UNITED STATESSECURITIES
AND EXCHANGE COMMISSIONWashington, D.C. 20549  FORM 20-F ANNUAL REPORTPURSUANT
TO SECTION 13 OR 15(D) OF THESECURITIES EXCHANGE ACT OF 1934 For the fiscal year
ended June 30, 2005Commission file number
000-30948   QI
      Systems Inc.
      (Exact name of Registrant as specified in its charter)   Province of British
Columbia, Canada(Jurisdiction of incorporation) Unit 101, 3820 Jacombs
Road, Richmond, British Columbia V6V 1Y6(Address
of principal executive offices) Securities registered
pursuant to Section 12(b) of the Act: Title
      of each class
    
    Name
      of each exchange
      on which registeredNone
    
    None  Securities registered pursuant to
Section 12(g) of the Act: None 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. 24,230,053 with no par value. Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes |X|     No
|_| Indicate by check mark which
financial statement item the registrant has elected to follow. Item
17 |X|     Item 18 |_| (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 |_|     No |_|     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 Description of Business  Risk Factors and
Operating and Financial Review and Prospects  Managements Discussion and
Analysis of Results of Operations and Financial Results.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.



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


1
QI SYSTEMS INC.FORM
20-F


TABLE OF
CONTENTS


Page
      No.PART
      IITEM
      1
    
    IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
    41.A
    
    Directors
      and Senior Management
    41.B
    
    Advisors
    41.C
    
    Auditors
    4ITEM
      2
    
    OFFER
      STATISTICS AND EXPECTED TIMETABLE
    4ITEM
      3
    
    KEY
      INFORMATION
    43.A
    
    Selected
      financial data
    43.B
    
    Capitalization
      and indebtedness
    63.C
    
    Reasons
      for the offer and use of proceeds
    63.D
    
    Risk
      factors
    6ITEM
      4
    
    INFORMATION
      ON THE COMPANY
    124.A
    
    History
      and development
    124.B
    
    Business
      overview
    134.C
    
    Organizational
      structure
    204.D
    
    Property,
      plants and equipment
    20ITEM
      5
    
    OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS
    205.A
    
    Operating
      results
    215.B
    
    Liquidity
      and capital resources
    225.C
    
    Research
      and development, patents and licenses, etc.
    235.D
    
    Trend
      information
    235.E
    
    Off-balance
      arrangements
    245.F
    
    Tabular
      disclosure of contractual obligations
    24ITEM
      6
    
    DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES
    246.A
    
    Directors
      and senior management
    246.B
    
    Compensation
    276.C
    
    Board
      practices
    316.D
    
    Employees
    326.E
    
    Share
      ownership
    32ITEM
      7
    
    MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    357.A
    
    Major
      shareholders
    357.B
    
    Related
      party transactions
    357.C
    
    Interests
      of experts and counsel
    37ITEM
      8
    
    FINANCIAL
      INFORMATION
    378.A
    
    Consolidated
      statements and other financial information
    378.B
    
    Significant
      changes
    37ITEM
      9
    
    THE
      OFFER AND LISTING
    37ITEM
      10
    
    ADDITIONAL
      INFORMATION
    3910.A
    
    Share
      capital
    3910.B
    
    Memorandum
      and articles of association
    3910.C
    
    Material
      contracts
    3910.D
    
    Exchange
      controls
    4010.E
    
    Taxation
    4110.F
    
    Dividends
      and paying agents
    4710.G
    
    Statement
      by experts
    4710.H
    
    Documents
      on display
    4710.I
    
    Subsidiary
      information
    47ITEM
      11
    
    QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    47ITEM
      12
    
    DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES
    4712.A
    
    Debt
      securities
    472
Page
      No.12.B
    
    Warrants
      and rights
    4812.C
    
    Other
      securities
    4812.D
    
    American
      depository shares
    48PART
      IIITEM
      13
    
    DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES
    48ITEM
      14
    
    MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND 
      USE OF PROCEEDS
    48ITEM
      15
    
    CONTROLS
      AND PROCEDURES
    48ITEM
      1616.A
    
    Audit
      Committee financial expert
    4816.B
    
    Code
      of Ethics
    4916.C
    
    Principal
      accountant fees and services
    4916.D
    
    Exemptions
      from the listing standards for audit committees
    5016.E
    
    Purchases
      of equity securities by the issuer and affiliated purchasers
    50PART
      IIIITEM
      17
    
    FINANCIAL
      STATEMENTS
    50ITEM
      18
    
    FINANCIAL
      STATEMENTS
    50ITEM
      19
    
    EXHIBITS
    513
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.




Item 3 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,
2005. 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 302005
      (US$)
    
    2004
      (US$)
    
    2003
      (US$)
    
    2002
      (US$)
    
    2001
      (US$)Revenue
    
    390,111
    
    
    383,722
    
    
    325,422
    
    
    152,985
    
    
    234,810Costs
      of Goods Sold
    
    216,652
    
    
    75,320
    
    
    84,742
    
    
    147,452
    
    
    380,870Net
      Revenue
    
    173,459
    
    
    308,402
    
    
    240,680
    
    
    5,533
    
    
    (146,060
    )General
      & Administrative Expenses
    
    1,178,110
    
    
    1,554,611
    
    
    951,029
    
    
    972,099
    
    
    921,965Net
      Gain (Loss) fromContinuing
      Operations
    
    (1,004,651
    )
    
    (1,246,209
    )
    
    (710,349
    )Canadian
      GAAP
    
    (982,179
    )
    
    (1,183,895
    )
    
    (710,175
    )
    
    (966,440
    )
    
    (1,066,772
    )US
      GAAP
    
    (982,179
    )
    
    (1,183,895
    )
    
    (710,175
    )
    
    (966,440
    )
    
    (1,095,105
    )Net
      Loss per ShareCanadian
      GAAP
    
    0.04
    
    
    0.06
    
    
    0.05
    
    
    0.08
    
    
    0.09US
      GAAP
    
    0.04
    
    
    0.06
    
    
    0.05
    
    
    0.08
    
    
    0.09Working
      Capital(Deficiency)
    
    (135,913
    )
    
    (198,097
    )
    
    (707,137
    )
    
    (78,130
    )
    
    (624,542
    )Total
      Assets
    
    719,257
    
    
    362,956
    
    
    251,027
    
    
    1,109,056
    
    
    293,558Total
      Liabilities
    
    846,064
    
    
    548,572
    
    
    940,993
    
    
    1,165,351
    
    
    837,256Shareholders
      Equity(Deficiency)Canadian
      GAAP
    
    (126,807
    )
    
    (185,616
    )
    
    (689,966
    )
    
    (56,295
    )
    
    (543,698
    )US
      GAAP
    
    (114,721
    )
    
    (174,573
    )
    
    (679,966
    )
    
    (56,295
    )
    
    (543,698
    )Long-term
      Obligations
    
    Nil
    
    
    Nil
    
    
    Nil
    
    
    Nil
    
    
    NilOutstandingNumber
      of Shares
    
    24,230,053
    
    
    22,246,598
    
    
    16,363,501
    
    
    12,280,168
    
    
    11,609,714Dividends
      Declared
    
    Nil
    
    
    Nil
    
    
    Nil
    
    
    Nil
    
    
    Nil4
*Note: For fiscal year 2000,
we did not include Cost of Goods Sold as a separate line item in our Financial Statements,
given our status at that time as a research and development organization.


We
have not paid dividends on our shares since our incorporation 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,
including 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
    LowCdn $
    Cdn $November
      2005
    1.19
    1.16October 2005
    1.18
    1.16September
      2005
    1.18
    1.16August 2005
    1.21
    1.18July 2005
    1.24
    1.20June 2005
    1.25
    1.225
The average closing exchange rates
for each of our five previous fiscal years ended June 30 are as follows:



Fiscal
      Year Ended
    AverageCdn$June
      30, 2005
    1.24June 30,
      2004
    1.34June
      30, 2003
    1.51June 30,
      2002
    1.57June
      30, 2001
    1.52On
December 27, 2005, 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 $0.85
(US$1.00 equals Cdn$1.1736).




3.B Capitalization
and indebtedness


Not applicable.




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.


Our
SmartKit® Cash Card reader fully supports Mondex/MasterCard and VisaCash
interoperability. We also anticipate that other Cash Card systems may be developed that
compete directly with Mondex/MasterCard and VisaCash. We cannot assure you that our
systems will be compatible with such systems or that such systems will not render our
SmartKit® obsolete in the financial industry.


6
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
affect 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, 2005, we had an accumulated deficit of
$12,218,019, and we incurred a net loss in fiscal 2005 of $982,179. 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, $1,066,772 in fiscal 2001 and $844,508 in fiscal 2000. We
expect that we may continue to incur losses in future years.


A
relatively high percentage of our expenses is typically fixed in the short term. Our gross
revenues net of cost of goods sold for each of the years ended June 30, 2005, 2004, 2003,
2002 and 2001 were $173,459, $308,402, $240,680, $5,533 and $(146,060), respectively,
while our general and administrative operating expenses for the same periods were
$1,178,110, $1,554,611, $951,029, $972,099 and $921,965, 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 $234,810 in fiscal 2001 to $152,985 in
fiscal 2002 to $325,422 in fiscal 2003 to $383,722 in fiscal 2004 to $390,111 in fiscal
2005. 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.


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


We
had working capital deficits of $135,913 at June 20, 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;7

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.


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 VisaCash and Mondex/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.


8
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.


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, 2005, approximately 60% of our
consolidated revenue was attributable to one customer, Cale Parking. During the fiscal
year ended June 30, 2004, approximately 63% of our consolidated revenue was attributable
to one customer. During the fiscal year ended June 30, 2003, approximately 83% of our
consolidated revenue was attributable to three customers. During the fiscal year ended
June 30, 2001, approximately 56% of our consolidated revenue was attributable to three
customers. During the fiscal year ended June 30, 2000, approximately 89% of our
consolidated revenue was attributable to two 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


9
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.


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.


10
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.


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, 2005). 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.


11
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 $0.09 and US $0.50 per share on the TSXV Venture Exchange (September 30, 2002
to June 30, 2004) and between US $0.07 and US $1.30 on the OTCBB (September 30, 2002 to
June 30, 2005); 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.




Item 4 Information on the Company




4.A History
and development


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 active 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 gives effect to the forward split.


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


We
are 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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.



We
have proposed a change our jurisdiction of incorporation from the Province of British
Columbia, Canada, to the State of Delaware and the adoption of a new certificate of
incorporation and bylaws for our company. On December 22, 2005, we filed a form S-4 to
register 39,387,635 of our shares of common stock, $.001 par value,


12
to be issued in connection with the
change of our jurisdiction of incorporation, or domestication, in exchange for our
existing share capital. If approved by our shareholders, it is anticipated that the
change of jurisdiction of incorporation, or domestication, will become effective as soon
as practicable after the meeting of our shareholders.



Our
domestication is intended to enhance shareholder value over the long-term by, among other
things, improving our ability and flexibility to meet future equity and debt financing
needs, enhancing marketability of our capital stock by raising our profile in the United
States and international capital markets, and providing greater ease in proposing and
winning business in the United States. We chose the State of Delaware to be our domicile
because Delaware has a modern and flexible corporate code and a court system with
considerable expertise in dealing with corporate issues.


Our
Board of Directors has reserved the right to terminate or abandon our domestication at any
time prior to its effectiveness, notwithstanding shareholder approval, if it determines
for any reason that the consummation of our domestication would be inadvisable or not in
our best interests or the best interests of our shareholders.


Our
principal business office is located at Unit 101, 3820 Jacombs Road, Richmond, British
Columbia Canada V6V 1Y6, and our telephone number there is (604) 248-2301. Our registered
and records offices are located at Suite 1000, 595 Burrard Street, P.O. Box 49290,
Vancouver, B.C. Canada V7X 1S8, and our telephone number there is (604) 687-6789.


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 Card), 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 product is the SmartKit® Cash Card reader, which enables Cash Card payments to
be accepted in a wide range of vending and self-serve machines. Our SmartKit® Cash
Card reader is a fully developed product that supports multiple Cash Card schemes. See
Our Products below. In a Cash Card transaction, our SmartKit® Cash Card
reader validates the Cash Card, displays the balance, deducts the amount of the
transaction from the card, then displays the remaining balance. We offer our SmartKit®
for factory installation in new equipment or in kits that can be installed in existing
machines in the field. SmartKit® consists of a custom computer and a custom smart card
interface in a steel or plastic enclosure designed for quick installation in the vending
machine. We have developed several variations of our SmartKit® readers, including the
SmartKit® II, a card acceptor, a user keypad and a back-lit liquid crystal display;
SmartKit® Laundry, a system that allows Cash Card payment at individual machines in a
laundry facility; and SmartKit® for newspaper vending machines.


