US$)**
            
            **2002**
              **(US$)****Revenue**
            
            
            406,168
            
            
            390,111
            
            
            383,722
            
            
            325,422
            
            
            152,985**Costs
                of Goods Sold**
            
            
            239,933
            
            
            216,652
            
            
            75,320
            
            
            84,742
            
            
            147,452**Net
                Revenue**
            
            
            166,238
            
            
            173,459
            
            
            308,402
            
            
            240,680
            
            
            5,533**General
                & Administrative Expenses**
            
            
            2,010,442
            
            
            1,232,497
            
            
            1,554,611
            
            
            951,029
            
            
            972,099**Net
                Gain (Loss) from****Continuing
                Operations**Canadian
                GAAP
            
            
            (1,789,433
            )
            
            (1,036,566
            )
            
            (1,183,895
            )
            
            (710,175
            )
            
            (966,440
            )US
                GAAP
            
            
            (1,789,433
            )
            
            (1,036,566
            )
            
            (1,183,895
            )
            
            (710,175
            )
            
            (966,440
            )**Net
                Loss per Share**Canadian
                GAAP
            
            
            0.05
            
            
            0.04
            
            
            0.06
            
            
            0.05
            
            
            0.08US
                GAAP
            
            
            0.05
            
            
            0.04
            
            
            0.06
            
            
            0.05
            
            
            0.08Working
                Capital(Deficiency)
            
            
            98,668
            
            
            (135,913
            )
            
            (198,097
            )
            
            (707,137
            )
            
            (78,130
            )**Total
                Assets**
            
            
            516,670
            
            
            719,257
            
            
            362,956
            
            
            251,027
            
            
            1,109,056**Total
                Liabilities**
            
            
            384,322
            
            
            846,064
            
            
            548,572
            
            
            940,993
            
            
            1,165,351**Shareholders’
                Equity**(Deficiency)Canadian
                GAAP
            
            
            132,348
            
            
            (126,807
            )
            
            (185,616
            )
            
            (689,966
            )
            
            (56,295
            )US
                GAAP
            
            
            132,348
            
            
            (126,807
            )
            
            (174,573
            )
            
            (679,966
            )
            
            (56,295
            )**Long-term
                Obligations**
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            Nil**Outstanding****Number
                of Shares**
            
            
            42,095,756
            
            
            24,230,053
            
            
            22,246,598
            
            
            16,363,501
            
            
            12,280,168**Dividends
                Declared**
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            Nil




1
 *Table
          of Contents*





We
      have
      not paid dividends on our shares and do not anticipate doing so for the
      foreseeable future. The declaration of dividends on our common shares is within
      the discretion of our board of directors and will depend upon, among other
      factors, our earnings, our capital requirements and our operating and financial
      condition.





**Currency
      and Exchange Rates**





The
      following tables set out the exchange rates for one Canadian dollar, represented
      by the symbol, “Cdn$”, expressed in terms of one United States dollar,
      represented by the symbol, “$”, derived from the reciprocals of the noon buying
      rates in New York City for cable transfers payable in Canadian dollars, as
      certified for customs purposes by the Federal Reserve Bank of New York.





The
      high
      and low exchange rates for each month during the previous six months are as
      follows (Canadian dollars per United States $1.00): ****





**Month**
            
            **High**
            
            **Low****Cdn
                $**
            
            **Cdn
                $****November
                2006**
            
            **1.1458**
            
            **1.1275****October
                2006**
            
            **1.1384**
            
            **1.1154****September
                2006**
            
            **1.1272**
            
            **1.1052****August
                2006**
            
            **1.1312**
            
            **1.1066****July
                2006**
            
            **1.1415**
            
            **1.1112****June
                2006**
            
            **1.1241**
            
            **1.0991**





The
      average closing exchange rates for each of our five previous fiscal years ended
      June 30 are as follows:





**Fiscal
                Year Ended**
            **Average****Cdn$****June
                30, 2006**
            **1.16****June
                30, 2005**
            **1.24****June
                30, 2004**
            **1.34****June
                30, 2003**
            **1.51****June
                30, 2002**
            **1.57****June
                30, 2001**
            **1.52**





On
      November 30, 2006, the exchange rate of Canadian dollars into United States
      dollars, based upon the noon buying rate in New York City for cable transfers
      payable in Canadian dollars as certified for customs purposes by the Federal
      Reserve Bank of New York, was $0.87 (US $1.00 equals Cdn $1.14).




**3.B**
            ***Capitalization
                and indebtedness***




Not
      applicable.




2
 *Table
          of Contents*




**3.C**
            ***Reasons
                for the offer and use of proceeds*******




Not
      applicable.




**3.D**
            ***Risk
                Factors*******




The
      following risk factors and other information in this prospectus contain
      forward-looking statements within the meaning of Section 27A of the Securities
      Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
      1934,
      as amended. Actual results could differ materially from those projected as
      a
      result of risk factors discussed in this section and elsewhere in this
      prospectus.





**We
      face intense competition.**





The
      smart
      card micropayment industry is intensely competitive and subject to rapid
      technological change. 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. We face competition from a number of
      companies across our range of businesses, including original equipment
      manufacturers, peripheral equipment manufacturers and others. Our competitors
      include other smart card micropayment system providers. These competitors are
      both national and regional. We anticipate that we will face additional
      competition from new entrants that provide significant performance, price,
      creative or other advantages over those we are able to offer. Many of these
      competitors have greater name recognition and resources than we do. 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.





Additionally,
      potential competitors with established market shares and greater financial
      resources may introduce competing products. Thus, there can be no assurance
      that
      we will be able to compete successfully in the future or that competition will
      not have a material adverse effect on the results of our
      operations.





**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. As **** of
      June
      30, 2006, we had an accumulated deficit of $14,061,839, and we incurred a net
      loss in fiscal 2006 of $1,789,433. As **** of
      June
      30, 2005, we had an accumulated deficit of $12,272,406, and we incurred a net
      loss in fiscal 2005 of $1,036,566. As
      of
      June 30, 2004 and June 30, 2003, we had an accumulated deficit of $11,235,840
      and $10,051,945, respectively. We incurred net losses of $1,183,895 in fiscal
      2004, $710,175 in fiscal 2003, $966,440 in fiscal 2002 and $1,066,772 in fiscal
      2001. We expect that we may continue to incur losses in future
      years.





A
      relatively high percentage of our expenses are typically fixed in the short
      term. Our gross revenues net of cost of goods sold for each of the years ended
      June 30, 2006, 2005, 2004, 2003 and 2002 were $166,235, $ 173,459, $308,402,
      $240,680 and $5,533, respectively, while our general and administrative
      operating expenses for the same periods were $2,010,442, $1 ,232,497, $1,554,611,
      $951,029 and $972,099, respectively. We expect our general and administrative
      operating expenses to increase in future periods as we increase our efforts
      to
      market and commercialize our products. To the extent that we are unable to
      increase net revenues significantly, we will continue to incur losses. 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.**





We
      commenced our current business of developing Cash Card technologies in December
      1995. Therefore, we 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 strategy has not been fully
      implemented. During the last four fiscal years, our revenue has been erratic,
      ranging from $152,985 in fiscal 2002 to $325,422 in fiscal 2003 to $383,722
      in
      fiscal 2004 to $390,111 in fiscal 2005 to 406,168 in fiscal 2006. We cannot
      assure you that, in the future, we will experience revenue growth or ever become
      profitable on a quarterly or annual basis. Based on our historical results
      of
      operations and the development stage of our business, 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.


3
 *Table
          of Contents*




**Our
      working capital position makes our ability to continue as a going concern
      doubtful.**





We
      had
      working capital of $98,668 at June 30, 2006 and working capital deficits of
      $135,913 at June 30, 2005, **** $198,097
      at June 30, 2004, and $707,137 at June 30, 2003. Our
      ability to continue as a going concern is doubtful when our working capital
      deficit and our expectation that we may incur losses in future years are
      considered. Our auditors have included an explanatory note to U.S. readers,
      and
      our financial statements contain a note expressing substantial doubt regarding
      our ability to continue as a going concern. Our financial statements were
      prepared based on the assumption that we would continue as a going concern
      and
      do not reflect adjustments to the carrying value of assets and liabilities,
      the
      reported expenses and balance sheet classifications 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
      but
      not limited to:





·
            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/MasterCard;


·
            the
                mix of international and North American revenue;
                and


·
            changes
                in tax policies, foreign currency exchange rates and general economic
                conditions.





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.**





Bank
      Cash
      Cards are a relatively new technology, and the industry is still in the
      developmental stage. There are only a few users of Cash Card systems in North
      America, and the growth of the industry has been slower than originally
      anticipated. Our SmartKit® project is dependent on the commercial deployment of
      Cash Cards by the world banking community and the overall success of Cash Cards
      as a monetary medium. Lack of standardization has created a barrier to
      acceptance because of the number of different platforms and smart chip
      technologies available for both attended and unattended point-of-sale
      applications. The success of the Cash Card industry depends on the ability
      of
      market participants, including us, to convince commercial enterprises,
      organizations and other potential system sponsors to adopt smart card systems
      in
      lieu of existing or alternative systems. Cash Card-based smart card systems
      may
      not prove economically feasible for some potential system sponsors due to a
      very
      high cost of implementation, the high cost of smart cards and negative consumer
      response to the data that is generated and stored from their use. Our success
      will depend upon our ability to enhance our existing products and to develop
      and
      introduce new products and technologies to meet customer
      requirements.


4
 *Table
          of Contents*





**We
      must constantly update our technology to remain
      competitive.**





The
      smart
      card technology on which Cash Cards are based is evolving very rapidly; thus,
      the Cash Card industry has been and continues to be dynamic and ever-changing.
      Our SmartKit® systems are primarily designed for self-serve or unattended
      point-of-sale (UPOS) applications. Both Visa and MasterCard have modified their
      specifications to better accommodate UPOS applications and to allow for the
      wide
      diversity of UPOS devices. These modifications may require us to develop
      compatible systems or update existing systems to accommodate the VisaCash and
      Mondex/MasterCard platforms. New technology is being developed that is expected
      to greatly enhance the functionality and data management capabilities of Cash
      Cards and other smart card technologies. We must continue to enhance our
      terminals to keep pace with the market and advances in Cash Card technologies
      in
      order to remain competitive.





**Our
      historical financial results may not be meaningful for comparative
      purposes.**





We
      are
      unable to forecast with certainty the receipt of orders for our products and
      services. Moreover, our expense levels are relatively fixed and are based,
      in
      part, upon our expectation of future revenue. Thus, 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. It
      is
      likely that in some future quarter(s) 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.





**The
      market’s acceptance of and demand for our products are
      uncertain.**





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. Existing demand for Cash Card products in North America
      is
      not large enough for all the companies seeking to engage in the Cash Card
      business to succeed. We and other competitors in the Cash Card business rely
      upon anticipated growth in demand, which may not occur or may be slow to occur.
      The success of the Cash Card industry depends on the ability of market
      participants, including us, to convince end users to utilize Cash Cards. Unless
      there is wide acceptance of Cash Card-based systems, there may never be
      sufficient demand for our Cash Card systems to make our business commercially
      viable.





**We
      experience lengthy sales cycles for our products.**





The
      purchase of a Cash Card system is often an enterprise-wide decision for
      prospective customers, which 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 uses 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 from a specific customer
      forecasted 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 effect 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.


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**We
      depend upon 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, 2006, approximately
      63% of our consolidated revenue was attributable to one customer, Cale Parking.
      During the fiscal year ended June 30, 2005, approximately 60% of our
      consolidated revenue was attributable to one customer. During the fiscal year
      ended June 30, 2004, approximately 63% of our consolidated revenue was
      attributable to three customers. We believe that revenue derived from current
      and future large customers will continue to represent a significant portion
      of
      our total revenue. If we are unable to continue to secure and maintain a
      sufficient number of large contracts, our business, operating results and
      financial condition will be materially adversely affected. 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 platforms and enhanced technology. 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 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.





**Our
      products may contain defects that could result in liability to us and have
      a
      material adverse effect on our business.**





Cash
      Card
      reader systems, including those offered by us, may from time to time contain
      undetected defects or 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, nor
      any
      patent protection. The absence of any registered proprietary rights may limit
      our ability to maintain control of trade and technology secrets. We rely
      principally upon a combination of trade secret laws, nondisclosure 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 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.


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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 grows and the functionality of products in different industry
      segments overlap. 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, or our inability to license the infringed
      or
      similar technology, could have a material adverse effect 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 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. Likewise, we 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 effect on our results of operations. In addition, any increase
      in the price of one or more of these parts, components, products or services
      could have a material adverse effect on our business, operating results and
      financial condition.





**We
      rely upon key personnel and may need additional personnel.**





We
      are
      largely dependent upon the personal efforts and abilities of existing management
      and staff. Our success will also be largely dependent upon our ability to
      continue to attract quality management and employees to help us operate as
      our
      operations may grow. An inability to retain or attract key personnel could
      have
      a material adverse effect on our operations.




**Our
      success depends upon marketing relationships.**





Our
      products are marketed by our direct field sales force as well as by resellers.
      There can be no assurance that our existing resellers 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 VisaCash and MasterCard, who assist us in our
      marketing efforts. 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
      effect 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.




**Our
      financial results may be affected by currency fluctuations.**




We
      do not
      currently hedge against foreign exchange fluctuations that may occur between
      Canadian and U.S. dollars, which are the two currencies that have a direct
      effect on our financial results. Our management anticipates that any gains
      or
      losses derived from foreign exchange fluctuations will be offset by either
      an
      increase in revenues and cost of sales or a decrease in revenues or cost of
      sales.




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**New
      rules, including the Sarbanes-Oxley Act of 2002, may make it difficult for
      us to
      retain or attract officers and directors.**





We
      may be
      unable to attract and retain qualified officers, directors and members of board
      committees required to provide for our effective management as a result of
      the
      recent and currently proposed changes in the rules and regulations which govern
      publicly held companies in the United States. The enactment of the
      Sarbanes-Oxley Act of 2002 has resulted in a series of rules and regulations
      by
      the Securities and Exchange Commission that increases responsibilities of
      officers and directors. The perceived increased personal risk associated with
      these recent changes may deter qualified individuals from accepting these roles.





**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 our 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 $0.09 and US $ 0.70 on the Over-the-Counter Bulletin
      Board
      (the “OTCBB”) (December 1, 2003 to June 30, 2006). See “Description of our
      Business—Market Information”. There can be no assurance that the market price of
      our common shares will not significantly fluctuate from its current level.
      The
      market price of our common shares may be subject to wide fluctuations in
      response to quarterly variations in operating results, announcements of
      technological innovations or new products by us or our competitors, changes
      in
      financial 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 has at times 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 effect 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 and are subject to the penny stock
      rules.**





Rules
      15g-1 through 15g-9 promulgated under the U.S. Securities Exchange Act of 1934,
      as amended, impose sales practice and disclosure requirements on specified
      brokers-dealers who engage in specified transactions involving a “penny stock.”
Subject to specific 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 $0.07 and US $1.30 on the OTCBB
      (September 30, 2002 to June 30, 2006); thus, our shares are deemed penny stock
      for these purposes. Under the penny stock regulations, a broker-dealer selling
      penny stock to anyone other than an established customer or “accredited
      investor” (which generally means 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 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. These 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.




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**Item4**
            **Information
                on the****Company**




**4.A**
            ***History
                and development of the company*******




Our
      legal
      and commercial name is “QI Systems Inc.”





We
      were
      incorporated on July 4, 1978, under the name Jewel Resources Inc. by
      registration of our memorandum and articles under the British Columbian Company
      Act. We were initially engaged in natural resource exploration. In the late
      1980s, we changed our business strategy and began to pursue our current mission
      of developing, marketing and selling technology related products. We
      subsequently changed our name to “Wkay Resources Inc.” on December 22, 1987, and
      to “Magnatron International Corp.” on October 18, 1990. Effective March 17,
      1994, we changed our name to “QI Technologies Corp.” Effective May 25, 2001, we
      changed our name to “QI Systems Inc.”





We
      have
      one subsidiary, QI Systems International, Inc., a Texas
      corporation.





On
      December 15, 1999, our shareholders approved a forward split or subdivision
      of
      our common shares on a one (old) for two (new) common shares basis. All
      references to our common shares in this registration statement give effect
      to
      the forward split. Prior to July 1, 2006, we were a reporting issuer in Canada
      under the Securities Act (British Columbia) and the Securities Act (Alberta).
      Our common shares were publicly traded in Canada (from May 9, 1979 to July
      16,
      2004) on the TSXV Venture Exchange under the symbol “QII. U,” in the United
      States (since May 23, 2001) on the OTCBB under the symbol “QIIIF” until July 1,
      2006 and since then as QIII; and in Germany (from March 23, 2000 to July
      16,
      2004 )
      on the
      Berlin Stock Exchange under WKN# 865679. On May 29, 2001, the Canadian Venture
      Exchange was acquired by the Toronto Stock Exchange and changed its name to
      TSXV
      Venture Exchange.





Effective
      July 1, 2006, we changed our jurisdiction of incorporation, or domesticated,
      from the Province of British Columbia, Canada to the State of Delaware. In
      connection with the domestication, we incorporated in the State of Delaware
      on
      July 1, 2006 and are now a domestic reporting issuer organized under the laws
      of
      the State of Delaware.




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





Our
      principal business office is located at 609 Cheek Sparger Road, Suite 300,
      Colleyville, Texas 76034, and our telephone number there is (817) 485-8111.




We
      had no
      material capital expenditures or divestures during the last three fiscal years.
      We have received no public takeover offers during the last or current fiscal
      year.




**4.B**
            ***Business
                overview***




Our
      personnel consist of engineers, technologists and marketing professionals
      specializing in smart card based micropayment systems. We design, manufacture
      and market hardware and software for electronic cash (Cash Cards), self-serve
      payment systems. See “Our Products” below. Cash Cards have data storage
      capabilities that allow secure storage and immediate transfer of verifiable
      financial credit from card to card. Consumers use the cards in place of coins
      and small bills to purchase goods and services from vending machines, copier
      machines, transit systems, laundromat machines and other machines that have
      Cash
      Card readers.




Our
      primary products are the QiWaveTM Contactless Card reader and the SmartKit® Cash
      Card reader, both of which enable Cash Card payments to be accepted in a wide
      range of vending and self-serve machines. Our QiWaveTM and SmartKit® Cash Card
      readers are fully developed products that support multiple Cash Card schemes.
      See “Our Products” below. In a Cash Card transaction, our readers validate the
      Cash Card, display the balance, deduct the amount of the transaction from the
      card, then display the remaining balance. We offer our QiWaveTM and SmartKit® for
      factory installation in new equipment or in kits that can be installed in
      existing machines in the field. QiWaveTM and SmartKit® consist of a custom
      computer and a custom smart card interface in a steel or plastic enclosure
      designed for quick installation in the vending machine. We have developed
      several variations of our readers, including a card acceptor, a user keypad
      and
      a back-lit liquid crystal display; a laundry system that allows Cash Card
      payment at individual machines in a laundry facility; and for newspaper vending
      machines.


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We
      also
      developed QLink®, a hand-held computer data retriever that allows data to be
      downloaded from SmartKit® readers. Our SmartKit® and QLink® systems are
      currently being used in commercial applications throughout the world. See “Our
      Products” below. We have incurred approximately $7 million over the past five
      years researching, developing, marketing and selling our SmartKit® and QLink®
products. We offer complete turnkey card payment systems that use our
      proprietary stored value cards and other stored value card schemes.





**Our
      Products**




We
      design, develop and market hardware and software for electronic cash
      applications that allows Cash Card payments to be accepted in a wide range
      of
      vending machines, parking
      meters, gaming devices and other applications. In addition, our products can
      be
      used for identification and security functions. We have the capability of
      providing top-to-bottom technology in both off-the-shelf and custom design
      smart
      card solutions.





QiWave TM





QiWaveTM
      is a contactless payment control system that allows contactless cash card
      payments to be accepted in a wide range of vending machines. It can be used
      in a
      variety of unattended point of sale applications, such as vending, laundry,
      parking, and in printers and copiers. It carries the same features of our
      SmartKit® with the added benefit of accepting the newer, more popular
      contactless cash cards.





QiWaveTM
      fulfills the promise of the multi-application card.  QiWaveTM’s contactless
      solution increases transaction speed and convenience for the user, reduces
      or
      eliminates cash handling, reduces machine maintenance and extends card life
      by
      eliminating mechanical contact between the card and the reader.  It is a
      plug and play payment technology for vending, laundry, parking, printing and
      photocopying.  QiWaveTM’s technology can be adapted to be used in almost any
      unattended point of sale situation.  QiWaveTM is completely flexible; it
      works with either the customer’s on-line system or as an off-line system using
      QI’s stored value electronic purse or it can be used in both
      environments.





