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

_______________

FORM 10-KSB

_______________

(Mark One)

x

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

OR

 ̈

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the transition period from  to

Commission file Number: 000-30090

_______________

IMAGIS TECHNOLOGIES INC.(Exact name of small business issuer in its charter)

_______________



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

1630  1075 West Georgia Street
Vancouver, British Columbia
V6E 3C9(Address of principal executive offices, including zip code)

(604) 684-2449(Issuer's telephone number, including area code)

_______________

Securities registered under Section 12(b) of the Exchange Act: None



Securities registered under Section 12(g) of the Exchange Act: Common Shares, no par value



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



Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the issuers knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. x



The Issuers revenues for its most recent fiscal year were Cdn$1,032,970.



The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of March 15, 2005, was US$5,934,690.  The number of shares outstanding of each of the Issuers classes of equity as of March 15, 2005, was 23,653,066 common shares.



Transitional Small Business Disclosure: Yes o No x

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IMAGIS TECHNOLOGIES INC.



FORM 10-KSB



For the Year Ended December 31, 2004



INDEX



|        |                                                     |    |    | 
|------- | --------------------------------------------------- | -- | -- | 
|        |                                                     |    |    | 
|        |                                                     |    |    | 
|PART I  |                                                     |    | 5  | 
|Item 1. | Description of Business                             |    | 5  | 
|        | History of the Company                              |    | 5  | 
|        | Incorporation/Name Changes/Initial Business         |    | 5  | 
|        | Acquisition of Imagis Cascade                       |    | 6  | 
|        | History of Business of Imagis Cascade               |    | 7  | 
|        | Business of the Company                             |    | 7  | 
|        | General Overview                                    |    | 8  | 
|        | BIE                                                 |    | 8  | 
|        | Imagis Facial and Image Recognition Technologies    | 8  |   
|        | Turn-key Solutions                                  |    | 9  | 
|        | Markets                                             |    | 9  | 
|        | Competition                                         |    | 10 | 
|        | Intellectual Property Rights                        |    | 11 | 
|        | Research and Development                            |    | 11 | 
|        | Sales and Marketing                                 |    | 11 | 
|        | Sales Strategy                                      |    | 11 | 
|        | Direct Sales Force                                  |    | 12 | 
|        | Strategic Business Partnerships and Alliances       |    | 12 | 
|        | Employees                                           |    | 13 | 
|        | Financial Statements                                |    | 14 | 
|        | Risk Factors                                        |    | 14 | 
|Item 2. | Description of Property                             |    | 18 | 
|Item 3. | Legal Proceedings                                   |    | 19 | 
|Item 4. | Submission of Matters to a Vote of Security Holders | 19 |   
|        |                                                     |    |    | 
|PART II |                                                     | 20 |   

|Item 5. | Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of
    Equity |    | 
|------- | ------------------------------------------------------------------------------------------------------- | -- | 
|        | Securities                                                                                              | 20 | 
|        | Exchange Controls                                                                                       | 21 | 
|        | Recent Sales of Unregistered Securities                                                                 | 23 | 
|        | Small Business Issuer Purchases of Equity Securities                                                    | 23 | 
|Item 6. | Managements Discussion and Analysis or Plan of Operation                                               | 23 | 
|        | About Imagis                                                                                            | 23 | 
|        | Overview                                                                                                | 23 | 
|        | The Companys Business                                                                                  | 23 | 
|        | Critical Accounting Polices                                                                             | 24 | 
|        | Results of Operations for the three month period and year ended December 31, 2004 compared to           |    | 
|        | December 31, 2003:                                                                                      | 25 | 
|        | Revenues                                                                                                | 25 | 
|        | Operating Costs                                                                                         | 26 | 
|        | Administration                                                                                          | 26 | 
|        | Bad Debt Expense                                                                                        | 26 | 
|        | Interest and Amortization                                                                               | 26 | 
|        | Sales and Marketing                                                                                     | 27 | 
|        | Technology Development                                                                                  | 27 | 
|        | Technical Services                                                                                      | 27 | 
|        | Net Loss for the Period                                                                                 | 27 | 
|        | Liquidity and Capital Resources                                                                         | 28 | 
|        | Contractual Obligations                                                                                 | 30 | 
|        | Off-Balance Sheet Arrangements                                                                          | 30 | 

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|Item 7.                         | Financial Statements                                                                               | 31 | 
|------------------------------- | -------------------------------------------------------------------------------------------------- | -- | 
|Item 8.                         | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure               | 56 | 
|Item 8A.Controls and Procedures | 56                                                                                                 |   
|Item 8B.Other Information       | 56                                                                                                 |   
|                                |                                                                                                    |    | 
|Part III                        |                                                                                                    | 57 | 
|Item 9.                         | Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the |    | 
|                                | Exchange Act                                                                                       | 57 | 
|                                | Executive Officers and Directors                                                                   | 57 | 
|                                | Board of Directors                                                                                 | 59 | 
|                                | Audit Committee and Audit Committee Financial Expert                                               | 59 | 
|                                | Compensation Committee                                                                             | 59 | 
|                                | Code of Ethics                                                                                     | 59 | 
|                                | Compliance with Section 16(a) of the Exchange Act                                                  | 59 | 
|Item 10.                        | Executive Compensation                                                                             | 59 | 
|                                | Compensation of Named Executive Officers                                                           | 59 | 
|                                | Options Granted during the Year Ended December 31, 2004                                            | 60 | 
|                                | Individual Grants                                                                                  | 60 | 
|                                | Options Exercised during the Year Ended December 31, 2004                                          | 61 | 
|                                | Employment Agreements                                                                              | 61 | 
|                                | Compensation of Directors                                                                          | 61 | 
|Item 11.                        | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     | 63 | 
|Item 12.                        | Certain Relationships and Related Transactions                                                     | 65 | 
|Item 13.                        | Exhibits                                                                                           | 66 | 
|Item 14.                        | Principal Accountant Fees and Services                                                             | 67 | 
|                                |                                                                                                    |    | 
|                                |                                                                                                    |    | 
|                                |                                                                                                    |    | 

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NOTE REGARDING FORWARD-LOOKING STATEMENTS



Except for statements of historical fact, certain information contained herein constitutes forward-looking statements, within Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).  In some cases, you can identify the forward-looking statements by Imagis Technologies Inc.s (Imagis or the Company) use of the words such as may, will, should, could, expect, plan, estimate, predict, potential, continue, believe, anticipate, intend, expect, or the negative or other variations of these words, or other comparable words or phrases.  Forward-looking statements in this report include, but are not limited to, the Companys expectation that revenues will increase during 2005; the potential revenues to be generated through the Companys partnership with Centrom Limited; the sale of new products acquired through the acquisition of Briyante Software Corp. (Briyante); new contracts to be entered into the near future; the Companys future operating expense levels; and the Companys ability to achieve breakeven operations on an EBITDA basis during the first six months of 2005.



Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements of the Company to be materially different from any future results or achievements of the Company expressed or implied by such forward-looking statements.  Such factors include, but are not limited to the following: the Companys limited operating history; the Companys need for additional financing; the Companys history of losses; the Companys dependence on a small number of customers; risks involving new product development; competition; the Companys dependence on key personnel; risks involving lengthy sales cycles; dependence on marketing relationships; the Companys ability to protect its intellectual property rights; risks associated with exchange rate fluctuations; risks of software defects; risks associated with product liability; the Companys dispute with OSI Systems Inc. (OSI); risks associated with the strategic alliance with Sanyo Semiconductor Company (Sanyo) and Intacta Technologies Inc. (Intacta) related to Zixsys, Inc. (Zixsys); the potential additional disclosure requirement for trades involving the issued common shares; the difficulty of enforcing civil liabilities against the Company or its directors or officers under United States federal securities laws; the volatility of the Companys share price; risks associated with certain shareholders exercising control over certain matters; and the other risks and uncertainties described under the heading Risk Factors beginning on page 14 of this annual report.



Although the Company believes that expectations reflected in these forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, achievements or other future events.  Moreover, neither the Company nor anyone else assumes responsibility for the accuracy and completeness of these forward-looking statements.  The Company is under no duty to update any of these forward-looking statements after the date of this report.  You should not place undue reliance on these forward-looking statements.





CURRENCY AND EXCHANGE RATES



The following table sets forth, for each period presented, the exchange rates at the end of such period, the average of the exchange rates on the last day of each month during such period and the high and low exchange rates during such period for one (1) Canadian dollar expressed in terms of one (1) United States dollar:





|                   | Year Ended December 31,
|------------------ | -----------------------
|                   | 2004                   
|Period End         | 0.8310                 
|Average for Period | 0.7719                 
|High               | 0.8493                 
|Low                | 0.7158                 



Exchange rates are based upon the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York.  The noon rate of exchange on March15, 2005 as reported by the United States Federal Reserve Bank of New York for the conversion of Canadian dollars into United States dollars was Cdn$1.00 = US$0.8289.  The Issuer prepares its financial statements in Canadian Dollars.  Unless otherwise indicated in this annual report, all references herein are to Canadian Dollars.

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PART I

Item 1.  Description of Business.



Imagis develops and markets software that simplifies, accelerates, and economizes the process of connecting existing, disparate databases, enhanced as appropriate with biometric facial recognition technology. The combination of these technologies enables information owners to share data securely with external stakeholders and software systems using any combination of text or imagery. This includes searching disconnected data repositories for information about an individual using only a facial image.This allows organizations to quickly create regional information sharing networks using any combination of text or imagery.



Using industry standard Web services and XML, Imagis delivers a secure and economical approach to true, real-time application interoperability. Production deployments of the Companys core integration technology  the Briyante Integration Environment (BIE)  have demonstrated remarkable reductions in the time and risk associated with implementing and supporting integrated access to physically and technologically disparate computers. The Company believes the broad ranging applicability of BIE into a variety of vertical markets such as health care, financial services, government services and telecommunications has been clearly demonstrated by recent, successful deployments in the United States.



Imagis was formed through the 1999 acquisition of Imagis Cascade Technologies Inc. (Imagis Cascade), which itself was founded in 1990 through the merger of two firms, one of which was engaged in the processing of satellite images and the other was engaged in the development and marketing of an imaging-oriented jail admission/discharge information system.



In conjunction with the Royal Canadian Mounted Police, Imagis Cascade developed a set of law enforcement and security software solutions culminating in the CABS Computerized Arrest & Booking System. At the request of the RCMP, Imagis Cascade expanded into image and facial recognition to provide an easy and effective way to identify a suspect using only a photograph. Soon thereafter, operating as Imagis Technologies Inc., the company initiated deployment of a facial recognition-enabled regional arrest and booking data sharing network in Alameda County, (Oakland, CA) using traditional system integration approaches.



In 2003, Imagis merged its operations with Briyante, a company specializing in disparate database integration and service oriented architecture application development. Briyantes reputation was solidified by its deployment of a Web Service-based data sharing network for the King County Sheriffs Office (Seattle, WA). Imagis continues to use the Briyante brand as a name for the Companys data integration technology.



Today, Imagis offers a product suite that facilitates the rapid integration of dissimilar information systems, enabling comprehensive access to sources of critical data without compromising the originating data-owners security protocols or requiring modifications to legacy systems. This ability to access external databases amplifies the power and range of the firms recognition and digital image matching technologiestechnology that provides time- and resource-saving tools for criminal investigations, surveillance, and security.



Combined, the Companys core technologies bridge the gap between islands of disparate data, facilitating access to comprehensive information about persons of interest using any combination of text or imagery.



History of the Company



Incorporation/Name Changes/Initial Business

The Company was incorporated on March 23, 1998, as a British Columbia corporation under the name 561648 B.C. Ltd., and commenced trading on the TSX Venture Exchange (TSX Venture Exchange) which was formerly known as the Vancouver Stock Exchange, on September 29, 1998 as a Venture Capital Pool Company (VCP).  A VCP is a blind pool company formed by qualified individuals that raises funds through an initial public offering (IPO) of securities, the proceeds of which must be used primarily to investigate business opportunities for acquisition by the VCP.  As a VCP, the Companys sole business from the time of incorporation was to investigate business opportunities with a view to completing a qualifying transaction (Qualifying Transaction) under the applicable rules of the TSX Venture Exchange.  A Qualifying Transaction is a transaction whereby the VCP: (a) issues or makes issuable securities representing more than 25% of its securities that are issued and outstanding immediately prior to such issuance in consideration for the acquisition of significant assets; (b) enters into an

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arrangement, amalgamation, merger or reorganization with another issuer with significant assets, whereby the ratio of securities that are distributed to the security holders of the VCP and the other issuer results in the security holders of the other issuer acquiring control of the resulting entity; or (c) otherwise acquires significant assets, but excludes a transaction whereby, prior to completion of the Qualifying Transaction, a VCP issues for cash securities representing more than 25% of its securities that are issued and outstanding immediately prior to such issuance.   Significant assets means assets other than cash or securities of another issuer that, when acquired by the VCP, results in the VCP meeting the minimum listing requirements set by the TSX Venture Exchange for a venture company, in accordance with the applicable rules of the TSX Venture Exchange.  On July 6, 1998 the Company changed its name from 561648 B.C. Ltd. to Colloquium Capital Corp.

On February 23, 1999, the Company acquired all of the outstanding shares of Imagis Cascade, a British Columbia corporation, thereby completing a Qualifying Transaction and becoming classified as a venture company by the TSX Venture Exchange.  As a result of the acquisition, the Company changed its name from Colloquium Capital Corp. to Imagis Technologies Inc. on February 25, 1999.

Acquisition of Imagis Cascade

On February 23, 1999, the Company acquired 100% of the issued and outstanding common shares of Imagis Cascade pursuant to a Share Purchase Agreement by and among the Company, Imagis Cascade and the former shareholders of Imagis Cascade (the Former Imagis Shareholders) dated December 14, 1998 (the Imagis Acquisition).  The Company paid a purchase price of $2,632,000, plus contingent additional consideration of up to $400,000 (see discussion of contingency below) to the Former Imagis Shareholders, allocated as described below.  The Former Imagis Shareholders were Pacific Cascade Consultants Ltd. (Pacific), Sonora Logging Limited (Sonora) and 385078 B.C. Ltd. (B.C. Ltd).  Pacific, a Canadian company, is owned by FWC Holdings Ltd., an entity controlled by a prior director of the Company, and the former Chief Technology Officer of the Company.  Sonora, a private Canadian company, is controlled by the daughter of a prior director of the Company.  B.C. Ltd., a private Canadian company, has no other affiliation with the Company other than as a former shareholder of Imagis Cascade.

Under the terms of the Share Purchase Agreement, the parties thereto agreed to the following:

(a)

The Company collectively paid Pacific, Sonora and B.C. Ltd. $2,632,000, plus contingent additional consideration of up to $400,000.  The purchase price was paid to the Former Imagis Shareholders as follows:



(i)

$100,000 to Pacific, by application of the sum of $100,000 paid by the Company to Imagis Cascade on behalf of the Former Imagis Shareholders pursuant to a Confidentiality and Standstill Agreement by and among the Company, Imagis Cascade and the Former Imagis Shareholders, dated October 6, 1998, as partial payment of the purchase price (which amount has been applied);



(ii)

$1,632,000 by allotment and issue to the Former Imagis Shareholders and First Capital Invest Corp. (FCIC) (a corporation to which the Former Imagis Shareholders were indebted in connection with a $350,000 bridge loan provided to Imagis Cascade by FCIC) of 3,400,000 common shares of the Company at $0.48 per share allocated as follows:



(A)

1,764,706 common shares to Pacific,

(B)

441,176 common shares to Sonora,

(C)

294,118 common shares to B.C. Ltd. and

(D)

900,000 common shares to FCIC



The common shares were restricted securities, subject to a one (1) year hold period in the United States;



(iii)

$900,000 paid to Pacific as follows:  $150,000 paid through the subscription by Pacific on March 19, 1999 on a private placement basis for 267,857 common shares at $0.56 per share, and the balance paid on May 6, 1999; and



(iv)

up to $400,000 payable to Pacific if, as and when, certain warrants issued by the Company are exercised for net proceeds to the Company in excess of $400,000.



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(b)

In consideration for renouncing his right to acquire up to a 6% equity interest in Imagis Cascade, the Company issued a warrant to purchase 400,000 common shares at an exercise price of $1.25 per share to the Companys former President and Chief Executive Officer.



History of Business of Imagis Cascade

The Companys wholly owned subsidiary, Imagis Cascade, acquired substantially all of its current assets pursuant to two technology purchase agreements among Imagis Cascade, Pacific and B.C. Ltd. dated March 6, 1998 (the Technology Purchase Agreements).  Pursuant to the Technology Purchase Agreements, Pacific and B.C. Ltd. became the holders of all of the issued and outstanding common shares of Imagis Cascade.  Pacific received 3,000,000 common shares of Imagis Cascade and B.C. Ltd. received 400,000 common shares of Imagis Cascade.  Pacific subsequently transferred 600,000 common shares of Imagis Cascade to Sonora.

Pacific was established in 1989 by the Companys former Chief Technology Officer, and a prior director of the Company.  Pacifics core business was the engineering of complex timber harvesting systems, the management of map-based data and the development of 3D-landscape visualization technology.



The Imagis Cascade technology and the Companys initial customer base were developed originally by B.C. Ltd.  B.C. Ltd. was a software developer and reseller in the area of geographical information systems and remote sensing services for the natural resources industry.  B.C. Ltd. also developed and marketed several software systems to manage digital images and recognized the commercial opportunity for software tools that manage digital image databases.



In July 1994, Pacific entered into a strategic alliance arrangement with B.C. Ltd. and loaned B.C. Ltd. funds to provide working capital in exchange for an option to acquire shares of B.C. Ltd.  The two companies worked cooperatively on the development of several software projects.  In 1995, Pacific acquired the operations and revenues of B.C. Ltd., as well as its intellectual property, the rights to the developed products, products under development and source code.



Pursuant to the Technology Purchase Agreements, Pacific and B.C. Ltd. sold to Imagis Cascade all rights to the business that is now carried on by the Company and certain intellectual property.  Under the Technology Purchase Agreements, Pacific and B.C. Ltd. became the holders of all of the issued and outstanding shares of Imagis Cascade.  The terms of the Technology Purchase Agreements were as follows:



- Agreement between B.C. Ltd. and Imagis Cascade:  B.C. Ltd. sold its business and technology to Imagis Cascade for a purchase price of $600,000, consisting of 400,000 common shares of Imagis Cascade at a price of $1.50 per share.

- Agreement between Pacific and Imagis Cascade:  Pacific sold its business and technology to Imagis Cascade for a purchase price of $1.5 million, consisting of 3,000,000 common shares of Imagis Cascade at a price of $0.50 per share, plus a royalty equal to 5% of gross sales of the software products (the 5% Royalty).



The Technology Purchase Agreements transferred the technology associated with CABSTM, ID-Inmate, Fraud-ID, ENVISAGE, ELMS and AIREIS to Imagis Cascade, including all source code, object code, link libraries, applications, function calls, file structures, screen layouts, hardware integration routines and documentation for both current an past releases.  All relevant documentation, including manuals and brochures used in operation, manufacturing, maintenance and marketing of the products, was included.

As part of the acquisition by the Company of all the issued and outstanding shares of Imagis Cascade, Pacific agreed to cancel the 5% Royalty.

Business of the Company

The Company derives a substantial portion of its revenues, and it expects to derive a substantial portion of its revenues in the near future, from sales of its software to a limited number of customers. Additional revenues are achieved through the implementation and customization of this software as well as from the support, training, and ongoing maintenance that results from each software sale. The Companys success will depend significantly upon the timing and size of future purchase orders from its largest customers as well as on its ability to maintain relationships with its existing installed customer base.



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General Overview

Imagis Technologies Inc. develops robust and easy-to-use software technologies for information sharing and biometric identification. This includes a standards-based data integration toolkit, known as the Briyante Integration Environment, as well as proprietary software algorithms enabling facial recognition and image matching.



BIE



BIE is a paradigm-shifting approach to the problem of disparate data integration and system interoperability. Classified as middleware software, BIE consists of a development toolkit and server: the Briyante Design Studio and the Briyante Integration Server, respectively. These elements work together to enable Imagis, its business partners, and the firms clients to architect and deploy data sharing solutions quickly and easily.



While the need for information sharing and system interoperability is not new, data integration projects have historically required specialist resources to engage in laborious, proprietary, and risky point-to-point programming using low-level components and application program interfaces. In contrast, BIE enables the rapid creation, assembly, and deployment of decoupled Web Services. These Web Service componentswhen combined with common schema and the Microsoft .NET frameworkcan be snapped together into a useable solution, allowing the integrator to focus on business process flow within an application environment rather than on the lines of code or glue that creates the interoperability. The difference between glueing components and snapping services results in increased flexibility in computer system design. Furthermore, snapping services facilitates the rapid reconfiguration of the business process logic, saving significant time over previous methods.



BIE offers the following benefits:



- Allows developers to leverage new code along with pre-existing logic to build true composite applications;
- Ensures that customers and users can sidestep many of the typical challenges associated with data integration;
- Reduces the complexity of political negotiations over data sharing by enabling extremely rapid implementation of governance decisions (typically measured in hours and days);
- Allows organizations to initiate the data sharing process with agreement on relatively few data elements, proving the concept and building trust between sharing partners; and
- Iterate the delivery of the system one organization or one system at a time, allowing participants to realize political wins without exposing themselves to significant risk.



BIE ensures that each participating data sharing partner maintains full control over the data shared. The software provides a simple, control-panel interface to implement sharing permissions that reflect the organizations governance decisions. This eliminates the issue of data ownership and location, which has proven to be a central stumbling block for data warehouse-oriented implementations.



Imagis Facial and Image Recognition Technologies



The Companys biometric facial recognition technologywhich originated in the mathematics of advanced satellite image processingenables one-to-many identification searches and one-to-one verification matches. To date, the technology is most effective as an identification tool capable of distilling large databases down to a smaller gallery of possible matches.



The technology consists of a series of components packaged within a Software Development Kit (SDK). These components find faces within a digital photograph or video stream and match those images to like-looking facial images stored within a database. This functionality is also available as a native component of the Companys data sharing solutions. Qualified business partners can use the Companys Facial Recognition SDK to build custom applications and devices to meet specific customer or market needs.



The technology can also be extended to whole image matching, enabling the detection and recognition of like-looking, non-facial imagery. For example, the technology has been deployed within Imagis ChildBase software system (see below) to facilitate the matching of highly-similar child pornography photographs and video clips.

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Turn-key Solutions



Based on the aforementioned core technologies, Imagis develops software solutions for specific market needs and verticals. Each solution highlights the Companys intrinsic ability to enhance access to textual data through connections to facial and other biometric or non-biometric imagery.



The solutions include:



InForce AB (Arrest and Booking)

InForce AB represents the next advancement of the Companys highly-successful Computerized Arrest and Booking System (CABS). Users are provided with a Web-based interface allowing them to execute queries using text or imagery from any of the data sources connected using the BIE. Perhaps more importantly, the Web services-based architecture of the solution allows for its data to be interoperable and re-purposed to other database technologies and/or standards such as Global Justice XML.



ChildBase

ChildBase is an image-centric, seizure management and scene analysis application that uses advanced facial recognition and image matching to assist investigations and prosecution of seizures of child pornography.



Identity Server

The Imagis Identity Server is an off-the-shelf solution that enables facial recognition capabilities for legacy applications that store mugshot-quality imagery. Customers can use Identity Server to rapidly configure a query-only connection to the legacy image database and conduct facial/text searches of the legacy data through an intuitive, flyweight browser interface.



The Company currently has more than 200 installations of its products around the world. These include King County RAIN Information Sharing Network, (Washington), Contra Costa County (California), Charlotte-Mecklenburg Police Department (North Carolina), Alameda County (California), over fifty (50) RCMP detachments in Canada, the National Crime Squad of England and Wales (the NCS), the PRIME - BC mugshot sharing project for the Province of British Columbia, and other organizations/projects.  Based on the aforementioned core technologies, Imagis develops software solutions for specific market needs and verticals. Each solution highlights the Companys intrinsic ability to enhance access to textual data through connections to facial and other biometric or non-biometric imagery.



Markets



For the past few years, government legislation in the United States and around the world has mandated two key improvements: security and information sharing. The Company has found that the former cannot be effectively accomplished without the latter. Nevertheless, there remain a large number of information silos within and throughout government, law enforcement and security agencies, as well as with information systems in the health care and financial services sectors.



The merger with Briyante in November of 2003 brought a unique capability to Imagis and its customers. The Company can rapidly and cost-effectively deliver data integration and unified query solutionsincorporating these core capabilities with facial recognition and image matching when necessaryto address legislated market needs and priorities.



The Company believes that a particularly significant opportunity exists for it to deliver information sharing systems between state and regional law enforcement agencies. The following statistics, assembled from various third-party sources support this assertion:



- There are more than 45,000 police departments, courts, correctional institutions, national security agencies, district attorney, and prosecution offices in the United States. Of this, approximately 6,500 are large enough (more than 50 employees) where an integrated justice solution would be beneficial to their operations (http://www.ojp.usdoj.gov/bjs/welcome.html)



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- Twenty-eight percent of local police departments in 2000, and 33% of Sheriffs' offices used computers for inter-agency information sharing. This includes three-quarters of all local departments serving 250,000 or more residents, and more than half of all sheriffs' offices serving 100,000 or more residents.
    (US Department of Justice - Bureau of Justice Statistics;
    http://www.ojp.usdoj.gov/bjs/sandlle.htm)

- In 2000, 75% of local police departments and 80% of sheriffs' offices used paper reports as the primary means to transmit criminal incident field data to a central information system, down from 86% and 87% in 1997. During the same time period, use of computer and data devices for this purpose increased from 7% to 14% in local police departments and from 9% to 19% in sheriffs' offices.
    (US Department of Justice - Bureau of Justice Statistics;
    http://www.ojp.usdoj.gov/bjs/sandlle.htm)

- Middleware and biometric technologies such as facial recognition are projected to reach sales of US$200 million and US$215 million, respectively, in 2005. (International Biometrics Group  2003-2007 Biometrics Market Report)

- The Government Sector will be the leading biometric vertical market through 2007 with US$1.2 billion projected in annual revenues. The Financial Sector and the Travel and Transportation sectors follow with projected US$672 million and US$556 million, respectively, in 2007. The various scenarios in which government agencies must identify and authenticate both citizens and employees, particularly subsequent to 9/11, is a critical growth factor.
    (International Biometrics Group  2003-2007 Biometrics Market Report)



Competition



Disparate Data Integration and System Interoperability



While there is no current market leader providing XML-based middleware technology to law enforcement, several vendors have solutions that compete with the BIE. They include Templar Corporation of Alexandria, VA, Thinkstream, Inc. of Tigard, OR, Metatomix of Waltham, MS, and IBM WebSphere system integrators. Imagis also competes with existing point-to-point system integration companies and firms advocating proprietary data warehousing solutions. The Company believes that both of these approaches are falling out of favor because they are costly and inefficient.