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.


Our
implementation and product rollout strategy has historically been to participate in
bank-sponsored pilot programs of VisaCash and Mondex/MasterCard card systems as well as
marketing our products to other card-issuing organizations and companies for proprietary
card applications. See Our Product Deployment below.


In
developing products for use with bank-issued cards, our systems were required to comply
with and be certified to international standards. As a result, our product line supports
multiple smart card platforms, including bank card platforms and proprietary card
platforms. We offer complete turnkey card payment systems that use our proprietary stored
value cards and other stored value card schemes.


13
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.


SmartKit®


SmartKit®
is a payment control system that allows Cash Card payments to be accepted in a wide range
of vending machines. SmartKit® has been certified by VisaCash and Mondex/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.


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.


14
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.


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


15
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


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


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.


QI SmartVend


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.


16
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.


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.


17
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:



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 StatesTo
date, we have installed over 3500 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.


18
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:
magnetic
stripe cards are simply ID badges with little or no security
smart
cards store hundreds or thousands of times more information;
smart
cards are more reliable;
smart
cards are more secure;
smart
cards are much more difficult or impossible to copy;
smart
cards can be used for a wide variety of applications (payment methods, identification,
security, authorized access, etc.);
smart
cards can provide advanced security features including data processing and encryption;
these features are simply not                      possible on magnetic stripe cards;
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.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 Timessays 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.


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



19
alternative supply sources for the
components we use are available with relative ease of effort and without compromising our
manufacturing capabilities.


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.


20
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, 2005, 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 business primarily in Canada and maintain our bank accounts in Canadian and
US dollars. Sales are 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, 2005, we had no allowance for doubtful
accounts. If future events indicate collection issues, we may be required to record
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.




5.A Operating
results


Years Ended June 30, 2005 Compared
to Years Ended June 30, 2004 and 2003


Revenues
during the twelve months ended June 30, 2005 were $390,111, 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 2% above sales achieved in fiscal 2004
and 20% above sales achieved in 2003. We attribute the increase in revenue from fiscal
2004 and 2005 compared to the increase from 2003 to 2004 to greater acceptance and


21
penetration of our product within
the parking industry. We anticipate that our revenue will continue to be derived from
sales to a few customers in fiscal 2005. In fiscal 2005, 60% of our sales were made to a
single customer, compared to 2004 and 2003, when 63% and 48%, respectively, were
attributable to a single customer. We anticipate that revenue will increase during fiscal
2006 as a result of new orders 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 2005 period was $216,652, which represents 56% of sales, up from total
cost of sales of $75,320, or 20% of sales, in fiscal 2004 and $84,742, or 26% of sales, in
fiscal 2003. The increase in 2005 compared to 2004 and 2003 comes mainly from thorough
inventory adjustments to account for obsolescence. Operating profits in fiscal 2005 were
$173,459, or 44% of sales in 2005, compared to 80% in 2004 and 74% in 2003.


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.


During
fiscal 2005, investor relations costs of $42,313 were incurred in association with
services pursuant to a secured capital financing (mainly a brokered private placement that
closed subsequent to year end). Most of the investor relation expense accrued in 2005 will
be met with the issuance of shares. Investor relations costs decreased $198,293 from
fiscal 2004 to 2005 because we decreased our focus on investor relations in 2005; however,
investor relations expenses were still significantly higher than investor relations
expenses in 2003. Due to an investment relations agreement entered into at the end of
2005, we expect investment relations expenses to be significantly higher in 2006.


Administration
expenses were $406,154 in 2005, compared to $419,060 in 2004 and $305,404 in 2003. These
2005 expenses include the following three major expenses: salaries and benefits paid to
administrative employees and managers of $162,598, management fees of $97,962 and $56,684
of rent expense. Most expenses were essentially flat in 2005 compared to 2004 due to
revised cost allocations of salaries of specific employees, increased travel expense,
consulting fees and contract labor, regulatory and compliance expense and in general
terms, higher office expenses, reflecting the increased business activity in 2005 and
2004. The overall decrease in administrative expenses in 2005 was caused by foreign
exchange benefits in 2005, which did not occur in 2004. It should be noted that $148,923
of management fees and salary expense to our President and CEO remained outstanding at the
end of fiscal 2005, and were recorded as a current liability of ours under accounts
payable. We anticipate that most administrative expenses in fiscal 2006 will remain
comparable with 2005 expenses, except for salaries and benefits, which will increase to
reflect the hiring of a full time CFO/COO.


Development
costs in 2005 were $269,997 of which the most significant category of expense was for
salaries in 2005, and benefits paid to employees involved in the development of our
products, which were $173,989 in fiscal 2005 compared to in 2004. We paid $56,610 to
Consultants to assist in the development of technology products and provide guidance to
our full-time employees. The third most significant development cost in 2005 was $20,360
paid for contract labor. While development costs decreased in 2004 from 2003 levels and in
2005 from 2004 levels, they are expected to increase in fiscal 2006 to accommodate our
expansion into the gaming and other industries.




5.B Liquidity and
capital resources


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


As
of December 30, 2005, we had options to purchase 1,076,000 shares of common stock, with
exercise prices ranging from $0.15 to $0.50, and warrants to purchase 15,553,074 shares of
common stock, with exercise prices ranging from $0.20 to $0.30.


During
the year ended June 30, 2005, warrants for 43,000 shares were exercised for net proceeds
of $17,200, warrants for 1,363,636 shares were issued in connection with a private
placement, at an exercise price of $0.30 per share and with an expiry date of November 17,
2006 and warrants for 3,820,333 shares expired unexercised.


22
Also
in fiscal 2005, we granted stock purchase options for 879,500 shares to officers,
employees and consultants, at a price of $0.15 per share. The options expire on December
31, 2009 and vest over four quarters starting on March 31, 2005. No options were exercised
in fiscal 2005, and options for 397,000 shares were forfeited.




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


During
the last several years, we have spent approximately $1.032 million on research and
development efforts. We currently employ seven employees and three contractors who develop
our technology. Our current research and development efforts focus on designing
SmartKit® 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.


We
are currently undertaking the following research and development projects:



PROJECT
    DESCRIPTION
    
    STATUSHybrid
      Credit Card
    Software
      development for SmartKit® Hybrid Cash reader that will permit the use
      and storage of credit cards in machines previous coin only.
    
    OngoingData Base
      Management/ Third Party Application Tools
    Improve
      data base management functionality of our SmartKit® readers and Qlink®
      system
    
    OngoingFunctionality
      Improvement
    Improve
      functionality and compatibility of our SmartKit® Cash Card systems with
      OEM and other platforms
    
    OngoingWe work
closely with VisaCash and Mondex/MasterCard to monitor advancements in Cash Card
technologies and undertake research and development efforts necessary to maintain the
multi-platform compatibility of our 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.


In
April, 2004, we announced an order from Cale Systems, Inc. for 525 units of the SmartKit
Hybrid payment terminals for delivery by the end of 2004. We announced that the 2004 order
was fully delivered. In December 2004, we announced that Cale issued a new order for 1480
units with a value of approximately $700,000 to be delivered in calendar 2005.  Some
of these orders were subsequently canceled.  We recorded revenue from Cale Systems of
$239,000 and $234,000 in fiscal years June 30, 2004 and 2005, respectively.  In
addition, during 2005 this key product was reengineered for added functionality and
improved manufacturing. At December 2005, we had an order in hand for 500 units of the
enhanced SmartKit Hybrid for delivery in early 2006.


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.


23
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.




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 December 30, 2005, information with respect to our known
contractual obligations.


Payments
      due by periodContractual
      Obligations
    Total
    
    Less
      
      than 1
      year
    
    1-3
      years
    
    3
       5
      years
    
    More
      
      than 5
      yearsLong-Term
      Debt Obligations
    
    Nil
    
    
    Nil
    
    
    Nil
    
    
    Nil
    
    
    NilCapital
      (Finance) Lease Obligations
    
    Nil
    
    
    Nil
    
    
    Nil
    
    
    Nil
    
    
    NilOperating
      Lease Obligations (1)
    $
    110,561
    
    $
    57,684
    
    $
    52,877
    
    
    Nil
    
    
    NilPurchase
      Obligations
    
    Nil
    
    
    Nil
    
    
    Nil
    
    
    Nil
    
    
    NilOther Long-Term
      Liabilities Reflected on our
    
    Nil
    
    
    Nil
    
    
    Nil
    
    
    Nil
    
    
    NilBalance
      Sheet under Canadian GAAPTotal
    $
    110,561
    
    $
    57,684
    
    $
    52,877
    
    
    Nil
    
    
    Nil(1)
Operating
lease obligations relate exclusively to the lease of office space.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 Description of
Business  Risk Factors above.




Item
6 Directors, Senior Management and Employees




6.A Directors
and senior management


The
following table sets forth the name, position with the Registrant, age and municipality of
residence of directors and senior management as of December 30, 2005:


24

---



|Name
      and Municipality of Residence |  | Principal Occupation or 
      Employment during the past five
      years |  | Position
      with Registrant    |  | Age
|---------------------------------------- |  | -------------------------------------------------------------------------- |  | --------------------------------- |  | ---
|                                        
|Steven
      R. Garman                   |  | President
      and Chief Executive Officer, QI                            |  | President,
      Chief Executive  |  | 58 
|Colleyville,
      Texas                 |  | Systems
      Inc. since June 30, 2003;                                    |  | Officer
      and Director        |  |    
|                                         |  | Management
      Consultant with True Horizon                              |  |                                   |  |    
|                                         |  | Marketing
      Inc. since 2002; President and                             |  |                                   |  |    
|                                         |  | Chief
      Executive Officer, FS Holdings from                            |  |                                   |  |    
|                                         |  | 1998
      to 2002.                                                        |  |                                   |  |    
|                                         |  |                                                                            |  |                                   |  |    
|Robert
      I. McLean, Jr.              |  | Chief
      Financial Officer and Chief                                    |  | Chief
      Financial Officer     |  | 48 
|Grapevine,
      Texas                   |  | Operating
      Officer since August 22, 2005;                             |  | and
      Chief Operating Officer |  |    
|                                         |  | Executive
      Vice President of Business                                 |  |                                   |  |    
|                                         |  | Development
      and Global Account Management                            |  |                                   |  |    
|                                         |  | for
      Teleplan International of the                                    |  |                                   |  |    
|                                         |  | Netherlands
      from 2004 to 2005.                                       |  |                                   |  |    
|                                         |  |                                                                            |  |                                   |  |    
|Richard
      H. Murray                  |  | Sr.
      VP and GM Canadian Operations since                              |  | Sr.
      Vice President,         |  | 58 
|Richmond,
      British Columbia         |  | September
      2005; VP of Business Development                           |  | General
      Manager of          |  |    
|Canada                                   |  | July
      2003- September 2005; Director of                               |  | Canadian
      Operations and     |  |    
|                                         |  | Business
      Development 2001 - July 2003.                               |  | Director                          |  |    
|                                         |  |                                                                            |  |                                   |  |    
|Billy
      Gene Parker, Jr.             |  | Owner
      and President, Mobil Contractor                                |  | Director                          |  | 50 
|The
      Woodlands, Texas               |  | Inc.,
      from 1985 to Present.                                          |  |                                   |  |    
|                                         |  |                                                                            |  |                                   |  |    
|William
      J. Reid                    |  | Software
      Development Project Manager for                             |  | Director                          |  | 33 
|Victoria,
      British Columbia, Canada |  | Edoc
      Systems Group Ltd. since 2002.                                  |  |                                   |  |    
|                                         |  |                                                                            |  |                                   |  |    
|Matthew
      G. Yugovich                |  | Commercial
      Real Estate Developer.                                    |  | Director                          |  | 50 
|Lubbock,
      Texas                     |  |                                                                            |  |                                   |  |    
|                                         |  |                                                                            |  |                                   |  |    
|Alan
      D. Graves                     |  | President
      of Gemcore Communications Inc.                             |  | Director                          |  | 44 
|Surrey,
      British Columbia, Canada   |  | since
      1999; Senior Technical Consultant to                           |  |                                   |  |    
|                                         |  | QI
      since 1995.                                                       |  |                                   |  |    

Members
of our Board of Directors are elected by our shareholders. Unless the directors
office is earlier vacated in accordance with the provisions of the Business
Corporations Act(British Columbia), 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, 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 25   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.