SmartKit ®




SmartKit®
      is a payment control system that allows Cash Card payments to be accepted in
      a
      wide range of vending machines. SmartKit® had been certified by VisaCash and
      Mondex/MasterCard, the principal bank card systems and proprietary Cash Card
      systems that use Cash Cards issued by a company, institution or organization.
      Both VisaCash and Mondex/MasterCard impose stringent testing requirements before
      a device is certified for use with their Cash Cards. The SmartKit® reader has
      been tested in markets throughout North America and Europe and works
      concurrently with multiple 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® validates the Cash Card and
      authorizes 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 system
      specifications.




SmartKit®
      is offered in kit form for field installation in existing equipment 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 molded 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. 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®
into its place. The coin changer is then plugged into the female connector
      on
      the SmartKit® harness.


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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 manufacturers
      (“OEM”) to route operators.




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 can be easily displayed.




Integrating
      Cash Card payment with existing payment options, SmartKit® II installs in almost
      all vending machines. We use multi-board architecture designed to enable us
      to
      configure board components compatible with current, custom and future
      requirements for power supply, software, data-storage and communications needs.
      SmartKit® II’s wide system compatibility and future upgrading or expansion
      should permit the support of additional card systems. SmartKit® II supports
      VisaCash, Mondex/MasterCard and additional Cash Cards, including proprietary
      card systems.





QLink ®




QLink®
is
      a “palmtop” computer linking card-accepting devices (“CADs”), such as our
      SmartKit®, with host computers and/or data gathering systems 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 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.




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 CP
      it
      presents the CADs as stations on a network. QLink® is part of the QLink
      Management System (“QMS”). QMS is designed to provide enhanced control and
      reporting for 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 upload from each CAD. It also
      reports the value of any re-transmission of old data when CADs re-send files
      per
      the 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.


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QLink®
      consists of our QLink hand-held software running on a palmtop computer together
      with a modem, cables and connectors as necessary for communications with
      CADs.


SmartKit®
      Laundry




The
      SmartKit® Laundry system allows Cash Card payment at individual machines in a
      laundry facility. SmartKit® Laundry can be integrated into most modern laundry
      machines. Support for custom or proprietary card systems is also available.
      SmartKit® Laundry is an unattended point-of-sale application 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. SmartKit® Laundry is part of the SmartKit® modular system
      of electronic Cash Card payment products. Other devices that share the payment
      module include vending machine kits and OEM kits for applications such as
      payphones and newspaper vending. Using SmartKit® products, coin-free pay laundry
      facilities are now possible. We can quickly implement custom machine interface
      modules for new applications.




SmartKit®
      Laundry 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.




SmartKit®
      Laundry 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. SmartKit® Laundry design is easily installed in the field or on the
      factory floor.





SmartKit®
      for Newspaper Vending





SmartKit®
      for Newspaper Vending is designed to increase access to newspapers by allowing
      consumers to buy newspapers using Cash Cards.




Newspaper
      vending boxes of varied design use the SmartKit® for Newspaper Vending system
      and are in use around the world. We can develop a solution to the specific
      requirements of most publishers or equipment manufacturers. Our products for
      the
      newspaper industry offer card acceptance with a battery powered device in a
      harsh environment and provide several years of service from a single
      battery.





QICash TM




QICash
      is
      a proprietary smart card purse offered by us for deployment in government and
      business applications. The product is scalable to meet a range of security
      features and system size requirements. As the supplier of both the card payment
      system itself and the supporting system hardware, we believe we are uniquely
      positioned to provide solutions tailored to the needs of our
      clients.





QI
      Value TM





QI
      Value
      is a system consisting of a range of products for loading value to smart cards.
      We offer self-serve cash to card load stations, and countertop value load
      terminals are offered. QI Value products are primarily used in government and
      industry applications. For example, the City of San Diego has installed QI
      Value
      terminals to enable convenience store operators to load value to Cash Cards
      used
      in parking meters throughout the city.




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QI
      SmartVend TM





QI
      SmartVend is the market name we apply to a range of turnkey financial and device
      control systems. The system will typically include our stored value cards,
      QI
      Value reload terminals and our SmartKit® payment terminals communicating with or
      directly controlling self-serve devices for delivery of products or
      services.




A
      good
      example of the concept is our Ranch Water Control system installed in Fort
      Collins, Colorado. It consists of a self-serve card sale and reload station,
      a
      water delivery control station and our stored value cards. The devices are
      packaged in secure, climate-controlled cabinets for unattended outdoor operation
      in all weathers. It is a complete turnkey solution that automates the processes
      of revenue collection, product delivery and micropayment processing at time
      of
      delivery.




QI
      SmartVend systems can be developed for essentially any form of self-serve
      device. Examples of systems in development or under consideration include
      revenue and control systems for pay showers for campgrounds, gaming machines
      in
      various configurations, amusement machines and exercise equipment. Cash Card
      technology is evolving quickly, and we are committed to keeping our products
      current through ongoing research and development, planning and product
      flexibility.





**Our
      Marketing Strategy**




Historically,
      our marketing strategy has consisted of two major initiatives:





·
            develop
                close relationships with the card associations and with their member
                financial institutions; and


·
            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.




Our
      strategy was based on a belief that open Cash Card schemes, sponsored by
      financial institutions, would be developed over a few years and would then
      deploy rapidly in commercial applications.




Our
      strategy was to use the relationships with the card associations to achieve
      credibility and market share, which would allow us to develop strategic
      partnerships to meet product demand and respond to the demand for commercial
      deployment.




We
      established good relationships with Visa, Mondex/MasterCard and other major
      financial institutions. We participated in several significant North American
      deployment projects for the VisaCash and Mondex/MasterCard card systems.
      Although we believe our strategy of establishing strong relationships with
      the
      banking community was very successful, banks have not yet proceeded to
      commercial deployment of Cash Card products in North America, and we have
      concentrated our recent marketing efforts on proprietary systems.




We
      believe that our relationships with the financial institutions and our successes
      in their pilot programs have helped us to establish a reputation for competence
      and technical excellence. Our systems, designed and certified to meet the
      demanding requirements of the bank-issued card schemes, are also fully able
      to
      support the simpler card schemes typically used in private industry deployments.
      Our marketing strategy is to promote our products and capabilities
      by:





·
            marketing
                our products to companies, institutions and organizations issuing
                Cash
                Cards; and


·
            offering
                QICash turnkey solutions to clients looking for the tools to implement
                closed electronic cash systems.




To
      date,
      our marketing efforts have been directed predominantly to the parking industry
      and the university campus industry. In the campus market, our products are
      used
      with card schemes deployed by Touch Technologies and by EFM (Enterprise Funds
      Management). These installations include our SmartKit® terminals installed in
      vending, parking, laundry and microfiche machines, in photocopiers and in print
      server controllers. They also typically include QI Value self-serve card reload
      machines.


13
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In
      the
      parking industry, we have developed SmartKit products to meet specific
      requirements of parking equipment OEMs. Our history of supporting multiple
      card
      schemes has allowed us to provide flexible solutions so our customers can meet
      the changing needs of their business and government clients. For these
      applications, we have developed hybrid versions of the SmartKit product,
      supporting both smart cards and magnetic strip credit cards. We believe the
      parking industry is an excellent example of an application where chip cards
      are
      being deployed in North America today because they are the most cost-effective
      solution, particularly for municipal parking operations.




Stored
      value card systems have historically been very costly to deploy. We believe
      that
      our experience and expertise with a wide range of other card systems allows
      us
      to offer complete turnkey solutions tailored specifically to the needs of
      potential clients at lower costs than competing systems.




Our
      systems can also be used as a secure ID badge, with or without the stored value
      purse. We continue to seek new opportunities to use our card technology for
      applications other than stored value electronic cash.




Our
      marketing strategy for fiscal 2006 can be summarized as follows:





·
            maintain
                and renew relationships with the card associations and financial
                industry;


·
            continue
                to develop strategic relationships with other card-issuing entities
                on a
                global basis;


·
            continue
                to seek new clients and new industries for new applications of Cash
                Card
                technology with complete turnkey systems;
                and


·
            continue
                to seek new clients and new industries for new applications of other
                chip
                card technologies.




In
      the
      past we have attended and/or exhibited at trade shows in the smart card,
      computer technology, banking, parking, vending and laundry industries. In the
      coming year we plan to expand our trade show involvement to include the gaming
      industry.





**Our
      Product Deployment**




Our
      core
      products were extensively deployed, tested and proven in the various pilots
      and
      programs with VisaCash and Mondex/MasterCard throughout North America and in
      some programs on other continents. In the past three years, product deployments
      have been predominantly to university campus and parking
      applications.




Our
      strategy is to continue to design and document our products for high volume
      manufacturing and third-party contract assembly in preparation for the time
      when
      the market for the products matures to justify these steps.




In
      the
      interim, we are using third-party contractors for circuit board manufacture
      and
      assembly but perform all the steps of final assembly and test of our products
      in
      our own plant.




We
      have
      made substantial investments developing relationships with financial
      institutions and preparing products for markets created by their deployments
      of
      Cash Card products. Although we continue to believe that this market will
      develop, we cannot predict when banks will proceed with deployment. In the
      interim, we must focus our energies and strategies on proprietary systems and
      turnkey solutions for existing applications and new markets.





**Proprietary
      System Platform Strategy**




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 and other systems that accept smart card payments
      from cards issued by the organization. We have installed or have arrangements
      to
      install our products in a variety of proprietary system applications,
      including:





·
            SmartCentric
                - university campus solutions


·
            HID
                Corporation - supplement to their access control solutions providing
                contactless vending
                applications


14
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·
            Telus
                Communications Ltd. - Prison and university campus solutions in
                Canada


·
            City
                of Fort Collins, Colorado - Ranch water
                systems


·
            Cale
                Systems Inc. - Parking solutions in Canada, the United States and
                Sweden


·
            Rothman’s
                Benson & Hedges - Tobacco programs in
                Canada


·
            Aurora
                Bar Code - Bulk water systems in
                Canada


·
            CardLogix
                - Parking systems in the United
                States


·
            Touch
                Technology (TTI ) - Campus and mass transit solutions in Canada and
                the
                United States


·
            Pepsi-Cola
                Canada - Vending and university campus systems in
                Canada


·
            Pepsi
                - Venezuela - Vending and university campus systems in
                Venezuela


·
            Coffee
                Solutions - Vending and university campus systems in
                Venezuela


·
            USA
                Today - Vending and university campus systems in the United
                States


·
            Coca
                Cola - Vending and university campus systems in Canada, the United
                States,
                Norway and England


·
            Jayd,
                LLC - Pay and display parking, and revalue stations utilized in the
                United
                States


·
            EFM
                - Smart business solutions to colleges and educational institutions
                in the
                United States


·
            Lexis
                Parking Systems - Metered parking solutions in Canada and the United
                States




To
      date,
      we have installed over 3,500 QI Cash Card payment terminals in proprietary
      system applications in Canada, the United States, Venezuela, Norway and
      England.





**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 North America 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, we believe that smart card technology is likely
      to achieve greater adoption in North America for several reasons,
      including:





·
            The
                cost of producing smart card products, including microchips, cards,
                readers, writers and terminals, is declining
                continuously;


·
            Smart
                card technology offers much more functionality and flexibility than
                the
                magnetic stripe credit/ debit card technologies that are currently
                popular
                in North America because:


o
            magnetic
                stripe cards are simply ID badges with little or no
                security


o
            smart
                cards store hundreds or thousands of times more
                information;


o
            smart
                cards are more reliable;


o
            smart
                cards are more secure;


o
            smart
                cards are much more difficult or impossible to
                copy;


o
            smart
                cards can be used for a wide variety of applications (payment methods,
                identification, security, authorized access,
                etc.);


o
            smart
                cards can provide advanced security features including data processing
                and
                encryption; these features are simply not possible on magnetic stripe
                cards;


o
            smart
                cards allow secure off-line
                transactions;


·
            Operating
                system advances, such as JavaCard and Multos, have allowed multiple
                applications to be co-resident in the
                cards;


·
            New
                technology such as the Internet and electronic commerce have increased
                the
                need for the added security and versatility smart cards provide;
                and


·
            Several
                industry standards have been recently developed by such organizations
                as
                Europay, MasterCard and Visa.


15
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**Self-Serve
      Point-of-Sale Applications**




We
      believe that the world vending machine and point-of-sale payment industry is
      a
      major market opportunity 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. In Japan, the ratio is one vending machine for every 25 people.
      In
      the United States alone, there are over seven million vending machines,
      including over 1.7 million canned cold drink machines. The
      vending market is growing about 35-40% per year. *Vending
      Times* says
      that
      the vending industry is presently a $45-$50 per year billion business.




Our
      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, we believe 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. Smart cards provide
      an
      easy, flexible and cost-effective way to achieve the key benefits of highly
      secure, authenticated transactions.





**Seasonality
      of Business**




Our
      business is not impacted by seasonality factors.





**Principal
      Supplier and Sources and Availability of Raw Materials**




We
      manufacture our products from components provided by third parties that are
      readily available, sourced in Canada and the United States and subject to
      standard purchase and credit terms in the industry. We believe that alternative
      supply sources for the components we use are available with relative ease of
      effort and without compromising our manufacturing capabilities.





**Marketing
      Channels**




We
      market
      our products in a variety of ways. Our primary focus is using direct sales
      conducted primarily by our Vice President of Sales and Business Development.
      We
      do receive leads as a direct result of our web pages on the internet. These
      leads are handled directly by an employee of the Company. We also use
      distributors and integrators to sell into specialized markets, such as municipal
      water departments or colleges and universities.




Recently,
      we have entered into several strategic partnerships with key companies to offer
      our products as part of their overall solution offering. Although our product
      may play a small part of the overall solution being sold, we believe that the
      volumes generated fro these strategic relationships will be significant.




We
      do not
      offer installment sales. Typically, we try to receive a deposit with each
      order.




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          of Contents*


**Competition**




Competition
      in the technology markets in which we 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,
      we
      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 our customers (see “Research and Development” below). The principal
      competitive factors affecting the market for our 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, we will be required to continue
      to respond promptly and effectively to the challenges of technological changes
      and our competitors’ innovations.




Several
      of our competitors have greater financial, technical and other resources than
      we
      do. SCM Microsystems, Gemplus, Utimaco, Towitoko Electronics, Philips
      Electronics, Activcard, Coincard, Smartmove and PubliCARD Cash Card systems
      compete directly with our SmartKit® card readers. Our SmartKit® laundry Cash
      Card products also compete with Danyl, ESD and Set-O-Matic commercial laundry
      Cash Card products. Several of our competitors develop, market and sell their
      own proprietary Cash Cards and Cash Card systems, which may have features that
      we cannot offer. Smartmove has developed a Cash Card reader that, like ours,
      supports multiple Cash Card platforms. In the future, OEMs, peripheral equipment
      manufacturers and software development companies may develop systems that
      compete directly with our SmartKit® and QLink® products.




Many
      of
      our 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 we do. In addition, as the Cash Card
      market develops, a number of companies with significantly greater resources
      than
      we have could attempt to increase their presence in the market by acquiring
      or
      forming strategic alliances with our competitors, resulting in increased
      competition. We cannot assure you that we will successfully compete against
      established competitors or that our SmartKit® system will gain market
      acceptance.




**4.C**
            ***Organizational
                structure***




We
      have
      one active subsidiary, QI Systems International Inc., incorporated under the
      laws of the State of Texas.




**4.D**
            ***Property,
                plants and equipment*******




We
      have
      no material tangible fixed assets, property, plants or equipment.




**Item
                5**
            **Operating
                and Financial Review and
                Prospects**





**Critical
      Accounting Policies**





Our
      significant accounting policies are outlined within Note 1 and Note 2 to our
      consolidated financial statements contained elsewhere in this annual report.
      Our
      consolidated financial statements have been prepared with accounting principles
      generally accepted in the Canada. The preparation of these consolidated
      financial statements requires us to make estimates and judgments that affect
      the
      reported amounts of assets, liabilities, revenue and expenses and the related
      disclosures of contingent assets and liabilities. We base our estimates on
      historical experience and on various assumptions that we believe to be
      reasonable under the circumstances, the results of which form the basis for
      making judgments about the carrying values of assets and liabilities that are
      not readily apparent from other sources. Actual results may differ from these
      estimates under different assumptions or conditions.




17
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          of Contents*


The
      following items require the most significant judgment and involve complex
      estimation:





**Going
      Concern**





Our
      consolidated financial statements have been prepared with accounting principles
      generally accepted in the Canada applicable to a going concern. The use of
      such
      principles may not be appropriate because as at June 30, 2006, there was
      substantial doubt that we would be able to continue as a going concern because
      of our significant losses, working capital deficit and accumulated deficit.
      We
      based our decision to apply going concern principles, in part, on our
      management’s estimates that we would be able to raise capital and improve cash
      flows from operations to meet our capital requirements as they became due.
      Our
      financial statements do not reflect adjustments to the carrying value of assets
      and liabilities, the reported expenses, balance sheet classifications that
      would
      be necessary if the going concern assumption were not applied.





**Revenue
      Recognition Policy**





We
      recognize revenues when all of the following criteria have been met:





·
            persuasive
                evidence for an arrangement exists;


·
            delivery
                has occurred;


·
            the
                fee is fixed or determinable; and


·
            collectibility
                is reasonably assured.





Generally,
      these criteria are met when we deliver our products to our customer.
      Installation revenues are generally recorded upon completion of services.





**Foreign
      Currency Transactions**





The
      U.S.
      dollar is our reporting currency and the Canadian dollar is our functional
      currency. We conduct our operations primarily in Canada and maintain our bank
      accounts in Canadian and US dollars. Sales are predominately based in US Dollars
      but can also be issued in Canadian Dollars. Canadian sales, if invoiced in
      Canadian Dollars, are converted using the daily exchange rate. Current exchange
      rates are used to translate monetary assets and liabilities, and historical
      exchange rates are used for non-monetary assets and liabilities. We compute
      a
      foreign exchange gain or loss at each balance sheet date on all recorded foreign
      transactions that have not been settled. The difference between the exchange
      rate that could have been used to settle the transaction at the date it occurred
      (the invoice date), and the exchange rate at the balance sheet date, is the
      unrealized gain or loss recognized in current net income.





**Accounts
      Receivable**





We
      periodically review the collectibility of our accounts receivable balances.
      Where significant doubt exists with regard to the collection of a certain
      receivable balance, an allowance and charge to the income statement is recorded.
      Allowances for doubtful accounts are based on estimates of management. At June
      30, 2006, we had $2,061 established as an allowance for doubtful accounts.
      If
      future events indicate collection issues, we may be required to record
      additional allowances for doubtful accounts.





**Warranties**





We
      provide a limited 12-month warranty on our products. Given past experience,
      warranty expense (less than 1%) has not been a significant cost of sales, and
      we
      do not anticipate it to be in the future.





**Stock-based
      Compensation Plans**





The
      Company has a stock-based compensation plan, which is described in Note 7.
      Effective for the year ending June 30, 2004, the Company adopted, on a
      prospective basis, the fair value method of accounting for stock options granted
      to employees, consultants and directors. Compensation expense is recognized
      over
      the options’ vesting period.


18
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The
      Company recognizes an expense for the fair value of options granted. Upon
      exercise of stock options, consideration paid by the option holder, together
      with the amount previously recognized in contributed surplus, is recorded as
      an
      increase to share capital. The Company uses the Black-Scholes option pricing
      model to value stock options granted. The Black-Scholes model was developed
      for
      use in estimating the fair value of traded options that have no vesting
      restrictions and are fully transferable. The model requires management to make
      estimates, which are subjective and may not be representative of actual results.
      Changes in assumptions can materially affect estimates of fair
      values.





**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.




**5.A**
            ***Operating
                results***




**Years
      Ended June 30, 2006 Compared to Years Ended June 30, 2005 and 2004**





Revenues
      during the twelve months ended June 30, 2006 were $406,168, derived from the
      sale of smart card systems and ancillary products to our client base,
      particularly within the parking industry. Sales of our products increased 4%
      above sales achieved in fiscal 2005 and 6% above sales achieved in 2004. We
      anticipate that our revenue will continue to be derived from sales to a few
      customers in fiscal 2007. In fiscal 2006, 63% of our sales were made to a single
      customer, compared to 2005 and 2004, when 60% and 63%, respectively, were
      attributable to a single customer. We anticipate that revenue will increase
      during fiscal 2007 as a result of new orders for our new QiWaveTM product and as
      we continue our marketing efforts to existing customers and plan to pursue
      new
      customers and applications for our products.