Biometric Face Recognition and Identification



While there are several vendors that offer face recognition technology, there are really four main players in this space, of which Imagis is one. The other three category leaders are: Identix Incorporated of Minnetonka, Minnesota, Visage Technology of Littleton, Massachusetts (which recently acquired ZN Vision of Germany), and Cognitec Systems GmbH of Dresden, Germany.



Child Recovery and Identification Software



Imagis believes that it is the only vendor to combine face recognition and scene/image analysis functionality into a full suite of child identification, investigation, and recovery products. While Paris-based LTU Technologies competes with Imagis scene recognition capabilities, at present this vendor does not have any face recognition capabilities within their product. Furthermore, the Company believes that the installation at the NCS represents the worlds largest repository of child abuse imagery, and each image has been encoded using Imagis proprietary technology. The Company believes future deployments in subsequent countries will benefit from the work already performed by the NCS.



Arrest and Booking Software



There are several vendors who have commercially available products that have some similarities or overlapping functionality to Imagis CABS application. They include Printrak International (a subsidiary of Motorola), ImageWare Systems Inc., and Niche Technologies Inc.



Certain of the Companys competitors have substantially greater financial, technical, marketing and distribution resources than the Company.  As a result, they may be able to respond more quickly to new or emerging technologies and changing customer requirements, or to devote greater resources to the development and distribution of existing products.  There can be no assurance that the Company will be able to compete successfully

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against current or future competitors or alliances of such competitors, or that competitive pressures faced by the Company will not materially adversely affect its business, financial condition, operating results and cash flows.  See Risk FactorsCompetition.



Intellectual Property Rights



The Companys success will depend upon its ability to protect its intellectual property rights.  The Company relies principally on a combination of copyright, patent and trade secret laws, non-disclosure agreements and other contractual provisions to establish and maintain its proprietary rights.



As part of its confidentiality procedures, the Company generally enters into nondisclosure and confidentiality agreements with each of its key employees, consultants, and business partners and limits access to and distribution of its technology, documentation, and other proprietary information.  In particular, the Company has entered into non-disclosure agreements with each of its employees and business partners.  The terms of the employee non-disclosure agreements include provisions requiring assignment to the Company of employee inventions.  In addition, the Companys source code for its software products is maintained in a controlled environment within the technology and development group.  For security purposes, a copy of the source code is maintained in lock-boxes at banks in Vancouver and Victoria, British Columbia.  There can be no assurance that the Companys efforts to protect its intellectual property rights will be successful.  Despite the Companys efforts to protect its intellectual property rights, unauthorized third parties (including competitors) may, from time to time, copy or reverse engineer certain portions of the Companys technology and use such information to create competitive products.



While policing the unauthorized use of the Companys technology is difficult, the Company has taken steps to make it difficult for organizations to use its products without registering with the Company first.  This includes requiring its customers to obtain computer-specific and IP address-specific registration codes that limit usage based on the software licensing agreement that is in place.



The Company has registered the ChildBase product name and mark in the United Kingdom. The Company has not registered any trademarks in the Canada, the United States or elsewhere. The firm has a patent pending in the United States filed on August 8, 2003 for its unique method for using Web Services to facilitate system interoperability. Furthermore, the Company has purchased certain patents from Intacta relating to its data compression technologies. The patent purchase agreement is included in this filing as an exhibit.



Research and Development



The Companys personnel have considerable experience and expertise in the development of service-oriented application architecture using XML Web Services as well as considerable experience in advanced computer vision and imaging systems. The Companys software product development personnel employ modular software architecture, object-oriented software development and graphical user interface design technologies to develop scaleable, modular products.



As of December 31, 2004, the Companys research and development staff consisted of thirteen (13) employees, all of whom were located in the province of British Columbia.



During the fiscal years ended December 31, 2004 and December 31, 2003, the Companys total expenditures for research and development (technology development in the consolidated financial statements) were $1,037,013 and $692,754, respectively.  Management believes that timely and continuing product development is critical to the Companys success and plans to continue to allocate significant resources to product development.



Sales and Marketing

Sales Strategy



Imagis employs multiple sales and distribution channels to effectively penetrate markets including:



- Direct Sales Force (to identify and develop business partner and strategic relationships);
- Strategic Business Partnerships and Alliances; and
- Strategic Acquisitions.

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Direct Sales Force



Imagis employs business development and sales personnel whose duties include the active recruitment of new business partners. Furthermore, the sales and business development team provides assistance to existing partners in qualifying sales opportunities, conducting joint customer calls, writing proposals, and performing analysis with the end customer.



Strategic Business Partnerships and Alliances



Imagis distributes its products on a global basis through business partners. These are typically companies with products to which the Companys data integration or imaging solutions add value, and who are already established and reputable suppliers in the appropriate vertical market. Using partners to promote and sell its products extends Imagis network of direct sales people, gives the Company global visibility, and ensures the customer receives high-quality local support. Under the business partner agreements, the business partners have agreed to sell the Companys products as part of their standard product line. While they typically have designated territories, the business partners may sell the Companys products anywhere they have opportunities, including Canada, the United States, and other countries.  The Company provides training and ongoing support, through training and support programs, on product demonstration, operation, installation, and customer support to the business partners staff.  The business partners have agreed to promote the Companys products and maintain sales and support teams to handle these functions.



The Company also allows third-party vendors to integrate Imagis products with their solutions in order to market complete law enforcement and security solutions, provide implementation and customization services, provide technical support and maintenance on a continuing basis, and provide clients with software applications that can be bundled with our products to address specific industry and customer requirements.



The Companys partner strategy focuses on driving revenue by combining internal strengths, business relationships, references, and experience with those of the firms partners to create compelling business solutions for end-users.



Imagis seeks to partner with qualified firms to develop business opportunities and prefers to have partners take the lead on sales opportunities.  Imagis is also prepared and willingunder the right circumstancesto lead sales efforts directly, leveraging as sub-contractors local partners who may not be well enough positioned to close a sale.



Imagis business partnerships include Imagis Technologies UK Limited; Microsoft Corp.; HP, Inc.; Cisco Systems; Orion Systems, a division of SRA Inc.; Serco plc; SANYO Semiconductor; and Tiburon, Inc a division of Compudyne Corporation.



Strategic Acquisitions



The Company is continually evaluating potential strategic acquisition candidates. The acquisition of Briyante during 2003 is an example of such strategic acquisitions. There can be no assurance, however, that the Company will find such strategic acquisition candidates or if found that terms can be negotiated on acceptable terms to the Company.



Marketing Strategy



The Companys primary sales and marketing strategy encompasses the following:



- Imagis will engage with strong systems integrators already entrenched in their respective regions, ensuring they are trained on our software (features/functionality) while providing them the necessary tools to sell and support the end-user environment. The initial focus for the Company is on partners involved in state and local government public safety and law enforcement agencies.  The Company is also in discussions with a few partners prospects about expanding its products and services into other market verticals outside of justice and public safety.  There can be no assurance, however, that these discussions will result in agreements with such prospects where such parties on terms acceptable will agree to Imagis to use its products.
- The Company aims to get closer to technical contacts inside of each government level, including local, county, state, and federal to better understand what they need and how Imagis can provide a rapid iteration

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of data-sharing via pilot projects and/or proof of concept proposals.  If the Company can prove the ease of use, show the softwares viability and cost effectiveness, and demonstrate the real-time benefits to having access to the information, the Company may be able to shorten the sales timeline and push sales through the cycle.



- To engage with projects where the need for data-sharing has already been identified, perhaps initiated in an RFI or RFP and where the Briyante tools will encourage rapid iteration of and access to disparate data.
- To provide pilot or proof of concept strategies to encourage ownership and adoption of the technologies as part of the Companys seeing-is-believing strategy.



Imagis has identified several key marketing strategies in its efforts to realize its growth and revenue objectives. These include:

- Leveraging and building on its success in the law enforcement market by introducing new products, expanding its
    client base, and selling add-on products and services to current customers;
- Using strategic partners to expand into new markets, including financial services and healthcare; and
- Increasing global visibility by expanding its network of business partners.



Current Position



The Company believes it has made significant progress in completing the groundwork necessary to achieve its growth plans. Specifically, the following elements are in place:



- The Company has several complementary products and technologies and a global network of business partners ready to pursue opportunities as they arise.
- The Company believes that it has established its position as a leading provider of software to the law enforcement market. This includes information sharing, identification technologies, and child protection.
- The Company believes that its biometric identification technology is recognized as a market leader in face recognition and identification.
- Imagis Facial Recognition software has been successfully installed at a number of law enforcement agencies and achieved success in identifying offenders and suspects.
- The Company believes it can leverage the success of its ChildBase application and relationship with a United Kingdom national police agency to promote other child identification and law enforcement applications.
- Excellent customer references have been established, including the Royal Canadian Mounted Police, King County Sheriffs Office, Charlotte Mecklenburg Police Department, Contra Costa County, and over thirty police departments and sheriffs offices in Alameda County, California  the largest digital imaging system on the West coast.
- Imagis products are available both as complete applications and as a series of components delivered within a software development kit that can be easily integrated into other products. Ease of integration ensures that new applications can be developed quickly to adapt to changing market needs.



Employees

As of December 31, 2004, the Company had 35 employees all of which were full-time employees, consisting of thirteen (13) employees in research and development, ten (10) employees in marketing and sales, 5 (five) employees in customer support and seven (7) employees in management, finance and administration.  The Companys success will depend in large part on its ability to attract and retain skilled and experienced employees.  None of the Companys employees are covered by a collective bargaining agreement, and the Company believes that its employee relations are good.  The Company has obtained key man insurance on one of its senior software developers, in the aggregate amount of $500,000.  See Risk Factors  Dependence on Key Personnel.

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Financial Statements

The Companys financial statements are prepared in accordance with generally accepted accounting principles (GAAP) of Canada, and Note 17 to the financial statements includes a reconciliation of the Companys financial information from Canadian GAAP to U.S. GAAP and a discussion of the differences between Canadian GAAP and U.S. GAAP that affect the Company and its financial statements.

Risk Factors

The price of the Companys common shares is subject to the risks and uncertainty inherent in the Companys business.  You should consider the following factors as well as other information set forth in this Annual Report, in connection with any investment in the Companys common shares.  If any of the risks described below occurs, the Companys business, results of operations and financial condition could be adversely affected.  In such cases, the price of the Companys common shares could decline, and you could lose all or part of your investment.

Limited Operating History; History of Losses

The Company commenced operations in March 1998 and, therefore, has only a limited operating history upon which an evaluation of its business and prospects can be based. The Company incurred net losses of $5,457,937 and $4,058,857 in the years ended December 31, 2004 and December 31, 2003, respectively.  The Company has never been profitable and there can be no assurance that, in the future, the Company will be profitable on a quarterly or annual basis.

In view of the rapidly evolving nature of the Companys business and markets and limited operating history, the Company believes that period-to-period comparisons of financial results are not necessarily meaningful and should not be relied upon as an indication of future performance.

The Report of the Independent Registered Public Accounting Firm on the Companys December 31, 2004 Financial Statements includes an explanatory paragraph that indicates the financial statements are affected by conditions and events that cast substantial doubt on the Companys ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Need for Additional Financing

The Company has cash sufficient to fund its operations through April 30, 2005.  The Company has also received orders that if completed will generate cash sufficient to fund its operations through September 30, 2005. If no further sales are received, the Company will be required to seek additional financing to fund its operations during the 2005 fiscal year.  There is no assurance that the Company will be able to secure financing or that such financing will be obtained on terms favourable to the Company.  Failure to obtain adequate financing if necessary could result in significant delays in development of new products and a substantial curtailment of Imagis operations.

Potential Fluctuations in Quarterly Financial Results



The Companys financial results may vary from quarter to quarter based on factors such as the timing of significant orders and contract completions.  The Companys revenues are not predictable with any significant degree of certainty and future revenues may differ from historical patterns. If customers cancel or delay orders, it can have a material adverse impact on the Companys revenues and results of operations from quarter to quarter. Because the Companys results of operations may fluctuate from quarter to quarter, you should not assume that you could predict results of operations in future periods based on results of operations in past periods.



Even though the Companys revenues are difficult to predict, it bases its expense levels in part on future revenue projections. Many of the Companys expenses are fixed, and it cannot quickly reduce spending if revenues are lower than expected. This could result in significantly lower income or greater loss than the Company anticipates for any given period. The Company will react accordingly to minimize any such impact.



New Product Development

The Company expects that a significant portion of its future revenue will be derived from the sale of newly introduced products and from enhancement of existing products. The Companys success will depend, in part, upon its ability to enhance its current products and to install such products in end-user applications on a timely and cost-effective basis. In addition, the Company must develop new products that meet changing market conditions, including changing customer needs, new competitive product offerings and enhanced technology. There can be no assurance that the Company 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 the Company is unable to

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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, the Companys business, financial condition, operating results and cash flows could be materially adversely affected. In light of the difficulties inherent in software development, the Company expects that it will experience delays in the completion and introduction of new software products.

Lengthy Sales Cycles

The purchase of any of the Companys software systems is often an enterprise-wide decision for prospective customers and requires the Company (directly or through its business partners) to engage in sales efforts over an extended period of time and to provide a significant level of education to prospective customers regarding the use and benefits of such systems. In addition, an installation generally requires approval of a governmental body such as municipal, county or state government, which can be a time-intensive process and require months before a decision to be made. Due in part to the significant impact that the application of the Companys products has on the operations of a business and the significant commitment of capital required by such a system, potential customers tend to be cautious in making acquisition decisions. As a result, the Companys products generally have a lengthy sales cycle ranging from six (6) to twelve (12) months. Consequently, if sales forecast from a specific customer for a particular quarter are not realized in that quarter, the Company 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 the Companys financial condition, operating results and cash flows.  Moreover, to the extent that significant contracts are entered into and required to be performed earlier than expected, the Companys future operating results may be adversely affected.

Dependence on a Small Number of Customers

The Company derives a substantial portion of its revenues, and it expects to continue to derive a substantial portion of its revenues in the near future, from sales to a limited number of customers. Unless and until the Company further diversifies and expands its customer base, the Companys success will depend significantly upon the timing and size of future purchase orders, if any, from its largest customers, as well as their product requirements, financial situation, and, in particular, the successful deployment of services using the Companys products. The loss of any one or more of these customers, significant changes in their product requirements, or delays of significant orders could have a material adverse affect upon the Companys business, operating results and financial condition.

Dependence on Key Personnel

The Companys performance and future operating results are substantially dependent on the continued service and performance of its senior management and key technical and sales personnel. The Company may need to hire a number of technical and sales personnel. Competition for such personnel is intense, and there can be no assurance that the Company can retain its key technical, sales and managerial employees or that it will be able to attract or retain highly qualified technical and managerial personnel in the future.

The loss of the services of any of the Companys senior management or other key employees or the inability to attract and retain the necessary technical, sales and managerial personnel could have a material adverse effect upon its business, financial condition, operating results and cash flows. With the exception of one key software developers, the Company does not currently maintain key man insurance for any senior management or other key employees.

Dependence on Marketing Relationships

The Companys products are primarily marketed by its business partners. The Companys existing agreements with business partners are nonexclusive and may be terminated by either party without cause at any time. Such organizations are not within the control of the Company, are not obligated to purchase products from the Company and may also represent and sell competing products. There can be no assurance that the Companys existing business partners will continue to provide the level of services and technical support necessary to provide a complete solution to its customers or that they will not emphasize their own or third-party products to the detriment of the Companys products. The loss of these business partners, the failure of such parties to perform under agreements with the Company or the inability of the Company to attract and retain new business with the technical, industry and application experience required to market the Companys products successfully could have a material adverse effect on the Companys business, financial condition, operating results and cash flows.

Additionally, with respect to most sales, the Company supplies products and services to a customer through a third-party supplier acting as a project manager or systems integrator. In such circumstances, the Company has a sub-contract to supply its products and services to the customer through the prime contractor. In these circumstances, the Company is at risk that situations may arise outside of its control that could lead to a delay, cost over-run or

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cancellation of the prime contract which could also result in a delay, cost over-run or cancellation of the Companys sub-contract. The failure of a third-party supplier to supply its products and services or perform its contractual obligations to the customer in a timely manner could have a material adverse effect on the Companys financial condition, results of operations and cash flows.

Competition

The markets for the Companys products are highly competitive. Numerous factors affect the Companys competitive position, including supplier competency, product functionality, performance and reliability of technology, depth and experience in distribution and operations, ease of implementation, rapid deployment, customer service and price.

Certain of the Companys competitors have substantially greater financial, technical, marketing and distribution resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changing customer requirements, or to devote greater resources to the development and distribution of existing products. There can be no assurance that the Company will be able to compete successfully against current or future competitors or alliances of such competitors, or that competitive pressures faced by it will not materially adversely affect its business, financial condition, operating results and cash flows.  See also Item 1  Business  Competition.

Proprietary Technology

The Companys success will be dependent upon its ability to protect its intellectual property rights. The Company relies principally upon a combination of copyright, patent and trade secret laws, non-disclosure agreements and other contractual provisions to establish and maintain its rights. The source codes for the Companys products and technology are protected both as trade secrets and as unpublished copyrighted works. As part of its confidentiality procedures, the Company enters into nondisclosure and confidentiality agreements with each of its key employees, consultants, distributors, customers and corporate partners, to limit access to and distribution of its software, documentation and other proprietary information. There can be no assurance that the Companys efforts to protect its intellectual property rights will be successful. Despite the Companys efforts to protect its intellectual property rights, unauthorized third-parties, including competitors, may be able to copy or reverse engineer certain portions of the Companys software products, and use such copies to create competitive products.

Policing the unauthorized use of the Companys products is difficult, and, while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to continue. In addition, the laws of certain countries in which the Companys products are or may be licensed do not protect its products and intellectual property rights to the same extent as do the laws of Canada and the United States. As a result, sales of products by the Company in such countries may increase the likelihood that its proprietary technology is infringed upon by unauthorized third parties.

In addition, because third parties may attempt to develop similar technologies independently, the Company expects that software product developers will be increasingly subject to infringement claims as the number of products and competitors in the Companys industry segments grow and the functionality of products in different industry segments overlaps. There can be no assurance that third parties will not bring infringement claims (or claims for indemnification resulting from infringement claims) against the Company 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 the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all. A claim of product infringement against the Company and failure or inability of the Company to license the infringed or similar technology could have a material adverse effect on its business, financial condition, operating results and cash flows.

Exchange Rate Fluctuations

Because the Companys reporting currency is the Canadian dollar, its operations outside Canada face additional risks, including fluctuating currency values and exchange rates, hard currency shortages and controls on currency exchange. The Company does not currently engage in hedging activities or enter into foreign currency contracts in an attempt to reduce the Companys exposure to foreign exchange risks. In addition, to the extent the Company has operations outside Canada, it is subject to the impact of foreign currency fluctuations and exchange rate charges on the Companys reporting in its financial statements of the results from such operations outside Canada. Since such financial statements are prepared utilizing Canadian dollars as the basis for presentation, results from operations outside Canada reported in the financial statements must be restated into Canadian dollars utilizing the appropriate foreign currency exchange rate, thereby subjecting such results to the impact of currency and exchange rate fluctuations.

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Risk of Software Defects

Software products as complex as those offered by the Company frequently contain errors or defects, especially when first introduced or when new versions or enhancements are released. Despite product testing, the Company has in the past released products with defects in certain of its new versions after introduction and experienced delays or lost revenue during the period required to correct these errors. The Company regularly introduces new versions of its software. There can be no assurance that, despite testing by the Company and its customers, defects and errors will not be found in existing products or in new products, releases, versions or enhancements after commencement of commercial shipments. Any such defects and errors could result in adverse customer reactions, negative publicity regarding the Company and its products, harm to the Companys reputation, loss or delay in market acceptance or required product changes, any of which could have a material adverse effect upon its business, results of operations, financial condition and cash flows.

Product Liability

The license and support of products by the Company may entail the risk of exposure to product liability claims. A product liability claim brought against the Company or a third-party that the Company is required to indemnify, whether with or without merit, could have a material adverse effect on the Companys business, financial condition, operating results and cash flows.

Dispute with OSI

On July 8, 2002, the Company entered into the following agreements with OSI:

i.

Product Development and Marketing Agreement. Under this agreement, the Company formed a strategic alliance with OSI to develop mutually agreed integrated airport and transportation security products The Company agreed to commit a minimum of US$250,000 to develop these products and operate this group.

ii.

Software Developer Services Agreement. Under this agreement, the Company agreed to engage the services of software engineers and equipment in OSIs software development facility in Hyderabad, India. The Company agreed to pay to OSI a minimum of US$250,000 during the term of the agreement, which expired on June 30, 2003, provided that if the aggregate amount paid to OSI on such date was less than US$250,000, the agreement could be extended for six months.

iii.

Joint Venture Letter of Intent. Under this letter of intent, upon OSIs establishment of a Brazilian entity to oversee marketing, sales, service and assembly and marketing of OSIs products, in Brazil and the establishment of an office in Brazil, Imagis would invest US$250,000 for a 20% equity ownership in that entity.

On March 20, 2003 the above agreements were amended as follows:

i.

the strategic alliance agreement to develop and market integrated airport and security products with OSI was extended to July 8, 2004. The expenditure commitment was reduced to a minimum of US$125,000 on product development and the operation of an Airport Security Group to market the products. As at December 31, 2004, the Company has incurred US$48,350 in expenditures on product development.

ii.

the agreement to engage OSI to provide software development services was extended to December 31, 2004. The expenditure commitment has been reduced to a minimum of US$125,000, based on hourly rates charged at 85% of fair market value.

iii.

The Company agreed to pay OSI a management fee of US$250,000 on or before March 20, 2004



On January 27, 2005 the Company received a Notice of Demand from OSI for US$500,000 alleging that the Company was in default under the terms of these agreements. The Company believes that OSI acted in bad faith and, as a result, the Company was unable to meet the terms of these agreements. The parties have agreed to refer this matter to the American Arbitration Association for resolution. While the Company believes that it has not defaulted under the terms of these agreements, there can be no assurance that this dispute will be resolved in the Companys favour and that the Company will not be required to pay the full or partial amount of such demand to OSI upon resolution of this dispute.



Strategic Alliance with Sanyo and Intacta  to form Zixsys (formerly known as SecurityART Inc.)

During the second quarter of 2002, the Company entered into a strategic alliance agreement with Sanyo and Intacta to form Zixsys.  Zixsys will integrate the hardware and software technologies of all three companies and thereafter market security products for use in airports, buildings, laboratories, document authentication and verification for passports, visas and ID cards. During the quarter ended September 30, 2002 Imagis acquired the rights to Intactas royalties payable under the strategic alliance agreement for consideration of US$150,000.  During fourth quarter ended December 31, 2002, the Company acquired all patents held by Intacta outside the United States in consideration of US$50,000.  There can be no assurance that the relationship with Zixsys or the integration of

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technologies with Zixsys will prove to be successful in the future or will result in any material revenue for the Company.

Volatility of the Company's Share Price

The Companys share price has fluctuated substantially since the Companys common shares were listed for trading on the TSX Venture Exchange and quoted on the Over-The-Counter Bulletin Board (OTCBB). The trading price of the Companys common shares is subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant orders, announcements of technological innovations, strategic alliances or new products by the Company or its competitors, general conditions in the securities industries and other events or factors. In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price for many companies in industries similar or related to the Company and have been unrelated to the operating performance of these companies. These market fluctuations may adversely affect the market price of the Companys common shares.

Certain Shareholders May Exercise Control over Matters Voted Upon by the Company's Shareholders

Certain of the Companys officers, directors and entities affiliated with the Company together beneficially owned a significant portion of the Companys outstanding common shares as of December 31, 2004. While these shareholders do not hold a majority of the Companys outstanding common shares, they will be able to exercise significant influence over matters requiring shareholder approval, including the election of directors and the approval of mergers, consolidations and sales of the Companys assets. This may prevent or discourage tender offers for the Companys common shares.



Additional Disclosure Requirements Imposed on Penny Stock Trades



If the trading price of Imagis common shares is less than $5.00 per share, trading in its common shares may be subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock.  Such additional disclosure includes, but is not limited to, U.S. broker-dealers delivering to customers certain information regarding the risks and requirements of investing in penny stocks, the offer and bid prices for the penny stock and the amount of compensation received by the broker-dealer with respect to any proposed transaction. The additional burdens imposed upon broker-dealers may discourage broker-dealers from effecting transactions in Imagis common shares, which could reduce the liquidity of Imagis common shares and thereby have a material adverse effect on the trading market for such securities.