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
H. 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


26
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.


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.


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




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, 2005, we had two named executive officers, namely Steven R.
Garman, our President and Chief Executive Officer from June 20, 2003 to present and Steven
R. Crowell, our Chief Financial Officer from November 2004 to July 1, 2005.


27
The following table sets forth, for
the periods indicated, the compensation of the named executive officers:


Summary
Compensation Table


|                                        
|----------------------------------------
|Name and 
      Principal
      Position
|                                        
|Awards                                  
|                                        
|Salary
      (US$)                      
|                                        
|Steven
      R. Garman                  
|President
      and CEO                 
|                                        
|                                        
|                                        
|                                        
|Steven
      R. Crowell                 
|CFO
      (5)                           
|                                        
|                                        
|                                        
|                                        
|Mesbah
      Taherzadeh                 
|Former
      CEO(6)                     
|                                        
|                                        
|                                        
|                                        

(1)
Financial
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.
Taherzadeh ceased to be a director on June 19, 2003 and ceased to be our Chief Executive
           Officer on June 12, 2003.  Options and
Stock Appreciation Rights 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. 28   No
share options were granted to or repriced on behalf of the named executive officers during
the financial year ended June 30, 2005. No share options were exercised by the named
executive officers during the financial year ended June 30, 2005.


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, 2005.






Name
      and named 
      executive officer
      and Principal 
      Position
    Year
      (1)
    
    Number of 
      Options Issued
    
    Exercise
      Price
    
    Expiration
      Date
    
    Vested
      at
      June 30,
      2005Steven
      R. Garman
    2005
    
    168,000
    
    US$0.15
    
    December
      31, 
      2009
    
    84,000President
      & Chief
    2004
    
    Nil
    
    Nil
    
    Nil
    
    NilExecutive
      Officer
    2003
    
    Nil
    
    Nil
    
    Nil
    
    NilSteven
      R. Crowell
    2005
    
    150,000
    
    US$0.15
    
    December
      31, 
      2009
    
    (2)former
      Chief
    2004
    
    Nil
    
    Nil
    
    Nil
    
    NilFinancial
      Officer
    2003
    
    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.Option Grants in the Twelve Months Ended June

30, 2005


|                                                   
|---------------------------------------------------
|Name
        of 
        Executive 
        Officer
|                                                   
|Steven
        R. Garman                           
|                                                   
|Steven
        R. Crowell                          
|                                                   



(1)
        Stock appreciation rights. We have not granted any SARs.  (2)
        Mr. Crowell resigned from his position as a director on April 21, 2005 and resigned as our CFO on July 1, 2005.

Accordingly, under the terms of the stock option plan, his 150,000 options became null and void upon his resignations.  The
following table discloses the particulars of options exercised during the last financial
year by any named executive officer and the value of unexercised options held by the named
executive officers: Aggregate Option
Exercises in the Twelve Months Ended June 30, 2005 and Financial Year-End Option Values Name of 
      Executive Officer
    Securities 
      Acquired on
      Exercise (#)
    
    Aggregate
      Value
      Realized ($)
    
    Unexercised 
Options/SARs(1) at 
Financial Year-End (#)
Exercisable/ 
Unexercisable
    
    Value
      of Unexercised in the 
      Money Options/SARs at 
      Financial Year-End ($) 
      Exercisable/ UnexercisableSteven
      R. Garman
    Nil
    
    Nil
    
    84,000/84,000
    
    $9,240/$9,240  (1)
We
have not granted any SARs.  No options granted to any named
executive officers were repriced downwards during the last financial year. Pension 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, 29   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.


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, he shall have the right to convert such amount into shares of our common
stock at a rate of $0.12 per share.


Other
than as disclosed above, there is no compensatory plan or arrangement, 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, 2005, to all officers and directors, as a group, for services in all
capacities was $253,142.


No
amounts have been set aside or accrued by us during fiscal 2005 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 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 December 30, 2005, there were options to purchase 1,076,000 shares of our common stock
outstanding. The names 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 December 30, 2005, are set forth below.




Name
    
    Number
      of
      Shares
    
    Exercise
      Price
      Per Share
    
    Expiry
      DateBilly
      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
    
    168,000
    
    $
    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, 2009Steven
      R. Garman
    
    168,000
    
    $
    0.15
    
    December
      31, 200930
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 (1)
    
    Period of
      ServiceBilly
      Gene Parker, Jr.
    
    Director
    
    December,
      2005
    
    Since
      November, 2001Matthew
      G. Yugovich (2)
    
    Director
    
    December,
      2005
    
    Since
      October, 2002Alan
      D. Graves (2)
    
    Director
    
    December,
      2005
    
    Since
      December, 2002William
      J. Reid (2)
    
    Director
    
    December,
      2005
    
    Since
      June, 2003Richard
      H. Murray (2)
    
    Sr.
        Vice President, General Manager of
    
    December,
      2005
    
    Since
      October, 2005Canadian
        Operations and DirectorSteven
      R. Garman (2)
    
    President,
        Chief Executive Officer and
    
    December,
      2005
    
    Since
      June, 2003Director(1)
Officers
are appointed by the directors for a term expiring at the following Annual General
Meeting.(2)
Member
of the Audit Committee.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
William
J. Reid
Steven
R. GarmanOur
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.31
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, 2005. We do not anticipate remunerating
members of the Audit Committee in the year ending June 30, 2006 by means of Directors
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, 2005
    June
      30, 2004
    June
      30, 20038
      employees
    8
      employees
    9
      employeesWe had
six employees and three contractors located in Canada in June 30, 2005; eight employees and five
contractors located in Canada of June 30, 2004; and nine employees and five contractors
located in Canada of June 30, 2003. As of June 30, 2005, four employees were involved in
management and administrative functions, seven employees and three contractors were
engaged in research and development and one employee were 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 December 30, 2005 information regarding the beneficial
ownership of our common stock by each director and each executive officer named in the
Summary Compensation Table appearing herein.




NAME
      AND ADDRESS
    BENEFICIAL
      OWNERSHIP (1)NUMBER
      OF SHARES
    
    PERCENT
      OF TOTALBilly
      Gene Parker, Jr. (3)(6)
    1,313,272
    
    3.24
    %Matthew
      G. Yugovich (2)(3)(4)(5) (7)
    1,716,212
    
    4.13
    %Alan D.
      Graves (2)(3)(7)
    250,081
    
    *William
      J. Reid (2)(3)(8)
    210,750
    
    *Richard
      H. Murray (3)(9)(10)
    1,523,800
    
    3.77
    %Steven
      R. Garman (2)(3)(11)(12)
    632,243
    
    1.56
    %* Indicates 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 power 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  December  30,  2005,  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 December 30, 2005, are deemed to be outstanding for purposes of
computing            the percentage of the shares held by an individual,  but are not
 outstanding for purposes of computing the percentage of any other            person.32
(2)
Denotes
a member of the Audit Committee.(3)
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,  December 30, 2005: Mr. Parker 218,000;  Mr. Yugovich  218,000;  Mr. Graves
129,000;  Mr.            Reid 33,000; Mr. Murray 25,000; and Mr. Garman 168,000.(4)
Includes
 181,818  shares held by Mrs.  Carol  Yugovich,  wife of Mr. Matthew G. Yugovich.  Mr.
 Yugovich  expressly  disclaims all            beneficial ownership of these shares.(5)
Includes
 1,142,727 shares subject to warrants held by Mrs.  Yugovich that were exercisable as of
or will be exercisable  within 60            days of December 30, 2005. Mr. Yugovich
expressly disclaims all beneficial ownership of these warrants.(6)
Includes
 113,636  shares subject to warrants held by Mr. Parker that are  exercisable as of or
will be exercisable  within 60 days            following, December 30, 2005.(7)
Includes
 120,081  shares  registered in the name of Gemcore  Communications,  Inc., a corporation
 for which Mr. Graves  currently            serves as director.(8)
Includes
 22,727 shares subject to warrants held by Mrs. Dana Reid,  wife or Mr. William J. Reid,
 which were  exercisable as of or            will be exercisable within 60 days
following, December 30, 2005.(9)
Includes
36,300 shares registered in the name of Mrs. Gisela Murray, wife of Mr. Richard H. Murray.(10)
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, December
30, 2005.  Mr. Murray currently serves as director for Burrard Technologies Corp.(11)
Includes
318,789 shares registered in the name of Mrs. Jane Garman, wife of Mr. Steven R. Garman.(12)
Includes
145,454 shares subject to warrants held by Mrs. Garman which were exercisable as of or
will be exercisable  within 60 days            following, December 30, 2005.A
summary of outstanding options granted to the above individuals to purchase our common
shares as at December 30, 2005 is set forth below:



Name
    
    Number
      of
      Shares
    
    Exercise
      Price
      Per Share
    
    Expiry
      DateBilly
      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
    
    168,000
    
    $
    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, 2009Richard
      H. Murray
    
    
    
    
    
    
    Steven
      R. Garman
    
    168,000
    
    $
    0.15
    
    December
      31, 200933
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.


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.


Equity
Compensation Plan Information


The
following table sets forth information related to our equity compensation plans as of
December 30, 2005:


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 (a))(a)
    
    (b)
    
    (c)Equity
      Compensation Plans approved
    
    1,076,000
      options
    
    US $0.27
    
    2,924,000by security
      holdersEquity
      Compensation Plans not
    
    Nil
    
    Nil
    
    Nilapproved
      by Security HoldersTotal
    
    1,076,000
      options
    
    
    
    2,924,00034
Item
7 Major Shareholders and Related Party Transactions




7.A
Major shareholders


Share
Ownership



The
following table shows, as of December 30, 2005, the information known by us regarding
shareholders that beneficially own more than 5% of our outstanding common shares:



Name
      of Shareholder
    Number
      of Shares
    
    PercentHobson,
      Lorenze, Bowersock and Associates (1)
    2,351,433
    
    5.8
    %Sabins
      TTEE - Sole Prop Profit Sharing Plan & Trust
    2,400,000
    
    6.0
    %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 December 30, 2005, 40,194,301 common shares were held of record by 2,078 registered
holders. Of those holders, 1,136 had registered addresses in the United States and 689 had
registered addresses in Canada. 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:


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
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 $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,
2005"


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


In
May 25, 2005, we entered into an Investors Relations agreement with an arms-length party,
Hobsen,


35
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, 2005.


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.


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.


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 30,2005
      $
    
    2004
      $
    
    2003
      $Administration
    253,142
    
    155,867
    
    205,834Development
      costs
    56,610
    
    58,276
    
    Financing
      costs and interests
    45,313
    
    
    
    355,065
    
    214,143
    
    205,834For
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.


In
October 2003, 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).


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.


On
September 10, 2002, we entered into a private placement Subscription Agreement with Billy
Gene Parker, Jr. whereby Mr. Parker purchased 625,000 shares at $0.40 per share. Subsequent
to the private placement, on November 13, 2002, Mr. Parker joined our Board of Directors.


In
May, 2002, James Roberts purchased 1,170,000 units, Mesbah Taherzadeh purchased 10,000
units, Lillie Cocunato, purchased 24,000 units, Douglas Brazier purchased 160,000 units,
Craig Jones purchased 10,000 units and Billy G. Parker purchased 750,000 units, at the
price of US$0.30/Cdn$0.50 per unit from a private placement under which we issued a total
issuance of 200,000 common shares at US$0.30/Cdn.$0.50 per common



36
share and 3,550,000 units at a price
of US$0.30/Cdn.$0.50 per unit. Total proceeds raised were US$1,125,000 (Cdn.$1,875,000).
Each unit comprised one share and one non-transferable share purchase warrant entitling
the holder to purchase one additional common share for a period of two years at an
exercise price of US$0.40/Cdn.$0.67 per share. An aggregate of 2,124,000 units for a
purchase price of US$637,200/Cdn.$1,062,000 were purchased by insiders of our company.




7.C
Interests of experts and counsel


Not applicable.




Item
8 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, 2005 and 2004;
Consolidated
Statements of Operations and Deficit for the Years Ended June 30, 2005, 2004 and 2003;
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2005, 2004 and 2003; and
Consolidated
Statement of Stockholders Deficiency for the Period July 1, 2002 to June 30, 2005;
Notes
to Consolidated Financial Statements June 20, 2005.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.