Cost
      of
      sales during the 2006 period was $239,933, which represents 59% of sales, up
      from total cost of sales of $216,652, or 56% of sales, in fiscal 2005 and
      $75,320, or 20% of sales, in fiscal 2004. The increase in 2006 compared to
      2005
      and 2004 comes mainly from thorough inventory adjustments to account for
      obsolescence. Gross Margins in fiscal 2006 were $166,235, or 41% of sales in
      2006, compared to 44% in 2005 and 80% in 2004.





Expenses
      are categorized as administration, development costs, investor relations,
      marketing, stock-based compensation, corporate finance, professional fees,
      bad
      debt, financing costs and interest and amortization.





Administration
      expenses were $848,958 in 2006, compared to $406,154 in 2005 and $419,060 in
      2004. These 2006 expenses include the following three major expenses: salaries
      and benefits paid to administrative employees and managers of $491,405, foreign
      exchange costs of $107,792 and $73,743 of rent expense. The primary increases
      in
      2006 over 2005 and 2004 are due to the hiring of a full time CFO/COO which
      was
      not in place in 2005, increased foreign exchange expenses due to increased
      activity between the US and Canada and rent expense attributed to the new
      headquarters located in Texas. Other expenses were slightly higher in 2006,
      compared to 2005, reflecting the increased business activity in fiscal 2006,
      compared to the fiscal years ended June 30, 2005 and 2004, respectively. We
      anticipate that most administrative expenses in fiscal 2007 will remain
      comparable with 2006 expenses.





During
      fiscal 2006, investor relations costs of $502,964 were incurred in association
      with services to support the Company’s stock compared to $42,313 and 240,606 in
      2005 and 2004, respectively. The majority of this expense relates to an
      investors relations agreement entered into on May 25, 2005. This agreement
      required us to irrevocably issue 3,000,000 of our common shares, having a value
      of $435,000, to the investor relations firm. Relating to this agreement,
      $404,344 of expense was taken in fiscal 2006. At the end of fiscal 2006, we
      issued 1,030,000 common shares, valued at $246,000 for investor relations
      services to two unrelated arms-length investor relations firms. The value of
      the
      shares was recorded as a prepaid expense for the investors relations services,
      which we are recognizing over the term of the related contracts. The contracts
      expire on various dates through December 22, 2006. At June 30, 2006, we had
      expensed $19,110 as investor relations fees in connection with these contracts.
      Cash payments for services and support for our stock positions accounted for
      the
      remaining expense. Investor relations costs decreased $198,293 from fiscal
      2004
      to 2005 because we decreased our focus on investor relations in 2005. We expect
      investment relations expenses to be lower in fiscal 2007; however, we still
      intend to continue to support investor relations initiatives.


19
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          of Contents*





Development
      costs in fiscal 2006 were $174,439, the most significant portion of which is
      for
      salaries and benefits of $169,279 paid to employees involved in the development
      of our products. Development costs in 2005 were $269,997, compared to $284,190
      in 2004, of which the most significant category of expense was for salaries
      and
      benefits paid to employees involved in the development of our products, which
      totalled $173,989. Development costs may increase in fiscal 2007 to accommodate
      our introduction of QiWaveTM contactless readers and reload stations and the
      development of credit card acceptance technology in our devices.





Professional
      fees were $253,123 in fiscal 2006, compared to $65,102 in 2005 and $59,500
      in
      2004, which include audit and legal fees paid in connection with our regulatory
      obligations as a reporting issuer in United States, British Columbia and
      Alberta, trading in the OTCBB. However, the most significant expense in 2006
      related to our change in domicile from British Columbia, Canada to the State
      of
      Delaware, United States. The expenses associated with the change in domicile
      were approximately $200,000. The Company expects to see a significant reduction
      in professional fees in 2007 now that the change of domicile has been completed,
      effective July 1, 2006.




**5.B**
            ***Liquidity
                and capital resources*******




Our
      ability to continue as a going concern is doubtful when our working capital
      deficit and our expectation that we may incur losses in future years are
      considered. 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.





We
      are
      not committed to further capital expenditures for the purchase of property,
      plant and equipment.





As
      of
      June 30, 2006, we had options to purchase 1,050,000 shares of common stock,
      with
      exercise prices ranging from $0.15 to $0.50, and warrants to purchase 14,225,803
      shares of common stock, with exercise prices ranging from $0.25 to $0.40.





During
      the year ended June 30, 2006, we issued 966,665 common shares pursuant to the
      exercise of share purchase warrants at $0.20 per share for total proceeds of
      $193,333. In addition, one of our directors, who is also an officer, exercised
      66,667 warrants at $0.20 and 145,454 warrants at $0.30 for a total of $56,970,
      which was applied to past due amounts owed to the director.





Also,
      during fiscal 2006, we issued 32,250 common shares pursuant to employee and
      director stock options at $0.15 for total proceeds of $4,838.




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




During
      the last several years, we have spent approximately $1.2 million on research
      and
      development efforts. We currently employ six employees who develop our
      technology. Our current research and development efforts focus on designing
      QiWaveTM Cash Card systems that are compatible with multiple Cash Card
      platforms. We
      currently have projects involving security, identification, gaming and data
      transfer application under development.




20
 *Table
          of Contents*


We
      are
      currently undertaking the following research and development
      projects:





PROJECT
            DESCRIPTION
            STATUSQiWaveTM
            Cash
                card readers and reload machines employing contactless card
                technologies.
            OngoingHybrid
                Credit Card
            Software
                development for QiWaveTM and SmartKit® Hybrid Cash reader that will permit
                the use and storage of electronic cash cards in machines which were
                previously coin only..
            OngoingData
                Base Management/ Third Party Application Tools
            Improve
                data base management functionality of our QiWaveTM and SmartKit® readers
                and QLink® system
            OngoingFunctionality
                Improvement
            Improve
                functionality and compatibility of our QI Wave® and SmartKit® Cash Card
                systems with OEM and other platforms
            Ongoing




We
      closely monitor advancements in Cash Card technologies and undertake research
      and development efforts necessary to maintain the multi-platform compatibility
      of our QiWaveTM and SmartKit® Cash Card systems.




**5.D**
            ***Trend
                information***




Smart
      Cards are plastic cards containing computer chips. Advances in technology allow
      these cards to become smaller, faster, cheaper, more reliable and more secure
      with each generation.




Recent
      advances in contactless technologies have created a unique opportunity for
      us to
      develop and deploy contactless smart card reader and reload machines to serve
      a
      variety of unattended point of sales machines. Our new QiWaveTM technology will
      be targeted in the campus environments, multi-unit housing and other vending
      applications.





Financial
      institutions have delayed the transition from magnetic stripe cards to smart
      cards until they can justify the cost of smart card deployment for stored value
      systems. However, fraud associated with bank credit and debit cards continues
      to
      increase and the banking communities in most countries outside North America
      have deployed or are actively planning to deploy smart cards to combat the
      problem. Banks in Canada have now established target dates of 2009-2010 for
      full
      deployment of smart cards and some US banks have begun deployment with 2010
      the
      established target for full deployment.




Our
      initial business strategy was to position our technology and systems to the
      banking industry. However, the long delays in deployment by the banking industry
      and our success in marketing proprietary systems have led to our focus on the
      proprietary systems market. We believe that bank industry deployment of smart
      card systems is still a few years away, and the incremental cost of adding
      Cash
      Card functionality to our Cash Card systems will be possible at reasonable
      costs. We cannot anticipate the overall effect that the scheduled roll out
      of
      cash cards by financial institutions will have on the overall demand for our
      products. We are continuing to pursue alternative marketing channels and systems
      to commercialize and market our products.




We
      believe that the declining costs of all elements of cash card systems will
      continue to create new market opportunities for us both with third party cards
      and also with our QI Cash proprietary cards and turnkey systems.




21
 *Table
          of Contents*




**5.E**
            ***Off-balance
                sheet arrangements***




We
      had no
      off-balance sheet arrangements that have or are likely to have a current or
      future effect on our financial condition, revenues or expenses, results of
      operations, liquidity, capital expenditures or capital resources.




**5.F**
            ***Tabular
                disclosure of contractual obligations*******




The
      following table lists, as of June 30, 2006, information with respect to our
      known contractual obligations.





**Payments
                due by period****Contractual
                Obligations**
            **Total**
            **Less
                than 1 year**
            **1-
                3 years**
            **3
                - 5 years**
            **More
                than 5 years**Long-Term
                Debt Obligations
            Nil
            Nil
            Nil
            Nil
            NilCapital
                (Finance) Lease Obligations
            Nil
            Nil
            Nil
            Nil
            NilOperating
                Lease Obligations (1)
            $127,030
            $85,000
            $42,030
            Nil
            NilPurchase
                Obligations
            Nil
            Nil
            Nil
            Nil
            NilOther
                Long-Term Liabilities Reflected on our Balance Sheet under Canadian
                GAAP
            Nil
            Nil
            Nil
            Nil
            NilTotal
            $127,030
            $85,000
            $42,030
            Nil
            Nil





(1)
      Operating lease obligations relate exclusively to the lease of office
      space.




**5.G**
            ***Safe
                Harbor***




Certain
      statements contained in the foregoing Results of Operations and elsewhere in
      this Form 20-F constitute forward-looking statements. Such forward-looking
      statements involve a number of known and unknown risks, uncertainties and other
      factors which may cause our actual results, performance or achievements to
      be
      materially different from any future results, performance or achievements
      expressed or implied by such forward-looking statements. Readers are cautioned
      not to place undue reliance on these forward-looking statements, which speak
      only as of the date the statements were made and readers are advised to consider
      such forward-looking statements in light of the risks set forth below.





Risk
      factors that could affect our future results are described under “Item 3.D, Key
      Information— Risk Factors” above.





**Item
                6**
            **Directors,
                Senior Management and Employees******




**6.A**
            ***Directors
                and senior management***




The
      following table sets forth the name, position, age and municipality of residence
      of directors and senior management as of November 30, 2006:




22
 *Table
          of Contents*




**Name
                and Municipality of Residence**
            
            **Business
                Activities Performed Outside the Company during the past five
                years**
            
            **Position**
            
            **Age**Steven
                R. Garman
            
            President
                and Chief Executive Officer, QI Systems Inc. since June 30, 2003;
                Management Consultant with True Horizon Marketing Inc. since 2002;
                President and Chief Executive Officer, FS Holdings from 1998 to
                2002.
            
            President,
                Chief Executive Officer and Director
            
            59Robert
                I. McLean, Jr.
            
            Chief
                Financial Officer and Chief Operating Officer sinceAugust
                22, 2005;
                Executive Vice President of Business Development and Global Account
                Management for Teleplan International of the Netherlands from 2004
                to
                2005.
            
            Chief
                Financial Officer and Chief Operating Officer and Director
            
            49Richard
                H. Murray
            
            Sr.
                VP and GM Canadian Operations since September 2005; VP of Business
                Development July 2003 - September 2005; Director of Business Development
                2001 - July 2003.
            
            Sr.
                Vice President, General Manager of Canadian Operations and
                Director
            
            59Billy
                Gene Parker, Jr.
            
            Owner
                and President, Mobil Contractor Inc., from 1985 to
                Present.
            
            Director
            
            51William
                J. Reid
            
            Software
                Development Project Manager for Edoc Systems Group Ltd. since
                2002.
            
            Director
            
            34Matthew
                G. Yugovich
            
            Commercial
                Real Estate Developer.
            
            Director
            
            51Alan
                D. Graves
            
            President
                of Gemcore Communications Inc. since 1999; Senior Technical Consultant
                to
                QI since 1995.
            
            Director
            
            45





Members
      of our Board of Directors are elected by our shareholders. Unless the director's
      office is earlier vacated, each director elected will hold office until the
      conclusion of our next annual general meeting, or if no director is then
      elected, until a successor is elected.




Our
      Board
      of Directors meets periodically to review significant developments affecting
      us
      and to act on matters requiring Board approval. Although our Board of Directors
      delegates many matters to others, it reserves certain powers and functions
      to
      itself. The only standing committee of our Board of Directors is an Audit
      Committee. The Audit Committee of our Board of Directors currently consists
      of
      Matthew G. Yugovich, Alan D. Graves, William J. Reid and Steven R. Garman.
      See,
“Item 6.C Board Practices,” below. This committee is directed to review the
      scope, cost and results of the independent audit of our books and records,
      the
      results of the annual audit with management and the internal auditors and the
      adequacy of our accounting, financial and operating controls; to recommend
      annually to our Board of Directors the selection of the independent auditors;
      to
      consider proposals made by our independent auditors; and to report to our Board
      of Directors, when so requested, on any accounting or financial matters.




None
      of
      our directors or executive officers is a party to any arrangement or
      understanding with any other person pursuant to which said individual was
      elected as a director or officer. None of our directors or executive officers
      has any family relationship with any of our other officers or directors.




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




Steven
      R. Garman, President, Chief Executive Officer and Director .
      Mr.
      Garman has over 35 years of business experience in the international corporate
      environment and a diversified management background including senior executive
      positions in varied industries such as health care services, high-tech medical
      devices, computer products, OEM manufacturing and sports and recreation. He
      has
      held multi-million dollar P & L responsibility with Olympus America, Inc.,
      an international market leader in the camera and medical products industry
      (1979
      to 1998); served as CEO and President of Fury Sports Holdings, Inc., a pre-IPO
      start-up engaged in sports facility management and sport skills training
      business (1998 to 2002); served as Managing General Partner for ProSource
      Holdings, Inc., a private investment group (1994 to 1996); served as a senior
      executive consultant with Drake Beam Morin (2002 to 2003); and been named a
      member of the boards of directors of multiple start-up corporations, including
      National Endoscope Systems, Inc., Advanced Compression Technologies, Inc.,
      ProSource Industries, Inc., Aliment Plus, Inc., Oswego Software, Inc., Fury
      Sports Holdings, Inc., and True Horizon Marketing, Inc. Mr. Garman received
      his
      Bachelor of Science Degree in Business Management and Administration from
      Indiana University’s Kelley School of Business in 1969. He has held senior
      leadership positions with industry leader Olympus America, Inc. (Olympus
      Corporation, Tokyo, Japan), spending 20 years in Olympus’ Medical Products
      Division, where he managed pioneering projects from concept through full-scale
      national deployment. Mr. Garman has international experience working with
      corporate manufacturing and sales partners in the United States, Western and
      Central Europe, Great Britain, Japan, Canada and Australia. Prior to his service
      with Olympus, Mr. Garman worked for Johnson & Johnson and ARCO Medical
      Products (Atlantic Richfield Corporation). Mr. Garman has served as a director
      and as our President and Chief Executive Officer since June 20,
      2003.


23
 *Table
          of Contents*




Robert
      I. McLean, Jr, Chief Financial Officer and Chief Operating
      Officer . Mr.
      McLean was formerly Executive Vice President of Business Development and Global
      Account Management for Teleplan International of the Netherlands, a $300M
      publicly traded technology company. Prior to his appointment as Vice President
      of Teleplan, Mr. McLean served as Treasurer of Teleplan’s American operations.
      Preceding this assignment, Mr. McLean held the position of Senior Vice President
      of Finance and Chief Financial Officer with PC Service Source of Dallas, Texas,
      a large publicly traded independent computer parts distributor. Earlier in
      Mr.
      McLean ́s career he was Vice President - Planning and Business Development of
      Computer City, Inc., a $2B subsidiary of Radio Shack, Inc., and Director of
      Planning and Analysis for Compucom Systems, Inc. Mr. McLean has also served
      as
      an auditor for PriceWaterhouseCoopers. Mr. McLean has a Bachelor of Science
      -
      Accounting degree from Drexel University and a Masters of Business
      Administration and Finance degree from the University of Miami.




Richard
      Murray, Senior Vice President and General Manager of Canadian
      Operation .
      Mr.
      Murray has devoted his career to applications of computer technology in
      engineering and business. Since 1984, Mr. Murray has focused on developing
      and
      marketing innovative products to integrate card payment in self-serve
      equipment.




Matthew
      G. Yugovich, Director .
      Mr.
      Yugovich has over 30 years of business management experience. During the past
      six years, Mr. Yugovich has served as the president of Great Western Adventure,
      Inc., a company engaged in the business of commercial real estate development.




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




William
      J. Reid, Director .
      Mr.
      Reid graduated from the University of British Columbia in 2000 with a Bachelor
      of Science degree in Forestry. After accumulating eight years of experience
      in
      forestry research (pre- and post-degree) with the British Columbia Ministry
      of
      Forests Research Branch, he completed the Application and Management of
      Information Technology program at the University of Victoria. Upon his
      completion of this program, Edoc Systems Group Ltd. hired him as a software
      developer in 2002. His current duties have expanded to Project Manager for
      a
      variety of software application projects, including a full-scale enterprise
      application spanning almost two years of development time, a cost tracking
      program that integrates with off-the-shelf accounting software and a custom
      data
      entry program designed on the .NET compact framework, which runs on a Personal
      Digital Assistant.




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 us,
      Technical Solutions, a company engaged in manufacturing and development, and
      Velocity Software, a company engaged in hardware and software development and
      consulting services. For the last four 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.


24
 *Table
          of Contents*




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 business entity of which he is
      a
      director, manager 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 business entity of which he
      is
      an officer, manager 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.




**6.B**
            ***Compensation*******




We
      do not
      compensate our directors for their services as directors in cash; however,
      we do
      grant stock options to directors, executive officers and employees, as more
      fully set forth below. Directors are entitled to reimbursement for reasonable
      travel and other out-of-pocket expenses incurred in connection with attendance
      at meetings of our Board of Directors. Our Board of Directors makes separate
      remuneration to any director undertaking services on our behalf 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.




**Executive
      compensation**




During
      the fiscal year ended June 30, 2006, we had two named executive officers, namely
      Steven R. Garman, our President and Chief Executive Officer and Robert I. McLean
      Jr, our Chief Financial Officer.





The
      following table sets forth, for the periods indicated, the compensation of
      the
      named executive officers:




25
 *Table
          of Contents*


SUMMARY
      COMPENSATION TABLE


**Name
                  and**
                **Principal
                  Position**
              
              **Year**
                **(1)**
              
              **Annual
                  Compensation**
              
              **Long
                  Term Compensation**
              
              **All
                  Other**
                **Compen-sation
                  ($)**Awards
              
              PayoutsSalary
                (US$)
              
              Bonus
                (US$)
              
              Other
                  Annual Compen-sation
                ($)
              
              Securities
                  under Options/ SARs(2)
                Granted
              
              Restricted
                  Shares or Restricted Share Units
                ($)
              
              LTIP
                Payouts
                ($)Steven
                  R. Garman
              
              2006
              
              210,000
              
              26,000
              
              Nil
              
              Nil
              
              Nil
              
              Nil
              
              NilPresident
                  and
              
              2005
              
              157,000
                  (3)
              
              Nil
              
              Nil
              
              168,000
              
              Nil
              
              Nil
              
              NilCEO
              
              2004
              
              120,000
                  (3)
              
              36,000
                  (4)
              
              Nil
              
              Nil
              
              Nil
              
              Nil
              
              NilSteven
                  R. Crowell
              
              2006
              
              Nil
              
              Nil
              
              Nil
              
              Nil
              
              Nil
              
              Nil
              
              Nilformer
              
              2005
              
              5,000
              
              Nil
              
              Nil
              
              150,000
              
              Nil
              
              Nil
              
              NilCFO
                  (5)
              
              2004
              
              Nil
              
              Nil
              
              Nil
              
              Nil
              
              Nil
              
              Nil
              
              NilRobert
                  I.
              
              2006
              
              130,532
              
              Nil
              
              Nil
              
              Nil
              
              60,750 (6)
              
              Nil
              
              NilMcLean
                  Jr.
              
              2005
              
              Nil
              
              Nil
              
              Nil
              
              Nil
              
              Nil
              
              Nil
              
              NilCFO/COO
              
              2004
              
              Nil
              
              Nil
              
              Nil
              
              Nil
              
              Nil
              
              Nil
              
              Nil





(1)
            Fiscal
                year ended June 30.





(2)
            Stock
                appreciation rights. We have not granted any
                SARs.





(3)
            During
                the years ended June 30, 2005 and 2004, US$141,000 and US$64,010,
                respectively, of the annual salary due to Mr. Garman was not paid
                by us
                and was recorded as a current liability due to Mr.
                Garman.





(4)
            Accrued
                in the fiscal year ended June 30, 2004, but unpaid as of June 30,
                2005.





(5)
            Mr.
                Crowell was hired in November 2004 as our Chief Financial Officer.
                On
                December 17, 2004 he was appointed to the Board of Directors. On
                April 21,
                2005, Mr. Crowell resigned as a director and resigned as Chief Financial
                Officer on July 1, 2005.





(6)
            Mr.
                McLean received 150,000 shares of restricted common stock of the
                Company
                as an incentive to join the
                Company.




**Stock
      Options and Stock Appreciation Rights**




During
      the year ended June 30, 2006, no stock options were granted.