Enforcement of Civil Liabilities



Imagis is a corporation incorporated under the laws of British Columbia, Canada.  A number of the Companys directors and officers reside in Canada or outside of the United States.  All or a substantial portion of the assets of such persons are or may be located outside of the United States.  It may be difficult to effect service of process within the United States upon the Company or upon such directors or officers or to realize in the United States upon judgments of United States courts predicated upon civil liability of the Company or such persons under United States federal securities laws. The Company has been advised that there is doubt as to whether Canadian courts would (i) enforce judgments of United States courts obtained against the Company or such directors or officers predicated solely upon the civil liabilities provisions of United States federal securities laws, or (ii) impose liability in original actions against the Company or such directors and officers predicated solely upon such United States laws.  However, a judgment against the Company predicated solely upon civil liabilities provisions of such United States federal securities laws may be enforceable in Canada if the United States court in which such judgment was obtained has a basis for jurisdiction in that matter that would be recognized by a Canadian court.





Item 2.  Description of Property.



The Company subleases approximately 7,500 square feet of office space at 1075 West Georgia Street in Vancouver, British Columbia, Canada for use as its headquarters.  This lease expires on June 29, 2005, with monthly payments totalling $13,225. The Company sublet approximately 3,400 square feet of office space at 506 Fort Street in Victoria, British Columbia, Canada for its technical support and research and development. This lease expires September 30, 2006, with monthly payments totalling $5,110.



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Item 3.  Legal Proceedings.

On July 8, 2002, the Company entered into the following agreements with OSI:

i.

Product Development and Marketing Agreement. Under this agreement, the Company formed a strategic alliance with OSI to develop mutually agreed integrated airport and transportation security products The Company agreed to commit a minimum of US$250,000 to develop these products and operate this group.

ii.

Software Developer Services Agreement. Under this agreement, the Company agreed to engage the services of software engineers and equipment in OSIs software development facility in Hyderabad, India. The Company agreed to pay to OSI a minimum of US$250,000 during the term of the agreement, which expires on June 30, 2003, provided that if the aggregate amount paid to OSI on such date was less than US$250,000, the agreement can be extended for six months.

iii.

Joint Venture Letter of Intent. Under this letter of intent, upon OSIs establishment of a Brazilian entity to oversee marketing, sales, service and assembly and marketing of OSIs products, in Brazil and the establishment of an office in Brazil, Imagis would invest US$250,000 for a 20% equity ownership in that entity.

On March 20, 2003 the above agreements were amended as follows:

i.

the strategic alliance agreement to develop and market integrated airport and security products with OSI was extended to July 8, 2004. The expenditure commitment was reduced to a minimum of US$125,000 on product development and the operation of an Airport Security Group to market the products. As at December 31, 2004, the Company incurred US$48,350 in expenditures on product development.

ii.

the agreement to engage OSI to provide software development services was extended to December 31, 2004. The expenditure commitment has been reduced to a minimum of US$125,000, based on hourly rates charged at 85% of fair market value.

iii.

The Company agreed to pay OSI a management fee of US$250,000 on or before March 20, 2004



On January 27, 2005 the Company received a Notice of Demand from OSI for US$500,000 alleging that the Company was in default under the terms of these agreements. The Company believes that OSI acted in bad faith and, as a result, the Company was unable to meet the terms of these agreements. The parties have agreed to refer this matter to the American Arbitration Association for resolution. While the Company believes that it has not defaulted under the terms of these agreements, there can be no assurance that this dispute will be resolved in the Companys favour and that the Company will not be required to pay the full or partial amount of such demand to OSI upon resolution of this dispute.



Item 4.

Submission of Matters to a Vote of Security Holders

During the quarter ended December 31, 2004, there were no matters submitted to a vote of the Companys security holders.

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PART II



Item 5.  Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities.



The Companys common shares, no par value, began trading on the TSX Venture Exchange under the symbol CAP on September 29, 1998 and changed its symbol to NAB on February 25, 1999.  The table below sets forth the reported high and low sales prices for the Companys common shares for the quarterly periods ended from March 31, 2003 to December 31, 2004 (as reported on the TSX Venture Exchange). On November 26, 2003, the Company changed its symbol to WSI following its consolidation of its share capital. The last reported closing price of the Companys common shares on the TSX Venture Exchange on March 15, 2005 was $0.38.



HighLow2003March 31, 2003$1.05$1.00June 30, 2003$0.34$0.29September 30, 2003$0.23$0.20December 31, 2003$0.61$0.602004March 31, 2004$0.57$0.57June 30, 2004$0.42$0.40September 30, 2004$0.40$0.40December 31, 2004$0.32$0.32




The Companys common shares were also quoted on the OTCBB, under the symbol IGSTF.OB.  On November 26, 2003, following its consolidation of its share capital, the Company changed its symbol to IMTIF The table below sets forth the reported high and low bid prices for the Companys common shares on the OTCBB for the quarterly periods ended March 31, 2003 to December 31, 2004.  These OTCBB quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.  On March 15, 2005, the closing price of the Companys common shares on the OTCBB was US$0.30.







High
(U.S.)Low
(U.S.)2003March 31, 2003$0.71$0.62June 30, 2003$0.27$0.21September 30, 2003$0.17$0.14December 31, 2003$0.55$0.402004March 31, 2004$0.45$0.45June 30, 2004$0.35$0.31September 30, 2004$0.28$0.28December 31, 2004$0.25$0.24






As of March 15, 2005, there were 113 holders of record based on the records of the Companys transfer agent.  This number does not include beneficial owners of the Companys common shares whose shares are held in the names of various securities brokers, dealers and registered clearing agencies.



The Company has never paid dividends on its common shares and does not intend to pay dividends on its common shares in the foreseeable future.  The board of directors of the Company intends to retain any earnings to provide funds for the operation and expansion of the Companys business.  See Item 6Managements Discussion and Analysis.





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Equity Compensation Plan Information as of December 31, 2004Plan CategoryNumber of securities to be issued upon exercise of outstanding options, warrants, and rightsWeighted average exercise price of outstanding options, warrants, and rightsNumber of securities remaining available for future issuance under equity compensation plansEquity compensation plan approved by security holders3,092,334$0.61255,356Equity compensation plans not approved by security holdersN/AN/AN/A3,092,334$0.61255,356




Exchange Controls

Other than as provided in the Investment Canada Act(Canada) (the ICA) and certain industry specific statutes imposing restrictions on ownership of businesses in Canada (for example, banking, customs and telecommunications, etc.), there is no limitation imposed by the laws of Canada or British Columbia to hold or vote the common shares of Imagis.  The following discussion summarizes the material features of the ICA for a non-Canadian who proposes to acquire a controlling number of the Companys common shares. It is general only, it is not a substitute for independent advice from an investors own advisor, and it does not anticipate statutory or regulatory amendments.



A non-Canadian would acquire control of the Company for the purposes of the ICA if the non-Canadian acquired a majority of its common shares. The acquisition of less than a majority but more than one-third of the common shares would be presumed to be an acquisition of control of Imagis unless it could be established that, on the acquisition, Imagis was not controlled in fact by the acquiror through the ownership of the common shares.



Except in very limited situations, the ICA prohibits implementation of a reviewable investment by a non-Canadian, unless after review the Minister responsible for the ICA is satisfied that the investment is likely to be of net benefit to Canada.   An investment in the Companys common shares by a non-Canadian (other than a WTO Investor as that term is defined in the ICA and which term includes entities which are nationals of or are controlled by nationals of member states of the World Trade Organization), when the Company was not controlled by a WTO Investor, would be reviewable under the ICA if:

- the investment was a direct investment to acquire control of the Company and the value of the Companys assets, as determined in accordance with the regulations promulgated under the ICA, was over $5 million, the investment was an indirect investment in the Company (i.e. the acquisition of control, directly or indirectly, of a corporation incorporated outside Canada which in turn controls the Company, directly or indirectly) and the value of the Companys assets, as determined in accordance with the regulations promulgated under the ICA,
- was at least $50 million, or
- was between $5 million and $50 million and comprised more than 50% of the value of the assets of all entities whose control had been acquired in the international transaction, or
- an order for review was made by the federal cabinet on the grounds that the investment related to Canadas cultural heritage or national identity, regardless of the value of the assets of the Company An investment in the common shares by a WTO Investor, or by a non-Canadian when the Company was controlled by a WTO Investor, would be reviewable under the ICA if:
- the investment was a direct investment to acquire control of the Company and the value of the Companys assets, as determined in accordance with the regulations promulgated under the ICA, was not less than a specified amount, which for 2003 is $223 million,
- the investment was an indirect investment in the Company and the value of the Companys assets, as determined in accordance with the regulations promulgated under the ICA, was not less than $223 million (for 2003) and comprised more than 50% of the value of the assets of all entities whose control had been acquired in the international transaction, or
- the Company (i) engages in the production of uranium or owns an interest in a producing uranium property in Canada, (ii) provides any financial service, (iii) provides any transportation service, or (iv) is a cultural business.

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Certain transactions relating to the Companys common shares would be exempt from the ICA, including:

- an acquisition of the Companys common shares by a person in the ordinary course of that persons business as a trader or dealer in securities,
- an acquisition of control of the Company in connection with the realization of security granted for a loan or other financial assistance and not for a purpose related to the provisions of the ICA, and an acquisition of control of the Company by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control in fact of the Company, through the ownership of the common shares, remained unchanged.





Certain Canadian Federal Income Tax Information for United States Residents

The following summarizes the principal Canadian federal income tax considerations generally applicable to the holding and disposition of common shares of the Company by a holder (a) who, for the purposes of the Income Tax Act (Canada) the (Tax Act), is not resident in Canada, deals at arms length with the Company, holds the common shares as capital property and does not use or hold the common shares in the course of carrying on, or otherwise in connection with, a business in Canada, and (b) who, for the purposes of the Canada-United States Income Tax Convention (the Treaty), is a resident of the United States, has never been a resident of Canada, has not held or used (and does not hold or use) common shares in connection with a permanent establishment or fixed base in Canada, and who qualifies for the full benefits of the Treaty.  Holders who meet all such criteria in clauses (a) and (b) are referred to herein as a U.S. Holder or U.S. Holders, and this summary only addresses such U.S. Holders.  The summary does not deal with special situations, such as particular circumstances of traders or dealers, limited liability companies, tax-exempt entities, insurers, financial institutions (including those to which the mark-to-market provisions of the Tax Act apply), or otherwise.

This summary is based on the current provisions of the Tax Act and the regulations thereunder, all proposed amendments to the Tax Act and regulations publicly announced by the Minister of Finance (Canada) to the date hereof, the current provisions of the Treaty and the current administrative practices of the Canada Revenue Agency.  It has been assumed that all currently proposed amendments will be enacted as proposed and that there will be no other relevant change in any governing law, the Treaty or administrative policy, although no assurance can be given in these respects.  This summary does not take into account provincial, U.S. or other foreign income tax considerations, which may differ significantly from those discussed herein.

This summary is not exhaustive of all possible Canadian income tax consequences.  It is not intended as legal or tax advice to any particular U.S. Holder and should not be so construed.  The tax consequences to a U.S. Holder will depend on that U.S. Holders particular circumstances.  Accordingly, all U.S. Holders or prospective U.S. Holders should consult their own tax advisors with respect to the tax consequences applicable to them having regard to their own particular circumstances.  The discussion below is qualified accordingly.

Dividend

Dividends paid or deemed to be paid or credited by the Company to a U.S. Holder are subject to Canadian withholding tax.  Under the Treaty, the rate of withholding tax on dividends paid to a U.S. Holder is generally limited to 15% of the gross dividend (or 5% in the case of corporate shareholders owning at least 10% of the Companys voting shares).

Disposition

A U.S. Holder is not subject to tax under the Tax Act in respect of a capital gain realized on the disposition of a common share in the open market unless the share is taxable Canadian property to the holder thereof, and even then only if the U.S. Holder is not entitled to relief under the Treaty.

A Common share will be taxable Canadian property to a U.S. Holder if, at any time during the 60 month period ending at the time of disposition, the U.S. Holder or persons with whom the U.S. Holder did not deal at arms length (or the U.S. Holder together with such persons) owned 25% or more of the issued shares of any class or series of the Company.  In the case of a U.S. Holder to whom common shares represent taxable Canadian property, no tax under the Tax Act will be payable on a capital gain realized on a disposition of such shares in the open market by reason of the Treaty unless the value of such shares is derived principally from real property situated in Canada.  Management of the Company believes that the value of its common shares is not derived principally from real property situated in

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Canada, and that no tax will be payable under the Tax Act on a capital gain realized by a U.S. Holder (as defined above) on a disposition of common shares in the open market.



ALL PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF PURCHASING THE COMPANYS COMMON SHARES



Recent Sales of Unregistered Securities

Certain of the information required by this Item 5 was previously reported by the Company on Form 10-Q and Form 8-K.



On December 22, 2004, the Company issued 12,882 common shares and 12,882 common share purchase warrants on conversion of 57,971 Special Warrants to individuals and companies in private transactions outside the United States.  The common shares and common share purchase warrants were issued to persons located outside the United States who were not U.S. persons, as such term is defined in Regulation S (Regulation S) promulgated under the Securities Act of 1933, as amended (the Securities Act), in reliance upon the exclusion from registration available under Regulation S.



Small Business Issuer Purchases of Equity Securities



During the quarter ended December 31, 2004, there were no purchases of equity securities effected by the Company.



Item 6.  Managements Discussion and Analysis or Plan of Operation



About Imagis



Imagis develops and markets software that simplifies, accelerates, and economizes the process of connecting existing, disparate databases, enhanced as appropriate with biometric facial recognition technology. The combination of these technologies enables information owners to share data securely with external stakeholders and software systems using any combination of text or imagery. This includes searching disconnected data repositories for information about an individual using only a facial image.This allows organizations to quickly create regional information sharing networks using any combination of text or imagery.



Using industry standard Web services and XML, Imagis delivers a secure and economical approach to true, real-time application interoperability. Production deployments of the Companys core integration technology  BIE  have demonstrated remarkable reductions in the time and risk associated with implementing and supporting integrated access to physically and technologically disparate computers. The Company believes that the broad ranging applicability of BIE into a variety of vertical markets such as health care, financial services, government services and telecommunications has been clearly demonstrated by recent, successful deployments in the United States.



Overview

The Companys Business

The Company derives a substantial portion of its revenues, and it expects to derive a substantial portion of its revenues in the near future, from sales of its software to a limited number of customers. Additional revenues are achieved through the implementation and customization of this software as well as from the support, training, and ongoing maintenance that results from each software sale. The Companys success will depend significantly upon the timing and size of future purchase orders from its largest customers as well as from the ability to maintain relationships with its existing installed customer base

Typically, the Company enters into a fixed price contract with a customer for the licensing of selected software products and the provision of specific services.  The Company generally recognizes total revenue for software and services associated with a contract using percentage of completion method based on the total costs incurred over the total estimated costs to complete the contract.

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The Companys revenue is dependent, in large part, on contracts from a limited number of customers.  As a result, any substantial delay in the Companys completion of a contract, the inability of the Company to obtain new contracts or the cancellation of an existing contract by a customer could have a material adverse effect on the Companys results of operations.  The loss of certain contracts could have a material adverse effect on the Companys business, financial condition, operating results and cash flows.  As a result of these and other factors, the Companys results of operations have fluctuated in the past and may continue to fluctuate from period-to-period.

Recent world events and concerns regarding security have increased awareness of and interest in products that have law enforcement or other security applications, including the products and services offered by Imagis.  There can be no assurance, however, that such trends will continue or will result in increased sales of the Companys products and services.

Critical Accounting Polices

Critical accounting policies are those that management believes are both most important to the portrayal of the Companys financial conditions and results, and that require difficult, subjective, or complex judgements, often as a result of the need to make estimates about the effects of matters that involve uncertainty.

Imagis believes the critical accounting policies it uses in preparation of its financial statements are as follows:

Revenue recognition

(i)

Software sales revenue:

The Company recognizes revenue consistent with Statement of Position 97-2, Software Revenue Recognition. In accordance with this Statement, revenue is recognized, except as noted below, when all of the following criteria are met: persuasive evidence of a contractual arrangement exists, title has passed, delivery and customer acceptance has occurred, the sales price is fixed or determinable and collection is reasonably assured.  Funds received in advance of meeting the revenue recognition criteria are recorded as deferred revenue.

When a software product requires significant production, modification or customization, the Company generally accounts for the arrangement using the percentage-of-completion method of contract accounting. Progress to completion is measured by the proportion that activities completed are to the activities required under each arrangement. When the current estimate on a contract indicates a loss, a provision for the entire loss on the contract is made.

When software is sold under contractual arrangements that include post contract customer support (PCS), the elements are accounted for separately if vendor specific objective evidence (VSOE) of fair value exists for all undelivered elements. VSOE is identified by reference to renewal arrangements for similar levels of support covering comparable periods. If such evidence does not exist, revenue on the completed arrangement is deferred until the earlier of (a) VSOE being established or (b) all of the undelivered elements are delivered or performed, with the following exceptions: if the only undelivered element is PCS, the entire fee is recognized ratably over the PCS period, and if the only undelivered element is service, the entire fee is recognized as the services are performed.

The Company provides for estimated returns and warranty costs, which to date have been nominal, on recognition of revenue.

(ii)

Support and services revenue:

Contract support and services revenue is deferred and is amortized to revenue ratably over the period that the support and services are provided.

Intangible Assets:

Intangible assets acquired either individually or with a group of other assets are initially recognized and measured at cost. The cost of a group of intangible assets acquired in a transaction, including those acquired in a business combination that meet the specified criteria for recognition apart from goodwill, is allocated to the individual assets acquired based on their relative fair values. The cost of internally developed intangible assets includes direct development costs and overhead directly attributable to development activity. The cost incurred to enhance the service potential of an intangible asset is a capitalized as betterment. Costs incurred in the maintenance of the service potential of an intangible asset are expensed as incurred.

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Intangible assets with finite useful lives are amortized over their useful lives. The assets are amortized on a straight-line basis at the following annual rates, which are reviewed annually:



Asset

Rate

Intellectual property

33.3%

Patents

33.3%

License

33.3%



Intangible assets with indefinite useful lives are not amortized and are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test compares the carrying amount of the intangible asset with its fair value, and an impairment loss is recognized in income for the excess, if any.

Use of estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported or disclosed in the financial statements. Actual amounts may differ from these estimates.  Areas of significant estimate include but are not limited to valuation of accounts receivable; amortization periods of equipment, intellectual property and other assets; valuation of intellectual property; fair value inputs for calculation of stock-based compensation; and the valuation allowance of future income tax assets.

Stock-based compensation

The Company accounts for all stock-based payments to employees and non-employees using the fair value based method.



Under the fair value based method, stock-based payments are measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measurable. The fair value of stock-based payments to non-employees is periodically re-measured until counterparty performance is compete, and any change therein is recognized over the period and in the same manner as if the Company had paid cash instead of paying with or using equity instruments. The cost of stock-based payments to non-employees that are fully vested and non-forfeitable at the grant date is measured and recognized at that date.



Under the fair value based method, compensation cost attributable to employee awards is measured at fair value at the grant date and recognized over the vesting period. Compensation cost attributable to awards to employees that call for settlement in cash or other assets is measured at intrinsic value and recognized over the vesting period. Changes in intrinsic value between the grant date and the measurement date result in a change in the measure of compensation cost. For awards that vest at the end of the vesting period, compensation cost is recognized on a straight-line basis; for awards that vest on a graded basis, compensation cost is recognized on a pro-rata basis over the vesting period.



Results of Operations for the three month period and year ended December 31, 2004 compared to December 31, 2003:

Revenues

Imagis total revenues for the three month period ended December 31, 2004 were $327,016 compared to the prior year level of $263,793. The year to date revenues decreased to $1,032,970 from the prior year level of $1,355,742. Revenues from the Companys software products increased to $209,919 for the current three month period as compared to $191,425 for 2003. Software revenues decreased by 27% to $639,805 for the year to date over the prior year level of $877,438.



As of March 15, 2005 Imagis received orders totalling $2,100,000 that are not recorded as at December 31, 2004. Consequently, Imagis expects that revenues will increase in the first two quarters of 2005 when compared to the first two quarters of 2004 and will continue to increase as the new products acquired and developed as a result of the acquisition of Briyante continue to gain increasing customer acceptance. In addition, the Company has entered into a partnership with a United Kingdom company described below in Liquidity and Capital Resources. Management of the Company believes that this relationship has significant potential to generate additional future revenue for Imagis.  There can be no assurance however that such revenue will materialize or if such revenue does materialize that it will be significant.

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Support and services revenues were 62% higher at $115,464 for the three month period ended December 31, 2004 than in 2003 of $71,324. Support and services revenues for the year to date declined 18% to $385,075 from the prior year level of $469,575. The support revenues decreased as a result of a large support contract that expired during 2003 and was taken over by Imagis business partner.

Operating Costs

Operating expenses totalled $1,597,196 for the three month period ended December 31, 2004, which is 31% greater than the 2003 operating expenses of $1,223,076. The 2004 expenses include stock-based compensation of $143,135 due to the increase of Imagis employee stock option plan and $348,921 in amortization, which includes $322,713 in amortization costs for the intellectual property acquired in the Briyante acquisition. Excluding these non-cash charges the 2004 operating expenses total $1,105,140. The 2003 expenses include amortization of $177,780. Excluding this expense, the operating expenses for 2003 were $1,045,295. The increase of $59,845 between 2004 and 2003 represents a 6% increase in operating expenses over the prior period. The increased costs over the prior period resulted from significant decreases in administration of $162,030, which were offset by an increase in interest expense of $43,452, an increase in sales and marketing of $99,220, an increase in technical services of $29,356 and an increase in technological development of $49,857. The increases are mainly due to hiring additional staff to achieve the anticipated sales growth in 2005.



Operating expenses totalled $6,490,907 for the year ended December 31, 2004, which is 20% greater than the 2003 operating expenses of $5,414,599. The 2004 expenses include stock-based compensation of $1,204,307 due to the restructuring of Imagis employee stock option plan and $1,524,525 in amortization, which includes $1,290,852 in amortization costs for the intellectual property acquired in the Briyante acquisition. Excluding these non-cash charges the 2004 operating expenses total $3,762,075. The 2003 expenses include a one-time charge of US$250,000 (CDN$366,950) recorded as a management fee owing to OSI, a $100,000 cost recovery of software consulting fees relating to sub-contracted work from 2002, and amortization of $359,241. Excluding these items, the operating expenses for 2003 were $4,788,408.  The difference of $1,026,333 between 2004 and 2003 represents a 21% reduction in operating expenses over the prior year. The lower costs over the prior period resulted from significant decreases in the areas of administration, cost of materials, sales and marketing, and technical services. This was offset partially by an increase in technology development costs due to the addition of staff. The cash operating expense rate had stabilized at approximately $3,200,000 per annum from July 2003 through March 2004. The current operating expense level is approximately $4,300,000 per year as a result of increased staffing levels required to meet increased demand for Imagis products and services. Any further increase in expenditure levels will only occur as the company receives increased levels of orders.



Administration

Administrative costs for the three month period ended December 31, 2004 were $450,155, which is 12% less than for 2003 of $512,472. These costs include a stock-based compensation charge of $99,713 in 2004. Excluding these charges, the administrative costs were $350,442 in 2004 versus $512,472 in 2003, which represents a 32% decrease. This decrease was due to decreased legal and general operating costs.  Administrative costs include staff salaries and related benefits and travel, stock-based compensation, consulting and professional fees, facility and support costs, shareholder, regulatory and investor relations costs.



Administrative costs for the year ended December 31, 2004 were $2,124,342, which is 3% less than for 2003 of $2,188,921. These costs include the stock-based compensation charge of $838,967 in 2004 and the one-time management fee of US$250,000 (CDN$366,950) in 2003 described above. Excluding these charges, the administrative costs were $1,285,375 in 2004 compared to $1,821,971 in 2003, which represents a 30% reduction.

Bad Debt Expense

The bad debt expense for the three month period ended December 31, 2003 and 2004 was nil.



The bad debt expense for the year ended December 31, 2003 of $117,433 consisted of three customers that defaulted on payment for a software license. There were no bad debts incurred in 2004.

Interest and Amortization

The interest expense for the three month period ended December 31, 2004 of $68,253, which is 175% greater than for 2003 of $24,802, is primarily due to interest charged on late payroll remittances to Revenue Canada which is currently being appealed. The increase in amortization expense to $348,921 from $177,780 is primarily due to the increased amortization expense associated with the acquisition of the intellectual property of Briyante.

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The interest expense for the year ended December 31, 2004 of $93,562, which is 40% greater than for 2003 of $66,765, is primarily due to interest charged on late payroll remittances to Revenue Canada which is currently being appealed. The increase in amortization expense to $1,524,525 from $359,240 is primarily due to the amortization expense associated with the acquisition of the intellectual property of Briyante.

Sales and Marketing

Sales and marketing expenses for the three month period ended December 31, 2004 were $377,728 which is 52% greater than for 2003 of $249,078. These costs include a stock-based compensation charge of $29,436 in 2004. Excluding these charges, the sales and marketing expenses were $348,292 in 2004 verses $249,078 in 2003  which represents a 40% increase. The Sales and marketing expenses for the year ended December 31, 2004 were $1,362,928, which is 2% less than the 2003 costs of $1,388,134. These costs include the stock-based compensation charge of $247,672 in 2004. Excluding these charges, the sales and marketing costs were $1,115,256 in 2004 verses $1,388,134 in 2003, which represents a 20% decrease. Imagis significantly decreased its sales team after March 31, 2003 and streamlined its associated travel and marketing costs as part of its strategy of utilizing a more targeted marketing and sales strategy. Sales and marketing costs have increased in the fourth quarter of 2004 to target opportunities where identifiable revenues exist.



Technology Development

The technology development expenses for the three month period ended December 31, 2004 were $248,371 which is 33% greater than the 2003 costs were $186,931. These costs include a stock-based compensation charge of $11,583 in 2004. Excluding these charges, the technology development expenses were $236,788 in 2004 which is 27% higher than 2003.