Item
9 The Offer and Listing


Markets


Our
common shares traded on the TSXV Venture Exchange (the TSXV) under the symbol
QIIU.V 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:


37
TSX Yearly Price
      History  Five most recent fiscal yearsPeriod
    
    High
    
    LowFiscal
      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$0.80TSX Quarterly Price
      History - Two most recent fiscal yearsPeriod
    
    High
      (US$)
    
    Low
      (US$)Fiscal
      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
    
    0.09TSX Monthly Price
      History - Six most recent months prior to delistingPeriod
       2004
    High
      (US$)
    
    Low
      (US$)June
    0.28
    
    0.24July
      -delisted on July 16,2004
    0.26
    
    0.18August
    
    
    September
    
    
    October
    
    
    November
    
    
    DecemberOur common shares began trading in
U.S. dollars on July 30, 2001.


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 yearsPeriod
    
    High
      (US$)
    
    Low
      (US$)Fiscal
      2005
    12
      Month Period ended June 30, 2005
    
    0.42
    
    0.18Fiscal
      2004
    12
      Month Period ended June 30, 2004
    
    0.48
    
    0.11Fiscal
      2003
    12
      Month Period ended June 30, 2003
    
    0.45
    
    0.07OTCBB Quarterly
      Price History - Two most recent fiscal yearsPeriod
    
    High
      (US$)
    
    Low
      (US$)Fiscal
      2005
    First
      Fiscal Quarter ended September 30, 2005
    
    0.27
    
    0.12Second
      Fiscal Quarter ended December 31, 2005
    
    0.20
    
    0.11Third
      Fiscal Quarter ended March 31, 2004
    
    0.25
    
    0.12Fourth
      Fiscal Quarter ended June 30, 2004
    
    0.42
    
    0.17Fiscal
      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
    
    0.1138
OTCBB Monthly Price
      History - Six most recent monthsPeriod
       2005
    High
      (US$)
    
    Low
      (US$)November
    0.35
    
    0.18October
    0.41
    
    0.28September
    0.45
    
    0.31August
    0.62
    
    0.30July
    0.70
    
    0.24June
    0.27
    
    0.19Our
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.




Item
10 Additional Information




10.A
Share capital


Not applicable.




10.B Memorandum
and articles of association


The Memorandum and Articles of the
Registrant and the related disclosure called for by this item are contained in, and
incorporated by reference, in Item 10B of our previously filed Form 20-F as filed in
January 2004.




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:


39
Contract
    
    DescriptionForm
      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.Form of
      Private Placement Subscription Agreement completed November, 2004
    
    In November,
      2004, we completed a private placement Subscription Agreement under which
      certain parties purchased an aggregate of 2,727,273 units for a purchase
      price of US$0.22 per unit.Form of
      Private Placement Subscription Agreement completed April, 2004
    
    In April,
      2004, we completed a private placement Subscription Agreement under which
      certain parties purchased an aggregate of 2,727,273 units for a purchase
      price of US$0.22 per unit.Form of
      Private Placement Subscription Agreement completed November, 2003
    
    In November,
      2003, we completed a private placement Subscription Agreement under which
      certain parties purchased an aggregate of 869,000 units for a purchase price
      of US$0.25 per unit.Form of
      Private Placement Subscription Agreement completed October, 2003
    
    In October,
      2003, we completed a private placement Subscription Agreement under which
      certain parties purchased an aggregate of 1,666,665 units for a purchase
      price of US$0.15 per unit.


10.D
Exchange controls


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


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


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


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


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


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


40
The
following investments by a non-Canadian are subject to review under the Act: (1) direct
acquisitions of control of Canadian businesses with assets of CDN$5 million or more unless
the acquisition is being made by an American investor; (2) direct acquisitions of control
of Canadian businesses with assets of CDN$152 million or more by an American investor; (3)
indirect acquisitions of control of Canadian businesses with assets of CDN$5 million or
more if such assets represent more than 50% of the total value of the assets of the
entities, the control of which is being acquired, unless the acquisition is being made by
an American investor; (4) indirect acquisitions of control of Canadian businesses with
assets of CDN$152 million or more by an American investor if such assets represent more
than 50% of the total value of the assets of the entities, the control of which is being
acquired; (5) indirect acquisitions of control of Canadian businesses with assets of
CDN$50 million or more even if such assets represent less than 50% of the total value of
the assets of the entities, the control of which is being acquired, unless the acquisition
is being made by an American investor in which case there is no review; and (6) an
investment subject to notification that would not otherwise be reviewable if the Canadian
business engages in the activity of publication, distribution or sale of books, magazines,
periodicals, newspapers, audio or video music recordings, or music in print or
machine-readable form.


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


An
American, as defined in the Act includes an individual who is an American national or a
lawful, permanent resident of the United States, a government or government agency of the
United States, an American-controlled corporation, limited partnership, trust or joint
venture and a corporation, limited partnership, trust or joint venture that is neither
American-controlled nor Canadian-controlled of which two-thirds of its board of directors,
general partners or trustees, as the case may be, are any combination of Canadians and
Americans. The higher thresholds for Americans do not apply if the Canadian business
engages in activities in certain sectors such as oil, natural gas, uranium, financial
services except insurance, transportation services or media activities.


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




10.E Taxation


U.S. Federal
Income Tax Consequences


The
following is a summary of the anticipated material U.S. federal income tax consequences to
a U.S. Holder, as defined below, arising from and relating to the acquisition, ownership
and disposition of our common shares.


This
summary is for general information purposes only and does not purport to be a complete
analysis or listing of all potential U.S. federal income tax consequences that may apply
to a U.S. Holder as a result of the acquisition, ownership and disposition of our common
shares.  In addition, this summary does not take into account the individual facts and
circumstances of any particular U.S. Holder that may affect the U.S. federal income tax
consequences of the acquisition, ownership and disposition of our common shares.
 Accordingly, this summary is not intended to be, and should not be construed as, legal
or U.S. federal income tax advice with respect to any U.S. Holder. Each U.S. Holder
should consult its own financial advisor, legal counsel or accountant regarding the U.S.
federal, U.S. state and local and foreign tax consequences of the acquisition, ownership
and disposition of our common shares.


41
Scope of this
Disclosure


Authorities


This
summary is based on the Internal Revenue Code of 1986, as amended, referred to below as
the Code, Treasury Regulations, published Internal Revenue Service, referred
to below as the IRS, rulings, published administrative positions of the IRS,
the Convention Between Canada and the United States of America with Respect to Taxes on
Income and on Capital, signed September 26, 1980, as amended, referred to below as the
Canada-U.S. Tax Convention, and U.S. court decisions that are applicable as of
the date of this Annual Report. Any of the authorities on which this summary is based
could be changed in a material and adverse manner at any time, and any such change could
be applied on a retroactive basis. This summary does not discuss the potential effects,
whether adverse or beneficial, of any proposed legislation that, if enacted, could be
applied on a retroactive basis.


U.S. Holders


For
purposes of this summary, a U.S. Holder is a beneficial owner of our common
shares that, for U.S. federal income tax purposes, is: (a) an individual who is a citizen
or resident of the U.S.; (b) a corporation, or other entity classified as a corporation
for U.S. federal income tax purposes, that is created or organized in or under the laws
of the U.S. or any state in the U.S., including the District of Columbia; (c) an estate
if the income of such estate is subject to U.S. federal income tax regardless of the
source of such income; or (d) a trust if (i) such trust has validly elected to be treated
as a U.S. person for U.S. federal income tax purposes or (ii) a U.S. court is able to
exercise primary supervision over the administration of such trust and one or more U.S.
persons have the authority to control all substantial decisions of such trust.



Non-U.S. Holders


A
non-U.S. Holder is a beneficial owner of our common shares other than a U.S.
Holder.  This summary does not address the U.S. federal income tax consequences of the
acquisition, ownership or disposition of our common shares to non-U.S. Holders.
 Accordingly, a non-U.S. Holder should consult its own financial advisor, legal counsel
or accountant regarding the U.S. federal, state and local and foreign tax consequences,
including the potential application of and operation of any tax treaties of the
acquisition, ownership and disposition of our common shares.



U.S. Holders Subject
to Special U.S. Federal Income Tax Rules Not Addressed


This
summary does not address the U.S. federal income tax consequences of the acquisition,
ownership or disposition of our common shares to U.S. Holders that are subject to special
provisions under the Code, including the following U.S. Holders: (a) U.S. Holders
that are tax-exempt organizations, qualified retirement plans, individual retirement
accounts, or other tax-deferred accounts; (b) U.S. Holders that are financial
institutions, insurance companies, real estate investment trusts, or regulated investment
companies or that are broker-dealers, dealers, or traders that elect to apply a
mark-to-market accounting method; (c) U.S. Holders that have a functional
currency other than the U.S. dollar; (d) U.S. Holders that are liable for the
alternative minimum tax under the Code; (e) U.S. Holders that own our common shares
as part of a straddle, hedging transaction, conversion transaction, constructive sale, or
other arrangement involving more than one position; (f) U.S. Holders that acquired
our common shares in connection with the exercise of employee stock options or otherwise
as compensation for services; (g) partners of partnerships that hold common shares or
owners of other entities classified as partnerships or pass-through entities
for U.S. federal income tax purposes that hold common shares; or (h) U.S. Holders
that hold our common shares other than as a capital asset within the meaning of
Section 1221 of the Code. U.S. Holders that are subject to special provisions under
the Code, including U.S. Holders described immediately above, should consult their own
financial advisor, legal counsel or accountant regarding the U.S. federal, state and local
and foreign tax consequences of the acquisition, ownership and disposition of our common
shares.


Tax Consequences Other
than U.S. Federal Income Tax Consequences Not Addressed


This
summary does not address the U.S. state and local or foreign tax consequences to U.S.
Holders of the acquisition, ownership and disposition of our common shares.  Each U.S.
Holder should consult its own financial



42
advisor, legal counsel, or
accountant regarding the U.S. state and local and foreign tax consequences of the
acquisition, ownership, and disposition of our common shares.  See TaxationCanadian
Federal Income Tax Consequences above.



Treaty Application to
Certain Individual U.S. Holders


An
individual U.S. Holder who does not maintain a substantial presence, permanent home or
habitual abode in the U.S., or whose personal and economic relations are not closer to
the U.S. than to any other country, other than Canada, may be unable to benefit from the
provisions of the Canada-U.S. Tax Convention.  An individual U.S. Holder described
immediately above should consult its own financial advisor, legal counsel or accountant
regarding the availability of benefits under the Canada-U.S. Tax Convention.



U.S. Federal Income Tax
Consequences of the Acquisition, Ownership, and Disposition of common shares


Distributions on
Common Shares


General
Taxation of DistributionsA
U.S. Holder that receives a distribution, including a constructive distribution, with
respect to our common shares will be required to include the amount of such distribution
in gross income as a dividend, without reduction for any Canadian income tax withheld from
such distribution, to the extent of our current or accumulated earnings and
profits. To the extent that a distribution exceeds our current and accumulated
earnings and profits, such distribution will be treated (a) first, as a
tax-free return of capital to the extent of a U.S. Holders tax basis in our common
shares and, (b) thereafter, as gain from the sale or exchange of such common shares.
For a more detailed discussion, see Disposition of Common Shares below.


Reduced
Tax Rates for Certain DividendsFor
taxable years beginning after December 31, 2002 and before January 1, 2009, any dividend
we pay generally will be taxed at the preferential tax rates applicable to long-term
capital gains if (a) we are deemed to be a qualified foreign corporation,
as defined below; (b) the U.S. Holder receiving such dividend is an individual,
estate or trust; and (c) such dividend is paid on common shares that have been held
by such U.S. Holder for at least 61 days during the 121-day period beginning 60 days
before the ex-dividend date, meaning the first date that a purchaser of such
common shares will not be entitled to receive such dividend.


We
generally will be a qualified foreign corporation under Section 1(h)(11)
of the Code, referred to below as QFC, if (a) we are incorporated in a
possession of the U.S., (b) we are eligible for the benefits of the Canada-U.S. Tax
Convention, or (c) our common shares are readily tradable on an established
securities market in the U.S. However, even if we satisfy one or more of such
requirements, we will not be treated as a QFC if we qualify as a foreign personal
holding company, a foreign investment company or a passive foreign
investment company, as defined below, for the taxable year during which we pay a
dividend or for the preceding taxable year.