During
      the year ended June 30, 2005, stock options for 368,000 shares of common stock
      were granted to the named executive officers. All the options were granted
      on
      December 31, 2004 and will expire December 31, 2009. The exercise price on
      the
      options is US$0.15. The options vest ratably over the ensuing four calendar
      quarters.


26
 *Table
          of Contents*





No
      share
      options were granted to or repriced on behalf of the named executive officers
      during the financial year ended June 30, 2004. No share options were exercised
      by the named executive officers during the financial year ended June 30, 2004.





The
      following table shows, as to the individuals named in the Summary Compensation
      Table above, information concerning stock options granted during the twelve
      months ended June 30, 2006.





**Name
                and named**
              **executive
                officer and**
              **Principal
                Position**
            **Year
                (1)**
            **Number
                of**
              **Options
                Issued**
            **Exercise
                Price**
            **Expiration
                Date**
            **Vested
                at**
              **June
                30, 2006**Steven
                R. Garman
            2006
            Nil
            Nil
            Nil
            NilPresident
                &
            2005
            168,000
            US$0.15
            December
                31, 2009
            168,000Chief
                Executive Officer
            2004
            Nil
            Nil
            Nil
            NilSteven
                R. Crowell
            2006
            Nil
            Nil
            Nil
            Nilformer
            2005
            150,000
            US$0.15
            December
                31, 2009
            (2)Chief
                Financial Officer
            2004
            Nil
            Nil
            Nil
            NilRobert
                I. McLean Jr.
            2006
            Nil
            Nil
            Nil
            NilChief
                Financial Officer/
            2005
            Nil
            Nil
            Nil
            NilChief
                Operating Officer
            2004
            Nil
            Nil
            Nil
            Nil





(1)
            July
                1 to June 30.





(2)
            Mr.
                Crowell was hired in November 2004 as our Chief Financial Officer.
                On
                December 17, 2004, he was appointed to the Board of Directors. On
                April
                21, 2005, Mr. Crowell resigned as a director and resigned as Chief
                Financial Officer on July 1, 2005.Accordingly,
                under the terms of the Stock Option Plan, his 150,000 options became
                null
                and void upon his resignations.




P **ension
      Plan**




We
      do not
      have any pension plan arrangements in place.




**Termination
      of Employment, Change in Responsibilities and Employment Contracts**




We
      entered into a Services Agreement with True Horizon Marketing, Inc., a company
      controlled by Steven R. Garman, on June 20, 2003, for the provision of
      professional services, including services as our Chief Executive Officer and
      President. A fee of $10,000 per month was payable to True Horizon during the
      year ended June 30, 2004. Subsequent to June 30, 2004, the fee was revised
      to
      $15,000 per month for management services and True Horizon also received $1,000
      for a monthly allowance towards office expenses. On January 1, 2005, the
      Services Agreement with True Horizon was terminated, and Mr. Garman became
      our
      employee with a monthly salary of $17,500.




On
      December 21, 2005, we entered into an Employment Agreement with Mr. Garman.
      Mr.
      Garman’s monthly salary under the Employment Agreement is $17,500. The base
      salary will increase by 10% when we attain audited annual revenues of
      $1,500,000, then by 20% when we attain audited annual revenues of $3,000,000
      and
      finally by 30% when we attain audited annual revenues of $5,000,000. Mr. Garman
      could also receive bonuses of up to twice his annual salary if specified
      financing, revenue and profitability targets are achieved.




27
 *Table
          of Contents*




In
      the
      event that Mr. Garman’s employment is terminated for any reason, other than just
      cause, following a change in our control, his Employment Agreement stipulates
      that he will receive two times his annual compensation paid in a lump sum.
      Under
      such circumstances, Mr. Garman would also have the right to exercise any
      options, rights or warrants within 90 days of his termination.




Further,
      if at the time of his termination, any amount is due and payable to him for
      services prior to April 1, 2005, Mr. Garman shall have the right to convert
      such
      amount into shares of our common stock at a rate of $0.12 per share.




On
      March
      1, 2006, we entered into an Employment Agreement with Mr. McLean. Mr. McLean’s
      monthly salary under the Employment Agreement is $13,000. The base salary will
      increase by 10% when we attain audited annual revenues of $1,500,000, then
      by an
      additional 10% when we attain audited annual revenues of $5,000,000 and finally
      by an additional 10% when we attain audited annual revenues of $8,000,000.
      Mr.
      McLean could also receive annual bonuses of up to one and one-half times his
      annual salary if specified financing, revenue and profitability targets are
      achieved.





In
      the
      event that Mr. McLean’s employment is terminated for any reason, other than just
      cause, following a change in our control, his Employment Agreement stipulates
      that he will receive an amount equal to his annual compensation paid in a lump
      sum. Under such circumstances, Mr. McLean would also have the right to exercise
      any options, rights or warrants within 90 days of his termination.




Other
      than as disclosed above, there are no compensatory plans or arrangements,
      including payments to be received from us or our subsidiaries, with respect
      to
      our named executive officers.




The
      aggregate amount of compensation paid by us and our subsidiaries during the
      fiscal year ended June 30, 2006, to all officers and directors, as a group,
      for
      services in all capacities was $440,532.




No
      amounts have been set aside or accrued by us during fiscal 2006 to provide
      pension, retirement or similar benefits for our directors or executive officers
      pursuant to any plan provided for or contributed to by us.




Except
      as
      set out above and as discussed in “Stock Options and Stock Appreciation Rights,”
we have no material bonus or profit sharing plans pursuant to which cash or
      non-cash compensation is or may be paid to our directors or executive officers.




**Stock
      Options**




As
      of
      June 30, 2006, there were options to purchase 1,050,000  shares
      of
      our common stock outstanding. The names and titles of our 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, 2006, are set forth below.




**Name**
            
            **Number
                of Shares**
            
            **Exercise
                Price Per Share**
            
            **Expiry
                Date**Steven
                R. Garman
            
            
            168,000
            
            $
            0.15
            
            
            December
                31, 2009Billy
                Gene Parker Jr.
            
            
            50,000
            
            $
            0.50
            
            
            December
                31, 2007Billy
                Gene Parker Jr.
            
            
            168,000
            
            $
            0.15
            
            
            December
                31, 2009William
                Reid
            
            
            33,000
            
            $
            0.15
            
            
            December
                31, 2009Matthew
                Yugovich
            
            
            50,000
            
            $
            0.50
            
            
            December
                31, 2007Matthew
                Yugovich
            
            
            142,000
            
            $
            0.15
            
            
            December
                31, 2009Alan
                D. Graves
            
            
            33,000
            
            $
            0.15
            
            
            December
                31, 2009Alan
                D. Graves
            
            
            96,000
            
            $
            0.50
            
            
            December
                31, 2007




28
 *Table
          of Contents*




**6.C**
            ***Board
                practices***




Set
      forth
      below are the names of our directors, their positions, the dates their current
      terms of office expire and the periods during which such persons have served
      as
      director:




**Name**
            
            **Position**
            
            **Expiration
                of Term**
              **of
                Office**
            
            **Period
                of**
              **Service**Steven
                R. Garman (1)
            
            President,
                Chief Executive Officer and Director
            
            (2)
            
            Since
                June 2003Richard
                Murray
            
            Sr.
                Vice President, General Manager of Canadian Operations and
                Director
            
            (2)
            
            Since
                October 2005Billy
                Gene Parker Jr
            
            Director
            
            (2)
            
            Since
                November 2001William
                J. Reid (1)
            
            Director
            
            (2)
            
            Since
                June 2003Matthew
                Yugovich (1)
            
            Director
            
            (2)
            
            Since
                October 2002Alan
                D. Graves (1)
            
            Director
            
            (2)
            
            Since
                December 2002Robert
                I. McLean Jr.
            
            Chief
                Financial Officer and Chief Operating Officer and Director
            
            (2)
            
            Since
                August 2006





(1)
            Member
                of the Audit Committee.


(2)
            Term
                expires on the date of our next annual stockholders
                meeting.




There
      are
      no director’s service contracts which provide benefits upon the termination of
      employment.




**Audit
      Committee**




Set
      forth
      below are the names of the members of our Audit Committee:




·
            Matthew
                G. Yugovich


·
            Alan
                D. Graves


·
            Steven
                R. Garman


·
            William
                J. Reid




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




Our
      Audit
      Committee Charter provides that the Audit Committee has two primary objectives:
      The first is to advise the board of directors in its oversight responsibilities
      regarding:





·
            the
                quality and integrity of our financial reports and
                information;


·
            our
                compliance with legal and regulatory
                requirements;


·
            the
                effectiveness of our internal controls for finance, accounting, internal
                audit, ethics and legal and regulatory
                compliance;


·
            the
                performance of our auditing, accounting and financial reporting
                functions;


·
            the
                fairness of related party agreements and arrangements between us
                and
                related parties; and


·
            the
                independent auditors' performance, qualifications and
                independence


29
 *Table
          of Contents*





The
      second primary objective of the Audit Committee is to prepare the reports
      required to be included in the management information circular in accordance
      with applicable laws or the rules of applicable securities regulatory
      authorities.





The
      members of the Audit Committee were not remunerated for their participation
      in
      this committee in the fiscal year ended June 30, 2006. We do not anticipate
      remunerating members of the Audit Committee in the year ending June 30, 2007
      by
      means of director’s fees, although we may grant certain stock option awards to
      members of the Audit Committee in the current fiscal year and/or in subsequent
      periods.




**6.D**
            ***Employees*******




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




**June
                30, 2006**
            
            ******June
                30, 2005**
            
            **June
                30, 2004**9
                employees
            
            8
                employees
            
            8
                employees




We
      had 6
      employees and 2 contractors located in Canada, and 3 employees and no
      contractors located in the United States at June 30, 2006. Three of our 10
      employees and one contractor were involved in management and administrative
      functions; five employees and one contractor were engaged in research and
      development; and one employee was engaged in sales and marketing. All employees
      are full-time employees. ** Our
      contractors generally engage in software design, product assembly and prototype
      manufacturing. They are paid hourly and are called when work is
      available.




**6.E**
            ***Share
                ownership*******




The
      following table sets forth as of November 30, 2006 information regarding the
      beneficial ownership of our common stock by each director and each executive
      officer named in the Summary Compensation Table appearing herein.





**Beneficial
                Ownership (1)****Name**
            **Number
                of Shares(2)**
            
            **Percent
                of Total**Steven
                R. Garman (3)(4)(5)
            822,832
            
            1.83%Robert
                I. McLean Jr.
            200,000
            
            *Richard
                H. Murray (4)(6)
            1,348,800
            
            3.00%Matthew
                G. Yugovich (3)(4)(7)(8)
            1,040,212
            
            2.32%Billy
                Gene Parker, Jr. (4)(9)
            573,272
            
            1.18%William
                J. Reid (3)(4)(10)
            112,400
            
            *Alan
                D. Graves (3)(4)(11)
            250,081
            
            *





*
      Less
      than 1%.





(1)
            Beneficial
                ownership is determined in accordance with the rules and regulations
                of
                the U.S. Securities and Exchange Commission and generally includes
                voting
                or investment power with respect to securities. Options and warrants
                to
                purchase shares of common stock, which are currently exercisable
                or will
                become exercisable within 60 days of November 30, 2006 are deemed
                to be
                beneficially owned by the individual. Similarly, options and warrants
                to
                purchase shares of common stock, which are currently exercisable
                or will
                become exercisable within 60 days of November 30, 2006, are deemed
                to be
                outstanding for purposes of computing the percentage of the shares
                held by
                an individual but are not deemed outstanding for purposes of computing
                the
                percentage of any other person. Except as indicated otherwise in
                the
                footnotes below, and subject to community property laws where applicable,
                the persons named in the table above have sole voting and investment
                power
                with respect to all shares of common stock shown as beneficially
                owned by
                them.




30
 *Table
          of Contents*


(2)
            44,834,629
                common shares were issued and outstanding as of November 20,
                2006.





(3)
            Denotes
                a member of the audit committee.





(4)
            Includes
                with respect to each of the following individuals, the following
                number of
                shares subject to options that were vested as of or will vest within
                60
                days following November 30, 2006: Mr. Parker, 25,000; Mr. Yugovich,
                142,000; Mr. Graves, 129,000; Mr. Reid, 33,000; Mr. Murray, 25,000;
                and
                Mr. Garman, 168,000.





(5)
            Includes
                460,244 shares registered in the name of Mrs. Jane Garman, wife of
                Mr.
                Garman.





(6)
            Includes
                150,000 shares subject to warrants held by Burrard Technologies Corp.
                that
                are exercisable as of or will be exercisable within 60 days following,
                November 30, 2006. Mr. Murray Currently serves as director for Burrard
                Technologies Corp.





(7)
            Includes
                337,727 shares held by Mrs. Carol Yugovich, wife of Mr. Yugovich.
                Mr.
                Yugovich expressly disclaims all beneficial ownership of these shares.





(8)
            Includes
                371,818 shares subject to warrants held by Mrs. Yugovich that were
                exercisable as of or will be exercisable within 60 days of November
                30,
                2006. Mr. Yugovich expressly disclaims all beneficial ownership of
                these
                warrants.





(9)
            Includes
                116,636 shares subject to warrants held by Mr. Parker that were
                exercisable as of or will be exercisable within 60 days following
                November
                30, 2006.





(10)
            Includes
                41,800 shares held by Mrs. Dana Reid, wife of Mr. Reid.





(11)
            Includes
                121,081 shares registered in the name of Gemcore Communications,
                Inc., a
                corporation for which Mr. Graves currently serves as
                director.




A
      summary
      of outstanding options granted to the above individuals to purchase our common
      shares as at November 30, 2006 is set forth below:


**Name**
              
              **Number
                  of Shares**
              
              **Exercise
                  Price Per Share**
              
              **Expiry
                  Date**Steven
                  R. Garman
              
              
              168,000
              
              $
              0.15
              
              
              December
                  31, 2009Richard
                  H. Murray
              
              
              25,000
              
              $
              0.15
              
              
              December
                  31, 2009Billy
                  Gene Parker Jr
              
              
              50,000
              
              $
              0.50
              
              
              December
                  31, 2007Billy
                  Gene Parker Jr
              
              
              168,000
              
              $
              0.15
              
              
              December
                  31, 2009Matthew
                  G. Yugovich
              
              
              50,000
              
              $
              0.50
              
              
              December
                  31, 2007Matthew
                  G. Yugovich
              
              
              50,000
              
              $
              0.15
              
              
              December
                  31, 2009Matthew
                  G. Yugovich
              
              
              7,000
              
              $
              0.15
              
              
              December
                  31, 2009Alan
                  D. Graves
              
              
              33,000
              
              $
              0.15
              
              
              December
                  31, 2009Alan
                  D. Graves
              
              
              96,000
              
              $
              0.50
              
              
              December
                  31, 2007William
                  J. Reid
              
              
              33,000
              
              $
              0.15
              
              
              December
                  31, 2009




**Stock
      Option Plan**




Our
      Incentive Stock Option Plan was drafted to comply with the rules set forth
      for
      such plans by the Toronto Stock Exchange (TSX). At no time may more than 5%
      of
      the outstanding issued shares be reserved with respect to any one individual.
      The Plan provides for the issuance of options to our directors, officers and
      employees and our subsidiaries to purchase our common shares. The stock options
      may be issued at the discretion of the Board of Directors and are exercisable
      for a period not exceeding five years. Stock Options granted to our employees
      and directors will vest in equal quarterly tranches, at the direction of the
      Board of Directors, subject to a minimum 18 month vesting period, in accordance
      with TSX policy, commencing from the date of grant of the Option. The exercise
      price may not be lower than the “discounted market price” being the last closing
      price of our shares on the day immediately preceding the date on which the
      directors grant and publicly announce the options, less the applicable discount
      from the market price in accordance with TSX policy, and will not otherwise
      be
      less than $0.10 per share. The Incentive Stock Option Plan provides that a
      person is entitled to have one or more stock options outstanding at a
      time.




31
 *Table
          of Contents*




As
      at
      June 30, 2004, we had a total of 2,175,000 options approved for issuance. On
      December 10, 2004, our shareholders approved an amendment to our stock option
      plan, which increased the
      number of our common shares that have been allocated and reserved for use in
      our
      Incentive Stock Option Plan from 2,175,000 shares to 4,000,000
      shares.




Effective
        July 1, 2006, we changed our jurisdiction of incorporation from the Province
        of
        British Columbia, Canada to the State of Delaware.In connection with our
        change of domicile, our Board of Directors determined that it was in our
        best
        interests and the best interests of our shareholders to discontinue the granting
        of options under our existing stock plan and to adopt a new 2005 Stock Plan
        that
        complied with U.S. federal and state tax and securities laws. Our Board of
        Directors adopted the Plan on November 4, 2005, and our stockholders approved
        the Plan on June 23, 2006. The Plan became effective on July 1, 2006, the
        date
        of our domestication. A total of 8,000,000 shares of our common stock have
        been
        reserved for issuance thereunder. A copy of our 2005 Stock Option Plan is
        contained in Amendment No.4 to our Form S-4 Registration Statement, filed
        with
        the Securities and Exchange Commission on May 24, 2006.





**Equity
      Compensation Plan Information**




The
      following table sets forth information related to our equity compensation plans
      as of November 30, 2006:





Plan
                Category
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            Weighted
                average exercise price of outstanding options, warrants and
                rights
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in
                column)Equity
                Compensation Plans approved by security holders
            1,050,000
                options
            US
                $0.28
            6,950,000Equity
                Compensation Plans not approved by Security Holders
            Nil
            Nil
            NilTotal
            1,050,000
                options
            
            6,950,000






**Item
                7**
            **Major
                Shareholders and Related Party Transactions******




**7.A**
            ***Major
                shareholders***




**Share
      Ownership**




The
      following table shows, as of November 30, 2006, the information known by us
      regarding shareholders that beneficially own more than 5% of our outstanding
      common shares:


32
 *Table
          of Contents*





**Name
                of Shareholder**
            
            **Number
                of Shares**
            
            **Percent**Scott
                Sabins
            
            
            3,150,300
            
            
            7.0
            %Dan
                Berry
            
            
            4,048,000
            
            
            9.0
            %





As
      far as
      we know, we are not directly or indirectly owned or controlled by another
      corporation or by any government, and there are no arrangements that may result
      in a change of our control.




All
      of
      our shareholders have the same voting rights.




As
      of
      November 30, 2006, 44,834,629 common shares were held of record by 218
      registered holders. Of those holders, 97 had registered addresses in the United
      States representing 94% of the shares outstanding and 116 had registered
      addresses in Canada representing 6% of the shares outstanding. We
      are
      aware that many of our common shares are held of record by brokers and other
      nominees. Accordingly, the above numbers are not necessarily representative
      of
      the actual number of persons who are beneficial owners of our common stock
      or
      the number of our common stock beneficially held by such persons.





We
      are
      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 us, the operation of which may at a subsequent date
      result in a change of control of our company.




**7.B**
            ***Related
                party transactions*******




During
      the period since the beginning of our preceding three financial years up to
      the
      date hereof, we entered into the following related party transactions:




On
      June
      20, 2003 we entered into a Services Agreement with True Horizon Marketing Inc.,
      a company controlled by Steven R. Garman, for the provision of his professional
      services including services as our Chief Executive Officer and President. The
      agreement is further described under “Termination of Employment, Change in
      Responsibilities and Employment Contracts,” above.




In
      October 2005, we completed a common shares-for-debt conversion plan. Pursuant
      to
      this plan, Gemcore Communications Inc., a company controlled by Alan D. Graves,
      one of our Directors, received 40,081 of our common shares at the price of
      $0.32
      to settle debt of $12,748 (Cdn$16,774).




For
      the
      period from July 1, 2003 to June 30, 2004, we paid $214,143 in consulting fees
      to directors and officers and former directors and officers of our company.
      As
      at June 30, 2004 and 2003, amounts of $246,336 and $142,827, respectively,
      were
      due to these directors and officers in respect of these fees, and included
      in
      accounts payable.




During
      the year ended June 30, 2004, we issued 799,090 common shares at $0.22 per
      share
      for proceeds of $175,800; 40,000 common shares at $0.25 per share for proceeds
      of $10,000; and 390,000 common shares at $0.15 per share for proceeds of $58,500
      pursuant to private placements to our directors.