The technology development expenses for the year ended December 31, 2004 were $1,037,013 which is 50% higher than the 2003 costs of $692,754. These costs include the stock-based compensation charge of $97,461 in 2004 and a 2003 cost recovery of $100,000 discussed above. Excluding these charges, the technology development costs were $939,552 in 2004 verses $792,754 in 2003, which represents a 19% decrease over 2003.



Technology development expenses were reduced during the second and third quarters of 2003 and then increased to current levels with the addition of staff associated with the Briyante acquisition and additional staff to meet development requirements associated with the orders received in late 2004 and early 2005. Management believes that continuing to invest in technology advancements is crucial to the future success of Imagis.

Technical Services

Costs for the technical services group for the three month period ended December 31, 2004 were $103,771, which is 44% greater than the comparable 2003 costs of $72,013. These costs include a stock-based compensation charge of $2,402 in 2004. Excluding these charges, the technology development expenses were $101,369 in 2004 which is 41% higher than 2003.



The technology services expenses for the year ended December 31, 2004 were $348,537 which is 12% lower than the 2003 costs of $397,412. These costs include the stock-based compensation charge of $20,207 in 2004. Excluding these charges, the technology services costs were $328,330 in 2004 , which represents a 17% reduction from 2003.



The technical services group generally assists the Companys strategic partners in their installation of Imagis products and also provides clients with any technical support they may require under annual support contracts, and includes primarily costs for salaries, facilities and travel. Costs for future quarters will be dependent on the sales levels achieved by the Company.

Net Loss for the Period

Overall, the Company incurred a net loss for the three month period ended December 31, 2004 of $1,270,180 or $0.08 per share, which is 32% higher than the net loss incurred during the three months ended December 31, 2003 of $959,283 or $0.14 per share. The loss per share figure for 2003 has been adjusted to take into account the Companys share consolidation that occurred in November of 2003. Adjusting the loss to take into account the non-cash and one-time expenses described above, the losses become $778,124 for 2004 and $781,503 for 2003, representing a 1% decrease. The Company has received significant sales orders during the final quarter of 2004 and the first quarter of 2005; however, installation did not commence until 2005 and the revenue will not be recognised until then.



The Company incurred a net loss for the year ended December 31, 2004 of $5,457,937 or $0.39 per share, which is 34% larger than the net loss incurred during the year ended December 31, 2003 of $4,058,857 or $0.74 per share.

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The loss per share figure for 2003 has been adjusted to take into account the Companys share consolidation that occurred in November of 2003. Adjusting the loss to take into account the non-cash and one-time expenses described above, the losses become $2,729,105 for 2004 and $3,432,666 for 2003, representing a 20% reduction. The rate of loss at December 31, 2004 on an EBITDA basis was $280,000 per month and management believes that the Company will be able to achieve break even operations on an EBITDA basis during the first six months of 2005. The timing will depend on the schedule of completion of existing contracts as this affects the recognition of revenue.



Summary of Quarterly Results





Q4-2004Q3  2004Q2 - 2004Q1 - 2004Q4 - 2003Q3 - 2003Q2 - 2003Q1 - 2003Total Revenue$327,016102,814317,085286,055263,793496,612317,829277,508Loss(1,270,180)(1,346,203)(1,259,753)(1,581,801)(959,283)(694,042)(620,431)(1,785,101)Net loss per share(0.08)(0.09)(0.09)(0.14)(0.15)(0.15)(0.13)(0.40)




The Companys changes in its Net Losses per quarter fluctuate according to the volume of sales. As the Company currently has a small number of customers generating the majority of its revenues, there is no consistency from one quarter to the next and past quarterly performance is not considered to be indicative of future results. The Company had significantly reduced its operating expenses during the period from Q3 2002 through Q3 2003, which also has a large impact on the comparative loss figures. The Company is not aware of any significant seasonality affecting its sales.



Liquidity and Capital Resources

The Companys cash on hand at the beginning of the three-month period ended December 31, 2004 aggregated $68,760. During the period, the Company received additional net funds of $1,179,100 from a private placement that closed in November, less $325,000 received prior to October 1, 2004, and an additional $140,000 in share subscriptions for a private placement that closed in January 2005.

The Company used these funds primarily to finance its operating loss for the period. The impact on cash of the loss of $1,329,178, after adjustment for non-cash items and changes to other working capital accounts in the period, resulted in a negative cash flow from operations of $893,258. The Company also repaid capital leases of $9,079, purchased a software asset for $25,000 in cash plus $75,000 in common share units, and purchased capital assets of $12,414, overall the Companys cash position decreased by $54,389 to $123,148 at December 31, 2004.

The Companys cash on hand at the beginning of the year ended December 31, 2004 aggregated $86,227. During the period, the Company received additional net funds of $1,534,150 in share subscriptions for a private placement that was closed on April 28, 2004, $1,179,100 from a private placement that closed November 30, 2004 and $140,000 in share subscriptions for a private placement that closed in January 2005. The Company also settled $1,094,562 in debt through the issuance of common shares. These transactions are described below.



The Company used these funds primarily to finance its operating loss for the period. The impact on cash of the loss of $5,516,935, after adjustment for non-cash items and changes to other working capital accounts in the period, resulted in a negative cash flow from operations of $2,723,503. The Company also repaid capital leases of $27,241, purchased a software asset for $25,000 cash and $75,000 in common share units, and purchased capital assets of $40,624, overall the Companys cash position increased by $36,921 to $123,148 at December 31, 2004.



In April 2004, the Company completed a private placement consisting of 4,007,875 units at $0.40 per unit. Each unit consists of one common share and one common share purchase warrant.  Each warrant entitles the holder to acquire one additional common share in the capital of Imagis at an exercise price of $0.50 until April 28, 2005 or at $0.75 from April 29, 2005 until April 28, 2006. The common shares and warrants were subject to a four (4) month hold period in Canada that expired on August 28, 2004. Finders fees of $69,000 in cash were paid on a portion of the private placement conducted outside the United States. The total net proceeds to Imagis were $1,534,150.



Concurrently with the private placement in April 2004, the Company settled $688,404 in debt included in accounts payable as at March 31, 2004 through the issuance of 1,708,509 common shares and 393,284 common share purchase warrants. Each warrant entitles the holder to acquire one additional common share in the capital of Imagis at an exercise price of $0.50 until April 29, 2005 or at $0.75 from April 30, 2005 until April 29, 2006. Included in this private placement, the Company settled debt with related parties and formerly related parties totaling $526,090 through the issuance of 1,315,225 common shares with no warrants. The common shares and warrants were subject to a four (4) month hold period in Canada that expired on August 29, 2004.

28



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As of July 15, 2004, management of the Company believed that the funds received through the Companys private placement in April 2004 combined with the then current and projected operating revenues and the reduction in liabilities achieved through the debt settlements in April 2004 would provide sufficient cash flow to fund the Companys operations for at least the six (6) month period thereafter.Because the Company experienced unexpected delays in concluding certain contract negotiations and completing certain software installations, it was required to seek further financing.



In November 2004, the Company completed a private placement consisting of 3,930,333 units at $0.30 per unit for total proceeds of $1,179,100. Each unit consisted of one common share and one common share purchase warrant.  Each warrant entitles the holder to acquire one additional common share in the capital of Imagis at an exercise price of $0.40 until November 31, 2005 or at $0.50 from November 30, 2005 until November 30, 2006. The common shares and warrants are subject to a four (4) month hold period in Canada that expires on March 30, 2005.



In November 2004, the Company also purchased intellectual property of a software asset for $100,000, consisting of $25,000 in cash and $75,000 through the issuance of 187,500 common shares and 187,500 common share purchase warrants. Each warrant entitles the holder to acquire one additional common share in the capital of Imagis at an exercise price of $0.40 until November 29, 2005 or at $0.50 from November 29, 2005 until November 29, 2006. The common shares and warrants are subject to a four (4) month hold period in Canada that expires on March 29, 2005.



In December 2004, the Company settled $331,158 in debt through the issuance of 946,166 common shares and 946,166 common share purchase warrants. Each warrant entitles the holder to acquire one additional common share in the capital of Imagis at an exercise price of $0.45 until December 31, 2005 or at $0.55 from December 31, 2005 until December 31, 2006. The common shares and warrants are subject to a four (4) month hold period in Canada that expires on April 30, 2005.



In December 31, 2004 the Company also received share subscriptions of $140,000 to be applied to a private placement that was completed in January 2005. The private placement consisted of 2,857,785 units at $0.35 per unit. Each unit consists of one common share and one common share purchase warrant.  Each warrant entitles the holder to acquire one additional common share in the capital of Imagis at an exercise price of $0.45 until January 11, 2006 or at $0.55 from January 12, 2006 until January 11, 2007. The common shares and warrants are subject to a four (4) month hold period in Canada that expires on May 10, 2005. Finders fees of $72,771 in cash were paid on a portion of the private placement. The total net proceeds to Imagis were $927,454.



During the final quarter of 2004, the Company was awarded a contract with PRIME Corp. of British Columbia, Canada to deploy the Imagis flagship InForce Arrest and Booking (InForce AB) software as an integrated component of the province-wide Police Records Information Management Environment (PRIME-BC). This contract will result in revenues to the Company in excess of $800,000; however, any amounts due under this contract will not be received by the Company until early 2005.  The Company also has received other orders with certain agencies in the United States that total an additional approximately $1,300,000, the amounts due under these contracts are expected to be received by the Company in the first six months of 2005.



The company has cash sufficient to fund its operations through April 30, 2005.  The Company has also received orders that if completed will generate cash sufficient to fund its operations through September 30, 2005.  If no further sales are received the Company may need to raise additional funds through private placements of its securities or seek other forms of financing. There can be no assurance that such financing will be available to the Company on terms acceptable to it, if at all.  If the Companys operations are substantially curtailed, it may have difficulty fulfilling its current and future contract obligations.

29



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Contractual Obligations

The Company is committed to the following operating lease payments over the next three years:



Year
   
   Equipment
   
   
   Building
   
   
   Total2005
   
   $
   37,706
   
   $
   140,664
   
   $
   178,3702006
   
   
   14,784
   
   
   45,985
   
   
   60,7692007
   
   
   14,931
   
   
   -
   
   
   14,931$
   67,421
   
   $
   186,649
   
   $
   254,070




On January 27, 2005 the Company received a Notice of Demand from OSI for US$500,000 alleging that the Company was in default under the terms of three agreements. The Company believes that OSI acted in bad faith and, as a result, the Company was unable to meet the terms of these agreements. The parties have agreed to refer this matter to the American Arbitration Association for resolution. While the Company believes that it has not defaulted under the terms of these agreements, there can be no assurance that this dispute will be resolved in the Companys favour and that the Company will not be required to pay the full or partial amount of such demand to OSI upon resolution of this dispute.  For a more detailed discussion of this matter, please see Item 3  Legal Proceedings.)



Off-Balance Sheet Arrangements

At December 31, 2004 the Company did not have any off-balance sheet arrangements.

30



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Item 7.  Financial Statements.



Imagis Technologies Inc.

Index to Consolidated Financial StatementsAuditors Report to the Shareholders33Report of Independent Registered Public Accounting Firm34Consolidated Balance Sheets35Consolidated Statements of Operations and Deficit36Consolidated Statements of Cash Flows37Notes to Consolidated Financial Statements39






31



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Financial Statements

(Expressed in Canadian dollars)



IMAGIS  TECHNOLOGIES  INC.



Years ended December 31, 2004 and 2003

32



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AUDITORS' REPORT TO THE SHAREHOLDERS

We have audited the consolidated balance sheets of Imagis Technologies Inc. as at December 31, 2004 and 2003 and the consolidated statements of operations and deficit and cash flows for the years then ended.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2004 and 2003 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.





KPMG LLP (signed)





Chartered Accountants



Vancouver, Canada

March 4, 2005

33



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Directors of Imagis Technologies Inc.



We have audited the accompanying consolidated balance sheets of Imagis Technologies Inc. as of December 31, 2004 and 2003 and the consolidated statements of operations and deficit, and cash flows for each of the years in the two-year period ended December 31, 2004.  These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about 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.  We believe that our audits provide a reasonable basis for our audit opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Imagis Technologies Inc. as of December 31, 2004 and 2003 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2004 in accordance with Canadian generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, a deficiency in operating cash flow and has a deficiency in working capital, all of which raise substantial doubt about its ability to continue as a going concern.  Managements plans in regard to these matters are also described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Canadian generally accepted accounting principles vary in certain significant respects from accounting principles generally accepted in the United States of America.  Information relating to the nature and effect of such differences is presented in note 17 to the consolidated financial statements.



KPMG LLP (signed)



Vancouver, Canada

March 4, 2005



34



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IMAGIS TECHNOLOGIES INC.

Consolidated Balance Sheets

(Expressed in Canadian dollars)



December 31, 2004 and 2003

2004
   
   
   2003AssetsCurrent assets:Cash and cash equivalents
   $
   123,148
   
   $
   86,227Accounts receivable
   
   358,300
   
   
   459,435Accrued revenue receivable
   
   27,000
   
   
   27,000Prepaid expenses and deposit
   
   97,869
   
   
   27,836606,317
   
   
   600,498Equipment, net (note 5)
   
   208,624
   
   
   254,933Intellectual property (note 7)
   
   2,550,960
   
   
   3,747,367Other assets (note 8)
   
   76,434
   
   
   181,309$
   3,442,335
   
   $
   4,784,107Liabilities and Shareholders EquityCurrent liabilities:Accounts payable and accrued liabilities
   $
   1,120,978
   
   $
   2,194,808Deferred revenue
   
   159,764
   
   
   130,998Capital lease obligations
   
   28,089
   
   
   24,7621,308,831
   
   
   2,350,568Long-term liabilities:Capital lease obligations (note 9)
   
   24,913
   
   
   19,171Shareholders' equity:Share capital (note 10)
   
   26,230,920
   
   
   21,528,421Special warrants (note 10)
   
   748,092
   
   
   1,642,740Share subscriptions (note 10)
   
   140,000
   
   
   -Contributed surplus
   
   1,648,402
   
   
   444,093Deficit
   
   (26,658,823)
   
   
   (21,200,886)2,108,591
   
   
   2,414,368$
   3,442,335
   
   $
   4,784,107Operations (note 1)Commitments (note 13)Subsequent events (note 16)See accompanying notes to consolidated financial statements.Approved on behalf of the Board:




/s/
Clyde Farnsworth                    
Director                                 /s/
Roy TrivettDirector



35



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IMAGIS TECHNOLOGIES INC.

Consolidated Statements of Operations and Deficit

(Expressed in Canadian dollars)



Years ended December 31, 2004 and 2003

2004
   
   
   2003Revenue:Software sales
   $
   639,805
   
   $
   877,438Support and services
   
   385,075
   
   
   469,575Other
   
   8,090
   
   
   8,7291,032,970
   
   
   1,355,742Expenses:Administration
   
   2,124,342
   
   
   2,188,921Amortization
   
   1,524,525
   
   
   359,240Bad debt expense
   
   -
   
   
   117,433Cost of materials
   
   -
   
   
   203,940Interest
   
   93,562
   
   
   66,765Sales and marketing
   
   1,362,928
   
   
   1,388,134Technology development
   
   1,037,013
   
   
   692,754Technical services
   
   348,537
   
   
   397,4126,490,907
   
   
   5,414,599Loss for the year
   
   5,457,937
   
   
   4,058,857Deficit, beginning of year
   
   21,200,886
   
   
   17,142,029Deficit, end of year
   $
   26,658,823
   
   $
   21,200,886Loss per share - basic and diluted
   $
   0.39
   
   $
   0.74Weighted average number of shares outstanding
   
   13,940,922
   
   
   5,464,356


See accompanying notes to consolidated financial statements.



36



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IMAGIS TECHNOLOGIES INC.

Consolidated Statements of Cash Flows

(Expressed in Canadian dollars)



Years ended December 31, 2004 and 2003



2004
   
   
   2003Cash provided by (used for):Operations:Loss for the year
   $
   (5,457,937)
   
   $
   (4,058,857)Items not involving cash:Amortization
   
   1,524,525
   
   
   359,240Stock-based compensation
   
   1,204,307
   
   
   (7,019)Gain on settlement of accounts payable
   
   (54,930)
   
   
   -Changes in non-cash operating working capital:Accounts receivable
   
   101,135
   
   
   408,540Accrued revenue receivable
   
   -
   
   
   (27,000)Prepaid
   
   (70,033)
   
   
   47,900Accounts payable and accrued liabilities
   
   664
   
   
   1,306,483Deferred revenue
   
   28,766
   
   
   (208,487)(2,723,503)
   
   
   (2,179,200)Investments:Purchase of equipment
   
   (40,624)
   
   
   (8,195)Net cash costs of business combination
   
   -
   
   
   (197,934)Purchase of intellectual property
   
   (25,000)
   
   
   -(65,624)
   
   
   (206,129)Financing:Issuance of common shares for cash
   
   2,782,289
   
   
   296,038Issuance of special warrants for cash
   
   -
   
   
   899,075Share issue costs
   
   (69,000)
   
   
   (2,031)Subscriptions received
   
   140,000Special warrant issue costs
   
   -
   
   
   (39,757)Cash advances received (note 10)
   
   -
   
   
   319,000Cash received for debenture (note 11)
   
   -
   
   
   75,000Cash received for credit facility (note 11)
   
   -
   
   
   396,750Capital lease repayments
   
   (27,241)
   
   
   (20,350)2,826,048
   
   
   1,923,725Increase (decrease) in cash
   
   36,921
   
   
   (461,604)Cash and cash equivalents, beginning of year
   
   86,227
   
   
   547,831Cash and cash equivalents, end of year
   $
   123,148
   
   $
   86,227






37



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IMAGIS TECHNOLOGIES INC.

Consolidated Statements of Cash Flows, Continued

(Expressed in Canadian dollars)



Years ended December 31, 2004 and 2003

|                                                                   |   |           |  |   |           | 
|------------------------------------------------------------------ | - | --------- |  | - | --------- | 
|                                                                   |   | 2004      |  |   | 2003      | 
|                                                                   |   |           |  |   |           | 
|Supplementary information and disclosures:                         |   |           |  |   |           | 
|Interest paid                                                      | $ | -         |  | $ | 41,964    | 
|Issuance of common shares on conversion of special warrants        |   | 907,985   |  |   | -         | 
|Issuance of common shares to acquire intellectual property         |   | 75,000    |  |   | -         | 
|Equipment acquired under capital lease                             |   | 36,310    |  |   | 3,440     | 
|Issuance of common shares on settlement of debt                    |   | 1,019,562 |  |   | 236,931   | 
|Finders fee recorded on issuance of common shares on conversion of |   |           |  |   |           | 
|special warrants                                                   |   | 13,337    |  |   | -         | 
|Investment acquired for grant of exclusivity                       |   | 1         |  |   | -         | 
|Issuance of special warrants on settlement of credit facility      |   | -         |  |   | 396,750   | 
|Issuance of special warrants on settlement of debentures           |   | -         |  |   | 75,000    | 
|Issuance of special warrants on settlement of advances             |   | -         |  |   | 319,000   | 
|Issuance of common shares on acquisition                           |   | -         |  |   | 3,636,365 | 
|Issuance of warrants as financing costs                            |   | -         |  |   | 7,328     | 
|                                                                   |   |           |  |   |           | 
|                                                                   |   |           |  |   |           | 
|See accompanying notes to consolidated financial statements.       |   |           |  |   |           | 
|                                                                   |   |           |  |   |           | 
|                                                                   |   |           |  |   |           | 
|                                                                   |   |           |  |   |           | 
|                                                                   |   |           |  |   |           | 

38



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IMAGIS TECHNOLOGIES INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2004 and 2003





1.

Operations:

Imagis Technologies Inc. (the Company) was incorporated under the Company Act (British Columbia) on March 23, 1998.  The Company operates in a single segment, being the development and sale of software applications and advanced data integration and biometric facial recognition software solutions.

These financial statements have been prepared on a going concern basis which includes the assumption that the Company will be able to realize its assets and settle its liabilities in the normal course of business.  For the year ended December 31, 2004, the Company has incurred a loss from operations of $5,457,937 and a deficiency in operating cash flow of $2,723,503.  In addition, the Company has incurred significant operating losses and net utilization of cash in operations in all prior periods.  At December 31, 2004, the Company has a working capital deficiency of $702,514.  Accordingly, the Company will require continued financial support from its shareholders and creditors until it is able to generate sufficient cash flow from operations on a sustained basis.  Failure to obtain ongoing support of its shareholders and creditors may make the going concern basis of accounting inappropriate, in which case the Companys assets and liabilities would need to be recognized at their liquidation values.  These financial statements do not include any adjustment due to this going concern uncertainty.



2.

Significant accounting policies:

The Company prepares its financial statements in accordance with generally accepted accounting principles in Canada and, except as set out in note 17, also complies, in all material respects, with accounting principles generally accepted in the United States.  The financial statements reflect the following significant accounting policies:

(a)

Basis of consolidation:

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Briyante Software Corp. (Briyante), since the date of its acquisition on November 25, 2003.  All material inter-company accounts and transactions have been eliminated.

(b)

Cash equivalents:

The Company considers all highly liquid investments with a term to maturity of three months or less when purchased to be cash equivalents.  Investments having a term in excess of three months but less than one year are classified as short-term investments.

39



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2.

Significant accounting policies (continued):

(c)

Equipment:

Equipment is recorded at cost and is amortized over its estimated useful life on a straight-line basis at the following annual rates:



Asset
   RateComputer hardware
   30%Furniture and fixtures
   20%Software
   100%Telephone equipment
   20%Tradeshow equipment
   20%




Leasehold improvements are amortized straight-line over the lesser of their lease term and estimated useful life.

(d)

Intangible assets:

Intangible assets acquired either individually or with a group of other assets are initially recognized and measured at cost.  The cost of a group of intangible assets acquired in a transaction, including those acquired in a business combination that meet the specified criteria for recognition apart from goodwill, is allocated to the individual assets acquired based on their relative fair values.  The cost of internally developed intangible assets includes direct development costs and overhead directly attributable to development activity.  The cost incurred to enhance the service potential of an intangible asset is a capitalized as a betterment.  Costs incurred in the maintenance of the service potential of an intangible asset are expensed as incurred.

Intangible assets with finite useful lives are amortized over their useful lives.  The assets are amortized on a straight-line basis at the following annual rates, which are reviewed annually:



Asset
   TermIntellectual property
   3 yearsPatents
   3 yearsLicenses
   3 years




Intangible assets with indefinite useful lives are not amortized and are tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.  The impairment test compares the carrying amount of the intangible asset with its fair value, and an impairment loss is recognized in income for the excess, if any.

(e)

Revenue recognition:

(i)

Software sales revenue:

The Company recognizes revenue consistent with Statement of Position 97-2, Software Revenue Recognition.  In accordance with this Statement, revenue is recognized, except as noted below, when all of the following criteria are met; persuasive evidence of a contractual arrangement exists, title has passed, delivery and customer acceptance has occurred, the sales price is fixed or determinable and collection is reasonably assured.  Cash received in advance of meeting the revenue recognition criteria is recorded as deferred revenue.

40



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2.

Significant accounting policies (continued):

(e)

Revenue recognition (continued):

(i)

Software sales revenue (continued):

When a software product requires significant production, modification or customization, the Company generally accounts for the arrangement using the percentage-of-completion method of contract accounting.  Progress to completion is measured by the proportion that activities completed are to the activities required under each arrangement.  When the current estimate on a contract indicates a loss, a provision for the entire loss on the contract is made.  In circumstances where amounts recognized as revenue under such arrangements exceed the amount invoiced, the difference is recorded as accrued revenue receivable.

When software is sold under contractual arrangements that include post contract customer support (PCS), the elements are accounted for separately if vendor specific objective evidence (VSOE) of fair value exists for all undelivered elements.  VSOE is identified by reference to renewal arrangements for similar levels of support covering comparable periods.  If such evidence does not exist, revenue on the completed arrangement is deferred until the earlier of (A) VSOE being established or (B) all of the undelivered elements being delivered or performed, with the following exceptions: if the only undelivered element is PCS, the entire fee is recognized ratably over the PCS period, and if the only undelivered element is service, the entire fee is recognized as the services are performed.

The Company provides for estimated returns and warranty costs, which to date have been nominal, on recognition of revenue.

(ii)

Support and services revenue:

Up front payments for contract support and services revenue are deferred and amortized to revenue over the period that the support and services are provided.

(f)

Use of estimates:

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported or disclosed in the financial statements.  Actual amounts may differ from these estimates.  Areas of significant estimate include but are not limited to valuation of accounts receivable; amortization periods of equipment, intellectual property and other assets; valuation of intellectual property; fair value inputs for calculation of stock-based compensation; and the valuation allowance of future income tax assets.

(g)

Foreign currency:

Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at exchange rates in effect at the balance sheet date.  Revenues and expenses are translated using rates in effect at the time of the transactions. Foreign exchange gains and losses are included in expenses and are insignificant for all periods presented.

41



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2.

Significant accounting policies (continued):

(h)

Income taxes:

The Company uses the asset and liability method of accounting for income taxes.  Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Future tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of substantive enactment.  To the extent that it is not considered to be more likely than not that a deferred tax asset will be realized, a valuation allowance is provided.

(i)

Stock-based compensation:

The Company has a stock-based compensation plan, which is described in note 10.  Subsequent to January 1, 2003, the Company accounts for all stock-based payments to employees and non-employees using the fair value based method.  Under the fair value based method, stock-based payments are measured at the fair value of the equity instruments issued.

The fair value of stock-based payments to non-employees is periodically re-measured until counterparty performance is compete, and any change therein is recognized over the period and in the same manner as if the Company had paid cash instead of paying with or using equity instruments.  The cost of stock-based payments to non-employees that are fully vested and non-forfeitable at the grant date is measured and recognized at that date.

Under the fair value based method, compensation cost attributable to employee awards is measured at fair value at the grant date and recognized over the vesting period.  Compensation cost attributable to awards to employees that call for settlement in cash or other assets is measured at intrinsic value and recognized over the vesting period.  Changes in intrinsic value between the grant date and the measurement date result in a change in the measure of compensation cost.  For awards that vest at the end of the vesting period, compensation cost is recognized on a straight-line basis; for awards that vest on a graded basis, compensation cost is recognized on a pro-rata basis over the vesting period.