As
discussed below, we believe that we are not a foreign personal holding
company, a foreign investment company, or a passive foreign
investment company (See more detailed discussion at Additional Rules that May
Apply to U.S. Holders below). Accordingly, we believe that we should be a QFC. There
can be no assurance, however, that the IRS will not challenge our determination concerning
our QFC status or that we will be a QFC for the current or any future taxable year. If we
are not a QFC, any dividend we pay to a U.S. Holder, including a U.S. Holder that is an
individual, estate or trust, generally will be taxed at ordinary income tax rates and not
at the preferential tax rates applicable to long-term capital gains. The dividend rules
are complex and each U.S. Holder should consult its own financial advisor, legal counsel
or accountant regarding the dividend rules.


Distributions
Paid in Foreign CurrencyThe
amount of a distribution paid to a U.S. Holder in foreign currency generally will be
equal to the U.S. dollar value of such distribution based on the exchange rate applicable
on the date of receipt. A U.S. Holder that does not convert foreign currency received as
a distribution into U.S. dollars on the date of receipt generally will have a tax
basis in such foreign currency equal to the U.S. dollar value of such foreign currency on
the date of


43
receipt. Such a U.S. Holder generally will recognize ordinary income or loss
on the subsequent sale or other taxable disposition of such foreign currency, including
an exchange for U.S. dollars.


Dividends
Received DeductionDividends
paid on our common shares generally will not be eligible for the dividends received
deduction. The availability of the dividends received deduction is subject to
complex limitations that are beyond the scope of this discussion, and a U.S. Holder that
is a corporation should consult its own financial advisor, legal counsel or accountant
regarding the dividends received deduction.


Disposition of Common
Shares


A
U.S. Holder will recognize gain or loss on the sale or other taxable disposition of our
common shares in an amount equal to the difference, if any, between (a) the amount of
cash plus the fair market value of any property received and (b) such U.S.
Holders tax basis in our common shares sold or otherwise disposed. Any such gain or
loss generally will be capital gain or loss, which will be long-term capital gain or loss
if the common shares are held for more than one year. Gain or loss recognized by a U.S.
Holder on the sale or other taxable disposition of our common shares generally will be
treated as U.S. source for purposes of the foreign tax credit rules. For a
more detailed discussion, see Foreign Tax Credit below.


Preferential
tax rates apply to long-term capital gains of a U.S. Holder that is an individual, estate
or trust. There currently are no preferential tax rates for long-term capital gains of a
U.S. Holder that is a corporation. Deductions for capital losses and net capital losses
are subject to complex limitations. For a U.S. Holder that is an individual, estate or
trust, capital losses may be used to offset capital gains and up to U.S.$3,000 of ordinary
income. An unused capital loss of a U.S. Holder that is an individual, estate or trust
generally may be carried forward to subsequent taxable years, until such net capital loss
is exhausted. For a U.S. Holder that is a corporation, capital losses may be used to
offset capital gains, and an unused capital loss generally may be carried back three years
and carried forward five years from the year in which such net capital loss is recognized.


Foreign Tax Credit


A
U.S. Holder who pays Canadian income tax, directly or through withholding, with respect to
dividends paid on our common shares generally will be entitled, at the election of such
U.S. Holder, to receive either a deduction or a credit for such Canadian income tax paid.
Generally, a credit will reduce a U.S. Holders U.S. federal income tax liability on
a dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holders income
subject to U.S. federal income tax. This election is made on a year-by-year basis and
applies to all foreign taxes paid, whether directly or through withholding, by a U.S.
Holder during a year.


Complex
limitations apply to the foreign tax credit, including the general limitation that the
credit cannot exceed the proportionate share of a U.S. Holders U.S. federal income
tax liability that such U.S. Holders foreign source taxable income bears
to such U.S. Holders worldwide taxable income. In applying this limitation, a U.S.
Holders various items of income and deduction must be classified, under complex
rules, as either foreign source or U.S. source. In addition, this
limitation is calculated separately with respect to specific categories of income,
including passive income, high withholding tax interest,
financial services income, shipping income, and certain other
categories of income. Dividends paid by us generally will constitute foreign
source income and generally will be classified as passive income or, in
the case of certain U.S. Holders, financial services income. In addition, a
U.S. Holder that is a corporation and that owns 10% or more of our voting stock may,
subject to complex limitations, be entitled to an indirect foreign tax credit
under Section 902 of the Code with respect to dividends paid by us. The foreign tax
credit rules are complex, and each U.S. Holder should consult its own financial advisor,
legal counsel or accountant regarding the foreign tax credit rules.


Information Reporting;
Backup Withholding Tax


Payments
made within the U.S. of dividends on, and proceeds arising from certain sales or other
taxable dispositions of, common shares generally will be subject to information reporting
and backup withholding tax, at the rate of 28%, if a U.S. Holder (a) fails to
furnish such U.S. Holders correct U.S. taxpayer identification number, generally on
Form W-9, (b) furnishes an incorrect U.S. taxpayer identification number, (c) is
notified by the IRS that


44
such U.S. Holder has previously
failed to properly report items subject to backup withholding tax or (d) fails to
certify, under penalty of perjury, that such U.S. Holder has furnished its correct U.S.
taxpayer identification number and that the IRS has not notified such U.S. Holder that it
is subject to backup withholding tax. However, U.S. Holders that are corporations
generally are excluded from these information reporting and backup withholding tax rules.
Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a
credit against a U.S. Holders U.S. federal income tax liability, if any, or will be
refunded, if such U.S. Holder furnishes required information to the IRS. Each U.S. Holder
should consult its own financial advisor, legal counsel or accountant regarding the
information reporting and backup withholding tax rules.


Additional
Rules that May Apply to U.S. Holders


If
we are deemed to be a foreign personal holding company, a foreign
investment company, a controlled foreign corporation or a passive
foreign investment company (each as defined below), the preceding sections of this
summary may not describe the U.S. federal income tax consequences to U.S. Holders of the
acquisition, ownership and disposition of our common shares.


Foreign Personal
Holding Company


We
generally will be a foreign personal holding company under Section 552 of
the Code, referred to below as an FPHC, if: (a) at any time during a
taxable year, more than 50% of the total voting power or the total value of our
outstanding shares is owned, directly or indirectly, by five or fewer individuals who are
citizens or residents of the U.S. and (b) 60%, or 50% in certain cases, or more of
our gross income for such taxable year is FPHC income. FPHC income includes,
for example, dividends, interest, certain rents and royalties, certain gains from the sale
of stock and securities and certain gains from commodities transactions.


If
we are deemed to be a FPHC, a U.S. Holder generally will be required to include in gross
income of such U.S. Holders allocable portion of our undistributed foreign
personal holding company income, as defined in Section 556 of the Code. We do
not believe that we have previously been, or currently are, a FPHC. The FPHC rules are
repealed for tax years of foreign corporations beginning after December 31, 2004, and for
tax years of U.S. Holders with or within which such tax years of foreign corporations end.


Foreign Investment
Company


We
generally will not be deemed a foreign investment company under
Section 1246 of the Code, referred to below as an FIC if: (a) 50% or
more of the total voting power or the total value of our outstanding shares is owned,
directly or indirectly, by citizens or residents of the U.S., domestic partnerships,
domestic corporations, domestic estates, or domestic trusts (each as defined in
Section 7701(a)(30) of the Code) and (b) we are (i) registered under the
U.S. Investment Company Act of 1940, as amended, as a management company or a
unit investment trust or (ii) engaged primarily in the business of
investing, reinvesting or trading in securities, commodities or any interest in securities
or commodities.


If
we are determined to be a FIC, all or part of any gain recognized by a U.S. Holder on the
sale or other taxable disposition of common shares will be treated as ordinary income,
rather than as capital gain. We do not believe that we have previously been, or currently
are, a FIC. The FIC rules are repealed for tax years of foreign corporations beginning
after December 31, 2004, and for tax years of U.S. Holders with or within which such tax
years of foreign corporations end.


Controlled Foreign
Corporation


We
generally will be a controlled foreign corporation under Section 957 of
the Code, referred to below as a CFC, if more than 50% of the total voting
power or the total value of our outstanding shares is owned, directly or indirectly, by
citizens or residents of the U.S., domestic partnerships, domestic corporations, domestic
estates or domestic trusts, (each as defined in Section 7701(a)(30) of the Code),
each of which own, directly or indirectly, 10% or more of the total voting power of our
outstanding shares, referred to below as a 10% Shareholder.


If
we are deemed to be a CFC, a 10% Shareholder generally will be subject to current
U.S. federal income tax with respect to (a) such 10% Shareholders pro rata
share of our subpart F income (as defined in Section 952


45
of the Code) and (b) such 10% Shareholders
pro rata share of our earnings invested in United States property (as defined
in Section 956 of the Code). In addition, under Section 1248 of the Code, any
gain recognized on the sale or other taxable disposition of common shares by a U.S.
Holder that was a 10% Shareholder at any time during the five-year period ending
with such sale or other taxable disposition generally will be treated as a dividend to
the extent of our earnings and profits that are attributable to such common
shares. If we are deemed to be both a CFC and a passive foreign investment company, as
defined below, we generally will be treated as a CFC, and not as a passive foreign
investment company,with respect to any 10% Shareholder.


We
do not believe that we have previously been, or currently are, a CFC. However, there can
be no assurance that we will not be a CFC for the current or any future taxable year.


Passive Foreign
Investment Company


We
generally will be a passive foreign investment company under Section 1297
of the Code, referred to below as a PFIC, if, for a taxable year (a) 75%
or more of our gross income for such taxable year is passive income or (b) 50% or
more of the assets held by us either produce passive income or are held for the production
of passive income, based on the fair market value of such assets. Passive
income includes, for example, dividends, interest, certain rents and royalties,
certain gains from the sale of stock and securities, and certain gains from commodities
transactions.


For
purposes of the PFIC income test and assets test described above, if we own, directly or
indirectly, 25% or more of the total value of the outstanding shares of another foreign
corporation, we will be treated as if we (a) held a proportionate share of the assets
of such other foreign corporation and (b) received directly a proportionate share of
the income of such other foreign corporation. In addition, for purposes of the PFIC income
test and asset test described above, passive income does not include any
interest, dividends, rents or royalties that are received or accrued by us from a
related person, as defined in Section 954(d)(3) of the Code, to the
extent such items are properly allocable to the income of such related person that is not
passive income.


If
we are a PFIC, the U.S. federal income tax consequences to a U.S. Holder of the
acquisition, ownership and disposition of our common shares will depend on whether such
U.S. Holder makes an election to treat us as a qualified electing fund or
QEF under Section 1295 of the Code, referred to below as a QEF
Election or a mark-to-market election under Section 1296 of the Code, referred
to below as a Mark-to-Market Election. A U.S. Holder that does not make either
a QEF Election or a Mark-to-Market Election will be referred to in this summary as a
Non-Electing U.S. Holder.


Under
Section 1291 of the Code, any gain recognized on the sale or other taxable
disposition of our common shares, and any excess distribution, as defined in
Section 1291(b) of the Code paid on our common shares, must be ratably allocated to
each day in a Non-Electing U.S. Holders holding period for our common shares. The
amount of any such gain or excess distribution allocated to prior years of such
Non-Electing U.S. Holders holding period for our common shares generally will be
subject to U.S. federal income tax at the highest tax applicable to ordinary income in
each such prior year. A Non-Electing U.S. Holder will be required to pay interest on the
resulting tax liability for each such prior year, calculated as if such tax liability had
been due in each such prior year.


A
U.S. Holder that makes a QEF Election generally will not be subject to the rules of
Section 1291 of the Code discussed above. However, a U.S. Holder that makes a QEF
Election generally will be subject to U.S. federal income tax on such U.S. Holders
pro rata share of (a) our net capital gain, which will be taxed as long-term
capital gain to such U.S. Holder, and (b) and our ordinary earnings, which
will be taxed as ordinary income to such U.S. Holder.  A U.S. Holder that makes a QEF
Election will be subject to U.S. federal income tax on such amounts for each taxable year
in which we are a PFIC, regardless of whether we actually distribute such amounts to such
U.S. Holder.



A
U.S. Holder that makes a Mark-to-Market Election generally will not be subject to the
rules of Section 1291 of the Code discussed above. A U.S. Holder may make a
Mark-to-Market Election only if the common shares are marketable stock, as
defined in Section 1296(e) of the Code. A U.S. Holder that makes a Mark-to-Market
Election will include in gross income, for each taxable year in which we are a PFIC, an
amount equal to the excess, if any, of (a) the fair market value of our common
shares as of the close of such taxable year


46
over (b) such U.S. Holders
tax basis in such common shares. A U.S. Holder that makes a Mark-to-Market Election will,
subject to certain limitations, be allowed a deduction in an amount equal to the excess,
if any, of (a) such U.S. Holders adjusted tax basis in our common shares over
(b) the fair market value of such common shares as of the close of such taxable
year.