33
 *Table
          of Contents*


During
      the years ended June 30, 2005, 2004 and 2003, we incurred fees charged by our
      directors and our officers and their related companies. These transactions
      were
      in the normal course of operations and are measured at the exchange amount
      which
      was the amount established and agreed to by the related parties and are as
      follows:




**Years
                ended June 30,****2006**
            
            **2005**
            
            **2004**$
            
            $
            
            **$**Administration
            
            
            368,185
            
            
            253,142
            
            
            155,867Development
                costs
            
            
            -
            
            
            56,610
            
            
            58,276Financing
                costs and interests
            
            
            -
            
            
            45,313
            
            
            -Sales
                and marketing
            
            
            118,882
            
            
            -
            
            
            -487,067
            
            
            355,065
            
            
            214,143




In
      May
      25, 2005, we entered into an Investors Relations agreement with an arms-length
      party, Hobson, Lorenze, Bowersock and Associates, which required us to
      irrevocably issue 3,000,000 of our common shares, valued at $435,000, to the
      investor relations firm as follows:




·
            1,500,000
                shares within 5 days of the  agreement
                date;


·
            750,000
                shares within 185 days of the agreement date;
                and


·
            750,000
                shares within 275 days of the agreement
                date.





For
      more
      information regarding this Investor Relations agreement, see “Share capital
      subscribed” ” in Note 7 of “Notes to Consolidated Financial Statements June 30,
      2006.”





During
      the year ended June 30, 2005, we issued 170,454 common shares at $0.22 per
      share
      for proceeds of $37,500 pursuant to a private placement to our
      directors. **** For
      more
      information regarding this agreement, see “Share capital subscribed” in Note 7
      of “Notes to Consolidated Financial Statements June 30, 2005.”




In
      December, 2005, we entered into an Employment Agreement with Steven R. Garman.
      See “Termination of Employment, Change in Responsibilities and Employment
      Contracts” above.




In
      March,
      2006, we entered into an Employment Agreement with Robert I. McLean Jr. See
      “Termination of Employment, Change in Responsibilities and Employment Contracts”
above.




During
      the year ended June 30, 2006, we issued 315,000 shares to a director pursuant
      to
      a private placement at $0.15 per share for proceeds of $11,000 and the
      settlement of $36,250 of amounts owing for 250,000 common shares delivered
      to an
      investor relations firm on our behalf. See Note 7 of “Notes to Consolidated
      Financial Statements June 30, 2006.”




During
      the year ended June 30, 2006, we issued 200,000 common shares valued at $72,750
      to our officers as hiring incentives.




During
      the year ended June 30, 2006, we issued 26,000 shares to a director pursuant
      to
      the exercise of share purchase options for total proceeds of
      $3,900.




During
      the year ended June 30, 2006, we issued 445,454 common shares to one of our
      directors for total proceeds of $46,667 and the settlement of $56,970 of amounts
      owing to that director for unpaid management fees included in administration
      expense.




In
      the
      first quarter of 2006, we received $48,667 from the exercise of warrants to
      purchase 243,333 shares of our common stock at an exercise price of $0.20.
      In
      the second quarter 2006, we received an additional $158,000 from the exercise
      of
      warrants to purchase 789,999 of our common stock at an exercise price of $0.20.


34
 *Table
          of Contents*





In
      October, 2006, we completed a private placement Subscription Agreement under
      which certain parties purchased an aggregate of 4,641,667 units for a purchase
      price of $0.15 per share and a debt settlement of $36,250 to one of our
      directors. For more information regarding this agreement, see Note 12 of “Notes
      to Consolidated Financial Statements June 30, 2006.”




**7.C**
            ***Interests
                of experts and counsel*******




Not
      applicable.




**Item8**
            **Financial
                Information******




**8.A**
            ***Consolidated
                statements and other financial information*******




Financial
      statements, audited by our independent auditor and accompanied by an audit
      report, comprised of:




·
            Consolidated
                Balance Sheets as at June 30, 2006 and 2005;


·
            Consolidated
                Statements of Operations and Deficit for the Years Ended June 30,
                2006,
                2005 and 2004;


·
            Consolidated
                Statements of Cash Flows for the Years Ended June 30, 2006, 2005
                and 2004;
                and


·
            Consolidated
                Statement of Stockholder’s Deficiency for the Period July 1, 2003 to June
                30, 2006; and


·
            Notes
                to Consolidated Financial Statements June 30,
                2006.




are
      attached hereto and form a part hereof.




We
      are
      not involved and have not been involved in any legal or arbitration proceedings
      which may have, or have had in the recent past, significant effects on our
      financial position or profitability, including governmental proceedings pending
      or known to be contemplated.




We
      have
      not, during our last three completed fiscal years, declared or paid any
      dividends on our common shares and do not currently intend to pay dividends.
      Earnings, if any, will be retained to finance further the growth and development
      of our business.




**8.B**
            ***Significant
                changes*******




No
      significant changes have occurred since the date of our consolidated financial
      statement included in this Form 20-F. See “Item 5.D Trend
      Information.”




**Item9**
            **The
                Offer and Listing******




**9.A**
            ***Share
                capital***




Not
      applicable.




**9.B**
            ***Plan
                of distribution***




Not
      applicable.


35
 *Table
          of Contents*




**9.C**
            ***Markets***




Our
      common shares traded on the TSXV Venture Exchange (the “TSXV”) under the symbol
      QII.U until we voluntarily delisted from the TSXV on July 16, 2004. The TSXV
      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, our
      common shares traded on the Vancouver Stock Exchange (the ‘VSE”). The VSE, CDNX
      and TSXV are collectively referred to herein as the “TSXV”. The following table
      sets out the price history of our common shares on TSXV and its relevant
      predecessors for the periods indicated:




**TSXV
                  Yearly Price History - Five most recent fiscal
                  years****Period**
              
              **High**
              
              **Low**Fiscal
                  2006
              12
                  Month Period ended June 30, 2006
              
              Nil
              
              NilFiscal
                  2005
              12
                  Month Period ended June 30, 2005
              
              Nil
              
              NilFiscal
                  2004
              12
                  Month Period ended June 30, 2004
              
              US$0.50
              
              Cdn$0.09Fiscal
                  2003
              12
                  Month Period ended June 30, 2003
              
              US$0.50
              
              Cdn$0.06Fiscal
                  2002
              12
                  Month Period ended June 30, 2002
              
              Cdn$0.90
              
              Cdn$0.18Fiscal
                  2001
              12
                  Month Period ended June 30, 2001
              
              Cdn$5.05
              
              Cdn$0.80





**TSXV
                Quarterly Price History - Two most recent fiscal years****Period**
            
            **High
                (US$)**
            
            **Low
                (US$)**Fiscal
                2006
            Fourth
                Fiscal Quarter ended June 30, 2006
            
            Nil
            
            NilThird
                Fiscal Quarter ended March 31, 2006
            
            Nil
            
            NilSecond
                Fiscal Quarter ended December 31, 2005
            
            Nil
            
            NilFirst
                Fiscal Quarter ended September 30, 2005
            
            Nil
            
            NilFiscal
                2005
            Fourth
                Fiscal Quarter ended June 30, 2005
            
            Nil
            
            NilThird
                Fiscal Quarter ended March 31, 2005
            
            Nil
            
            NilSecond
                Fiscal Quarter ended December 31, 2004
            
            Nil
            
            NilFirst
                Fiscal Quarter ended September 30, 2004
            
            0.34
            
            0.23Fiscal
                2004
            Fourth
                Fiscal Quarter ended June 30, 2004
            
            0.46
            
            0.25Third
                Fiscal Quarter ended March 31, 2004
            
            0.40
            
            0.19Second
                Fiscal Quarter ended December 31, 2003
            
            0.37
            
            0.15First
                Fiscal Quarter ended September 30, 2003
            
            0.50
            
            0.09





**TSXV
                Monthly Price History - Six most recent months prior to
                delisting****Period - 2004**
            
            **High
                (US$)**
            
            **Low
                (US$)**June
            
            
            0.28
            
            
            0.24July
                -delisted on July 16, 2004
            
            
            0.26
            
            
            0.18August
            
            
            -
            
            
            -September
            
            
            -
            
            
            -October
            
            
            -
            
            
            -November
            
            
            -
            
            
            -December
            
            
            -
            
            
            -


Our
      common shares began trading in U.S. dollars on July 30, 2001.




36
 *Table
          of Contents*




The
      following table sets out the price history of our common shares on the OTCBB
      from May 23, 2002, being the date our common shares commenced trading, and
      for
      the following periods indicated (in US dollars):





**OTCBB
                Yearly Price History -Three most recent fiscal
                years****Period**
            
            **High
                (US$)**
            
            **Low
                (US$)**Fiscal
                2006
            12
                Month Period ended June 30, 2006
            
            0.70
            
            0.18Fiscal
                2005
            12
                Month Period ended June 30, 2005
            
            0.42
            
            0.11Fiscal
                2004
            12
                Month Period ended June 30, 2004
            
            0.48
            
            0.11Fiscal
                2003
            12
                Month Period ended June 30, 2003
            
            0.45
            
            0.07








**OTCBB
                Quarterly Price History - Two most recent fiscal
                years****Period**
            
            **High
                (US$)**
            
            **Low
                (US$)**Fiscal
                2006
            Fourth
                Fiscal Quarter ended June 30, 2006
            
            0.34
            
            0.18Third
                Fiscal Quarter ended March 31, 2006
            
            0.45
            
            0.24Second
                Fiscal Quarter ended December 31, 2005
            
            0.41
            
            0.18First
                Fiscal Quarter ended September 30, 2005
            
            0.70
            
            0.24Fiscal
                2005
            Fourth
                Fiscal Quarter ended June 30, 2005
            
            0.42
            
            0.17Third
                Fiscal Quarter ended March 31, 2005
            
            0.25
            
            0.12Second
                Fiscal Quarter ended December 31, 2004
            
            0.20
            
            0.11First
                Fiscal Quarter ended September 30, 2004
            
            0.27
            
            0.12Fiscal
                2004
            Fourth
                Fiscal Quarter ended June 30, 2004
            
            0.46
            
            0.25Third
                Fiscal Quarter ended March 31, 2004
            
            0.42
            
            0.18Second
                Fiscal Quarter ended December 31, 2003
            
            0.41
            
            0.16First
                Fiscal Quarter ended September 30, 2003
            
            0.48
            
            0.11





**OTCBB
                Monthly Price History - Six most recent months****Period
                - 2006**
            
            **High
                (US$)**
            
            **Low
                (US$)**November
            
            
            0.082
            
            
            0.065October
            
            
            0.160
            
            
            0.070September
            
            
            0.170
            
            
            0.100August
            
            
            0.220
            
            
            0.150July
            
            
            0.270
            
            
            0.175June
            
            
            0.250
            
            
            0.180




Our
      common shares began trading on the Berlin Stock Exchange on March 23, 2000.
      During the year ended June 30, 2004 we requested to the Berlin Stock Exchange
      to
      cease all trading of our shares in that exchange.




**9.D**
            ***Selling
                shareholders***




Not
      applicable.




37
 *Table
          of Contents*




**9.E**
            ***Dilution***




Not
      applicable.




**9.F**
            ***Expenses
                of the issue***




Not
      applicable.




**Item10**
            **Additional
                Information******




**10.A**
            ***Share
                capital*******




Not
      applicable.




**10.B**
            ***Memorandum
                and articles of
                association***




Effective
      July 1, 2006, the date of our change of jurisdiction from the Province of
      British Columbia, Canada to the State of Delaware, we are no longer governed
      by
      our former British Columbia Memorandum and Articles of Association. Instead,
      as
      a Delaware corporation, we now have a Certificate of Incorporation and Bylaws,
      both of which were attached as exhibits to our registration statement on Form
      S-8, filed with the Securities and Exchange Commission, on July 3, 2006 and
      incorporated by reference herein.




**10.C**
            ***Material
                contracts***




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


**Contract**
                
                **Description**Convertible
                    Subordinated Capital Note Agreement with Scott and Kymberly Sabins
                    dated
                    September 5, 2006
                
                We
                    were loaned $150,000 by the Sabins. The subordinated loan has
                    a term of
                    five years, bears interest at 10% per annum and is convertible
                    into shares
                    of our common stock at a price of $0.07 per share. In addition,
                    for each
                    share of common stock issued, a warrant to purchase additional
                    shares of
                    our common stock will be issued at an exercise price of $0.20
                    per share
                    for two years from the date the loan is converted.Secured
                    Demand Loan Agreement with Danny Berry dated August 31,
                    2006
                
                We
                    were loaned $100,000 by Mr. Berry. This loan is secured by our
                    inventory,
                    equipment, trademarks, trade names, contract rights and leasehold
                    interests and is non-interest bearing. The agreement provides
                    that if the
                    loan is not repaid within 90 days, interest will accrue at a
                    monthly rate
                    of 2.5% of the principal unpaid balance. As a funding fee for
                    the loan, we
                    issued the shareholder 250,000 shares of our common
                    stock.Unsecured
                    Loan Agreement with Danny Berry dated August 9, 2006
                
                We
                    were loaned $50,000 by Mr. Berry. This loan is unsecured and
                    non-interest
                    bearing. The agreement provides that if the loan is not repaid
                    within 60
                    days, interest will accrue at a monthly rate of 2% of the principal
                    unpaid
                    balance. As a funding fee for the loan, we issued the shareholder
                    30,000 shares of our common stock.Form
                    of Private Placement Subscription Agreement completed October,
                    2006
                
                In
                    October, 2006, we completed a private placement Subscription
                    Agreement
                    under which certain parties purchased an aggregate of2,408,873units for a purchase price of US $0.07 per unit.Form
                    of Private Placement Subscription Agreement completed October,
                    2005
                
                In
                    October, 2005, we completed a private placement Subscription
                    Agreement
                    under which certain parties purchased an aggregate of 6,820,500
                    units for
                    a purchase price of US $0.10 per unit.Form
                    of Private Placement Subscription Agreement completed October,
                    2005
                
                In
                    October, 2005, we completed a private placement Subscription
                    Agreement
                    under which certain parties purchased an aggregate of 4,641,667
                    units for
                    a purchase price of US $0.15 per share and a debt settlement
                    of $36,250 to
                    one of our directors.Investor
                    Relations Agreement completed May, 2005
                
                In
                    May, 2005, we entered into an Investors Relations agreement with
                    an
                    arms-length party under which we agreed to issue 3,000,000 of
                    our common
                    shares having a value of $435,000 to specified parties.




38
 *Table
          of Contents*


**10.D**
            ***Exchange
                controls***




Effective,
        July 1, 2006, we changed our jurisdiction of incorporation from the Province
        of
        British Columbia, Canada to the State of Delaware.Because we are no
        longer a “foreign private issuer,” as that term is defined in Rule 3b-4,
        promulgated under the Securities Exchange Act of 1934, as amended, we feel
        that
        this Item 10.D is no longer applicable to us. Disclosures required under
        this
        Item 10.D, as applicable to us during the fiscal year ended June 30, 2006,
        are
        contained in Item 10.D of our Form 20-F, filed with the Securities and Exchange
        Commission on December 30, 2005.




**10.E**
            ***Taxation***




**U.S.
      Federal Income Tax Consequences**




Effective,
        July 1, 2006, we changed our jurisdiction of incorporation from the Province
        of
        British Columbia, Canada to the State of Delaware.Because we are no
        longer a “foreign private issuer,” as that term is defined in Rule 3b-4,
        promulgated under the Securities Exchange Act of 1934, as amended, we feel
        that
        this Item 10.E is no longer applicable to us. Disclosures required under
        this
        Item 10.E, as applicable to us during the fiscal year ended June 30,
        2006, are contained in Item 10.E of our Form 20-F, filed with the
        Securities and Exchange Commission on December 30, 2005.




**10.F**
            ***Dividends
                and paying agents*******




Not
      applicable.




**10.G**
            ***Statement
                by experts***




Not
      applicable.




**10.H**
            ***Documents
                on display*******




Copies
      of
      material contracts herein described may be examined at our head office located
      at 609 Cheek Sparger Road, Suite 300, Colleyville, Texas 76034 during normal
      business hours. The documents referred to in this report can also be read the
      Securities and Exchange Commission public reference facilities at Room 1024,
      450
      Fifth Street, N.W., Washington, D.C. 20549.


39
 *Table
          of Contents*




**10.I**
            ***Subsidiary
                information***




We
      have
      one active subsidiary, QI Systems International, Inc., a Texas
      corporation.




**Item11**
            **Quantitative
                and Qualitative Disclosures About Market Risk******




We
      do not
      believe we have any material exposure to interest or commodity risks. We do
      not
      own any derivative instruments, do not engage in any hedging transactions and
      do
      not have any outstanding long-term debt.




**Item
                12**
            **Description
                of Securities Other Than Equity Securities******




**12.A**
            ***Debt
                securities***




Not
      applicable.




**12.B**
            ***Warrants
                and rights***




Not
      applicable.




**12.C**
            ***Other
                securities*******




Not
      applicable.




**12.D**
            ***American
                depositary shares***




Not
      applicable.




**PART
      II**




**Item
                13**
            **Defaults,
                dividends arrearages and delinquencies.******




Not
      applicable.




**Item14**
            **Material
                modifications to the rights of security holders and use of
                proceeds******




Effective
      July 1, 2006, we changed our jurisdiction of incorporation from the Province
      of
      British Columbia, Canada to the State of Delaware. At a special meeting of
      our
      stockholders, held on June 23, 2006, our stockholders approved our domestication
      and also approved our Delaware Certificate of Incorporation, our Bylaws and
      our
      2005 Stock Plan. As a result of our domestication, a total of 42,095,756 shares
      of no par value common stock issued by us as a British Columbia corporation
      were
      converted into an equal number of shares of common stock, $.001 par value,
      issued by us as a Delaware corporation. Modifications to the rights of our
      stockholders resulting from our domestication are described in more detail
      in
      Amendment No.4 to our Registration Statement on Form S-4, file number
      000-130594, filed with the Securities and Exchange Commission on May 24, 2006
      at, “Particular Matters to be Acted Upon -- Proposal Number One -- Domestication
      to the State of Delaware -- Corporate Governance Differences.”




**Item15**
            **Controls
                and Procedures******




Under
      the
      supervision and with the participation of our management, including our Chief
      Executive Officer and Chief Financial Officer, we evaluated the effectiveness
      of
      the design and operation of our disclosure controls and procedures (as defined
      in Rule 13a-15(e) ****** under
      the
      Securities Exchange Act of 1934, referred to below as the “Exchange Act”). Based
      upon that evaluation, the Chief Executive Officer and Chief Financial Officer
      concluded that, as of the end of the period covered by this report, our
      disclosure controls and procedures were effective in timely alerting them to
      the
      material information relating to us (or our consolidated subsidiaries) required
      to be included in the reports we file or submit under the Exchange
      Act.




40
 *Table
          of Contents*




During
      the period covered by this annual report, there has been no change in our
      internal control over financial reporting (as defined in Rule
      13a-15(f) ****** under
      the
      Exchange Act) that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial reporting.




**Item
      16**




**16.A**
            ***Audit
                Committee Financial
                Expert***




All
      of
      the members of the Audit Committee are financially literate and the Board has
      determined that Mr Steve Garman meets the requirements of an “audit committee
      financial expert” as defined by the SEC. Mr. Garman is not an “independent
      director” as defined in Rule 10A-3 of the Securities Exchange Act of 1934, as
      amended, or Section 121B of the American Stock Exchange Company Guide related
      to
      audit committee requirements for listed companies. Mr. Garman received his
      Bachelor of Science Degree in Business Management and Administration from
      Indiana University’s Kelley School of Business in 1969. Mr. Garman has over 35
      years of business experience in the international corporate environment and
      a
      diversified management background including senior executive positions in varied
      industries such as health care services, high tech medical devices, computer
      products, OEM manufacturing, and sports and recreation. He has held
      multi-million dollar P & L responsibility with Olympus America,
      Inc.




**16.B**
            ***Code
                of Ethics***




We
      developed, and our board subsequently adopted, a Code of Ethics to reflect
      SEC
      rules and other proposed regulations. The Code of Ethics governs the actions
      of
      and is applicable to all of our directors and officers and our subsidiary and
      its affiliates. The Code of Ethics deals with the following issues:





·
            compliance
                with all the laws and regulations identified in the Code of Ethics;


·
            corporate
                opportunities and conflicts of interest;


·
            the
                quality of the public disclosures;


·
            the
                protection and appropriate use of our properties;


·
            the
                protection of confidential information and property;


·
            fair
                behavior; and


·
            compliance
                with insider trading and corrupt practices legislation;




A
      copy of
      our Code of Ethics is filed as an exhibit to the 20-F for the year ended June
      30, 2004, filed with the Securities and Exchange Commission on December 17,
      2004. All interested investors may acquire a copy of our Code of Ethics free
      of
      charge by sending electronic mail to the attention of investor relations on
      our
      website at http://www.qisystems.ca .




There
      were no waivers to the Code of Ethics in the fiscal year ended June 30,
      2006.




**16.C**
            ***Principal
                Accountant Fees and
                Services***




Amisano
      Hanson, Chartered Accountants, was our external auditor for the financial year
      ending June 30, 2006 and 2005 after being appointed on July 7, 2004.