42



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2.

Significant accounting policies (continued):

(i)

Stock-based compensation (continued):

Prior to January 1, 2003, the Company followed the settlement method of accounting for employee stock options.  The fair value method was used for non-employee grants made in the year ended December 31, 2002 and the settlement method for grants made prior to that date.  Had compensation expense associated with employee stock options awarded prior to January 1, 2003 been determined in accordance with the fair value method, the Companys net loss and net loss per share for the years ended December 31, 2004 and 2003, would have been adjusted to the pro forma amounts indicated below:



2004
   
   
   2003Net loss:As reported
   $
   5,457,937
   
   $
   4,058,857Pro forma
   
   5,457,937
   
   
   4,811,704Net loss per share:As reported
   
   0.39
   
   
   0.74Pro forma
   
   0.39
   
   
   0.88






The pro forma amounts exclude the effect of stock options granted prior to January 1, 2002.  The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following average inputs:  volatility - 114%; risk free interest rate - 5%; option term - 5 years; and dividend yield - nil.

(j)

Loss per share:

Loss per share is calculated using the weighted average number of shares outstanding during the reporting period.  This average includes common shares issued in a reporting period from their date of issuance.  Diluted per share amounts are calculated by the treasury stock method whereby the assumed proceeds of dilutive exercisable instruments are applied to repurchase common shares at the average market price for the period.  The resulting net issuance is included in the weighted average number for purposes of the diluted per share calculation.  As all outstanding shares and warrants are anti-dilutive, there is no difference between basic and diluted loss per share.  Loss per share and weighted average number of shares outstanding for the comparative period ending December 31, 2003 have been restated to take into account the share consolidation completed during 2003 (note 10(b)).

(k)

Comparative figures:

Certain comparative figures have been reclassified to conform with the presentation adopted in the current year.

43



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3.

Change in accounting for stock-based compensation:

Prior to January 1, 2003, the Company applied the fair value based method of accounting prescribed by CICA Handbook Section 3870, Stock-based Compensation and Other Stock-based Payments, only to non-employee awards made on or after January 1, 2002 and to employee stock appreciation rights, and applied the settlement method of accounting to employee stock options.  Under the settlement method, any consideration paid by employees on the exercise of stock options or purchase of stock is credited to share capital and no compensation expense was recognized.

The CICA Accounting Standards Board amended CICA Handbook Section 3870  Stock-based Compensation and Other Stock-based Payments  to require entities to account for employee stock options using the fair value based method, beginning January 1, 2004, with early adoption encouraged.  The Company has elected to apply fair value accounting for all employee stock options granted on or after January 1, 2003 and, in accordance with one of the transitional options permitted under amended Section 3870, has accounted for this change prospectively.

4.

Acquisition of Briyante:

On October 3, 2003, the Company and Briyante entered into an Arrangement Agreement whereby the Company agreed to acquire 100% of the issued and outstanding shares of Briyante under the following terms:

(i)

The Company acquired all outstanding shares of Briyante in exchange for shares of the Company.  Briyante shareholders received 0.31111 post-consolidation common shares of the Company in exchange for each common share of Briyante;

(ii)

The closing of the acquisition was subject to the Company raising a minimum $800,000, before finders fees or commissions, of new capital by way of an equity financing; and

(iii)

The Company agreed that the Briyante shareholders nominate two directors for election at the Companys AGM.

Briyantes shareholders approved the Arrangement Agreement at a Special Meeting that was held on November 21, 2003.  The Companys shareholders approved the arrangement on November 21, 2003 at the Companys Annual General Meeting (AGM).  The Companys shareholders also approved a share consolidation on a 4.5 old shares for 1 new share basis, to be completed prior to the closing of the Briyante acquisition.

On November 25, 2003, the Company announced that it had completed the acquisition of Briyante.  The Company consolidated its shares on a 4.5 old shares for 1 new share basis and issued 4,040,406 new shares having a value of $0.90 for a total consideration of $3,636,365 to the shareholders of Briyante.  Briyantes shares were then de-listed from trading on the TSX Venture Exchange on November 26, 2003 and Briyante became a wholly-owned subsidiary of the Company.

The acquisition of Briyante has been accounted for as a business combination with the Company identified as the acquirer. In accordance with generally accepted accounting principles, the shares issued were valued based on their market price at the time the proposed transaction was agreed to and announced as, at that time, the Company concluded that its shares traded in an active and liquid market.  The fair value of the net assets acquired based on assets and liabilities at Briyantes balance sheet date and consideration issued are as follows:

44



---

Current assets
   $
   464,414Equipment
   
   44,079Intellectual property (note 7)
   
   3,872,551Current liabilities
   
   (476,355)$
   3,904,689Shares issued
   $
   3,636,365Costs
   
   268,324$
   3,904,689




5.

Equipment:



Accumulated
   
   
   Net book2004
   
   Cost
   
   amortization
   
   
   valueComputer hardware
   $
   412,691
   
   $
   308,506
   
   $
   104,185Furniture and fixtures
   
   134,886
   
   
   68,500
   
   
   66,386Software
   
   134,871
   
   
   122,199
   
   
   12,672Telephone Equipment
   
   6,761
   
   
   1,485
   
   
   5,276Tradeshow Equipment
   
   64,897
   
   
   44,792
   
   
   20,105Leasehold Improvements
   
   734
   
   
   734
   
   
   -$
   754,840
   
   $
   546,216
   
   $
   208,624




Accumulated
   
   
   Net book2003
   
   
   Cost
   
   amortization
   
   
   valueComputer hardware
   
   $
   364,798
   
   $
   227,924
   
   $
   136,874Furniture and fixtures
   
   
   125,300
   
   
   46,307
   
   
   78,993Software
   
   
   115,416
   
   
   112,968
   
   
   2,448Telephone Equipment
   
   
   6,761
   
   
   133
   
   
   6,628Tradeshow Equipment
   
   
   64,897
   
   
   35,627
   
   
   29,270Leasehold Improvements
   
   
   734
   
   
   14
   
   
   720$
   677,906
   
   $
   422,973
   
   $
   254,933


6.

Investment



On July 31, 2004 the Company entered into an agreement with a United Kingdom (UK) company to form a jointly owned subsidiary company Imagis Technologies UK Limited (Imagis UK). Imagis UK is the exclusive distributor of Imagis software products in the UK and a non-exclusive distributor on a world-wide basis. The Company owns a 25% interest in Imagis UK in consideration of the grant of UK exclusivity, and the UK company has committed to provide £500,000 (approximately $1.25 million) over the next two years to support the initial start-up costs of Imagis UK in consideration for a 75% ownership interest in Imagis UK. The Companys initial investment in Imagis UK has been recorded at a nominal amount of $1 and the Companys share of Imagis UKs income is accounted for on an equity accounted basis. Imagis UKs operations are in the start-up phase and there has been no significant gain or loss to date.

45



---

7.

Intellectual property:

|   | -                                              |    | -           | Accumulated  | -        | - | Net book    |        
|-- | ---------------------------------------------- | -- | ----------- | ------------ | -------- | - | ----------- | -------
|   | 2004                                           | -  | Cost        | amortization |          |   | value       |        
|   |                                                |    |             |              |          |   |             |        
|   | Intellectual property (note 4)                 |    | $ 3,972,551 | $ 1,421,591  |          |   | $ 2,550,960 |        
|   | -                                              | -- | -           | -            | -        | - | -           |        
|   |                                                |    |             |              |          |   |             |        
|   |                                                |    |             |              |          |   |             |        
|   | -                                              | -  | -           | Accumulated  | -        | - | Net book    |        
|   | 2003                                           | -  | Cost        | amortization | -        | - | value       |        
|   |                                                |    |             |              |          |   |             |        
|   | Intellectual property (note 4)                 |    | $ 3,872,551 | $ 125,184    |          |   | $ 3,747,367 |        
|   | -                                              | -  | -           | -            | -        | - | -           |        
|   |                                                |    |             |              |          |   |             |        
|   |                                                |    |             |              |          |   |             |        
|   |                                                |    |             |              |          |   |             |        
|8. | Other
Assets:                                  |    |             |              |          |   |             |        
|   |                                                |    |             |              |          |   |             |        
|   |                                                |    |             |              |          |   |             |        
|   |                                                |    |             |              |          |   |             |        
|   |                                                |    |             |              |          |   |             |        
|   |                                                |    |             | Accumulated  |          |   | Net book    |        
|   | 2004                                           |    | Cost        | amortization |          |   | value       |        
|   |                                                |    |             |              |          |   |             |        
|   | Patents                                        | $  | 78,227      | $            | 47,806   |   | $           | 30,421 
|   | License                                        |    | 236,395     |              | 190,382  |   |             | 46,013 
|   |                                                |    |             |              |          |   |             |        
|   |                                                | $  | 314,622     | $            | 238,188  |   | $           | 76,434 
|   |                                                |    |             |              |          |   |             |        
|   |                                                |    |             |              |          |   |             |        
|   |                                                |    |             |              |          |   |             |        
|   |                                                |    |             | Accumulated  |          |   | Net book    |        
|   | 2003                                           |    | Cost        | amortization |          |   | value       |        
|   |                                                |    |             |              |          |   |             |        
|   | Patents                                        | $  | 78,227      | $            | 21,730   |   | $           | 56,497 
|   | License                                        |    | 236,396     |              | 111,584  |   |             | 124,812
|   |                                                |    |             |              |          |   |             |        
|   |                                                | $  | 314,623     | $            | 133,314  |   | $           | 181,309
|   |                                                |    |             |              |          |   |             |        
|9. | Capital
    lease obligations::                |    |             |              |          |   |             |        
|   |                                                |    |             |              | 2004     |   |             | 2003   
|   |                                                |    |             |              |          |   |             |        
|   | 2004, including buy-out options                |    |             | $            | -        |   | $           | 29,046 
|   | 2005, including buy-out options                |    |             |              | 34,836   |   |             | 20,052 
|   | 2006, including buy-out options                |    |             |              | 14,784   |   |             | -      
|   | 2007, including buy-out options                |    |             |              | 14,931   |   |             | -      
|   |                                                |    |             |              | 64,551   |   |             | 49,098 
|   | Implicit interest portion                      |    |             |              | (11,549) |   |             | 5,165  
|   |                                                |    |             |              | 53,002   |   |             | 43,933 
|   | Current portion of capital lease obligations   |    |             |              | 28,089   |   |             | 24,762 
|   |                                                |    |             |              |          |   |             |        
|   | Long-term portion of capital lease obligations |    |             | $            | 24,913   |   | $           | 19,171 



46



---



10.

Share capital:

(a)

Authorized:

100,000,000 common shares without par value

50,000,000 preferred shares without par value, non-voting, issuable in one or more series

(b)

Issued:



Numberof shares
   
   
   AmountBalance, December 31, 2002
   4,522,414
   
   $
   17,361,118Issued during year for cash:Options exercised
   43,446
   
   
   129,370Warrants exercised
   29,630
   
   
   166,668Issued in settlement of accounts payable
   209,261
   
   
   236,931Issued for acquisition of Briyante Software
   4,040,406
   
   
   3,636,365Share issuance costs
   -
   
   
   (2,031)Balance, December 31, 2003
   8,845,157
   
   
   21,528,421Issued during year for cash:Private Placements
   7,938,208
   
   
   2,782,289Special Warrants exercised
   1,169,741
   
   
   907,985Issued in settlement of accounts payable
   2,654,675
   
   
   1,019,562Issued for acquisition of intellectual property
   187,500
   
   
   75,000Share issuance costs
   -
   
   
   (82,337)Balance, December 31, 2004
   20,795,281
   
   $
   26,230,920




On November 21, 2003, the Company consolidated its common shares on a one new share for each 4.5 old shares basis.  The table above and all references to number of shares in these financial statements and the earnings per share figures give effect to the share consolidation on a retroactive basis.

(c)

Special warrants:

During October and November 2003, the Company sold a total of 9,796,087 Special Warrants at $0.1725 per Special Warrant in a series of four tranches.  Cash proceeds of $899,075 less commissions of $39,758 were received for the sale of 5,212,029 Special Warrants and 4,584,058 Special Warrants were issued in settlement of $790,750 in debt.  Each Special Warrant is exercisable, for no additional consideration, into Units consisting of 0.2222 common shares and 0.2222 share purchase warrants, with the exception of 1,002,899 Special Warrants issued to insiders of the Company.  The Units issued to insiders of the Company are exercisable into 0.2222 common shares with no share purchase warrant.  Each whole warrant entitles the holder for two years from the date of issue of the Special Warrants to acquire one additional common share at an exercise price of $1.04 per share in the first year and $1.14 per share in the second year.  The Special Warrants are convertible at the holders option at any time for an eighteen month period and will convert automatically at the end of the eighteen months.  The Company will not be required to meet any conditions prior to conversion.  Finders fees of $39,758 in cash and 38,641 in brokers warrants exercisable at $1.04 per share were paid.  The brokers warrants were exercisable until October 30, 2004 and have been recorded at the fair value as at the date of issue of $7,327 as a reduction in the proceeds of the Special Warrants and an increase in Contributed Surplus.  As at December 31, 2004, 1,169,741 Units

47



---

have been issued on conversion of the Special Warrants which resulted in the issuance of 1,169,741 common shares and 1,169,741 share purchase warrants.

10.

Share capital (continued):

(d)

Share subscriptions

As at December 31, 2004 the Company had received share subscriptions of $140,000 to be applied to a private placement that was completed January 11, 2005. The private placement consisted of 2,857,785 Units at $0.35 per Unit. Each Unit consists of one common share and one common share purchase warrant.  Each warrant entitles the holder to acquire one additional common share in the capital of Imagis at an exercise price of $0.45 until January 11, 2006 or at $0.55 from January 12, 2006 until January 11, 2007. The common shares and warrants are subject to a four month hold period that expires on May 10, 2005. Finders fees of $72,771 in cash were paid on a portion of the private placement. The total net proceeds to Imagis of $927,454 are recorded in January 2005, except for the $140,000 received prior to year-end.

(e)

Warrants:

At December 31, 2003, and 2004, the following warrants were outstanding:



December 31,
   
   
   
   
   
   December 31,
   
   Exercise2003
   
   
   Granted
   Exercised
   Expired
   
   2004
   
   price
   
   Expiry date11,111
   
   
   -
   -
   (11,111)
   
   -
   
   $9.90
   
   January 18, 200464,815
   
   
   -
   -
   (64,815)
   
   -
   
   US$8.78
   
   July 8, 200423,333
   
   
   -
   -
   (23,333)
   
   -
   
   US$10.53
   
   July 24, 200438,641
   
   
   -
   -
   (38,641)
   
   38,641
   
   $1.04
   
   October 30, 2004670,930
   
   
   -
   -
   -
   
   670,930
   
   $0.64
   
   November 20, 2005-
   
   
   64,412
   -
   
   
   64,412
   
   $1.14
   
   September 30, 2005-
   
   
   128,824
   -
   -
   
   128,824
   
   $1.14
   
   October 10, 2005-
   
   
   976,505
   -
   -
   
   976,505
   
   $1.14
   
   October 31, 2005-
   
   
   4,007,875
   -
   -
   
   4,007,875
   
   $0.50
   
   April 28, 2005or at $0.75
   
   April 28, 2006-
   
   
   226,584
   -
   -
   
   226,584
   
   $0.50
   
   April 29, 2005or at $0.75
   
   April 29, 2006-
   
   
   166,700
   -
   -
   
   166,700
   
   $0.53
   
   May 20, 2005or at $0.75
   
   May 20, 2006-
   
   
   187,500
   -
   -
   
   187,500
   
   $0.40
   
   November 29, 2005or at $0.50
   
   November 29, 2006-
   
   
   3,930,333
   -
   -
   
   3,930,333
   
   $0.40
   
   November 30, 2005or at $0.50
   
   November 30, 2006-
   
   
   946,166
   -
   -
   
   946,166
   
   $0.45
   
   December 31, 2005-
   
   
   
   
   
   
   
   
   or at $0.55
   
   December 31, 2006808,830
   
   10,634,899
   -
   (137,900)
   11,305,829




48



---

10.

Share capital (continued):

(e)

Warrants (continued):

At December 31, 2002 and 2003, the following warrants were outstanding (giving retroactive effect to the share consolidation):



December 31,
   
   
   
   
   
   December 31,
   
   Exercise2002
   
   Granted
   Exercised
   Expired
   
   2003
   
   price
   Expiry date29,630
   
   -
   (29,630)
   -
   
   -
   
   $
   5.63
   February 23, 200348,933
   
   -
   
   (48,933)
   
   -
   
   $
   8.15
   March 9, 20033,474
   
   -
   -
   (3,474)
   
   -
   
   $
   8.15
   March 9, 200311,111
   
   -
   -
   -
   
   11,111
   
   $
   9.90
   January 18, 200464,815
   
   -
   -
   -
   
   64,815
   
   US$8.78
   July 8, 200423,333
   
   -
   -
   -
   
   23,333
   
   US$10.53
   July 24, 2004-
   
   38,641
   -
   -
   
   38,641
   
   $
   1.04
   October 30, 2004-
   
   670,930
   -
   -
   
   670,930
   
   $
   0.64
   November 20, 2005181,296
   
   709,571
   (29,630)
   (52,407)
   
   808,830


(f)

Options:

The Company has a stock option plan that was approved at the Companys AGM on June 18, 2004.  Under the terms of the plan the Company may reserve up to 3,347,690 common shares for issuance under the plan.  The Company has granted stock options to certain employees, directors, advisors, and consultants.  These options are granted for services provided to the Company.  All options granted prior to November 25, 2003, expire five years from the date of grant with the exception of 22,222 options issued during 2002 to a consultant that expire two years from the date of grant.  All options granted subsequent to November 25, 2003, expire 3 years from the date of the grant.  All options vest one-third on the date of the grant, one-third on the first anniversary of the date of the grant and one-third on the second anniversary of the date of the grant.  On November 25, 2003, all stock options along with the Companys outstanding shares were consolidated on a 1 new option for 4.5 old basis. During the period ended December 31, 2004 all options outstanding as at December 31, 2003 were repriced to $0.78. For options that were granted prior to the adoption of the fair value based method, the fair value of the award was remeasured at the date of modification, and the full amount of the fair value was recorded as the compensation cost to the extent that vesting has occurred at December 31, 2004.

For options issued in 2003 and previously accounted for under the fair value method, modification accounting is applied.  Under modification accounting the Company recorded additional expense equal to the difference between the fair value of the original award on the date of the repricing, and the fair value of the modified award also on the date of the repricing.

A summary of the status of the Companys stock options at December 31, 2004, and December 31, 2003 (giving retroactive effect to the share consolidation), and changes during the periods ended on those dates is presented below:



December 31, 2004
   
   December 31, 2003Weighted average
   
   
   
   Weighted averageShares
   
   exercise price
   
   Shares
   
   exercise priceOutstanding, beginning of period
   770,294
   
   $
   5.26
   
   668,198
   
   $
   7.56Repriced to $0.78
   
   
   
   (4.48)Granted
   2,690,925
   
   
   0.58
   
   421,557
   
   
   1.51Exercised
   
   
   
   
   
   (43,446)
   
   
   2.97Cancelled
   (368,885)
   
   
   0.78
   
   (276,015)
   
   11.70Outstanding, end of period
   3,092,334
   
   $
   0.61
   
   770,294
   
   $
   5.26




49



---

10.

Share capital (continued):

(f)

Options (continued):

The following table summarizes information about stock options outstanding at December 31, 2004:



Options outstanding
   
   
   
   
   Options exercisableNumber
   
   
   
   
   
   
   Numberoutstanding
   
   Weighted
   
   Weighted
   
   exercisable,
   
   WeightedDecember 31,
   
   remaining
   
   average
   
   December 31,
   
   averageExercise price
   
   2004
   
   contractual life
   
   exercise price
   
   2004
   
   exercise price$
   0.30
   
   5,000
   
   2.87
   
   $
   0.30
   
   1,667
   
   $
   0.30$
   0.33
   
   105,000
   
   2.96
   
   $
   0.33
   
   35,000
   
   $
   0.33$
   0.34
   
   40,000
   
   2.86
   
   $
   0.34
   
   13,334
   
   $
   0.34$
   0.40
   
   1,148,932
   
   2.63
   
   $
   0.40
   
   382,951
   
   $
   0.40$
   0.41
   
   18,000
   
   2.48
   
   $
   0.41
   
   6,000
   
   $
   0.41$
   0.45
   
   15,000
   
   2.42
   
   $
   0.45
   
   5,000
   
   $
   0.45$
   0.55
   
   10,000
   
   2.34
   
   $
   0.55
   
   3,333
   
   $
   0.55$
   0.66
   
   103,333
   
   2.17
   
   $
   0.66
   
   34,441
   
   $
   0.66$
   0.78
   
   1,647,069
   
   2.00
   
   $
   0.78
   
   1,227,829
   
   $
   0.783,092,334
   
   2.29
   
   $
   0.61
   
   1,709,556
   
   $
   0.68


The weighted average fair value of employee stock options granted during the year was $0.86 (2003: $NIL) per share purchase option. The weighted average fair value of employee stock options repriced during the period ended December 31, 2004 was $0.52 (2003:$NIL) per share purchase option as at the date of the reprice.  The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following average inputs:  volatility - 200%; risk free interest rate - 5%; option term - 3 years; and dividend yield - nil.  The total compensation expense of $1,204,307 has been allocated to the expense account associated with each individual employee expense and credited to contributed surplus.

The weighted average fair value of employee stock options granted during the year ended December 31, 2004 was $0.72 (2003 - $7.29) per share purchase option.



11.

Related party transactions not disclosed elsewhere are as follows:

At December 31, 2004, accounts payable and accrued liabilities included $284,759 (at December 31, 2003-$418,258) owed by the Company to directors, officers and companies controlled by directors and officers of the Company. These amounts are unsecured, non-interest bearing and payable on demand. At December 31, 2004, accounts payable and accrued liabilities included $300,500 (at December 31, 2003 - $372,442) owed by the Company to companies formerly related by virtue of having a director or officer in common with the Company.

12.

Income taxes:

Income tax expense differs from the amount that would be computed by applying the federal and provincial statutory income tax rates of 35.62% (2003 - 35.62%) to income before taxes due to valuation allowances provided against losses incurred in the year.

50



---

12.

Income taxes (continued):

The effective income tax rates differ from the Canadian statutory rates for the following reasons:



2004
   
   
   2003Canadian statutory rates
   
   35.62%
   
   
   35.62%Canadian federal and provincial taxes
   $
   (1,944,117)
   
   $
   (1,445,476)Intellectual property not recorded for tax purposes
   
   (229,901)
   
   
   667,406Non-capital losses expired (not previously recognized)
   
   406,068
   
   
   (755,646)Non-deductible stock based compensation
   
   428,974
   
   
   2,500Non-deductible amortization of intellectual property
   
   459,801
   
   
   44,590Financing costs charged against share capital
   
   29,588
   
   
   59,389Permanent and other differences
   
   (49,763)
   
   
   (49,115)Changes in valuation allowance
   
   899,350
   
   
   1,476,352$
   -
   
   $
   -Future income tax assets:Non-capital losses carried forward
   $
   8,359,169
   
   $
   7,733,168Capital assets
   
   234,836
   
   
   165,289Financing costs
   
   103,653
   
   
   133,241Other
   
   43,422
   
   
   38,708Total future income tax assets
   
   8,741,080
   
   
   8,070,406Less valuation allowance
   
   (8,303,574)
   
   
   (7,403,000)437,506
   
   
   667,406Future income tax liability:Intellectual property
   
   (437,506)
   
   
   (667,406)Net future income taxes
   $
   -
   
   $
   -


In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will be realized.  The ultimate realization of the future tax assets is dependant upon the generation of future taxable income during the periods in which those temporary differences become deductible.

As at December 31, 2004, the Company has non-capital loss carry forwards aggregating approximately $23,469,000 available to reduce taxable income otherwise calculated in future years.  These losses expire as follows:



2005
   
   $
   301,0002006
   
   
   2,274,0002007
   
   
   3,031,0002008
   
   
   4,129,0002009
   
   
   6,976,0002010
   
   
   3,866,0002011
   
   
   2,892,000


51



---

13.

Commitments:

The Company is committed to the following operating lease payments over the next four years:



Year
   Equipment
   
   
   Building
   
   
   Total2005
   $
   37,706
   
   $
   140,664
   
   $
   178,3702006
   
   14,784
   
   
   45,985
   
   
   60,7692007
   
   14,931
   
   
   -
   
   
   14,931$
   67,421
   
   $
   186,649
   
   $
   254,070


The Company has entered into the following commitments with a company formerly related to the Company by virtue of having a director in common:

On July 8, 2002, the Company entered into the following agreements with OSI Systems Inc (OSI):

i.

Product Development and Marketing Agreement. Under this agreement, the Company formed a strategic alliance with OSI to develop mutually agreed integrated airport and transportation security products The Company agreed to commit a minimum of US$250,000 to develop these products and operate this group.

ii.

Software Developer Services Agreement. Under this agreement, the Company agreed to engage the services of software engineers and equipment in OSIs software development facility in Hyderabad, India. The Company agreed to pay to OSI a minimum of US$250,000 during the term of the agreement, which expired on June 30, 2003, provided that if the aggregate amount paid to OSI on such date is less than US$250,000, the agreement could be extended for six months.

iii.

Joint Venture Letter of Intent. Under this letter of intent, upon OSIs establishment of a Brazilian entity to oversee marketing, sales, service and assembly and marketing of OSIs products, in Brazil and the establishment of an office in Brazil, Imagis was to invest US$250,000 for a 20% equity ownership in that entity.