We
do not believe that we were a PFIC for the taxable year ended June 30, 2005. There can be
no assurance, however, that the IRS will not challenge our determination concerning our
PFIC status or that we will not be a PFIC for the current or any future taxable year.


The
PFIC rules are complex, and each U.S. Holder should consult its own financial advisor,
legal counsel, or accountant regarding the PFIC rules and how the PFIC rules may affect
the U.S. federal income tax consequences of the acquisition, ownership and disposition of
our common shares.




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 Unit
101, 3820 Jacombs Road, Richmond, British Columbia, V6V 1Y6 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.


WE
ARE REQUIRED TO FILE REPORTS AND OTHER INFORMATION WITH THE SEC UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. REPORTS AND OTHER INFORMATION WE FILED WITH THE SEC MAY
BE INSPECTED AND COPIED AT THE SECS PUBLIC REFERENCE FACILITIES DESCRIBED ABOVE. AS
A FOREIGN PRIVATE ISSUER, WE ARE EXEMPT FROM THE RULES UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED PRESCRIBING THE FURNISHING AND CONTENT OF PROXY STATEMENTS AND OUR
OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS ARE EXEMPT FROM THE REPORTING AND
SHORT-SWING PROFIT RECOVERY PROVISIONS CONTAINED IN SECTION 16 OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS A
FOREIGN PRIVATE ISSUER, WE ARE NOT REQUIRED TO PUBLISH FINANCIAL STATEMENTS AS FREQUENTLY
OR AS PROMPTLY AS UNITED STATES COMPANIES.




10.I
Subsidiary information


Not applicable.




Item 11 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.


47
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.




Item 14     Material
modifications to the rights of security holders and use of proceeds


Not applicable.




Item 15 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.


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.


48
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 & Exchange Commission on December 17, 2005. 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
have been no waivers to the Code of Ethics in the fiscal year ended June 30, 2005.




16.C Principal
Accountant Fees and Services


Amisano
Hanson, Chartered Accountants, was our external auditor for the financial year ending June
30, 2005 and 2004 after being appointed on July 7, 2004. Wolrige Mahon, Chartered
Accountants, was our external auditor for the fiscal year ended June 30, 2003.


The
following table charts the external auditors fees for each of the financial years
ending June 30, 2005 and June 30, 2004 by category:




Years
      ended June 30
    Total
      (1)2005
    2004Audit
      Fees:
    Cdn$29,755
    Cdn$20,000
    Cdn$49,755Audit
      Related Fees (2)
    Nil
    Nil
    NilTax
      Fees (3)
    Cdn$795
    Nil
    Cdn$795All
      Other Fees (4)
    Nil
    Nil
    NilTotal
    Cdn$30,550
    Cdn$20,000
    $50,550(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


49
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 minimusexception before the
completion of the engagement.  In the fiscal year ended June 30, 2005, 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.


PART III




Item 17    Financial
Statements


Reference
is made to pages F-1 through F-18.



The
Report and Consolidated Financial Statements for the years ended June 30, 2005 and June
30, 2004 are reported by Amisano Hanson, Chartered Accountants and the 2003 Report and
Consolidated Financial Statements for the year ended June 30, 2003 are reported on by
Wolrige Mahon, 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, 2005.



The
following financial Statements and related Notes are included in this Item:




Description
    PageNumberReport
      of Independent Registered Public Accounting Firm
    F-2Comments
      from Auditor for U.S. Readers of Canada-U.S. Reporting Differences
    F-2Consolidated
      Balance Sheets as at June 30, 2005 and 2004
    F-3Consolidated
      Statements of Operations and Deficit for the Years
    F-4Ended
      June 30, 2005, 2004 and 2003Consolidated
      Statements of Cash Flows for the Years Ended
    F-5June
      30, 2005, 2004 and 2003Consolidated
      Statement of Stockholders Deficiency for the Period
    F-6July
      1, 2002 to June 30, 2005Notes to
      the Consolidated Financial Statements June 30, 2005
    F-750
Item
18 Financial Statements


We have elected to provide financial
statements pursuant to Item 17.




Item
19 Exhibits




Exhibit
      Number
    
    Description*1.1
    
    Memorandum
      and Articles of Incorporation of the Company dated July 4, 1978*1.2
    
    Certificate
      for Jewel Resources Inc. changing name to Wkay Resources Inc. dated December
      22, 1987*1.3
    
    Certificate
      for Wkay Resources Inc. changing name to Magnatron International Corp. dated
      October 18, 1990*1.4
    
    Certificate
      for Magnatron International Corp. changing name to Q I Technologies Corp.
      dated March 17, 1994*1.5
    
    Form 21
      Special Resolutions filed December 22, 1987 with the British Columbia Registrar
      of Companies altering our authorized capital by consolidating every 2.5
      common shares before consolidation into one consolidated common share; changing
      the name of the Company*1.6
    
    Form 21
      Special Resolutions filed October 18, 1990 with the British Columbia Registrar
      of Companies to cancel and replace the Articles of the Company.*1.7
    
    Form 21
      Special Resolutions filed March 17, 1994 with the British Columbia Registrar
      of Companies altering our authorized capital by consolidating every 5 common
      shares before consolidation into one consolidated common share; changing
      the name of the Company*1.8
    
    Directors
      Resolutions filed May 7, 1996 with the British Columbia Registrar of Companies,
      amending our share capital.*1.9
    
    Form 19
      Special Resolutions filed November 1, 1999 with the British Columbia Registrar
      of Companies altering our authorized capital by subdividing each one common
      share into two common shares and increasing the authorized capital of the
      Company to*4.1
    
    Technology
      Acquisition Agreement dated March 14, 1995 between Robert Angus, Richard
      Murray and James D. Roberts and QI Technologies Corp.*4.2
    
    Escrow
      Agreement dated March 14, 1995 among Montreal Trust Company of Canada, QI
      Technologies Corp., Richard H. Murray, Robert Angus, James D. Roberts, Doug
      Brazier and J. Michael Page.Pooling Agreement dated April 15, 1995 among
      James D. Roberts,*4.4
    
    Allotted
      Shares Agreement dated August 16, 1995 among QI Technologies Corp. and Robert
      Angus, Richard Murray and James D. Roberts.*4.5
    
    Settlement
      Agreement dated March 31, 1999 among James D. Roberts, Robert M. Angus,
      Richard H. Murray, Brenda N. Angus, QI Technologies Corp., Equus Technologies
      Inc., Douglas C. Brazier, and J. Michael Page.*4.6
    
    Voluntary
      Pooling Agreement dated March 31, 1999 between Pacific Corporate Trust Company,
      QI Technologies corp. and James D. Roberts, Richard H. Murray, Robert M.
      Angus and Brenda N. Angus.*4.7
    
    Consulting
      Agreement dated July 1, 1995 between QI Technologies Corp. and James D.
      Roberts.*4.8
    
    Amendment
      to Consulting Agreement dated January 1, 1997 between QI Technologies Corp.
      and James D. Roberts.*4.9
    
    Management
      Services Agreement dated July 1, 1996 between QI Technologies Corp. and
      Douglas C. Brazier.*4.10
    
    Amendment
      to Management Services Agreement dated January 1, 1997 between QI Technologies
      Corp. and Douglas C. Brazier.*4.11
    
    QI Technologies
      Corp. Stock Option Plan.*4.12
    
    Form of
      Stock Option Agreement*4.13
    
    Employment
      Agreement dated April 20, 2000 between QI Technologies Corp. and Craig Jones.*4.14
    
    GPT License
      Agreement dated March 23, 1998.**4.15
    
    Purchase
      order dated October 31, 2000 related to slimline design purchase of 250
      cash card reader systems**4.16
    
    Confidentiality
      agreement dated February 7, 1997 between QI Technologies Corp. and GPT Phone
      Systems**4.17
    
    Non-disclosure
      agreement dated June 8, 1999 between QI Technologies Corp. and Diebold,
      Incorporated**4.18
    
    Mutual
      confidentiality agreement dated February 7, 1997 between QI Technologies
      and Maytag appliances*****4.2651
**4.19
    
    Mutual
      non disclosure agreement dated September 9, 1997 between QI Technologies
      and Mondex USA Services Limited Liability Company**4.20
    
    Visa Master
      confidentiality agreement dated November 10, 1998***4.21
    
    Termination
      Agreement dated April 28, 2000 between QI Technologies Corp. and Richard
      H. Murray.***4.22
    
    Employment
      Agreement dated May 1, 2002 between QI Technologies Corp. and Mesbah Taherzadeh.***4.23
    
    Private
      Placement Subscription Agreement dated September 10, 2002 between QI Systems
      Inc. and Billy Gene Parker Jr.*****4.24
    
    Memorandum
      of Understanding dated May 26, 2005 between Richard H. Murray, QI Systems
      Inc. and Matthew Yugovich*****4.25
    
    Advertising
      and Promotional Service Agreement dated March 25, 2005 between QI Systems
      Inc. and Hobson, Lorenze, Bowersock and Associates*****4.26
    
    Employment
      Agreement between QI Systems Inc. and QI Systems International, Inc. and
      Steven R. Garman dated December 21, 2005*****8.1
    
    List of
      subsidiaries12.1
    
    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
      Officer13.2
    
    Section
      906 of the Sarbanes-Oxley Act of 2002 Certification of Principal Financial
      Officer****16
      B
    
    Code
      of Ethics*
    
    Previously
      filed on Form 20-F filed on September 29, 2000 (SEC File No. 000-30948).**
    
    Previously
      filed on Form 20-F/A Amendment No. 1 filed on or about January 15, 2002.***
    
    Previously
      filed on Form 20-F filed on January 31, 2002****
    
    Previously
      filed on Form 20-F filed on December 17, 2004*****
    
    Previously
      filed on Form S-F filed on December 22, 200552
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.


Date: December 30, 2005 
      Executed at Colleyville, Texas,
      USA
    
    QI SYSTEMS
      INC.
      
      Registrant 
              Steven R. Garman
              
      By:  Steven R. Garman, PresidentINDEX TO FINANCIAL STATEMENTS(Expressed in US Dollars)QI SYSTEMS INC.
    
    PageReport of Independent Registered Public Accounting Firm
    
    F-2Comments from Auditor for U.S. Readers of Canada-U.S. Reporting Differences
    
    F-2Consolidated Balance Sheets as at June 30, 2005 and 2004
    
    F-3Consolidated Statements of Operations and Deficit for the YearsEnded June 30, 2005, 2004 and 2003
    
    F-4Consolidated Statements of Cash Flows for the YearsEnded June 30, 2005, 2004 and 2003
    
    F-5Consolidated Statements of Stockholders Deficiencyfor the Period July 1, 2002 to June 30, 2005
    
    F-6Notes to the Consolidated Financial Statements June 30, 2005
    
    F-7F-1REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the ShareholdersQI Systems Inc.
We have audited the consolidated balance sheets of QI Systems Inc. as at June 30, 2005 and 2004 and
the consolidated statements of operations and deficit, cash flows and stockholders deficiency
for the years then ended. 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, 2005 and 2004 and the results of its operations
and its cash flows for the years then ended in accordance with Canadian generally accepted accounting
principles.
The consolidated financial statements for the year ended June 30, 2003 were audited by other auditors
who expressed an opinion without reservation on those statements in their report dated October 6,
2003.Vancouver, Canada
    AMISANO HANSONOctober 7, 2005, except as to Notes 7 and 12,
which are as of October 27, 2005
    Chartered AccountantsCOMMENTS BY AUDITOR FOR US READERS ON CANADA-US REPORTING DIFFERENCESIn the United States, reporting standards for auditors require the addition of an explanatory paragraph
(following the opinion paragraph) when the financial statements are affected by conditions and events
that cast substantial doubt on the Companys ability to continue as a going concern. As discussed
in Note 1 to the consolidated financial statements, the Company designs and sells readers for use
in cash payment systems and has a working capital deficiency, incurred substantial losses from operations
and has not achieved positive cash flow, which raises substantial doubt about the Companys
ability to continue as a going concern. The accompanying consolidated financial statements do not
include any adjustment that might result from the outcome of this uncertainty.
Our report to the shareholders dated September 10, 2004 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October 7, 2005, except as to Notes 7 and 12,
      which are as of October 27, 2005
    Chartered Accountants750 WEST PENDER STREET, SUITE 604
    TELEPHONE:
    604-689-0188VANCOUVER CANADA
    FACSIMILE:
    604-689-9773V6C 2T7
    E-MAIL:
    amishan@telus.netF-2QI SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
As at June 30, 2005 and 2004(Expressed in US Dollars)2005
      $
    