41
 *Table
          of Contents*


The
      following table charts the external auditors’ fees for each of the financial
      years ending June 30, 2006 and June 30, 2005 by category:





**Years
                ended June 30**
            
            **Total
                (1)****2006**
            
            **2005**Audit
                Fees:
            
            Cdn$32,361
            
            Cdn$29,755
            
            Cdn$62,116Audit
                Related Fees (2)
            
            Nil
            
            Nil
            
            NilTax
                Fees (3)
            
            Cdn$775
            
            Cdn$795
            
            Cdn$1,570All
                Other Fees (4)
            
            Cdn$1,744
            
            Nil
            
            Cdn$1,744Total
            
            Cdn$34,880
            
            Cdn$30,550
            
            Cdn$65,430





(1)
            Aggregate
                fees billed by the external auditor in each of the last two financial
                years.


(2)
            Fees
                billed for assurances and related services that are reasonably related
                to
                the performance of the audit or review of our financial statements
                and are
                not reported under “Audit Fees”.


(3)
            Aggregate
                fees billed for professional services rendered for tax compliance,
                tax
                advice, and tax planning.


(4)
            Aggregate
                fees for products and services provided other than the services reported
                under the three previous rows.





**Pre-Approval
      Policies and Procedures**





The
      Audit
      Committee is responsible for reviewing all financial statements prior to
      approval by the board, all other disclosures containing financial information
      and all management reports which accompany any financial statements. The Audit
      Committee is also responsible for all internal and external audit plans, any
      recommendation affecting our internal controls, the results of internal and
      external audit plans, any recommendation affecting our internal controls, the
      results of internal and external audits and any changes in accounting practices
      or policies. The Audit Committee reviews any accruals, provisions, estimates
      or
      related party transactions that have a significant impact on our financial
      statements and any litigation, claim or other contingency that could have a
      material effect upon our financial statements. In addition, the Audit Committee
      is responsible for assessing management's programs and policies relating to
      the
      adequacy and effectiveness of internal controls over our accounting and
      financial systems. The Audit Committee reviews and discusses with the Chief
      Executive Officer and Chief Financial Officer, the procedures undertaken in
      connection with their certifications for annual and quarterly filings in
      accordance with the requirements of applicable securities regulatory
      authorities. The Audit Committee is also responsible for considering the
      appointment and remuneration of external auditors. The Audit Committee reports
      directly to the board of directors.




Any
      services provided by our independent auditors that are not specifically included
      within the scope of the audit must be pre-approved by the audit committee prior
      to any engagement. The audit committee is permitted to approve certain fees
      for
      audit-related services, tax services and other services pursuant to a *de
      minimus* exception
      before the completion of the engagement. In the fiscal year ended June 30,
      2006,
      none of the fees paid to Amisano
      Hanson, Chartered Accountants, were
      approved pursuant to the *de
      minimus* exception.




**16.D**
            **Exemptions
                from the Listing Standards for Audit
                Committees.**




Not
      Applicable




**16.E**
            **Purchases
                of Equity Securities by the Issuer and Affiliated
                Purchasers.**




None.


42
 *Table
          of Contents*




**PART
      III** ****




**Item17**
            **Financial
                Statements******




The
      Report and Consolidated Financial Statements for the years ended June 30, 2006,
      June 30, 2005 and June 30, 2004 are reported by Amisano Hanson, Chartered
      Accountants collectively referred to below as the Annual Statements. 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 14 to the Consolidated Financial Statements
      June 30, 2006.”




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




·
            Report
                of Independent Registered Public Accounting
                Firm


·
            Comments
                from Auditor for U.S. Readers of Canada-U.S.
                Reporting


·
            Consolidated
                Balance Sheets as at June 30, 2006 and 2005;


·
            Consolidated
                Statements of Operations and Deficit for the Years Ended June 30,
                2006,
                2005 and 2004;


·
            Consolidated
                Statements of Cash Flows for the Years Ended June 30, 2006, 2005
                and 2004;


·
            Consolidated
                Statement of Stockholder’s Deficiency for the Period July 1, 2003 to June
                30, 2006; and


·
            Notes
                to the Consolidated Financial Statements June 30,
                2006.




The
      financial statements and the notes thereto as required under Item 17 are
      attached hereto and are found immediately following the text of this annual
      report.





**Item18**
            **Financial
                Statements******





Not
      Applicable.





**Item19**
            **Exhibits******





**Exhibit
                No.**
            
            **Exhibit
                Description**1.1
            
            Certificate
                of Incorporation of QI Systems Inc., filed as an exhibit to Form
                8-A of QI
                Systems Inc., filed with the Securities and Exchange Commission,
                on July
                3, 2006 and incorporated by reference herein.1.2
            
            Bylaws
                of QI Systems Inc., filed as an exhibit to Form 8-A of QI Systems
                Inc.,
                filed with the Securities and Exchange Commission on July 3, 2006
                and
                incorporated by reference herein.4.1
            
            Advertising
                and Promotional Service Agreement dated March 25, 2005 between QI
                Systems
                Inc. and Hobson, Lorenze, Bowersock and Associates, filed as an exhibit
                to
                our Registration Statement on Form S-4 filed with the Securities
                and
                Exchange Commission on December 22, 2005 and incorporated by reference
                herein.4.2
            
            Memorandum
                of Understanding dated May 26, 2005 between Richard H. Murray, QI
                Systems
                Inc. and Matthew Yugovich, filed as an exhibit to our Registration
                Statement on Form S-4 filed with the Securities and Exchange Commission
                on
                December 22, 2005 and incorporated by reference herein.4.3
            
            Employment
                Agreement between QI Systems Inc. and QI Systems International, Inc.
                and
                Steven R. Garman dated December 21, 2005, filed as an exhibit to
                our
                Registration Statement on Form S-4 filed with the Securities and
                Exchange
                Commission on December 22, 2005 and incorporated by reference
                herein.




43
 *Table
          of Contents*




4.4
            
            Employment
                Agreement between QI Systems Inc. and QI Systems International, Inc.
                and
                Robert I. McLean Jr. dated March 1, 2006, filed as an exhibit to
                the
                Amendment No. 3 to our Registration Statement on Form S-4 filed with
                the
                Securities and Exchange Commission on May 23, 2006 and incorporated
                by
                reference herein.4.5
            
            Form
                of Subscription Agreement filed as an exhibit to the current report
                on
                Form 8-K, filed with the Securities and Exchange Commission on October
                4,
                2006 and incorporated by reference herein.4.6
            
            Form
                of Share Purchase Warrant filed as an exhibit to the current report
                on
                Form 8-K, filed with the Securities and Exchange Commission on October
                4,
                2006 and incorporated by reference herein.4.7
            
            Loan
                Agreement, dated August 4, 2006, by and between QI Systems Inc. and
                Danny
                Berry, filed as an exhibit to our quarterly report on Form 10-QSB
                filed
                with the Securities and Exchange Commission on November 20, 2006
                and
                incorporated by reference herein.4.8
            
            Loan
                Agreement, dated August 31, 2006, by and between QI Systems Inc.
                and Danny
                Berry, filed as an exhibit to our quarterly report on Form 10-QSB
                filed
                with the Securities and Exchange Commission on November 20, 2006
                and
                incorporated by reference herein.4.9
            
            Convertible
                Subordinated Capital Note, dated September 5, 2006, by and between
                QI
                Systems Inc. and Scott and Kymberly Sabins, filed as an exhibit to
                our
                quarterly report on Form 10-QSB filed with the Securities and Exchange
                Commission on November 20, 2006 and incorporated by reference
                herein.11
            
            Code
                of Ethics, filed as an exhibit to our annual report on From 20-F
                for the
                year ended June 30, 2004, filed with the Securities and Exchange
                Commission on December 17, 2004 and incorporated by reference herein.12.1
            
            Certification
                of Principal Executive Officer required by Rule
                13a-14(a).12.2
            
            Certification
                of Principal Financial Officer required by Rule
                13a-14(a).13.1
            
            Section
                906 of the Sarbanes-Oxley Act of 2002 Certification of Principal
                Executive
                Officer.13.2
            
            Section
                906 of the Sarbanes-Oxley Act of 2002 Certification of Principal
                Financial
                Officer.




**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./s/
                Steven R. GarmanDate:
                December 14, 2006
            
            By:
            Steven
                R. Garman, President and Chief Executive Officer




44
 *Table
          of Contents*


**QI
          SYSTEMS INC.**
  Richmond,
          B.C.
  REPORT
          AND CONSOLIDATED FINANCIAL STATEMENTS
  June
          30,
          2006 and 2005
  (Expressed
          in US dollars)
  F-1
 *Table
              of Contents*
 
 **A
                    P****ARTNERSHIP****O****F****I****NCORPORATED****P****ROFESSIONALS**
                **A****MISANO********H****ANSON****C****HARTERED****A****CCOUNTANTS**
 
 **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
          the
          Shareholders
 QI
          Systems Inc.
  We
          have
          audited the consolidated balance sheets of QI Systems Inc. as at June 30,
          2006
          and 2005 and the consolidated statements of operations, cash flows and
          stockholders’ deficiency for each of the years in the three year period ended
          June 30, 2006. These consolidated financial statements are the responsibility
          of
          the Company's management. Our responsibility is to express an opinion on
          these
          financial statements based on our audits.
  We
          conducted our audits in accordance with Canadian generally accepted auditing
          standards and the standards of the Public
          Company Accounting Oversight Board (United States of America). 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 consolidated financial statements present fairly, in all
          material
          respects, the financial position of the Company as at June 30, 2006 and
          2005 and
          the results of its operations and its cash flows for each of the years
          in the
          three year period ended June 30, 2006 in accordance with Canadian generally
          accepted accounting principles.
 
 Vancouver,
                    Canada
                ***“AMISANO
                    HANSON”***September
                    22, 2006, except for Note 12, which is  as of October 3,
                    2006
                Chartered
                    Accountants
 
  **Comments
          by Auditor for US Readers on Canada-US Reporting
          Differences**
  In
          the
          United States, reporting standards for auditors require the addition of
          an
          explanatory paragraph (following the opinion paragraph) when there is
          substantial doubt about a Company’s ability to continue as a going concern. The
          accompanying consolidated financial statements have been prepared on the
          basis
          of accounting principles applicable to a going concern, which assumes the
          realization of assets and discharge of liabilities in the normal course
          of
          business. As discussed in Note 1 to the accompanying financial statements,
          the
          Company has accumulated substantial losses since its inception and expects
          to
          incur further losses in the development of its business. Its ability to
          continue
          as a going concern is dependent upon the ability of the Company to obtain
          the
          necessary financing to meet its obligations and repay its liabilities arising
          from normal business operations when they come due.
 
 Our
          report to the shareholders dated September 22, 2006 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 consolidated financial statements.
 
 Vancouver,
                    Canada
                ***“AMISANO
                    HANSON”***September
                    22, 2006, except for Note 12, which is  as of October 3,
                    2006
                Chartered
                    Accountants
  F-2
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 CONSOLIDATED
          BALANCE SHEETS
 As
          at
          June 30, 2006 and 2005
 (Expressed
          in US Dollars)
 2006
                
                Restated
                  -
                    Note 13
                  2005$
                
                $**Assets**CurrentCash
                    and cash equivalents
                
                
                73,559
                
                
                59,950Receivables
                    (net of allowance of $2,061; 2005: $Nil)
                
                
                31,963
                
                
                40,784Share
                    subscriptions receivable - Note 7
                
                
                -
                
                
                6,635Prepaid
                    expenses - Note 7
                
                
                227,566
                
                
                410,545Inventory
                    - Note 4
                
                
                149,902
                
                
                192,237482,990
                
                
                710,151Deposit
                
                
                1,000
                
                
                -Equipment
                    - Note 5
                
                
                32,680
                
                
                9,106516,670
                
                
                719,257**Liabilities**CurrentPayables
                    and accruals - Notes 6 and 7
                
                
                350,954
                
                
                808,094Shareholder
                    loans - Note 6
                
                
                2,575
                
                
                21,392Deposits
                    received
                
                
                20,059
                
                
                16,578Unearned
                    revenue
                
                
                10,734
                
                
                -384,322
                
                
                846,064**Shareholders’
                    Deficiency**Share
                    capital - Notes 7 and 12
                
                
                42,096
                
                
                24,230Share
                    capital subscribed - Notes 7 and 12
                
                
                -
                
                
                692,333Contributed
                    surplus - Note 7
                
                
                14,167,682
                
                
                11,515,952Deficit
                
                
                (14,061,839
                )
                
                (12,272,406
                )Cumulative
                    translation adjustment
                
                
                (15,591
                )
                
                (86,916
                )132,348
                
                
                (126,807
                )516,670
                
                
                719,257
 Nature
          and Continuance of Operations - Note 1
 Commitments
          and Contingencies - Notes 7, 11 and 12
 Subsequent
          Events - Notes 7 and 12
 
 
 Approved
                    by the Directors:*“Steve
                    Garman”*
                Director
                
                *“Matthew
                    Yugovich”*
                DirectorSteve
                    Garman
                
                
                Matthew
                    Yugovich
  F-3
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 CONSOLIDATED
          STATEMENTS OF OPERATIONS
 For
          the
          years ended June 30, 2006, 2005 and 2004
 (Expressed
          in US Dollars)
 2006
                
                Restated
                  -
                    Note 13
                  2005
                
                2004$
                
                $
                
                $Revenue
                
                
                406,168
                
                
                390,111
                
                
                383,722Cost
                    of goods sold
                
                
                239,933
                
                
                216,652
                
                
                75,320166,235
                
                
                173,459
                
                
                308,402ExpensesAdministration
                    - Note 6
                
                
                848,958
                
                
                406,154
                
                
                419,060Amortization
                
                
                5,360
                
                
                3,375
                
                
                4,697Bad
                    debt (recovery)
                
                
                2,687
                
                
                (131
                )
                
                13,887Corporate
                    finance
                
                
                -
                
                
                -
                
                
                116,166Development
                    costs - Note 6
                
                
                174,439
                
                
                269,997
                
                
                284,190Financing
                    costs and interest - Note 6 and 7
                
                
                2,334
                
                
                112,468
                
                
                5,554Investor
                    relations - Note 7
                
                
                502,964
                
                
                42,313
                
                
                240,606Sales
                    and marketing
                
                
                162,235
                
                
                221,683
                
                
                207,782Professional
                    fees
                
                
                253,123
                
                
                65,102
                
                
                59,500Stock-based
                    compensation - Note 7
                
                
                58,342
                
                
                111,536
                
                
                203,1692,010,442
                
                
                1,232,497
                
                
                1,554,611Operating
                    loss
                
                
                (1,844,207
                )
                
                (1,059,038
                )
                
                (1,246,209
                )Interest
                    income
                
                
                4,098
                
                
                -
                
                
                -Gain
                    on settlement of debt
                
                
                50,676
                
                
                22,472
                
                
                62,314Net
                    loss
                
                
                (1,789,433
                )
                
                (1,036,566
                )
                
                (1,183,895
                )Loss
                    per share - basic and diluted - Note 10
                
                
                (0.05
                )
                
                (0.04
                )
                
                (0.06
                )
  F-4
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 CONSOLIDATED
          STATEMENT OF CASH FLOWS
 For
          the
          years ended June 30, 2006, 2005 and 2004
 (Expressed
          in US Dollars)
 2006
                
                Restated
                  -
                    Note 13
                  2005
                
                2004$
                
                $
                
                $Cash
                    Flows related to Operating ActivitiesNet
                    loss for the year
                
                
                (1,789,433
                )
                
                (1,036,566
                )
                
                (1,183,895
                )Adjustments
                    to reconcile net loss used in OperationsStock-based
                    compensation
                
                
                58,342
                
                
                111,536
                
                
                203,169Investor
                    relations expense
                
                
                423,454
                
                
                42,313
                
                
                -Wages
                    and benefits
                
                
                72,750
                
                
                -
                
                
                -Finance
                    fee
                
                
                -
                
                
                45,313
                
                
                -Gain
                    on settlement of debt
                
                
                (50,676
                )
                
                (22,472
                )
                
                (62,314
                )Amortization
                
                
                5,360
                
                
                3,375
                
                
                4,697Changes
                    in non-cash working capital itemsReceivables
                
                
                15,456
                
                
                (9,906
                )
                
                5,327Prepaid
                    expenses
                
                
                6,540
                
                
                (6,675
                )
                
                7,778Inventory
                
                
                42,335
                
                
                26,352
                
                
                (30,255
                )Payables
                    and accruals
                
                
                (282,263
                )
                
                191,540
                
                
                115,866Deposits
                    received
                
                
                3,481
                
                
                299
                
                
                16,279Unearned
                    revenue
                
                
                10,734
                
                
                -
                
                
                -(1,483,920
                )
                
                (654,891
                )
                
                (923,348
                )Cash
                    Flows related to Investing ActivityInvestment
                    in capital assets
                
                
                (28,934
                )
                
                -
                
                
                -Cash
                    Flows related to Financing ActivitiesProceeds
                    from (repayment of) shareholder loans
                
                
                (15,707
                )
                
                4,267
                
                
                (90,559
                )Proceeds
                    from share issuances, net of issue costs
                
                
                1,476,245
                
                
                397,865
                
                
                970,450Proceeds
                    from share capital subscribed
                
                
                -
                
                
                248,270
                
                
                -1,460,538
                
                
                650,402
                
                
                879,891Effect
                    of foreign currency translation on cash
                
                
                65,925
                
                
                52,281
                
                
                64,465Net
                    increase (decrease) in cash
                
                
                13,609
                
                
                47,792
                
                
                21,008Cash
                    (cash deficiency), beginning
                
                
                59,950
                
                
                12,158
                
                
                (8,850
                )Cash
                    and cash equivalents, ending
                
                
                73,559
                
                
                59,950
                
                
                12,158
  F-5
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 CONSOLIDATED
          STATEMENT OF CASH FLOWS (Continued)
 For
          the
          years ended June 30, 2006, 2005 and 2004
 (Expressed
          in US Dollars)
 2006
                
                Restated
                  -
                    Note 13
                  2005
                
                2004$
                
                $
                
                $Cash
                    and cash equivalents are comprised as follows:Cash
                
                
                54,461
                
                
                59,950
                
                
                12,158Term
                    deposits
                
                
                19,098
                
                
                -
                
                
                -73,559
                
                
                59,950
                
                
                12,158Supplementary
                    cash flow information:Cash
                    paid for:Interest
                
                
                -
                
                
                (909
                )
                
                (1,849
                )
 
 Non-cash
          Transactions - Note 15
  F-6
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 CONSOLIDATED
          STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
 for
          the
          period July 1, 2004 to June 30, 2006
 ( Stated
          in US Dollars )
  Share
                
                
                
                (Restated
                    - Note 13)
                
                Cumulative
                
                Stockholders’Common
                    Shares
                
                Capital
                
                Contributed
                
                Accumulated
                
                Translation
                
                EquityNumber
                
                Par
                    Value*
                
                Subscribed
                
                Surplus*
                
                Deficit
                
                Adjustment
                
                (Deficiency)Balance,
                    June 30, 2003
                
                
                16,363,501
                
                $
                16,364
                
                $
                -
                
                $
                9,403,322
                
                $
                (10,051,945
                )
                $
                (57,707
                )
                $
                (689,966
                )Issued
                    for cash pursuant to private placements
                
                
                4,866,120
                
                
                4,866
                
                
                -
                
                
                975,084
                
                
                -
                
                
                -
                
                
                979,950Subscriptions
                    received
                
                
                -
                
                
                -
                
                
                87,300
                
                
                -
                
                
                -
                
                
                -
                
                
                87,300Exercise
                    of warrants for cash
                
                
                20,000
                
                
                20
                
                
                -
                
                
                7,980
                
                
                -
                
                
                -
                
                
                8,000Issued
                    in settlement for debt
                
                
                1,176,977
                
                
                1,177
                
                
                -
                
                
                412,164
                
                
                -
                
                
                -
                
                
                413,341Stock-based
                    compensation
                
                
                -
                
                
                -
                
                
                -
                
                
                203,169
                
                
                -
                
                
                -
                
                
                203,169Foreign
                    currency translation adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (3,515
                )
                
                (3,515
                )Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,183,895
                )
                
                -
                
                
                (1,183,895
                )Balance,
                    June 30, 2004
                
                
                22,426,598
                
                
                22,427
                
                
                87,300
                
                
                11,001,719
                
                
                (11,235,840
                )
                
                (61,222
                )
                
                (185,616
                )Issued
                    for cash pursuant to private placements
                
                
                1,760,455
                
                
                1,760
                
                
                (87,300
                )
                
                385,540
                
                
                -
                
                
                -
                
                
                300,000Subscriptions
                    received
                
                
                -
                
                
                -
                
                
                714,363
                
                
                -
                
                
                -
                
                
                -
                
                
                714,363Share
                    issue costs
                
                
                -
                
                
                -
                
                
                (22,030
                )
                