On March 20, 2003 the above agreements were amended as follows:

i.

the strategic alliance agreement to develop and market integrated airport and security products with OSI was extended to July 8, 2004. The expenditure commitment was reduced to a minimum of US$125,000 on product development and the operation of an Airport Security Group to market the products. As at December 31, 2004, the Company has incurred USD$48,350 in expenditures on product development.

ii.

the agreement to engage OSI to provide software development services was extended to December 31, 2004. The expenditure commitment has been reduced to a minimum of US$125,000, based on hourly rates charged at 85% of fair market value.

iii.

The Company agreed to pay OSI a management fee of US$250,000 on or before March 20, 2004



The Company has received a Notice of Demand from OSI for USD$500,000 alleging that the Company is in default under the terms of these agreements. The Company believes that OSI acted in bad faith and intends to defend its position. The dispute has been referred to the American Arbitration Association for resolution. While the Company believes that it will not be liable for OSIs claim there can be no assurance that the claim will be resolved in the Companys favour.

14.

Financial instruments and risk management:

(a)

Fair values:

The fair value of the Companys financial instruments, represented by cash, accounts receivable, accounts payable and accrued liabilities, approximates their carrying values due to their ability to be promptly liquidated or their immediate or short term to maturity.  Based on current interest rates relative to those implicit in the leases, the fair value of capital lease obligations is estimated to not be materially different from their carrying values.

52



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14.

Financial instruments and risk management (continued):

(b)

Credit risk:

The Company is exposed to credit risk only with respect to uncertainty as to timing and amount of collectibility of accounts receivable.  The Companys maximum credit risk is the carrying value of accounts receivable.

(c)

Foreign currency risk:

Foreign currency risk is the risk to the Companys earnings that arises from fluctuations in foreign currency exchange rates, and the degree of volatility of these rates.  Management has not entered into any foreign exchange contracts to mitigate this risk.



15.

Segmented information:

The Company operates in a single segment, the development and sale of software.  Management of the Company makes decisions about allocating resources based on this one operating segment.

Substantially all revenue is derived from sales to customers located in Canada, the United States and the United Kingdom.  Geographic information is as follows:



|               |   |   | 2004      |  |   |   | 2003      | 
|-------------- | - | - | --------- |  | - | - | --------- | 
|               |   |   |           |  |   |   |           | 
|Canada         | $ |   | 183,980   |  | $ |   | 104,985   | 
|United States  |   |   | 308,625   |  |   |   | 1,085,567 | 
|United Kingdom |   |   | 448,189   |  |   |   | 75,285    | 
|Japan          |   |   | -         |  |   |   | -         | 
|Other          |   |   | 92,176    |  |   |   | 89,905    | 
|               |   |   |           |  |   |   |           | 
|               | $ |   | 1,032,970 |  | $ |   | 1,355,742 | 
|               |   |   |           |  |   |   |           | 
|               |   |   |           |  |   |   |           | 
|               |   |   | 2004      |  |   |   | 2003      | 
|               |   |   |           |  |   |   |           | 
|Customer A     |   | $ | 255,165   |  |   | $ | -         | 
|Customer B     |   |   | 98,142    |  |   |   | -         | 
|Customer C     |   |   | 23,337    |  |   |   | 390,222   | 
|Customer D     |   |   | -         |  |   |   | 401,337   | 





16.
Subsequent events:



On January 11, 2005 the Company closed a private placement, see Note 10 (d).



53



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17.

United States generally accepted accounting principles:

These financial statements have been prepared in accordance with generally accepted accounting principles in Canada (Canadian GAAP) which differ in certain respects with accounting principles generally accepted in the United States (U.S. GAAP).  Material issues that could give rise to measurement differences to these consolidated financial statements are as follows:



(a)

Stock-based compensation:

As described in note 10, the Company has granted stock options to certain employees, directors, advisors, and consultants.  These options are granted for services provided to the Company.  For options issued subsequent to December 31, 2001, the Company amortizes the expense of all options issued to non-employees based on the Black-Scholes model under Canadian GAAP.  For U.S. GAAP purposes, an enterprise recognizes or, at its option, discloses the impact of the fair value of stock options and other forms of stock based compensation in the determination of income.  The Company has elected under U.S. GAAP to continue to measure compensation cost for stock options granted to employees prior to January 1, 2003 by the intrinsic value method.  Options granted to non employees prior to January 1, 2002, are required to be measured and recognized at their fair value as the services are provided and the options are earned.  In addition, during the year ended December 31, 2001 and 2002, the Company repriced certain options and consequently, in accordance with the intrinsic value method under U.S. GAAP, such options are accounted for as variable options and net increases in the underlying common shares market price since the repricing date are recognized as compensation cost until the options are exercised, expire or forfeited.

(b)

Beneficial conversion option:

During the year ended December 31, 2000, the Company issued convertible debentures with detachable warrants attached.  For Canadian GAAP purposes, the issuance was considered to be of a compound debt and equity instrument and the proceeds were allocated between the two elements based on their relative fair values.  For U.S. GAAP purposes, the consideration received was allocated between the debt and warrants resulting in a beneficial conversion option as the fair value of the shares issuable on conversion of the debt is in excess of the value at which such shares would be issuable based on the reduced carrying value of the debt element.  This beneficial conversion option was amortized over the period to the first conversion date.

(c)

Warrant issuances for services:

During the year ended December 31, 2000, the Company issued 200,000 warrants having an exercise price of $3.50 each for services rendered. In accordance with the Companys accounting policies, for Canadian GAAP purposes no value has been assigned to these warrant issuances. For U.S. GAAP purposes, the fair value of these warrants would be determined based on an option pricing model and recognized as the services are provided.

54



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17.

United States generally accepted accounting principles (continued):

The effect of these accounting differences on deficit, net loss, loss per share and future income taxes under United States accounting principles are as follows:



2004
   
   
   2003Deficit, Canadian GAAP
   $
   (26,658,823)
   
   $
   (21,200,886)Cumulative stock based compensation (a)
   
   (1,380,198)
   
   
   (1,345,198)Beneficial conversion options (b)
   
   (208,200)
   
   
   (208,200)Warrants issued for services (c)
   
   (722,000)
   
   
   (722,000)Deficit, U.S. GAAP
   $
   (28,969,221)
   
   $
   (23,476,284)Loss for the year, Canadian GAAP
   $
   (5,457,937)
   
   $
   (4,058,857)Stock-based compensation
   
   (35,000)
   
   
   (50,174)Loss for the year, U.S. GAAP
   $
   (5,492,937)
   
   $
   (4,109,031)Loss per share, U.S. GAAP  basic and diluted
   $
   (0.39)
   
   $
   (0.87)




55



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Item 8.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.



Item 8A. Controls and Procedures.



Under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief Operating Officer and Vice-President, Finance, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) of the end of the period covered by this report (the Evaluation Date).  Based upon that evaluation, the Chief Executive Officer and Chief Operating Officer and Vice-President, Finance concluded that, as of the Evaluation Date, the Companys disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company (or its consolidated subsidiaries) required to included in the Companys periodic SEC filings.



During the quarter ended December 31, 2004, there was no significant change in the Companys internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



The Companys management, including the Chief Executive Officer and Chief Operating Officer and Vice President, Finance, does not expect that the Companys disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.



Item 8B. Other Information.

None

56



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Part III

Item 9.

Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.

Executive Officers and Directors

The following table sets forth certain information concerning the Companys executive officers and directors as of December 31, 2004:



Name

Age

Position with the Company



Oliver Buck Revell

66

Chairman of the Board

Roy Davidson Trivett

57

President, Chief Executive Officer and Director

Wayne Smith

48

Chief Operating Officer and Vice President, Finance

Al Kassam

42

Vice-President, Sales and a Director

Karim Jadavjee Khoja(1)

46

Director

Michael C. Volker(1)

56

Director

Keith Kretschmer

70

Director

Clyde Farnsworth(1)

64

Director

Chris Wiesinger

38

Vice President, Business Development

Colby James Smith

39

Vice President, Engineer

___________________________

(1)

Audit Committee Member



Oliver "Buck" Revellwas appointed as the Companys Chairman of the board of directors (the Board) in January 2000.  Mr. Revell served for over 30 years in the United States Federal Bureau of Investigation, and during his career advanced to the position of Associate Deputy Director.  Mr. Revell has served on a number of Presidential and Vice Presidential task forces, including as Vice-Chairman of the Interagency Group for Counter-Intelligence and as a member of both the National Foreign Intelligence Board and the Terrorist Crisis Management Committee of the National Security Council.  Mr. Revell is a life member of the International Association of Chiefs of Police, and the founding Chairman of its Committee on Terrorism. Mr. Revell was President of the Law Enforcement Television Network 1999 to 2004 and also serves as a Trustee of the Center for American and International Law Dallas Texas and as President of the Institute for the Study of Terrorism and Political Violence in Washington DC.



Roy Davidson Trivettwas appointed as a director of Imagis in March 2002.  Mr. Trivett was appointed President and Chief Executive Officer of the Company in July 2003. Mr. Trivett has been the President of Trivett Holdings Ltd. since August 1994 and the President and a director of Silicon Slopes Capital Corp. since October 1998.  Mr. Trivett holds Bachelor and Masters degrees in engineering from Carleton University in Canada.



Wayne Smithhas been with Imagis since May 2002 and served as the Companys Chief Financial Officer from September, 2002 to July 2003.  Mr. Smith was appointed Chief Operating Officer and Vice President, Finance on July 2003.  Since 1997, Mr. Smith has also been a partner of TelePartners Consulting Inc., a consulting services company that provides management and financial consulting services, primarily in the call center and help desk areas.  From May 2002 to September 2002, Mr. Smith served as comptroller of International Portfolio Management.  From October 2001 to May 2002, Mr. Smith was a risk management advisor of Peter Reimer & Associates, from 1997 to July 2001 Mr. Smith was an Audit Senior of Amisano Hanson Chartered Accountants.  Mr. Smith holds a Chartered Accountants designation in Canada.



Al Kassam was appointed Vice President, Sales in April 2004.  He originally joined Imagis as Vice President, Technology and Development, Chief Technology Officer and Director in November 2003, upon completion of the acquisition of Briyante Software Corp. Mr. Kassam was President and  Chief Executive Officer of Briyante from October 2001 until November 2003 where he oversaw the development of the firm from a research and development organization to a developer and marketer of data-sharing products in the North American Justice market. Prior to October 2001, he was a co-founder and Managing Partner of Benchmark Technologies Inc. from April 1995 to October 2001, an IT consulting firm engaged in the development of custom software for business to business data exchange. Mr. Kassam has 18 years of information technology experience.  Mr. Kassam holds a Bachelor of Science from Simon Fraser University and a Masters of Business Administration from the University of British Columbia.

He is a Microsoft Certified Professional, and has spoken worldwide on the topics of disparate database integration and system development.



57



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Karim Jadavjee Khoja became a Director of Imagis in November 2003. Prior to joining the Board of Imagis; Mr. Khoja served on the Board of Directors for Briyante. Mr. Khoja has 14 years of data communication experience establishing and developing business activities internationally, including in North America, Europe, Central Eastern Europe, the Middle East, South Asia, and South East Asia. Mr. Khojas experience includes a role as Chief Executive Officer and Director of EXI Wireless, a two-way wireless tagging business. Mr. Khoja has also held senior-level positions with HT Mobile, Croatia (as Chief Executive Officer); Era GSM, Polska Telefonia Cyfrowa (Director, Director of Strategy, Marketing, and Sales); and with Mobilink Nation-wide GSM Cellular, Pakistan (as President and Chief Executive Officer). Mr. Khoja holds a Bachelor of Science and a Masters of Business Administration from the University of London.



Michael C. Volkerwas appointed to the Board of Directors of Imagis in November 2003. He also currently serves as the Director of the Industry Liaison Office of Simon Fraser University in Burnaby, British Columbia.  From June 1996 to June 2001, he was Chairman of the Vancouver Enterprise Forum and continues as an active director managing the Vancouver Technology Angel Network. Mr. Volker has taught courses in engineering, economics, design and management (organizational behavior) at the University of Waterloo, University of Toronto, Simon Fraser University, and Kansas University. Mr. Volker obtained his Bachelor of Science and Masters of Science degrees from the University of Waterloo. Mr. Volker also served a maximum term as a Governor of the University of Waterloo (1987 - 1993).



Keith Kretschmer retired following a thirty-year career in financial services and investments in 2001. Prior to retirement, Mr. Kretschmer served as the Managing Director of Oppenheimer & Co. from 1993 to 1994 and with Oppenheimer Capital from 1994 to 2001. Oppenheimer Capital is a leading global value-equity investment firm with more than $20 billion in assets under management. Prior to his involvement at Oppenheimer, Mr. Kretschmer was a General Partner of Bear Stearns and Co. (Los Angeles) and Senior Managing Director of Bear Stearns and Co. Inc. (Boston). He also serves on the Board of Directors of Cogent Financial (dba Medicredit).  Mr. Kretschmer served on the White House Advance Staff during the Ford and Nixon administrations and he has served as an officer and director with a number of charities. He is a graduate of Wentworth Military Academy, the University of Nebraska, and attended UCLAs Graduate School of Management.



Clyde Farnsworthserved as the Director of Reserve Bank Operations and Payment Systems for the Board of Governors of the United States Federal Reserve System prior to retirement in June 1999. As the Director, Mr. Farnsworth had responsibility for operations of the twelve Federal Reserve banks on behalf of the Federal Reserve Board. During his term, he represented the Board of Governors on the following Group of Ten Committees of the Bank for International Settlements; the Committee on Payment and Settlement Systems; the Group of Computer Experts; and the Security Experts. Mr. Farnsworths duties also included automation and communication planning, financial planning, financial control, and budgeting for the twelve Reserve Banks. Prior to joining the Federal Reserve Board in 1975, he served as an officer and economist at the Federal Reserve Bank of Richmond, VA, from August 1969 to August 1975.  He was a professor of economics at Virginia Tech from 1967 to 1969, and was an Adjunct Professor at the University of Richmond and at Virginia Commonwealth University while working at the Richmond Federal Reserve Bank.  Mr. Farnsworth holds a Bachelor of Arts degree in mathematics, a Master of Arts degree in finance, and a Ph.D. in economics.



Chris Wiesinger joined Imagis in February 2003 and was promoted to Vice President, Business Development in March 2004. Prior to joining Imagis, Mr. Wiesinger was a principal and co-founder of SigmaLogic Associates, providing business development and product management consulting services to a variety of firms in biometrics, law enforcement, and data sharing verticals. As Director of Strategic Partnerships for Touchless Sensor Technology AG from March 2000 to January2002, he was responsible for forging business relationships and opportunities for the sale of fingerprint sensors in North America and Europe. As an Account Executive for the EDS International Public Safety Group from May 1997 to January 2000, Mr. Wiesinger provided sales leadership on consulting, system integration and functional outsourcing opportunities for corrections, emergency communications, and public safety command and control clients.  Mr. Wiesinger holds Bachelor of Arts (First Class) and Master of Arts degrees from the University of British Columbia.



Colby James Smith
originally joined Imagis in
April 1999 as a Senior Software Engineer and was a key engineer in the development of the Companys face recognition technology and applications.  Mr. Smith left Imagis in May 2003 to work for Microsoft as a technical evangelist on many varied security and surveillance software projects. He is regarded as an expert on 64-bit technology and was the key speaker in a 15 city Microsoft worldwide seminar series on 64-bit migration.  Mr. Smith rejoined the Imagis team in August 2004 as a senior software engineer. Prior 
to joining Imagis
 in April 1999,
he developed software for several Physics research projects for the Institute of Ocean Sciences, the UBC TRIUMF particle accelerator and most recently the Centre for Water Research in Perth, Australia. Mr.
Smith holds a Bachelor of
Science degree
in Computer Science from the University of
Victoria.

58



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Board of Directors



Each Board member is elected annually and holds office until the next annual meeting of shareholders or until his or her successor has been elected or appointed, unless his or her office is earlier vacated in accordance with our Bylaws. Officers serve at the discretion of the Board and are appointed annually.  None of the Companys directors or executive officers has any family relationship with any other officer or director.



Audit Committee and Audit Committee Financial Expert

Imagis has established an audit committee which was comprised of Clyde Farnsworth, Chairman, Karim Khoja and Mike Volker as of December 31, 2004.  The Board has determined that Mr. Farnsworth, who is an independent director, (as that term is used in Item 7(d)(3)(iv) of Schedule 14A under Exchange Act) meets all of the criteria required of an audit committee expert.  The audit committee recommends independent accountants to audit its financial statements, discusses the scope and results of the audit with the independent accountants, reviews its interim and year-end operating results with its executive officers and independent accountants, considers the adequacy of the internal accounting controls, considers the audit procedures of the Company and reviews the non-audit services to be performed by the independent accountants.



Compensation Committee

Imagis has a compensation committee which was comprised of Keith Kretschmer, Chairman, Mike Volker and Karim Khoja at December 31, 2004.

Code of Ethics

Imagis has adopted a Code of Ethics that applies to all the Companys directors, officers and employees. A copy of the Code of Ethics may be viewed on the Companys website at www.imagistechnologies.com.

Compliance with Section 16(a) of the Exchange Act

The Company is a foreign private issuer as defined in Rule 3b-4 promulgated under the Exchange Act and, therefore, its officers, directors and greater than 10% shareholders are not subject to Section 16 of the Exchange Act, pursuant to Rule 3a12-3(b) promulgated under such Act.

Item 10.  Executive Compensation.



Compensation of Named Executive Officers

The following table sets forth compensation paid to the Companys Chief Executive Officers and each of the Companys executive officers that received compensation in excess of US$100,000 during the year ended December 31, 2004  (the Named Executive Officers).

59



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Summary Compensation Table



Summary Compensation TableName and
Principal PositionFiscal
YearAnnual CompensationLong Term CompensationAwardsPayoutsSalary
($)Bonus
($)Other Annual Compensation
($)Restricted Stock Awards
($)Securities Under Options
(#)LTIP Payouts
($)All Other Compensation
($)Roy Trivett
President and Chief Executive Officer (1)2004
2003
2002172,496
84,767
20,000N/A
N/AN/A
N/AN/A
N/A674,444
N/A
55,556N/A
N/AN/A
N/AWayne Smith
Chief Operating Officer and Vice President, Finance(2)2004
2003
2002132,040
112,500
63,79530,000N/A358,888
0
11,112N/AN/AAl Kassam
Vice President, Sales(3)2004
2003137,298
10,412N/AN/A120,356
79,644N/AN/AChris Wiesinger
Vice President, Business Development(4)2004
2003105,808
49,50014,500N/A200,000
0N/AN/A


(1)

Mr. Trivett Joined the Company as of July 15, 2003

(2)

Mr. Smith Joined the Company as of May 1, 2002

(3)

Mr. Kassam joined the Company as of November 24, 2003

(4)

Mr. Wiesinger joined the Company as of  February 1, 2003



Options Granted during the Year Ended December 31, 2004



The following table sets forth the Companys stock options grants to the Named Executive Officers during the year ended December 31, 2004:



Individual GrantsNameNumber of
Securities
Underlying
Options% of Total
Options
Granted to
Employees in
Fiscal YearExercise
Price Per
ShareNumber of
Options
Vested (1)Expiration
DateRoy Trivett484,444
190,00025.0%
9.8%$0.78
$0.40322,964
63,324December 5, 2006
August 18, 2007Wayne Smith258,888
100,00013.4%
5.2%$0.78
$0.40172,592
33,333December 5, 2006
August 18, 2007Al Kassam30,356
90,0001.6%
4.7%$0.78
$0.4020,238
30,000December 5, 2006
August 18, 2007Chris Wiesinger25,000
50,000
125,0001.3%
2.6%
6.5%$0.78
$0.66
$0.4016,666
33,335
41,663December 5, 2006
March 4, 2007
August 18, 2007




(1)

All options are granted for a period of three years.  One-third of the options vest on the date of grant, one-third on the first anniversary of the date of grant and one-third on the second anniversary of the date of grant.

60



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Options Exercised during the Year Ended December 31, 2004



The following table sets forth for the Named Executive Officers the number of shares acquired upon exercise of stock options during the year ended December 31, 2004 and the number of shares issuable subject to exercised and unexercised stock options held as of December 31, 2004.



Aggregated Options Exercised During 2004 Fiscal Year and Financial Year-End Option ValuesNumber of Securities
Underlying Unexercised
Options at Fiscal Year-EndValue of Unexercised
In-The-Money Options at
Fiscal Year End (1)NameShares Acquired
on ExerciseValue
RealizedExercisableUnexercisableExercisableUnexercisableRoy Trivett----441,854288,146N/AN/AWayne Smith----217,034152,966N/AN/AAl Kassam----129,88270,118N/AN/AChris Wiesinger----74,996125,004N/AN/A




(1) The value of unexercised in-the-money options at December 31, 2004 is based upon a price of $0.32 per share, the closing price of the Companys common shares at December 31, 2004 on the TSX Venture Exchange less the exercise price per share.

Employment Agreements

Imagis has entered into an employment agreement with Roy Trivett, the Companys President and Chief Executive Officer.  Mr. Trivetts contract consists of an annual fee of $172,200 and an annual cash performance bonus to be 40% of cumulative fees paid each year based on Imagis having completed a profitable calendar year or partial year.

Compensation of Directors

During the most recently completed financial year ended December 31, 2004, there was cash compensation of $44,000 accrued by Imagis to its directors.  The Company compensates directors that do not receive compensation as consultants or employees on a fee per meeting attended basis, there were five meetings during 2004.  The payment structure is $2,500 for personal attendance at full board of directors meetings, $1,500 for attendance by telephone and $1,000 for personal attendance at committee meetings and $750 for attendance by telephone to committee meetings.  The Company reimburses directors for expenses incurred in connection with their services as directors.  The Company may grant stock options to its directors of which the timing, number, and exercise price are established on a case-by-case basis.



61



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The following table outlines the stock purchase options that have been granted to the Companys directors during the fiscal year ended December 31, 2004:



DirectorNumber of OptionsExercise PriceExpiry DateVesting ProvisionAl Kassam30,356$0.78December 5, 20063 yearsAl Kassam90,000$0.40August 18, 20073 yearsClyde Farnsworth50,000$0.66March 4, 20073 yearsClyde Farnsworth95,000$0.40August 18, 20073 yearsKarim Khoja34,133$0.78December 5, 20063 yearsKarim Khoja95,000$0.40August 18, 20073 yearsKeith Kretschmer50,000$0.66March 4, 20073 yearsKeith Kretschmer95,000$0.40August 18, 20073 yearsMichael Volker50,000$0.78December 5. 20063 yearsMichael Volker95,000$0.40August 18, 20073 yearsOliver Revell124,445$0.78December 5, 20063 yearsOliver Revell10,000$0.55May 5, 20073 yearsOliver Revell60,000$0.40August 18, 20073 years




Mr. Revell has a consulting agreement with Imagis that provides for annual payments of USD$100,000. See also Item 12  Certain Relationships and Related Transactions.



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Item 11.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth certain information concerning the number of the Companys common shares owned beneficially as of March 15, 2005 by: (i) each Named Executive Officer of the Company; (ii) each director of the Company; (iii) each person known to the Company to beneficially own more than five percent (5%) of the Companys common shares based upon statements filed with the Securities and Exchange Commission pursuant to Sections 13(d) or (g) of the Exchange Act; and (iv) all of the Companys directors and officers as a group.  Unless otherwise indicated, the shareholders listed possess sole voting and investment power with respect to the shares shown.

TITLE OF
CLASSNAME AND ADDRESS OF BENEFICIAL OWNERAMOUNT AND NATURE OF BENEFICIAL OWNERPERCENT
OF CLASS(1)Common
    SharesRoy Davidson Trivett
2683 Country Woods Drive
Surrey, BC V3S 0E6
Canada5,514,189(2)20.8%Common
    SharesOliver Buck Revell
36 Victoria Drive, Suite A
Rowlett, TX     75088-6062
USA814,082(3)3.4%Common
    SharesClyde Farnsworth
2566
Mariners Way SE
Southport, NC  28461
USA734,168(4)3.1%Common
    SharesKeith Kretschmer
294 Sunshine Avenue
Sequim, Washington  98382-9681
USA1,585,002(5)6.5%Common
    SharesAl Kassam
5518  129th Street
Surrey, BC  V3X 3G4
Canada545,703(6)2.3%Common
    SharesKarim Khoja
6525 Adera Street
Vancouver, BC  V6P 5B9
Canada70,268(7)*Common
    SharesMichael C. Volker
7165 Cliff Rd
West Vancouver, BC  V7W 2L3
Canada398,331(8)1.7%Common
    SharesWayne Smith
11C-1015 Ironwork Passage
Vancouver, BC V6H 3R4292,034(9)1.2Common
    SharesChris Wiesinger
1737 Kitchener
Vancouver, BC V5L 2W4255,940(10)1.1%Common
SharesLang Michener LLP  Western Division
Suite 1500  1055 West Georgia Street
Vancouver, BC V6E 4N71,892,332(11)7.7%Common
    SharesAll directors and officers as a group (10 persons)10,243,051(12)35.2%




____________________

63



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* Indicates less than one (1) percent



(1)

Based on an aggregate 23,653,066 common shares issued and outstanding as of March 15, 2005.

(2)

Includes (a) 475,189 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 15, 2005, (b) 900,000 common shares issuable upon the exercise of warrants exercisable within 60 days of March 15, 2005, and (c) 1,782,000 common shares and 1,457,000 common shares issuable upon exercise of warrants exercisable within sixty days of March 15, 2005 held by Trivett Holdings, a corporation in which Mr. Trivett is the sole shareholder, officer and director.

(3)

Includes (a) 129,634 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 15, 2005, (b) 215,137 common shares issuable upon the exercise of special warrants exercisable within 60 days of March 15, 2005, and (c) 450,000 common shares held by Revell Group International, a corporation in which Mr. Revell is the officer and director.