    2004
      $AssetsCurrentCash
    
    59,950
    
    
    12,158Receivables
    
    40,784
    
    
    30,878Share subscriptions receivable  Note 7
    
    6,635
    
    
    87,300Prepaid expenses  Note 7
    
    410,545
    
    
    1,550Inventory  Note 4
    
    192,237
    
    
    218,589710,151
    
    
    350,475Equipment  Note 5
    
    9,106
    
    
    12,481719,257
    
    
    362,956LiabilitiesCurrentPayables and accruals  Notes 6, 7, 11 and 12
    
    808,094
    
    
    515,168Shareholder loans  Note 6
    
    21,392
    
    
    17,125Deposits received
    
    16,578
    
    
    16,279846,064
    
    
    548,572Shareholders Deficiency
    
    11,225,477
    
    
    10,820,977Share capital  Notes 7 and 12Share capital subscribed  Notes 7 and 12
    
    692,333
    
    
    87,300Contributed surplus  Note 7
    
    260,318
    
    
    203,169Deficit
    
    (12,218,019
    )
    
    (11,235,840
    )Cumulative translation adjustment
    
    (86,916
    )
    
    (61,222
    )(126,807
    )
    
    (185,616
    )719,257
    
    
    362,956Nature and Continuance of Operations  Note 1Commitments and Contingencies  Notes 7, 11 and 12Subsequent Events  Notes 7, 11 and 12Approved by the Directors:Steve Garman
    
    Matthew Yugovich________________________________, Director
    
    ________________________________, DirectorF-3QI SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
For the Years Ended June 30, 2005, 2004 and 2003(Expressed in US Dollars)2005
      $
    
    2004
      $
    
    2003
      $Revenue
    
    390,111
    
    
    383,722
    
    
    325,422Cost of goods sold
    
    216,652
    
    
    75,320
    
    
    84,742173,459
    
    
    308,402
    
    
    240,680ExpensesAdministration  Note 6
    
    406,154
    
    
    419,060
    
    
    305,404Amortization
    
    3,375
    
    
    4,697
    
    
    5,974Bad debt (recovery)
    
    (131
    )
    
    13,887
    
    
    5,000Corporate finance
    
    
    
    
    116,166
    
    
    Development costs  Note 6
    
    269,997
    
    
    284,190
    
    
    341,154Financing costs and interest  Notes 6 and 7
    
    112,468
    
    
    5,554
    
    
    38,757Investor relations  Notes 6 and 7
    
    42,313
    
    
    240,606
    
    
    4,414Marketing
    
    221,683
    
    
    207,782
    
    
    171,911Professional fees
    
    65,102
    
    
    59,500
    
    
    78,415Stock-based compensation  Note 7
    
    57,149
    
    
    203,169
    
    
    1,178,110
    
    
    1,554,611
    
    
    951,029Operating loss
    
    (1,004,651
    )
    
    (1,246,209
    )
    
    (710,349
    )Interest income
    
    
    
    
    
    
    
    174Gain on settlement of debt
    
    22,472
    
    
    62,314
    
    
    Net loss
    
    (982,179
    )
    
    (1,183,895
    )
    
    (710,175
    )Deficit, beginning of year
    
    (11,235,840
    )
    
    (10,051,945
    )
    
    (9,341,770
    )Deficit, end of year
    
    (12,218,019
    )
    
    (11,235,840
    )
    
    (10,051,945
    )Loss per share  basic and diluted  Note 10
    
    (0.04
    )
    
    (0.06
    )
    
    (0.04
    )F-4QI SYSTEMS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended June 30, 2005, 2004 and 2003(Expressed in US Dollars)2005
      $
    
    2004
      $
    
    2003
      $Cash Flows related to Operating ActivitiesNet loss for the year
    
    (982,179
    )
    
    (1,183,895
    )
    
    (710,175
    )Adjustments to reconcile net loss used in OperationsStock-based compensation
    
    57,149
    
    
    203,169
    
    
    Investor relations expense
    
    42,313
    
    
    
    
    
    Finance fee
    
    45,313
    
    
    
    
    
    Gain on settlement of debt
    
    (22,472
    )
    
    (62,314
    )
    
    Amortization
    
    3,375
    
    
    4,697
    
    
    5,974Changes in non-cash working capital items
    
    (856,501
    )
    
    (1,038,343
    )
    
    (704,201
    )Receivables
    
    (9,906
    )
    
    5,327
    
    
    1,555Prepaid expenses
    
    (6,675
    )
    
    7,778
    
    
    (2,981
    )Inventory
    
    26,352
    
    
    (30,255
    )
    
    (45,164
    )Payables and accruals
    
    191,540
    
    
    115,866
    
    
    252,307Deposits received
    
    299
    
    
    16,279
    
    
    (25,000
    )(654,891
    )
    
    (923,348
    )
    
    (523,484
    )Cash Flows related to Investing ActivityInvestment in capital assets
    
    
    
    
    
    
    
    (1,310
    )Cash Flows related to Financing ActivitiesProceeds from (repayment of) shareholder loans
    
    4,267
    
    
    (90,559
    )
    
    119,500Proceeds from share issuances, net of issue costs
    
    397,865
    
    
    970,450
    
    
    335,979Proceeds from share capital subscribed
    
    248,270
    
    
    
    
    
    650,402
    
    
    879,891
    
    
    455,479Effect of foreign currency translation on cash
    
    52,281
    
    
    64,465
    
    
    (23,496
    )Net increase (decrease) in cash
    
    47,792
    
    
    21,008
    
    
    (92,811
    )Cash (cash deficiency), beginning
    
    12,158
    
    
    (8,850
    )
    
    83,961Cash (cash deficiency), ending
    
    59,950
    
    
    12,158
    
    
    (8,850
    )Supplementary cash flow information:Interest received
    
    
    
    
    
    
    
    174Interest paid
    
    (909
    )
    
    (1,849
    )
    
    (6,831
    )Income taxes paid
    
    
    
    
    
    
    
    Non-cash Transactions  Note 15F-5QI SYSTEMS INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIENCY
For the Period July 1, 2002 to June 30, 2005(Expressed in US Dollars)Common Shares
    
    Share
      Capital
    Subscribed
    
    Contributed
    Surplus
    
    Accumulated
    Deficit
    
    Cumulative
      Translation
    Adjustment
    
    Stockholders
      Equity
    (Deficiency)Number
    
    AmountBalance, June 30, 2002
    12,280,168
    
    $
    7,967,877
    
    $
    
    
    $
    
    
    $
    (9,341,770
    )
    $
    (34,211
    )
    $
    (1,408,104
    )Issued for cash:Private placements
    2,131,333
    
    
    707,794
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    707,794Issued in settlement for debt:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shareholder loan
    1,000,000
    
    
    326,415
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    326,415Trade accounts payable
    770,000
    
    
    253,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    253,600Warrants transferred to share
      capital
    
    
    
    164,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    164,000Foreign currency translation
      adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,496
    )
    
    (23,496
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    (710,175
    )
    
    
    
    
    (710,175
    )Balance, June 30, 2003
    16,363,501
    
    
    9,419,686
    
    
    
    
    
    
    
    
    (10,051,945
    )
    
    (57,707
    )
    
    (689,966
    )Issued for cash pursuant to
      private placements
    4,866,120
    
    
    979,950
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    979,950Subscriptions received
    
    
    
    
    
    
    87,300
    
    
    
    
    
    
    
    
    
    
    
    87,300Exercise of warrants for cash
    20,000
    
    
    8,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,000Issued in settlement for debt
    1,176,977
    
    
    413,341
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    10,820,977
    
    
    87,300
    
    
    203,169
    
    
    (11,235,840
    )
    
    (61,222
    )
    
    (185,616
    )Issued for cash pursuant to
      private placements
    1,760,455
    
    
    387,300
    
    
    (87,300
    )
    
    
    
    
    
    
    
    
    
    
    300,000Subscriptions received
    
    
    
    
    
    
    714,363
    
    
    
    
    
    
    
    
    
    
    
    714,363Share issue costs
    
    
    
    
    
    
    (22,030
    )
    
    
    
    
    
    
    
    
    
    
    (22,030
    )Exercise of warrants for cash
    43,000
    
    
    17,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,200Stock-based compensation
    
    
    
    
    
    
    
    
    
    57,149
    
    
    
    
    
    
    
    
    57,149Foreign currency translation
      adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,694
    )
    
    (25,694
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    (982,179
    )
    
    
    
    
    (982,179
    )Balance, June 30, 2005
    24,230,053
    
    $
    11,225,477
    
    $
    692,333
    
    $
    260,318
    
    $
    (12,218,019
    )
    $
    (86,916
    )
    $
    (126,807
    )F-6QI SYSTEMS INC.
Notes to the Consolidated Financial Statements
June 30, 2005(Expressed in US Dollars)Note 1
  Nature and Continuance of OperationsQI Systems Inc. (QI or the Company) was incorporated in 1978 under the British
  Columbia Company Act. The Company manufactures, designs and sells readers that allow the use of cash
  payment systems for self-serve applications such as vending, gaming, laundromat machines, transit
  fare collection systems and newspaper vending machines.These consolidated financial statements have been prepared using Canadian generally accepted accounting
    principles applicable to a going concern. The use of such principles may not be appropriate because
    as at June 30, 2005, there was substantial doubt that the Company would be able to continue as a
    going concern.The Company has accumulated a deficit of $12,218,019 since inception, has yet to achieve profitable
  operations and has a working capital deficiency of $135,913 at June 30, 2005. The Company requires
  additional capital and revenue sources. The outcome of these matters cannot be predicted with any
  certainty at this time. The Company has historically satisfied its capital needs by issuing equity
  securities. These financial statements do not give effect to any adjustments and classification of
  assets and liabilities that would be necessary should the Company be unable to continue as a going
  concern and therefore be required to realize its assets and discharge its liabilities and commitments
  at amounts different from those reported in the financial statements.Note 2
  Significant Accounting PoliciesThese 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
    reasonable limits of materiality and within the framework of the significant accounting policies
    summarized below:Principles of ConsolidationThese consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries,
      QI Systems International Inc., incorporated under the laws of the State of Texas, and Magnatron Inc.
      (inactive), incorporated under the laws of the State of Nevada. All inter-company transactions have
      been eliminated.Amortization of EquipmentEquipment is carried at cost less accumulated amortization. Amortization is calculated using the following
  annual rates and method:Furniture and fixtures
    
    - 20% declining balanceComputer equipment
    
    - 30% declining balanceF-7In the year of acquisition amortization is provided for at one-half the annual rate.Inventories and Cost of Goods SoldThe 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 RecognitionRevenues 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.Development CostsDevelopment 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 the Canadian generally
  accepted accounting principles.Foreign Currency TranslationThe 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 TaxesThe 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.Stock-based Compensation PlansThe 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.F-8The 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.WarrantsConsideration 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 InstrumentsThe 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 accounts receivable and accounts
  payable to be settled in Canadian dollars. The Company monitors this exposure, but had no hedge positions
  at June 30, 2005 or 2004.Note 4
  Inventory2005
      $
    
    2006
      $Raw materials
    
    125,516
    
    
    163,748Finished goods
    
    66,721
    
    
    54,841192,237
    
    
    218,589Note 5
    EquipmentCost
      $
    
    2005 
      Accumulated
      Amortization
      $
    
    Net
      $
    
    Cost
      $
    
    2004 
      Accumulated
      Amortization
      $
    
    Net
      $Furniture and fixtures
    
    22,268
    
    
    19,315
    
    
    2,953
    
    
    22,268
    
    
    18,578
    
    
    3,690Computer equipment
    
    74,049
    
    
    67,896
    
    
    6,153
    
    
    74,049
    
    
    65,258
    
    
    8,79196,317
    
    
    87,211
    
    
    9,106
    
    
    96,317
    
    
    83,836
    
    
    12,481F-9Note 6
  Related Party Transactions and Balances  Notes 7 and 12During the years ended June 30, 2005, 2004 and 2003, 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 30,2005
      $
    
    2004
      $
    
    2003
      $Administration
    
    253,142
    
    
    155,867
    
    
    205,834Development costs
    
    56,610
    
    
    58,276
    
    
    Financing costs and interests
    
    45,313
    
    
    
    
    