                -
                
                
                -
                
                
                -
                
                
                (22,030
                )Exercise
                    of warrants for cash
                
                
                43,000
                
                
                43
                
                
                -
                
                
                17,157
                
                
                -
                
                
                -
                
                
                17,200Stock-based
                    compensation
                
                
                -
                
                
                -
                
                
                -
                
                
                111,536
                
                
                -
                
                
                -
                
                
                111,536Foreign
                    currency translation adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (25,694
                )
                
                (25,694
                )Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,036,566
                )
                
                -
                
                
                (1,036,566
                )Balance,
                    June 30, 2005, as restated - Note 13
                
                
                24,230,053
                
                
                24,230
                
                
                692,333
                
                
                11,515,952
                
                
                (12,272,406
                )
                
                (86,916
                )
                
                (126,807
                )
  .../cont’d
  F-7
 *Table
              of Contents*
  Continued
 **QI
          SYSTEMS INC.**
 CONSOLIDATED
          STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
 for
          the
          period July 1, 2004 to June 30, 2006
 ( Stated
          in US Dollars )
  Share
                
                
                
                (Restated
                    - Note 13)
                
                Cumulative
                
                Stockholders’Common
                    Shares
                
                Capital
                
                Contributed
                
                Accumulated
                
                Translation
                
                EquityNumber
                
                Par
                    Value*
                
                Subscribed
                
                Surplus*
                
                Deficit
                
                Adjustment
                
                (Deficiency)Balance,
                    June 30, 2005, as restated - Note 13
                
                
                24,230,053
                
                
                24,230
                
                
                692,333
                
                
                11,515,952
                
                
                (12,272,406
                )
                
                (86,916
                )
                
                (126,807
                )Issued
                    pursuant to private placementsfor
                    cash
                
                
                12,620,500
                
                
                12,620
                
                
                (270,300
                )
                
                1,609,430
                
                
                -
                
                
                -
                
                
                1,351,750for
                    settlement of debts
                
                
                241,667
                
                
                242
                
                
                -
                
                
                36,008
                
                
                -
                
                
                -
                
                
                36,250Issued
                    pursuant to a debt settlement agreement
                
                
                100,000
                
                
                100
                
                
                -
                
                
                30,900
                
                
                -
                
                
                -
                
                
                31,000Issued
                    for services
                
                
                4,292,500
                
                
                4,293
                
                
                (444,063
                )
                
                758,520
                
                
                -
                
                
                -
                
                
                318,750Share
                    issue costs
                
                
                150,000
                
                
                150
                
                
                22,030
                
                
                (95,854
                )
                
                -
                
                
                -
                
                
                (73,674
                )Stock-based
                    compensation
                
                
                -
                
                
                -
                
                
                -
                
                
                58,047
                
                
                -
                
                
                -
                
                
                58,047Exercise
                    of options for cash
                
                
                32,250
                
                
                32
                
                
                -
                
                
                4,806
                
                
                -
                
                
                -
                
                
                4,838Exercise
                    of warrantsfor
                    cash
                
                
                966,665
                
                
                967
                
                
                -
                
                
                192,366
                
                
                -
                
                
                -
                
                
                193,333for
                    settlement of debts
                
                
                212,121
                
                
                212
                
                
                -
                
                
                56,757
                
                
                -
                
                
                -
                
                
                56,969Escrow
                    shares cancelled
                
                
                (750,000
                )
                
                (750
                )
                
                -
                
                
                750
                
                
                -
                
                
                -
                
                
                -Foreign
                    currency translation adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                71,325
                
                
                71,325Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,789,433
                )
                
                -
                
                
                (1,789,433
                )Balance,
                    June 30, 2006
                
                
                42,095,756
                
                $
                42,096
                
                $
                -
                
                $
                14,167,682
                
                $
                (14,061,839
                )
                $
                (15,591
                )
                $
                132,348
 
 *The
          par
          value of common shares has been retroactively restated to reflect a change
          from
          no par value to a par value of $0.001 effective July 1, 2006.
  F-8
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 for
          the
          years ended June 30, 2006 and 2005
 (Expressed
          in US Dollars)
  
  Note
                    1
                Nature
                    and Continuance of Operations
  
 
 QI
          Systems Inc. (“QI” or “the Company”) was incorporated in 1978 under the British
          Columbia Company Act and effective July 1, 2006, the Company changed its
          jurisdiction of incorporation to the State of Delaware, USA. The Company
          manufactures designs and sells readers that allow the use of cash-card
          payment
          systems for self-serve applications such as vending, gaming, laundromat
          machines, transit fare collection systems and newspaper vending
          machines.
 
 These
          consolidated financial statements have been prepared in accordance with
          generally accepted accounting principles applicable to a going concern,
          which
          assumes that the Company will be able to meet its obligations and continue
          its
          operations for its next fiscal year. Realization values may be substantially
          different from carrying values as shown and these financial statements
          do not
          give effect to adjustments that would be necessary to the carrying values
          and
          classification of assets and liabilities should the Company be unable to
          continue as a going concern. At June 30, 2006, the Company had not yet
          achieved
          profitable operations, has working capital of $98,688 which may not be
          sufficient to sustain operations over the next twelve months and expects
          to
          incur further losses in the development of its business, all of which casts
          substantial doubt about the Company’s ability to continue as a going concern.
          The Company’s ability to continue as a going concern is dependent upon its
          ability to generate future profitable operations and/or to obtain the necessary
          financing to meet its obligations and repay its liabilities arising from
          normal
          business operations when they come due. Management has no formal plan in
          place
          to address this concern but considers that the Company will be able to
          obtain
          additional funds by equity financing and/or related party advances, however
          there is no assurance of additional funding being available.
  
 
 Note
                    2
                Significant
                    Accounting Policies
  
 
 These
          consolidated financial statements have been prepared in accordance with
          generally accepted accounting principles in Canada and are stated in United
          States dollars and, except as described in Note 14, conform in all material
          respects with accounting principles generally accepted in the United States
          of
          America. Because a precise determination of many assets and liabilities
          is
          dependent upon future events, the preparation of financial statements for
          a
          period necessarily involves the use of estimates which have been made using
          careful judgement. Actual results may differ from these estimates.
 
 The
          consolidated financial statements have, in management’s opinion, been properly
          prepared within the framework of the significant accounting policies summarized
          below:
  F-9
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
  
 
 Note
                    2
                Significant
                    Accounting Policies (continued)
  
 
 **Principles
          of Consolidation**
 
 These
          consolidated financial statements include the accounts of the Company and
          its
          wholly-owned subsidiaries Magnatron Inc. (inactive), incorporated under
          the laws
          of the State of Nevada and QI Systems International Inc., incorporated
          under the
          laws of the State of Texas. All inter-company transactions have been
          eliminated.
 
 **Cash
          and Cash Equivalents**
 
 Cash
          and
          cash equivalents is comprised of cash and short-term deposits with original
          maturities of three months or less.
 
 **Amortization
          of Equipment**
 
 Equipment
          is carried at cost less accumulated amortization. Amortization is calculated
          using the declining balance method at the following annual rates:
 
 Furniture
                    and fixtures
                -
                    20%Computer
                    equipment
                -
                    30%
 
 In
          the
          year of acquisition 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 and collection is reasonably assured. Service, installation
          and
          contract revenue is recognized upon completion and acceptance and collection
          is
          reasonably assured. Revenue received in advance of being earned is recorded
          as
          unearned revenue.
 
 **Development
          Costs**
  Development
          costs include on-going research and development of the modular payment
          systems.
          Development costs are expensed as incurred unless they meet the criteria
          for
          deferral under Canadian generally accepted accounting principles.
  F-10
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
  
 Note
                    2
                Significant
                    Accounting Policies (continued)
  
 **Earnings
          (loss) per share**
  The
          Company uses the treasury stock method to compute the dilutive effect of
          options, warrants and similar instruments. Under this method the dilutive
          effect
          on earnings per share is recognized on the use of the proceeds that could
          be
          obtained upon exercise of options, warrants and similar instruments. It
          assumes
          that the proceeds would be used to purchase common shares at the average
          market
          price during the year.
  Basic
          earnings (loss) per share is calculated using the weighted-average number
          of
          shares outstanding during the year. For the years ended June 30, 2006,
          2005 and
          2004, the inclusion of the Company’s stock options and warrants in the
          computation of diluted loss per share would have an anti-dilutive effect
          on loss
          per share and therefore are excluded from the computation.
  **Foreign
          Currency Translation**
 
 The
          Company’s functional currency is Canadian dollars (“CDN dollars”). Monetary
          items denominated in a foreign currency other than CDN dollars are translated
          into CDN dollars at exchange rates prevailing at the balance sheet date
          and
          non-monetary items are translated at exchange rates prevailing when the
          assets
          were acquired or obligations incurred. Foreign currency denominated revenue
          and
          expense items are translated at exchange rates prevailing at the transaction
          date. Gains or losses arising from the translations are included in
          operations.
 
 The
          Company’s reporting currency is United States dollars (“US dollars”) and CDN
          dollar amounts are translated using the current rate method. Assets and
          liabilities are translated at exchange rates prevailing at the balance
          sheet
          date and revenue expense items at actual or average exchange rates for
          the year.
          Translation adjustments arising from changes in exchange rates are accounted
          for
          as a separate component of shareholders’ equity as the cumulative translation
          adjustment.
 
 **Income
          Taxes**
 
 The
          Company records income taxes in accordance with the Canadian Institute
          of
          Chartered Accountants’ recommendations for accounting for income taxes. Under
          these recommendations current income taxes recognize the estimated income
          taxes
          payable for the current period. Future income tax assets and liabilities
          are
          recognized for temporary differences between the tax basis and the accounting
          basis of assets and liabilities, as well as for the benefits of losses
          available
          to be carried forward to future years for tax purposes that are more
          likely-than-not to be realized.
  F-11
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
  
 Note
                    2
                Significant
                    Accounting Policies (continued)
  
 **Stock-based
          Compensation Plans**
  The
          Company has a stock-based compensation plan, which is described in Note
          7.
          Effective for the year ending June 30, 2004, the Company adopted, on a
          prospective basis, the fair value method of accounting for stock options
          granted
          to employees, consultants and directors. Compensation expense is recognized
          over
          the options’ vesting period.
 
 The
          Company recognizes an expense for the fair value of options granted. Upon
          exercise of stock options, consideration paid by the option holder, together
          with the amount previously recognized in contributed surplus, is recorded
          as an
          increase to share capital. The Company uses the Black-Scholes option pricing
          model to value stock options granted. The Black-Scholes model was developed
          for
          use in estimating the fair value of traded options that have no vesting
          restrictions and are fully transferable. The model requires management
          to make
          estimates, which are subjective and may not be representative of actual
          results.
          Changes in assumptions can materially affect estimates of fair
          values.
 
 **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, payables and accruals, shareholder
          loans and deposits approximates their carrying amount due to the relatively
          short periods to maturity of the instruments.
 
 The
          Company provides credit to its clients in the normal course of operations.
          It
          carries out, on a continuing basis, credit checks on its clients and maintains
          provisions for contingent losses. For other debts, the Company estimates,
          on a
          continuing basis, the probable losses and provides a provision for losses
          based
          on the estimated realizable value.
 
 The
          Company is exposed to fluctuations in foreign currencies through receivables
          and
          payables to be settled in Canadian dollars. The Company monitors this exposure,
          but had no hedge positions at June 30, 2006 or 2005. At June 30, 2006 the
          Company held net monetary liabilities of $118,183 (2005: $501,395) denominated
          in Canadian dollars.
  F-12
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
  
  Note
                    4
                Inventory
  
 
 2006
                
                2005$
                
                $Raw
                    materials
                
                
                92,055
                
                
                125,516Finished
                    goods
                
                
                57,847
                
                
                66,721149,902
                
                
                192,237
 
 
 Note
                    5
                Equipment
  
  2006
                
                2005Accumulated
                
                
                
                
                
                AccumulatedCost
                
                Amortization
                
                Net
                
                Cost
                
                Amortization
                
                Net$
                
                $
                
                $
                
                $
                
                $
                
                $Furniture
                     and fixtures
                
                
                34,563
                
                
                21,135
                
                
                13,428
                
                
                22,268
                
                
                19,315
                
                
                2,953Computerequipment
                
                
                90,688
                
                
                71,436
                
                
                19,252
                
                
                74,049
                
                
                67,896
                
                
                6,153125,251
                
                
                92,571
                
                
                32,680
                
                
                96,317
                
                
                87,211
                
                
                9,106
  
  Note
                    6
                Related
                    Party Transactions and Balances - Notes 7, 11 and
                    12
  
  During
          the years ended June 30, 2006, 2005 and 2004, the Company incurred fees
          charged
          by directors and officers of the Company and their related companies. These
          transactions are in the normal course of operations and are measured at
          the
          exchange amount which was the amount established and agreed to by the related
          parties and are as follows:
 
 Years
                    ended June 30,2006
                
                2005
                
                2004$
                
                $
                
                $Administration
                
                
                368,185
                
                
                253,142
                
                
                155,867Development
                    costs
                
                
                -
                
                
                56,610
                
                
                58,276Financing
                    costs and interests
                
                
                -
                
                
                45,313
                
                
                -Sales
                    and marketing
                
                
                118,882
                
                
                -
                
                
                -487,067
                
                
                355,065
                
                
                214,143
  F-13
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
  
 Note
                    6
                Related
                    Party Transactions and Balances - Notes 7, 11 and 12
                    (continued)
  
 As
          at
          June 30, 2006, included in payables and accruals was $66,765 (2005 :
          $ 372,514 )
          due to
          directors and officers of the Company and former directors and officers
          of the
          Company relating to the above expenses. Included in shareholder loans is
          $Nil
          (2005: $2,494) due to a director of the Company. These loans are unsecured,
          non-interest bearing and have no specific repayment terms.
 
 During
          the year ended June 30, 2006, the Company issued 315,000 shares to a director
          of
          the Company pursuant to a private placement at $0.15 per share for proceeds
          of
          $11,000 and the settlement of $36,250 of amounts owing for 250,000 common
          shares
          delivered to an investor relations firm on behalf of the Company (Note
          7).
 
 During
          the year ended June 30, 2006, the Company issued 200,000 common shares
          valued at
          $72,750 to officers of the Company as hiring incentives.
 
 During
          the year ended June 30, 2006, the Company issued 26,000 shares to a director
          of
          the Company pursuant to the exercise of share purchase options for total
          proceeds of $3,900.
 
 During
          the year ended June 30, 2006, the Company issued 445,454 common shares
          to
          directors of the Company for total proceeds of $46,667 and the settlement
          of
          $56,970 of amounts owing to a director of the Company for unpaid management
          fees
          included in administration expense.
 
 During
          the year ended June 30, 2005, the Company issued 170,454 common shares
          at $0.22
          per share for proceeds of $37,500 pursuant to a private placement to directors
          of the Company.
 
 
 Note
                    7
                Share
                    Capital and Contributed Surplus - Notes 6 and
                    12
  
  **Authorized** :
 
 100,000,000
          common shares, par value $0.001
 
 Effective
          July 1, 2006, the Company amended its authorized share capital from 200,000,000
          common shares without par value to 100,000,000 common shares with $0.001
          par
          value. The par value of common shares has been retroactively restated to
          reflect
          the change from no par value to a par value of $0.001.
  F-14
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
  
  Note
                    7
                Share
                    Capital and Contributed Surplus - Notes 6 and 12
                    (continued)
  
 
 **Shares
          Issued:**
 
 During
          the year ended June 30, 2006 the Company:
 
 ·
                Completed
                    a private placement of 6,820,500 units at $0.10 per unit for
                    gross
                    proceeds of $682,050. Each unit was comprised of one common share
                    and one
                    share purchase warrant. Each warrant entitles the holder to purchase
                    one
                    common share at $0.25 per share. The warrants expire on August
                    31, 2006.
                    In connection with this placement the Company paid commission
                    of $68,205
                    in cash and issued 150,000 common
                    shares.
 
 ·
                Completed
                    a private placement of 4,641,667 units at $0.15 per unit for
                    gross
                    proceeds of $660,000 and a debt settlement of $36,250 owing to
                    a director
                    of the Company (Note 6). Each unit is comprised of one common
                    share and
                    one share purchase warrant. Each warrant entitles the holder
                    to purchase
                    one common share at $0.30 per share. The warrants expire on August
                    31,
                    2007. In connection with the private placement the Company incurred
                    share
                    issuance costs of $10,000.
 
 ·
                Issued
                    3,000,000 common shares of the Company, valued at $435,000, pursuant
                    to an
                    Investors Relations agreement with an arms-length
                    party.
 
 Pursuant
          to this agreement, two directors of the Company loaned the Company 750,000
          free
          trading shares which were delivered to the investor relations firm on behalf
          of
          the Company for the following consideration:
 
 ·
                Debt
                    of $36,250 (included in accounts payable and accruals at June
                    30, 2005)
                    for 250,000 common shares delivered to the investor relations
                    firm by a
                    director of the Company. This debt was settled by a private placement
                    at
                    $0.15 per unit (Note 6); and
 
 ·
                500,000
                    common shares issued in return for 500,000 common shares delivered
                    to the
                    investor relations firm by a director and officer of the Company.
                    In
                    addition, the Company issued a further 312,500 common shares,
                    valued at
                    $45,313, to this officer as a financing
                    fee.
 
 ·
                Completed
                    a private placement of 1,400,000 units at $0.20 per share for
                    gross
                    proceeds of $280,000. Each unit is comprised of one common share
                    and one
                    share purchase warrant. Each warrant entitles the holder to purchase
                    one
                    common share at $0.40 per share. The warrants expire on June
                    20,
                    2008.
  F-15
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
  
 Note
                    7
                Share
                    Capital and Contributed Surplus - Note 12
                    (continued)
  
  ·
                Issued
                    1,030,000 common shares, valued at $246,000 for investor relations
                    services to two new arms-length investor relations firms. The
                    value of the
                    shares was recorded as a prepaid expense and the expense for
                    those
                    services is being recognized over the term of the related contracts,
                    expiring at various dated to December 22, 2006. In this regard,
                    at June
                    30, 2006 the Company has expensed $19,110 as investor relations
                    fees.
 
 ·
                Issued
                    200,000 common shares valued at $72,750 to employees of the Company
                    as
                    hiring incentives which were expensed when the shares were issued.
 
 ·
                Issued
                    966,665 common shares pursuant to the exercise of share purchase
                    warrants
                    at $0.20 per share for total proceeds of $193,333. In addition,
                    a director
                    and officer of the Company exercised 66,667 warrants at $0.20
                    and 145,454
                    warrants at $0.30 for a total of $56,970 which was applied to
                    past due
                    amounts owed to the officer. The remaining 633,333 share purchase
                    warrants
                    exercisable at $0.20 per share expired
                    unexercised.
 
 ·
                Issued
                    32,250 common shares pursuant to employee and director stock
                    options at
                    $0.15 for total proceeds of $4,838.
 
 ·
                Settled
                    an outstanding payable balance for cash and 100,000 shares valued
                    at $0.31
                    per share or $31,000.
 
 During
          the year ended June 30, 2005 the Company:
 
 ·
                Issued
                    396,819 common shares for proceeds of $87,300 pursuant to a private
                    placement completed on April 1, 2004. The shares had been accounted
                    for as
                    share capital subscribed at June 30, 2004.
 
 ·
                Completed
                    a private placement for proceeds of $300,000. The placement consisted
                    of
                    1,363,636 units at $0.22 per unit; each unit is comprised of
                    one common
                    share and one share purchase warrant. Each warrant entitles the
                    holder to
                    purchase one common share at $0.30 per share prior to November
                    17,
                    2006.
 
 During
          the year ended June 30, 2004, the Company:
 
 ·
                Completed
                    a private placement for proceeds of $250,000. The placement consisted
                    of
                    1,666,665 units at $0.15 per unit; each unit comprised of one
                    common share
                    and one share purchase warrant. Each warrant entitles the holder
                    to
                    purchase one common share at $0.20 per share prior to October
                    27,
                    2005.
 
 ·
                Issued
                    1,176,977 common shares to settle debt of $413,341 at an average
                    price of
                    $0.35 per share.
  F-16
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
  
 Note
                    7
                Share
                    Capital and Contributed Surplus - Note 12
                    (continued)
  
  ·
                Completed
                    a private placement for proceeds of $217,250. The placement consisted
                    of
                    869,000 units at $0.25 per unit; each unit is comprised of one
                    common
                    share and one share purchase warrant. Each warrant entitles the
                    holder to
                    purchase one common share at $0.35 prior to November 17,
                    2005.
 