(4)

Includes (a) 65,002 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 15, 2005, and (b) 333,333 common shares issuable upon the exercise of warrants exercisable within 60 days of March 15, 2005.

(5)

Includes (a) 65,002 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 15, 2005, and (b) 747,500 common shares issuable upon the exercise of warrants exercisable within 60 days of March 15, 2005.

(6)

Includes (a) 129,882 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 15, 2005, (b) 23,437 common shares issuable upon the exercise of special warrants exercisable within 60 days of March 15, 2005, and (c) 93,333 common shares held by the Kassam Trust, a trust in which Mr. Kassam the trustee.

(7)

Includes 70,287 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 15, 2005.

(8)

Includes (a) 64,998 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 15, 2005, and (b) 333,333 common shares and 333,333 common shares issuable upon the exercise of warrants exercisable within 60 days of March 15, 2005 held by WUTIF Capital (VCC) Inc., a corporation in which Mr. Volker is an officer and director.

(9)

Includes (a) 217,034 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 15, 2005, and (b) 75,000 common shares held by Telepartners Consulting, a corporation in which Mr. Smith is controlling shareholder.

(10)

Includes (a) 91,664 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 15, 2005, and (b) 79,583 common shares issuable upon the exercise of warrants exercisable within 60 days of March 15, 2005.

(11)

Includes 946,166 common shares issuable upon the exercise of warrants exercisable within 60 days of March 15, 2005.

(12)

Includes (a) 1,342,026 common shares issuable pursuant to stock options under the Companys stock option plan exercisable within 60 days of March 15, 2005, (b) 3,850,749 common shares issuable pursuant to warrants exercisable within 60 days of March 15, 2005, and (c) 238,574 common shares issuable pursuant to special warrants exercisable within 60 days of March 15, 2005.



The Company is not aware of any arrangement that might result in a change in control in the future.



Equity Compensation Plan Information as of December 31, 2004Plan CategoryNumber of securities to be issued upon exercise of outstanding options, warrants, and rightsWeighted average exercise price of outstanding options, warrants, and rightsNumber of securities remaining available for future issuance under equity compensation plansEquity compensation plan approved by security holders3,092,334$0.61255,356Equity compensation plans not approved by security holdersN/AN/AN/A3,092,334$0.61255,356




64



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Item 12.  Certain Relationships and Related Transactions.

(a)

The Company has entered into the following commitments with OSI, a company formerly related to the Company by virtue of having a director in common:



i.

Product Development and Marketing Agreement. Under this agreement, the Company formed a strategic alliance with OSI to develop mutually agreed integrated airport and transportation security products The Company agreed to commit a minimum of US$250,000 to develop these products and operate this group.

ii.

Software Developer Services Agreement. Under this agreement, the Company agreed to engage the services of software engineers and equipment in OSIs software development facility in Hyderabad, India. The Company agreed to pay to OSI a minimum of US$250,000 during the term of the agreement, which expires on June 30, 2003, provided that if the aggregate amount paid to OSI on such date was less than US$250,000, the agreement can be extended for six months.

iii.

Joint Venture Letter of Intent. Under this letter of intent, upon OSIs establishment of a Brazilian entity to oversee marketing, sales, service and assembly and marketing of OSIs products, in Brazil and the establishment of an office in Brazil, Imagis would invest US$250,000 for a 20% equity ownership in that entity.

On March 20, 2003 the above agreements were amended as follows:

i.

the strategic alliance agreement to develop and market integrated airport and security products with OSI was extended to July 8, 2004. The expenditure commitment was reduced to a minimum of US$125,000 on product development and the operation of an Airport Security Group to market the products. As at December 31, 2004, the Company incurred US$48,350 in expenditures on product development.

ii.

the agreement to engage OSI to provide software development services was extended to December 31, 2004. The expenditure commitment has been reduced to a minimum of US$125,000, based on hourly rates charged at 85% of fair market value.

iii.

The Company agreed to pay OSI a management fee of US$250,000 on or before March 20, 2004



The Company is engaged in a dispute with OSI with regard to these agreements. See Item 3  Legal Proceedings.



(b)

On September 4, 2002 the Company acquired a license to certain software applications related to their use in certain specified business fields from Intacta, a company formerly related by virtue of having a director in common. The Company paid US$150,000 (CDN$236,395, recorded in Other Assets) cash in consideration of the license. The license expires on the latter of August 31, 2017 and the expiry date of the last patent of the underlying software. The cost of the license will be amortized over its 3 year expected useful life.



(c)

During 2004, the Company incurred consulting fees owed to Mr. Revell in the amount of US$100,000.



Except as otherwise disclosed herein, no director, senior officer, principal shareholder, or any associate or affiliate thereof, had any material interest, direct or indirect, in any transaction since the beginning of the last fiscal year of the Company that has materially affected it, or any proposed transaction that would materially affect it, except for an interest arising from the ownership of shares of the Company where the member will receive no extra or special benefit or advantage not shared on a pro rata basis by all holders of shares in the capital of the Company.



65



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Item 13. Exhibits



The following exhibits are filed (or incorporated by reference herein) as part of this Form 10-KSB:



| | ExhibitNumber | Description                                                                                                         
| | ------------- | --------------------------------------------------------------------------------------------------------------------
| | 3.1(1)        | Articles of Incorporation                                                                                           
| | 3.2(8)        | Bylaws                                                                                                              
| | 4.1(1)        | Shareholder Agreement dated February 23, 1999 among the original shareholders and the Former Imagis Shareholders    
| | 4.2(3)        | Registration rights agreement dated July 8, 2002 between Imagis and OSI                                             
| | 10.1(2)*      | Imagis Technologies Inc. 2000 Stock Option Plan                                                                     
| | 10.2(3)       | Subscription Agreement dated July 8, 2002 between Imagis and OSI                                                    
| | 10.3(3)       | Letter of Intent dated July 8, 2002 between Imagis and OSI                                                          
| | 10.4(3)       | Product Development and Marketing Agreement dated July 8, 2002 between Imagis and OSI                               
| | 10.5(3)       | Software Developer Services Agreement dated July 8, 2002 between Imagis and OSI                                     
| | 10.6(4)       | Agreement to amend the terms of Item 10.9 dated October 8, 2002                                                     
| | 10.7(4)       | Agreement to amend the terms of Item 10.9 and 10.10 dated October 9, 2002                                           
| | 10.8(5)       | Revolving Line of Credit dated February 23, 2003 between Imagis and Altaf Nazerali                                  
| | 10.9(5)       | Amended and Restated Loan Agreement: Revolving Line of Credit dated April 15, 2003 between Imagis and Altaf Nazerali
| | 10.10(5)      | General Security Agreement dated April 15, 2003 between Imagis and Altaf Nazerali                                   
| | 10.11(5)      | Grid Promissory Note dated February 21, 2003 between Imagis and Altaf Nazerali                                      
| | 10.12(5)      | Grid Promissory Note Amended and Restated dated April 15, 2003 between Imagis and Altaf Nazerali                    
| | 10.13(5)      | Source Code License Agreement dated April 15, 2003 between Imagis and Altaf Nazerali                                
| | 10.14(5)      | Source Code Escrow Agreement dated April 15, 2003 between Imagis and Altaf Nazerali                                 
| | 10.15(6)      | Debenture agreement between the Company and 414826 B.C. Ltd dated May 30, 2003                                      
| | 10.16(7)*     | Consulting Agreement dated July 15, 2003 between Imagis and Roy Trivett                                             
| | 21.1          | List of Subsidiaries                                                                                                
| | 24.1          | Powers of Attorney (included on signature page)                                                                     
| | 31.1          | Section 302 Certification                                                                                           
| | 31.2          | Section 302 Certification                                                                                           
| | 32.1          | Section 906 Certification                                                                                           
| | 32.2          | Section 906 Certification                                                                                           
| | 99.1          | Form 51-901F as required by the British Columbia Securities Commission                                              



*Indicates a management contract or compensatory plan or arrangement



(1)

Previously filed as part of Imagis Registration Statement on Form 10-SB (File No. 000-30090).

(2)

Previously filed as part of Imagis Annual Report on Form 10-KSB for the year ended December 31, 2000.

(3)

Previously filed as part of Imagis Current Report on Form 8-K filed on December 19, 2002.

(4)

Previously filed as part of Imagis Annual Report on Form 10-KSB for the year ended December 31, 2002.

(5)

Previously filed as part of Imagis Quarterly Report on Form 10-QSB for the period ended March 31, 2003.

(6)

Previously filed as part of Imagis Quarterly Report on Form 10-QSB for the period ended June 30, 2003.

(7)

Previously filed as part of Imagis Quarterly Report on Form 10-QSB for the period ended September 30, 2003.

(8)

Previously filed as part of Imagis Quarterly Report on Form 10-QSB for the period ended June 30, 2004.



66



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Item 14.  Principal Accountant Fees and Services.



Audit Fees



Fees billed by KPMG LLP, for professional services totaled $54,500 for the year ended December 31, 2004 and $89,730 for the year ended December 31, 2003, including fees associated with the annual audit and reviews of quarterly reports on Form 10-QSB.



Audit-Related Fees



Fees for audit-related services totaled $nil for the year ended December 31, 2004.   Audit-related fees incurred for the year ended December 31, 2003 were $nil.



Tax Fees



Fees for tax services, including fees for review of the Companys consolidated federal income tax return, totaled $2,700 for the year ended December 31, 2004 and $15,155 for the year ended December 31, 2003.



All other Fees



No fees were billed by KPMG LLP, for professional services rendered during the fiscal years ended December 31, 2004 and December 31, 2003 other than those specified above.



The Audit Committee pre-approves audit engagement terms and fees prior to the commencement of any audit work, other than that which may be necessary for the independent auditor to prepare the proposed audit approach, scope and fee estimates. The independent auditors annually submit a written proposal that details all audit and audit related services. Audit fees are fixed and contained in the proposal, and the Audit Committee reviews the nature and dollar value of services provided under such proposal. Any revisions to such proposal after the engagement has begun are reviewed and pre-approved by the Audit Committee.



There were no fees in 2004 that were not pre-approved by the Audit Committee. All services described above under the captions "Audit Fees", Audit Related Fees" and "Tax Fees" were approved by the Audit Committee pursuant to SEC Regulation S-X, Rule 2-01(c)(7)(i).





67



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SIGNATURES



In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Vancouver, Province of British Columbia, on March 18, 2005.



IMAGIS TECHNOLOGIES INC.





/s/ Roy Trivett



Roy Trivett

President and Chief Executive Officer





POWERS OF ATTORNEY



KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Roy Trivett and Wayne Smith, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents of them or their substitute or substitutes, may lawfully do or cause to be done by virtue thereof.



In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



SignatureTitleDate/s/ Oliver Revell____________________
Oliver RevellChairman and DirectorMarch 18, 2005/s/ Roy Trivett____________________
Roy TrivettPresident, Chief Executive Officer and Director
(Principal Executive Officer )March 18, 2005/s/ Wayne Smith____________________
Wayne SmithChief Operating Officer and Vice-President, Finance
(Principal Financial and Accounting Officer)March 18, 2005/s/ Clyde Farnsworth____________________
Clyde FarnsworthDirectorMarch 18, 2005/s/ Al Kassam____________________
Al KassamDirectorMarch 18, 2005/s/ Karim J. Khoja­­­­­­­­­­­­­­____________________
Karim Jadavyee KhojaDirectorMarch 18, 2005/s/ Keith Kretschmer____________________
Keith KretschmerDirectorMarch 18, 2005/s/ Michael Volker____________________
Michael VolkerDirectorMarch 18, 2005


68



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EXHIBIT 21.1



List of Subsidiaries





Wholly-owned subsidiary of Imagis Technologies Inc.:



Name

Jurisdiction of Incorporation



Briyante Software Corp.

British Columbia



Wholly-owned subsidiaries of Briyante Software Corp.:



Name

Jurisdiction of Incorporation



Benchmark Technologies Inc.



British Columbia

874252 Alberta Ltd.

Alberta

Bodhi Enterprises Ltd.

British Columbia

Copper Cliff Investments Ltd.

British Columbia

Triple AG Investments Inc.

British Columbia









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EXHIBIT31.1

CERTIFICATION

I, Wayne Smith, certify that:



1.

I have reviewed this annual report on Form 10-KSB of Imagis Technologies Inc.;





2.

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



3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;



4.

The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:



(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



(b)

Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



(c)

Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and



5.

The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):



(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and



(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.



Date: March 18, 2005

/s/ Wayne Smith

Wayne Smith

Chief Operating Officer and Vice-President, Finance

(Principal Financial and Accounting Officer)



---

EXHIBIT31.2



CERTIFICATION



I, Roy Trivett, certify that:



1.

I have reviewed this annual report on Form 10-KSB of Imagis Technologies Inc.;



2.

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



3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;



4.

The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:



(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



(b)

Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



(c)

Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and



5.

The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):



(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and



(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.



Date: March 18, 2005

/s/ Roy Trivett

Roy Trivett

Chief Executive Officer and President

(Principal Executive Officer)



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EXHIBIT32.1



CERTIFICATION PURSUANT TO
18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Imagis Technologies Inc. (the Company) Form 10-KSB for the period ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Wayne Smith, Chief Operating Officer and Vice-President, Finance of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

| | (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
| | --- | ---------------------------------------------------------------------------------------------------------------------



| | (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------



| | /s/ Wayne SmithWayne Smith
Chief Operating Officer and Vice-President, Finance
(Principal Financial and Accounting Officer)
March 18, 2005
| | ------------------------------------------------------------------------------------------------------------------------------------------



---

EXHIBIT32.2



CERTIFICATION PURSUANT TO
18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Imagis Technologies Inc. (the Company) Form 10-KSB for the period ended December 31, 2004 filed with the Securities and Exchange Commission on the date hereof (the Report), I, Roy Trivett, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

| | (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
| | --- | ---------------------------------------------------------------------------------------------------------------------



| | (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------



| | /s/ Roy TrivettRoy Trivett
Chief Executive Officer and President
(Principal Executive Officer)
March 18, 2005
| | -------------------------------------------------------------------------------------------------------------







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BC FORM 51-102F1





ANNUAL REPORT







ISSUER DETAILS:



|Name of Issuer           | IMAGIS TECHNOLOGIES INC.                                           
|------------------------ | -------------------------------------------------------------------
|For The Year Ended       | December 31, 2004                                                  
|Date of Report           | March 18, 2005                                                     
|Issuer Address           | 1630  1075 West Georgia Street
Vancouver, British Columbia
V6E 3C9
|Issuer Fax Number        | (604) 684-9314                                                     
|Issuer Telephone Number  | (604) 684-2449                                                     
|Contact Name             | Wayne Smith                                                        
|Contact Position         | Vice President Finance                                             
|Contact Telephone Number | (604) 684-2449                                                     
|Contact Email Address    | wayne.smith@imagistechnologies.com                                 
|Web Site Address         | www.imagistechnologies.com                                         







CERTIFICATE





THE THREE SCHEDULES REQUIRED TO COMPLETE THIS REPORT ARE ATTACHED AND THE DISCLOSURE CONTAINED THEREIN HAS BEEN APPROVED BY THE BOARD OF DIRECTORS.  A COPY OF THIS REPORT WILL BE PROVIDED TO ANY SHAREHOLDER WHO REQUESTS IT.



Clyde Farnsworth
Name of Director/s/Clyde Farnsworth
Sign (typed)05/3/18
Date Signed (YY/MM/DD)Roy Trivett
Name of Director/s/ Roy Trivett
Sign (typed)05/3/18
Date Signed (YY/MM/DD)








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Supplementary Information to the Financial Statements



Managements Discussion and Analysis

As at March 18, 2005



Forward-looking information



Except for statements of historical fact, certain information contained herein constitutes forward-looking statements, within Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).  In some cases, you can identify the forward-looking statements by Imagis Technologies Inc.s (Imagis or the Company) use of the words such as may, will, should, could, expect, plan, estimate, predict, potential, continue, believe, anticipate, intend, expect, or the negative or other variations of these words, or other comparable words or phrases.  Forward-looking statements in this report include the Companys expectation that revenues will increase during 2005; the potential revenues to be generated through the Companys partnership with Centrom Limited, the sale of new products acquired through the acquisition of Briyante Software Corp. (Briyante); and new contracts to be entered into the near future; and the Companys future operating expense levels.



Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements of the Company to be materially different from any future results or achievements of the Company expressed or implied by such forward-looking statements.  Such factors include, but are not limited to the following: the Companys limited operating history; the Companys need for additional financing; the Companys history of losses; the Companys dependence on a small number of customers; risks involving new product development; competition, the Companys dependence on key personnel; risks involving lengthy sales cycles; dependence on marketing relationships; the Companys ability to protect its intellectual property rights; risks associated with exchange rate fluctuations; risks of software defects; risks associated with product liability; risks associated with the partnerships with Imagis UK Limited (Imagis UK) and Centrom Limited (Centrom); the Companys dispute with OSI Systems Inc. (OSI); risks associated with the strategic alliance with Sanyo Semiconductor Company and Intacta Technologies Inc. related to Zixsys, Inc.; the potential additional disclosure requirement for trades involving the issued common shares; the difficulty of enforcing civil liabilities against the Company or its directors or officers under United States federal securities laws; the volatility of the Companys share price; risks associated with certain shareholders exercising control over certain matters; and the other risks and uncertainties described in Exhibit 99.1 to this Quarterly Report.



Although the Company believes that expectations reflected in these forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, achievements or other future events.  Moreover, neither the Company nor anyone else assumes responsibility for the accuracy and completeness of these forward-looking statements.  The Company is under no duty to update any of these forward-looking statements after the date of this report.  You should not place undue reliance on these forward-looking statements.

About Imagis

Imagis develops and markets software that simplifies, accelerates, and economizes the process of connecting existing, disparate databases, enhanced as appropriate with biometric facial recognition technology. The combination of these technologies enables information owners to share data securely with external stakeholders and software systems using any combination of text or imagery. This includes searching disconnected data repositories for information about an individual using only a facial image. This allows organizations to quickly create regional information sharing networks using any combination of text or imagery.



Using industry standard Web services and XML, Imagis delivers a secure and economical approach to true, real-time application interoperability. Production deployments of the Companys core integration technology  BIE  have demonstrated remarkable reductions in the time and risk associated with implementing and supporting integrated access to physically and technologically disparate computers. The Company believes that the broad ranging applicability of BIE into a variety of vertical markets such as health care, financial services, government services and telecommunications has been clearly demonstrated by recent, successful deployments in the United States.

1



---

Overview

The Companys Business

The Company derives a substantial portion of its revenues, and it expects to derive a substantial portion of its revenues in the near future, from sales of its software to a limited number of customers. Additional revenues are achieved through the implementation and customization of this software as well as from the support, training, and ongoing maintenance that results from each software sale. The Companys success will depend significantly upon the timing and size of future purchase orders from its largest customers as well as from the ability to maintain relationships with its existing installed customer base

Typically, the Company enters into a fixed price contract with a customer for the licensing of selected software products and the provision of specific services.  The Company generally recognizes total revenue for software and services associated with a contract using percentage of completion method based on the total costs incurred over the total estimated costs to complete the contract.

The Companys revenue is dependent, in large part, on contracts from a limited number of customers.  As a result, any substantial delay in the Companys completion of a contract, the inability of the Company to obtain new contracts or the cancellation of an existing contract by a customer could have a material adverse effect on the Companys results of operations.  The loss of certain contracts could have a material adverse effect on the Companys business, financial condition, operating results and cash flows.  As a result of these and other factors, the Companys results of operations have fluctuated in the past and may continue to fluctuate from period-to-period.

Recent world events and concerns regarding security have increased awareness of and interest in products that have law enforcement or other security applications, including the products and services offered by Imagis.  There can be no assurance, however, that such trends will continue or will result in increased sales of the Companys products and services.

Critical Accounting Polices

Critical accounting policies are those that management believes are both most important to the portrayal of the Companys financial conditions and results, and that require difficult, subjective, or complex judgements, often as a result of the need to make estimates about the effects of matters that involve uncertainty.

Imagis believes the critical accounting policies it uses in preparation of its financial statements are as follows:

Revenue recognition

(iii)

Software sales revenue:

The Company recognizes revenue consistent with Statement of Position 97-2, Software Revenue Recognition. In accordance with this Statement, revenue is recognized, except as noted below, when all of the following criteria are met: persuasive evidence of a contractual arrangement exists, title has passed, delivery and customer acceptance has occurred, the sales price is fixed or determinable and collection is reasonably assured.  Funds received in advance of meeting the revenue recognition criteria are recorded as deferred revenue.

When a software product requires significant production, modification or customization, the Company generally accounts for the arrangement using the percentage-of-completion method of contract accounting. Progress to completion is measured by the proportion that activities completed are to the activities required under each arrangement. When the current estimate on a contract indicates a loss, a provision for the entire loss on the contract is made.

When software is sold under contractual arrangements that include post contract customer support (PCS), the elements are accounted for separately if vendor specific objective evidence (VSOE) of fair value exists for all undelivered elements. VSOE is identified by reference to renewal arrangements for similar levels of support covering comparable periods. If such evidence does not exist, revenue on the completed arrangement is deferred until the earlier of (a) VSOE being established or (b) all of the undelivered elements are delivered or performed, with the following exceptions: if the only undelivered element is PCS, the entire fee is

2



---

recognized ratably over the PCS period, and if the only undelivered element is service, the entire fee is recognized as the services are performed.

The Company provides for estimated returns and warranty costs, which to date have been nominal, on recognition of revenue.

(iv)

Support and services revenue:

Contract support and services revenue is deferred and is amortized to revenue ratably over the period that the support and services are provided.

Intangible Assets:

Intangible assets acquired either individually or with a group of other assets are initially recognized and measured at cost. The cost of a group of intangible assets acquired in a transaction, including those acquired in a business combination that meet the specified criteria for recognition apart from goodwill, is allocated to the individual assets acquired based on their relative fair values. The cost of internally developed intangible assets includes direct development costs and overhead directly attributable to development activity. The cost incurred to enhance the service potential of an intangible asset is a capitalized as betterment. Costs incurred in the maintenance of the service potential of an intangible asset are expensed as incurred.



Intangible assets with finite useful lives are amortized over their useful lives. The assets are amortized on a straight-line basis at the following annual rates, which are reviewed annually:



Asset

Rate

Intellectual property

33.3%

Patents

33.3%

License

33.3%



Intangible assets with indefinite useful lives are not amortized and are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test compares the carrying amount of the intangible asset with its fair value, and an impairment loss is recognized in income for the excess, if any.

Use of estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported or disclosed in the financial statements. Actual amounts may differ from these estimates.  Areas of significant estimate include but are not limited to valuation of accounts receivable; amortization periods of equipment, intellectual property and other assets; valuation of intellectual property; fair value inputs for calculation of stock-based compensation; and the valuation allowance of future income tax assets.

Stock-based compensation

The Company accounts for all stock-based payments to employees and non-employees using the fair value based method.



Under the fair value based method, stock-based payments are measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measurable. The fair value of stock-based payments to non-employees is periodically re-measured until counterparty performance is compete, and any change therein is recognized over the period and in the same manner as if the Company had paid cash instead of paying with or using equity instruments. The cost of stock-based payments to non-employees that are fully vested and non-forfeitable at the grant date is measured and recognized at that date.



Under the fair value based method, compensation cost attributable to employee awards is measured at fair value at the grant date and recognized over the vesting period. Compensation cost attributable to awards to employees that call for settlement in cash or other assets is measured at intrinsic value and recognized over the vesting period. Changes in intrinsic value between the grant date and the measurement date result in a change in the measure of compensation cost. For awards that vest at the end of the vesting period, compensation cost is recognized on a straight-line basis; for awards that vest on a graded basis, compensation cost is recognized on a pro-rata basis over the vesting period.



3



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Results of Operations for the three month period and year ended December 31, 2004 compared to December 31, 2003:

Revenues

Imagis total revenues for the three month period ended December 31, 2004 were $327,016 compared to the prior year level of $263,793. The year to date revenues decreased to $1,032,970 from the prior year level of $1,355,742. Revenues from the Companys software products increased to $209,919 for the current three month period as compared to $191,425 for 2003. Software revenues decreased by 27% to $639,805 for the year to date over the prior year level of $877,438.

As of March 15, 2005 Imagis received orders totalling $2,100,000 that are not recorded as at December 31, 2004. Consequently, Imagis expects that revenues will increase in the first two quarters of 2005 when compared to the first two quarters of 2004 and will continue to increase as the new products acquired and developed as a result of the acquisition of Briyante continue to gain increasing customer acceptance. In addition, the Company has entered into a partnership with a United Kingdom company described below in Liquidity and Capital Resources. Management of the Company believes that this relationship has significant potential to generate additional future revenue for Imagis.  There can be no assurance however that such revenue will materialize or if such revenue does materialize that it will be significant.

Support and services revenues were 62% higher at $115,464 for the three month period ended December 31, 2004 than in 2003 of $71,324. Support and services revenues for the year to date declined 18% to $385,075 from the prior year level of $469,575. The support revenues decreased as a result of a large support contract that expired during 2003 and was taken over by Imagis business partner.

Operating Costs

Operating expenses totalled $1,597,196 for the three month period ended December 31, 2004, which is 31% greater than the 2003 operating expenses of $1,223,076. The 2004 expenses include stock-based compensation of $143,135 due to the increase of Imagis employee stock option plan and $348,921 in amortization, which includes $322,713 in amortization costs for the intellectual property acquired in the Briyante acquisition. Excluding these non-cash charges the 2004 operating expenses total $1,105,140. The 2003 expenses include amortization of $177,780. Excluding this expense, the operating expenses for 2003 were $1,045,295. The increase of $59,845 between 2004 and 2003 represents a 6% increase in operating expenses over the prior period. The increased costs over the prior period resulted from significant decreases in administration of $162,030, which were offset by an increase in interest expense of $43,452, an increase in sales and marketing of $99,220, an increase in technical services of $29,356 and an increase in technological development of $49,857. The increases are mainly due to hiring additional staff to achieve the anticipated sales growth in 2005.