    355,065
    
    
    214,143
    
    
    205,834As at June 30, 2005, included in payables and accruals was $372,514 (2004: $246,336) due to directors
and officers of the Company and former directors and officers of the Company relating to the above
expenses. Included in shareholders loans is $2,494 due to a director of the Company. These loans
are unsecured, non-interest bearing and have no repayment terms.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  Note 12Authorized:200,000,000 common shares with no par valueShares Issued: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.
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 toF-10November 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 $0.30 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 subsequent to June
  30, 2005 (Note 12). 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 subsequent to June
  30, 2005 (Note 12). The Company paid $10,000 in share issuance costs related to this private placement.As at June 30, 2005, the Company had a 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 subsequent to June 30, 2005.As at June 30, 2004, the Company had a share subscriptions receivable of $87,300 with respect to 396,818
  common shares issued at $0.22 per share pursuant to a private placement. This subscription was paid
  during the year ended June 30, 2005.On May 25, 2005, the Company entered into an Investors Relations agreement with an arms-length party
  which requires the Company to irrevocably issue 3,000,000 common shares of the Company, valued at
  $435,000, to the investor relations firm (IR) 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.One half of the shares issued at each date are to contain an escrow trading restriction until May 26, 2006.Pursuant to this agreement, a shareholder and an officer of the Company loaned the Company 750,000
  free trading shares which were delivered to IR prior to June 30, 2005 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 IR by a shareholder of the Company. This debt was settled by a private placement completed
  subsequent to June 30, 2005 (Note 12); and
500,000 common shares to be issued for 500,000 common shares delivered to IR by an officer of the Company.
  In addition, the Company agreed to issue a further 312,500 common shares, valued at $45,313, to this
  officer as a financing fee.F-11The Company has recorded the commitment of 3,000,000 common shares ($435,000) as a prepaid investor
  relations expense to be expensed over the term of the agreement, to May 26, 2006. In this regard,
  at June 30, 2005, the Company had expensed $42,313 as investor relation fees.Subsequent to June 30, 2005, the Company issued the remaining 750,000 shares to IR and the 812,500
  shares to the officer of the Company and also placed 1,500,000 shares in escrow, all pursuant to
  the above noted agreement.WarrantsShare purchase warrants outstanding to acquire an equal number of common shares as of June 30, 2005
are as follows:Number of
      Warrants
    
    
    Exercise
      Price
    
    Expiry
      Date1,666,665
    
    
    $ 0.20
    
    October 27, 2005869,000
    
    
    $ 0.35
    
    November 17, 20052,727,273
    
    
    $ 0.30
    
    April 1, 20061,363,636
    
    
    $ 0.30
    
    November 17, 20066,626,574Subsequent to June 30, 2005, 633,333 warrants expired unexercised.Escrow SharesIssued share capital includes 750,000 shares held in escrow subject to release at the direction of
the British Columbia Securities Commission.Stock OptionsThe 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, 2005 the total number of options approved
for issue is 2,175,000, of which no more than 1,085,000 options may be granted to insiders.F-12A summary of the status of the Companys stock option plan as of June 30, 2005 and 2004, and changes
during the years ending on those dates, is presented below:2005
    
    2004Number
      Of
      Options
    
    Weighted Average
      Exercise Price
    
    Number
      Of
      Options
    
    Weighted Average
      Exercise PriceUS$
    
    CDN$
    
    
    US$
    
    CDN$Outstanding,
      beginning of
     Year
    
    1,298,000
    
    
    0.83
    
    
    1.11
    
    
    1,507,500
    
    
    0.81
    
    
    1.25Granted
    
    879,500
    
    
    0.15
    
    
    0.18
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    (397,000
    )
    
    1.25
    
    
    1.54
    
    
    (209,500
    )
    
    1.18
    
    
    1.59Outstanding,
    end of year
    
    1,780,500
    
    
    0.43
    
    
    0.53
    
    
    1,298,000
    
    
    0.83
    
    
    1.11Options Outstanding
    
    Options 
      ExercisableNumber 
      Outstanding
      at June 30,
      2005
    
    Weighted 
      Average 
      Remaining 
      Contractual
      Life 
      (Years)
    
    Number 
      Exercisable
      at June 30,
      2005Exercise PriceUS$
    CDN$0.15
    
    0.18
    
    
    879,500
    
    
    4.51
    
    
    439,7500.50
    
    0.61
    
    
    300,000
    
    
    2.82
    
    
    300,0000.50
    
    0.61
    
    
    434,000
    
    
    2.50
    
    
    434,0001.63
    
    2.00
    
    
    167,000
    
    
    0.48
    
    
    167,0001,780,500
    
    3.36
    
    1,340,750The options expire at various dates between December 22, 2005 and December 31, 2009 and are exercisable
at amounts ranging from $0.15 to $1.63.During the years ended June 30, 2005 and 2004 the Company expensed the stock option benefit of $57,149
and $203,169 respectively, which were estimated using the Black Scholes Option Pricing Model over
the vesting term, with 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 yearsF-13Note 8
  Segmented InformationThe Company operates in one business segment: the development, manufacture and installation of unattended
  smartcard applications.Revenues by country are as follows:2005
      $
    
    2004
      $
    
    2003
      $Canada
    
    273,194
    
    
    267,970
    
    
    175,505United States
    
    116,917
    
    
    115,752
    
    
    149,317United Kingdom
    
    
    
    
    
    
    
    600390,111
    
    
    383,722
    
    
    325,422All capital assets are located in Canada.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.During the year ended June 30, 2003, three customers accounted for 48%, 24% and 11% of revenues respectively.Note 9
  Income TaxesThe Company has accumulated non-capital losses in Canada totalling $7,018,574 and non-capital losses
  in the United States totalling $154,281 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
      $2006
    
    1,025,284
    
    
    2007
    
    991,993
    
    
    2008
    
    1,248,591
    
    
    2009
    
    1,159,337
    
    
    2010
    
    842,684
    
    
    2011
    
    984,063
    
    
    2012
    
    766,622
    
    
    2025
    
    
    
    
    154,2817,018,574
    
    
    154,281In addition, the Company has incurred scientific research and experimental development expenditures
(SR&ED) of approximately $2,232,625 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 $513,622 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-142005
    
    2004Canadian federal and provincial tax rates
    
    35.62
    %
    
    35.62
    %Unites States rate
    
    15.00
    %
    
    Income tax recovery based on statutory rates:Losses carried forward
    $
    2,523,158
    
    $
    2,427,441Scientific research and experimental development
  expenditures
    
    796,922
    
    
    766,666Investment tax credit
    
    513,622
    
    
    467,850Valuation allowance for future income tax assets
    
    (3,833,702
    )
    
    (3,661,957
    )$
    
    
    $
    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 shareLoss per share is calculated using the weighted average number of common shares outstanding during
the year of 23,674,454 shares (2004: 19,445,139 shares; 2003: 16,046,378 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  Note 12Obligations under the operating lease on the office premises are:$2006
    57,6842007
    52,877110,561The Company is party to a settlement agreement, dated March 31, 1999, between various shareholders
  and directors of the Company. As a condition of this settlement, and in exchange for certain rights
  relating to the intangible assets of the Company, the Company has agreed to indemnify certain shareholders
  against potential tax liabilities and related incidental costs that may result on the transfer of
  escrow shares as determined in the settlement agreement. The amount of the potential liability is
  not determinable, and accordingly, no provision has been made in these financial statements. To date,
  no claims have been made.During the year ended June 30, 2003, a former director and officer of the Company filed a complaint
  under the Employment Standards Act for fees of $130,445 plus interest. In September 2004, the Company
  settled this claim for $100,000 payable as to $8,333 per month beginning September 15, 2004. The
  former director and officer of the Company has been granted security for the claim against accounts
  receivable and the Company accrued an adequate provision included in the payables and accruals for
  the settlement. Subsequent to June 30, 2005 the claim was paid in full and all claims against the
  Companys assets were discharged.Various other claims by suppliers and professionals for unpaid balances are pending against the Company
and, in managements opinion, these claims are unfounded and no provision has been made in the
financial statements. These claims total approximately $12,450.Note 12
  Subsequent Events  Notes 7 and 11Subsequent to June 30, 2005:F-15The Company completed a private placement of 6,820,500 units at $0.10 per unit for gross proceeds of
  $682,050. Each unit is comprised of one common share and one share purchase warrant. Each warrant
  entitles the holder to purchase one common share at $0.25 per share. The warrants expire on August
  31, 2006. In connection with this placement the Company paid $68,205 in cash and issued 150,000 common
  shares as commissions. At June 30, 2005, the Company had received $120,300 as subscriptions
  for this placement.The Company completed a private placement of 4,641,667 units at $0.15 per share for gross proceeds
  of $660,000 and a debt settlement of $36,250 to a director of the Company included in payables and
  accruals at June 30, 2005. 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, which was included in payables and accruals at June 30, 2005. At June 30, 2005,
  the company had received $150,000 as subscriptions for this placement.The Company issued 1,033,332 common shares pursuant to the exercise of share purchase warrants at $0.20
  per share for total proceeds of $206,666. The remaining 633,333 share purchase warrants exercisable
  at $0.20 per share expired unexercised.The Company entered into a premise lease agreement until December 2008 which requires monthly lease
  payments of $2,032 for a total commitment of $73,152.The Company entered into a consulting agreement for $5,000 per month to June 30, 2006 for a total commitment
  of $60,000.Note 13
  Comparative FiguresCertain comparative figures for the years ended June 30, 2004 and 2003 have been reclassified to conform
to the financial statement presentation adopted for the year ended June 30, 2005.Note 14
  Differences Between Generally Accepted Accounting Principles in Canada and the United StatesThese 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:2005
      $
    
    2004
      $Share CapitalCommon shares
    
    11,225,477
    
    
    10,820,977Additional capital  stock options
    
    1,410,984
    
    
    805,469Deferred compensation expenses
    
    
    
    
    (56,667
    )12,636,461
    
    
    11,569,779Accumulated other comprehensive loss
    
    (86,916
    )
    
    (61,222
    )Accumulated DeficitBalance, beginning of year
    
    (11,682,087
    )
    
    (10,499,235
    )Loss for the year
    
    (982,179
    )
    
    (1,183,895
    )(12,664,266
    )
    
    (11,683,130
    )(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.F-16Had the Company followed US GAAP, it would have reported consolidated statements of comprehensive loss
within the financial statements as follows:2005
      $
    
    2004
      $
    
    2003
      $Loss for the year under Canadian and
      US GAAP
    
    (982,179
    )
    
    (1,183,895
    )
    
    (710,175
    )Foreign currency translation adjustment
    
    (25,694
    )
    
    (3,515
    )
    
    (23,496
    )Comprehensive loss under US GAAP
    
    (1,007,873
    )
    
    (1,187,410
    )
    
    (733,671
    )Loss per common share  basic and dilutedCanadian GAAP
    
    (0.04
    )
    
    (0.06
    )
    
    (0.04
    )US GAAP
    
    (0.04
    )
    
    (0.06
    )
    
    (0.05
    )Had the Company followed US GAAP, it would have reported consolidated statements of cash flows within
the financial statements as follows:2005
      $
    
    2004
      $
    
    2003
      $Cash flows from operating activitiesNet loss for the year under US GAAP
    
    (982,179
    )
    
    (1,183,895
    )
    
    (710,175
    )Items not affecting cashStock-based compensation
    
    57,149
    
    
    203,169
    
    
    Investor relations expense
    
    42,313
    
    
    
    
    
    Finance fee
    
    45,313
    
    
    
    
    
    Gain on settlement of debt
    
    (22,472
    )
    
    (62,314
    )
    
    Amortization
    
    3,375
    
    
    4,697
    
    
    5,974Changes in non-cash working capitalReceivables
    
    (9,906
    )
    
    5,327
    
    
    1,555Prepaid expenses
    
    (6,675
    )
    
    7,778
    
    
    (2,981
    )Inventory
    
    26,352
    
    
    (30,255
    )
    
    (45164
    )Payable and accruals
    
    191,540
    
    
    115,866
    
    
    252,307Deposits received
    
    299
    
    
    16,279
    
    
    (25,000
    )Operating activities under US GAAP
    
    (654,891
    )
    
    (923,348
    )
    
    (523,484
    )Stock-based CompensationUnder 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.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 forF-17stock-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 IncomeUS 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 StandardsManagement 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 TransactionsInvesting and financing activities that do not have an impact on current cash flows are excluded from
the statement of cash flows.During the year ended June 30, 2005, the share capital subscribed includes $444,063 as consideration
for investor relations 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 statement of cash flows.F-18