 ·
                Completed
                    a private placement for proceeds of $512,700. The placement consisted
                    of
                    2,727,273 units at $0.22 per unit; each unit is comprised of
                    one common
                    share and one share purchase warrant. Each warrant entitles the
                    holder to
                    purchase one common share at 40.30 per share prior to April 1,
                    2006.
 
 **Commitments:**
 
 **Share
          capital subscribed:**
 
 As
          at
          June 30, 2005, proceeds of $120,300 representing 1,203,000 shares at $0.10
          per
          share had been received by the Company as subscription for a private placement
          to be completed during the year ended June 30, 2006. The Company paid $12,030
          in
          share issuance costs related to these subscriptions.
 
 As
          at
          June 30, 2005, proceeds of $150,000 representing 1,000,000 shares at $0.15
          per
          share had been received by the Company as subscription for a private placement
          to be completed during the year ended June 30, 2006. The Company paid $10,000
          in
          share issuance costs related to this private placement.
 
 As
          at
          June 30, 2005, the Company had share subscriptions receivable of $6,635
          with
          respect to 30,160 common shares issued to a director of the Company at
          $0.22 per
          share pursuant to a private placement. This subscription was paid during
          the
          year ended June 30, 2006.
 
 As
          at
          June 30, 2005, the Company had recorded the commitment of 3,000,000 common
          shares valued at $435,000 pursuant to an investor relations agreement and
          312,500 common shares valued at $45,313 to be issued as a financing fee
          in
          connection with this agreement. All of these shares were issued during
          the year
          ended June 30, 2006.
  F-17
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
 
 
 Note
                    7
                Share
                    Capital and Contributed Surplus - Note 12
                    (continued)
  
 
 **Commitments:** (continued)
 
 **Warrants**
 
 Share
          purchase warrants outstanding to acquire an equal number of common shares
          as of
          June 30, 2006 are as follows:
 
 Number
                    of
                
                Exercise
                
                ExpiryWarrants
                
                Price
                
                Date6,820,500
                
                $
                0.25
                
                
                August
                    31, 2006
                (1)1,363,636
                
                $
                0.30
                
                
                November
                    17, 20064,641,667
                
                $
                0.30
                
                
                September
                    01, 20071,400,000
                
                $
                0.40
                
                
                June
                    20, 200814,225,803
 
 (1)
          Subsequent to June 30, 2006, the Company extended the warrant exercise
          period to
          expire on October 30, 2006.
 
 During
          the year ended June 30, 2006, 633,333 warrants with an exercise price of
          $0.20
          per share expired; 2,581,819 warrants with an exercise price of $0.30 per
          share
          expired; and 869,000 warrants with an exercise price of $0.35 per share
          expired.
 
 **Escrow
          Shares**
 
 As
          at
          June 30, 2005, issued share capital included 750,000 shares held in escrow
          subject to release at the direction of the British Columbia Securities
          Commission. During the year ended June 30, 2006, these shares were cancelled
          in
          accordance with the share escrow agreement.
 
 **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 as a minimum and may be granted for
          periods
          of up to five years. The vesting schedule for each grant is determined
          by the
          board of directors. As at June 30, 2006 the total number of options approved
          for
          issue is 4,000,000, of which no more than 1,085,000 options may be granted
          to
          insiders.
  F-18
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
  
 Note
                    7
                Share
                    Capital and Contributed Surplus - Note 12
                    (continued)
 
 
 **Commitments:** (continued)
 
 **Stock
          Options** (continued)
 
 A
          summary
          of the status of the Company's stock option plan as of June 30, 2006 and
          2005,
          and changes during the years ending on those dates, is presented
          below:
  2006
                
                2005Number
                
                Weighted
                    Average
                
                Number
                
                Weighted
                    Averageof
                
                Exercise
                    Price
                
                Of
                
                Exercise
                    PriceOptions
                
                US$
                
                CDN$
                
                Options
                
                US$
                
                CDN$Outstanding,
                     beginning of  year
                
                
                1,780,500
                
                
                0.43
                
                
                0.53
                
                
                1,298,000
                
                
                0.83
                
                
                1.11Granted
                
                
                -
                
                
                -
                
                
                -
                
                
                879,500
                
                
                0.15
                
                
                0.18Exercised
                
                
                (32,250
                )
                
                0.15
                
                
                0.18
                
                
                -
                
                
                -
                
                
                -Expired
                
                
                (167,000
                )
                
                1.79
                
                
                2.00
                
                
                -
                
                
                -
                
                
                -Forfeited
                
                
                (531,250
                )
                
                0.38
                
                
                0.43
                
                
                (397,000
                )
                
                1.25
                
                
                1.54Outstanding,
                     end of year
                
                
                1,050,000
                
                
                0.28
                
                
                0.31
                
                
                1,780,500
                
                
                0.43
                
                
                0.53
 
 Options
                    Outstanding
                
                Options
                    ExercisableExercise
                    Price
                
                Number
                    Outstanding at June 30,
                
                Weighted
                    Average Remaining Contractual Life
                
                Number
                    Exercisable at June 30,US$
                
                CDN$
                
                2006
                
                (Years)
                
                20060.15
                
                
                0.17
                
                
                666,000
                
                
                3.51
                
                
                666,0000.50
                
                
                0.56
                
                
                384,000
                
                
                1.50
                
                
                384,0001,050,000
                
                
                2.77
                
                
                1,050,000
 
 The
          options expire December 31, 2007 as to 384,000 options at $0.15 per share
          and
          December 31, 2009 as to 666,000 options at $0.50 per share.
  F-19
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
  
 
 Note
                    7
                Share
                    Capital and Contributed Surplus - Note 12
                    (continued)
  
 
 **Commitments:** (continued)
 
 **Stock
          Options** (continued)
 
 During
          the year ended June 30, 2006 the Company recognized the stock option benefit
          of
          $58,342 (2005: $111,536; 2004: $203,169) for the vesting of stock options,
          which
          were estimated using the Black Scholes Option Pricing Model using the following
          assumptions:
 
 2005
                
                2004Risk
                    free rate
                
                
                3.8
                %
                
                4.06%
                    - 4.20
                %Dividend
                    yield
                
                
                0
                %
                
                0
                %Expected
                    volatility
                
                
                115
                %
                
                69%
                    - 703
                %Weighted
                    average expected stock option life
                
                
                5
                    years
                
                
                2
                    - 5 years
  
  Note
                    8
                Segmented
                    Information
  
  The
          Company operates in one business segment: the development, manufacture
          and
          installation of unattended smartcard applications.
 
 Revenues
          by country are as follows:
 
 2006
                
                2005
                
                2004$
                
                $
                
                $Canada
                
                
                289,386
                
                
                273,194
                
                
                267,970United
                    States
                
                
                116,782
                
                
                116,917
                
                
                115,752406,168
                
                
                390,111
                
                
                383,722
 
 As
          at
          June 30, 2006, the net book value of capital assets are located
          in Canada and the United States are $7,180 and $25,500, respectively. As
          at June
          30, 2005, all capital assets were located in Canada.
 
 During
          the year ended June 30, 2006, one customer accounted for 63% of
          revenues.
 
 During
          the year ended June 30, 2005, one customer accounted for 60% of
          revenues.
 
 During
          the year ended June 30,
          2004, one customer accounted for 63% of revenues.
  F-20
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
  
 Note
                    9
                Income
                    Taxes
  
 
 The
          Company has accumulated non-capital losses in Canada totalling approximately
          $8,582,000 and non-capital losses in the United States totalling $1,044,000
          for
          income tax purposes, which may be deducted in the calculation of taxable
          income
          in future years. The losses expire as follows:
  Canada
                  $
                
                United
                    States
                  $2007
                
                
                1,122,000
                
                
                -2008
                
                
                1,086,000
                
                
                -2009
                
                
                1,367,000
                
                
                -2010
                
                
                1,269,000
                
                
                -2011
                
                
                922,000
                
                
                -2014
                
                
                1,077,000
                
                
                -2015
                
                
                823,000
                
                
                -2016
                
                
                916,000
                
                
                -2025
                
                
                -
                
                
                162,0002026
                
                
                
                
                
                882,0008,582,000
                
                
                1,044,000
 
 In
          addition, the Company has incurred scientific research and experimental
          development expenditures (SR&ED)
          of approximately $2,200,000 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
          approximately $528,000 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 tax authorities 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 Company’s future tax assets
          and liabilities at enacted corporation tax rates are as
          follows:
  F-21
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
 
 
 Note
                    9
                Income
                    Taxes (continued)
  
 
 2006
                
                2005
                
                2004Canadian
                    federal and provincial tax rates
                
                
                34.12
                %
                
                35.62
                %
                
                35.62
                %Unites
                    States rate
                
                
                15.00
                %
                
                15.00
                %
                
                -Income
                    tax recovery based on statutoryrates:Losses
                    carried forward
                
                $
                3,085,000
                
                $
                2,523,000
                
                $
                2,427,000Scientific
                    research and experimentaldevelopment
                    expenditures
                
                
                762,000
                
                
                797,000
                
                
                767,000Investment
                    tax credit
                
                
                528,000
                
                
                514,000
                
                
                468,000Temporary
                    differences related toequipment
                
                
                57,000
                
                
                -
                
                
                -Valuation
                    allowance for futureincome
                    tax assets
                
                
                (4,432,000
                )
                
                (3,834,000
                )
                
                (3,662,000
                )$
                -
                
                $
                -
                
                $
                -
 
 Management
          considers it more-likely-than-not that the amounts will not be utilized
          and,
          accordingly, a full valuation allowance has been applied.
  
 
 Note
                    10
                Loss
                    per share
  
 
 Loss
          per
          share is calculated using the weighted average number of common shares
          outstanding during the year of 37,236,666 shares (2005: 23,674,454 shares;
          2004:
          19,445,139 shares). Fully diluted per share amounts are not presented as
          the
          effect of outstanding options and warrants is anti-dilutive.
 
 
 Note
                    11
                Commitments
                    and Contingencies - Notes 6
  
 
 Obligations
          under the operating leases on office premises are:
 
 $2007
                
                
                85,0002008
                
                
                25,6182009
                
                
                16,412127,030
  F-22
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
  
 Note
                    11
                Commitments
                    and Contingencies - Notes 6
                    (continued)
 
  The
          Company signed an employment agreement dated December 19, 2005 with the
          president of the Company whereby the president will receive a salary of
          $17,500
          per month plus $1,000 per month in benefits. In addition, the president
          is
          entitled to receive bonuses not to exceed 200% of his salary based on the
          achievement of certain financial targets. The term of the contract is
          indefinite.
 
 The
          Company signed an employment agreement dated March 1, 2006 with an officer
          of
          the Company whereby the officer will receive a salary of $13,000 per month
          plus
          benefits. In addition, the officer is entitled to receive bonuses not to
          exceed
          150% of his salary based on the achievement of certain financial targets.
          The
          term of the contract is indefinite.
 
 A
          notice
          of claim has been filed in the Provincial Court of British Columbia against
          the
          Company whereby the claimant is claiming $25,000 in damages plus costs
          from
          misrepresentation. Management of the Company feels the claim is without
          merit
          and is unlikely to succeed.
  
 
 Note
                    12
                Subsequent
                    Events - Note 7
  
 By
          a loan
          agreement dated August 9, 2006, the Company was loaned $50,000 by a shareholder
          of the Company. This loan is unsecured and non-interest bearing. The agreement
          provides that if the loan is not repaid within 60 days, interest will accrue
          at
          a monthly rate of 2% of the principal unpaid balance. As a funding fee
          for the
          loan, the Company issued the shareholder 30,000 shares of the Company's
          common
          stock.
 
 By
          an
          agreement dated August 31, 2006, the Company was loaned $100,000 by the
          above
          noted shareholder. This loan is secured and non-interest bearing. The loan
          is
          secured by the Company’s inventory, equipment, trademarks, trade names, contract
          rights and leasehold interests. The agreement provides that if the loan
          is not
          repaid within 90 days, interest will accrue at a monthly rate of 2.5% of
          the
          principal unpaid balance. As a funding fee for the loan, the Company issued
          the
          shareholder 250,000 shares of the Company's common stock.
 
 By
          an
          agreement dated September 5, 2006, the Company was loaned $150,000 by a
          shareholder of the Company. The subordinated loan has a term of five years,
          bears interest at 10% per annum and is convertible into common stock of
          the
          Company at $0.07 per share. In addition, for each share of common stock
          issued,
          a warrant to purchase additional shares of common stock of the Company
          will be
          issued at an exercise price of $0.20 per share for two years from the date
          the
          loan is converted.
  F-23
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
  
 Note
                    12
                Subsequent
                    Events - Note 7 (continued)
 
  In
          August
          2006, a director of the Company exercised 50,000 share purchase options
          at $0.15
          per share for options outstanding at June 30, 2006 for total proceeds of
          $7,500.
 
 On
          October 3, 2006 the Company completed a private placement of 2,408,873
          units at
          $0.07 per unit for total proceeds of $168,621. Each unit is comprised of
          one
          common share and one share purchase warrant. Each warrant entitles the
          holder to
          purchase one common share at $0.20 per share until October 3, 2008.
 
 
 Note
                    13
                Prior
                    Year’s Restatement
  
 
 The
          financial statements for the year ended June 30, 2005 have been restated
          to
          reflect an adjustment to the amount recognized for stock based compensation
          for
          the vesting of options. Accordingly, stock based compensation expense,
          deficit
          and contributed surplus increased by $54,387 for the year ended June 30,
          2005.
          The amount of the restatement did not change the amount reported for basic
          and
          diluted loss per share.
 
 Note
                    14
                Differences
                    Between Generally Accepted Accounting Principles in Canada and
                    the United
                    States
 
 
 These
          consolidated 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 (US GAAP).
 
 Had
          the
          Company followed US GAAP, the consolidated statement of shareholder's equity
          (deficiency) under US GAAP would have been reported as follows, after giving
          effect to the cumulative change in stock based compensation discussed
          below:
  F-24
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
  
 Note
                    14
                Differences
                    Between Generally Accepted Accounting Principles in Canada and
                    the United
                    States (continued)
  
 
 Restated
                    -Note
                    132006
                
                2005
                
                2004$
                
                $
                
                $Share
                    CapitalCommon
                    shares
                
                
                42,096
                
                
                24,230
                
                
                22,427Additional
                    paid-in capital
                
                
                14,626,015
                
                
                12,666,618
                
                
                11,604,019Deferred
                    compensation expenses
                
                
                -
                
                
                -
                
                
                (56,667
                )14,668,111
                
                
                12,690,848
                
                
                11,569,779Accumulated
                    other comprehensive loss
                
                
                (15,591
                )
                
                (86,916
                )
                
                (61,222
                )Accumulated
                    DeficitBalance,
                    beginning of year
                
                
                (12,718,653
                )
                
                (11,682,087
                )
                
                (10,499,235
                )Loss
                    for the year
                
                
                (1,789,433
                )
                
                (1,036,566
                )
                
                (1,183,895
                )(14,508,056
                )
                
                (12,718,653
                )
                
                (11,683,130
                )(144,434
                )
                
                (114,721
                )
                
                (174,573
                )
 
 Had
          the
          Company followed US GAAP, the consolidated statements of operations would
          be the
          same as under Canadian GAAP after giving effect to the change in stock-based
          compensation discussed below.
 
 Had
          the
          Company followed US GAAP, it would have reported consolidated statements
          of
          comprehensive loss within the financial statements as follows:
  Restated
                    -Note
                    132006
                
                2005
                
                2004$
                
                $
                
                $Loss
                    for the year under Canadian andUS
                    GAAP
                
                
                (1,789,433
                )
                
                (1,036,566
                )
                
                (1,183,895
                )Foreign
                    currency translation adjustment
                
                
                71,325
                
                
                (25,694
                )
                
                (3,515
                )Comprehensive
                    loss under US GAAP
                
                
                (1,718,108
                )
                
                (1,062,260
                )
                
                (1,187,410
                )Loss
                    per common share - basic and dilutedCanadian
                    GAAP
                
                
                (0.05
                )
                
                (0.04
                )
                
                (0.06
                )US
                    GAAP
                
                
                (0.05
                )
                
                (0.04
                )
                
                (0.06
                )
  F-25
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
  
 Note
                    14
                Differences
                    Between Generally Accepted Accounting Principles in Canada and
                    the United
                    States (continued)
  Had
          the
          Company followed US GAAP, it would have reported consolidated statements
          of cash
          flows within the financial statements as follows:
  Restated
                    -Note
                    132006
                
                2005
                
                2004$
                
                $
                
                $Cash
                    flows from operating activitiesNet
                    loss for the year under US GAAP
                
                
                (1,789,433
                )
                
                (1,036,566
                )
                
                (1,183,895
                )Items
                    not affecting cashStock-based
                    compensation
                
                
                58,342
                
                
                111,536
                
                
                203,169Investor
                    relations expense
                
                
                423,454
                
                
                42,313
                
                
                -Wages
                    and benefits
                
                
                72,750
                
                
                -
                
                
                -Finance
                    fee
                
                
                -
                
                
                45,313
                
                
                -Gain
                    on settlement of debt
                
                
                (50,676
                )
                
                (22,472
                )
                
                (62,314
                )Amortization
                
                
                5,360
                
                
                3,375
                
                
                4,697Changes
                    in non-cash working capitalReceivables
                
                
                15,456
                
                
                (9,906
                )
                
                5,327Prepaid
                    expenses
                
                
                6,540
                
                
                (6,675
                )
                
                7,778Inventory
                
                
                42,335
                
                
                26,352
                
                
                (30,255
                )Payable
                    and accruals
                
                
                (282,263
                )
                
                191,540
                
                
                115,866Deposits
                    received
                
                
                3,481
                
                
                299
                
                
                16,279Unearned
                    revenue
                
                
                10,734
                
                
                -
                
                
                -Operating
                    activities under US GAAP
                
                
                (1,483,920
                )
                
                (654,891
                )
                
                (923,348
                )
 
 **Stock-based
          Compensation**
 
 Under
          Canadian GAAP, effective for fiscal years beginning on or after January
          1, 2002,
          all public companies were required to adopt recommendations of the Canadian
          Institute of Chartered Accountants regarding accounting for Canadian stock-based
          compensation. Under these requirements, all stock-based payments to
          non-employees and direct awards of stock to employees need to be accounted
          for
          using a fair value based method of accounting. However, the new standard
          allowed
          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 elected to apply the pro forma disclosure provisions
          of
          the new standard to awards granted to employees on or after July 1, 2002
          for
          both US and Canadian GAAP. For the year ended June 30, 2004, however, the
          Company elected to follow the fair value method of accounting for stock
          options
          granted to employees for both US and Canadian GAAP. This will result in
          a charge
          to income in respect of the fair value of such options.
  F-26
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
  
 Note
                    14
                Differences
                    Between Generally Accepted Accounting Principles in Canada and
                    the United
                    States (continued)
 
 
 **Stock-based
          Compensation** (continued)
 
 For
          fiscal years prior to June 30, 2003 under US GAAP, the Company used 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. Under
          Canadian
          GAAP, prior to June 30, 2002 the Company did not record this stock-based
          compensation.
 
 **Comprehensive
          Income**
 
 US
          GAAP
          requires disclosure of comprehensive income which, for the Company, is
          net
          income (loss) under US GAAP plus the change in unrealized foreign exchange
          gains
          (losses) shown as cumulative translation adjustments under US GAAP.
 
 The
          concept of comprehensive income is not required to be disclosed under Canadian
          GAAP.
 
 **New
          Accounting Standards**
 
 Management
          does not believe that any recently issued, but not yet effective, accounting
          standards if currently adopted could have a material effect on the accompanying
          financial statements.
 
 
 Note
                    15
                Non-cash
                    Transactions
  
  Investing
          and financing activities that do not have an impact on current cash flows
          are
          excluded from the statements of cash flows.
 
 During
          the year ended June 30, 2006, the company issued 1,030,000 shares valued
          at
          $246,000 for investor relation services.
 
 During
          the year ended June 30, 2006 the Company issued 200,000 shares valued at
          $72,750
          as compensation to its employees.
  F-27
 *Table
              of Contents*
  **QI
          SYSTEMS INC.**
 Notes
          to
          the Consolidated Financial Statements
 June
          30,
          2006 and 2005
 (Expressed
          in US Dollars)
  
  Note
                    15
                Non-cash
                    Transactions (continued)
  
  During
          the year ended June 30, 2006, the Company issued 553,788 common shares
          of the
          Company as settlement of accounts payable totalling $124,220.
 
 During
          the year ended June 30, 2005, the share capital subscribed includes $444,063
          as
          consideration for investor relation services.
 
 During
          the year ended June 30, 2004, the Company issued common shares of the Company
          as
          settlement of accounts payable totalling $413,341.
 
 These
          transactions have been excluded from the statements of cash flows.
   F-28