Operating expenses totalled $6,490,907 for the year ended December 31, 2004, which is 20% greater than the 2003 operating expenses of $5,414,599. The 2004 expenses include stock-based compensation of $1,204,307 due to the restructuring of Imagis employee stock option plan and $1,524,525 in amortization, which includes $1,290,852 in amortization costs for the intellectual property acquired in the Briyante acquisition. Excluding these non-cash charges the 2004 operating expenses total $3,762,075. The 2003 expenses include a one-time charge of US$250,000 (CDN$366,950) recorded as a management fee owing to OSI, a $100,000 cost recovery of software consulting fees relating to sub-contracted work from 2002, and amortization of $359,241. Excluding these items, the operating expenses for 2003 were $4,788,408.  The difference of $1,026,333 between 2004 and 2003 represents a 21% reduction in operating expenses over the prior year. The lower costs over the prior period resulted from significant decreases in the areas of administration, cost of materials, sales and marketing, and technical services. This was offset partially by an increase in technology development costs due to the addition of staff. The cash operating expense rate had stabilized at approximately $3,200,000 per annum from July 2003 through March 2004. The current operating expense level is approximately $4,300,000 per year as a result of increased staffing levels required to meet increased demand for Imagis products and services. Any further increase in expenditure levels will only occur as the company receives increased levels of orders.

Administration

Administrative costs for the three month period ended December 31, 2004 were $450,155, which is 12% less than for 2003 of $512,472. These costs include a stock-based compensation charge of $99,713 in 2004. Excluding these charges, the administrative costs were $350,442 in 2004 versus $512,472 in 2003, which represents a 32% decrease. This decrease was due to decreased legal and general operating costs.  Administrative costs include staff salaries and related benefits and travel, stock-based compensation, consulting and professional fees, facility and support costs, shareholder, regulatory and investor relations costs.

Administrative costs for the year ended December 31, 2004 were $2,124,342, which is 3% less than for 2003 of $2,188,921. These costs include the stock-based compensation charge of $838,967 in 2004 and the one-time

4



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management fee of US$250,000 (CDN$366,950) in 2003 described above. Excluding these charges, the administrative costs were $1,285,375 in 2004 compared to $1,821,971 in 2003, which represents a 30% reduction.

Bad Debt Expense

The bad debt expense for the three month period ended December 31, 2003 and 2004 was nil.



The bad debt expense for the year ended December 31, 2003 of $117,433 consisted of three customers that defaulted on payment for a software license. There were no bad debts incurred in 2004.

Interest and Amortization

The interest expense for the three month period ended December 31, 2004 of $68,253, which is 175% greater than for 2003 of $24,802, is primarily due to interest charged on late payroll remittances to Revenue Canada which is currently being appealed. The increase in amortization expense to $348,921 from $177,780 is primarily due to the increased amortization expense associated with the acquisition of the intellectual property of Briyante.

The interest expense for the year ended December 31, 2004 of $93,562, which is 40% greater than for 2003 of $66,765, is primarily due to interest charged on late payroll remittances to Revenue Canada which is currently being appealed. The increase in amortization expense to $1,524,525 from $359,240 is primarily due to the amortization expense associated with the acquisition of the intellectual property of Briyante.

Sales and Marketing

Sales and marketing expenses for the three month period ended December 31, 2004 were $377,728 which is 52% greater than for 2003 of $249,078. These costs include a stock-based compensation charge of $29,436 in 2004. Excluding these charges, the sales and marketing expenses were $348,292 in 2004 verses $249,078 in 2003  which represents a 40% increase. The Sales and marketing expenses for the year ended December 31, 2004 were $1,362,928, which is 2% less than the 2003 costs of $1,388,134. These costs include the stock-based compensation charge of $247,672 in 2004. Excluding these charges, the sales and marketing costs were $1,115,256 in 2004 verses $1,388,134 in 2003, which represents a 20% decrease. Imagis significantly decreased its sales team after March 31, 2003 and streamlined its associated travel and marketing costs as part of its strategy of utilizing a more targeted marketing and sales strategy. Sales and marketing costs have increased in the fourth quarter of 2004 to target opportunities where identifiable revenues exist.

Technology Development

The technology development expenses for the three month period ended December 31, 2004 were $248,371 which is 33% greater than the 2003 costs were $186,931. These costs include a stock-based compensation charge of $11,583 in 2004. Excluding these charges, the technology development expenses were $236,788 in 2004 which is 27% higher than 2003.

The technology development expenses for the year ended December 31, 2004 were $1,037,013 which is 50% higher than the 2003 costs of $692,754. These costs include the stock-based compensation charge of $97,461 in 2004 and a 2003 cost recovery of $100,000 discussed above. Excluding these charges, the technology development costs were $939,552 in 2004 verses $792,754 in 2003, which represents a 19% decrease over 2003.

Technology development expenses were reduced during the second and third quarters of 2003 and then increased to current levels with the addition of staff associated with the Briyante acquisition and additional staff to meet development requirements associated with the orders received in late 2004 and early 2005. Management believes that continuing to invest in technology advancements is crucial to the future success of Imagis.

Technical Services

Costs for the technical services group for the three month period ended December 31, 2004 were $103,771, which is 44% greater than the comparable 2003 costs of $72,013. These costs include a stock-based compensation charge of $2,402 in 2004. Excluding these charges, the technology development expenses were $101,369 in 2004 which is 41% higher than 2003.

The technology services expenses for the year ended December 31, 2004 were $348,537 which is 12% lower than the 2003 costs of $397,412. These costs include the stock-based compensation charge of $20,207 in 2004. Excluding these charges, the technology services costs were $328,330 in 2004 , which represents a 17% reduction from 2003.

The technical services group generally assists the Companys strategic partners in their installation of Imagis products and also provides clients with any technical support they may require under annual support contracts, and includes primarily costs for salaries, facilities and travel. Costs for future quarters will be dependent on the sales levels achieved by the Company.

5



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Net Loss for the Period

Overall, the Company incurred a net loss for the three month period ended December 31, 2004 of $1,270,180 or $0.08 per share, which is 32% higher than the net loss incurred during the three months ended December 31, 2003 of $959,283 or $0.14 per share. The loss per share figure for 2003 has been adjusted to take into account the Companys share consolidation that occurred in November of 2003. Adjusting the loss to take into account the non-cash and one-time expenses described above, the losses become $778,124 for 2004 and $781,503 for 2003, representing a 1% decrease. The Company has received significant sales orders during the final quarter of 2004 and the first quarter of 2005; however, installation did not commence until 2005 and the revenue will not be recognised until then.

The Company incurred a net loss for the year ended December 31, 2004 of $5,457,937 or $0.39 per share, which is 34% larger than the net loss incurred during the year ended December 31, 2003 of $4,058,857 or $0.74 per share. The loss per share figure for 2003 has been adjusted to take into account the Companys share consolidation that occurred in November of 2003. Adjusting the loss to take into account the non-cash and one-time expenses described above, the losses become $2,729,105 for 2004 and $3,432,666 for 2003, representing a 20% reduction. The rate of loss at December 31, 2004 on an EBITDA basis was $280,000 per month and management believes that the Company will be able to achieve break even operations on an EBITDA basis during the first six months of 2005. The timing will depend on the schedule of completion of existing contracts as this affects the recognition of revenue.

Summary of Annual Results





|                      |   | 2004        | 2003        | 2002       
|--------------------- | - | ----------- | ----------- | -----------
|                      |   |             |             |            
|Total Revenue         | $ | 1,032,970   | 1,355,742   | 3,022,888  
|Loss                  |   | (5,457,937) | (4,058,857) | (6,951,393)
|Net loss per share    |   | (0.39)      | (0.74)      | (1.71)     
|Assets                |   | 2,836,018   | 4,183,609   | 634,633    
|Long term liabilities |   | 24,913      | 19,171      | 41,720     



The Companys changes in its annual Net Losses fluctuate according to the volume of sales. As the Company currently has a small number of customers generating the majority of its revenues there is no consistency from one year to the next and past annual performance is not considered to be indicative of future results. The Company had significantly reduced its operating expenses during the period from Q3 2002 through Q3 2003, which also has a large impact on the comparative loss figures. The Company is not aware of any significant seasonality affecting its sales.

Liquidity and Capital Resources

The Companys cash on hand at the beginning of the three-month period ended December 31, 2004 aggregated $68,760. During the period, the Company received additional net funds of $1,179,100 from a private placement that closed in November, less $325,000 received prior to October 1, 2004, and an additional $140,000 in share subscriptions for a private placement that closed in January 2005.

The Company used these funds primarily to finance its operating loss for the period. The impact on cash of the loss of $1,329,178, after adjustment for non-cash items and changes to other working capital accounts in the period, resulted in a negative cash flow from operations of $893,258. The Company also repaid capital leases of $9,079, purchased a software asset for $25,000 in cash plus $75,000 in common share units, and purchased capital assets of $12,414, overall the Companys cash position decreased by $54,389 to $123,148 at December 31, 2004.

The Companys cash on hand at the beginning of the year ended December 31, 2004 aggregated $86,227. During the period, the Company received additional net funds of $1,534,150 in share subscriptions for a private placement that was closed on April 28, 2004, $1,179,100 from a private placement that closed November 30, 2004 and $140,000 in share subscriptions for a private placement that closed in January 2005. The Company also settled $1,094,562 in debt through the issuance of common shares. These transactions are described below.



The Company used these funds primarily to finance its operating loss for the period. The impact on cash of the loss of $5,516,935, after adjustment for non-cash items and changes to other working capital accounts in the period, resulted in a negative cash flow from operations of $2,723,503. The Company also repaid capital leases of $27,241, purchased a software asset for $25,000 cash and $75,000 in common share units, and purchased capital assets of $40,624, overall the Companys cash position increased by $36,921 to $123,148 at December 31, 2004.



In April 2004, the Company completed a private placement consisting of 4,007,875 units at $0.40 per unit. Each unit consists of one common share and one common share purchase warrant.  Each warrant entitles the holder to acquire

6



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one additional common share in the capital of Imagis at an exercise price of $0.50 until April 28, 2005 or at $0.75 from April 29, 2005 until April 28, 2006. The common shares and warrants were subject to a four (4) month hold period in Canada that expired on August 28, 2004. Finders fees of $69,000 in cash were paid on a portion of the private placement conducted outside the United States. The total net proceeds to Imagis were $1,534,150.



Concurrently with the private placement in April 2004, the Company settled $688,404 in debt included in accounts payable as at March 31, 2004 through the issuance of 1,708,509 common shares and 393,284 common share purchase warrants. Each warrant entitles the holder to acquire one additional common share in the capital of Imagis at an exercise price of $0.50 until April 29, 2005 or at $0.75 from April 30, 2005 until April 29, 2006. Included in this private placement, the Company settled debt with related parties and formerly related parties totaling $526,090 through the issuance of 1,315,225 common shares with no warrants. The common shares and warrants were subject to a four (4) month hold period in Canada that expired on August 29, 2004.



As of July 15, 2004, management of the Company believed that the funds received through the Companys private placement in April 2004 combined with the then current and projected operating revenues and the reduction in liabilities achieved through the debt settlements in April 2004 would provide sufficient cash flow to fund the Companys operations for at least the six (6) month period thereafter.Because the Company experienced unexpected delays in concluding certain contract negotiations and completing certain software installations, it was required to seek further financing.



In November 2004, the Company completed a private placement consisting of 3,930,333 units at $0.30 per unit for total proceeds of $1,179,100. Each unit consisted of one common share and one common share purchase warrant.  Each warrant entitles the holder to acquire one additional common share in the capital of Imagis at an exercise price of $0.40 until November 31, 2005 or at $0.50 from November 30, 2005 until November 30, 2006. The common shares and warrants are subject to a four (4) month hold period in Canada that expires on March 30, 2005.



In November 2004, the Company also purchased intellectual property of a software asset for $100,000, consisting of $25,000 in cash and $75,000 through the issuance of 187,500 common shares and 187,500 common share purchase warrants. Each warrant entitles the holder to acquire one additional common share in the capital of Imagis at an exercise price of $0.40 until November 29, 2005 or at $0.50 from November 29, 2005 until November 29, 2006. The common shares and warrants are subject to a four (4) month hold period in Canada that expires on March 29, 2005.



In December 2004, the Company settled $331,158 in debt through the issuance of 946,166 common shares and 946,166 common share purchase warrants. Each warrant entitles the holder to acquire one additional common share in the capital of Imagis at an exercise price of $0.45 until December 31, 2005 or at $0.55 from December 31, 2005 until December 31, 2006. The common shares and warrants are subject to a four (4) month hold period in Canada that expires on April 30, 2005.



In December 31, 2004 the Company also received share subscriptions of $140,000 to be applied to a private placement that was completed in January 2005. The private placement consisted of 2,857,785 units at $0.35 per unit. Each unit consists of one common share and one common share purchase warrant.  Each warrant entitles the holder to acquire one additional common share in the capital of Imagis at an exercise price of $0.45 until January 11, 2006 or at $0.55 from January 12, 2006 until January 11, 2007. The common shares and warrants are subject to a four (4) month hold period in Canada that expires on May 10, 2005. Finders fees of $72,771 in cash were paid on a portion of the private placement. The total net proceeds to Imagis were $927,454.



During the final quarter of 2004, the Company was awarded a contract with PRIME Corp. of British Columbia, Canada to deploy the Imagis flagship InForce Arrest and Booking (InForce AB) software as an integrated component of the province-wide Police Records Information Management Environment (PRIME-BC). This contract will result in revenues to the Company in excess of $800,000; however, any amounts due under this contract will not be received by the Company until early 2005.  The Company also has received other orders with certain agencies in the United States that total an additional approximately $1,300,000, the amounts due under these contracts are expected to be received by the Company in the first six months of 2005.



The company has cash sufficient to fund its operations through April 30, 2005.  The Company has also received orders that if completed will generate cash sufficient to fund its operations through September 30, 2005.  If no further sales are received the Company may need to raise additional funds through private placements of its securities or seek other forms of financing. There can be no assurance that such financing will be available to the Company on terms acceptable to it, if at all.  If the Companys operations are substantially curtailed, it may have difficulty fulfilling its current and future contract obligations.

7



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Contractual Obligations

The Company is committed to the following contractual obligations over the next five years:



Year
   
   Capital Lease
   
   Office Lease
   
   
   Total2005
   
   $
   28,089
   
   $
   140,664
   
   $
   178,3702006
   
   
   11,247
   
   
   45,985
   
   
   60,7692007
   
   
   13,666
   
   
   -
   
   
   14,93120082009$
   53,002
   
   $
   186,649
   
   $
   254,070


On July 8, 2002, the Company entered into the following agreements with OSI Systems Inc (OSI):

ii.

Product Development and Marketing Agreement. Under this agreement, the Company formed a strategic alliance with OSI to develop mutually agreed integrated airport and transportation security products The Company agreed to commit a minimum of US$250,000 to develop these products and operate this group.

iii.

Software Developer Services Agreement. Under this agreement, the Company agreed to engage the services of software engineers and equipment in OSIs software development facility in Hyderabad, India. The Company agreed to pay to OSI a minimum of US$250,000 during the term of the agreement, which expired on June 30, 2003, provided that if the aggregate amount paid to OSI on such date is less than US$250,000, the agreement could be extended for six months.

iv.

Joint Venture Letter of Intent. Under this letter of intent, upon OSIs establishment of a Brazilian entity to oversee marketing, sales, service and assembly and marketing of OSIs products, in Brazil and the establishment of an office in Brazil, Imagis was to invest US$250,000 for a 20% equity ownership in that entity.

On March 20, 2003 the above agreements were amended as follows:

i.

the strategic alliance agreement to develop and market integrated airport and security products with OSI was extended to July 8, 2004. The expenditure commitment was reduced to a minimum of US$125,000 on product development and the operation of an Airport Security Group to market the products. As at December 31, 2004, the Company has incurred USD$48,350 in expenditures on product development.

ii.

the agreement to engage OSI to provide software development services was extended to December 31, 2004. The expenditure commitment has been reduced to a minimum of US$125,000, based on hourly rates charged at 85% of fair market value.

iii.

The Company agreed to pay OSI a management fee of US$250,000 on or before March 20, 2004



The Company has received a Notice of Demand from OSI for USD$500,000 alleging that the Company is in default under the terms of these agreements. The Company believes that OSI acted in bad faith and intends to defend its position. The dispute has been referred to the American Arbitration Association for resolution. While the Company believes that it will not be liable for OSIs claim there can be no assurance that the claim will be resolved in the Companys favour.

Off-Balance Sheet Arrangements

At December 31, 2004 the Company did not have any off-balance sheet arrangements.

Transactions with Related Parties



At December 31, 2004, accounts payable and accrued liabilities included $284,759 (at December 31, 2003 - $418,258) owed by the Company to directors and officers and companies controlled by directors and officers of the Company.  These amounts are unsecured, non-interest bearing and payable on demand.  At December 31, 2004, accounts payable and accrued liabilities included $300,500 (at December 31, 2003 - $372,442) owed by the Company to companies formerly related by virtue of having a director or officer in common with the Company.



Other Management Discussion & Analysis Requirements



(a)

Additional information relating to the Company, including the Companys Annual Information Form, is on available on SEDAR at www.sedar.com.

8



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(b)

Share capital:

(a)

Authorized:

100,000,000 common shares without par value

50,000,000 preferred shares without par value, non-voting, issuable in one or more series

(b)

Issued:



Numberof shares
   
   
   AmountBalance, December 31, 2003
   8,845,157
   
   
   21,528,421Issued during year for cash:Private Placements
   7,938,208
   
   
   2,782,289Special Warrants exercised
   1,169,741
   
   
   907,985Issued in settlement of accounts payable
   2,654,675
   
   
   1,019,562Issued for acquisition of intellectual property
   187,500
   
   
   75,000Share issuance costs
   -
   
   
   (82,337)Balance, December 31, 2004
   20,795,281
   
   $
   26,230,920Issued during year for cash:Private Placements
   2,857,785
   
   
   1,000,225Share issuance costs
   -
   
   
   (72,771)Balance, March 18, 2005
   23,653,066
   
   $
   27,158,374


On November 21, 2003, the Company consolidated its common shares on a one new share for each 4.5 old shares basis.  The table above gives effect to the share consolidation on a retroactive basis.

(c)

Special warrants:

During October and November 2003, the Company sold a total of 9,796,087 Special Warrants at $0.1725 per Special Warrant in a series of four tranches.  Cash proceeds of $899,075 less commissions of $39,758 were received for the sale of 5,212,029 Special Warrants and 4,584,058 Special Warrants were issued in settlement of $790,750 in debt.  Each Special Warrant is exercisable, for no additional consideration, into Units consisting of 0.2222 common shares and 0.2222 share purchase warrants, with the exception of 1,002,899 Special Warrants issued to insiders of the Company.  The Units issued to insiders of the Company are exercisable into 0.2222 common shares with no share purchase warrant.  Each whole warrant entitles the holder for two years from the date of issue of the Special Warrants to acquire one additional common share at an exercise price of $1.04 per share in the first year and $1.14 per share in the second year.  The Special Warrants are convertible at the holders option at any time for an eighteen month period and will convert automatically at the end of the eighteen months.  The Company will not be required to meet any conditions prior to conversion.  Finders fees of $39,758 in cash and 38,641 in brokers warrants exercisable at $1.04 per share were paid.  The brokers warrants were exercisable until October 30, 2004 and have been recorded at the fair value as at the date of issue of $7,327 as a reduction in the proceeds of the Special Warrants and an increase in Contributed Surplus.  As at December 31, 2004, 1,169,741 Units have been issued on conversion of the Special Warrants which resulted in the issuance of 1,169,741 common shares and 1,169,741 share purchase warrants.

9



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(d)

Warrants:

At December 31, 2003, and March 18, 2005, the following warrants were outstanding (giving retroactive effect to the share consolidation):



December 31,
   
   
   
   March 18,
   
   Exercise2003
   Granted
   Exercised
   Expired
   2005
   
   price
   
   Expiry date11,111
   -
   -
   (11,111)
   -
   
   $9.90
   
   January 18, 200464,815
   -
   -
   (64,815)
   -
   
   US$8.78
   
   July 8, 200423,333
   -
   -
   (23,333)
   -
   
   US$10.53
   
   July 24, 200438,641
   -
   -
   (38,641)
   38,641
   
   $1.04
   
   October 30, 2004670,930
   -
   -
   -
   670,930
   
   $0.64
   
   November 20, 2005-
   64,412
   -
   
   64,412
   
   $1.14
   
   September 30, 2005-
   128,824
   -
   -
   128,824
   
   $1.14
   
   October 10, 2005-
   976,505
   -
   -
   976,505
   
   $1.14
   
   October 31, 2005-
   4,007,875
   -
   -
   4,007,875
   
   $0.50
   
   April 28, 2005or at $0.75
   
   April 28, 2006-
   226,584
   -
   -
   226,584
   
   $0.50
   
   April 29, 2005or at $0.75
   
   April 29, 2006-
   166,700
   -
   -
   166,700
   
   $0.53
   
   May 20, 2005or at $0.75
   
   May 20, 2006-
   187,500
   -
   -
   187,500
   
   $0.40
   
   November 29, 2005or at $0.50
   
   November 29, 2006-
   3,930,333
   -
   -
   3,930,333
   
   $0.40
   
   November 30, 2005or at $0.50
   
   November 30, 2006-
   946,166
   -
   -
   946,166
   
   $0.45
   
   December 31, 2005-
   
   
   
   
   
   or at $0.55
   
   December 31, 20062,857,785
   -
   -
   2,857,785
   
   $0.35
   
   January 12, 2006or at $0.45
   
   January 12, 2007808,830
   13,492,684
   -
   (137,900)
   14,163,614




(e)

Options:

The Company has a stock option plan that was approved at the Companys AGM on June 18, 2004.  Under the terms of the plan the Company may reserve up to 3,347,690 common shares for issuance under the plan.  The Company has granted stock options to certain employees, directors, advisors, and consultants.  These options are granted for services provided to the Company.  All options granted prior to November 25, 2003, expire five years from the date of grant with the exception of 22,222 options issued during 2002 to a consultant that expire two years from the date of grant.  All options granted subsequent to November 25, 2003, expire 3 years from the date of the grant.  All options vest one-third on the date of the grant, one-third on the first anniversary of the date of the grant and one-third on the second anniversary of the date of the grant.  On November 25, 2003, all stock options along with the Companys outstanding shares were consolidated on a 1 new option for 4.5 old basis. During the period ended December 31, 2004 all options outstanding as at December 31, 2003 were repriced to $0.78. A summary of the status of the Companys stock options at March 18, 2005, and December 31, 2003 (giving retroactive effect to the share consolidation), and changes during the periods ended on those dates is presented below:

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March 18, 2005
   
   December 31, 2003Weighted average
   
   
   
   Weighted averageShares
   
   exercise price
   
   Shares
   
   exercise priceOutstanding, beginning of period
   770,294
   
   $
   5.26
   
   668,198
   
   $
   7.56Repriced to $0.78
   
   
   
   (4.48)Granted
   2,797,257
   
   
   0.56
   
   421,557
   
   
   1.51Exercised
   
   
   
   
   
   (43,446)
   
   
   2.97Cancelled
   (416,217)
   
   
   0.78
   
   (276,015)
   
   11.70Outstanding, end of period
   3,151,334
   
   $
   0.58
   
   770,294
   
   $
   5.26


The following table summarizes information about stock options outstanding at March 18, 2005:



Options outstanding
   
   Options exercisableNumber
   
   
   
   
   
   
   Numberoutstanding
   
   Weighted
   
   Weighted
   
   exercisable,
   
   WeightedMarch 18,
   
   remaining
   
   average
   
   December 31,
   
   averageExercise price
   
   2005
   
   contractual life
   
   exercise price
   
   2004
   
   exercise price$
   0.30
   
   5,000
   
   2.66
   
   $
   0.30
   
   1,667
   
   $
   0.30$
   0.33
   
   105,000
   
   2.76
   
   $
   0.33
   
   35,000
   
   $
   0.33$
   0.34
   
   40,000
   
   2.66
   
   $
   0.34
   
   13,334
   
   $
   0.34$
   0.35
   
   8,000
   
   2.81
   
   $
   0.35
   
   2,667
   
   $
   0.34$
   0.36
   
   53,332
   
   2.59
   
   $
   0.36
   
   15,778
   
   $
   0.34$
   0.38
   
   10,000
   
   2.83
   
   $
   0.38
   
   3,334
   
   $
   0.34$
   0.40
   
   1,175,555
   
   2.43
   
   $
   0.40
   
   412,365
   
   $
   0.40$
   0.41
   
   18,000
   
   2.27
   
   $
   0.41
   
   6,000
   
   $
   0.41$
   0.45
   
   15,000
   
   2.22
   
   $
   0.45
   
   5,000
   
   $
   0.45$
   0.55
   
   10,000
   
   2.14
   
   $
   0.55
   
   3,333
   
   $
   0.55$
   0.66
   
   103,333
   
   1.97
   
   $
   0.66
   
   34,441
   
   $
   0.66$
   0.78
   
   1,608,114
   
   1.80
   
   $
   0.78
   
   1,209,666
   
   $
   0.783,151,334
   

   2.11
  $
   0.60
  
   1,742,519
  $
   0.67


The weighted average fair value of employee stock options granted during the year was $0.86 (2003: $NIL) per share purchase option. The weighted average fair value of employee stock options repriced during the period ended December 31, 2004 was $0.52 (2003:$NIL) per share purchase option as at the date of the reprice.  The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following average inputs:  volatility - 200%; risk free interest rate - 5%; option term - 3 years; and dividend yield - nil.  The total compensation expense of $1,204,307 has been allocated to the expense account associated with each individual employee expense and credited to contributed surplus.

The weighted average fair value of employee stock options granted during the year ended December 31, 2004 was $0.72 (2003 - $7.29) per share purchase option.







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